In a bankruptcy reorganization case, an obligation to pay royalties for the use of Intellectual Property is usually covered by a license. However, royalties paid after the sale of Intellectual Property require a different analysis.

In Sanofi-Aventis U.S. LLC v. Mallinckrodt PLC (In re Mallinckrodt PLC), No. 20-12522-JTD, (D. Del. Dec. 20, 2022), the U.S. District Court determined that royalties were a pre-petition debt that was dischargeable in bankruptcy.

Facts:

In 2001, Mallinckrodt and Sanofi-Aventis executed an asset purchase agreement. Sanofi sold certain intellectual property, including trademarks and regulatory rights, relating to Acthar gel, a therapeutic treatment for inflammatory and autoimmune conditions. As part of the sale, Mallinckrodt agreed to pay Sanofi future annual royalties equal to 1 percent of all Mallinckrodt's net sales of Acthar gel that exceeded $10 million per year.

On Oct. 12, 2020, Mallinckrodt filed a Chapter 11 bankruptcy case in the U.S. Bankruptcy Court for the District of Delaware. Mallinckrodt faced several billion dollars of legal liabilities related to the opioid epidemic and Acthar gel rebates. Mallinckrodt continued to manufacture and sell the Acthar gel but there were post-petition breaches of the Sanofi agreement, including the failure to pay royalties.

One year later, Sanofi filed a motion to determine if the asset purchase agreement was an executory contract. The bankruptcy court held that the asset purchase agreement was not executory. So claims for breach of the asset purchase agreement were unsecured claims that are dischargeable upon confirmation of Mallinckrodt's Chapter 11 plan.

Sanofi appealed to the district court.

Holding:

Affirmed. Sanofi's contingent claim for future royalties arose at the time of the sale under the asset purchase agreement. The asset purchase agreement did not provide for Sanofi to retain a property interest in the intellectual property that was sold.

Comment:

Bankruptcy’s goal of giving a debtor a fresh start does not always mesh with the protection of intellectual property rights. Here, the asset purchase agreement was complete and the assets were transferred. The remaining obligation to pay royalties was Mallinckrodt’s one-sided performance of future payments. Relying on what the court called “boilerplate” language in the agreement, the court appears to take the position that Sanofi had no property right in the post-petition revenues from the gel. There are two possible solutions to this problem. First, if a sale includes post-closing consideration, the parties should address when a transfer of title occurs and the remedies for post-closing default. Second, the parties could enter into a license agreement that contains criteria for the transfer of title to the licensee.

This Article was first published in the Illinois State Bar Association’s Section on Intellectual Property Law’s quarterly newsletter. June 2023 • Volume 62 • Number 4 •

Beverly A. Berneman is a partner with Golan Christie Taglia LLP where she is the chair of the firm’s Intellectual Property Practice.

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