Getting Access to Source Code from Your Bankrupt Developer
August 13, 2009
You did it right: you hired a seemingly reputable developer to make a reliable interface and efficient trading algorithm. Your attorney prepared an agreement allowing you to license the developer’s proprietary software customized for your system. The developer holds the rights to the source code, but will provide you with maintenance and upgrades as needed. The system rarely crashes; the developer is quick to respond to bugs and to provide tweaks to meet your customers’ needs. Unfortunately, your developer invested its seed capital in our domestic automobile industry and has now filed a petition for relief under Chapter 11 of the Bankruptcy Code. Your best customer emails you that on a certain type of trade, the interface crashes and, by the way, your competitor’s algorithm executes faster. You call your developer and get an automated disconnect message; your emails get bounced back. What happens?
Most intellectual property licenses are considered executory contacts. In the Chapter 11 bankruptcy, the developer has the option to assume or reject your executory contract (i.e., the license). If the bankruptcy court allows the developer to assume your license, then the developer and you continue with your obligations in the normal course. If the developer then breaches the agreement post-petition, you may have a claim for damages that will be treated with high priority (i.e., administrative).
If the developer rejects your license, any claim you have against the developer will be treated as a pre-petition breach. So, you may file for damages with very low priority (i.e., usually unsecured). Or, you may retain your rights under the license and stay current with your obligations (e.g., royalty payments) for the remaining duration of the license. If you decide to retain your rights, the developer is not obligated to provide any future improvements, maintenance, or upgrades.
Scenario 1: Let’s be friends
[Assumption: the developer intends to continue the relationship and the only statement in the license agreement about the source code is that the developer owns it and holds all rights to it.]In practice, even if the developer intends to assume your license, it may initially reject the license to increase its negotiating leverage in receiving new, more favorable license terms. In addition, you generally have no right to the developer’s source code if the agreement is silent on that issue. So, the developer may initially move to reject your license. Then, the developer may tell you that it is no longer under an obligation to fix your bug or tweak your algorithm to make it run better. However, the developer is willing to provide you with those services in a new license agreement for a slightly higher royalty. The costs of developing an entirely new system greatly outweigh the projected costs factoring the new royalty rate, so you reluctantly accept. The developer and you file a consent agreement where the developer assumes your license based on the new royalty rate. The bankruptcy court must approve the consent agreement.
Scenario 2: It’s hard to deal with rejection
[Assumption: the developer intends to enter into a more favorable relationship with your competitor, or sell the source code outright to the competitor, and the only statement in the license agreement about the source code is that the developer owns it and holds all rights to it.]
