Patenting for Inventors Ep. 172: Do You Lose Your Patents in Bankruptcy?

In this episode of Patenting for Inventors, Nolan Heimann partner and registered patent attorney Adam Diament breaks down a topic most inventors don't think about until it's too late: what happens to your patents when bankruptcy enters the picture. Adam explains how patents are treated as assets in the bankruptcy estate, what rights patent licensees have under Section 365(n) of the Bankruptcy Code, and why inventors who assign their patents to a company may have less control than they assume. He also covers practical protective measures—from recording licenses with the USPTO to negotiating bankruptcy survival clauses—that can make a real difference if financial trouble ever hits. It's a timely, practical episode for any inventor or small business owner with IP to protect.

Patenting for Inventors Ep. 172:

Podcast Transcript:

Hello, and welcome to the Patenting for Inventors podcast. I’m your host, Adam Diament, a registered patent attorney and partner at the law firm of Nolan Heimann in Los Angeles, California. This episode is Do You Lose Your Patents in Bankruptcy?  

So this isn’t exactly the most cheerful topic—patents and bankruptcy in the same sentence, yeah, probably not what you wanted to hear when you woke up this morning. But it’s actually one of those things that’s super important and often overlooked. Because a lot of inventors and small business owners think, “Well, I’ve got my patents, those are protected, they’ll survive anything,” and… not so fast. Bankruptcy law has its own set of rules, and patents, believe it or not, can get tossed right into the mix with everything else. 

Now, let’s say you’re a startup founder. You’ve spent years working on your tech, got a few patents issued, maybe even licensed some of them out. But then cash dries up, things don’t pan out, and you’re looking at bankruptcy. What happens to those patents? Can you still license them? Sell them? Do you lose them altogether? Or maybe you’re on the other side—you’re the one licensing a patent from a company that’s now going bankrupt, and you’re wondering, “Hey, is my license still good. 

Here’s the thing: patents are property. Just like your car or your office furniture. So when a company goes bankrupt, patents become part of what’s called the bankruptcy estate. That’s the legal pile of stuff that the bankruptcy court gets to deal with—assets, liabilities, and everything in between. And the court’s job is to make sure creditors get as much money back as possible, which means assets, including patents, can be sold off to pay debts. 

Now, if you’re the one who owns the patents and you file for bankruptcy, there’s a chance those patents get sold to someone else. This could be a competitor, or some third-party investor who’s just buying IP like it’s on clearance. You, as the original inventor, might be totally out of the loop. Unless you’ve got certain contracts or agreements in place, your input on what happens to those patents could be zero. 

On the flip side, let’s talk about patent licenses. If you’ve licensed your patent to someone else, that license might get impacted by the bankruptcy, depending on how it’s structured. Some licenses are considered “executory contracts.” Basically, that just means both sides still have something they’re supposed to do. If that’s the case, then the bankruptcy trustee—or whoever’s in charge—can either assume the contract and keep it going, or reject it, which is the legal equivalent of hitting the delete button. 

Now, if you’re the licensee—the one using the patent—and the licensor files for bankruptcy and the license gets rejected, are you totally out of luck? Not necessarily. There’s something called Section 365(n) of the Bankruptcy Code, which was added to specifically protect licensees of intellectual property. It gives you the right to keep using the IP, even if the bankrupt party tries to reject the agreement. That’s a big deal. It means if you’ve been paying for a patent license, and the company owning it files for bankruptcy, they can’t just yank it away. You get to keep using it, assuming you keep paying whatever the deal was. 

Of course, that assumes the license falls under what’s defined as “intellectual property” in the Bankruptcy Code. Patents are included, thankfully. But oddly enough, trademarks are not. Which makes things even more confusing because people often lump IP together—“Oh yeah, I’ve got some IP”—without realizing that bankruptcy law doesn’t treat it all equally. 

Another twist is that the court may actually sell off the patents free and clear of your license. That’s right. Even if you’ve got a valid license, the court could approve a sale of the patents to someone else, and that new owner might not want to honor your deal. That’s where it gets tricky. You might have to assert your rights under 365(n), and depending on how your agreement was written, that could be messy. 

Timing matters, too. If your license was recorded with the USPTO’s assignment database, that can help show that the world knew about your interest in the patent. It doesn’t make you bulletproof, but it’s better than nothing. If it wasn’t recorded, then the buyer might try to argue they didn’t know you had rights, and that could lead to a fight. 

Let’s say you’re a startup that licensed some patents from a university or a research lab. You’re paying your royalties, maybe you’re trying to build a product. But then the university—or more likely, one of its tech transfer affiliates—starts having financial problems. Maybe it files for bankruptcy. Now what? 

Well, you’re going to want to dig up that license agreement, fast. Because the whole game now depends on what it says, and how it was recorded. If you didn’t register your license with the USPTO—or at least file a memorandum of license—there’s a risk the license might not be considered a property right that’s visible to the outside world. And if that patent gets sold to someone else in the bankruptcy, they might say, “Who are you? Never heard of you. I bought this thing clean.” Messy stuff. 

Another scenario: you’re an inventor, and you assigned your patents to your startup. You’re also the founder, you’ve got equity, you’re running the show—but the company owns the patents. That’s a very common setup. But here’s the kicker: if the company goes bankrupt, even though you are the one who invented everything, the patents aren’t yours anymore. They belong to the company, and they go into the bankruptcy estate. So unless there’s a clawback provision or some reversion language tucked into your assignment agreement, you might be completely cut off from the IP that you literally created. 

Some founders get caught off guard by this. They think, “Well, I’m the inventor, I’ll just take the patents back and start a new company.” Sorry, it doesn’t work like that. You assigned the rights away, and now they’re assets of the bankrupt entity. The court could auction those patents off to the highest bidder—even if that bidder is your direct competitor. That’s the brutal reality of bankruptcy law. 

Now, what about if you’re buying patents out of bankruptcy? Well, there can be deals to be had. Because the bankruptcy trustee’s job is to get the most value for the creditors, and sometimes they don’t fully understand the strategic value of IP. You could end up buying a patent portfolio for pennies on the dollar. But here’s the thing to watch out for: prior licenses. Just because you’re buying the patent doesn’t mean you’re getting it free and clear of encumbrances. You’ve got to do some serious due diligence—find out if there are licenses recorded, unpublished licenses, weird revenue-sharing agreements—because those could affect what rights you’re actually buying. 

Oh, and if you’re on the creditor side—let’s say someone owes you money, and they’ve got patents—can you just take the patents and call it even? Not directly. You’d typically have to get in line with all the other creditors, and maybe bid on the patents during the liquidation process. It’s not like repossessing a car. You can’t just show up at the USPTO with a tow truck and say, “Hey, I’m taking these patents now.” There’s a legal process. But patents are often among the most valuable assets a bankrupt company has, especially in tech and biotech, so they’re definitely a focus. 

One quick clarification, because bankruptcy isn’t just one thing. Most of what I’ve been talking about today applies primarily to Chapter 11 and Chapter 7 bankruptcies, which are the ones you usually see with companies that own patents. Chapter 11 is reorganization, where the business might keep operating while assets are restructured or sold. Chapter 7 is liquidation, where assets, including patents, are sold off to pay creditors. In both of those scenarios, patents are clearly part of the bankruptcy estate, and everything we discussed about licenses, sales, and Section 365(n) is very much in play. 

Other types of bankruptcy can look very different. For example, Chapter 13 is generally for individuals with regular income, not companies, and patents are far less commonly the centerpiece of those cases. Chapter 9 applies to municipalities, which is a whole different universe. And even within Chapter 11, the way patents are handled can vary depending on whether the company is reorganizing, selling assets, or shutting down entirely. So while the core principles are the same, the practical outcome depends a lot on the chapter, the debtor, and the specific court orders involved. 

One more practical point here—and it’s kind of boring, but important: if you’re negotiating a license agreement, and you’re worried the licensor might go under, try to build in protections. Make sure you get what’s called a “bankruptcy survival clause” that says your license survives a bankruptcy. Reference 365(n) directly. And definitely record the license with the USPTO if you can. The more visible your rights are, the harder it is for someone to ignore them down the line. 

So yeah, when people talk about “IP strategy,” they’re often thinking about patents versus trade secrets, or foreign filing, or when to file provisionals. But thinking about what happens to your IP in bankruptcy—that’s next-level strategy. And it’s not just for big companies. Even solo inventors and small businesses need to be aware of how fragile patent rights can be if the financial walls start closing in. 

Alright, not the most upbeat topic, but one of those things that could save your skin if you ever find yourself—or your business—on the edge. Patents can be powerful tools, but they’re also legal property, and bankruptcy law treats them like anything else you can buy or sell. 

That’s it for today’s episode, and if you need help filing a patent application, or other intellectual property, give me a call at 424-281-0162. Until next time, I’m Adam Diament, and keep on inventing!