Daniel J. Ritterbeck, Widener University School of Law Class of 2013, and Senior Staff Member of the Delaware Journal of Corporate Law, was recently awarded first prize in the 2012 Pennsylvania Bar Association’s Intellectual Property Writing Competition for his paper titled The Assignability of an Exclusive Copyright License in a Bankruptcy Context: The Correct Application of ‘Applicable Law.’

In 2004, the Pennsylvania Bar Association’s Intellectual Property Law Section established the writing competition to create an opportunity for second and third-year law students to express, in writing, their knowledge and interest in the areas of patents, copyrights, trademarks, trade secrets or trade dress. In his paper, Ritterbeck analyzes the effects that sections of the Bankruptcy and Copyright statutes have on the transfer of exclusive copyright licenses, and suggests how courts should approach analyzing the issue in the future.

“I’m honored to be recognized by the Pennsylvania Bar Association,” says Ritterbeck. “I’m passionate about intellectual property rights and how they relate to other complex civil issues. Consistent treatment by the courts is crucial considering the importance of intellectual property in today’s business and legal landscapes.”

As the first place winner, Ritterbeck was awarded a $2,500 cash prize, and his paper will be published in the Intellectual Property section of a forthcoming issue of the Pennsylvania Bar Association’s newsletter, and will also be available on the bar association’s website.

Abstract

Various forms of intellectual property, including copyrights, continue to serve as the most valuable assets found in the portfolios of many corporations in the United States.  As the U.S. economy struggles to recover from its recent years spent in recession, many corporations are being forced to file for bankruptcy. It follows that the role intellectual property assets play in bankruptcy proceedings, especially in Chapter 11 reorganizations, is of utmost importance and the treatment they receive by the courts will have sweeping implications on debtor licensees, non-debtor licensors, and creditors alike. This is especially true in the bankruptcy context of whether a debtor licensee has the right to freely assign an exclusive copyright license without the consent of the licensor. However, no steadfast rule has been developed by and between non-bankruptcy and bankruptcy courts, despite Congressional guidance on the matter in Titles 11 and 17 of the U.S. Code.

The problem exists because the assignment of exclusive copyright licenses in a bankruptcy context is governed by applicable non-bankruptcy laws (i.e. federal copyright laws), and bankruptcy and non-bankruptcy courts are in disagreement concerning the correct application of those laws.   The problem is exacerbated by the fact that the policies underlying the two areas of law are antagonistic to say the least. This Note will argue that the Ninth Circuit’s holding in Gardner v. Nike illustrates the correct application of copyright law as it pertains to the assignability of an exclusive copyright license because the court’s holding was based on an accurate reading of 17 U.S.C. § 201(d)(2); the protections and remedies afforded to a licensee of an exclusive copyright license do not include the right to transfer a copyright absent consent from the owner of the copyright. Such an interpretation better reflects the policies underlying copyright law, and the results that follow its application are equitable to all parties involved. Therefore, the United States Bankruptcy Court for the District of Delaware should adopt the well-reasoned approach articulated in Gardner and accordingly reconsider its holding in In re Golden Books.

 This post is authored by Benjamin Chapple (Widener Law ’13)

In Hospitalists of Delaware, LLC v. Lutz, C.A. 622-1 VCP (August 28, 2012), Vice Chancellor Parsons extensively reviews the basis for exercising personal jurisdiction over alleged co-conspirators. Here’s a brief review of the opinion:

When sued by two judgment creditors, the managers and controlling stockholder of Cubit Medical Practice Solutions, Inc. (“the Company”) consented to personal jurisdiction; however, three other defendants, all of whom are non-Delaware business entities, did not. These non-consenting defendants (BCV, BC2, and Integra) all moved to dismiss for lack of personal jurisdiction.

Hospitalist (one of the two plaintiffs) sent the Company a claims letter because the Company was failing to process and collect medical bills. This claims letter threatened suit. Plaintiffs alleged that upon receipt of this letter the defendants immediately began to hatch a plan in which they would sell or dissolve the Company and, at the same time, extract their investment from Integra (a separate Ohio corporation that the defendants controlled) for the purpose of avoiding the Company’s creditors (the plaintiffs). The defendants began by changing Integra’s name and removing its website. Importantly, the defendants transferred the Company’s assets to another entity (BC4), planning to sell the worthless Company. By mid-2010, realizing that the judgments were inevitable, and unable to sell the business, the defendants decided to dissolve the Company before the plaintiffs could obtain default judgments. The Company’s board and stockholders authorized the dissolution. In connection with that dissolution process, however, the director defendants allegedly caused the Company to transfer all or substantially all of the Company’s remaining assets to the other business entity (BC4).

Plaintiffs  Pled Bancario‘s “Conspiracy Theory” of Jurisdiction

Plaintiffs argued that the Court may exercise personal jurisdiction over the non-consenting defendants because (1) the director defendants caused the Company to file a certificate of dissolution with the Secretary of State, which constitutes the transaction of business for purposes of the long-arm statute; and (2) that jurisdictional act can be attributed to the non-consenting defendants under the so-called “conspiracy theory” of personal jurisdiction recognized by the Delaware Supreme Court in the Istituto Bancario decision. Plaintiffs contended that all the defendants, including the non-consenting defendants, participated in a conspiracy to dissolve the Company. Further, according to the plaintiffs, because the director defendants filed a certificate of dissolution, their action should be imputed to the non-consenting defendants because the conspiracy involved a collective effort between all defendants.  

In discussing the relevant law regarding the plaintiffs’ personal jurisdiction claim, the Court explained:

[b]ecause the Long Arm Statute speaks in terms of acts committed “in person or through an agent,” and because “conspirators are considered agents for jurisdictional purposes,” “a foreign defendant may be subject to jurisdiction in Delaware, despite lacking direct forum contacts of its own, where it acts as part of a scheme in which the others engaged in Delaware-directed activity.”

The Court next explained that under the five-part test articulated in Bancario, a plaintiff asserting a conspiracy theory of jurisdiction must make a factual showing that:

 (1) a conspiracy to defraud existed; (2) the defendant was a member of that conspiracy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.

 Additionally, the Court stated, “Although Bancario literally speaks in terms of a ‘conspiracy to defraud,’ it is now well-settled that ‘a claim for aiding and abetting a breach of fiduciary duty satisfies the first and second elements of the Bancario test.” Next, the Court identified the elements of aiding and abetting a breach of fiduciary duty as the following: (1) a fiduciary relationship exists; (2) a breach of that relationship occurred; (3) that the alleged aider or abettor knowingly participated in the fiduciary’s breach of duty; and (4) damages exists that are proximately caused by the breach.

Conspiracy Jurisdiction Exists Over Integra

There was no dispute that a fiduciary relationship existed and the plaintiffs suffered damages; however, Integra denied that the plaintiffs pled a breach of duty against the director defendants or that Integra, the entity itself, as opposed to its directors– “knowingly participated” in the Company’s directors’ breach. The Court disagreed with Integra, stating:

Integra’s argument . . . deserves short shrift. . . . The Complaint alleges that the Director Defendant’s “breached their fiduciary duties by unlawfully dissolving [the Company] and engaging in a series of self-dealing and interested transactions . . . to the detriment of [the Company’s] creditors, including [the] plaintiffs.” That allegation is supported by the specific fact, among others, that [the Company] made preferential payments to Integra under the 2005 Management Services Agreement while insolvent and when Defendants feared that judgment creditors like [the] plaintiffs would have priority over Integra’s accounts receivable. These allegations state a claim for breach of fiduciary duty.

            . . .

 The flaw in Integra’s argument is that it mischaracterizes the alleged wrong as a conspiracy to dissolve [the Company]. Although dissolution of the Company was a substantial component of the alleged scheme to effect self-dealing transactions, the “conduct advocated or assisted constitut[ing the] breach” was the preferential treatment [the Company] gave to a subset of its creditors for self-interested reasons at a time when the Company was insolvent and, ultimately, planning to dissolve.  Hence, Plaintiffs only need to plead facts permitting an inference that Integra knowingly advocated or assisted the Director Defendants in giving Integra the alleged preferential treatment.

 The Court went on to state, “in the context of merger negotiations . . . while the acquirer’s mere receipt of preferential terms does not demonstrate participation in the target board’s breach of duty, ‘the terms of the negotiated transaction themselves may be so suspect as to permit, if proven, an inference of knowledge of an intended breach of trust.” The Court then noted that the alleged breach of duty in the case sub judice does not involve a negotiated merger, but disloyal preferential treatment to certain creditors.  However, “by analogous reasoning . . . the extent of preferential treatment to insider creditors also may be so suspect or egregious as to permit an inference of knowing participation in the breach of duty.”

The Court found that the plaintiffs satisfied the first two Bancario elements as to Integra based on: (1) the Company did not make payments to the plaintiffs under the 2005 Management Services Agreement for a period of almost three years; (2) Rosenberg, a director of the Company, “instructed”/”suggested” that Integra start formally documenting a payable from the Company to Integra as a secured note rather than an unsecured payable so that Integra could claim priority over any potential judgment creditors of the Company; (3) the suggestion to take down the website for the purpose of making it difficult for creditors to “track them down”; (4) the “brash attitude” in Rosenberg’s emails about managing the Company’s affairs solely and explicitly to undermine the plaintiffs’ ability to recover their then still prospective judgments and to advantage its affiliate Integra; (5) Integra knew that Company was insolvent because both of its directors served on Cubits Board and Integra provided day-to-day management services to the Company.

In regards to the third element of the Bancario test—that a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state—the Court found that the Company filing a certificate of dissolution with the Secretary of State was a substantial act in furtherance of the director defendants’ allegedly disloyal scheme to give preferential treatment to Integra.

Finally, “[t]he fourth and fifth . . . elements are that ‘the defendant knew or had reason to know of the act [or effect] in the forum states’ and that ‘the act in[, or effect on,] the forum states was a direct and foreseeable result of the conduct in furtherance of the conspiracy.” The Court found that both elements were satisfied because Integra is charged with the knowledge of its directors who authorized the Company’s dissolution. Moreover, the Court found the act of filing a certificate of dissolution to be a direct and foreseeable result of conspiring to dissolve the Company. Similarly, it was reasonable to infer that Integra, through the director defendants, knew of the preferential payments to Integra and that, as a result of those payments, the Company would be unable to afford comparable treatment to the plaintiffs, even though they were (or imminently would be) judgment creditors of the Company.

After finding that all five elements were satisfied, the Court held that its exercise of personal jurisdiction over Integra comports with constitutional due process.

Conspiracy Jurisdiction Does Not Exist Over BC2

The Court held that the plaintiffs failed to satisfy the first two Bancario elements because the plaintiffs’ pleading failed to state a claim of either aiding or abetting or civil conspiracy against BC2.

Conspiracy Jurisdiction Does Not Exist Over BCV

Similarly, the Court found that the plaintiffs’ basis for personal jurisdiction over BCV failed for the same reason as with BC2—as a result of the absence of nonconclusory allegations or evidence that BCV conspired or knowingly participated in an unlawful scheme to defraud the Company’s creditors. Except for conclusory allegations, there is no indication that BCV participated in any of the events that gave rise to the plaintiff’s various claims.  The Court went on to explain that the only specific allegations supporting the plaintiffs’ conspiracy theory of jurisdiction against BCV are that two of the alleged primary wrongdoers held management-level positions at BCV and BCV benefited from the allegedly fraudulent transfers. “More than mere knowledge, however, is required to subject a foreign corporation to the personal jurisdiction of this Court.” Rather, unless the plaintiffs “seek to predicate personal jurisdiction on a veil-piercing theory, they must identify some action by BCV, the entity, from which the Court can infer the requisite participation or conspiratorial agreement.”

This post is authored by Luke M. Scheuer, Assistant Professor of Law:

Last week, a host of online media sites reported that the Securities and Exchange Commission (the “SEC”) issued an order granting the first payment under a new whistleblower program authorized by the Dodd-Frank Act.  The program allows the SEC to reward whistleblowers who provide information that leads to sanctions of $1M or more.

The order and accompanying press release issued by the SEC are notable in that they provide virtually no information about the underlying case, and are therefore of little to no practical use to attorneys advising potential defendants or whistleblowers.  The SEC has an interest in protecting the identity of whistleblowers, as they provide information that allows the SEC to prevent and prosecute cases of corporate fraud.  If the identity of a whistleblower is revealed, it will naturally make future whistleblowers reluctant to come forward.  In addition, the SEC is prohibited under federal law from disclosing information that might reasonably reveal a whistleblower’s identity.  Thus, the SEC must balance the need to protect the anonymity of whistleblowers against the need for public disclosure and promotion of the program if it wants the program to be a success.

 Although the press release and order do not provide details of the underlying case, the press release states that the SEC has collected $150,000 in sanctions, and that the whistleblower has received a $50,000 award.  Under the program, the SEC can award anywhere from 10 to 30 percent of total sanctions collected.  By giving the whistleblower the highest possible monetary award of 30% in this case, the SEC seems to be sending a message that they are fully committed to the program and want to encourage other whistleblowers to come forward.  The whistleblower may receive an even larger award if the SEC is successful in collecting more in this case.

Although there are laws protecting whistleblowers against retaliation, their effectiveness is limited.  SEC Rule 21F-17 bars any person from taking “any action to impede an individual from communicating directly with the Commission staff about possible securities law violations.”  Nevertheless, if outed, whistleblowers will have a hard time remaining in their job, as colleagues will view them with suspicion.  The consequences of not protecting the whistleblower’s anonymity can be seen in the sad case of Peter Sivere who provided information to the SEC about his employer JPMorgan, only to have an SEC attorney inform JPMorgan of Sivere’s actions and provide JPMorgan confidential information received from Sivere that could be used in an employment action against Sivere. Despite the fact that the SEC admitted that its attorney had engaged in this conduct, in clear violation of SEC rules, the SEC decided to take no action against its attorney.  Sivere ended up being pushed out of his job by JPMorgan after it learned of his whistleblowing.  More can be read about the Sivere incident here. Perhaps, the lack of information in this recent whistleblower case is a necessary reaction to the Sivere incident.

Although whistleblower anonymity is critical to the success of the program, the lack of disclosure in this case is frustrating to practitioners advising potential defendants and whistleblowers. The SEC stated that the whistleblower “provided documents and other significant information that allowed the SEC’s investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims.” The SEC also denied an award to a second whistleblower because “the information provided did not lead to or significantly contribute to the SEC’s enforcement action.”  The order provides no other details that distinguish the two cases, or that might help attorneys advise their clients on the possibility they can collect an award for whistleblowing.  We know nothing about the timing of the tip, how crucial the whistleblower’s information was, or whether the whistleblower had clean hands for example.  Without this kind of information, attorneys cannot use the case as a basis on which to advise clients, whether whistleblowers or potential defendants, on where they are likely to fall within this program. This may be a necessary sacrifice for the reward program to work, but it seems to indicate a lack of faith in the effectiveness of whistleblower protection laws.