ABI Bankruptcy Blog Exchange » Items by Warren Agin

Items by Warren Agin

Co-owned Patent Fools Mammoth Mart

Posted: November 16th, 2008, 1:32am PST by Warren Agin

I'm a little late in writing about an interesting decision from my home court, In re Diomed, Inc., 394 B.R. 260 (Bankr. D. Mass. 2008), which shows how a debtor's clever use of co-owned patent rights helped it get past Mammoth Mart.

The Diomed case deals with a rather unusual fact pattern - one that Judge Rosenthal described as "a scenario caused by the intersection of bankruptcy and patent law not addressed in any published decision." While you are not likely to see this particular pattern again, the decision illuminates an important patent law rule and, for this reason alone, is worth reading.

The debtor, Diomed, had an exclusive patent license from Endolaser Associates, LLC related to the manufacture of a medical laser. The license was exclusive, allowed sublicenses, and gave Diomed the right to bring actions to enforce the patent against infringers. The license required Diomed to pay Endolaser periodic royalties, including a percentage of any recovery from enforcement actions. The twist, however, was that Endolaser apparently did not own the entire patent. It had co-owned the patent with an inventor, Dr. Robert Min. Diomed had purchased this co-owner interest from the inventor.

So, at the time of its bankruptcy filing, Diomed held an exclusive license from Endolaser, but also owned a partial interest in the patent by virtue of the assignment from Dr. Min. The decision does not say how Endolaser was able to grant an exclusive licence when it did not own the entire patent. It also doesn't talk about how Diomed acquired its ownership interest from Dr. Min. I suspect Diomed may have purchased Dr. Min's interest in order to resolve an ownership dispute of some kind. But, that is purely speculation.

Diomed had also brought two infringement lawsuits against two companies, AngioDynamics and Vascular Solutions, Inc., and obtained large multi-million dollar judgments against them.

In March 2008, Diomed filed its chapter 11 petition. I'll leave out some of the procedural history - you can read the decision yourself. Just say that in the end Diomed settled the two infringement actions for multi-million dollar sums and, as part of the settlement, granted a non-exclusive patent license to AngioDynamics. But, first, it rejected its license with Endolaser under 11 USC 365.

Endolaser filed a motion for allowance of an administrative expense. It asked for payment of (a) royalties for the pre-rejection period, (b) royalties payments due as a result of Diomed's sale of equipment during the case, (c) the 25% of patent infringement settlement proceeds due it under the license terms, and (d) some other item not really relevant to this blog.

How, you might ask, could Diomed both reject the up-stream license and still grant a down-stream license? How could it avoid payment of royalties as an administrave expense? It relied on the interest in the patent it had purchased from Dr. Min.

Judge Rosenthal allowed the administrative expense claim for the royalties due pre-rejection. But, he declined to allow as an administrative expense claim the royalty claims arising from the equipment sale and the patent infringement settlement. Why? Because the exclusive license had been rejected by the debtor prior to those events. Thus, the particular benefit to the estate did not arise from the license agreement.

Judge Rosenthal's decision was based on the relatively unknown rules governing the rights of parties who co-own a patent. When parties co-own a patent, either party can make use of the patent without the consent of and without accounting to the other owners. 11 USC 262. This allows a co-owner to grant a non-exclusive license of the entire patent regardless of the co-owner's rights. Thus, once Diomed rejected its license agreement with Endolaser, it became just a co-owner of the patent. Its ability to use, license, and enforce the patent remained - because of its co-ownership position. And, as Judge Rosenthal noted, its generation of proceeds arose not because of the rejected license, but because of its rights as a co-owner of the patent. As a result, the elements of Mammoth Mart were not met and Endolaser was not entitled to payment of an administrative expense claim.

The parties subsequently settled the case. Diomed agreed to pay Endolaser about $700,000 and transfer to Endolaser the patent rights held by Diomed.

Bankruptcy fraud doesn't pay (again)

Posted: November 14th, 2008, 1:07am PST by Warren Agin

Intellectual property attorney Pamela Chestek posted a blog entitled "You Still Have to Own the Copyright" about a painter whose copyright infringement case was dismissed because she had transferred her copyrights to family members prior to filing a 1997 Chapter 7 bankruptcy petition.

In Giddings v. Vision House Production, Inc., 2008 WL 4700903 (D. Ariz. 2008), Giddings accused the defendants of violating her copyrights in several paintings by making and distributing prints without a license. In their defense, the defendants produced evidence that Giddings had, in 1996, executed written assignments of the copyrights in the paintings to various relatives just prior to filing her Chapter 7 bankruptcy petition in 1997. The copyrights were not assigned back to Giddings until February 2008 (more than two years after Giddings filed the infringement complaint.) Because Giddings did not hold the copyrights at the time of the claimed infringement, the District Court ruled that she lacked standing to bring the infringement action and dismissed the case on the defendants' motion for summary judgment.

In their pleadings, the defendants claimed Giddings "transferred all her copyrights to keep them out of bankruptcy proceedings and away from her creditors." While Giddings disputed this characterization, she did not dispute the fact that her 1997 bankruptcy schedules did not include any interest in intellectual property, and failed to disclose all but one of the transfers. Since Giddings apparently felt, when she brought the complaint in 2005, that she owned the copyrights even though they had never been reassigned to her, an observer could wonder whether the prior assignments were in fact a sham designed to conceal her assets from her bankruptcy trustee.

If so, she certainly got what she deserved.

Who owns a trademark?

Posted: November 12th, 2008, 12:38am PST by Warren Agin

Who really owns a trademark? The company that holds the registration or the company that uses the trademark?

That's going to be the issue in In re Goen Technologies, Inc., the bankruptcy case for the distributor of the TrimSpa diet pill. Originally filed in New Jersey as a Chapter 11 case, the case converted to Chapter 7 in September. Now, according to a news story in NJ.com, the Chapter 7 trustee has a million dollar offer to purchase the TrimSpa mark. There is a catch however. The mark itself is registered to an affiliated company, Nutrimerica, which is not in bankruptcy.

The chapter 7 trustee has filed a complaint with the New Jersey bankruptcy court asking the Court to determine that the bankruptcy estate, which used the mark, is the proper owner of the mark. Since trademark rights are acquired through use, its possible that under the right set of facts the trustee may have something to sell.

Free CLE on Bankruptcy and Intellectual Property [humorous]

Posted: November 10th, 2008, 5:17am PST by Warren Agin

The blog for the Bankruptcy Bill comic strip, promises a free (I assume) "...CLE course on the intersection of bankruptcy and intellectual property laws" for those who post the latest Bankruptcy Bill comic strip without proper attribution. But, be warned: they claim the course will be "...so painfully dull as to violate several major provisions of the Geneva Convention."

I've given a few talks like that.

Footstar shuts down

Posted: November 5th, 2008, 9:39am PST by Warren Agin

According to an article in the NJ Biz Journal, Footstar, Inc. is going to shut down at the end of the month.

Footstar filed a chapter 11 petition in 2004, in the Southern District of New York, and reached some level of fame resulting from that court's 2005 decision allowing the debtor to assume its operational leases with Kmart over Kmart's objection. That decision defined the now somewhat popular "Footstar Test."

The contracts with Kmart run out at the end of of this year, and they will not be renewed. According to the article, Kmart will pay $13 million for Footstar's intellectual property, buy its inventory, and employ some of its employees.

Biksi gets Bilked by the Federal Circuit

Posted: October 30th, 2008, 9:53am PDT by Warren Agin

In a key patent decision released today, the Court of Appeals for the Federal Circuit, sitting en banc, has stated that the proper test for patentability of a process patent is the "machine or transformation" test previously set forth by the U.S. Supreme Court in Gottschalk v. Benson, 409 U.S. 63 (1972). According to the Electronic Frontier Foundation, the case, In re Bilski, No. 2007-1130 involved a patent on a "method of managing the risk of bad weather through commodities trading." A classic so-called business method patent.

The Federal Circuit held that the primary claim under the patent was not patentable under the machine or transformation test, effectively putting a stake in the heart of so-called business method patents. The Court took the time to explain how the machine or transformation test does allow patents for transformations of electronic information, thus allowing patentability of electronic processes. The Court referenced as an example of a patentable process a system that takes electronic representations of body parts and displays them on a computer screen - leaving open software patentability. And, the Court explicitly stated that business methods were not per-se unpatentable. But, the decision will certainly call into question the ability of companies to patent business methods and software.

For more information see:

Dischargeability of Copyright Infringement Claims

Posted: October 29th, 2008, 1:34am PDT by Warren Agin

The Court of Appeals for the Ninth Circuit recently issued a decision discussing the ability of a debtor to discharge a copyright infringement claim, In re Barboza, 2008 WL 4307451 (9th Cir. 2008).

Claims for copyright infringement are brought under 17 U.S.C. sec. 502, et. seq., and the damages can be quite serious. Willful copyright infringement comes with a statutory damages price tag of up to $150,000 per incident, plus attorneys fees. In many contexts, the statutory damages claim can be astronomical.

In the bankruptcy context, creditors with copyright infringement claims will claim that because the infringement was willful, the damages are not discharged. Section 523(a)(6) of the bankruptcy code provides that the Chapter 7 and Chapter 11 discharges do not discharge claims for willful and malicious injury by the debtor to another entity or its property.

In Barboza, the debtors ran a video distribution business and purchased a large quantity of videotapes from Million Dollar Video Corp., including ten Spanish language films. The plaintiff held an exclusive right to copy and distribute those ten films, and so informed the debtors. The debtors, however, made 500 copies of the ten films, and started selling them. The plaintiff sued the debtor, the jury ruled in its favor, and awarded statutory damages of $75,000 a film. The total judgment for the ten films, including legal fees - $893,077. Million Dollar video indeed. The debtors then filed for bankruptcy. The plaintiff objected to dischargeability of the debt and won on summary judgment based on the prior jury finding of willful infringement.

The Ninth Circuit held that the willfulness standards were different for copyright infringement and for non-dischargeability purposes. The standard for willful copyright infringement was whether the infringing act was intentional or reckless.

The non-dischargeability standard had two separate prongs. The injury had to be both willful and malicious. For an injury to be willful, there must be a deliberate or intentional injury - not just a deliberate or intentional act that led to an injury. Kawaahau v Geiger, 523 U.S. 57 (1998). So, right there, the standard under the Bankruptcy Code is stricter than the standard under the Copyright Act. For an injury to be malicious, a four part test had to be met. The act must involve (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse.

Thus, a claim for willful copyright infringement is not automatically non-dischargeable. The Court of Appeals remanded the case for further findings. The take away from this case is the same as for the earlier California bankruptcy court decision on the subject, In re Chan. Claims for willful violations of copyright infringement will not automatically be dischargeable or non-dischargeable in bankruptcy, but the facts surrounding settlement or trial of the claims may determine whether or not a non-dischargeability action can be won on summary judgment. Counsel involved in a copyright dispute should pay heed to Barboza, and think about the ability to enforce a settlement or judgment in a subsequent bankruptcy case.

Gonzo for IP at Gonzanga

Posted: October 27th, 2008, 9:45pm PDT by Warren Agin

The Gonzanga Law Review recently published a A Symposium on The Treatment of Intellectual Property in Insolvency Proceedings.

Articles include:

Prof. Xuan-Thao Nguyen, Selling It First, Stealing It Later: The Trouble with Trademarks in Corporate Transactions in Bankruptcy (she always does come up with the best titles)

Prof. Nadine Farid, The Fate of Intellectual Property Assets in Cross-Border Insolvency Proceedings

Prof. Sharon K. Sandeen, Identifying and Keeping the Genie in the Bottle: The Practical and Legal Realities of Trade Secrets in Bankruptcy Proceedings

David R. Kuney, Restructuring Dilemmas for the High Technology Licensees: Will "Plain Meaning" Bring Order to the Chaotic Bankruptcy Law for Assumption and Assignment of Technology Licenses?

I'm sure all four articles are required reading for those interested in the field, although I've only had a chance to read Professor Farid's article on comparative IP and insolvency law so far. The articles are all available on Westlaw. Thanks to Professors Linda Rusch and Stephen L. Sepinuck for organizing the symposium.

Don't gamble with your domain names

Posted: October 19th, 2008, 2:31am PDT by Warren Agin

My friend, Phil Corwin of Butera & Andrews sent me a copy of the just issued opinion in Commonwealth of Kentucky v. 141 Internet Domain Names, which allowed the Commonwealth of Kentucky to seize 141 different domain names they claimed were "gambling devices" in use in Kentucky. This decision of the Franklin Circuit Court held that domain names are property and in rem jurisdiction could be held over a domain name so long as the connections between the domain name and the forum are sufficient to justify the exercise of jurisdiction. This holding is, clearly, far more expansive from that of Office Depot, Inc. v. Zuccarini, 2007 WL 2688460 (N.D. Cal. 2007), which held that the proper loci for in rem jurisdiction over a domain name were the locations of the registry and the registrar.

The context for 141 Internet Domain Names is fairly interesting. Kentucky law allows law enforcement to immediately, and without process, seize gambling devices used in illegal gambling. Leaving aside the somewhat interesting question of how a domain name qualifies as a gambling device, law enforcement officials in Kentucky identified 141 domain names used to host websites offering gambling, and which Kentucky residents could access. They asked the Franklin County Court for an ex-parte seizure order, which the court granted. The court ordered the various related domain name registrars to turn over to the Commonwealth of Kentucky the registrations for the names, but allowed the other information related to the domain names to remain unchanged. This meant the domain names continued to work. The matter was then set for further hearing.

Lawyers appeared representing the interests of nine of the names. In addition, a number of associations representing domain name registrars, on-line gamblers, and on-line gambling sites, appeared and provided the court with briefs. And they raised a number of issues including the question of whether domain names are property subject to seizure and whether the court in Franklin County could exercise in rem jurisdiction over the names.

With respect to the property issue, the court followed Kremen v. Cohen, 337 F.3d 1024 (9th Cir. 2003) in holding that domain names are in fact a form of property.

The court also held that it could exercise in rem jurisdiction over the domain names. First, it stated that in rem jurisdiction could be exercised wherever the domain names were located. It then rejected the schema used in the Anticybersquatting Consumer Protection Act, that domain names have a dual situs, located where the registry and the registrars are located.

Instead, the court crafted a presence test based on an interweaving of in rem jurisdiction principles and rules addressing specific in personam jurisdiction over defendants based on the presence of a website. Basically, the court held that because the websites allowed Kentucky residents to gamble, and the relevant websites were accessed through the domain names, the domain names were located in Kentucky. The analysis did not make any sense to me, but there it is.

So, I'm not sure where all this is going to go. The court did give the domain name owners the option to avoid the forfeiture order by blocking access to Kentucky residents and I suspect that would be the smart thing for them to do. Better than losing the domain name. On the other hand, I think I smell an appeal.

I also wonder what Kentucky would do with the names. Resell them? That seems a little hypocritical. Under the state statute governing seizure of gaming devices, they are supposed to destroy them. How do you do that? I have no idea. I suppose you could accomplish the same thing by just sitting on the registrations. Of course, the domain name registrars might be able to refuse to renew the names. Wouldn't that be fun.

Patent transfers are nothing to sniff at

Posted: October 14th, 2008, 5:59am PDT by Warren Agin

I just came across an interesting patent transfer case from the Northern District of California, In re Lockwood, 2008 WL 943025 (Bankr. N.D. Cal. 2008). It addresses some odd ball issues that can arise when selling patents in an individual's chapter 7 case.

When Lockwood filed his individual chapter 7 case in 2005, he owned a patent for an "improved nasal dilator system." He had licensed the patent to JMS Labs Limited, which was supposed to pay royalties. The patent license was for the existing patent, and also any other improvements Lockwood might sniff up.

Initially, the chapter 7 trustee turned up her nose at this potential asset, and let the license be automatically rejected 60 days into the case. (Section 365(d)(1) will do that in a chapter 7 case.) But, the smell of money eventually got the better of her, and she agreed to sell the patent and assign the patent license to JMS Labs Limited. The sale and assignment were appropriately noticed, and when no objecting parties came nosing around, the Court approved the sale.

That's when Lockwood and JMS started to stink up the place. JMS filed a complaint against Lockwood seeking to enforce the licensor's obligation under the license to license future inventions. In other words, Lockwood was still inventing new ideas and JMS wanted access to them. In response, JMS filed a motion for reconsideration, asking the court to overturn the prior sale order on two grounds. First, he argued that the patent license had been automatically rejected and the Court could not therefore enter a sale order that, in effect, raised it up from the dead. In other words, Lockwood argued, there was no remaining license agreement for JMS to enforce. Second, Lockwood argued that the once JMS held the patent and both the licensee and licensor interests in the license, the license was eliminated by merger.

The Court thought these arguments passed the smell test and considered them in turn. The Court held that rejection is not an elimination of the contract, but merely a breach. Thus, the Court retained authority to assume and assign the licensor's interest, particularly to the only party entitled to enforce the breach - the licensee.

However, the Court felt the merger argument might have merit. The sale order did, actually, have a clause preventing merger. But, the sale motion itself had not clearly disclosed this provision or ask the Court to enter it. The Court felt that part of the order should not have been entered and ordered submission of a revised order. The Court did not decide whether or not the doctrine of merger would, in fact, apply.

One issue I find of interest, which the Court did not address, was the licensee's ability under the patent license to seek performance not from the new licensor (itself), but the old licensor (Lockwood). Once the patent was transfered to JMS and the licensor's rights under the license assumed by the estate and assigned to JMS, how in the world would Lockwood have had any further obligation under the license? JMS had taken an assignment of the licensor's interest because they wanted to eliminate any argument that they had to pay continuing royalty obligations. Maybe, they should have just purchased the payment stream, and left the rest of the license behind.

I don't know. Maybe the answer is right in the middle of my face.

Luddite Trustees?

Posted: October 1st, 2008, 10:19am PDT by Warren Agin

Get a load of the e-mail I received today from the bankruptcy court for the Southern District of Texas:

Change in Policy Regarding Submission of Paper Documents

The Judges of the United States Bankruptcy Court for the Southern District of Texas have agreed that chapter 7 trustees should not routinely refuse to accept electronic documents or to require that paper copies of documents be provided in addition to electronic copies. Section 341 meetings of creditors should not routinely be delayed or continued on the basis that chapter 7 trustees have been provided with only electronic copies of documents.

This policy change is intended to affect requests for schedules and statements and for routine documents required by a chapter 7 trustee. The Court recognizes that there may be occasions when original, paper copies of documents must be examined. This policy is not intended to inhibit a chapter 7 trustee from examining original documents when appropriate circumstances so warrant. This policy also does not impair the chapter 7 trustees' exclusive ownership and control of property of the estate, including all estate-owned documents.

To implement this policy, the United States Bankruptcy Court for the Southern District of Texas has amended its participation in the Uniform Administrative Procedures for Electronic Filing in Texas Bankruptcy Court by deleting the special provision contained in section III(E)(5)(b)(1) in the Uniform Administrative Procedures.

This policy change is effective for all cases filed on or after October 15, 2008.

I guess some of the local trustees down in Texas still like to do things the old fashioned way. As for me, I'm a chapter 7 trustee and we process all the schedules and most other documents electronically. When I do my meetings, I lug along a couple of laptops and a 17" screen as well. I can pop the bankruptcy schedules up on the large screen and flip through the pages while I talk to the debtors. The best part is they have no idea what I'm looking at. Is it the smoking gun document? When I ask them if they own real estate - am I looking at the title report? They have no way of knowing since they can't see the screen.

My guess is the trustees who want paper will continue to want paper and will find ways of getting the paper from the debtors' counsel who, if they are smart, will start faxing stuff from their computers.

Who will be the Lehman Brothers CPO?

Posted: September 16th, 2008, 2:52am PDT by Warren Agin

Lehman Brothers has consumer customers, they have personal information, and they have privacy policies. And, judging from the television news shots of employees leaving with boxes tucked under their arms, I am guessing that Lehman Brothers will be selling off assets.

So, that raises the question. Will there be a consumer privacy ombudsman for the Lehman Brothers' case? The main case, In re Lehman Brothers Holdings, Inc., was filed in the Southern District of New York as case no. 08-13555. Judge Peck is the winner of this particular lottery.

Maybe there won't be a CPO. According to a press release issued by Lehman Brothers, only the holding company filed. No other US subsidiary or affiliate was included. This means that the divestiture of assets will likely be through the sale of subsidiary entities, not through asset sales. And, very likely, that means the CPO provisions of section 363 won't be implicated.

On the other hand, who knows.

Getting Your Name in (LED) Lights

Posted: April 12th, 2008, 11:25am PDT by Warren Agin

Judge Alan Jarolovsky of the Bankruptcy Court for the Northern District of California, recently decided to use the web to help give pro-se filers warning of a problematic bankruptcy petition preparer. In In re Monrean, he fined bankruptcy petition preparer John Hall Mayton for a number of transgressions including charging excessive fees, providing a false address to the court, and failing to appear at a show cause hearing.

To make sure other pro-se debtor's received fair warning of Mr. Mayton's standing with the court, Judge Jarolovsky's order also provided that "[t]he Clerk shall post a copy of this order on the court website in an Internet-searchable manner." And indeed it is.

I wonder if Judge Jaroslovsky googled Mr. Mayton himself. If he did, he might have found the following order, entered by the US District Court for the Eastern District of Virginia in December 2007.

ORDER granting 11 Motion for Default Judgment; entering judgment in favor of the U.S. Trustee; U.S. Trustee seeking to impose maximum fine of $43,500 on defendant; as defendant is likely unable to pay such fine, defendant John Hall Mayton shall only pay a fine of $1,000 to the U.S. Trustee, for deposit as directed in 11 USC Sec. 110(1)(4)(A); defendant shall immediately forfeit $375 in fees, and return them to the debtor, Teddy Lee Burns; defendant shall pay $2,000 in statutory damages to debtor; permanently enjoining defendant from acting as a bankruptcy petition preparer in the EDVA, and in every other district, jurisdiction, Bankruptcy Court, or District Court of the USA; enjoining defendant from engaging in fraudulent, deceptive, and/or unfair conduct; enjoining defendant from using a computer, internet website, or any other electronic means to conduct business in violation of 11 USC Sec. 110, etc.; enjoining defendant from unauthorized practice of law; all injunctive relief granted herein shall continue in full force until Mayton appears and presents evidence to this court for removal or amendment of the terms; payments shall be paid in certified funds within 30 days of entry of this order; failure to comply may result in additional monetary sanctions, fines, etc.; directing the Clerk to deliver copies of this order to counsel of record and directing the Clerk to deliver a copy of this order in PDF format to defendant at j_h14@hotmail.com and jomayt@aol.com. Signed by Judge Robert G. Doumar and filed on 12/13/07. (vwar, ) (Entered: 12/13/2007)

Or, perhaps this order, from a Texas bankruptcy court.

Thanks to Michael St. James for forwarding the order to me.

Exclusive patent license deemed non-assignable

Posted: March 31st, 2008, 8:46am PDT by Warren Agin

In a non-bankruptcy case, Proteotech, Inc. v. Unicity International, Inc., 2008 WL 750595 (W.D. Wash.), a Federal District Court has held that an exclusive patent license is not freely assignable absent the licensor's consent. In reaching this decision, the Court reached out to the bankruptcy court decisions in In re Hernandez, 285 B.R. 435 (Bankr. D. Ariz. 2002) and In re Aerobox Composite Structures, 373 B.R. 135 (Bankr. D.N.M. 2007).

The plaintiff, Proteotech, had granted an exclusive patent license to Rexall Sundown, Inc. The license did not contain any relevant provisions regarding sublicensing of the patent rights. Rexall then granted a non-exclusive license of the technology to the defendant, Unicity. In 2006, Proteotech sued Unicity alleging patent infringement, among other things. Proteotech claimed that because Rexall had no authority to sublicense the patent rights, Unicity had not received any right to practice the patent and thus was violating the patent.

The Court noted the controlling precedent of In re CFLC, Inc. (Everex) with respect to non-exclusive patent licenses, but still was faced with the question of whether an exclusive patent license was non-assignable. Following Hernandez, the District Court held that exclusive patent licenses are, by default, non-assignable.

Selling a Domain Name Online

Posted: March 10th, 2008, 10:42am PDT by Warren Agin

Usually, I post about a new case, or interesting article. But, I haven't seen anything in a while. So, I thought I'd put up a post about a pending sale of a domain name, ECO.ORG, I'm handling for another chapter 7 trustee.

The name originally belonged to The Environmental Careers Organization, Inc., a non-profit which helped place interns in ecology friendly jobs using grant money. When they had some problems involving the use of EPA grants, they closed their doors and filed a chapter 7 petition.

So that's the background. ECO.ORG seemed like a pretty good name - but not top dollar. I did some background research and spoke to one investment banker who deals with million dollar domain names - and found out that the market is mostly driven these days by "domainers" who want to park generic domain names and pick up advertising revenue. The game is to get the website picked up by search engines, and feed visitors advertisements. Apparently, domain names will sell for about 1x expected revenue, and something like ECO.ORG might generate $100,000 or so a year. Not too shabby. But not rich enough for the investment bankers.

So, I had to look elsewhere. The premier place to auction off domain names these days seems to be a website called Sedo.com. You can list a domain name there, and troll for offers. Or, you can put the name up for auction. If the name is a good quality name - generally defined as a generic term or 2 or 3 letter word in the .com Tld - you can submit the name for inclusion in Sedo's GreatDomains auction. The GreatDomains auction runs once a month, auctioning off a large number of names at the same time. Sort of the Christies of the domain name world. I spoke to a fellow at Sedo, with the auspicious title of "chief negotiator" and he seemed willing to let me auction ECO.ORG on GreatDomains. After watching their March auction (eggs.com sold for over $100,000), I decided this was the route to use.

But, GreatDomains' audience is mostly domainers. I wanted to reach non-profits and sellers of consumer goods, or perhaps other strategic purchasers. So, I decided to also prepare and issue a press release. These days, issuing press releases is fairly easy. I used a service called PRweb, which gets the release issued on a number of on-line news feeds as well as the AP feed. Because the debtor's original chapter 7 filing had been newsworthy, the press release worked off the insolvency angle and the fact that the company was selling its domain name to pay creditors. I picked a May auction date, and advertised the date in the press release. I used a long lead time because trade magazines have a fairly long publication cycle.

So, we will see what happens. The court approval process is underway, the press release goes out in a day or two, and maybe we will get some great bids.

So, we will see what happens.

More on Thyroff

Posted: February 3rd, 2008, 1:30am PST by Warren Agin

Citing to the Thyroff decision, a Massachusetts Superior Court recently held that computer files can be "converted" under Massachusetts' state law. In Network Systems Architects Corp. v. Dimitruk, 2007 WL 4442349 (Mass. Super.), the plaintiff sued a former employee for trade secret violations and conversion, among other claims. The plaintiff claimed the employee had copied confidential computer information onto his laptop and onto computer disks. The information included customer contacts, supplier pricing and business plans.

The plaintiff claimed the computer data was converted. In response, Dimitruk argued that the information was not personal property subject to conversion. In its responsive papers, the plaintiff then drew a difference between information, and computer files containing information. The Court agreed that the distinction made a difference.

"If paper documents can be converted, as they no doubt can...., no reason appears that computer files cannot."

On this note, the Court denied Dimitruk's motion for summary judgment. The Court understood the concept that a computer file, like a paper document, is information placed in a tangible form and, in some circumstances, subject to similar legal treatment.

Patent Act KOs Title 11

Posted: November 26th, 2007, 8:23am PST by Warren Agin

A few years ago I posted a blog about an interesting District Court decision, Morrow v. Microsoft Corporation, 2004 WL 1781010 (Aug. 10, 2004), which held that a chapter 11 plan could divide the ownership of a patent from the right to sue for infringement of that patent. In the underlying bankruptcy, the debtor's chapter 11 plan had established three liquidating trusts. One received the patent and another the right to bring infringement claims. When one trust sued Microsoft for patent infringment, Microsoft claimed the trustee (Morrow) lacked standing. The District Court for the Northern District of California disagreed. The court held the trustee had standing under the terms of the confirmed plan and general trust principles.

In September, the Federal Circuit reversed the decision at 499 F.3d 1332 (Fed. Cir. 2007). The Federal Circuit held that a plaintiff must have an interest in a patent in order to bring an infringement claim. To simplify (a lot, because I have other work to do), the requirement is constitutional in origin - a bankruptcy Court apparently can not circumvent the requirement through the provisions of Title 11 and confirmation of a Chapter 11 plan.

Because the creditor's trust holding the cause of action did not have an interest in the patent, the Trustee lacked standing to assert a claim against Microsoft for patent infringement. The Patent Act won.

Second Life Credit Card

Posted: November 13th, 2007, 7:35am PST by Warren Agin

I came across an interesting article recently about a credit card that is usable in the Second Life on-line world. Apparently, it links to your real life credit card, so purchases made in Second Life would be passed through as charges against your real world credit card. Obviously, there must be merchants who would have to accept these Second Life credit cards.
All this is interesting in and of itself, but, more importantly, it is pretty much a truism that where credit exists insolvency structures will soon follow. Will Second Life come up with its own ways of dealing with insolvencies?

A Second Life Shutdown?

Posted: October 14th, 2007, 2:04pm PDT by Warren Agin

A few months ago, I blogged about Second Life - the online world with a real economy. One player in that economy is AxisVR, LLC, which operates a couple of on-line office buildings and two very large conference centers - one in the middle of a space station. Very cool stuff. I recently got a hold of the following e-mail that AxisVR sent out to members of its in-world "group:"

"Greetings All,

Unfortunately, the rent has fallen behind quite a bit, and I will be dissolving this group and reclaiming the land shortly. I'll wait a few hours to give everyone a chance to take any objects they do not want returned. (No copy object that are owned by the group do get permanently lost when items are returned so please take anything you do not want to lose).

Regretfully,"

Sort of like the standard message to employees - we are about to hand the keys over to the landlord so make sure you clear out your personal belongings. Is the business folding? Are they just taking down some of the virtual buildings? Is the real estate on the auction block? I don't know the answers, but I might post again if I find out.

Domain Names: contract right or something more

Posted: October 11th, 2007, 6:53am PDT by Warren Agin

Judge Illston, U.S. District Court Judge for the Northern District of California, recently issued an interesting decision about the nature of a domain name as an asset and, of tangential interest, where that asset is located. In Office Depot, Inc. v. Zuccarini, 2007 WL 2688460 (N.D. Cal. 2007), Judge Illston appointed a receiver to take control over and liquidate domain names owned by the infamous cybersquatter, John Zuccarini. On the way, she held that a domain name is property and that property can be located where the domain name's registry and registrar are located.

DS Holdings (the holder of Office Depot's judgment against Zuccarini) sought appointment of a receiver to sell Zuccarini's domain names. Zuccarini objected, holding that the domain names were not located in California and, thus, under California law, the District Court for the Northern District of California was not the proper forum for the receivership request. The Court noted this raised a two part question. First, is a domain name property? Second, where is that property located?

A Virginia court, in 2000, held that a domain name is really nothing more than a contract between the domain name holder and the domain name registrar. However, Judge Illston followed the applicable 9th Circuit law holding that a domain name constitutes a form of intangible property right, as set forth in Kreman v. Cohen, 337 F.3d 1024 (9th Cir. 2003). (see Warren E. Agin, I'm a Domain Name. What Am I? Making Sense of Kremen v. Cohen, 14 J. BANKR. L. & PRAC. 3 (2005)).

But where is that asset located? Domain names are managed through central registries - and there is only one central registry for each top level domain (ie .com, .org, etc.) The registry for Zuccarini's domain names was Verisign, located in California. However, domain name owners don't deal directly with the registry. They deal with domain name registrars, who are delegated the job of contracting with the domain name owners. And, typically, one goes to the domain name registrar to enforce or effect a transfer of ownership. For Zuccarini's domain names, the registrars were in Virginia, Washington, Germany and Israel. So, what is the proper forum? Judge Illston considered a number of options, but in the end held that the domain name exists in the location of both the registrar and the registry. Motion to appoint a receiver granted.

New Mexico Court Adopts "Actual Test," Defines New "Footstar Test."

Posted: October 1st, 2007, 2:59am PDT by Warren Agin

In In re Aerobox Composite Structures, LLC, 2007 WL 2178045 (Bankr. D. N.M. 2007), the bankruptcy court for the District of New Mexico has adopted the actual test. Tubus Bauer GmbH had licensed patents to Aerobox. When Aerobox filed its chapter 11 petition, Tubus Bauer filed a motion to compel Aerobox to reject the license, relying on the Catapult decision.

Judge McFeeley denied the motion, based on application of the actual test set forth in Institute Pasteur v. Cambridge Biotech Corp., 104 F.3d 489 (1st Cir. 1997). Along the way, he made a couple of interesting points.

First, he addressed the Debtor's argument that the patent license was not executory. In this particular case, the license was pre-paid. The Court found material performance remained on both sides as a result of standard anciliary provisions found in the license. The licensee had an obligation to refrain from selling certain technology separately and to maintain confidentiality. The licensor had an obligation to defend the patent. These provisions were enough to make the license executory.

Second, the Court defined a new "Footstar Test." In the Footstar decision, the Court reasoned that for purposes of section 365(c) the term "trustee" means only that, and does not encompass the term "debtor in possession." Thus, section 365(c) can only affect the right of a trustee to assume a contract, not a debtor in possession. The Aerobox decision referred to this as the "Footstar Rule" and applied it as an alternative basis for reaching its result.

Online Foreclosures: Commercially Reasonable?

Posted: September 15th, 2007, 7:34am PDT by Warren Agin

A year ago or so a reporter asked me to comment on why more Article 9 foreclosures are not conducted on-line. I told him I wasn't sure, but I suspected the reason was concern over whether an on-line foreclosure auction would be considered commercially reasonable.

It's not that I think an on-line foreclosure auction might be commercially unreasonable. In many circumstances - if not most - I think an on-line foreclosure auction would be more commercially reasonable than a traditional auction. In fact, I think we may someday see the day when a court holds a traditional auction commercially unreasonable because a much better on-line liquidation venue is available. The problem in this circumstance is the danger in being the first to try something new - whenever a secured creditor tries any new liquidation method it takes the risk of being accused of having foreclosed its collateral in a commercially unreasonable manner. Absent judicial acceptance, new foreclosure methods are inherently risky.

I recently came across a 2006 decision from the US Bankrutpcy Court for the District of Idaho that helps: In re A.W. Logging, Inc., 2006 WL 2860808 (Bankr. D. Idaho 2006).

Les Bois Leasing leased a sawmill and loader to A.W. Logging, Inc. After A.W. Logging, Inc. filed bankruptcy, Les Bois Leasing was able to terminate the leases and liquidate the equipment. Les Bois did so by selling the equipment through an online auction service called Iron Planet. Iron Planet is a fairly well known website used for liquidating all kinds of heavy equipment and vehicles. After liquidating its equipment, Les Bois filed a proof of claim for the remaining amount due under the lease.

The Debtor claimed the use of Iron Planet to sell the equipment was not commercially reasonable. The Debtor did not object to the use of an on-line auction, per se. Instead the Debtor objected to the particular auction site used. The Debtor claimed Les Boise should have used a speciality auction website, called the Sawmill Exchange, rather than an auction site that focused on heavy equipment generally. The Court agreed that under Idaho law, the leasing company had an obligation to dispose of the equipment in a commercially reasonable manner. But, as to the choice of auction site the Court had little to say, pointing out that:

"[t]he evidence showed that Iron Planet is a well-respected auction website that specializes in the sale of heavy equipment...[T]he Court is not persuaded that...the sawmill was not exposed to a broad market."

The Court noted that several bids were placed and held that the sale of the equipment on Iron Planet was reasonable.

The case demonstrates that on-line auctions are suitable for foreclosure auctions, provided suitable thought is given to the market for the auction website and its ability to reach an adequate audience of potential buyers. A few recent law review articles have addressed the issue, and show that a secured lender should not be afraid to look at on-line auctions. For example Richard H. Nowka, Ebay Auctions of Repossessed Vehicles - A Template for Commercial Reasonableness Under Revised Article 9, 31 S. Ill. U. L.J. 281 (2007); Michael Korbut, Online Auctions of Repossessed Collateral, 31 Rutgers L.J. 29 (1999).

SCO Group Files Bankruptcy: Penguins Rejoice!

Posted: September 14th, 2007, 9:32am PDT by Warren Agin

I've just learned from various friends in Delaware that the infamous The SCO Group has just filed a chapter 11 petition in Delaware. If you are not familiar with The SCO Group, they are famous - or perhaps infamous - for lawsuits against IBM and others claiming that the LINUX operating system violates IP rights The SCO Group had previously acquired from Novell. Last month, a federal judge held that the rights in question belonged to Novell, not The SCO Group. Novell promptly announced it has no interest in suing anyone in connection with use of the LINUX operating system.
Robbed of its business model of selling licenses to use the otherwise free LINUX operating system, The SCO Group apparently cannot cover its debts. I would have thought a chapter 7 would be more appropriate, since as far as I know the company has no actual business. But, I may be wrong.

Ignored License Agreements Do "Ride Through"

Posted: September 2nd, 2007, 3:07am PDT by Warren Agin

In December 2006, I wrote about a "ride-through" case from the District of Idaho. In In re JZ, LLC, 2006 WL 3782988 (Bankr. D. Idaho). In that case, a reorganized Debtor, JZ, LLC, sued Diamond Z Trailer, Inc. for breach of a license agreement. The defendant argued that the license was terminated because it had been ignored during the bankruptcy process - that is, the Debtor neither assumed it or assigned it. The bankruptcy court held that the license "rode through" the bankruptcy process and could be enforced.

The BAP for the Ninth Circuit has now affirmed that decision, holding that the Bankruptcy Act clearly established the ride-through doctrine; the First, Second and Fifth judicial circuits have recognized the doctrine's continued application; and the ride-through doctrine would apply in the JZ, LLC case to allow the Debtor to enforce the license. Diamond Z Trailer, Inc. v. JZ, LLC, 2007 WL 1954035 (9th Cir. BAP 2007).

I'm at the beach and uninterested in discussing the matter further. Fortunately, Sheppard Mullen's Bankruptcy Law Blog has posted an excellent and thorough analysis of the case.

Commercial Law in a Virtual World

Posted: July 31st, 2007, 8:17am PDT by Warren Agin

Not really a bankruptcy issue, but I have been a bit taken with the idea of legal structures in virtual worlds, such as Second Life. They might seem like a lark, but virtual on-line worlds are starting to develop their own internal commercial structures. Where money is involved, lawsuits will soon follow.

With more than five million registered users, Second Life is a complete virtual world, complete with a monetary system. Users maintain an “avatar,” a three-dimensional cartoon representation of themselves. They can travel through the virtual world, ride in virtual cars, planes and other vehicles, shop in virtual stores, dance in virtual nightclubs, and carry on discussions with other members’ avatars. Trade is in “Linden Dollars,” which members can purchase or obtain through trade or by having their avatars perform work in the virtual world. Members can purchase real estate, build or buy houses and furniture, and create three dimensional objects that they can use, trade or sell. As of April 2007, the Second Life virtual world had a monetary supply of about two billion Linden Dollars, the equivalent of $7,500,000 US. Moreover, Linden dollars can be converted into real dollars, through an on-line currency exchange.

In Second Life, members can "own" real estate and other property. In some cases, property accumulated in Second Life represents a very significant investment in real world money. So, is this virtual property real property? In Kremen v. Cohen, 337 F.3d 2024 (9th Cir. 2003), a case dealing with domain names, the Court of Appeals for the Ninth Circuit articulated a three-part test for defining property. “[F]irst, there must be an interest capable of precise definition; second, it must be capable of exclusive possession or control; and third, the putative owner must have established a legitimate claim to exclusivity.” One commentator, Allen Chein, posits that these characteristics arguably may apply to many of the virtual objects and land in Second Life and other virtual worlds. See, Chein, A Practical Look at Virtual Property, 80 St. John's Law Review 1059 (Summer 2006).

A recent case, Bragg v. Linden Research, Inc., 2007 WL 1549013 (E.D. Pa. 2007), demonstrates how the virtual world economy will result in legal disputes. Linden Research, Inc., which runs Second Life, terminated the account of a customer, Marc Bragg. This resulted in Bragg's loss of his "virtual assets" within Second Life. So, he sued the company. While the decision itself dealt with jurisdictional issues and the enforceability of an arbitration agreement (the Court held it was not enforceable), the underlying dispute will likely address the key issue of Bragg's rights to the virtual property he had acquired. Can a Second Life customer acquire property rights in virtual goods? We will have to wait and see.

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