Bankruptcy Clauses In Publishing Agreements

Many publishing agreements include bankruptcy clauses to protect the author, for example:

 In the event of the bankruptcy, insolvency or liquidation of the Publisher, this Agreement shall terminate and all rights granted to the Publisher shall revert to the Author automatically and without the necessity of any demand or notification.

Sounds good. But is it  enforceable?  Surprisingly – no.  Section 541(c) of the Bankruptcy Code provides that an interest of the debtor (the bankrupt company or person) in property becomes “property of the estate,” meaning that the debtor does not lose the property or contract right, despite a provision in an agreement.  A clause that terminates a contract because of the “insolvency” or “financial condition” of the debtor, or due to the filing of a bankruptcy case, will be unenforceable once a bankruptcy case has been filed – and the bankruptcy court could than dispose of the author’s copyright as part of the bankruptcy proceeding, without the consent of the author.

So why do I advise putting a bankruptcy clause in a publishing agreement? Several reasons: First, under the previous version of the Bankruptcy Code, these clauses were enforceable, so publishers grew used to seeing them, and it’s always possible that the Bankruptcy Code could be changed to reinstate the old rule, so why take it out?

Second, the rule against enforceability applies only if a bankruptcy action actually is filed by the publisher.  If the agreement provides that it terminates merely upon the publisher’s insolvency or liquidation — and no bankruptcy case is ever filed—the clause is enforceable.

Third, there is a special exception to the rule, at least in some federal circuits, where copyright licenses and assignments are involved. (Legalese alert!)  Section 365(c)(1) of the Bankruptcy Code (dealing with “executory” contracts”) has been interpreted by a number of courts to apply to contracts involving intellectual property.  Courts have ruled that federal intellectual property laws excuse a non-debtor party to an IP license from accepting performance from, or rendering performance to, an entity other than the “debtor in bankruptcy” (the publisher).  As a result, these courts have held that an IP licensor who does not consent to an assignment can successfully block a debtor – via the bankruptcy trustee — from assigning a patent, copyright, or trademark license to a third party during a bankruptcy case.  This rule applies with greatest force to non-exclusive IP licenses but may also apply to certain exclusive licenses too.

Confusing? Well, yes.  But including a bankruptcy clause in your publishing contract can’t hurt, and very well may help.