In Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., what is the effect of rejecting an executory contract under 365(g)?

In Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., what is the effect of rejecting an executory contract under 365(g)?

• A. The license terminates and breach damages may be sought
• B. The license remains in force
• C. The license automatically transfers to another licensee
• D. The license is suspended until restructuring

Answer: (A)

When a debtor in bankruptcy rejects an executory contract under section 365(g), the rejection is treated as a breach of that contract as of the petition date. For an IP license, that breach terminates the license, ending the licensee’s right to use the licensed IP going forward. The non-debtor party is entitled to damages caused by the breach, i.e., breach damages. This is precisely what Lubrizol established: rejection ends the license instead of keeping it alive or transferring it automatically. There’s no automatic license survival or transfer unless the contract is specifically assumed and assigned under a separate provision.

When a debtor in bankruptcy rejects an executory contract under section 365(g), the rejection is treated as a breach of that contract as of the petition date. For an IP license, that breach terminates the license, ending the licensee’s right to use the licensed IP going forward. The non-debtor party is entitled to damages caused by the breach, i.e., breach damages. This is precisely what Lubrizol established: rejection ends the license instead of keeping it alive or transferring it automatically. There’s no automatic license survival or transfer unless the contract is specifically assumed and assigned under a separate provision.