Identifying and Keeping the Genie in the Bottle: The Practical and Legal Realities of Trade Secrets in Bankruptcy Proceedings

Sharon K. Sandeen


Anyone who has paid attention to developments in the world of business over the past quarter century knows that intellectual property ("IP")is a hot commodity. Indeed, in contrast to companies that emerged from the Industrial Revolution, many of the companies spawned during the Information Age attribute much of their value and prospects to intangible, rather than tangible, assets. Pursuant to IP theory, this shift in focus should have the desirable effect of encouraging more inventive and creative activity. From a practical point of view, it has created a situation where the value of a company can be more "smoke and mirrors" than real.

The ethereal nature of IP should be of particular concem to the parties to a bankruptcy proceeding because a principal focus in such cases is the identification and distribution of the assets of the debtor's estate. If, as some companies represent to their shareholders, creditors, and others, IP rights make up a major portion of a company's assets, then it is important for bankruptcy judges, trustees, and creditors to be able to identify, secure, and properly value such assets. Unfortunately, while bankruptcy courts and commentators have recognized the need to distinguish between tangible assets and IP rights, particularly when determining whether a claim against the bankruptcy estate is secured or unsecured,2 they often fail to acknowledge the practical and legal differences between the various forms of intellectual property. Not all forms of IP are created equal. For instance, while existing patent rights and pending patent applications are documented in writings that are available over the Internet, the same cannot be said for copyrights, trademarks, and trade secrets.5 Trade secrets, in particular, present a challenge for bankruptcy courts because they do not always exist in tangible form and, by definition, they must be kept secret.6 Thus, the very act of identifying and attempting to place a value on them may result in the loss ofsuch rights. . . .

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