By Solomon Genet

As a semi-regular guest-author on this blog, I try to stick with bankruptcy-related trade-secret issues.  The bankruptcy court’s January 2015 decision in In re NMFC, LLC is worthy of note. There, the court determined whether the debtor still owned its trade secrets. A copy of the opinion is linked below.

The South Carolina bankruptcy court had to decide whether certain trade secrets were either: (1) sold by the chapter 7 bankruptcy debtor pre-petition as part of a lender-imposed UCC sale to a buyer; or (2) outside of the assets sold, and therefore property of the debtor’s bankruptcy estate.  The bankruptcy court examined the language of the Bill of Sale, which included the following items being sold: intellectual property used by the debtor “in the manufacture, sale or other commercialization of performance fibers.” In other words, the court had to decide whether this definition include the debtor’s trade secrets. The trade secrets at issue related to the development of battery technology.

The bankruptcy court focused on the term “commercialization.” It ruled that since, when the sale occurred, the pre-petition debtor (1) was only having preliminary discussions about applications for its trade secrets; (2) had not yet established how a product would be created or what properties, in terms of weight, size or otherwise, it would have; and (3) had not yet set up a trial schedule for the product or drafted a patent; the trade secrets were not yet at the stage of “commercialization.”  Therefore, these trade secrets were not sold to the third party and they instead belonged to the debtor’s estate.

This appears to be a harsh result against the buyer, but is a good lesson for the purchasers of trade secrets in the marketplace: make sure the purchase contract explicitly defines the trade secrets being conveyed.

In re NMFC, LLC

Solomon Genet is a partner at Meland Russin & Budwick, P.A. in Miami, FL. He specializes in complex commercial litigation, business insolvency, and financial-fraud-related matters in the State and Federal courts.

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