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Mallinckrodt Ruling Holds Creditor Lessons For IP Sellers
By Mark Dendinger and Jonathan Lozano ( January 17 , 2023 , 4:12 PM EST )
In late December , the U . S . District Court for the District of Delaware issued an opinion in In re : Mallinckrodt PLC affirming the Mallinckrodt [ 1 ] bankruptcy court ' s November 2021 decision that the debtor could discharge certain post-petition , post-confirmation royalty obligations for the sale of the company ' s Acthar gel .
The district court ' s affirmation serves as a reminder to holders of intellectual property that a debtor ' s fresh start under the U . S . Bankruptcy Code could trump royalty obligations that are found to be contingent claims arising as of the time of the transaction .
Parties should heed the district court ' s warning and give careful consideration when crafting corporate transactions to protect their rights to future payments .
As background , in 2001 , Mallinckrodt and Sanofi-Aventis U . S . LLC executed an asset purchase agreement under which Sanofi sold Mallinckrodt certain intellectual property , including trademarks and regulatory rights , relating to Acthar gel , a therapeutic treatment for inflammatory and autoimmune conditions .
As a component of the purchase price , Mallinckrodt agreed to pay Sanofi annual royalties equal to 1 % of all Mallinckrodt ' s net sales of Acthar gel that exceeded $ 10 million per year .
On Oct . 12 , 2020 , Mallinckrodt filed for Chapter 11 bankruptcy protection in the U . S . Bankruptcy Court for the District of Delaware , seeking to resolve several billion dollars of legal liabilities related to the opioid epidemic and Acthar gel rebates .[ 2 ]
One year into the bankruptcy , Sanofi filed a motion seeking a determination that either the asset purchase agreement was not executory and Mallinckrodt could not discharge the royalty payment obligations under the asset purchase agreement in its Chapter 11 cases , or , in the alternative , if the asset purchase agreement was executory and Mallinckrodt did reject it , Mallinckrodt could no longer sell Acthar gel .
On Nov . 8 , 2021 , the bankruptcy court held that the asset purchase agreement was not executory , but that claims for post-petition breaches of the asset purchase agreement , including for Mallinckrodt ' s failure to pay any royalties to Sanofi as a component of the purchase price , constituted prepetition