In the recent decision of Automotive Coalition for Traffic Safety, Inc. v. Joyson Safety Systems Acquisition, LLC, et al., (In re: TK Holdings, Inc., et al.), (Bankr. D. Del. June 18, 2020),  the Delaware Bankruptcy Court adjudicated ownership of certain patent rights (the “Patent Assets”) between Automotive Coalition for Traffic Safety (“ACTS”) and TK Holdings (“Takata”), in order to determine whether the Patent Assets were part of the sale to Joyson Safety Systems Acquisition LLC (“Joyson”). The Court found that the Patent Assets were the property of plaintiff ACTS, not of the debtor Takata, and therefore such assets were not transferred to Joyson under Takata’s Fifth Confirmed Amended Joint Chapter 11 Reorganization Plan (the “Plan”).  Accordingly, Judge Shannon granted summary judgment in favor of ACTS, and denied Takata’s cross-motion.

Background and Analysis

In 2017, Takata filed for bankruptcy protection under Chapter 11.  Takata’s Plan was structured to sell substantially all of its assets to Joyson, which included the Patent Assets at issue. ACTS objected to the Plan, taking the position that the assets at issue were property of ACTS, not Takata.  Specifically, ACTS objected to the proposed sale of U.S. Provisional Patent Application No. 61/451,022 and certain other patents and patent applications.

The Patent Assets involved a new alcohol detection system that would detect alcohol and help prevent the user from driving under the influence.  The research program was called Driver Alcohol Detective System for Safety (“DASS”). ACTS initiated this program in 2008 and hired TruTouch Technologies, Inc. (“TruTouch”) initially but, in 2010 entered into a contract to use the engineers and existing technology at Takata to develop an anti-circumvention mechanism.

Takata completed the work and responded to ACTS’s request for proposal (“RFP”) on February 9, 2011 with the presentation meeting to be held on March 10, 2011. Takata filed the ‘082 patent one day before the meeting, on March 9, 2011, and therefore claimed its development to be a “proprietary method”.

In determining which party had rights to the Patent Assets, the Court analyzed the language of an agreement entered into between ACTS and Takata (the “Agreement”), dated months after the ‘082 patent was filed by Takata.  The Agreement signed by ACTS and Takata defines “Work Product” as “any and all deliverables… which are of were, after February 9, 2011, developed, discovered etc.”  Because the patent was filed after February 9, 2011 (on March 2011), the Court found that it constituted “Work Product” under the terms of the Agreement.

Key Takeaway

This decision is interesting in that a retroactive agreement following the filing of a patent application by Takata ultimately deprived the purchaser of Takata’s assets of the patent rights at issue.  Entities acquiring assets through a bankruptcy sale or plan should make sure to closely analyze the pertinent agreements at issue in order to determine the likelihood that such assets will in fact be transferred pursuant to a plan over an objection.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.