Levying Execution on IP Assets as the Debtor’s Property

Alexandra Pelikh
Head of IP Group
Pepeliaev Group, LLC

It is often the case that the majority of intellectual property (IP) assets are not included in the bankruptcy estate during bankruptcy proceedings. This is primarily attributable to the specific legal nature of exclusive rights to the results of intellectual activity and means of identification, the difficulties involved in the disposal of a number of assets and, in some cases, the impossibility of identifying such assets.

The situation has changed now, however. The entry into force of Part 4 of the Civil Code enshrines in law for the very first time the ability to levy execution on IP assets. All IP assets mentioned within the scope of bankruptcy proceedings may hypothetically be divided into three groups:

• IP assets that may not be subject to execution by virtue of express provision in the law.

Firstly, these include the personal nonproperty rights of the author and other right holders (such as the right of authorship, the right of divulgation) by virtue of the inalienability of such assets stipulated by Article 150 of the Civil Code. It is impossible to force an author to publish a work to repay debts.

Secondly, execution may not be levied on the exclusive right to a work that is owned by the author. This rule also applies to the author’s heirs.

At the same time, it is possible to levy execution on the author’s rights of claim against other persons under agreements on the alienation of the exclusive right to a work and under licensing agreements, as well as on the author’s profits obtained from the use of work.

• IP assets on which execution is levied most frequently.

This group consists of assets that have been duly registered with the Federal Service for Intellectual Property, the exclusive rights to which are confirmed by the relevant documents of title (title of protection), such as a patent (invention, utility model, industrial design, selective breeding achievements) or a certificate (trade mark, registered software, if the exclusive rights do not belong to the author).

Information about the existence or absence of the debtor’s exclusive property rights to the results of IP activity and means of individualization may be obtained from the relevant state register.

• IP assets with respect to which the levy of execution is not directly prohibited by law, but appears extremely complicated owing to the lack of clear-cut regulatory procedures and documents of title.

Such assets consist of, for example, trade secrets (know-how), integrated circuit topographies and unregistered software — if the author does not own the exclusive right to the software — which is virtually protected as a work.

In practice, it proves extremely difficult to obtain information about the debtor’s exclusive rights to said IP assets, as they are contained only in documents and agreements belonging to the debtor, instead of a generally accessible register.

As for trade secrets, levy of execution on this type of IP asset is complicated owing to its legal nature. Trade secrets are protected by virtue of the fact that they are not known to any third party and are kept under the trade secrecy regime. Once information constituting a trade secret comes into the public domain, all the right holders lose their right to the know-how. In this context, it remains unclear how to form a lot for the auction and how to describe a trade secret.

The subject matter of the lot may constitute the exclusive right to the trade secret in full. In other words, the trade secret should be fully disclosed, as the law does not provide for the transfer of certain components of a trade secret. Consequently, a situation could occur where the confidentiality of data constituting a trade secret is lost, and as a result the exclusive right to a trade secret is terminated by virtue of law.

It seems most reasonable to levy execution with respect to exclusive rights on such IP assets as corporate name, patents and trade marks within the scope of the levy of execution on a property complex as a whole. In the event of the sale of an enterprise, all types of property and property rights designated for entrepreneurial activity are alienated, including IP assets, but excluding exclusive rights that cannot be transferred to others under effective legislation.

The issue as to whether it is possible to levy execution on such means of individualization as a corporate name has not been resolved. This is attributable to the fact that Clause 2, Article 1474 of the Civil Code does not permit the disposal of the exclusive right to a corporate name, including through alienation.