## Facts

- CellNet Data Systems, Inc. developed wireless data technology and, before bankruptcy, licensed technology to third parties in exchange for royalty payments.
- CellNet filed for Chapter 11 relief in the District of Delaware.
- CellNet sold certain assets to Schlumberger Resource Management Services, Inc. under an asset purchase agreement that transferred intellectual property but expressly excluded specified license agreements, related assets, and related liabilities.
- The purchase agreement also expressly separated the royalty streams under the excluded license agreements from the intellectual property conveyed to Schlumberger.
- Consistent with the sale structure, CellNet moved to reject the excluded license agreements under 11 U.S.C. § 365(a), and the bankruptcy court authorized rejection.
- A licensee under an excluded license elected under 11 U.S.C. § 365(n) to retain its licensed rights and continue paying royalties under the license terms.
- CellNet and Schlumberger disputed who was entitled to receive the post-rejection royalty payments.
- The bankruptcy court held the royalties belonged to the bankruptcy estate; the district court affirmed.

## Issues

1. Whether a purchaser of a debtor’s intellectual property is entitled to post-rejection royalties paid under a prepetition license when the asset purchase agreement expressly excluded the license and severed the royalty stream from the transferred intellectual property.
2. Whether a licensee’s election under 11 U.S.C. § 365(n) reallocates the recipient of royalty payments from the debtor’s estate to the purchaser of the intellectual property.

## Decision

- The Third Circuit affirmed the district court and bankruptcy court.
- The court held the post-rejection royalties were not conveyed to Schlumberger and remained property of CellNet’s bankruptcy estate.
- The court concluded that § 365(n) preserved the licensee’s ability to continue using the intellectual property in exchange for royalties, but did not transfer CellNet’s contractual right to receive those royalties to Schlumberger.

## Legal Principles

- An asset purchase agreement controls allocation of rights transferred in a bankruptcy sale; when it expressly excludes specified license agreements and separates associated royalties, the purchaser does not obtain the royalty rights.
- Rejection of an executory contract under 11 U.S.C. § 365(a) constitutes a breach and triggers statutory consequences, but does not itself convey contract payment rights to a third-party purchaser.
- Under 11 U.S.C. § 365(n), an intellectual-property licensee may retain its licensed rights after rejection if it continues to pay royalties; the statute preserves the licensee’s rights but does not reassign who is entitled to receive the royalty payments absent a valid transfer.

## Conclusion

The Third Circuit held that, where a bankruptcy sale transferred intellectual property but expressly excluded the related license and severed the royalty stream, royalties paid after the licensee’s § 365(n) election remained payable to the debtor’s estate rather than the intellectual-property purchaser.


In re CellNet Data Sys., Inc., 327 F.3d 242 (3d Cir. 2003)