Opposition Brief — Institut Pasteur v. Cambridge Biotech Corp., 117 S. Ct. 2511 (1997) (No. 96-1698)

No. 96-1698 se FE

AAY 27

IN THE CLEFK

Suprene Court of the United States

OCTOBER TERM, 1996

an?

Wi

-

INSTITUT PASTEUR and PASTEUR SANOFI DIAGNOSTICS,

Petitioners,

CAMBRIDGE BIOTECH CORPORATION,

Respondent.

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT

RESPONDENT?’S BRIEF IN OPPOSITION

Of Counsel:

WILLIAM J.T. BROWN

DONOVAN LEISURE NEWTON

& IRVINE

30 Rockefeller Plaza

New York, New York 10112

(212) 632-3000

May 27, 1997

JOSEPH F. RYAN

Counsel of Record

ANDREW P. STREHLE

BROWN RUDNICK, FREED

& GESMER, P.C.

One Financial Center

Boston, Massachusetts 02111

(617) 856-8200

Counsel for Respondent

Cambridge Biotech

Corporation

Si sa ae

i

QUESTION PRESENTED FOR REVIEW

Should this Court reverse the Court of Appeals’ decision

permitting a debtor in possession to assume and retain its own

prepetition patent licenses pursuant to 11 U.S.C. § 365(c), where

lower courts found that: (i) the transaction was not a “disguised

assignment” to a different pariy; (ii) the debtor in possession was

not, legally or in substance, an entity materially distinct from the

debtor; (iii) if the contract were assumed by the debtor in

possession, the non-debtor party would nonetheless receive the full

benefit of its bargain; and (iv) the contract and applicable law

permit the transaction in question?

il

RULE 29.6 STATEMENT

The parent companies of Respondent Cambridge Biotech

Corporation are, in ascending order, bioMérieux Vitek, Inc., ABG

Stella Acquisition, Inc., bioMérieux S.A., and bioMérieux

Alliance, S.A. Respondent has one nonwholly owned subsidiary,

Cambridge Affiliate Corporation.

ill

TABLE OF CONTENTS

QUESTION PRESENTED FOR REVIEW ...........:ccscecsssseeeesesenenenes i

RULE 29.6 STATEMENT .............sssscssssssssresressssssesersersnsessnsonsensees i

TABLE OF AUTHORITIES ...........:.sccsscsscsssesscseecssesesssscersenesensesees Vv

STATEMENT OF THE CASE ............s0cccssessresssecesssseecsneeseserseenenes 1

SUMMARY OF ARGUMENT. ............scsscsseessesesenerteseneesseneneesnenees 2

REASONS FOR DENYING THE PETITION ............:::2:0ece0eeee004 3

I. THE CASE WAS RIGHTLY DECIDED

AND PRESENTS NO COMPELLING

ISSUE FOR REVIEW..............ccsssccssssecsesresnrssesersessensonns 3

II. THERE IS NO CONFLICT BETWEEN THE

FIRST CIRCUIT’S DECISION AND THE

DECISIONS OF OTHER CIRCUITS

APPLYING § 365(C). ...........c.scssccsssssersercserssesesecssesessoans 6

A. Both The Third Circuit And The First

Circuit Focus On Whether The Debtor

In Possession Seeking Contract

Assumption Is A Materially Distinct

Entity From The Prepetition Debtor,

And The Differences In The Decisions

Are Attributable To The Different Facts

a sala cuabiedsnedbscolinsanyivated 6

B. Even The Third Circuit Does Not

Follow The So-Called “Hypothetical

Test” That Petitioners Contend

Conflicts With The First Circuit’s

as aa ienaptnenndanecrnenioeniee 8

:

ee ee eee

iv

C. In Any Event, The “Hypothetical Test”

Would Not Be Relevant Here, Because

The Cross-Licenses And Applicable

Law Permit The Transaction At Issue. .................. 9

D. The Decision Of The First Circuit Poses

No Conflict With The Decisions Of

Other Courts OF Ammeals, .....:.cc.cesssesescasessecsesseasee 1]

E. The Facts Of This Case Present No

Conflict Of Federal Policies. ..................cccccseeeeee 14

Ill. THE COURT OF APPEALS’ DECISION

DOES NOT CONFLICT WITH PRIOR

DECISIONS OF THIS COURT. ...sccsscssevosessoversnessncosees 15

Cet RPE T i cridclidecsincssvoniiatipcabibaisaindanioanikal wentaaraticudoammtcnns 17

v

TABLE OF AUTHORITIES

Page

Cases

Breeden v. Catron (In re Catron), 158 B.R.

629 (E.D.Va. 1993), aff'd, 25 F.3d 1038

(4th Cir. 1994)... sssccccssesesenessesesneneeseessessecsesessenesenenes 7, 10, 14

Breeden v. Catron (in re Catron), 25 F.3d

1038 (4th Cir. 1994)... essssecssesssneeeseseseeenenseseneseeennensnsneees 14

Everex Systems, Inc. v. Cadrak Corp. (In re CFLC, Inc.),

89 F.3d 673 (9th Cir. 1996)...............scsccscrccsssesnreserescsees 3, 12,14

Gould v. Antonelli (In re Antonelli), 4 F.3d 984, 1993 U.S.

App. LEXIS 37907 (4th Cir. 1993)......ssssssesssesssrsnsenensnesenens 14

In re Adana Mortgage Bankers, Inc., 12 B.R. 977

(Bankr. N.D. Ga. 1980) ........:scscssssssssssessserenenenenensessesesensneennenens 13

In re Anglo Energy Ltd., 41 B.R. 337

(Bankr. S.D.N.Y. 1984).......ccccccssecesesseessssererennenensesstsenseeenenenenens 16

In re Cardinal Indus., Inc., 116 B.R. 964

(Bankr. S.D. Ohi0 1990) ........cccsccsesessseeeeereneeenensnsseensseenensens 5,12

In re Carolina Parachute Corp., 108 B.R. 100

(M.D. N.C. 1989), aff'd in part, vacated in part,

907 F.2d 1469 (4th Cir. 1990)............cesscssesseereseseseensesseesensenes 7

In re Carolina Parachute Corp., 907 F.2d 1469

(Ath Cir. 1990) .....cecscesssccressesvorssnsenencesnsssssensneresncssnesccsacsnsenssnenseees 7

In re Corporacion de Servicios Medicos

Hospitalarios de Fajardo, 805 F.2d 440

(Ast Cir. 1986)...........ccccscsssscsssconssccvserssecsccsenesesecssnconssscesenconensenes 9

vi

In re Fastrax, Inc., 129 B.R. 274

IE. BEEF TK BOY icc icc ciccscnistriiinsicis sistaliacanoiabiceinds 12

In re Hartec Enters., Inc., 117 B.R. 865

(Bankr. W.D. Tex. 1990), vacated by compromise,

Sa es OD es ieitisisisiciciivinteadnietbcdvaaiid uajeaaea ila geo 12

In re Headquarters Dodge, Inc., 13 F.3d 764

PR BO siricidarnnnlelindiidatucicbccadbedepilid diac dioneeea N 8

In re James Cable Partners, L.P. , 27 F.3d 534

RCs SOOPOR iclmepiclnidiipingsicciiclalatgtie testes 2S cei 11

In re Nizny, 175 B.R. 934 (Bankr. S.D. Ohio 1994) o.o...ceeccecesee. 12

In re Ontario Locomotive & Indus. Ry. Supplies

Inc., 126 B.R. 146 (Bankr. W.D.N.Y. 1991)....c.ccccccecesssssccsceeees 12

In re Pioneer Ford Sales, Inc., 729 F.2d 27

SING aA ONE isch crcninleasnithonniertoeh adel samhdas idealist ten! 10-11, 13

In re University Medical Center, 973 F.2d 1965

SR: BUNUN iiicieaspseneistinki epi pteilenibltaccitatlcsesiies Gia Mears 9

In re West Electronics Inc., 852 F.2d 79

ea SON asisesianbitssstons tiie tiniiadesnaceaiiadaidsicnta tae gatas 3 6, 7,8

Institut Pasteur v. Cambridge Biotech Corp.

(/n re Cambridge Biotech Corp.), 186 B.R. 9

(Bankr. D. Mass. 1995), appeals docketed and pending,

Nos. 95-40188, 95-40189 (D. Mass. October 5, 1995)............. 10

In the Matter of American Ship Bldg. Co., Inc.,

164 B.R. 358 (Bankr. M.D. Fla. 1994)..0....cccccccescsssescsssoscsoseees 12

In the Matter of GP Express Airlines, 200 B.R. 222

UI. ED, FRI TO is cceteicnsictosictinsecnicienaanianit ea 12

Vii

In the Matter of Optimum Merchants Servs.,

163 B.R. 546 (Bankr. D. Neb. 1994), vacated on

appeal by consent order, 199 B.R. 409 (D. Neb. 1995).........+.. 12

Layne & Bowler Corp. v. Western Well Works, Inc.,

BE REM, SF CSRS ici ivnsicccscsscsncncnceivtescevssaauesastertninasstvsasiations 12

Metropolitan Airports Comm'n v. Northwest Airlines

(In re Midway Airlines), 6 F.3d 492 (7th Cir. 1993)...... 10-11, 13

National Labor Relations Board v. Bildisco & Bildisco,

BGG ETD. SES CIO nsccctstcccschitiintssssinesebintenvsercnsnatesseneencenve 15, 16

National Labor Relations Board v. Pittsburgh S.S. Co.,

DAB US. QOD CIIGA D cievscecevsincvansevrinetinstetiontaveiiocceppiaamesneseds 11-12

Pension Benefit Guar. Corp. v. Braniff Airways, Inc.

(In re Braniff Airways, Inc.), 700 F.2d 935

C5 Gly Cir. 19G3) .ceccincerenssnsosvscsocssacesesocsnndensnsesnessusessacteventoncetonatess 13

Rieser v. Dayton Country Club Co. (In re Magness),

S72 F.2d GBS CG Cir. FFD) arcerscccercsscscercossecvessnserosccosnsenss 12, 49

Sommerville v. United States, 376 U.S. 909 (1964) .......csecseeenes 11

Summit Inv. And Dev. Corp. v. LeRoux (In re LeRoux),

GF F.3d GOS (isk Cie, LIDS) cnceccniscsesssvecereeivirscascsevocnevsnces 5, ley 00

; Texaco Inc. v. Louisiana Land and Exploration

Co., 136 B.R. 658 (Bankr. M.D. La. 1992)............0s0recesersenees 12

The Monrosa v. Carbon Black Export, Inc.,

DOD UES BID CAT wiccntccivctcstnsntnvinstensavsnnesinsiatinssindocesensacvensevies 10

United States v. Johnson, 269 U.S. 220 (1925)......cccccsccsseseeeeererers 8

| eee

Vili

Volt Info. Sciences, Inc. v. Board of Trustees

of the Leland Stanford Junior Univ.,

ae Ae ah Se EE ees ncsprrisvstieninsinnatiieosancisiearsainshiigeisdccanuesssteidaaos 3

Wisniewski v. United States, 353 U.S. 901 (1957) ...cccccscsccsseceseeeees 9

Statutes

55 Sd ces Ae OD soirhinerasnedgnivenscieotesentinintanisioniniabaniliasamieh passim

BE Cr ns Bem D ensiicecpin cin sosieescnciinssitiintiailanincaiiaeeissuladebedeiibliads 4

SS iia Oe I oa crsstiitoseninniesevtchuccscipele neue psmaabladiosiokia Pe I

DE Rimeies Me Min ciipaesuhs-sesscoasaiccakaleioiimithiis cideitepiemti hme ailaglatldoiit 4

OF Sruiillie Mt BPA vei ciibcnstensonesssbabaeptessnapeibiasad paelipeanidaataaiaiebadgeies 1,4

FP Oct MPA vicsnnttnvvinhiohienseeiresdonpsledapseiatbatbadigidinition aubscpisoiGda 3

Be is 8 Bon tenniacernentaratlivenncaniniaviniohamapinnttealiniarasen 6,9

Other Authorities

Restatement (Second) of Contracts FEE) CEP Te wicsievevenenasenis 3

H.R. Rep. No. 1195, 96th Cong. § 27(b)(1980) .........sessessesseeseeseees 5

11 U.S.C.A. § 365, Historical and Statutory

Notes, “1984 Amendments” (West 1997)..........cccccccccssesessesscecees 4

ee ee ee ee nai

]

STATEMENT OF THE CASE

In 1994 Respondent Cambridge Biotech Corporation

(“Respondent”), then a publicly traded company, filed a voluntary

petition under Chapter 11 of the United States Bankruptcy Code.

As a Chapter 11 debtor in possession, Respondent had all the

rights and powers of a trustee, 11 U.S.C. § 1107, and continued in

operation. Respondent emerged from bankruptcy upon

consummation of its Chapter 11 reorganization plan (the “Plan”)

during the week of October 21, 1996. Prior to bankruptcy,

Respondent had two main business lines: a retroviral diagnostic

business accounting for the majority of its sales (App. 17a) ‘anda

biopharmaceutical business. Under the Plan, Respondent retained

its traditional retroviral business and spun off the developing

biopharmaceutical business to a new company, Aquila

Biopharmaceuticals, Inc. App. 18a. Under the Plan, the stock of

Respondent was sold to bioMérieux Vitek, Inc. (“bioMérieux”) for

cash to be used to fund other aspects of the Plan. See App. 38a-

39a, § 3(e). In continuing to operate the retroviral business,

Respondent has retained related employees, equipment, and some

38 license and sublicense agreements, including the Cross-

Licenses with Petitioners.” App. 9a; 32a. Respondent’s

assumption of all such licenses and sublicenses, together with

certain supply agreements and other executory contracts, was a

material condition for consummation of the Plan. App. 48a, § 33.

' Citations to material contained in the Appendix to the Petition (“App.”) are

to the material as it appears in such Appendix.

2 The Cross-Licenses concern processes and compounds for the diagnosis of

Human Immunodeficiency Virus (“HIV”), the virus that causes AIDS. See App.

2a-3a. Respondent holds an exclusive license from Harvard University for

patents related to such diagnosis, while Petitioner Pasteur Sanofi Diagnostics

(“PSD”) holds a license from the other Petitioner, Institut Pasteur (“IP”), for other

patents. Jd. The Cross-Licenses ensure that Respondent and Petitioner PSD will

each have the necessary technology for their independent manufacture of

diagnostic test kits for AIDS.

2

Petitioners unsuccessfully asserted below that: (i) the Plan

effected a disguised assignment of the Cross-Licenses to

Respondent’s new shareholder, bioMérieux; and (ii) even if there

was no such assignment, 11 U.S.C. § 365(c)(1) prohibits a debtor

in possession, such as Respondent, from assuming patent licenses

for use in its ongoing business. Petitioners have presented only the

second issue for review by this Court. In their Petition, the

Petitioners have made material misstatements of fact and law.’

SUMMARY OF ARGUMENT

The decision of the Court of Appeals does not conflict with

decisions of other Courts of Appeals or of this Court. As part of

its Chapter 11 reorganization Plan, Respondent underwent a

change in ownership and, under 11 U.S.C. § 365, assumed certain

prepetition contracts, including the patent Cross-Licenses with

Petitioners. In upholding the Plan confirmation order, the Court of

Appeals determined that: (i) the transaction was not a disguised

assignment of the Cross-Licenses to a different party;

(ii) Respondent is not, legally or in substance, an entity distinct

from the prepetition entity that entered into the contracts with

Petitioners; (iii) after Respondent’s assumption of the contracts,

Petitioners will receive the full benefit of their bargain; and

(iv) the contracts by their terms permit retention by Respondent of

the licenses following a change in corporate ownership of

Respondent.

If a licensee of United States patents who seeks rehabilitation

under Chapter 11 must forfeit its right to assume and carry out its

patent licenses, the rehabilitative purposes of Chapter 11 would be

3 Misstatements of fact and law are discussed infra notes 4, 5, 11, 12 and 16.

‘ Notwithstanding that each lower court has rejected Petitioners’ attempt to

characterize the bioMérieux transaction as effecting an “assignment” of the Cross-

Licenses, Petitioners continue to refer to it as one. Petition 3-4. As found by the

lower courts, Respondent has retained, not assigned, the Cross-Licenses, and there

are no compelling circumstances that warrant treating the transaction as

something else. App. | la-12a; 30a - 33a; S5la, § 34(h).

$

;

é

h

‘

{

3

defeated and Chapter 11 would become a graveyard for technology

companies whose business depends upon continued viability of

their patent licenses. No circuit court has interpreted the current

version of § 365(c) to deny contract assumption by a debtor in

possession that is, as Respondent is here, materially the same

entity as it was when it made the contract. Likewise, no circuit

court has interpreted the current version of § 365(c) to deny

contract assumption where the contract, as it does here, authorizes

the transaction in question. Finally, the decision of the Court of

Appeals is in accord, not at odds, with relevant authority of this

Court recognizing, in the absence of contrary evidence, that a

debtor in possession is not an entity different from the prepetition

debtor.

REASONS FOR DENYING THE PETITION

I. THE CASE WAS RIGHTLY DECIDED AND PRESENTS

NO COMPELLING ISSUE FOR REVIEW.

While contracts are generally assignable, common law

recognizes that rights and obligations under certain types of

contracts cannot be assigned or delegated to a third party. See

RESTATEMENT (SECOND) OF CONTRACTS § 317(2) (1979). A

number of cases have also held that nonexclusive licenses under

United States patents may not be assigned, unless the contrary is

provided in the license.’ The courts below assumed, for purposes

of their decision, that the patent licenses at issue would have been

5 Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 679

(9th Cir. 1996)(“CFLC”) and cases cited. This conclusion is said to be a matter of

“federal common law,” although the license agreement may have a choice of law

clause adopting the law of a state (in the instant case, Massachusetts law; App.

66a, 80a). Cf Volt Info. Sciences, Inc. v. Board of Trustees of the Leland

Stanford Junior Univ., 489 U.S. 468, 476 (1989) (parties’ choice of California

law precludes application of Federal Arbitration Act, despite strong federal policy

favoring arbitration). Petitioners err (Petition 6 n.5) in attributing

nonassignability to the act of Congress providing that patents for invention have

the attributes of “personal property” (35 U.S.C. § 261), as such enactment merely

means that patents for invention are personal property, not real property.

4

nonassignable under federal common law, but held that the debtor

in possession could assume them for use in its business. See App.

8a; 25a-26a; 51a.®

Section 365 of the Bankruptcy Code generally permits

assumption or assignment of a debtor’s contracts. (See §§ 365(a)

and (f)), but seeks to accommodate the policy of applicable

common law against assignment of certain contracts to third

parties. Thus, Section 365(c) as originally enacted in 1978

provided that, absent consent:

The trustee may not assume or assign any executory

contract or unexpired lease of the debtor, whether or not

such contract or lease prohibits or restricts assignment of

rights or delegation of duties, if-

(1)(A) applicable law excuses a party, other than the

debtor, to such contract or lease from accepting

performance from or rendering performance to the trustee

or an assignee of such contract or lease, whether or not

such contract or lease prohibits or restricts assignment of

rights or delegation of duties . . . .

11 U.S.C.A. § 365, Historical and Statutory Notes, “1984

Amendments.” (West 1997)(emphasis added)

The trustee is of course a third party, someone other than the

debtor, and assumption and performance of an executory contract

by the trustee might arguably offend the law applicable to some

contracts. Under Chapter 11 the debtor in possession exercises the

rights and powers of the trustee, subject to applicable limitations.

11 U.S.C. § 1107. But when a debtor in possession assumes its

own prepetition contract, applicable law could not be offended, so

long as the debtor in possession is regarded as the same entity as

* Respondent reserved its argument as to application of Massachusetts law,

the bankruptcy court having found as a matter of fact that the corporate change of

control transaction did not effect any “assignment” of the patent licenses. App.

Sla

5

the original contracting party. In 1984 Congress amended the

statute to delete the above italicized reference to “the trustee” and

to insert instead “an entity other than the debtor or the debtor in

possession.” (emphasis added.) The legislative history explains

that Congress intended to:

make [ ] clear the prohibition against the trustee’s powers

to assume an executory contract does not apply where it is

the debtor that is in possession and the performance to be

given or received under a personal service contract will be

the same as if no petition had been filed because of the

personal nature of the contract.

H.R. Rep. No. 1195, 96th Cong. 2d Sess. § 27(b)(1980).

The 1984 amendment, whose purpose is explained by its

legislative history, obviates a claim that the debtor in possession

cannot assume and perform any contract that the trustee or a third

party would be barred from taking over. See Summit Inv. and Dev.

Corp. v. LeRoux (In re LeRoux), 69 F.3d 608, 613 (1st Cir. 1995),

(relying on legislative intent); Jn re Cardinal Indus., Inc., 116 B.R.

964, 979 (Bankr. S.D. Ohio 1990) (same). The First Circuit

decision in the instant case is consistent with all other circuit court

authority in holding that a debtor in possession which is found to

be materially the same entity as the prepetition debtor will not be

barred from assuming and performing the contract. Here, there

was no factual showing that Respondent’s assumption of its own

patent licenses, whether viewed separately or in conjunction with

acquisition of stock ownership by bioMérieux, was a transaction

that would deprive Petitioners of the benefit of their original

bargain. Indeed, as the Court of Appeals held, the potential for

change in corporate ownership had been the subject of negotiation

and Petitioners foresaw or should have foreseen the possibility of

6

such a change as to Respondent, but understood and agreed that

the licenses would nonetheless remain in effect. App. 12a-14a.

There was no basis in fact or law for the Court of Appeals to reach

a different result, and the case presents no compelling issue for

review.

ll. THERE IS NO CONFLICT BETWEEN THE FIRST

CIRCUIT’S DECISION AND THE DECISIONS OF

OTHER CIRCUITS APPLYING § 365(C).

A. Both The Third Circuit And The First Circuit Focus

On Whether The Debtor In Possession Seeking

Contract Assumption Is A Materially Distinct Entity

From The Prepetition Debtor, And The Differences In

The Decisions Are Attributable To The Different Facts

In Each Case.

Petitioners seek to contrive a conflict between the instant case

and the opinion of a divided panel of the Third Circuit in Jn re

West Electronics Inc., 852 F.2d 79, 83 (3d Cir. 1988) (“West”), but

the result in West was a function of very different facts and

applicable law.’

In West, the issue was whether the automatic stay under 11

U.S.C. § 362 should be lifted to permit the government to

terminate a contract for the production of military equipment. In

holding that the stay should be lifted, the West court pointed out

that the Anti-Assignment Act, 41 U.S.C. § 15, prohibited

assignment of the contract without the government’s consent and

that the government had not consented. Jd. at 83. Here, in

7 Petitioners acknowledged below that West was not on point, prefacing

citations to West with the caveat that: “Similarly, although not directly on point,

cases involving contracts other than patent licenses also look to whether

applicable nonbankruptcy law prohibits assignment to determine whether §365(c)

operates as a limitation on the general authority of §§365(a) and (f) to assume and

assign executory contracts.” Brief Of Appellants Institut Pasteur And Pasteur

Sanofi Diagnostics, pp. 30-31 n.37 (emphasis added), filed with the Court of

Appeals.

A Ail Seth I Se

wear Eure

Lt pact A RES At ORR eater naib e

UMNO ac Nek Oe ee nee ate

ta Nenad Bh tr EA

7

contrast, it was found that the contract permitted the transaction.

App. 13a. Moreover, the West court. in attempting to divine

Congressional purpose in § 365(c), believed that Congress was

intent on precluding assumption in that context, as “a solvent

contractor and an insolvent debtor in possession going through

bankruptcy are materially distinct entities.” West, 852 F.2d at 83.

Here, in contrast, the Court of Appeals (and the lower courts)

concluded that Respondent, under new ownership, was not an

entity materially distinct from the prebankruptcy debtor.* App.

10a-1 1a; 26a-33a; 51a, § 34(h). In contrast to the debtor in West,

Respondent was solvent and was capable of performing under the

contract.’

* The two courts use the same terminology in discussing whether § 365(c)

precludes assumption: in West, assumption was denied where the debtor in

possession was a “materially distinct entity” from the prepetition debtor; in the

instant case, assumption was permitted where the debtor in possession was not an

“entity materially distinct” from the prepetition debtor.

* Petitioners include a string cite of lower court decisions evidencing what

petitioners say is confusion in the lower courts. Petition 9 n.7. In fact,

assumption was permitted in every post-West decision Petitioners cited in which

the debtor in possession was materially the same entity as the prepetition debtor,

infra note 14, whereas both cases in which assumption was denied were cases in

which the debtors in possession were materially distinct entities from the

prepetition debtors. Both such cases are not relevant authority for other reasons

as well. Breeden v. Catron (In re Catron), 158 B.R. 629, 638 (E.D. Va. 1993)

(terminating partnership agreement based on reading of 11 U.S.C. § 365(e)(2),

which is not applicable here, and because the postpetition debtor was not the

“same legal entity” due to the effect of the bankruptcy filing in shifting the

debtor’s fiduciary obligations from his partners to his creditors), aff'd, 25 F.3d

1038 (4th Cir. 1994); In re Carolina Parachute Corp., 108 B.R. 100, 101 (M.D.

N.C. 1989) (“Carolina Parachute I’) (allowing the government to terminate its

contract with the debtor in possession, because the court concluded that the

postpetition debtor was a materially different entity), aff'd in part, vacated in

part, and remanded, 907 F.2d 1469 (4th Cir. 1990) (“Carolina Parachute IT’).

Petitioners cited to Carolina Parachute I (Petition 9 n.7), the district court

decision, but failed to note that such decision was reviewed and vacated on appeal

on the § 365(c) issue. On appeal, termination of the contract was denied, as the

government had not timely objected to its assumption. Carolina Parachute II,

907 F.2d at 1473.

8

Such fact-specific decisions do not offer a sound basis for

review on certiorari. See United States v. Johnson, 268 U.S. 220,

227 (1925) (“We do not grant a certiorari to review evidence and

discuss specific facts.”).

B. Even The Third Circuit Does Not Follow The So-Called

“Hypothetical Test” That Petitioners Contend

Conflicts With The First Circuit’s Decision.

The West court wrote, in dicta, that: “11 U.S.C. 365(c)(1)

creates a hypothetical test--i.e., under the applicable law, could the

government refuse performance from ‘an entity other than the

debtor or the debtor in possession.”” West, 852 F.2d at 83

(emphasis in original). Petitioners contend that under such dicta a

debtor in possession may never assutne a contract where

applicable law would prevent assignment of that contract to a third

party, but that portion of the West opinion was subject to a dissent

by Judge Higginbotham (852 F.2d at 84), and such a rule has not

been sustained in subsequent Third Circuit decisions, which make

clear the Third Circuit does not subscribe to such a test.

In In re Headquarters Dodge, Inc., 13 F.3d 764, 682-83 (3d

Cir. 1993), a § 365(c) case which is not directly in point because it

involved assignment of the contract to a third party, the Third

Circuit referred to statements in West and another case as “Third

Circuit dicta” (id. at 682) and concluded that a fact intensive

inquiry would be necessary, based on factors such as the original

expectations of the parties, to determine whether assignment in

bankruptcy should be denied. Jd. at 683. Thus, on appropriate

facts, “he Third Circuit would permit assignment by a trustee or

debtor in possession despite applicable law precluding assignment

in other circumstances. If the Third Circuit would permit

assignment in the face of applicable law making the contract non-

assignable, it would necessarily permit assumption in that

‘© Apart from producing absurd results, application of such a hypothetical

test has been severely criticized as contrary to the legislative history of § 365(c)

and a prior decision of this Court. See infra notes 14 and 18.

9

circumstance, because assumption is a statutory prerequisite to

assignment. See 11 U.S.C. § 365(f)(2) (“the trustee may assign an

executory contract... only if -- the trustee assumes such

contract... .”).

Again, in Jn re University Medical Ctr., 973 F.2d 1065 (3d

Cir. 1992), the Third Circuit recognized that the Anti-Assignment

Act makes government contracts non-assignable, id. at 1076 n.15,

but nonetheless found “persuasive” the First Circuit view that no

blanket prohibition on assumption applies: “‘/W/e see no reason

why section 365 should not apply with full force to permit the

assumption or rejection of government contracts by debtors.’” Id.

at 1077 n.16 (3d Cir. 1992) (emphasis in original) (quoting Jn re

Corporacion de Servicios Medicos Hospitalarios de Fajardo, 805

F.2d 440, 447 n.10 (1st Cir. 1986)). While in that case the

government waived its rights under the Anti-Assignment Act, the

general statement to which the Third Circuit subscribed is

nonetheless irreconcilable with the hypothetical test attributed to

West by Petitioners, which would render all government contracts

non-assumable, because the Anti-Assignment Act prohibits their

transfer to any other party, without consent. 41 U.S.C. § 15(a). If

panels of the Third Circuit are inconsistent, it is for the Third

Circuit, not this Court, “to reconcile its internal difficulties.”

Wisniewski v. United States, 353 U.S. 901 (1957).

ORE ee FR WRT, RAS PE TaN atts AO

Sides 3x

a aoa 2a

C. In Any Event, The “Hypothetical Test” Would Not Be

Relevant Here, Because The Cross-Licenses And

Applicable Law Permit The Transaction At Issue.

While the Court of Appeals did not herein apply the

“hypothetical test,” the facts of this case would lead to the same

result under that test, since the contract in question and applicable

law permit the very transaction complained of by Petitioners. The

Court of Appeals held that Petitioners “foresaw, or reasonably

should have foreseen” that Respondent might undergo a change in

ownership, “but nonetheless chose not to condition the continued

viability of its cross-licenses accordingly.” App. 13a-14a. As the

court determined, “[t]hese cross-licenses explicitly authorize

BE nate we Sa te Tit Sle aa eS Saale Ted NER OP wera Meth

te be

aCe eae

=

ee

10

[Respondent] to share its license rights with any ‘affiliated

company,’ which on its face presumably encompasses a parent

corporation such as bioMérieux’s subsidiary.” App. 13a. Such

determinations, involving interpretation of a contract, provide no

basis for grant of certiorari. See The Monrosa v. Carbon Black

Export, Inc., 359 U.S. 180, 182-185 (1959) (certiorari denied

despite conflict of decision where case concerned contract

interpretation)."' Even if § 365(c)(1)(A) would prohibit

assumption, § 365(c)(1)(B) permits assumption where the non-

debtor party has consented. See, e.g., Catron, 158 B.R. at 636

(“the statute also requires that the nondebtor parties to the contract

fail to consent to the assumption...”). Here, the terms of the

Cross-Licenses clearly permit their retention despite the change in

corporate ownership.’ App. 12a-14a. See Metropolitan Airports

'' In an apparent invitation to this Court to resolve a factuai dispute,

Petitioners argue that the First Circuit’s analysis of the contract is incorrect

(Petition 16 n.16), and that the territory licensed to Respondent excluded the

United States, but the Cross-Licenses state that the covered territory “shall be

automatically extended” to include the United States (as well as other territories

listed under Exhibit C to the Cross-Licenses), in the event that Petitioners

recovered from Genetic Systems the right to practice in such territories, which

Petitioners were to use “best effort[s] to recover.” App. 6la, § 2.2; App. 74a,

§ 2.2. In a separate action between Petitioner IP and Respondent, the bankruptcy

court found, over Petitioner IP’s objections, that, for purposes of the contract, the

rights had been so extended, thereby authorizing Respondent to use Petitioners’

technology in those territories, including the United States. See Institut Pasteur v.

Cambridge Biotech Corp. (In re Cambridge Biotech Corp.), 186 B.R. 9, 16-17,

22 (Bankr. D. Mass. 1995), appeals docketed and pending Nos. 95-40188, 95-

40189 (D. Mass. October 5, 1995). Petitioners maintain “federal common law”

prevents assignment of licenses covering U.S. patents, but U.S. patent law will

not be applicable if the territory covered by the Cross-Licenses does not include

the United States.

'2 In their effort to avoid the terms of the Cross-License, Petitioners argue

that the terms of the contract are irrelevant, although that contention is not

supported by any citations. Petition 16. The phrase “whether or not such contract

or lease prohibits or restricts assignment of rights or delegations of duties” in

§ 365(c) does not make irrelevant the terms of the contract authorizing

assignment. The only contractual language to be ignored under § 365(c) is

anti-assignment language, as § 365(c): “prevents parties from using contractual

language to prevent the trustee from assigning contracts that (when the contract is

4

2

4

1]

Comm'n v. Northwest Airlines (In re Midway Airlines), 6 F.3d 492,

496 (7th Cir. 1993) (where the non-debtor party agreed in the

contract to a transaction that later takes place, it “cannot now

object to the one proposed here”). Thus, even if this Court found

that the First Circuit incorrectly applied § 365(c) such a ruling

would not change the result. See Sommerville v. United States,

376 U.S. 909 (1964) (denying certiorari where resolution of a

conflict would not change the result below).

D. The Decision Of The First Circuit Poses No Conflict

With The Decisions Of Other Courts Of Appeals.

This case does not present the Court with an opportunity to

resolve any “conflict” between the First Circuit and other

circuits.’ Petitioners cite to several decisions that arose in a

patchwork of various factual circumstances, none of which

resemble the facts presented here. No circuit court has denied

assumption where (as here) the debtor in possession seeking

assumption was found to be materially the same entity as the

prepetition debtor. No circuit court has denied assumption where

(as here) the contract was to be retained in the debtor’s bona fide

ongoing business following a change in corporate ownership. The

First Circuit’s decision below creates no “real and embarrassing

conflict of opinion and authority between the circuit courts of

appeal” justifying review on certiorari. National Labor Relations

Board v. Pittsburgh S.S. Co., 340 U.S. 498, 502 (1951) (quoting

silent) contract law typically makes assignable.” Pioneer Ford, 729 F.2d at 28

(emphasis added). See also Metropolitan A irports Comm'n v. Northwest Airlines

(In re Midway Airlines), 6 F.3d 492, 495-96 (7th Cir. 1993) (assumption was

permitted, over the nondebtor party’s objections, because the contract authorized

it).

** Petitioners argue that the First Circuit’s decision conflicts with Jn re

James Cable Partners, L.P., 27 F.3d 534 (11th Cir. 1994), but that case ruled that

assumption was permitted, despite an applicable law that prohibited assignment.

12

Layne & Bowler Corp. v. Western Well Works, Inc., 261 U.S. 387,

393 (1923))."

In their effort to contrive a conflict, Petitioners have also cited

cases which are distinguishable because they involved assignment,

not assumption. See Jn re CFLC, Inc., 89 F.3d 673 (9th Cir.

1996); Rieser v. Dayton Country Club Co. (In re Magness), 972

‘* The reading Petitioners seek to adduce from West also has been rejected

nearly uniformly by the lower courts in decisions since West. These courts view

the test as “absurd” or as a “legal tautology.” See, e.g., Summit Inv. and Dev. Cc

v. LeRoux (In re LeRoux), 69 F.3d 608, 613 (Ist Cir. 1995) (rejecting the

hypothetical test, because it leads to the nonsensical result of preventing a debtor

from assuming its own contracts); Jn the Matter of American Ship Bldg. Co., Inc.,

164 B.R. 358, 362 (Bankr. M.D. Fla. 1994) (permitting debtor to assume a

government contract, and rejecting the hypothetical test, because it prevents a

debtor from assuming its own contract and is, at the least, a legal tautology). See

also In the Matter of GP Express Airlines, Inc., 200 B.R. 222, 231-32 (Bankr. D.

Neb. 1996) (where there is an assumption, rather than an assignment, there is no

need to pose the hypothetical question); Jn re Nizny, 175 B.R. 934, 936-38

(Bankr. S.D. Ohio 1994) (rejecting hypothetical test under analysis of §§ 365(c)

and 365(e)); In the Matter of Optimum Merchants Servs., 163 B.R. 546, 554

(Bankr. D. Neb. 1994) ("[MJost bankruptcy courts have expressly rejected the

Third Circuit's hypothetical test."), vacated on appeal by consent order, 199 B.R.

409 (D. Neb. 1995); Texaco Inc. v. Louisiana Land and Exploration Co., 136

B.R. 658, 670 (Bankr. M.D. La. 1992) ("the trend appears to be away from the

‘hypothetical test’ of West”): In re Fastrax, Inc., 129 B.R. 274, 277 (Bankr. M.D.

Fla. 1991) (hypothetical test is not “appropriate under § 365(c)(1)”); In re Hartec

Enters., Inc., 117 B.R. 865, 871 (Bankr. W.D. Tex. 1990) (“The hypothetical test

also violates a basic rule of statutory construction that a court should give effect

to every word in a statute.”), vacated by compromise, 130 B.R. 929 (Bankr. W.D.

Tex. 1991); In re Ontario Locomotive & Indust. Ry. Supplies, Inc., 126 B.R. 146,

147 (Bankr. W.D. N.Y. 1991) (remarking that West "has not been lacking for

hostile critics"); Jn re Cardinal Indus., Inc., 116 B.R. 964, 979 (Bankr. S.D. Ohio

1990) (examining the legislative history of the 1984 amendment and finding the

hypothetical test in West to be “not appropriate under § 365(c)(1)”).

ee ae

13

F.2d 689 (6th Cir. 1992); ° In re Pioneer Ford Sales, Inc., 729

F.2d 27 (1st Cir. 1984);'° Pension Benefit Guar. Corp. v. Braniff

Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935 (5th Cir.

1983). The decisions in those cases pose no conflict, because they

did not deny a request for mere assumption and retention of a

contract by an original party to the contract.

Petitioners also try to contrive a conflict by citing cases that

interpreted the version of § 365(c) that existed prior to the 1984

amendment, discussed supra at pp. 4-6. See Braniff Airways, 700

F.2d 935; In re Adana Mortgage Bankers, Inc., 12 B.R. 977

(Bankr. N.D. Ga. 1980). Jn re Pioneer Ford Sales, Inc., 729 F.2d

27 (ist Cir. 1984), as an assignment case is consistent with the

decision below, but also predates the 1984 amendment regarding

assumption by the debtor in possession. The instant decision

cannot be said to conflict with the pre-1984 amendment cases,

because the purpose and effect of that amendment was to preclude

'S While the Sixth Circuit in Magness disagreed with Pioneer Ford as to the

interplay of § 365(c) and (f) in cases involving assignment, the transaction in this

case does not involve assignment and thus does not involve § 365(f). In any

event, the Magness court is in accord with the First Circuit that the preliminary

inquiry under § 365(c) is whether the non-debtor’s rights will be adversely

impacted. The Magness court wrote:

Subsection (c) states that if the attempted assignment by the

trustee will impact upon the rights of a non-debtor third

party, then any applicable law protecting the right of such

party to refuse to accept from or render performance to an

assignee will prohibit assignment by the trustee.

Magness, 972 F.2d at 695 (emphasis added).

' Petitioners incorrectly state that the court in Pioneer Ford “wrote that §

365(c) prohibits assumption where applicable law renders the contract

nonassignable.” Petition 5. In fact, Pioneer Ford addressed only assignment, not

assumption. See also Midway Airlines, 6 F.3d at 495 (distinguishing Pioneer

Ford as applying only to contracts silent on the issue of assignability and as

inapplicable where the contract authorized assignment).

i4

any prohibition on the debtor’s own assumption and performance

of contracts that could not be assigned to a third party."”

E. The Facts Of This Case Present No Conflict Of Federal

Policies.

Similarly, the facts of this case do not require a court to

balance patent policies against bankruptcy policies. This case

involved assumption and retention, not assignment to a third party.

Cf. CFLC, 89 F.3d at 676-77 (involving assignment of patent

licenses, not mere assumption). There is no policy prohibiting

retention of patent licenses by original parties. Indeed, contract

policies support upholding a patent licensor’s agreement, such as

that here, which authorize a licensee to retain its license

notwithstanding a change in corporate ownership. See App. 13a.

Cognizant of the patent policies against assignment to which

Petitioners refer, the Court of Appeals noted that “the product-

innovation theme promoted under patent law may well be

accommodated by allowing patent holders to control sublicensing

'7 Petitioners refer in a footnote to two unpublished decisions of the Fourth

Circuit, neither of which conflicts with the First Circuit's decision here. In

Breeden v. Catron (in re Catron), 25 F.3d 1038, 1994 W.L. 258400, * 1, 1994

U.S. App. LEXIS 14585, * 2 n.1 (4th Cir. June 14, 1994) (unpublished opinion)

(“Catron IT’), without extended analysis the Fourth Circuit affirmed the district

court’s decision, which is distinguishable on its facts. The district court found the

postpetition debtor to be a different entity than the prepetition debtor, as the

debtor’s fiduciary obligations in that case shifted from his partners to his creditors

when he filed for bankruptcy. Breeden v. Catron v. (In re Catron), 158 B.R. 629,

638 (E.D. Va. 1993) (“Catron I”), aff'd, 25 F.3d 1038 (4th Cir. Aug. 23, 1994).

In addition, Catron actually involved application of § 365(e)(2) (which

invalidates certain clauses that purport to terminate, ipso facto, a contract based

upon a bankruptcy filing), while this case does not involve an ipso facto clause

and thus does not involve § 365(e)(2).

The second unpublished Fourth Circuit opinion that Petitioners cite is

consistent with the First Circuit’s decision below. Gould v. Antonelli (In re

Antonelli), 4 F.3d 984, 1993 U.S. App. LEXIS 37907 (4th Cir. 1993)

(unpublished opinion). In its opinion, the Fourth Circuit, after extensive analysis,

affirmed the district court’s “adoption” of a “materiality of identity” test similar to

the one adopted by the First Circuit in this case.

esha nati

= ca

a ee ee

15

through negotiated contract restrictions.” App. 12a n.1l

(emphasis in original). The Court of Appeals decision merely

enforces Petitioners’ own contractual intent, that Respondent was

to retain benefits of the Cross-Licenses despite potential shifts in

Respondent’s corporate ownership.

Il. THE COURT OF APPEALS’ DECISION DOES NOT

CONFLICT WITH PRIOR DECISIONS OF THIS

COURT.

The act of commencing a bankruptcy case does not change the

legal identity of an entity or its capacity to perform its contracts.

National Labor Relations Board v. Bildisco & Bildisco, 465 U.S.

513, 528 (1984)."* This Court in Bildisco said that a debtor in

possession is not, on its face, a distinct entity:

Obviously if the [debtor in possession] were a wholly

“new entity,” it would be unnecessary for the Bankruptcy

Code to allow it to reject executory contracts, since it

would not be bound by such contracts in the first place.

For our purposes, it is sensible to view the debtor-in-

possession as the same “entity” which existed before the

filing of the bankruptcy petition, but empowered by virtue

of the Bankruptcy Code to deal with its contracts and

'S In LeRoux, the First Circuit wrote:

Mirroring the 1984 legislative history discussed above,

pertinent Supreme Court decisions diminish the legal

“fiction” that the prepetition debtor and the postpetition

debtor are to be treated as though they were separate legal

entities, see National Labor Relations Bd. v. Bildisco &

Bildisco, 465 U.S. 513, 528, 104 S. Ct. 1188, 1197, 97

L.Ed.2d 482 (1984), thereby undermining [the nondebtor

party’s] thesis that the postpetition “change” in contract

performance is sufficiently substantial--in and of itself--to

deprive parties like [the nondebtor party] of the full benefit of

their bargain. [citations omitted].

LeRoux, 69 F.3d at 613-14.

16

property in a manner it could not have employed absent

the bankruptcy filing.

The fundamental purpose of reorganization is to prevent a

debtor from going into liquidation. . . .

Bildisco, 465 U.S. at 528. Whatever the appropriate allocation of

burdens of proof or persuasion, the First Circuit did not need to

decide that issue, as the record established beyond dispute that:

[Respondent] all along has conducted, and proposes to

continue, its retroviral diagnostic enterprise as the same

corporate entity which functioned prepetition, while

utilizing [Petitioners’] HIV2 procedures in that same

prepetition endeavor.

App. Ila.

The Court of Appeals’ decision does not alter the debtor in

possession’s obligation to prove that its assumption or rejection

will “benefit” the estate, the only burden the decisions cited by

Petitioners impose on Respondent. Bildisco, 465 U.S. at 526; Jn re

Anglo Energy Ltd., 41 B.R. 337, 340 (Bankr. S.D. N.Y. 1984).

The bankruptcy court found that Respondent discharged that

burden, and Petitioners have never argued otherwise. See App.

42a; 46a, §§ 9, 25, 27. Accordingly, the First Circuit’s decision

presents no conflict with Bildisco.

17

CONCLUSION

For all of the foregoing reasons, Respondent respectfully

requests that the petition for certiorari be denied.

Respectfully Submitted,

Of Counsel: JOSEPH F. RYAN

Counsel of Record

WILLIAM J.T. BROWN ANDREW P. STREHLE

DONOVAN LEISURE NEWTON BROWN RUDNICK, FREED

& IRVINE & GESMER, P.C.

30 Rockefeller Plaza One Financial Center

New York, New York 10112 Boston, Massachusetts 02111

(212) 632-3000 (617) 856-8200

Counsel for Respondent

Cambridge Biotech Corporation