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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1997

## Text

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).

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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.

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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

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[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

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_0635%3A2. Public record. Not legal advice.