Emory Bankruptcy Developments Journal

CTRL+ALT+DELETE: Does the Bankruptcy Code Need a Reboot? The Eligibility of Consumer Digital Goods for Liquidation
Gene Goldmintz Editor-in-Chief, Emory Bankruptcy Developments Journal; J.D. Candidate, Emory University School of Law (2015); B.A., magna cum laude, University of Florida (2010); Winner of the 2014 Keith J. Shapiro Award for Excellence in Consumer Bankruptcy Writing. I would first like to thank Professor Rafael Pardo for providing his expertise and support in writing this Comment. I would also like to thank the staff of the Emory Bankruptcy Developments Journal for their assistance in editing and refining this Comment—especially Jacob Davis, Adam Gross, Jonathan Lawler, and Lauren Riker. Finally, special thanks to my parents for their unwavering support.

Abstract

The explosive growth of computers and the Internet at the end of the twentieth century sparked a fundamental change in the form of copyrighted materials. Books, films, music, and entertainment software have more recently been sold and bought as digital goods.

This Comment argues that the first-sale doctrine should apply to digital goods. These digital goods are typically sold in single lump sum payments determined by the quantity of the good, as opposed to a licensing fee determined by usage over time. The result is that these transactions are more similar to purchases rather than licenses. The first-sale doctrine should apply despite the naming conventions utilized in the End-User License Agreements accompanying these digital goods and the form-over-substance analysis favored by courts. Recognizing mass-market digital goods transactions as purchases would grant title of the copy of the digital good to the purchaser. The purchaser with title would be free to exercise the first-sale rights historically enjoyed in the physical world.

Even if courts refuse to recognize these transactions as purchases, § 365(f) of the Bankruptcy Code permits the assignment of these licenses as executory contracts. Through assignment, the trustee could sell off the licenses to third parties during the liquidation of the bankruptcy estate’s property in chapter 7. In doing so, the bankruptcy policy of promoting the free assignability of assets and contracts would be respected. Finally, since most chapter 7 cases are no-asset cases, the resale of digital goods through assignment under § 365(f) would provide an additional source of returns to creditors.

Introduction

The Internet has enabled a nearly infinite amount of content available at the click of a mouse. 1 See The Domain Name Industry Brief, Verisign, Inc. (Apr. 1, 2013), http://www.verisigninc.com/assets/domain-name- brief-april2013.pdf (stating that, as of 2012, over 250 million domain names were registered). Increased broadband penetration has brought enhanced connection speeds. 2 See Leichtman Research Group: Press Release, Leicthman Research Group (Sept. 4, 2012), http://www.leichtmanresearch.com/press/090412release.html (“New consumer research . . . found that nearly 90% of US households . . . currently subscribe to a broadband Internet service.”). This growth in Internet speed and access has brought digital networks to prominence as the dominant means for distributing copyrighted works. 3See generally Philippe Kern, The Impact of Digital Distribution—A Contribution, KEA European Affairs (Apr. 10, 2009), http://www.keanet.eu/docs/impactondigitaldistribution.pdf.

Digital distribution is the transmission of computer software, books, music, movies, and photos repackaged as digital media. 4What is Digital Media?, Microsoft.com (Mar. 30, 2011), http://technet.microsoft.com/en-us/library/what-is-digital-media-2.aspx (“Digital media refers to audio, video, and photo content that has been encoded (digitally compressed).”). Digital distribution has evolved beyond downloads to include apps and digital streaming. 5“App” is the shorthand name for an application program that processes digital data. Software applications include web browsers, word processors, e-mail, presentation programs, and more. Definition of: Application Program, PC Mag., http://www.pcmag.com/encyclopedia/term/37919/application-program (last visited Feb. 28, 2014). “Streaming” refers to the delivery of multimedia to a user’s computer or mobile device on-demand as opposed to downloading the content to the user’s hard drive for permanent storage. Jan Ozer, What is Streaming?, Streaming Media (Feb. 26, 2011), http://www.streamingmedia.com/Articles/ReadArticle.aspx?ArticleID=74052. This evolution in delivery has fundamentally uprooted established business models in affected industries. 6See, e.g., Jessica E. Vascellaro & Sam Schechner, Slow Fade-Out for Video Stores, Wall St. J., Sept. 30, 2010, at A6, available at http://online.wsj.com/news/articles/SB10001424052748704082104575515933391663168 (suggesting that new digital movie-delivery methods such as Netflix and YouTube contributed to Blockbuster’s bankruptcy); Rosa Golijan, iTunes Turns 10: How Apple Music Store Killed Old Music Industry, NBC News (Apr. 28, 2013), http://www.nbcnews.com/technology/itunes-turns-10-how-apple-music-store- killed-old-music-6C9633923 (claiming that the convenience, portability, and price offered by Apple’s iTunes store “killed the music shop in the last decade”); Todd Leopold, The Death and Life of a Great American Bookstore, CNN (Sept. 12, 2011, 12:47 PM EDT), http://www.cnn.com/2011/US/09/12/first.borders.bookstore.closing/index.html (providing a thorough history of the rise and fall of Borders bookstores and crediting the demise of Borders, in part, to its late entry into the e-book market long after Amazon’s Kindle and Barnes & Noble’s Nook gained control of the market). For example, in 2012, as physical compact disk sales fell over 13% from 2011, digital album sales achieved 14.10% growth. 7The Nielsen Company & Billboard’s 2012 Music Industry Report, Bus. Wire (Jan. 4, 2013), http://www.businesswire.com/news/home/20130104005149/en/Nielsen-Company- Billboard%E2%80%99s-2012-Music-Industry-Report. This growth continued the shift that was already evident in 2011, when digital music sales exceeded physical sales for the first time, resulting in a 50.3% market share. 8Sam Gustin, Digital Music Sales Finally Surpassed Physical Sales in 2011, TIME (Jan. 6, 2012), http://business.time.com/2012/01/06/digital-music-sales-finally-surpassed- physical-sales-in-2011. In the book industry, Amazon’s e-book sales have even cannibalized its own physical book sales. 9See Jason Kincaid, That Was Fast: Amazon’s Kindle Ebook Sales Surpass Print (It Only Took Four Years), TechCrunch (May 19, 2011), http://techcrunch.com/2011/05/19/that-was-fast-amazons- kindle-ebook-sales-surpass-print-it-only-took-four-years.

Digital media is commoditized and sold in the form of digital goods. 10Digital Goods, Webopedia, http://www.webopedia.com/TERM/D/digital_goods.html (last visited Jan. 25, 2014) (defining digital goods as “any goods that are stored, delivered and used in its [sic] electronic format. . . . Examples of digital goods include e-books, music files, software, digital images, Web site templates, manuals in electronic format, and any item which can be electronically stored in a file or multiple files.”). The digital goods market for e-books, music, and entertainment software is dominated by Amazon, 11Estimating Kindle E-Book Sales for Amazon, FORBES (Apr. 2, 2014), http://www.forbes.com/sites/greatspeculations/2014/04/02/estimating-kindle-e- book-sales-for-amazon. Apple, 12Apple’s iTunes Accounts for 75% of Global Digital Music Market, Worth $6.9B a Year, Apple Insider (June 20, 2013), http://appleinsider.com/articles/13/06/20/apples-itunes-accounts-for-75-of- global-digital-music-market-worth-69b-a-year. and Valve Corporation, 13Oliver Chiang, The Master of Online Mayhem, Forbes (Feb. 2, 2011, 6:00 PM), http://www.forbes.com/forbes/2011/0228/technology-gabe-newell- videogames-valve-online-mayhem.html (stating that Valve’s proprietary platform, Steam, controls 50% to 70% of the PC market for downloaded games). respectively. These digital retailers exploit the favorable economics of digital catalogs which provide (1) limitless inventory; (2) infinite catalogs for both mass-market hits and niche offerings; and (3) decreased manufacturing and distribution costs. 14Chris Anderson, The Long Tail: Why the Future of Business is Selling Less of More 9–10 (2006). With regards to the entertainment software industry, Gabe Newell, CEO of Valve Corporation and developer of the digital entertainment software distribution service Steam, summarized the advantages of digital distribution over physical retail stating, “[Valve employees] can put something up on Steam, deliver it to people all around the world, [and] make changes . . . . On Steam there’s no shelf-space restriction. . . . [E]ventually pretty much every game that’s ever been available will be on there 24/7.” John Walker, RPS Exclusive: Gabe Newell Interview, Rock, Paper, Shotgun (Nov. 21, 2007, 3:40 PM), http://www.rockpapershotgun.com/2007/11/21/rps-exclusive-gabe-newell- interview.

These benefits have been accompanied by an increase in control by rights holders over the ways in which consumers can use their purchases. 15See generally Jonathan L. Zittrain, The Future of the Internet—And How to Stop It 102–03 (2008) (discussing the increased regulatory intervention inherent in tethered appliances). This increased control limits consumer freedoms by (1) preventing consumers from purchasing or reselling digital goods through second-hand markets; (2) invoking privacy concerns; (3) hindering consumer innovation; and (4) inhibiting market efficiency through increased transaction costs. 16Aaron Perzanowski & Jason Schultz, Digital Exhaustion, 58 UCLA L. Rev. 889, 891 (2011).

With technology outpacing legal developments, it is unclear what happens to these digital goods in chapter 7 bankruptcies. If these items were eligible for liquidation, they could generate returns for creditors, thereby promoting the bankruptcy policy of maximizing the value of the bankruptcy estate. 174 Collier on Bankruptcy ¶ 506.03[6][a][ii] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010) (“[T]he policy of maximizing the value of the debtor’s bankruptcy estate”). This Comment argues that these digital goods should be eligible for (1) resale under the first-sale doctrine or, in the alternative, (2) assumption and assignment to third parties under § 365(f) of the Bankruptcy Code (the “Code”) as property of the bankruptcy estate.

I. Background

A. The First-Sale Doctrine

Copyright law seeks to balance the exclusive rights of copyright owners with the public interest in access to information and advancement of the arts and sciences. 18See Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984).Because this task involves a difficult balance between the interests of authors and inventors in the control and exploitation of their writings and discoveries on the one hand, and society’s competing interest in the free flow of ideas, information, and commerce on the other hand, our patent and copyright statutes have been amended repeatedly.Id. These exclusive rights include the right to reproduce the copyrighted work, prepare derivative works, distribute copies, and perform or display the work publicly. 1917 U.S.C. § 106 (2012). To meet this goal, the legal doctrine of exhaustion limits rights holders’ power over their works when a copyrighted work is transferred from the rights holder to a transferee. 20See Herbert Hovenkamp, Post-Sale Restraints and Competitive Harm: The First Sale Doctrine in Perspective, 66 N.Y.U. Ann. Surv. Am. L. 487, 491 (2011).

Section 109 of the Copyright Act is the statutory embodiment of the first-sale doctrine. 2117 U.S.C. § 109. The first-sale doctrine allows owners of legally purchased copies of copyrighted works to redistribute those copies, whether through resale, gift, donation, etc. 22See 2 Paul Goldstein, Goldstein on Copyright § 7.6.1 n.4 (3d ed. 2005) (“[A] gift of copies or phonorecords will qualify as a ‘first sale’ to the same extent as an actual sale for consideration.”). This limitation on an author’s exclusive rights strikes “a balance between the artist’s right to control [her] work . . . and the public’s need for access.” 23Perzanowski & Schultz, supra note 16, at 892 (quoting Stewart v. Abend, 495 U.S. 207, 228 (1990)) (explaining that the monopoly privileges under Article I, § 8 of the Constitution are intended to provide an important public benefit); see also United States v. Paramount Pictures, Inc., 334 U.S. 131, 158 (1948) (“The copyright law, like the patent statute, makes reward to the owner a secondary consideration.”); Fox Film Corp. v. Doyal, 286 U.S. 123, 127 (1932) (“The sole interest of the United States and the primary object in conferring the monopoly lie in the general benefits derived by the public from the labors of authors.”). Without the first-sale doctrine, copyright owners could restrict everyday transactions that would not otherwise involve them. 24Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1386 (2013) (“Congress did not intend to permit copyright owners ‘to fasten . . . a restriction upon the subsequent alienation of the subject-matter of copyright after the owner had parted with the title to one who had acquired full dominion over it and had given a satisfactory price for it.’” (quoting Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350 (1908))). The first-sale doctrine prevents such interference by severing the copyright owner’s exclusive distribution right whenever it transfers title to a particular copy of a work. 2517 U.S.C. § 109; e.g., Columbia Pictures Indus., Inc. v. Redd Horne, Inc., 749 F.2d 154, 159 (3d Cir. 1984) (“The first sale doctrine prevents the copyright owner from controlling the future transfer of a particular copy once its material ownership has been transferred.”); Am. Int’l Pictures, Inc. v. Foreman, 576 F.2d 661, 664 (5th Cir. 1978) (“After the first sale of a copy the copyright holder has no control over the occurrence or conditions of further sales of it. . . . The first sale thus extinguishes the copyright holder’s ability to control the course of copies placed in the stream of commerce.”).

The first-sale doctrine provides four benefits: (1) access, (2) preservation, (3) privacy, and (4) transactional clarity. 26Joseph P. Liu, Owning Digital Copies: Copyright Law and the Incidents of Copy Ownership, 42 Wm. & Mary L. Rev. 1245, 1303, 1310–11, 1320–21, 1330–33, 1336 (2001); R. Anthony Reese, The First Sale Doctrine in the Era of Digital Networks, 44 B.C. L. Rev. 577, 584 (2003) (addressing access, preservation, privacy); see also Perzanowski & Schultz, supra note 16, at 894 (listing two additional benefits: increased innovation and platform competition). First, the first-sale doctrine promotes access by lowering costs and increasing availability of copyrighted works. 27Reese, supra note 26, at 578. The copyrighted goods are more affordable and accessible through second-hand markets beyond the copyright owners’ control. 28Id. Second-hand markets pressure copyright owners to lower prices for their works. 29Id. at 585. The availability of these works is broadened through the geographic dispersion of second-hand markets, as well as the willingness of these markets to serve customers beyond the copyright owners’ primary customer bases. 30Id. at 604 (citing the works of Homer and Virgil as historical proof that distribution of a work in multiple copies to various owners increases the likelihood that at least one copy will survive the test of time). Additionally, the reduced costs of purchasing previously-owned works allow second-hand markets to experiment with alternative access models, such as rentals or product sampling. 31Id. at 586–88. Libraries, used bookstores, Amazon’s physical book offerings, video rental stores, and online auction sites, such as eBay, are just some examples of the myriad commercial access models made possible through the first-sale doctrine.

Price competition facilitates access to copyrighted works by compelling copyright owners and second-hand markets to lower their prices. Since the copyright owner can only set the price for the initial sale of a copy of the work, second-hand markets have discretionary authority to set prices. 32Id. at 585. The price competition within these markets drives prices down, which ultimately benefits the consumer.

Second, the first-sale doctrine preserves and maintains the circulation of publicly accessible works. 33Id. at 594–95, 599. The preservation of these copyrighted works occurs by ensuring their availability. Copyright owners may cease production of a work, thereby terminating the public’s ability to obtain new copies. This decision may be cost-related. For example, a publisher may determine that the demand for a work is insufficient as compared to the costs involved in creating, storing, distributing, and marketing copies to consumers. 34Id. at 593. In this scenario, the first-sale doctrine allows for continued access to these works by sale, rental, or borrowing, even though production of new copies may no longer be economically viable for the copyright owner. 35Id. at 593–94.

Besides economic reasons, new copies may no longer be available because the copyright owner refuses to supply the work or decides to recall distributed copies. The copyright owner’s refusal may be due to dissatisfaction with some aspect of the work, such as quality or an outdated authorial message. 36E.g., id. at 595 (citing the example of silent-film actress Mary Pickford’s attempts to withhold her films from television and cinema for fear that future audiences would ridicule her); see also Worldwide Church of God v. Phila. Church of God, Inc., 227 F.3d 1110, 1122 (9th Cir. 2000) (Brunetti, J., dissenting). In that case, the plaintiff, Worldwide Church of God, destroyed copies of a book written by its founder and ceased circulation of the book. Its decision was “based on a ‘Christian duty’ to keep doctrinal errors out of circulation.” Id. Additionally, if the creator has transferred copyright ownership to a corporate author or publisher, the copyright owner may recall the work if it is antithetical to the current moral or political climate. 37E.g., Reese, supra note 26, at 597 n.69 (relating book publisher Harper Collins’s decision to not publish Leon Trotsky’s book because the United States might have allied with Josef Stalin’s Soviet Union for the remainder of World War II as an example of a politically-motivated decision to not release a copyrighted work into circulation). When the copyright owner takes such measures, the first-sale doctrine provides an alternate way for the public to maintain access to previously distributed copies of the work.

Third, the first-sale doctrine protects consumer privacy by permitting owners of lawfully purchased copies to transfer their copies without requiring the copyright owner’s permission. 3817 U.S.C. § 109 (2012). If consent were required, the copyright owner could monitor, record, and possibly restrict the transfer of copies. 39Perzanowski & Schultz, supra note 16, at 896. This privacy protection takes on greater importance when considering works that may be controversial or unpopular. 40See generally Julie E. Cohen, A Right to Read Anonymously: A Closer Look at “Copyright Management” in Cyberspace, 28 Conn. L. Rev. 981 (1996).

Fourth, the first-sale doctrine provides transactional clarity by removing restrictions on the transfer of copyrighted goods. 41Perzanowski & Schultz, supra note 16, at 896. This transactional clarity simplifies information costs and improves market efficiency by removing idiosyncratic restrictions, which restrain each second-hand seller. 42Id. at 896–97. Complying with such restrictions imposes additional costs on the initial purchaser as well as any downstream transferees. These additional costs may discourage consumers from lawfully acquiring a copy or choosing to ignore the restrictive terms entirely. 43See id. (citing Straus v. Victor Talking Mach. Co., 243 U.S. 490, 501 (1917) (“[N]ot one purchaser in many would read such a notice, and that not one in a much greater number, if he did read it, could understand its involved and intricate phraseology . . . .”)).

B. Software End-User License Agreements

While the first-sale doctrine governs the secondary distribution of copyrighted works, it is generally not applicable to transactions involving digital goods. This is because digital retailers typically structure the transaction as a license, not a sale. Industry practice requires consumers to agree to the terms of the digital retailer’s End- User License Agreement (“EULA”), which dictates the terms of the transaction. 44E.g., iTunes Store: Terms and Conditions, Apple, http://www.apple.com/legal/internet-services/itunes/us/terms.html#GIFTS (last updated Sept. 17, 2014); Kindle Store Terms of Use, Amazon, http://www.amazon.com/gp/help/customer/display.html/ref=help_search_1-4? ie=UTF8&nodeId=201014950 (last updated Sept. 6, 2012); Steam Subscriber Agreement, Steam Powered, http://store.steampowered.com/subscriber_agreement (last visited Oct. 20, 2013). These EULAs generally prohibit copying, reverse engineering, renting, and transferring the software. 45E.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44. Typically, EULAs refer to the transaction as a license rather than a sale, and courts have interpreted these contracts in the retailers’ favor. 46See Vernor v. Autodesk, 621 F.3d 1102 (9th Cir. 2010); ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). By qualifying the transaction as a license, retailers are able to limit the software’s dissemination in compliance with the EULAs’ terms and restrictions. 47See Vernor, 621 F.3d at 1104, 1116.

This conflict between the competing interests of the retailer and the consumer is referred to as the “software licensing dilemma.” 48Nancy S. Kim, The Software Licensing Dilemma, 2008 BYU L. Rev. 1103, 1103. If software is sold, rather than licensed, the retailer’s ability to restrict unauthorized use of its product is severely limited. 49Id. In contrast, if the software is licensed, the consumer’s right to use the software is greatly limited because the first-sale doctrine does not extend to licenses. 50Id. at 1145 (noting that if the parties were to enter into a “pure licensing transaction,” then the transfer restriction terms would be enforceable as a contractual obligation). For example, most EULAs restrict any transfer of software, including noncommercial transfers, to prevent the possibility of buyers renting the software to third parties. 51See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44.

Vernor v. Autodesk 52621 F.3d 1102. and Krause v. Titleserv, Inc. 53402 F.3d 119 (2d Cir. 2005). exemplify the software licensing dilemma. In Vernor, the Ninth Circuit Court of Appeals favored the terms of the software license and held that the transferee had violated the terms of the license by reselling the software. 54621 F.3d at 1112. Despite the fact that the transferee had purchased the physical disks on which the software was written, the court held the transferee was bound by the original license agreement which restricted resale of the software. 55Id. at 1103–04, 1116.

In Krause, the Second Circuit Court of Appeals held that the right to continuous and indefinite possession was a critical factor in assigning ownership. 56402 F.3d at 124–25. Here, the plaintiff had developed software solely for use by the defendant, who then altered the software without the plaintiff’s consent. 57Id. at 120–21. Despite the licensing agreement’s contrary language, the court held the defendant to be an owner of the software because the plaintiff never reserved the right to repossess the software copies and the defendant had the right to continue to use and possess the program indefinitely. 58Id. at 124.

C. The Chapter 7 Bankruptcy Process and Executory Contracts

When a debtor files his or her chapter 7 bankruptcy petition, a bankruptcy estate is simultaneously formed. 5911 U.S.C. § 541(a) (2012) (“The commencement of a case under . . . this title creates an estate.”). The bankruptcy estate is comprised of “all legal or equitable interests of the debtor as of the commencement of the case” and extends to any proceeds derived from such property. 60Id. § 541(a)(1), (6). The bankruptcy trustee serves as a fiduciary for the creditors of the bankruptcy estate. 61E.g., Phx. Elec. Contracting Corp. v. N.Y. Tel. Co., 587 N.Y.S.2d 485, 486 (Sup. Ct. 1992) (“A Trustee in bankruptcy representing all creditors of the estate has a duty to examine all proofs of claim, and must object to allowance of claims found to be improper. Thus, the Trustee stands in a fiduciary relationship to all creditors . . . .” (citation omitted)). The trustee administers the estate, which, in a chapter 7 bankruptcy, primarily involves the liquidation of estate property and the pro rata distribution of liquidation returns to unsecured creditors. 6211 U.S.C. § 704(a) enumerates the various duties of the trustee, listing foremost among them the duty to “collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest.” 11 U.S.C. § 704(a) (1). 11 U.S.C. § 726(b) provides for the pro rata distribution of payments to unsecured creditors in accordance with the priority order enumerated in § 507 and to non-priority unsecured creditors under § 726(a)(2). Id. § 726(b).

Upon filing, the trustee must assume, reject, or assign the debtor’s prepetition contracts. 63Id. § 365(a), (f). These prepetition contracts may include executory contracts. An executory contract is a contract in which “the obligation of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” 64Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973). A common example of an executory contract is a lease. A lease is executory because there are outstanding obligations by both the lessor and the lessee—the lessor agrees to continued leasing of the property and the lessee agrees to pay rent and maintain the leased property throughout the term of the lease. To assign an executory contract, the trustee must first assume the contract under § 365(a) of the Code, subject to court approval. 6511 U.S.C. § 365(f)(2)(A) (“The trustee may assign an executory contract or unexpired lease of the debtor only if . . . the trustee assumes such contract or lease in accordance with the provisions of this section . . . .”). Generally, courts defer to the trustee’s judgment in determining the treatment of the executory contract. 663 Collier on Bankruptcy, supra note 17, at ¶ 365.03[2] (citing Cor 5 Route Co. v. Penn Traffic Co. (In re Penn Traffic Co.), 524 F.3d 373, 383 (2d Cir. 2008); Orion Pictures Corp. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095 (2d Cir. 1993); Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303 (5th Cir. 1985); In re Old Carco LLC, 406 B.R. 180 (Bankr. S.D.N.Y. 2009); In re Pilgrim’s Pride Corp., 403 B.R. 413 (Bankr. N.D. Tex. 2009)).

Outside of bankruptcy, a debtor may be prevented from assigning an executory contract because the contract prohibits, restricts, or conditions assignment. 67Michelle Morgan Harner et al., Debtors Beware: The Expanding Universe of Non-Assumable/Non-Assignable Contracts in Bankruptcy, 13 Am. Bankr. Inst. L. Rev. 187, 195 (2005). Within bankruptcy, § 365(f) permits the trustee to assign the executory contract to a third-party, even if the contract or applicable nonbankruptcy law would otherwise prohibit such assignment. 6811 U.S.C. § 365(f) (“[N] otwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease . . . .”). In this way, the Code permits the trustee to effectively exchange contracts for value for the benefit of the estate.

In order to assign an executory contract under § 365(f), the trustee must first assume the contract. 69Id. Section 365(f) permits assignment, except as provided in subsection (c), despite anti-assignment provisions or applicable law. 70Id. § 365(f)(1). Section 365(c) prohibits assumption or assignment of an executory contract if applicable law excuses the non-debtor party from accepting or rendering performance to a party other than the debtor. 71Id. § 365(c)(1)(A).

The references to applicable law in § 365(c) and (f) have differing scopes. 72Madlyn Gleich Primoff & Erica G. Weinberger, E-Commerce and Dot-Com Bankruptcies: Assumption, Assignment and Rejection of Executory Contracts, Including Intellectual Property Agreements, and Related Issues Under Sections 365(c), 365(e) and 365(n) of the Bankruptcy Code, 8 Am. Bankr. Inst. L. Rev. 307, 333 (2000) (quoting In re Catapult Entm’t, Inc., 165 F.3d 747, 754 (9th Cir. 1999)). Section 365(f)(1) provides an exception to laws that prohibit, restrict, or condition the assignment of executory contracts. In contrast, § 365(c)(1) applies where applicable nonbankruptcy law specifically excuses a non-debtor party from accepting performance or rendering performance because the identity of the assignor is material to the agreement. 73Id. at 333–34.

III. The Economic Realities of Digital Goods Transactions Favor Permitting Legal Resale Under Both the First-Sale Doctrine and § 365(f)

A. Digital Goods Should Be Eligible for Resale Under the First-Sale Doctrine

1. Copy Ownership Is a Prerequisite to Exercising First-Sale Rights

Before being able to take advantage of the first-sale doctrine, an individual must own a legally acquired copy of the copyrighted work. 7417 U.S.C. § 109(a) (2012) (extending § 109 rights only to “the owner of a particular copy . . . lawfully made”). A sale involves transfer of title from seller to buyer, whereas a license is only a temporary transfer with expectation that the transferred good must be returned. 75Brian W. Carver, Why License Agreements Do Not Control Copy Ownership: First Sales and Essential Copies, 25 Berkeley Tech. L.J. 1887, 1896, 1934 (2010) (defining a sale as a transaction in which “a copy is transferred, the recipient owns the copy, and the recipient is therefore entitled to the benefits of § 109 and § 117”; whereas a license is a “permanent transfer of a copy of a copyrighted work in which the transferor purportedly retains full title to and ownership of the transferred copy”).

Under federal copyright law, licenses are either exclusive or non-exclusive. An exclusive license entitles the licensee to all the rights of the copyright owner contemplated in the license. 7617 U.S.C. § 201(d)(2) (“Any of the exclusive rights compromised in a copyright . . . may be transferred . . . and owned separately.”). Conversely, a non-exclusive license does not transfer ownership rights, which, instead, remain vested in the copyright owner. 77See In re Patient Edu. Media, Inc. 210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997) (stating that a non-exclusive license does not transfer any ownership rights from owner to licensee). Courts have used various approaches to determine when title to a copyrighted work has transferred from copyright owner to transferee. 78Carver, supra note 75, at 1898–99 (categorizing the five investigative approaches as follows: the “reservation of title” approach; the “agreement controls” approach; the “UCC controls” approach; the “economic realities” approach; and the “perpetual possession” approach). Historically, courts have almost exclusively looked to the language of the contract in determining whether a sale or granting of a license has occurred. 79See, e.g., MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 518 n.5, 518–19 (9th Cir. 1993); see also Microsoft Corp. v. Harmony Computers & Elecs., Inc., 846 F. Supp. 208 (E.D.N.Y. 1994). For example, in MAI Systems Corp. v. Peak Computer, Inc., the software contract between MAI Systems (“MAI”) and Peak Computer (“Peak”) restricted use of MAI’s software solely for Peak’s own internal use. 80991 F.2d at 511. In violation of the contract, Peak used MAI’s software to maintain its customers’ computers. 81Id. at 517–18. The court determined copyright ownership from the language of MAI’s contract. The contract defined itself as a license, effectively disqualifying Peak’s customers as MAI software owners. 82Id. at 518 n.5. The court held that Peak’s additional usage had violated MAI’s exclusive reproduction right since only MAI, as the owner of the computer program, was permitted to legally make another copy. 83Id. at 518–19 (quoting 17 U.S.C. § 117 (2012)).

2. Commercial Digital Goods Transactions Are Sales

The intangibility of digital goods has created newfound considerations regarding ownership. 84Kim, supra note 48, at 1113 (“Software does not fit neatly into preexisting legal categories because it is both tangible and intangible, and both privately owned and publicly distributable.”). The analysis is complex because software licensing involves elements of contract law, intellectual property, and commercial law. 85Id. at 1106–07. The current standard in software licensing is for distributors to qualify the transaction as the granting of a license rather than a sale. 86See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44. Tactically, software distributors include this limitation in order to limit the ownership rights of consumers, particularly their rights under the first-sale doctrine. 87Douglas E. Phillips, The Software License Unveiled: How Legislation by License Controls Software Access 23 (2009) (refuting the argument that EULAs grant rights to users that would otherwise not be present under the first-sale doctrine in stating, “On the contrary, most licenses state that even lending the software is prohibited, and they also impose conditions and limitations on the transfer of a license to third parties.”); John A. Rothchild, The Incredible Shrinking First-Sale Rule: Are Software Resale Limits Lawful?, 57 Rutgers L. Rev. 1, 25–26 (2004).

In analyzing the transaction between the copyright owner and the consumer, courts should extend their analysis beyond the four corners of the contract. Instead, courts should look to the underlying economic realities of the transactions. 88Raymond Nimmer, The Law of Computer Technology § 1.18[1], at 1-103 (2d ed. 1992) (“Ownership of a copy should be determined based on the actual character, rather than the label, of the transaction by which the user obtained possession. Merely labeling a transaction as a lease or license does not control.”).

Software distributors use “license” as a term of art to refer to what is in fact “a permanent transfer of a copy of a copyrighted work” to the licensee while the transferor retains full title and ownership of the transferred copy. 89Carver, supra note 75, at 1896 (emphasis added); see, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44. Despite the naming convention, the “license” referred to in the software distributor’s EULA contemplates no expected return of the digital good. 90See Carver, supra note 75, at 1896–97 (providing an analysis of the confusion this classification has caused amongst the courts).

The Ninth Circuit Court of Appeals followed this “economic realities” approach in Microsoft Corp. v. DAK Industries, Inc. (In re DAK Industries, Inc.). 9166 F.3d 1091 (9th Cir. 1995). Before DAK Industries (“DAK”) filed its chapter 11 bankruptcy petition, DAK and Microsoft agreed to a license agreement. This agreement granted DAK non-exclusive, worldwide licensing rights for one year to Microsoft’s Word software. 92Id. at 1092. Under the terms of the agreement, Microsoft agreed to supply DAK with a master disk for Word, and DAK would use that disk to install Word on computers it would then sell to consumers. 93Id. DAK was also entitled to updates and new versions of Word. 94Id. In exchange, DAK agreed to pay a $45 royalty rate per copy of Word it installed. 95Id. at 1092–93. DAK was obligated to pay Microsoft a minimum commitment of $2,750,000 in five installments. 96Id. The royalty rate would apply only after DAK sold more than 61,000 units. 97Id. at 1093.

After paying the first three installments, DAK filed for bankruptcy with two outstanding payment obligations totaling $1,395,833. 98Id. DAK sold approximately 7,600 Word copies postpetition. 99Id. DAK sold these copies without paying any royalties to Microsoft. 100Id. Microsoft filed a motion for an administrative expense payment for DAK’s postpetition use and sale of its software. 101Id.

The Ninth Circuit Court of Appeals confirmed the lower courts’ denial of Microsoft’s claim. 102Id. at 1092. Under its holding, DAK was not obligated to pay any administrative expenses to Microsoft, even though DAK profited from Microsoft’s software postpetition. 103Id. at 1095.

The Ninth Circuit based its holding on the “economic realities of the particular arrangement.” 104Id. (citing In re Moreggia & Sons, Inc., 852 F.2d 1179, 1182 (9th Cir. 1988)). In doing so, the court concluded the agreement was more akin to a lump sum sale of software rather than a license. 105Id. In recognizing the transaction as a sale despite Microsoft’s intent to license, the court analyzed the pricing structure of the agreement. First, the pricing structure was unlike a license because the payments were not based on the duration of the software’s use. 106Id. Rather, the payments were based upon the quantity of units purchased by DAK. 107Id. Second, the agreement resembled a sale because DAK received all of its rights under the agreement at the agreement’s commencement without regard to the amount of software sold. 108Id. Third, Microsoft did not provide DAK with anything following DAK’s bankruptcy filing. 109Id. at 1096. Most significantly, DAK’s postpetition software sales were similar to inventory sales because “DAK did not employ Word over a period of time in order to run its operation. Rather, it sold the program to consumers.” 110Id.

These same factors are present in a typical digital good transaction. Most importantly, in such a transaction, a consumer pays a one- time fee in exchange for the digital good, and this fee is based on the quantity purchased as opposed to the duration of use. 111See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44. Second, when the licensor has few ongoing obligations or none at all, the agreement is not an executory contract and is not governed by § 365. 112Jennifer S. Bisk, Software Licenses Through the Bankruptcy Looking Glass: Drafting Individually Negotiated Software Licenses that Protect the Client’s Interests in Bankruptcy, 17 Fordham Intell. Prop. Media & Ent. L.J. 611, 623 (2007) (citing In re Stein, 81 B.R. 263, 266–67 (Bankr. S.D.N.Y. 1988); In re Monument Record Corp., 61 B.R. 866, 868–69 (Bankr. M.D. Tenn. 1986)).

Software distributors may object to recognizing these transactions as sales; however, market efficiency should trump such protectionist motivations. 113See Kim, supra note 48, at 1162–63 (noting the greater significance of this policy concern beyond the software industry in light of the possibility that other commercial goods may follow similarly restrictive practices). Courts should apply the first-sale doctrine to digital goods to permit consumers to transfer their digital purchases. With the freedom to take advantage of the first-sale doctrine, consumers would enjoy the same rights traditionally enjoyed with respect to their physical purchases. As a result, the benefits of the first-sale doctrine—access, preservation, privacy, and transactional clarity—would be extended into the digital realm. In doing so, the balance between the exclusive rights of copyright holders with the public interest in the free flow of information would be respected. 114Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984). Further, by extending the first-sale doctrine to digital goods, these digital assets would be eligible for liquidation in a chapter 7 bankruptcy as property of the bankruptcy estate.

B. Technology Licenses Are Executory Contracts

If courts continue not to recognize mass-market, digital goods transactions as sales, § 365(f) provides an alternative means by which a bankruptcy trustee may assign these digital goods to maximize the value of the estate. Section 365(f) permits assumption and assignment of certain executory contracts without the consent of the non-debtor party, even if the contract explicitly prohibits assignment. 11511 U.S.C. § 365(f)(1) (2012) (“ [N]otwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection.”).

A prebankruptcy contract is executory if there are material obligations owed by each party to the other and such obligations remain incomplete. 116Countryman, supra note 64, at 460 (defining executory contracts as existing when “obligation[s] of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other”). Some courts utilize a functional analysis in determining whether a contract is executory by looking to the nature of the parties, the intended outcome of reorganization, and whether acceptance or rejection will benefit the bankruptcy estate. 117Jay Lawrence Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227, 280 (1989). A trustee must determine whether an intellectual property license is an executory contract before the trustee may assume and assign it. 118Peter M. Gilhuly et al., Intellectually Bankrupt?: The Comprehensive Guide to Navigating IP Issues in Chapter 11, 21 Am. Bankr. Inst. L. Rev. 1, 3 (2013). Intellectual property licenses that contain continuing obligations are generally considered to be executory contracts. 119See, e.g., In re Buildnet, Inc., No. 01-82293, 2002 WL 31103235, at *8 (Bankr. M.D.N.C. Sept. 20, 2002) (“[M]ost patent, trademark, technology and other intellectual property licenses are executory contracts.” (citing Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043, 1045 (4th Cir. 1985) (Richmond III))).

Generally, licensing agreements are executory because each party owes an outstanding obligation to the other party. Most commonly, the licensor agrees not to sue the licensee for infringement and the licensee reciprocates by limiting its use of the licensed intellectual property to those uses stipulated by the licensor’s terms. 120See, e.g., Jacob Maxwell, Inc. v. Veeck, 110 F.3d 749, 753 (11th Cir. 1997) (concluding implied non-exclusive license to use copyrighted material prevented infringement suit); In re Access Beyond Techs., Inc., 237 B.R. 32, 43 (Bankr. D. Del. 1999) (citing DeForest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927)) (stating that refraining from suing the other party for patent infringement was a material obligation and the raison d’etre for a patent license). Other contract provisions such as royalty payments, revocation, and the length of the agreement are also indicative of an executory license. 121Gleich Primoff & Weinberger, supra note 72, at 317 (citing Andrews v. Riggs Nat’l Bank of Wash., D.C. (In re Andrews), 80 F.3d 906, 914 (4th Cir. 1996); Encino Bus. Mgmt., Inc. v. Prize Frize, Inc. (In re Prize Frize, Inc.), 32 F.3d 426, 428 (9th Cir. 1994); In re Constant Care Cmty. Health Ctr., Inc., 99 B.R. 697, 702 (Bankr. D. Md. 1989)). In the context of software licensing, there may be additional ongoing performance obligations such as reporting, servicing, providing maintenance, and providing technological upgrades. 122Peter S. Menell, Bankruptcy Treatment of Intellectual Property Assets: An Economic Analysis, 22 Berkeley Tech. L.J. 733, 756–57 (2007); see, e.g., RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 264 (4th Cir. 2004) (holding that each party owed the continuing material duty to maintain the confidentiality of the source code developed by the other party under the license agreement).

Whether the court holds the contract to be executory depends, in part, on whether the license is exclusive or non-exclusive. 123See, e.g., In re Richmond Metal Finishers, Inc., 38 B.R. 341, 344 (E.D. Va. 1984) (Richmond II), rev’d sub nom., Richmond III, 756 F.2d at 1045–47; PlayMedia Sys. v. Am. Online, Inc., 171 F. Supp. 2d 1094, 1099 (C.D. Cal. 2001); In re Valley Media, Inc., 279 B.R. 105, 135 (Bankr. D. Del. 2002); In re Golden Books Family Entm’t, Inc., 269 B.R. 300, 311 (Bankr. D. Del. 2001); In re Patient Educ. Media, Inc., 210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997). An exclusive license to use intellectual property transfers title and ownership of the contracted intellectual property to the licensee. 124See Fawick v. Comm’r, 436 F.2d 655, 662 (6th Cir. 1971) (citing S. Rep. No. 83-1622 (1954), as reprinted in 1954 U.S.C.C.A.N. 4621, 5082–5883) (stating exclusive license agreements may be recognized as sales for tax purposes); Golden Books Family Entm’t, Inc., 269 B.R. at 310. In contrast, a non-exclusive license typically only grants the licensee the permission to use the licensed intellectual property. The licensor usually retains the rights and remedies associated with ownership in the underlying intellectual property. 125See Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 679 (9th Cir. 1996) (concluding non-exclusive patent is personal and, so, non-assignable without licensor’s consent); Gilson v. Republic of Ireland, 787 F.2d 655, 658 (D.C. Cir. 1986) (asserting non-exclusive licensee of patent does not possess property interest). This grant of permission is considered personal to the individual licensee, and can be freely alienated without the licensor’s consent. 126Federal common law holds patent license agreements personal to the licensee and consequently non-assignable without the consent of the licensor. See CFLC, Inc., 89 F.3d at 679; PPG Indus., Inc. v. Guardian Indus. Corp., 597 F.2d 1090, 1093 (6th Cir. 1979) (“It has long been held by federal courts that agreements granting patent licenses are personal and not assignable unless expressly made so.” (citing Unarco Indus., Inc. v. Kelley Co., 465 F.2d 1303, 1306 (7th Cir. 1972))). This same reasoning has been extended to prevent the assignment of non-exclusive copyright licenses absent the licensor’s consent. See PlayMedia Sys., 171 F. Supp. 2d at 1099 (“A non-exclusive licensee . . . has ‘no right to re-sell or sublicense the rights acquired unless he has been expressly authorized to do so.’” (quoting Harris v. Emus Records Corp., 734 F.2d 1329, 1333 (9th Cir. 1984))); Valley Media, Inc., 279 B.R. at 135 (“A non-exclusive license of rights by a copyright owner to another party is not assignable by that party without the permission of the copyright holder under federal copyright law since the license represents only a personal and not a property interest in the copyright.” (citing Golden Books Family Entm’t Inc., 269 B.R. at 309)); Patient Educ. Media, Inc., 210 B.R. at 240–41 (“[T]he nonexclusive license is personal to the transferee, and the licensee cannot assign it to a third-party without the consent of the copyright owner.” (citing CFLC, Inc., 89 F.3d at 679)). The personal aspect stems from the licensor’s reliance on the named licensee in negotiating the license terms such that substitution of the licensee would affect the substance of the agreement. 127Bisk, supra note 112, at 618–19.

In In re Richmond Metal Finishers, the Bankruptcy Court for the Eastern District of Virginia held a technology license, which permitted the non-debtor licensee to use the debtor’s metal-coating technology, to be an executory contract eligible for rejection by the licensor-debtor under § 365. 12834 B.R. 521, 526 (Bankr. E.D. Va. 1983) (Richmond I), rev’d, Richmond II, 38 B.R. 341 (E.D. Va. 1984), rev’d sub nom., Richmond III, 756 F.2d 1043, 1045–47 (4th Cir. 1985). The debtor argued that interested potential licensees would be more eager to purchase its technology if the debtor was not obligated to permit the existing licensee to use the technology. 129Id. The debtor also argued that the non-exclusive license was an executory contract eligible for rejection because its efforts to license the technology were restrained by the existing license. 130Id.

The licensee countered that the technology license was not executory because the debtor executed the agreement prepetition. 131Id. at 523. However, the licensee had an ongoing obligation to account for and pay royalties to the debtor-licensor. 132Id. at 524. The bankruptcy court held that these obligations were sufficient to make the contract executory. 133Id. Under the business judgment rule, the court was satisfied that the contract was executory and permitted the rejection. 134Id. at 525–26. The business judgment rule, which originated in Otis & Co. v. Pa. R.R. Co., 61 F. Supp. 905 (E.D. Pa. 1945), holds directors, managers, and officers of a corporation free from liability for unprofitable business decisions so long as they exercised due diligence and the decision was entered into in good faith. The bankruptcy court was subsequently reversed by the district court. 135See id. at 521, rev’d, Richmond II, 38 B.R. 341 (E.D. Va. 1984), rev’d sub nom., Richmond III, 756 F.2d 1043, 1045–47 (4th Cir. 1985).

On further appeal, the Fourth Circuit Court of Appeals reversed the district court and agreed with the bankruptcy court holding that the license was executory due to the debtor’s continuing obligations to the licensee. 136See Richmond III, 756 F.2d at 1048. The licensee’s ongoing duty was to account for and pay royalties. 137Id. at 1045–47. The debtor’s continuing obligations included (1) notifying the licensee of any infringement claims arising from the licensed technology; (2) defending the licensee in any such infringement suit; and (3) notifying the licensee of any additional licenses to third parties. 138Richmond I, 34 B.R. at 522.

D. Software Licenses Are Executory Contracts

Most cases have determined software licenses to be executory contracts. 139See Fenix Cattle Co. v. Silver (In re Select-A-Seat Corp.), 625 F.2d 290 (9th Cir. 1980); In re Buildnet, Inc., No. 01-82293, 2002 Bankr. LEXIS 1851, at *99 (Bankr. M.D.N.C. Sept. 20, 2002); Rudaw/Empirical Software Prods. Ltd. v. Elgar Electronics Corp. (In re Rudaw/Empirical Software Prods. Ltd.), 83 B.R. 241 (Bankr. S.D.N.Y. 1988); In re Logical Software, Inc., 66 B.R. 683, 684 (Bankr. D. Mass. 1986). But see Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1095 (9th Cir. 1995) (holding the software “license” was a sale in substance and could not be found to be executory so as to bar assignment). In Fenix Cattle Co. v. Silver (In re Select-A-Seat Corp.), the Ninth Circuit Court of Appeals held that an exclusive software distribution and use license was an executory contract eligible for rejection. 140625 F.2d 290. The court reached this conclusion because the licensee was obligated to pay the debtor an annual fee for use of the software. 141Id. at 292. Failure to make the annual payment would have resulted in a breach of the contract. Additionally, the debtor was restricted from selling its software packages to other parties. 142Id.

Similarly, in In re Buildnet, the court prohibited assignment of a non-exclusive software license without the licensor’s consent because of the contract’s personal nature. 1432002 Bankr. LEXIS 1851, at *13. Here, the customized development of the software for the customer supported the claim that the identity of the licensee was material. 144Id. at *16–17.

1. EULAs Are Executory Contracts

EULAs contain continuing obligations for both the digital retailer and the consumer. 145See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44. Consequently, these EULAs may be characterized as executory contracts. 146See, e.g., RCI Tech. Corp. v. Sunterra Corp (In re Sunterra Corp.), 361 F.3d 257, 264 (4th Cir. 2004) (the license was executory due to the continuing obligation of each party to keep the software source code confidential). But see Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1095 (9th Cir. 1995). EULAs are also non-exclusive licenses because they grant the same contractual permissions to several licensees through mass-market sales. Software is protected by copyright law. 147See Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1249 (3d Cir. 1983) (“[A] computer program, whether in object code or source code, is a ‘literary work’ and is protected from unauthorized copying, whether from its object or source code version.”). As a result, within every software license, there is an underlying copyright license which is transferred to the licensee. 148See Sunterra Corp., 361 F.3d at 262 & n.7 (stating that because the software at issue was registered with the United States Copyright Office, copyright law was the applicable nonbankruptcy law that would excuse acceptance of the assignment of the non-exclusive license in the case).

Typically, EULAs grant the licensee uninterrupted permission to access the content, subject to use and transfer restrictions. 149See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44. Because EULA obligations govern for the life of the agreement, it is impossible for either party to fully perform at the outset. The mutual outstanding performance implicit in EULAs matches the elements of an executory contract. 150Countryman, supra note 64, at 460. Following this analysis, the license, as an executory contract, may be assigned under § 365(f) of the Code, which permits assignment notwithstanding contractual restrictions on assignment.

E. Assignment of Intellectual Property Licenses

A trustee seeking to assign licensed digital goods must maneuver between the conflicting values of intellectual property and bankruptcy law. Intellectual property law holds that copyright licenses cannot be assigned without the copyright owner’s consent. 151David R. Kuney, Intellectual Property Law in Bankruptcy Court: The Search for a More Coherent Standard in Dealing with a Debtor’s Right to Assume and Assign Technology Licenses, 9 Am. Bankr. Inst. L. Rev. 593, 594 (2001). This policy is incorporated into § 365(c)(1) of the Code. 152See 11 U.S.C. § 365(c) (2012). This restriction is based on intellectual property law’s fundamental policy to “encourag[e] the creation and disclosure of new, useful, and non-obvious advances in technology and design.” 153Everex Sys., Inc. v. Cadtrak Corp (In re CFLC Inc.), 89 F.3d 673, 679 (9th Cir. 1996) (quoting Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 150–51 (1989)). On the contrary, bankruptcy policy seeks to promote the free assignability of assets and contracts to maximize the value of the bankruptcy estate. 1544 Collier on Bankruptcy, supra note 17, at ¶ 506.03[6][a][ii] (“[T]he policy of maximizing the value of the debtor’s bankruptcy estate”).

Intellectual property licenses, whether exclusive or non- exclusive, are analyzed in the same manner as any other executory contract in a bankruptcy case. If there are continuing material obligations owed by both parties, the license will be recognized as an executory contract. 155See, e.g., Otto Preminger Films, Ltd. v. Qintex Entm’t, Inc. (In re Qintex Entm’t, Inc.), 950 F.2d 1492, 1495 (9th Cir. 1991) (“[W]e will only consider a contract executory if material unperformed obligations remain for both parties.”); In re Patient Educ. Media, Inc., 210 B.R. 237, 242–43 (Bankr. S.D.N.Y. 1997). Conversely, if the licensor has fulfilled its obligations under the license and there are no longer any material mutual obligations, the license is not executory. 156Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1093 (9th Cir. 1995). If the license is not executory, then it is not governed under § 365.

Whether the debtor possesses title or a license is essential for determining if a contract is executory. If title has been transferred and there are no other obligations under the contract, then the contract is not executory. 157Id. at 1095–96. As a result, § 365 is inapplicable. 158Kuney, supra note 151, at 604. Instead, the digital good is owned by the debtor and is property of the bankruptcy estate. As such, it is eligible for liquidation by the trustee.

Within the Code, the default rule is that prepetition contracts are assets of the bankruptcy estate and may be assigned subject to limitation. 159See 11 U.S.C. § 365(f)(1) (2012) (“Except as provided in subsections (b) and (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease . . .”). In § 365(c), one such limitation prevents a contract from being assigned if applicable law excuses a non-debtor party from accepting or rendering performance to anyone other than the debtor when the debtor’s performance is material. 160Id. § 365(c)(1)(A). This limitation is referred to as the “materiality” test. 161Kuney, supra note 151, at 606–07. The materiality test is most applicable to personal services contracts. 162Kuney, supra note 151, at 630 (noting that some courts have viewed § 365(c) as intending to “protect the non-debtor party from an assignment where the identity of the party providing performance is material”). As an example, imagine a concert agency that contracts with a famous pop singer to perform on stage. The singer could not assign her contractual obligation to perform to another individual because the services are personal in nature. 163This example is borrowed from Kuney, supra note 151, at 630 (“It seems almost beyond debate that rock stars cannot assign their contracts, inside or outside of bankruptcy because the identity of the performer is material.”).

In In re Patient Education Media, Inc., the Bankruptcy Court for the Southern District of New York held that the federal common law of non-assignability prevented the transfer of a copyright license in bankruptcy. 164 210 B.R. 237, 242–43 (Bankr. S.D.N.Y. 1997). The debtor’s assets included photographic images that had been included in an educational film it acquired through a non-exclusive copyright license with a photographer. 165Id. at 239. Upon filing, the debtor attempted to sell its rights to the videotapes. The photographer objected and argued that, under copyright theory, the license was “personal” and not freely assignable. 166Id. at 240.

The court ruled for the photographer. 167Id. at 243. First, the court distinguished between exclusive and non-exclusive licenses, stating that under a non-exclusive license, ownership remains with the licensor. 168Id. at 240–41 (contrasting between an exclusive license under which a licensee “may freely transfer his rights” with a non-exclusive license in which “the licensee cannot assign it to a third-party without the consent of the copyright owner”). Second, the court concluded that a non-exclusive copyright license is generally an executory contract governed by § 365. 169Id. Lastly, the court looked to analogous patent cases and held that the debtor could not sell the videotapes because the sale would be an assignment of the copyright license without the requisite consent of the licensor. 170Id. at 242–43 (“Because federal law governs the assignability of nonexclusive patent licenses, and because federal law makes such licenses personal and assignable only with the consent of the licensor, the . . . license is not assumable and assignable in bankruptcy under 11 U.S.C. § 365(c).” (quoting Gilson v. Republic of Ireland, 787 F.2d 655, 658 (D.C. Cir. 1986))).

In its conclusion, the court recognized the conflicting interests of bankruptcy law and intellectual property law in stating, “Although the assignment of the . . . license will maximize the assets available to creditors, this goal must give way to the countervailing considerations expressed in § 365(c).” 171Id. at 243.

The court should not have looked to federal common law in determining the assignability of the executory contract. 172Contra id. at 242. The court was dealing with a copyright license, not a patent governed by federal law. Instead, state law should have been the applicable law under § 365(c) as state law typically determines contract rights. 173Cf. Farmland Irrigation Co. v. Dopplmaier, 308 P.2d 732, 739 (Cal. 1957) (“We can find no policy underlying the federal patent statutes that requires a uniform federal rule of construction of license contracts to determine their assignability.”). But see id. at 242 (“Ordinarily, a court will apply state contractual law to disputes concerning the scope of a copyright license. State contractual law will yield, however, to an overriding federal law or policy.” (citations omitted)).

1. Section 365(f) Permits Assignment of Software Licenses

EULAs classify their underlying licenses as non-exclusive. 174See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44. Courts have consistently held non-exclusive copyright licenses like EULAs non-assignable without the consent of the licensor if the license explicitly restricts assignment. 175See SQL Solutions, Inc. v. Oracle Corp., No. C-91-1079, 1991 WL 626458, at *5–6 (N.D. Cal. Dec. 18, 1991). Courts look to the personal nature of non-exclusive copyright licenses as the basis for holding them non-assignable under § 365(c). 176Neil S. Hirshman et al., Is Silence Really Golden? Assumption and Assignment of Intellectual Property Licenses in Bankruptcy, 3 Hastings Bus. L.J. 197, 202 (2007). However, the personal nature of a contract is not “self- evident” but should be determined by the purposes and provisions of each particular contract. 177Farmland Irrigation Co., 308 P.2d at 740. Section 365(f) of the Code provides an exception to § 365(c) by permitting assignment of executory contracts notwithstanding an anti- assignment provision in the contract. 17811 U.S.C. § 365(f) (2012).

The key issue in assigning digital goods is whether the assignment involves the transfer of personal, non-assignable rights or the assignment is more akin to a commodity in which the personal nature of the transferee is immaterial. In these mass-market commodity transactions, the personal nature of the performance aspect is absent. The EULAs are not negotiated between the parties and the licensee’s identity is not material to the license’s terms. Consequently, assumption and assignment of digital goods and their governing EULAs are not barred by § 365 (c). As a result, § 365(f) allows a trustee to assign digital goods to a third-party even if the contract expressly restricts assignment. 179Id.

Conclusion

For over a hundred years, books, films, and records have been freely gifted, loaned, rented, and sold by their purchasers under the first-sale doctrine. This freedom has resulted in the uninhibited flow of information and the creation of innovative business models to the benefit of society. As the world converts to a digital landscape, these personal effects—our favorite books, music, movies, and videogames—will vanish into bits and bytes.

Currently, these digital forms are not eligible for resale under the first-sale doctrine. This restraint inhibits alienability of goods, consumer freedom, and innovation potential. This transfer restriction is the result of the digital retailers’ classification of the underlying transactions as licenses rather than sales. Courts have traditionally supported software distributors by applying a form-over-substance analysis, in which the words of the agreement trump the economic realities of the transaction. Instead, courts should strongly consider recognizing the transaction as a sale, in which title of the copy is transferred from the distributor to the consumer. In doing so, the consumer would be vested with the requisite ownership rights to legally resell the copy under the first-sale doctrine.

Should courts not recognize digital goods transactions as sales, § 365(f) of the Code, which permits assumption and assignment of executory contracts notwithstanding anti-assignment provisions, provides an alternative method for reselling digital copies in chapter 7. Further, § 365(c)’s assignment limitation should be limited to personal contracts and not digital goods.

As digital goods comprise an ever-growing proportion of debtors’ assets, permitting trustees to assign access and use of digital goods is essential to maximizing the value of the estate. The benefits of this solution extend beyond the bankruptcy context. Freeing these digital goods from the grasp of licensors will maximize their value to society and promote the free flow of information.

Footnotes

1 See The Domain Name Industry Brief, Verisign, Inc. (Apr. 1, 2013), http://www.verisigninc.com/assets/domain-name- brief-april2013.pdf (stating that, as of 2012, over 250 million domain names were registered).

2 See Leichtman Research Group: Press Release, Leicthman Research Group (Sept. 4, 2012), http://www.leichtmanresearch.com/press/090412release.html (“New consumer research . . . found that nearly 90% of US households . . . currently subscribe to a broadband Internet service.”).

3See generally Philippe Kern, The Impact of Digital Distribution—A Contribution, KEA European Affairs (Apr. 10, 2009), http://www.keanet.eu/docs/impactondigitaldistribution.pdf.

4What is Digital Media?, Microsoft.com (Mar. 30, 2011), http://technet.microsoft.com/en-us/library/what-is-digital-media-2.aspx (“Digital media refers to audio, video, and photo content that has been encoded (digitally compressed).”).

5“App” is the shorthand name for an application program that processes digital data. Software applications include web browsers, word processors, e-mail, presentation programs, and more. Definition of: Application Program, PC Mag., http://www.pcmag.com/encyclopedia/term/37919/application-program (last visited Feb. 28, 2014). “Streaming” refers to the delivery of multimedia to a user’s computer or mobile device on-demand as opposed to downloading the content to the user’s hard drive for permanent storage. Jan Ozer, What is Streaming?, Streaming Media (Feb. 26, 2011), http://www.streamingmedia.com/Articles/ReadArticle.aspx?ArticleID=74052.

6See, e.g., Jessica E. Vascellaro & Sam Schechner, Slow Fade-Out for Video Stores, Wall St. J., Sept. 30, 2010, at A6, available at http://online.wsj.com/news/articles/SB10001424052748704082104575515933391663168 (suggesting that new digital movie-delivery methods such as Netflix and YouTube contributed to Blockbuster’s bankruptcy); Rosa Golijan, iTunes Turns 10: How Apple Music Store Killed Old Music Industry, NBC News (Apr. 28, 2013), http://www.nbcnews.com/technology/itunes-turns-10-how-apple-music-store- killed-old-music-6C9633923 (claiming that the convenience, portability, and price offered by Apple’s iTunes store “killed the music shop in the last decade”); Todd Leopold, The Death and Life of a Great American Bookstore, CNN (Sept. 12, 2011, 12:47 PM EDT), http://www.cnn.com/2011/US/09/12/first.borders.bookstore.closing/index.html (providing a thorough history of the rise and fall of Borders bookstores and crediting the demise of Borders, in part, to its late entry into the e-book market long after Amazon’s Kindle and Barnes & Noble’s Nook gained control of the market).

7The Nielsen Company & Billboard’s 2012 Music Industry Report, Bus. Wire (Jan. 4, 2013), http://www.businesswire.com/news/home/20130104005149/en/Nielsen-Company- Billboard%E2%80%99s-2012-Music-Industry-Report.

8Sam Gustin, Digital Music Sales Finally Surpassed Physical Sales in 2011, TIME (Jan. 6, 2012), http://business.time.com/2012/01/06/digital-music-sales-finally-surpassed- physical-sales-in-2011.

9See Jason Kincaid, That Was Fast: Amazon’s Kindle Ebook Sales Surpass Print (It Only Took Four Years), TechCrunch (May 19, 2011), http://techcrunch.com/2011/05/19/that-was-fast-amazons- kindle-ebook-sales-surpass-print-it-only-took-four-years.

10Digital Goods, Webopedia, http://www.webopedia.com/TERM/D/digital_goods.html (last visited Jan. 25, 2014) (defining digital goods as “any goods that are stored, delivered and used in its [sic] electronic format. . . . Examples of digital goods include e-books, music files, software, digital images, Web site templates, manuals in electronic format, and any item which can be electronically stored in a file or multiple files.”).

11Estimating Kindle E-Book Sales for Amazon, FORBES (Apr. 2, 2014), http://www.forbes.com/sites/greatspeculations/2014/04/02/estimating-kindle-e- book-sales-for-amazon.

12Apple’s iTunes Accounts for 75% of Global Digital Music Market, Worth $6.9B a Year, Apple Insider (June 20, 2013), http://appleinsider.com/articles/13/06/20/apples-itunes-accounts-for-75-of- global-digital-music-market-worth-69b-a-year.

13Oliver Chiang, The Master of Online Mayhem, Forbes (Feb. 2, 2011, 6:00 PM), http://www.forbes.com/forbes/2011/0228/technology-gabe-newell- videogames-valve-online-mayhem.html (stating that Valve’s proprietary platform, Steam, controls 50% to 70% of the PC market for downloaded games).

14Chris Anderson, The Long Tail: Why the Future of Business is Selling Less of More 9–10 (2006). With regards to the entertainment software industry, Gabe Newell, CEO of Valve Corporation and developer of the digital entertainment software distribution service Steam, summarized the advantages of digital distribution over physical retail stating, “[Valve employees] can put something up on Steam, deliver it to people all around the world, [and] make changes . . . . On Steam there’s no shelf-space restriction. . . . [E]ventually pretty much every game that’s ever been available will be on there 24/7.” John Walker, RPS Exclusive: Gabe Newell Interview, Rock, Paper, Shotgun (Nov. 21, 2007, 3:40 PM), http://www.rockpapershotgun.com/2007/11/21/rps-exclusive-gabe-newell- interview.

15See generally Jonathan L. Zittrain, The Future of the Internet—And How to Stop It 102–03 (2008) (discussing the increased regulatory intervention inherent in tethered appliances).

16Aaron Perzanowski & Jason Schultz, Digital Exhaustion, 58 UCLA L. Rev. 889, 891 (2011).

174 Collier on Bankruptcy ¶ 506.03[6][a][ii] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010) (“[T]he policy of maximizing the value of the debtor’s bankruptcy estate”).

18See Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984).Because this task involves a difficult balance between the interests of authors and inventors in the control and exploitation of their writings and discoveries on the one hand, and society’s competing interest in the free flow of ideas, information, and commerce on the other hand, our patent and copyright statutes have been amended repeatedly.Id.

1917 U.S.C. § 106 (2012).

20See Herbert Hovenkamp, Post-Sale Restraints and Competitive Harm: The First Sale Doctrine in Perspective, 66 N.Y.U. Ann. Surv. Am. L. 487, 491 (2011).

2117 U.S.C. § 109.

22See 2 Paul Goldstein, Goldstein on Copyright § 7.6.1 n.4 (3d ed. 2005) (“[A] gift of copies or phonorecords will qualify as a ‘first sale’ to the same extent as an actual sale for consideration.”).

23Perzanowski & Schultz, supra note 16, at 892 (quoting Stewart v. Abend, 495 U.S. 207, 228 (1990)) (explaining that the monopoly privileges under Article I, § 8 of the Constitution are intended to provide an important public benefit); see also United States v. Paramount Pictures, Inc., 334 U.S. 131, 158 (1948) (“The copyright law, like the patent statute, makes reward to the owner a secondary consideration.”); Fox Film Corp. v. Doyal, 286 U.S. 123, 127 (1932) (“The sole interest of the United States and the primary object in conferring the monopoly lie in the general benefits derived by the public from the labors of authors.”).

24Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1386 (2013) (“Congress did not intend to permit copyright owners ‘to fasten . . . a restriction upon the subsequent alienation of the subject-matter of copyright after the owner had parted with the title to one who had acquired full dominion over it and had given a satisfactory price for it.’” (quoting Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350 (1908))).

2517 U.S.C. § 109; e.g., Columbia Pictures Indus., Inc. v. Redd Horne, Inc., 749 F.2d 154, 159 (3d Cir. 1984) (“The first sale doctrine prevents the copyright owner from controlling the future transfer of a particular copy once its material ownership has been transferred.”); Am. Int’l Pictures, Inc. v. Foreman, 576 F.2d 661, 664 (5th Cir. 1978) (“After the first sale of a copy the copyright holder has no control over the occurrence or conditions of further sales of it. . . . The first sale thus extinguishes the copyright holder’s ability to control the course of copies placed in the stream of commerce.”).

26Joseph P. Liu, Owning Digital Copies: Copyright Law and the Incidents of Copy Ownership, 42 Wm. & Mary L. Rev. 1245, 1303, 1310–11, 1320–21, 1330–33, 1336 (2001); R. Anthony Reese, The First Sale Doctrine in the Era of Digital Networks, 44 B.C. L. Rev. 577, 584 (2003) (addressing access, preservation, privacy); see also Perzanowski & Schultz, supra note 16, at 894 (listing two additional benefits: increased innovation and platform competition).

27Reese, supra note 26, at 578.

28Id.

29Id. at 585.

30Id. at 604 (citing the works of Homer and Virgil as historical proof that distribution of a work in multiple copies to various owners increases the likelihood that at least one copy will survive the test of time).

31Id. at 586–88. Libraries, used bookstores, Amazon’s physical book offerings, video rental stores, and online auction sites, such as eBay, are just some examples of the myriad commercial access models made possible through the first-sale doctrine.

32Id. at 585.

33Id. at 594–95, 599.

34Id. at 593.

35Id. at 593–94.

36E.g., id. at 595 (citing the example of silent-film actress Mary Pickford’s attempts to withhold her films from television and cinema for fear that future audiences would ridicule her); see also Worldwide Church of God v. Phila. Church of God, Inc., 227 F.3d 1110, 1122 (9th Cir. 2000) (Brunetti, J., dissenting). In that case, the plaintiff, Worldwide Church of God, destroyed copies of a book written by its founder and ceased circulation of the book. Its decision was “based on a ‘Christian duty’ to keep doctrinal errors out of circulation.” Id.

37E.g., Reese, supra note 26, at 597 n.69 (relating book publisher Harper Collins’s decision to not publish Leon Trotsky’s book because the United States might have allied with Josef Stalin’s Soviet Union for the remainder of World War II as an example of a politically-motivated decision to not release a copyrighted work into circulation).

3817 U.S.C. § 109 (2012).

39Perzanowski & Schultz, supra note 16, at 896.

40See generally Julie E. Cohen, A Right to Read Anonymously: A Closer Look at “Copyright Management” in Cyberspace, 28 Conn. L. Rev. 981 (1996).

41Perzanowski & Schultz, supra note 16, at 896.

42Id. at 896–97.

43See id. (citing Straus v. Victor Talking Mach. Co., 243 U.S. 490, 501 (1917) (“[N]ot one purchaser in many would read such a notice, and that not one in a much greater number, if he did read it, could understand its involved and intricate phraseology . . . .”)).

44E.g., iTunes Store: Terms and Conditions, Apple, http://www.apple.com/legal/internet-services/itunes/us/terms.html#GIFTS (last updated Sept. 17, 2014); Kindle Store Terms of Use, Amazon, http://www.amazon.com/gp/help/customer/display.html/ref=help_search_1-4? ie=UTF8&nodeId=201014950 (last updated Sept. 6, 2012); Steam Subscriber Agreement, Steam Powered, http://store.steampowered.com/subscriber_agreement (last visited Oct. 20, 2013).

45E.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44.

46See Vernor v. Autodesk, 621 F.3d 1102 (9th Cir. 2010); ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996).

47See Vernor, 621 F.3d at 1104, 1116.

48Nancy S. Kim, The Software Licensing Dilemma, 2008 BYU L. Rev. 1103, 1103.

49Id.

50Id. at 1145 (noting that if the parties were to enter into a “pure licensing transaction,” then the transfer restriction terms would be enforceable as a contractual obligation).

51See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44.

52621 F.3d 1102.

53402 F.3d 119 (2d Cir. 2005).

54621 F.3d at 1112.

55Id. at 1103–04, 1116.

56402 F.3d at 124–25.

57Id. at 120–21.

58Id. at 124.

5911 U.S.C. § 541(a) (2012) (“The commencement of a case under . . . this title creates an estate.”).

60Id. § 541(a)(1), (6).

61E.g., Phx. Elec. Contracting Corp. v. N.Y. Tel. Co., 587 N.Y.S.2d 485, 486 (Sup. Ct. 1992) (“A Trustee in bankruptcy representing all creditors of the estate has a duty to examine all proofs of claim, and must object to allowance of claims found to be improper. Thus, the Trustee stands in a fiduciary relationship to all creditors . . . .” (citation omitted)).

6211 U.S.C. § 704(a) enumerates the various duties of the trustee, listing foremost among them the duty to “collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest.” 11 U.S.C. § 704(a) (1). 11 U.S.C. § 726(b) provides for the pro rata distribution of payments to unsecured creditors in accordance with the priority order enumerated in § 507 and to non-priority unsecured creditors under § 726(a)(2). Id. § 726(b).

63Id. § 365(a), (f).

64Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973).

6511 U.S.C. § 365(f)(2)(A) (“The trustee may assign an executory contract or unexpired lease of the debtor only if . . . the trustee assumes such contract or lease in accordance with the provisions of this section . . . .”).

663 Collier on Bankruptcy, supra note 17, at ¶ 365.03[2] (citing Cor 5 Route Co. v. Penn Traffic Co. (In re Penn Traffic Co.), 524 F.3d 373, 383 (2d Cir. 2008); Orion Pictures Corp. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095 (2d Cir. 1993); Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303 (5th Cir. 1985); In re Old Carco LLC, 406 B.R. 180 (Bankr. S.D.N.Y. 2009); In re Pilgrim’s Pride Corp., 403 B.R. 413 (Bankr. N.D. Tex. 2009)).

67Michelle Morgan Harner et al., Debtors Beware: The Expanding Universe of Non-Assumable/Non-Assignable Contracts in Bankruptcy, 13 Am. Bankr. Inst. L. Rev. 187, 195 (2005).

6811 U.S.C. § 365(f) (“[N] otwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease . . . .”).

69Id.

70Id. § 365(f)(1).

71Id. § 365(c)(1)(A).

72Madlyn Gleich Primoff & Erica G. Weinberger, E-Commerce and Dot-Com Bankruptcies: Assumption, Assignment and Rejection of Executory Contracts, Including Intellectual Property Agreements, and Related Issues Under Sections 365(c), 365(e) and 365(n) of the Bankruptcy Code, 8 Am. Bankr. Inst. L. Rev. 307, 333 (2000) (quoting In re Catapult Entm’t, Inc., 165 F.3d 747, 754 (9th Cir. 1999)).

73Id. at 333–34.

7417 U.S.C. § 109(a) (2012) (extending § 109 rights only to “the owner of a particular copy . . . lawfully made”).

75Brian W. Carver, Why License Agreements Do Not Control Copy Ownership: First Sales and Essential Copies, 25 Berkeley Tech. L.J. 1887, 1896, 1934 (2010) (defining a sale as a transaction in which “a copy is transferred, the recipient owns the copy, and the recipient is therefore entitled to the benefits of § 109 and § 117”; whereas a license is a “permanent transfer of a copy of a copyrighted work in which the transferor purportedly retains full title to and ownership of the transferred copy”).

7617 U.S.C. § 201(d)(2) (“Any of the exclusive rights compromised in a copyright . . . may be transferred . . . and owned separately.”).

77See In re Patient Edu. Media, Inc. 210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997) (stating that a non-exclusive license does not transfer any ownership rights from owner to licensee).

78Carver, supra note 75, at 1898–99 (categorizing the five investigative approaches as follows: the “reservation of title” approach; the “agreement controls” approach; the “UCC controls” approach; the “economic realities” approach; and the “perpetual possession” approach).

79See, e.g., MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 518 n.5, 518–19 (9th Cir. 1993); see also Microsoft Corp. v. Harmony Computers & Elecs., Inc., 846 F. Supp. 208 (E.D.N.Y. 1994).

80991 F.2d at 511.

81Id. at 517–18.

82Id. at 518 n.5.

83Id. at 518–19 (quoting 17 U.S.C. § 117 (2012)).

84Kim, supra note 48, at 1113 (“Software does not fit neatly into preexisting legal categories because it is both tangible and intangible, and both privately owned and publicly distributable.”).

85Id. at 1106–07.

86See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44.

87Douglas E. Phillips, The Software License Unveiled: How Legislation by License Controls Software Access 23 (2009) (refuting the argument that EULAs grant rights to users that would otherwise not be present under the first-sale doctrine in stating, “On the contrary, most licenses state that even lending the software is prohibited, and they also impose conditions and limitations on the transfer of a license to third parties.”); John A. Rothchild, The Incredible Shrinking First-Sale Rule: Are Software Resale Limits Lawful?, 57 Rutgers L. Rev. 1, 25–26 (2004).

88Raymond Nimmer, The Law of Computer Technology § 1.18[1], at 1-103 (2d ed. 1992) (“Ownership of a copy should be determined based on the actual character, rather than the label, of the transaction by which the user obtained possession. Merely labeling a transaction as a lease or license does not control.”).

89Carver, supra note 75, at 1896 (emphasis added); see, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44.

90See Carver, supra note 75, at 1896–97 (providing an analysis of the confusion this classification has caused amongst the courts).

9166 F.3d 1091 (9th Cir. 1995).

92Id. at 1092.

93Id.

94Id.

95Id. at 1092–93.

96Id.

97Id. at 1093.

98Id.

99Id.

100Id.

101Id.

102Id. at 1092.

103Id. at 1095.

104Id. (citing In re Moreggia & Sons, Inc., 852 F.2d 1179, 1182 (9th Cir. 1988)).

105Id.

106Id.

107Id.

108Id.

109Id. at 1096.

110Id.

111See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44.

112Jennifer S. Bisk, Software Licenses Through the Bankruptcy Looking Glass: Drafting Individually Negotiated Software Licenses that Protect the Client’s Interests in Bankruptcy, 17 Fordham Intell. Prop. Media & Ent. L.J. 611, 623 (2007) (citing In re Stein, 81 B.R. 263, 266–67 (Bankr. S.D.N.Y. 1988); In re Monument Record Corp., 61 B.R. 866, 868–69 (Bankr. M.D. Tenn. 1986)).

113See Kim, supra note 48, at 1162–63 (noting the greater significance of this policy concern beyond the software industry in light of the possibility that other commercial goods may follow similarly restrictive practices).

114Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984).

11511 U.S.C. § 365(f)(1) (2012) (“ [N]otwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection.”).

116Countryman, supra note 64, at 460 (defining executory contracts as existing when “obligation[s] of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other”).

117Jay Lawrence Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227, 280 (1989).

118Peter M. Gilhuly et al., Intellectually Bankrupt?: The Comprehensive Guide to Navigating IP Issues in Chapter 11, 21 Am. Bankr. Inst. L. Rev. 1, 3 (2013).

119See, e.g., In re Buildnet, Inc., No. 01-82293, 2002 WL 31103235, at *8 (Bankr. M.D.N.C. Sept. 20, 2002) (“[M]ost patent, trademark, technology and other intellectual property licenses are executory contracts.” (citing Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043, 1045 (4th Cir. 1985) (Richmond III))).

120See, e.g., Jacob Maxwell, Inc. v. Veeck, 110 F.3d 749, 753 (11th Cir. 1997) (concluding implied non-exclusive license to use copyrighted material prevented infringement suit); In re Access Beyond Techs., Inc., 237 B.R. 32, 43 (Bankr. D. Del. 1999) (citing DeForest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927)) (stating that refraining from suing the other party for patent infringement was a material obligation and the raison d’etre for a patent license).

121Gleich Primoff & Weinberger, supra note 72, at 317 (citing Andrews v. Riggs Nat’l Bank of Wash., D.C. (In re Andrews), 80 F.3d 906, 914 (4th Cir. 1996); Encino Bus. Mgmt., Inc. v. Prize Frize, Inc. (In re Prize Frize, Inc.), 32 F.3d 426, 428 (9th Cir. 1994); In re Constant Care Cmty. Health Ctr., Inc., 99 B.R. 697, 702 (Bankr. D. Md. 1989)).

122Peter S. Menell, Bankruptcy Treatment of Intellectual Property Assets: An Economic Analysis, 22 Berkeley Tech. L.J. 733, 756–57 (2007); see, e.g., RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 264 (4th Cir. 2004) (holding that each party owed the continuing material duty to maintain the confidentiality of the source code developed by the other party under the license agreement).

123See, e.g., In re Richmond Metal Finishers, Inc., 38 B.R. 341, 344 (E.D. Va. 1984) (Richmond II), rev’d sub nom., Richmond III, 756 F.2d at 1045–47; PlayMedia Sys. v. Am. Online, Inc., 171 F. Supp. 2d 1094, 1099 (C.D. Cal. 2001); In re Valley Media, Inc., 279 B.R. 105, 135 (Bankr. D. Del. 2002); In re Golden Books Family Entm’t, Inc., 269 B.R. 300, 311 (Bankr. D. Del. 2001); In re Patient Educ. Media, Inc., 210 B.R. 237, 240 (Bankr. S.D.N.Y. 1997).

124See Fawick v. Comm’r, 436 F.2d 655, 662 (6th Cir. 1971) (citing S. Rep. No. 83-1622 (1954), as reprinted in 1954 U.S.C.C.A.N. 4621, 5082–5883) (stating exclusive license agreements may be recognized as sales for tax purposes); Golden Books Family Entm’t, Inc., 269 B.R. at 310.

125See Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 679 (9th Cir. 1996) (concluding non-exclusive patent is personal and, so, non-assignable without licensor’s consent); Gilson v. Republic of Ireland, 787 F.2d 655, 658 (D.C. Cir. 1986) (asserting non-exclusive licensee of patent does not possess property interest).

126Federal common law holds patent license agreements personal to the licensee and consequently non-assignable without the consent of the licensor. See CFLC, Inc., 89 F.3d at 679; PPG Indus., Inc. v. Guardian Indus. Corp., 597 F.2d 1090, 1093 (6th Cir. 1979) (“It has long been held by federal courts that agreements granting patent licenses are personal and not assignable unless expressly made so.” (citing Unarco Indus., Inc. v. Kelley Co., 465 F.2d 1303, 1306 (7th Cir. 1972))). This same reasoning has been extended to prevent the assignment of non-exclusive copyright licenses absent the licensor’s consent. See PlayMedia Sys., 171 F. Supp. 2d at 1099 (“A non-exclusive licensee . . . has ‘no right to re-sell or sublicense the rights acquired unless he has been expressly authorized to do so.’” (quoting Harris v. Emus Records Corp., 734 F.2d 1329, 1333 (9th Cir. 1984))); Valley Media, Inc., 279 B.R. at 135 (“A non-exclusive license of rights by a copyright owner to another party is not assignable by that party without the permission of the copyright holder under federal copyright law since the license represents only a personal and not a property interest in the copyright.” (citing Golden Books Family Entm’t Inc., 269 B.R. at 309)); Patient Educ. Media, Inc., 210 B.R. at 240–41 (“[T]he nonexclusive license is personal to the transferee, and the licensee cannot assign it to a third-party without the consent of the copyright owner.” (citing CFLC, Inc., 89 F.3d at 679)).

127Bisk, supra note 112, at 618–19.

12834 B.R. 521, 526 (Bankr. E.D. Va. 1983) (Richmond I), rev’d, Richmond II, 38 B.R. 341 (E.D. Va. 1984), rev’d sub nom., Richmond III, 756 F.2d 1043, 1045–47 (4th Cir. 1985).

129Id.

130Id.

131Id. at 523.

132Id. at 524.

133Id.

134Id. at 525–26. The business judgment rule, which originated in Otis & Co. v. Pa. R.R. Co., 61 F. Supp. 905 (E.D. Pa. 1945), holds directors, managers, and officers of a corporation free from liability for unprofitable business decisions so long as they exercised due diligence and the decision was entered into in good faith.

135See id. at 521, rev’d, Richmond II, 38 B.R. 341 (E.D. Va. 1984), rev’d sub nom., Richmond III, 756 F.2d 1043, 1045–47 (4th Cir. 1985).

136See Richmond III, 756 F.2d at 1048.

137Id. at 1045–47.

138Richmond I, 34 B.R. at 522.

139See Fenix Cattle Co. v. Silver (In re Select-A-Seat Corp.), 625 F.2d 290 (9th Cir. 1980); In re Buildnet, Inc., No. 01-82293, 2002 Bankr. LEXIS 1851, at *99 (Bankr. M.D.N.C. Sept. 20, 2002); Rudaw/Empirical Software Prods. Ltd. v. Elgar Electronics Corp. (In re Rudaw/Empirical Software Prods. Ltd.), 83 B.R. 241 (Bankr. S.D.N.Y. 1988); In re Logical Software, Inc., 66 B.R. 683, 684 (Bankr. D. Mass. 1986). But see Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1095 (9th Cir. 1995) (holding the software “license” was a sale in substance and could not be found to be executory so as to bar assignment).

140625 F.2d 290.

141Id. at 292.

142Id.

1432002 Bankr. LEXIS 1851, at *13.

144Id. at *16–17.

145See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44.

146See, e.g., RCI Tech. Corp. v. Sunterra Corp (In re Sunterra Corp.), 361 F.3d 257, 264 (4th Cir. 2004) (the license was executory due to the continuing obligation of each party to keep the software source code confidential). But see Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1095 (9th Cir. 1995).

147See Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1249 (3d Cir. 1983) (“[A] computer program, whether in object code or source code, is a ‘literary work’ and is protected from unauthorized copying, whether from its object or source code version.”).

148See Sunterra Corp., 361 F.3d at 262 & n.7 (stating that because the software at issue was registered with the United States Copyright Office, copyright law was the applicable nonbankruptcy law that would excuse acceptance of the assignment of the non-exclusive license in the case).

149See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44.

150Countryman, supra note 64, at 460.

151David R. Kuney, Intellectual Property Law in Bankruptcy Court: The Search for a More Coherent Standard in Dealing with a Debtor’s Right to Assume and Assign Technology Licenses, 9 Am. Bankr. Inst. L. Rev. 593, 594 (2001).

152See 11 U.S.C. § 365(c) (2012).

153Everex Sys., Inc. v. Cadtrak Corp (In re CFLC Inc.), 89 F.3d 673, 679 (9th Cir. 1996) (quoting Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 150–51 (1989)).

1544 Collier on Bankruptcy, supra note 17, at ¶ 506.03[6][a][ii] (“[T]he policy of maximizing the value of the debtor’s bankruptcy estate”).

155See, e.g., Otto Preminger Films, Ltd. v. Qintex Entm’t, Inc. (In re Qintex Entm’t, Inc.), 950 F.2d 1492, 1495 (9th Cir. 1991) (“[W]e will only consider a contract executory if material unperformed obligations remain for both parties.”); In re Patient Educ. Media, Inc., 210 B.R. 237, 242–43 (Bankr. S.D.N.Y. 1997).

156Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1093 (9th Cir. 1995).

157Id. at 1095–96.

158Kuney, supra note 151, at 604.

159See 11 U.S.C. § 365(f)(1) (2012) (“Except as provided in subsections (b) and (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease . . .”).

160Id. § 365(c)(1)(A).

161Kuney, supra note 151, at 606–07.

162Kuney, supra note 151, at 630 (noting that some courts have viewed § 365(c) as intending to “protect the non-debtor party from an assignment where the identity of the party providing performance is material”).

163This example is borrowed from Kuney, supra note 151, at 630 (“It seems almost beyond debate that rock stars cannot assign their contracts, inside or outside of bankruptcy because the identity of the performer is material.”).

164 210 B.R. 237, 242–43 (Bankr. S.D.N.Y. 1997).

165Id. at 239.

166Id. at 240.

167Id. at 243.

168Id. at 240–41 (contrasting between an exclusive license under which a licensee “may freely transfer his rights” with a non-exclusive license in which “the licensee cannot assign it to a third-party without the consent of the copyright owner”).

169Id.

170Id. at 242–43 (“Because federal law governs the assignability of nonexclusive patent licenses, and because federal law makes such licenses personal and assignable only with the consent of the licensor, the . . . license is not assumable and assignable in bankruptcy under 11 U.S.C. § 365(c).” (quoting Gilson v. Republic of Ireland, 787 F.2d 655, 658 (D.C. Cir. 1986))).

171Id. at 243.

172Contra id. at 242.

173Cf. Farmland Irrigation Co. v. Dopplmaier, 308 P.2d 732, 739 (Cal. 1957) (“We can find no policy underlying the federal patent statutes that requires a uniform federal rule of construction of license contracts to determine their assignability.”). But see id. at 242 (“Ordinarily, a court will apply state contractual law to disputes concerning the scope of a copyright license. State contractual law will yield, however, to an overriding federal law or policy.” (citations omitted)).

174See, e.g., iTunes Store: Terms and Conditions, supra note 44; Kindle Store Terms of Use, supra note 44; Steam Subscriber Agreement, supra note 44.

175See SQL Solutions, Inc. v. Oracle Corp., No. C-91-1079, 1991 WL 626458, at *5–6 (N.D. Cal. Dec. 18, 1991).

176Neil S. Hirshman et al., Is Silence Really Golden? Assumption and Assignment of Intellectual Property Licenses in Bankruptcy, 3 Hastings Bus. L.J. 197, 202 (2007).

177Farmland Irrigation Co., 308 P.2d at 740.

17811 U.S.C. § 365(f) (2012).

179Id.

Editor-in-Chief, Emory Bankruptcy Developments Journal; J.D. Candidate, Emory University School of Law (2015); B.A., magna cum laude, University of Florida (2010); Winner of the 2014 Keith J. Shapiro Award for Excellence in Consumer Bankruptcy Writing. I would first like to thank Professor Rafael Pardo for providing his expertise and support in writing this Comment. I would also like to thank the staff of the Emory Bankruptcy Developments Journal for their assistance in editing and refining this Comment—especially Jacob Davis, Adam Gross, Jonathan Lawler, and Lauren Riker. Finally, special thanks to my parents for their unwavering support.