Case Highlight: Spiro v. Vions Technology, Inc. – State Court Maintains Subject Matter Jurisdiction In Dispute Surrounding Intellectual Property Ownership Rights of A Now-Bankrupt Corporation

Intellectual property and bankruptcy disputes are matters typically reserved for the subject matter jurisdiction of the federal courts. However, in Spiro v. Vions Technology, Inc., C.A. No. 8287-VCP (Del. Ch. March 23, 2014) the Court of Chancery of the State of Delaware (“Chancery Court”) addressed a procedural question as to subject matter jurisdiction and held that where a debtor’s intellectual property and related licensing agreements had been abandoned by the bankruptcy trustee, the Chancery Court has subject matter jurisdiction over an action to determine, among other things, the ownership of such intellectual property. Specifically, plaintiff Spiro, a creditor in the bankruptcy action and a former shareholder of the bankrupt corporation, Ionsep Corporation Inc. (“Ionsep”), brought an action in the Chancery Court seeking, along with damages, that the Court: (i) void the exclusive licensing of the intellectual property as an allegedly fraudulent transfer, (ii) enjoin further licensing of the intellectual property by the licensee and (iii) return the intellectual property to the shareholders of Ionsep. Defendant Vions Technology Inc. (“Vions”), to which the intellectual property at issue had been transferred pre-bankruptcy, argued that Spiro had no standing to bring the fraudulent transfer action and that the bankruptcy court maintained jurisdiction over the intellectual property in question.

By way of background, Ionsep had been founded by Daniel Vaughan, a scientist who developed patented technologies and who had licensed various intellectual property to Ionsep. With the exception of plaintiff Spiro, who became an Ionsep shareholder in 2008, all other shareholders, directors and officers of Ionsep were related to Mr. Vaughan. In addition to becoming a shareholder, Spiro had, over a nineteen-year period and prior to his becoming a shareholder, loaned in excess of $1.5 million to Ionsep. In 2005, Mr. Vaughan appeared to have assigned all of his existing and future patent rights to Vions, which Spiro later argued was controlled by Mr. Vaughan’s relatives. In addition to loans from Spiro, the Wilmington Trust Company (“WTC”) issued promissory notes to Ionsep that were secured by Ionsep’s property — including its intellectual property. In 2010, shortly after Mr. Vaughan passed away, Spiro and Ionsep’s creditors successfully forced Ionsep into Chapter 7 bankruptcy. Also in 2010, WTC assigned its rights under the promissory notes to Spiro. As such, when the chapter 7 bankruptcy trustee abandoned Ionsep’s intellectual property rights, Spiro contended that the rights were abandoned to him as a result of WTC’s assignment of those rights.

The Chancery Court stated that “the key underlying documents are loose and imprecise.” In its factual summary, the Court attempted to provide some clarity as to the question of who “owns” the subject intellectual property. However, the Court notes that the question of ownership was not the most significant question facing the Court, but rather, whether the Court had subject matter jurisdiction thus, invalidating the motion to dismiss and allowing the Court to later proceed to address the intricate question of ownership.

In support of Vions’ motion to dismiss the action for lack of subject matter jurisdiction or alternatively to stay the action pursuant to the automatic stay of Section 362 of the Bankruptcy Code, Vions argued that the Bankruptcy Court maintained jurisdiction over the subject intellectual property because Ionsep failed to list these assets on its bankruptcy schedules. In addition, Vions argued that because there was ambiguity as to the nature and scope of the intellectual property rights granted to Vions, the Bankruptcy Court had to first resolve this ambiguity before the Chapter 7 trustee could properly abandon Ionsep’s rights to the intellectual property. As such, Vions argued that the Chancery Court action should be stayed, pending the bankruptcy court’s resolution of the nature and scope of the intellectual property rights that were the subject of the action.

In denying Vions’ motion to dismiss, the Chancery Court found that Ionsep’s failure to list its rights in the intellectual property as assets of its bankruptcy estate, had no impact on whether such assets could be abandoned by the bankruptcy trustee as the listing of the assets on a debtor’s schedules is not the determining factor in what constitutes assets of a debtor’s bankruptcy estate. The Chancery Court noted that the bankruptcy trustee, in several motions to extend the time to assume or reject certain executory contracts pursuant to Section 365 of the Bankruptcy Code, consistently stated that Ionsep’s intellectual property was its only “valuable asset,” thus recognizing that the intellectual property at issue were assets of Ionsep’s bankruptcy estate. With that backdrop, citing several bankruptcy cases, the Chancery Court held that the bankruptcy trustee’s abandonment of the intellectual property was valid.

Moving to the jurisdictional issue, the Chancery Court found that upon abandonment, the rights to the intellectual property reverted back to the owners of Ionsep and thus, Spiro had standing to bring the state court action. Further, because the abandonment was valid and the bankruptcy court lost jurisdiction over the intellectual property, Vions’ motion to stay the matter pending the bankruptcy court’s determination of the scope and nature of the intellectual property rights was rendered moot and the Chancery Court had jurisdiction over such action.

In light of the Chancery Court’s holding that adjudication as to the scope and nature of intellectual property rights and what is to happen to those rights when abandoned in the bankruptcy action is within the purview of the state court, intellectual practitioners accustomed to federal practice should be aware that they could well find themselves in state court discussing the scope, nature and ownership of their clients’ intellectual property.