Royalty Rights as Unsecured Claims

Consider this scenario: A company sells intellectual property rights to a buyer that plans to develop the intellectual property (IP) into a profitabl product. The buyer pays a minimal upfront purchase price in cash, with the most valuable consideration taking the form of future “royalties” and/or “milestone payments” related to the development and sale of the product.

Upon closing the buyer obtains ownership of the IP.

The product does well and perhaps the seller even starts receiving the promised milestone and/or royalty payments. But then an unanticipated event changes the way the scenario plays out. For reasons that may or may not be related to the product, the buyer file for bankruptcy protection. The buyer continues to develop, market and sell the product, but stops paying royalty or milestone payments to the seller, claiming that the seller is now only entitled to a lump sum payment of a tiny fraction of the future payments it bargained for.