Eastman Kodak Company issued a press release on July 2, 2012, explaining that they obtained approval from the United States Bankruptcy Court for the Southern District of New York to conduct an auction to sell its Digital Capture and Kodak Imaging Systems and Services (KISS) patent portfolios. Rather than simply taking Kodak’s word for it I always like to sign into PACER to verify. I could not find the Order discussed in the Kodak press release. I reached out to Kodak for comment and was told that the order was undergoing revision prior to being issued by the Court. Ultimately, on July 5, 2012, the Order Conditionally Authorizing Sale of Patent Assets was issued by the Court, and now I am comfortable writing about the sale of patent assets being authorized by the Bankruptcy Court.
Kodak’s motion was contested by Apple, Inc. (“Apple”) and FlashPoint Technologies, Inc. (“FlashPoint”) which have asserted “ownership” interests in a small number of the 1,100 patents in the portfolios. The Bankruptcy Court, over Apple and Flashpoint’s objections, found that all of the patents in the Digital Capture and KISS patent portfolios are property of Kodak’s estate. Accordingly, the Court granted Kodak the right to sell these patents free and clear of Apple and FlashPoint’s claims at the auction, subject to the applicable provisions of the U.S. Bankruptcy Code.
The Bankruptcy Court did, however, order that Kodak adequately protect the interests of Apple and FlashPoint as required under § 363(e) of the Bankruptcy Code. An Adequate Protection hearing will be scheduled after Apple and FlashPoint have received the required notice. The Bankruptcy Court also specifically recognized Apple and Flashpoint’s right to object, saying: “The rights of Apple and Flashpoint to object to the sufficiency of or request additional adequate protection are expressly reserved.”
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Even if the dispute with Apple and FlashPoint has not been fully resolved by the time of the final sale of the patent assets Kodak may still be able to proceed with the sale if they establish “adequate protection” under the Bankruptcy Code for Apple and Flashpoint at the time of sale. Kodak’s adequate protection could take many forms depending on the value of any remaining alleged interests, the amount of the sale proceeds, and other factors. Alternatively, the Bankruptcy Court also authorized Kodak to sell the patents subject to Apple and FlashPoint’s claims, if mutually agreed between Kodak and the winning bidder.
Despite the potential wrinkle presented by Apple and FlashPoint, Kodak clearly believes that the claims are without merit. On this issue Timothy Lynch, Kodak Vice President and Chief Intellectual Property Officer, has said: “The Apple and FlashPoint claims are baseless and Kodak will still seek dismissal on summary judgment in July… [the] ruling provides a Court-approved process allowing buyers to acquire the patents free and clear of all ownership allegations, regardless of the status of the dispute with Apple and Flashpoint at the time of closing.”
With respect to other objections made and not presented the Bankruptcy Court explained:
All objections (including the Filed Objections) to the Motion as it pertains to the entry of this Order that have not been withdrawn, waived, settled or resolved in this Order, and all reservations of rights in the Filed Objections with respect to the relief requested in the Motion, are hereby overruled on the merits with prejudice. All persons and entities that failed to timely object to the Motion as it pertains to the entry of this Order are deemed to have consented to the relief sought therein.
With Apple and FlashPoint’s objections already on file, and the Order specifically giving them the ability to further challenge, the Apple and FlashPoint claims may still be a hurdle for Kodak, at least to some extent.
The Bankruptcy Court Order also sets a hearing to authorize the anticipated sale, which will take place in the Court on August 20, 2012 at 2:30pm ET. Kodak may seek an earlier date for the Final Sale Hearing should it be necessary or advantageous, provided that no hearing will be allowed to take place earlier than seven (7) days after service of the Notice of Final Sale Hearing. The deadline for objecting to the Sale was set for 4:00pm ET four (4) days prior to the Final Sale Hearing. This Objection Deadline can be extended. The Court also specifically stated that Apple and Flashpoint may apply to the Court for additional time to object for cause.
All of this is certainly a positive development for Kodak, as their bankruptcy case continues to proceed without incident. The giant question, however, will be whether there is real interest in the Kodak patent portfolios that will lead to the billions of dollars that the portfolios were originally anticipated to fetch. The fact that the Bankruptcy Court has conditionally authorized the sale does not mean that there will be any bidders, or that the bidding will go as high as anticipated. This means there remains some important issues for Kodak and for its creditors surrounding the value of the assets.
The sale of the of Kodak patents will proceed as per the Bankruptcy Order and pursuant to section 363 of the U.S. Bankruptcy Code. Ultimately, whoever purchases the patents is expected to take the patents free and clear of any adverse claim or interest. The patents will be sold in a fair, competitive process overseen by the Bankruptcy Court as set forth in the Bankruptcy Order. For more on the procedures proposed by Kodak see Kodak Seeks to Sell Patents Without Minimum Bid.
“We are gratified that the Court has enabled us to move ahead with our patent auction in a timely manner and with clarity on ownership for the winning buyer,” said Lynch. As previously announced, interested buyers will be able to submit bids on a confidential basis, subject to review by Kodak, certain of its creditors and the Bankruptcy Court. The auction is expected to be held in early August.