                                                                                                                           Opinions of the United
2003 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-30-2003

In Re: Cellnet Data
Precedential or Non-Precedential: Precedential

Docket 02-2546




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Recommended Citation
"In Re: Cellnet Data " (2003). 2003 Decisions. Paper 574.
http://digitalcommons.law.villanova.edu/thirdcircuit_2003/574


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                          PRECEDENTIAL

                                        Filed April 30, 2003

        UNITED STATES COURT OF APPEALS
             FOR THE THIRD CIRCUIT


                    No. 02-2546


       IN RE: CELLNET DATA SYSTEMS, INC.,
                               Debtor
           SCHLUMBERGER RESOURCE
          MANAGEMENT SERVICES, INC.,
                               Appellant
                          v.
           CELLNET DATA SYSTEMS, INC.

APPEAL FROM THE UNITED STATES DISTRICT COURT
           FOR THE DISTRICT OF DELAWARE
                 (D.C. No. 01-cv-00008)
  District Judge: The Honorable Roderick R. McKelvie

             Argued December 16, 2002
     BEFORE: NYGAARD, ALITO, and RENDELL,
                Circuit Judges.

                (Filed April 30, 2003)

                  Mary Grace Diehl, Esq. (Argued)
                  Troutman Sanders
                  600 Peachtree Street, N.E.,
                   Suite 5200
                  Atlanta, GA 30308
                    Counsel for Appellant
                              2


                      John H. Knight, Esq.
                      Mark D. Collins, Esq.
                      Richards, Layton & Finger
                      One Rodney Square, P.O. Box 551
                      Wilmington, DE 19899
                      Mark J. Thompson, Esq. (Argued)
                      Simpson, Thacher & Bartlett
                      425 Lexington Avenue
                      New York, NY 10017
                        Counsel for Appellee


                 OPINION OF THE COURT

NYGAARD, Circuit Judge.
   This appeal presents us with an issue of first impression
involving elections under 11 U.S.C. § 365(n). CellNet Data
Systems, Inc. sold its intellectual property to Schlumberger
Resource Management Services, Inc., which specifically
excluded the assets and liabilities of certain licensing
agreements under the terms of the sale. After CellNet
rejected those licensing agreements under 11 U.S.C.
§ 365(a) of the bankruptcy code, the licensee exercised its
rights under § 365(n) to continue to use the intellectual
property, subject to the royalty payments due under the
original license. Both CellNet, as party to the contract, and
Schlumberger, as holder of the intellectual property, claim
the right to receive the royalty payments. The District Court
determined that Schlumberger had expressly severed the
royalties from the intellectual property by the terms of the
purchase agreement and that the royalties remained in
CellNet’s estate. Although CellNet then rejected the license,
the licensee, by operation of § 365(n), elected to enforce the
license and thus the District Court concluded that the
royalties due under the revived contract belonged to
CellNet. We will affirm.

          I. Jurisdiction and Standard of Review
  The Bankruptcy Court had subject matter jurisdiction
over the initial proceedings pursuant to 28 U.S.C.
                             3


§ 1334(b). The District Court’s jurisdiction for the
bankruptcy appeal is found in 28 U.S.C. § 158(a)(1). Our
jurisdiction over this appeal arises from 28 U.S.C. § 158(d).
We exercise plenary review of an order issued by a district
court sitting as an appellate court in review of the
bankruptcy court. In re Top Grade Sausage, Inc., 227 F.3d
123, 125 (3d Cir. 2000). Pursuant to Rule 8013 of the
Federal Rules of Bankruptcy Procedure, on appeal, findings
of fact by the bankruptcy court are set aside if clearly
erroneous. A factual finding is clearly erroneous when “the
reviewing court on the entire evidence is left with the
definite and firm conviction that a mistake has been
committed.” United States v. United States Gypsum Co., 333
U.S. 364, 395 (1948). We review legal conclusions de novo
and mixed questions of law and fact under a mixed
standard, affording a clearly erroneous standard to integral
facts, but exercising plenary review of the lower court’s
interpretation and application of those facts to legal
precepts. In re Top Grade Sausage, Inc., 227 F.3d at 125.

                      II. Background
  The essential facts are not in dispute, rather how those
facts operate is at issue. In 1997, CellNet, a developer of a
wireless data network for meter reading, now in
bankruptcy, entered into a joint venture with Bechtel
Enterprises, Inc., forming a company called BCN Data
Systems LLC. As part of the joint venture, CellNet entered
into several licensing agreements with BCN, that provided
BCN with an exclusive license to use CellNet’s intellectual
property outside the United States. In return, CellNet
received a royalty payment equal to three percent of BCN’s
gross revenues. The License Agreements also contained a
covenant that CellNet would provide technological support
to BCN during the lifetime of the Agreements.
  Three years later, with CellNet on the verge of
bankruptcy, Appellant, Schlumberger, proposed the sale of
CellNet’s assets. Schlumberger and CellNet entered into a
Proposal Letter under which Schlumberger would purchase
“all or substantially all of the assets and business
operations of [CellNet] and its subsidiaries.” The January
31, 2000 Proposal Letter also provided that Schlumberger
                                  4


“would acquire all assets of [CellNet] free and clear of all
liens other than certain liens to be agreed (the ‘Assets’),
other than the Excluded Assets (as defined below), used in,
held for use in, or related to the business and operations of
[CellNet].” Thus, the proposal contemplated that certain
assets of CellNet would not be subject to the ultimate
purchase agreement. However, the term “Excluded Assets”
was left open for future agreement by the parties.
  CellNet filed for bankruptcy on February 4, 2000. On
March 1, 2000, Schlumberger and CellNet entered into an
Asset Purchase Agreement that mirrored the intent of the
Proposal Letter, in that Schlumberger would purchase all of
CellNet’s assets, subject only to certain excluded assets.
This time, however, the agreement included language that
explained:
     At any time prior to March 25, 2000, [Schlumberger]
     shall be entitled unilaterally to amend this Agreement,
     including without limitation Schedules 1.01(a)(i) (Stock
     Acquired), 1.01(b) (Excluded Contracts) and 1.01(e)
     (Excluded Assets) attached hereto, solely for the
     purpose of excluding any or all of the stock, assets,
     liabilities and agreements of [CellNet] pertaining to
     [CellNet’s] joint venture with Bechtel Enterprises, Inc.,
     or its affiliates, (collectively, the “BCN Assets and
     Liabilities”) from the stock, assets, liabilities and
     agreements      being    acquired    or  assumed      by
     [Schlumberger] hereunder.
Thus, the Purchase Agreement provided that Schlumberger
would purchase all of CellNet’s intellectual property, etc.,
but would be able to specifically exclude all stocks, assets,
liabilities, and agreements pertaining to CellNet’s venture
with BCN.1 Pursuant to a letter by counsel on March 24,
2000, Schlumberger elected to exercise its right to exclude
the BCN assets and liabilities. The letter went on to
specifically designate the License Agreements between
CellNet and BCN as assets and liabilities excluded from the
purchase under the heading “Excluded Contracts.”

1. The contract also contained an integration clause and a provision
stating that disputes over the agreement would be governed by New York
law.
                             5


   Despite excluding the License Agreements, Schlumberger
asserted a right to the royalties under the Agreements prior
to the approval of the Asset Purchase Agreement by the
bankruptcy court. This was based on the belief that CellNet
would have to reject the Agreements under § 365(a) as
executory contracts that it could not fulfill and that
Schlumberger would then be entitled to the royalties as
owner of the underlying intellectual property. CellNet
believed otherwise, but in an effort to complete the sale of
its assets, agreed to reject the License Agreements and
preserve the right of the parties to contest ownership of the
royalties. The parties memorialized the decision to reject
the License Agreements under § 365(a) in an additional
section of the Asset Purchase Agreement. The new section
read:
    [Schlumberger] has elected not to assume the License
    and Consulting Services Agreement between [CellNet]
    and BCN Data Systems, L.L.C. (“BCN”), dated January
    1, 1997, the [OCDB License Agreement] between
    [CellNet] and BCN dated January 1, 1997 . . .
    (collectively, the “BCN License Agreements”). [CellNet]
    shall obtain an order from the Bankruptcy Court
    pursuant to Section 365(a) of the Bankruptcy Code
    rejecting the BCN License Agreements. The parties
    hereto acknowledge that if BCN elects to retain its
    rights under the BCN License Agreements in
    accordance with Section 365(n)(1)(B) of the Bankruptcy
    Code, then the rights and obligations of the parties
    with respect to the License Agreements, including
    without limitation any royalty rights thereunder, are
    disputed by the parties. Each party reserves all rights
    under this Agreement with respect to the BCN License
    Agreements, and neither this Amendment nor any
    action taken in connection herewith, including the
    filing of any modified Sale Order, shall be deemed to be
    a waiver or admission of any matter related to the
    dispute between [CellNet] and [Schlumberger] regarding
    the BCN License Agreements.
Under this agreement, CellNet agreed to reject the License
Agreements pursuant to § 365(a), but both parties
acknowledged that a dispute over royalties would remain if
                              6


BCN elected to retain its rights under § 365(n). On May 4,
2001, the Bankruptcy Court approved the Asset Purchase
Agreement with both the addition, as well as additional
language that further expressed that the sale did not alter
the rights of CellNet, Schlumberger, or BCN regarding the
License Agreements and the royalties due thereunder.
   Following approval of the sale, CellNet moved to reject the
License Agreements under § 365(a). Section 365(a) provides
that “the trustee, subject to the court’s approval, may
assume or reject any executory contract or unexpired lease
of the debtor.” 11 U.S.C. § 365(a). CellNet was permitted to
act as the trustee because it was a debtor-in-possession
pursuant to 11 U.S.C. § 1107(a). The Bankruptcy Court
approved the motion and CellNet informed BCN of its
election. BCN, in turn, chose to retain its rights under
§ 365(n). Section 365(n) provides that “[i]f a trustee rejects
an executory contract under which the debtor is a licensor
of a right to intellectual property, the licensee under such
contract may elect” to either terminate the contract or
retain certain rights under the license. Specifically, the
licensee may elect:
    to retain its rights (including a right to enforce any
    exclusivity provision of such contract, but excluding
    any other right under applicable non-bankruptcy law
    to specific performance of such contract) under such
    contract and under any agreement supplementary to
    such contract, to such intellectual property . . . as
    such rights existed immediately before the case
    commenced. . . .
11 U.S.C. § 365(n)(1)(B). If a licensee elects to retain its
rights, section 365(n)(2)(B) of the Code requires it to “make
all royalty payments due under such contract for the
duration of such contract. . . .” By its election, and
operation of § 365(n), BCN was permitted to continue to use
the intellectual property originally licensed from CellNet,
but was required to pay the royalties due under that
license.
  Rather than remain in a joint venture, CellNet and
Bechtel agreed that Bechtel would acquire all of the assets
and liabilities of BCN and make one lump sum payment to
                              7


CellNet that would encompass the future royalty payments
due under the License Agreements. The Bankruptcy Court
approved the sale to Bechtel, and the negotiated amount of
$2,250,000 for the future royalties was placed in escrow
pending resolution of who was entitled to the royalties.
  Both the Bankruptcy Court and the District Court found
that CellNet was entitled to the royalties. In its opinion, the
District Court addressed the same arguments now raised
before us. Schlumberger argued that the Asset Purchase
Agreement and its later rejection of the License Agreement
did not operate to separate the right to the royalties from
the underlying ownership of the intellectual property.
Alternatively, Schlumberger asked the District Court to look
past the original exclusion and find that because it owns
the intellectual property and CellNet subsequently rejected
the license under § 365(a), it has superior rights to the
royalties.
   In affirming the decision of the Bankruptcy Court in favor
of CellNet, the District Court thoroughly analyzed the Asset
Purchase Agreement and subsequent exclusion of License
Agreements. After finding that the Purchase Agreement was
not ambiguous, the District Court looked at the “express
reservation” requirement necessary for the separation of
royalties from intellectual property and decided that the
Purchase Agreement could only be interpreted to separate
the royalties due under the license from the intellectual
property. The District Court also addressed Schlumberger’s
contention that it had superior rights under § 365 because
it owned the intellectual property and CellNet had rejected
the license pursuant to § 365(a). The District Court agreed
with CellNet that the election of BCN pursuant to § 365(n)
renewed certain obligations related to the license. The
District Court found that under the License Agreements,
the royalty payments were due to CellNet and that because
Schlumberger had excluded those License Agreements from
its purchase, CellNet “remains entitled to receive the BCN
royalties pursuant to statutory authority even if it rejected
the License Agreements and is not technically a party to
them.” In Re CellNet Data Systems, Inc., 277 B.R. 588, 595
(D. Del. 2002).
                               8


                        III. Discussion
A. The Effects of the Asset Purchase Agreement:
   Schlumberger’s first argument is that the Purchase
Agreement and letter of March 2000 did not operate to
sever the royalties from ownership of the intellectual
property. Both the Bankruptcy Court and District Court
disagreed and found that Schlumberger had separated
ownership from its rights by the plain language of the
Purchase Agreement and March Letter Amendment. These
findings are clearly correct.
   On appeal, Schlumberger points to two cases from the
bankruptcy court that would require an express reservation
to separate the components. In Chemical Foundation, Inc. v.
E.I. Du Pont De Nemours & Co., 29 F.2d 597 (D. Del. 1928)
the court discussed the effects of assigning a patent on the
right to receive royalties for that patent:
    Yet, as an assignment of a patent, without more, does
    not transfer to the assignee the right to recover
    damages or profits for prior infringements, although
    royalties to accrue and damages and profits for future
    infringements are incident to and accompany the
    patent unless separated by express reservation, and as
    a patentee may after assigning the patents sue and
    recover for past infringements, it would seem obvious
    that an assignor of a patent would have like rights with
    respect to royalties accrued at the time of the
    assignment. But the right to recover accrued royalties
    or damages and profits for past infringements may
    likewise be assigned.
Id. at 600 (citations omitted). Chemical espouses the
proposition that royalties were inherent in ownership of a
patent and flowed accordingly, although they could be
divorced by an express reservation. This idea was expanded
in Crom v. Cement Gun Co., 46 F. Supp. 403 (D. Del. 1942),
where the court discussed the ownership of a patent. After
quoting much of the above language in Chemical, the court
found that:
    Where an assignment conveys all the assignor’s right,
    title and interest, if the right to receive royalties is to be
                             9


    severed from the beneficial ownership of the patent and
    remain in the assignor, there must be an express
    reservation or some agreement to that effect. I do not
    think that the mere retention of the ‘license’... is
    sufficient to make the severance, particularly where, as
    in the present case, it is merely for the purpose of
    protecting a supposed but nonexistent shop right and
    is in contravention of the understanding of the parties.
Id. at 405-06 (emphasis added).
   Unlike the cases Schlumberger cites, the unambiguous
Purchase Agreement and March Letter Amendment present
here did expressly sever the royalties. This conclusion has
support in a straightforward reading of the documents. The
Purchase Agreement permitted Schlumberger “unilaterally
to amend this Agreement...solely for the purpose of
excluding any or all of the stock, assets, liabilities and
agreements of [CellNet] pertaining to [CellNet’s] joint
venture with Bechtel Enterprises, Inc.” Beyond this
language, the Purchase Agreement also explained that
“[n]otwithstanding anything herein to the contrary, the
Purchaser shall not purchase or acquire, and shall have no
rights or liabilities with respect to, any Excluded Asset.”
The Purchase Agreement further defined “Excluded Assets”
to include “all rights of the Sellers under any Excluded
Asset” and “all proceeds from any Excluded Asset.”
  These sections must be read in concert with the March
24, 2000 Letter, which sought to specify those items
excluded from the Purchase Agreement. In that letter,
Schlumberger “elect[ed] to amend the Asset Purchase
Agreement to exclude the BCN Assets and Liabilities from
the stock, assets, liabilities and agreements of the Sellers
being acquired or assumed under the Asset Purchase
Agreement.” The letter went on to specifically enumerate
the various License Agreements between CellNet and BCN
as excluded assets. Thus, Schlumberger expressly sought
to exclude all rights and liabilities under the License
Agreements, including its rights to all proceeds under those
Agreements.
  Schlumberger now attempts to argue that the Purchase
Agreement and March Letter (both of which it drafted) are
                             10


ambiguous and that extrinsic evidence is necessary to
decide whether the Purchase Agreement contemplated
severance of the royalties. This argument is unpersuasive.
As the District Court correctly noted:
    The Asset Purchase Agreement and March 24 letter
    contain no ambiguities and, by those documents,
    Schlumberger excluded the License Agreements from
    the assets it was acquiring. While Schlumberger has
    argued that, under this pattern of events, it is entitled
    to receive the royalties from BCN, either as a matter of
    contract law or under the Bankruptcy Code, both
    parties agree the Asset Purchase Agreement and March
    24 letter accurately represent the parties’ intentions.
    Thus, it is only the legal effect of the transaction that
    Schlumberger challenges.
In Re CellNet, 277 B.R. at 595. Under New York law,
“ambiguity does not exist ‘simply because the parties urge
different interpretations.’ ” Hugo Boss Fashions v. Federal
Insurance Co., 252 F.3d 608, 616 (2d Cir. 2001). When
Schlumberger elected to exclude “all the proceeds from [the
BCN License Agreements]” it expressly excluded the
royalties from these agreements from the intellectual
property it was purchasing. The effect of this exclusion is
that the License Agreements remain in CellNet’s estate.
   Schlumberger also finds fault with the District Court’s
holding that “[b]ecause the right to royalties arises only
from the License Agreements, Schlumberger’s exclusion of
those agreements (and the royalties they set forth) was
unambiguous and effective.” In Re CellNet, 277 B.R. at 594.
Instead, Schlumberger argues that the right to the royalties
derives from ownership of the intellectual property and not
from the License Agreements. As a general proposition,
Schlumberger is correct that it is the intellectual property
that creates the right to royalties—as an owner may parcel
out its “bundle of rights.” However, this argument does not
alter our analysis under these factual circumstances. At the
time the License Agreements were created, CellNet owned
the intellectual property and thus could license the right of
exclusivity outside the United States to BCN in exchange
for royalties. This separation of rights from the “bundle”
was memorialized in the License Agreements. When
                                   11


Schlumberger purchased the intellectual property owned by
CellNet, the license already existed and, pursuant to
§ 365(n), would likely continue to exist. Based on
Schlumberger’s acceptance that they would be purchasing
CellNet’s intellectual property subject to BCN’s rights,2 and
that BCN’s rights existed solely from the excluded licenses,
what Schlumberger bought was less than the full “bundle
of rights” associated with ownership.
  Thus, the initial right to royalties arose from the
ownership of the intellectual property, but after
Schlumberger elected to exclude the License Agreements, it
severed those rights from the bundle it was purchasing.
Once the royalties were divorced from the intellectual
property, the only authority for their existence was the
License Agreement. Because Schlumberger had excluded
the Agreements, CellNet remained a party to those
Agreements and would be entitled to the royalties
thereunder.
  Finding that CellNet would be otherwise rightfully
entitled to the royalties once Schlumberger separated the
royalties from the intellectual property that it purchased,
we now turn to the question of how CellNet’s rejection of
the License Agreements under 11 U.S.C. § 365(a) and BCN’s
subsequent revival under § 365(n) affects the rights of the
parties.

2. The Bankruptcy Court had to modify the Proposed Sale Order to
account for BCN’s interest in the sale. Originally, Schlumberger sought
to “acquire all assets of [CellNet] free and clear of all liens other than
certain liens to be agreed.” This was modified by the Bankruptcy Court
to account for BCN’s rights under § 365(n) and the ultimate Sale Order
approved reflected that Schlumberger could not acquire CellNet’s assets
free and clear of BCN’s right to continue to use the licensed intellectual
property. The Purchase Agreement defines the Sale Order as “an order of
the Bankruptcy Court, in substantially the form attached hereto as
Exhibit 1.01(d) and other in form and substance satisfactory to the
Purchaser.” Thus by closing on the sale, Schlumberger accepted the
condition placed on it by the modified order, acknowledging that BCN’s
rights could interfere with its rights in the intellectual property.
                               12


B. After the 11 U.S.C. § 365(n) Election, Who is Entitled to
the Royalties?
   Under the Bankruptcy Code, a trustee may elect to reject
or assume its obligations under an executory contract. This
election is an all-or-nothing proposition—either the whole
contract is assumed or the entire contract is rejected. 11
U.S.C. § 365(a). Pursuant to its Purchase Agreement with
Schlumberger, CellNet, as trustee, rejected the License
Agreements under 365(a). Normally in bankruptcy, this
would end the obligations between the contracting parties
and relegate the non-breaching party to an unsecured
creditor. See In Re Trans World Airlines, 145 F.3d 124, 136
(3d Cir. 1998) (“If the lease is rejected, a creditor’s claim for
the stream of future rental payments due under the now-
rejected lease is denied post-petition administrative status
and is treated as an unsecured prepetition claim”).
Congress, however, altered this system by passing an
amendment that added § 365(n). Section 365(n) only
applies to intellectual property and grants the licensee of
intellectual property certain rights not enjoyed by other
contracting parties. Specifically, if a trustee rejects an
executory contract under § 365(a), the licensee of
intellectual property may elect either:
    (A) to treat such contract as terminated by such
    rejection if such rejection by the trustee amounts to
    such a breach as would entitle the licensee to treat
    such contract as terminated by virtue of its own terms,
    applicable nonbankruptcy law, or an agreement made
    by the licensee with another entity; or
    (B) to retain its rights (including a right to enforce any
    exclusivity provision of such contract, but excluding
    any other right under applicable nonbankruptcy law to
    specific performance of such contract) under such
    contract and under any agreement supplementary to
    such contract, to such intellectual property (including
    any embodiment of such intellectual property to the
    extent protected by applicable nonbankruptcy law), as
    such rights existed immediately before the case
    commenced, for—
       (i)   the duration of such contract; and
                                13


      (ii) any period for which such contract may be
      extended by the licensee as of right under applicable
      nonbankruptcy law.
11 U.S.C. § 365(n)(1)(A)-(B).
   Looking to the facts before us, Schlumberger excluded
the License Agreements from its purchase, and then CellNet
rejected the Agreements under § 365(a). In turn, BCN
elected to retain its rights and was thus obligated to “make
all royalty payments due under such contract for the
duration of such contract.” 11 U.S.C. § 365(n)(2)(B).
Schlumberger argues that because CellNet rejected the
contract, it has not assumed the benefits of the contract
and thus has no rights under the contract. Schlumberger
then posits that because it owns the underlying intellectual
property, it has superior rights to the royalties—despite not
purchasing the License Agreements. We disagree.
   The District Court found that CellNet was entitled to the
royalties because “§ 365(n) of the Bankruptcy Code renews
certain obligations related to the license.” In Re CellNet, 277
B.R. at 594. Despite Schlumberger’s argument that because
“§ 365(n)(2) does not designate that the payment of royalties
must be made to any particular party,” it should be entitled
to the royalties, the District Court focused instead on the
language stating that the “licensee shall make all royalty
payments due under such contract.” Id. at 594-95. The
District Court concluded “that Congress intended the
language ‘due under the contract’ to provide both the
quantity of the royalty payments and the designation of the
party intended to receive those payments, whether the
debtor or its contractual assignee.” Id. at 595. Because
Schlumberger excluded the contract from its purchase,
“CellNet remains entitled to receive the BCN royalties
pursuant to statutory authority even if it rejected the
License Agreements and is not technically a party to them.”
Id. The District Court concluded that “royalty payments
made pursuant to § 365(n)(2)(B) of the Bankruptcy Code are
the property of the licensor, even though the licensor may
have transferred its intellectual property assets during the
bankruptcy.” Id.
  Schlumberger makes essentially three arguments related
to the effects of § 365(n). First, Schlumberger claims that
                              14


CellNet has no rights because it rejected the contract under
§ 365(a). To support this conclusion, Schlumberger cites
our opinion in In Re Bildisco, 682 F.2d 72, 82 (3d Cir.
1982), where we held that “as a matter of law, a debtor-in-
possession is ‘[a] new entity . . . created with its own rights
and duties, subject to the supervision of the bankruptcy
court.’ ” Schlumberger claims that this demonstrates that
the License Agreements were not part of the estate because
they were never assumed by CellNet as debtor-in-
possession. Schlumberger is incorrect. In NLRB v. Bildisco,
465 U.S. 513 (1984), the Supreme Court affirmed our
previously cited opinion. The Court, however, stated that:
    Obviously if the [debtor-in-possession] were a wholly
    ‘new entity,’ it would be unnecessary for the
    Bankruptcy Code to allow it to reject executory
    contracts, since it would not be bound by such
    contracts in the first place. For our purposes, it is
    sensible to view the debtor-in-possession as the same
    ‘entity’ which existed before the filing of the bankruptcy
    petition, but empowered by virtue of the Bankruptcy
    Code to deal with its contracts and property in a
    manner it could not have done absent the bankruptcy
    filing.
Id. at 528. This implies that the License Agreements were
property of the bankruptcy estate after Schlumberger
excluded them and before CellNet rejected them.
Schlumberger contends that the act of rejection serves to
remove the contract from the bankruptcy estate and points
to In Re Access Beyond Technologies, Inc., 237 B.R. 32, 47
(D. Del. 1999), for the proposition that “[a]n executory
contract does not become an asset of the estate until it is
assumed pursuant to § 365(a) of the Code.” That case
however, is factually distinguishable from ours. In Access,
the debtor attempted to assign its rights under a patent
cross-license agreement. The debtor characterized the
transaction as a sale under 11 U.S.C. § 363, but the court
held that the debtor must first assume the agreement in
order to transfer it. The court noted that otherwise, “[i]f the
debtor does not assume an executory contract, it is deemed
rejected. Thus, if a debtor does not assume an executory
contract before he sells it . . . , the buyer may be
                              15


purchasing an illusion: the executory contract will
disappear on conclusion of the bankruptcy case.” Id. at 47-
48. Access did not deal with our situation, which involves
an executory contract after an election by a licensee under
§ 365(n). We need not specify the exact status of the
contract. For our purposes it is suffice to say that after a
licensee has resorted to § 365(n), the rights of the contract
as they existed pre-petition and pre-rejection are in force.
   The plain language of § 365(n)(2)(B) indicates that the
renewed royalties are directly linked to the rejected
contract, not the intellectual property. The section
specifically provides that the “licensee shall make all royalty
payments due under such contract for the duration of such
contract.” 11 U.S.C. § 365(n)(2)(B)(emphasis added). Thus,
the contract is the primary mechanism for determining
where the royalties flow. Although Schlumberger is correct
that § 365 (n)(2)(B) does not specify that the royalties must
be paid to the trustee, the immediately proceeding section
says that “trustee shall allow the licensee to exercise such
rights,” and the next section deals with the rights of the
licensee against the trustee. 11 U.S.C. § 365(n)(2)(A), (C).
The several sections of § 365(n)(2) make sense only in
contemplation of an ongoing relationship between the
licensee and the licensor/trustee.
   Schlumberger next argues that the legislative history of
§ 365(n) favors awarding it the royalties. It notes that the
legislative history of § 365(n) explains that the subsection
parallels § 365(h), which deals with real estate and allows a
similar retention of rights by holders of real estate leases.
See S. Rep. 100-505, 1988 U.S.C.C.A.N. 3200, 3203 (“The
bill provides for treatment of intellectual property licenses
under Section 365 in a manner that parallels generally the
treatment of real estate leases in the existing provisions of
Section 365(h)(1).”). With this link in place, Schlumberger
analogizes that its position in this case would be the
equivalent of where a purchaser bought a shopping center,
but did not assume the lease of an occupying tenant. Under
§ 365(h), the tenant could choose to remain in possession
and pay rent, but the rent would belong to the new owner.
According to Schlumberger, the position taken by CellNet
and the District Court would alter the above situation and
                             16


provide that the tenant could still remain in possession, but
would pay rent to the former owner of the shopping center.
  Although this analogy is powerful, and the logic
deceptively simple, Schlumberger’s reasoning is specious
because it rests on a flawed comparison of the parties.
Although both sections of the Bankruptcy Code discuss
their respective elections as being limited by non-
bankruptcy law, the concept of tenants remaining in
possession when a new landlord gains control is fraught
with state law property principles not applicable in the
intellectual property context. We find that there is no
relationship between Schlumberger and the License
Agreements—which it specifically did not purchase—that
can be equated with the relationship of possessory control
by a new landlord over a tenant remaining in possession.
  Schlumberger’s final argument is that the long-standing
principle that the benefits of a contract should accompany
the burden dictates that they should retain the royalties. Its
argument, however, is trumped by the facts. It is true that
the burden of the License Agreements falls on
Schlumberger, who cannot use the intellectual property
outside the United States and that the benefit to that
burden is the royalty payments. However, state law allows
the severance of the benefit from the burden and
Schlumberger has done just that by excluding the License
Agreement from its purchase and not contracting with
CellNet for the royalties.

                       IV. Conclusion
   We will affirm the decision of the District Court.
Schlumberger expressly excluded the License Agreement
from its purchase of CellNet’s intellectual property and thus
severed the benefit of royalties from the associated
burdens. Although CellNet rejected the License Agreements
pursuant to 11 U.S.C. § 365(a), certain rights were renewed
under the License Agreements by operation of BCN’s
§ 365(n) election. If Schlumberger had wanted the royalties,
they only needed to purchase the License Agreements or
contract with CellNet for the royalties as part of the
                             17


Purchase Agreement. As they did neither, they are not
entitled to the royalties from the BCN License Agreements.

A True Copy:
        Teste:

                  Clerk of the United States Court of Appeals
                              for the Third Circuit
