Be careful when you sell intellectual property (“IP”) in return for future royalty payments. You may think your contract is airtight, guaranteeing you a future annuity on the sales of product relating to your IP, but that might not be the case if your buyer files for bankruptcy.

You ship goods to a customer that is having financial difficulties. The customer sends you a check for the goods. What do you do?

Cash it and potentially be sued for a preference after the customer files for bankruptcy

or

Don’t cash it, and have a claim in the ensuing bankruptcy

In a highly anticipated decision issued last Thursday (on December 19, 2019), the United States Court of Appeals for the Third Circuit held in In re Millennium Lab Holdings II, LLC that a bankruptcy court may constitutionally confirm a chapter 11 plan of reorganization that contains nonconsensual third-party releases. The court considered whether, pursuant to the United States Supreme Court’s decision in Stern v. Marshall, 564 U.S. 462 (2011), Article III of the United States Constitution prohibits a bankruptcy court from granting such releases.