The market for bankrupt companies’ intellectual property is favoring sellers, as another wave of virus-related commercial Chapter 11 filings looms.
Retailers’ branding and e-commerce IP assets, in particular, have become more valuable as stores have increasingly pivoted away in recent years from brick-and-mortar operations—a trend accelerated by the pandemic— attorneys and consultants say.
With the transition, bankrupt or liquidating retailers’ IP assets that would otherwise have been frittered away or dumped for meager sums in the past are fetching relatively high dollars in auctions. Pier 1 Imports Inc. revealed plans this month to sell its IP and online retail business for $31 million.
Other retailers also have found buyers for their IP assets while store operations have shuttered.
Investors increasingly see lucrative opportunities in buying bankrupt retailers’ trademarks, customer lists and other IP, creating a pool of buyers that is deeper and more competitive.
“What we’re seeing is more interest in brands today than maybe at any time in these two cycles,” said David Peress, an executive at the IP advisory firm Hilco Streambank, referring to two most recent economic cycles. “It’s being driven principally by private equity.”
Investment-minded companies are watching bankruptcy filings for other potentially valuable IP assets, including patents and software code. This interest spotlights a push within law firms for collaboration, and bankruptcy attorneys working more closely with their IP colleagues.
“When bankruptcy starts to intersect with something as complex as IP rights, it makes sense to bring those specialists in as well,” said Mark Salzberg, a bankruptcy attorney at Squire Patton Boggs in Washington D.C.
Over 3,600 companies filed for Chapter 11 bankruptcy protection in the first half of 2020, outpacing the last several years, according to the American Bankruptcy Institute. Clothing retailers and home furnishing stores were among those hit hardest.
Brooks Brothers Group Inc. cited the impact of the pandemic when it filed for bankruptcy this month. Several other retailers, including J. Crew Group Inc., Neiman Marcus Group Inc., and Sur La Table Inc. have also filed for bankruptcy since the virus took hold in March.
Compared to assets like real estate and inventory, IP is a relatively new value driver when retailers go bankrupt. Investors have realized that reshaping brick-and-mortar retailers into online companies is doable, attorneys said. That switch drew skepticism in the past.
Consumers’ transition to e-commerce is being accelerated amid the pandemic. In June, online spending rose 76% year-over-year to $73 billion, according to the Adobe Digital Economy Index.
“People have learned to exist from their homes without going to physical stores in a very abrupt way,” Jeffrey Cohen, a bankruptcy attorney at Lowenstein Sandler LLP in New York, said. “I think it is really magnifying the value of IP going forward.”
Online shoppers are more likely to trust brand names they recognize, which could put a premium on well-established names.
The winning bidder for Pier 1’s IP and online retail business was Retail Ecommerce Ventures LLC, an investment company which also bought the Dressbarn brand last year. Retail Ecommerce outbid private equity firm Sycamore Partners Management LP.
“Having recognizable, iconic brands in the e-commerce space does really become important,” said Gary Epstein, an executive at Hilco Global. “That’s where there’s really inherent value in picking up some of these brands.”
Brand or e-commerce acquisitions during bankruptcies can create opportunities for IP lawyers. Aaron Kaufman, a bankruptcy attorney at Dykema Gossett PLLC in Dallas, said he would be doing a disservice to a client spending millions of dollars in acquiring a brand and not having an IP attorney help with due diligence.
Computer software, like a retailers’ point of sale system, also can have immense value separate from the company, attorneys said. Manufacturers have also looked to gain from their patent portfolios in bankruptcy.
Kirkland & Ellis LLP IP attorney Ellisen Turner said his firm is advising companies to keep close tabs on bankruptcy filings and restructuring businesses’ assets.
“It’s not just their physical assets that people are used t
o thinking about, but their IP assets that may become available,” Turner said.
Over 80% of S&P 500 companies’ value is in IP and other intangible assets, a reversal from decades ago, a 2019 report sponsored by insurance broker Aon PLC found. At the same time, law firms’ bankruptcy teams have shifted towards getting IP attorneys more involved, lawyers said.
Salzberg, of Squire Patton, said they will work “hand-in-glove” with IP lawyers, particularly when evaluating potential purchases. Ongoing IP litigation, including patent infringement disputes, can also follow companies into bankruptcy court, and require the attention of IP specialists. There can also be major disputes over things like licensing rights, attorneys said.
“Having someone with both technology knowledge of the subject area, and also the sometimes very complex intellectual property issues that can be associated with the rights changing hands or valuing the IP, that can be very important,” Turner said.
IP attorneys are also calling on bankruptcy attorneys for help. Luke Pedersen, a lawyer at Baker Botts LLP who handles technology transfers, said it can be helpful to turn to bankruptcy professionals when hammering out complicated license agreements, with an eye toward the future.
“We need bankruptcy professionals helping us through our sophisticated licenses and due diligence because there’s a strong likelihood that many of these companies will go bankrupt,” Pedersen said.