DAK Industries - Microsoft Dispute

Microsoft Dispute

During the bankruptcy case, computer software giant Microsoft Corporation lost a major lawsuit to DAK Industries. It was a decision that even today has significant implications for software licensors and also copyright license agreements under which distributors are given the right to sublicense or sell directly videos, theater or television rights, or other exploitations of intellectual property. Microsoft had sought to obtain payment from DAK for a non-exclusive software licensing agreement covering mostly its Word product.

The dispute was based on principles of bankruptcy law. A company in bankruptcy generally does not pay its debts while courts determine which creditors should get paid. But if that applied to all debts, no one would extend further credit to the company and it would be less able to administer the bankruptcy and ensure fair payment to its existing creditors. Therefore, bankruptcy law gives priority to new debts, incurred after filing of the bankruptcy, as part of administering the bankruptcy.

DAK continued to use a copyright license from Microsoft after filing bankruptcy and did not make royalty payments to Microsoft, classifying the money owed to Microsoft as just another debt so that Microsoft would have to compete with other creditors for payment. Microsoft contended that the ongoing use of the license constituted an administrative expense and extension of credit by Microsoft, so should have priority over previous debt.

The U.S. Ninth Circuit held, however, that DAK's bankruptcy case was not entitled to priority as administrative expenses, and would instead be treated as nonpriority general unsecured claims. Moreover, it found DAK as the debtor/licensee was not otherwise required to pay any administrative expense for its post-bankruptcy use of the license. Thus, DAK was not required to make any administrative payments to Microsoft, even though DAK made significant use of the copyright license following the Chapter 11 filing.