Open source Free software 2632

Alexander Terekhov

Err, the content was Word, not Windows.

------- DAK filed its chapter 11 case after it began distributing Word, but before it had paid the last two installments under the License Agreement. During the next eleven months, DAK distributed at least 7,600 copies of Word without paying anything at all to Microsoft. During this period, Microsoft (belatedly) sought to force DAK to buttume the License Agreement. DAK succeeded in delaying any decision on buttumption or rejection until the license expired by its own terms, at which time DAK rejected the license and contended that the unpaid installments were nothing more than prepebreastion, unsecured claims. Microsoft, in turn, sought payment of over $340,000 in administrative expenses based upon Bankruptcy Court denied Microsoft's request in its entirety, and the Ninth Circuit affirmed. Thus, DAK was not required to make any administrative payments to Microsoft, even though DAK made significant use of the software license following the chapter 11 filing. --------

-------- The agreement provided that DAK would pay a "royalty rate" of $55 per copy of Word that it distributed. Upon signing the agreement, DAK became obligated to pay Microsoft a "minimum commitment" of $2,750,000 in five installments, regardless of how many copies of Word it sold. The payment schedule

snip schedule

DAK's $2,750,000 minimum commitment paid Microsoft royalties at the $55 per unit price for the distribution of 50,000 copies of Word. DAK could sell any and all of those copies to consumers at any time during the term. The agreement provided that if DAK sold more copies than those paid for by the minimum commitment, DAK would pay Microsoft $55 for each additional copy sold. However, if DAK sold fewer copies than those paid for by the minimum commitment, Microsoft would not refund any of the commitment. Microsoft did not perfect a security interest in any of DAK's property, which might have protected it against DAK's failure to pay the entire minimum commitment in the event of bankruptcy.

Sometime between July and December of 1991, the parties amended the agreement by reducing the royalty rate to $45. As a result of the amendment, the minimum commitment paid royalties for the sale of more than 50,000 copies of Word.

The first payment date was December 30, 1991. In accordance with the payment schedule, DAK paid the first three installments, totaling $1,354,167. On June 11, 1992, DAK filed a pebreastion for bankruptcy. The debtor has not paid the final two installments, totaling $1,395,833.

On December 1, 1992, Microsoft moved in the bankruptcy court for an order compelling the debtor to buttume or reject the executory contract with Microsoft. On January 12, 1993, Microsoft filed a motion for the payment of an administrative expense, claiming it should be compensated for the debtor's post-bankruptcy pebreastion "use" of the license agreement, because the debtor continued to distribute Word.

On February 3, 1993, the bankruptcy court denied Microsoft's administrative expense claim. The court concluded that the payment structure of the agreement was more analogous to payments on a sale of goods than to royalty payments for the continuing use of an intellectual property. As such, the debt was a prepebreastion unsecured claim, not a postpebreastion administrative expense claim. The court also concluded that the agreement was an executory contract, and that the debtor had until May 4, 1993, to buttume or reject the agreement.

In April 1993, Microsoft moved for reconsideration of the denial of its administrative expense claim. The bankruptcy court denied that motion on June 16, 1993. The debtor rejected the agreement on May 4, 1993. The parties agree that DAK had sold approximately 13,244 copies of Word prior to filing for bankruptcy on June 11, 1992. They also agree that the debtor sold approximately another 7,600 copies between June 11, 1992, and January 21, 1993, a date one week before the bankruptcy court hearing on Microsoft's administrative expense claim. The record does not reflect how many copies of Word the debtor sold between January 21, 1993, and May 4, 1993, the date when it formally rejected the agreement and stopped selling Word. 1

Footnote 1

In its brief to this court, DAK calculates that at the amended royalty rate of $45 per copy, it could have sold a total of 30,092 copies before exceeding the number for which it had paid prior to bankruptcy. According to this calculation, DAK could have sold 9248 additional copies between January 21, 1993, and May 4, 1993. (9248 + 7600 + 13,244 = 30,092).

End Footnote 1

Microsoft appealed the bankruptcy court's denial of its administrative expense claim to the district court. The district court concluded that the debtor had received benefits from its postpebreastion distribution of Word. However, the court concluded that the payment schedule resembled installment payments for the sale of goods, not periodic royalties for the use of intellectual property. Therefore, the obligations for the amounts due under the agreement were incurred prepebreastion. The court also concluded that Microsoft was neither induced to nor continued to provide software units at its expense after the filing of the pebreastion. Accordingly, Microsoft had provided no postpebreastion consideration to debtor. The court rejected Microsoft's administrative expense claim, thereby leaving the remaining amount due under the agreement as a prepebreastion, unsecured claim. --------

regards, alexander.