Why Bankruptcy Code §365(n) Is Foundational to Technology Risk Management

Disclaimer: PRAXIS does not provide legal advice, and nothing in this article should be construed as such or relied upon as a substitute for consultation with qualified legal counsel. The content reflects a variety of perspectives, experiences, and points of view that we have encountered over many years serving as technology escrow agents.

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Why Bankruptcy Code §365(n) Matters in Modern Technology Transactions

As businesses become increasingly dependent on third-party software, SaaS platforms, and proprietary technology, continuity risk has become a material legal and operational concern. For enterprises, lenders, and investors, technology failure is no longer viewed as a purely operational issue. It is a transactional risk.

One of the most important, and often misunderstood, legal protections in this area is Section 365(n) of the U.S. Bankruptcy Code. Understanding how §365(n) works, and how it interacts with technology escrow, is critical for companies operating in enterprise, cross-border, and regulated transactions.

Organizations working with PRAXIS Technology Escrow frequently address this risk by aligning legal protections with operational safeguards such as technology escrow arrangements. Learn more about escrow here. 

What Is Bankruptcy Code §365(n)?

Section 365(n) of the U.S. Bankruptcy Code protects licensees of intellectual property when a licensor enters bankruptcy.

In practical terms, §365(n) allows a licensee to:

• Retain its rights to licensed intellectual property
• Continue using that IP for the duration of the license
• Enforce access rights to the underlying technology, even if the licensor rejects the contract during bankruptcy proceedings

This provision was enacted to prevent licensees from losing access to mission-critical technology due to a vendor’s insolvency. For companies that rely on licensed software rather than owned IP, §365(n) is a cornerstone of risk mitigation.

Why §365(n) Is Especially Important for Technology

Technology assets such as software platforms, SaaS environments, AI models, and proprietary infrastructure are often:

• Central to daily operations

   

• Costly or impractical to replace quickly

   

• Licensed rather than owned outright

Without statutory protection, a bankruptcy trustee could reject an IP license, leaving the customer without lawful access to the technology it depends on. Section 365(n) was specifically designed to address this exposure, particularly for software and source code–based solutions.

For this reason, many organizations supplement §365(n) with software escrow or source code escrow to strengthen operational continuity.

How §365(n) Works with Technology Escrow

Technology escrow complements §365(n) by providing practical access to the licensed IP if a bankruptcy or similar event occurs.

Together:

• §365(n) preserves the legal right to use the intellectual property
• Escrow provides controlled access to the materials needed to continue operations

Without escrow, §365(n) rights may exist contractually but remain difficult or impossible to enforce in practice. This gap is especially pronounced in SaaS and cloud-based environments, where continuity depends on more than static source code.

To address this, enterprises increasingly rely on SaaS escrow structures and Automated Escrow solutions that support ongoing deposits, validation, and readiness.

Why Companies Often Prefer a U.S. Escrow Agent

Even for non-U.S. companies, there are several reasons why a U.S.-based escrow agent is often preferred when §365(n) protections are important.

Direct Alignment with §365(n)

U.S. escrow agreements are routinely drafted to:

• Align explicitly with §365(n)
• Support licensee step-in and continuity rights
• Anticipate bankruptcy-related release scenarios

This alignment reduces legal uncertainty during a crisis.

Predictability of U.S. Bankruptcy and IP Law

The U.S. has:

• A highly developed body of bankruptcy jurisprudence
• Well-established treatment of intellectual property licenses
• Extensive case law interpreting §365(n)

For multinational enterprises and lenders, this predictability is often more important than geographic proximity.

Neutral Jurisdiction in Cross-Border Transactions

In international deals, a U.S. escrow agent can serve as a neutral third-country intermediary, avoiding:

• “Home court” advantages for either party
• Unfamiliar or untested insolvency regimes
• Conflicts between local insolvency laws

This neutrality can simplify negotiations and reduce friction.

Enterprise and Lender Expectations

Many large enterprises, financial institutions, and private equity firms maintain internal risk and governance policies that either expect or require U.S.-based escrow arrangements, particularly in transactions where software or intellectual property represents a material component of deal value. 

Aligning with a U.S. escrow agent often streamlines internal approvals, accelerates diligence processes, and reduces transaction friction.

Enforceability and Operational Readiness

U.S. escrow providers are typically:

• Experienced in bankruptcy-driven release events
• Structured to operate under U.S. court orders
• Familiar with urgent, time-sensitive releases

This operational readiness matters when continuity is at stake.

Why This Matters for All Companies — Not Just U.S. Ones

Even companies headquartered outside the United States frequently:

• License technology to U.S. customers
• Contract under U.S. governing law
• Raise capital from U.S. investors
• Rely on U.S. legal frameworks for IP protection

In these situations, aligning escrow arrangements with §365(n) is a strategic risk-management decision rather than a geographic preference. Providers such as PRAXIS Technology Escrow support this alignment by designing escrow frameworks that meet enterprise, legal, and operational requirements globally.

Key Takeaway

Bankruptcy Code §365(n) remains one of the most important legal protections available to technology licensees. When paired with a properly structured technology escrow arrangement and administered by a U.S.-based escrow agent, it delivers:

• Legal certainty
• Practical continuity
• Predictable enforcement
• Reduced transaction risk

For organizations that rely on software, SaaS, or proprietary technology, this combination is increasingly viewed as a best practice, regardless of where the parties are located.

Country-by-Country Comparison of Technology Licensee Protection in Insolvency

United States — The Benchmark Under §365(n)

Status: Best-in-class, explicit statutory protection

How §365(n) Performs in Practice

Bankruptcy Code §365(n) provides clear and purpose-built protections for licensees of intellectual property when a licensor enters bankruptcy. Specifically, it:

• Explicitly preserves the licensee’s rights to intellectual property
• Allows continued use of licensed IP for the full contractual term
• Prevents a bankruptcy trustee from eliminating access by rejecting the license
• Benefits from extensive and well-developed case law
• Is routinely coordinated with technology escrow arrangements to support operational continuity

Bottom line:

The United States remains the only jurisdiction with a statutory regime expressly designed to protect technology licensees in insolvency, delivering a high level of legal certainty and market confidence.

United Kingdom — Contractual Rather Than Statutory Protection

Status: No direct equivalent to §365(n)

Key Considerations

UK insolvency law does not include a statutory provision comparable to §365(n). As a result:

• The survival of IP licenses depends heavily on contractual drafting
• Insolvency administrators retain broad discretion to disclaim contracts
• Outcomes are fact-specific and influenced by judicial interpretation
• There is limited technology-specific insolvency precedent

Practical Reality

Protection in the UK relies primarily on:

• Carefully structured license agreements
• Escrow arrangements to support access and continuity
• Negotiated step-in and usage rights

   

Compared to the U.S., outcomes are less predictable and more sensitive to case-by-case analysis.

Bottom line:
While workable, the UK framework is contract-driven and inherently less certain. This dynamic explains why UK-based companies frequently accept U.S. governing law and U.S. escrow agents in enterprise technology transactions.

Australia — Limited and Indirect Safeguards

Status: No direct statutory equivalent

Key Considerations

Australian insolvency law does not expressly protect intellectual property licensees. In practice:

• Administrators may terminate or disclaim executory contracts
• Ipso facto reforms restrict certain termination rights, but
  • They do not guarantee continued access to IP
  • They are not tailored to technology licensing arrangements
• Judicial discretion plays a significant role in outcomes

Practical Reality

Technology licensees face material uncertainty in insolvency scenarios. Escrow is frequently used as a contractual mitigation mechanism, and many Australian technology providers elect U.S. governing law for international transactions.

Bottom line:
Australia offers some modern insolvency protections, but these fall well short of the clarity and predictability provided by §365(n).

Canada — The Closest Alternative, Yet Still Distinct

Status: Closest of the three, but still materially different from the U.S.

Key Considerations

Canadian insolvency law provides limited protections for IP licensees, including:

• Court discretion to permit continued use of intellectual property post-insolvency

However:

• Protections are not explicitly codified
• Case law remains comparatively thin
• Outcomes may vary by province and insolvency proceeding

Practical Reality

Canada offers greater protection than the UK and Australia, but still lacks a single, unified statutory provision equivalent to §365(n). Escrow arrangements and U.S. law alignment are commonly used to supplement continuity planning.

Bottom line:
Canada comes closest to the U.S. framework, but does not offer the same level of certainty or market predictability.

Why the U.S. Is Widely Regarded as the Preferred Jurisdiction

Across all three jurisdictions, the distinction is consistent. Only the United States has enacted a statute specifically designed to protect intellectual property licensees in bankruptcy.

This statutory clarity results in:

• More predictable legal outcomes
• Faster enforcement during insolvency events
• Lower litigation risk
• Greater confidence for lenders, enterprises, and investors
  

Practical Takeaway for Attorneys and Clients

For technology-dependent transactions, the combination of U.S. governing law and Bankruptcy Code §365(n) provides the strongest available licensee protection.

In contrast, other jurisdictions rely more heavily on:

• Contract drafting precision
• Escrow structuring
• Judicial interpretation

This reliance introduces additional uncertainty during high-risk events. As a result, non-U.S. companies frequently elect U.S. governing law and U.S. escrow agents, even when neither party is based in the United States.

From a commercial and risk-management perspective, the objective is not jurisdictional preference. It is continuity, enforceability, and predictability when technology matters most.