Intellectual Property Licenses in Bankruptcy Scenarios

Intellectual property licenses will have additional certainty regarding their status when recent amendments to the Bankruptcy and Insolvency Act and Companies’ Creditors Arrangement Act come into force. Licensees may preserve rights under intellectual property license agreements, as long as they continue to perform their obligations even if the licensor goes through insolvency, bankruptcy or arrangement in various circumstances.

These changes were included in Bill C-86 Budget Implementation Act that received Royal Assent in December, 2018. These changes add to changes that were implemented in 2009 that also addressed intellectual property license agreements.

The 2009 amendments (s. 65.11(7) of the Bankruptcy and Insolvency Act, and s. 32(6) of the Companies’ Creditors Arrangement Act) allowed debtors in respect of whom a notice of intention or a proposal was filed (under the BIA) or a debtor company (under the CCAA) to disclaim agreements but said such disclaimer or resiliation does not affect the licensee’s right to use the intellectual property if the licensee continued to perform their obligations.

The 2018 changes, when they come into force, address several other scenarios. The amendments to s. 65.13 of the Bankruptcy and Insolvency Act and to s. 36 of the Companies’ Creditors Arrangement Act cover the rights of licensees in situations where a court is involved in ordering the sale or disposition of a debtor’s assets. The additions would state:

65.13(9) If … the [insolvent person/company] is a party to an agreement that grants to another party a right to use intellectual property that is included in a sale or disposition authorized [by the court], that sale or disposition does not affect the other party’s right to use the intellectual property — including the other party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the other party extends the agreement as of right, as long as the other party continues to perform its obligations under the agreement in relation to the use of the intellectual property.

New section s. 72.1 of the Bankruptcy and Insolvency Act would apply to sales or dispositions by the trustee in bankruptcy and new section 246.1 of Bankruptcy and Insolvency Act would apply to sales or dispositions by a receiver. Both of these new sections states that sales or deposition of property, or disclaimer or resiliation of agreements have similar restrictions as quoted above.

There is also an amendment to the French version of s. 65.11(7) that had been added in 2009.

Since 2009, the intellectual property provisions have had some limited judicial consideration. In Golden Opportunities Fund Inc. v. Phenomenome Discoveries Inc. 2016 SKQB 306, the Court held that the 2009 amendments did not apply to a court appointed receiver stating that, “Section 65.11(7) of the BIA has no bearing on a court-appointed receivership. Oppositely, s. 65.11 is a provision in Part III, Division 1 of the BIA that permits an insolvent debtor to avoid bankruptcy by making a proposal to its creditors. Likewise, s. 32 of the CCAA pertains to the debtor’s right to disclaim contracts during the stay period to enable the debtor to facilitate compromises and arrangements with its creditors. However, the CCAA does not apply to court-appointed receivers.” New section 246.1 of the 2018 amendments to the Bankruptcy and Insolvency Act applies to receivers so this decision may be decided differently if it was decided with the 2018 amendments in force.

Even where the intellectual property provisions of the BIA and CCAA do apply, there is still some uncertainty as to what is meant by the term “intellectual property” as that term is not defined. There is also uncertainty relating to the scope of the “right to use the intellectual property” referred to in the legislation. Patent licences, for example, typically include the right to make, use and sell the invention, not just the “use” specified in the legislation. Similarly, if the licence included the right of the licensee to grant further sublicences, would those rights continue?

Interestingly, it was only earlier this year that the United States Supreme Court clarified the status of trademark licenses in bankruptcy. In Mission Product Holdings Inc. v. Tempnology, LLC the court held:

Today we consider the meaning of those provisions in the context of a trademark licensing agreement. The question is whether the debtor-licensor’s rejection of that contract deprives the licensee of its rights to use the trademark. We hold it does not. A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.

Often, intellectual property licences are wrapped up into larger contractual arrangements, perhaps involving ongoing technical support, the sharing of improvements, or ongoing maintenance of the intellectual property. If only the portion of the contract relating to the “use of the intellectual property” is covered by the legislation, this may leave the licensee in an undesirable situation if other aspects of the contract are disclaimed. Also, it may leave the parties unclear as to what is required to “perform its obligations under the agreement in relation to the use of the intellectual property” if, for example, the royalty payment covers multiple aspects, only one of which is the intellectual property.

For companies entering into licence agreements, particularly where there is a concern of an insolvency by one of the parties, the existing and proposed new sections of the BIA and CCAA should be reviewed having regard to the licence and contractual terms. According to the jurisprudence, if ownership in the intellectual property has been transferred, the transfer cannot be disclaimed during the insolvency. Therefore carefully structuring the intellectual property ownership is one way to provide additional certainty in the event of an insolvency. If access to source code is important to the licensee, it may be advisable to have a copy placed into escrow as part of the licence arrangement.

Insolvency, restructurings and proposals always involve uncertainty but for third party licensees who have relied on a long-term licence arrangement, the effects can be devastating. Intellectual property licence agreements have been recognized as being different than other contracts giving some reassurance that the licences will be recognized in more bankruptcy and insolvency scenarios once these sections come into force.

(Portions of this article were previously published as “Life After Insolvency” in The Lawyer’s Daily, March 16, 2017)