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The messy problem of IP licensing during insolvency

The treatment of IP licence agreements during bankruptcy or insolvency proceedings throws up many complicated questions

The recent insolvency of several large companies that owned significant patent portfolios and engaged in international licensing arrangements has highlighted the devastating effects on parties to such agreements should the licensor or licensee become insolvent.

This issue will be debated today in the AIPPI plenary session that takes place before the General Assembly

Many countries do not provide clear protection or guidance to licensing parties involved in insolvency. And national approaches vary dramatically even in those countries where guidance is in place.

Wide range of opinions

The Working Committee for this Question received reports from 39 national and regional groups, which contained many suggestions. A wide range of opinions were given about whether, how, and the degree to which an administrator’s abilities to adopt, assign, modify, or terminate an IP licence should be restricted. Areas of some consensus included such restrictions not being dependent upon registration of the licence, the type of licence, the type of IP rights involved and the existence of security interest.

Some 24 of the 39 responding groups indicated that a voluntary registration system is available for IP licences in their jurisdiction. But implementation of the system and the rights covered vary widely among the groups. “In most cases, the voluntary registration systems are not necessary for validity of the licence, but may be desirable for public notice purposes and for enforcement of rights against third parties,” said the Working Committee summary report, prepared by John Osha. Eight groups said registration is mandatory in at least some cases.

The group reports reflected a wide variety of approaches to bankruptcy and insolvency proceedings. Thirty of the groups reported that the bankruptcy law does not treat IP rights or licences differently from other types of rights and contracts. Exceptions include Canada, Estonia, Norway, the Republic of Korea, Sweden and the United States. In the US, IP rights or licences are treated as distinct from other types of contracts, assets and property rights by statute.

Possible improvements

The groups were asked whether there were other changes to the law in their countries that would be advisable to protect IP licences in bankruptcy. The Canadian group noted it would be good to close the gap between federal and provincial legislation by including provisional legislation language that parallels the provisions relating to IP licences in federal bankruptcy laws. The French group suggested strengthening of rights of pre-emption, or preferential allocation of court-ordered IP licences in favour of the licensee.

When asked whether harmonisation of laws relating to treatment of IP licensing in bankruptcy and insolvency proceedings was desirable, all groups answered yes except Portugal and Uruguay.

The group reports from Argentina, China, Egypt, Germany, Hungary, Japan, Mexico, the Netherlands, and Republic of Korea supported generally strict limitations on the administrator’s power to modify or terminate an IP licence, emphasising the importance of the language of the licence contract itself.

The group reports from Canada, Finland, France, Latvia, Norway, the Philippines, Portugal, Turkey and the United States generally supported allowing the administrator to adopt or terminate an IP licence subject to reasonable restrictions. Sweden, Switzerland, Ukraine and Uruguay suggested that a case-by-case determination is best and restrictions should not be put in place that would impede the discretion of the administrator. Twenty of the groups said that any such restrictions should not depend upon the pre-bankruptcy registration of the IP licence.

Hammering out principles

The group reports were taken on board in Sunday’s Working Committee meeting, chaired by Wilfrido Fernandez of Paraguay, which discussed whether and under what circumstances an administrator of such a proceeding may adopt, modify or terminate such an agreement. A number of suggested principles for a draft resolution were debated.

The first three proposed principles attracted some debate during the meeting but were unchanged. These were: harmonisation of the laws governing the treatment of IP licences during bankruptcy and insolvency proceedings should be strongly encouraged at both regional and international levels; the pertinent legal rules should apply equally to all types of IP rights, and make no distinction between foreign and national IP rights; the pertinent rules should apply equally to exclusive or non-exclusive licences.

The fourth principle, relating to contractual clauses, attracted a lot of debate, however. When there is a bankruptcy it is down to the judge to decide whether the licence agreement stands. The original proposal was a clear-cut statement that contractual clauses should be enforceable. However, the debate during the working committee shifted this to becoming less clear by adding that they should be enforceable “as a rule”, and saying the exceptions must safeguard legitimate interests. The US representative wanted to change the whole sense of the statement by saying clauses “should not as a rule be enforceable”, but this was only supported by one other person.

Also on the subject of contractual clauses, a principle was approved that clauses in an IP licence agreement restricting or prohibiting transfer or assignment of such IP licences during a bankruptcy or insolvency proceeding should be enforceable. It was debated whether this statement should include the phrase “absent conflict with relevant statutes”, but this was voted out.

Other principles agreed upon were: in the event of termination of an IP licence agreement during a bankruptcy or insolvency proceeding, the licensee should not be able to continue using the underlying IP rights unless the licence is fully paid up; rules should be enacted that specifically address IP rights or IP licences in bankruptcy or insolvency proceeding, in addition to rules governing other types of contracts, assets and property rights; the administrator’s ability to adopt, assign, modify or terminate an IP licence, if any, should be restricted based on keeping the balance of different interests involved and upon guaranteeing the normal exploitation of IP licences and the payment to creditors involved in bankruptcy and insolvency proceedings.

It was agreed that the solvent licensee should have the option to acquire the pertinent IP rights or to continue as a licensee, at least until the regular termination of the contract.

A principle was also agreed upon that there should be limitations on the administrator’s ability to adopt, assign, modify or terminate an IP licence, if any, emphasising the importance of the language of the licence agreement itself. The phrasing for this originally stated “strict limitations” but that was viewed as vague because it did not say what the limitations were.

Other principles debated included whether the restrictions should depend on which party is insolvent, should not depend on whether a licence is exclusive or non-exclusive, and should not depend on the type of IP licence involved.

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