New risks and rewards for licensors and licensees in BIA/CCAA amendments

February 8, 2010 Author: Evan Cobb

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Introduction

On September 18, 2009, after years of Parliamentary delay dating back to 2005, wide-ranging amendments to Canada's Companies’ Creditors Arrangement Act (CCAA) and Bankruptcy and Insolvency Act (BIA) (the “Amendments”) came into force, providing, among other things, new protections for licensees of intellectual property.

It is important to note that the Amendments only apply in the CCAA restructuring and BIA proposal context, and not to conventional bankruptcies or receiverships.

An insolvent licensor presents risk for licensees.  Prior to the Amendments, intellectual property licensees were at serious risk of having their rights to use licensed intellectual property extinguished in a restructuring proceeding. The Amendments attempt to mitigate this risk, recognizing that intellectual property licences create unique concerns relative to other types of licences and can be of particular significance to a licensee’s business.  

Below is a brief summary of the changes licensees and licensors can expect as well as a review of the new bargaining power dynamic as a result of the Amendments.

Enhanced protection for licensees

The Amendments create a detailed framework for the disclaimer of contracts generally within a CCAA or BIA proposal proceeding.1 Even if an intellectual property licence has been successfully disclaimed by the licensor in accordance with that framework, the licensee’s right to use, or its ability to enforce rights of exclusive use of,  the licensed intellectual property is not affected for the duration of the licence agreement (which includes any rights of renewal).  The right of continued use comes with obligations further described below.
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What is intellectual property?

Whereas the US Bankruptcy Code has developed a specific definition of intellectual property for the purposes of legislation analogous to the Amendments and has excluded certain items such as trade-marks, the Amendments provide no such definition. Arguably anything with an intellectual or knowledge-based component could be intellectual property, even if it does not fit into one of the categories traditionally thought to be included within the scope of that term.  

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Uncertain licensee obligations

The right to continued use is conditional upon the licensee’s continued performance of “its obligations under the agreement in relation to the use of the intellectual property.” This condition may be problematic if, for example, a single fee is owed for both the use of intellectual property and the licensor’s provision of support - is the licensee expected to continue to pay for all or a pro-rated portion of that fee post-disclaimer? A licence agreement drafted with the Amendments in mind could solve this problem.

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Depreciation concerns

From the licensee’s perspective, the ability to continue using licensed intellectual property may be of dubious value where the licensed intellectual property requires extensive ongoing maintenance, support and upgrade from the licensor.  The Amendments create no obligation for the licensor to continue to provide support services in accordance with the disclaimed licence or even to maintain the intellectual property (which may have particularly detrimental effects on trade-mark rights). Practically speaking, there is often little incentive for a cash-strapped licensor to invest in maintaining its intellectual property, so this is a legitimate concern.

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Licensees: New bargaining power?

The Amendments establish intellectual property licensees as key stakeholders at the negotiating table in restructuring scenarios, particularly in the case of debtor companies that have licensed their intellectual property extensively.  

If the licensed intellectual property can be used exclusively by the licensee without much support or maintenance (or such support or maintenance could be procured from a third party), it would be difficult or costly to persuade a licensee to agree in a restructuring context to concessions in respect of its rights to exclusively use the licensed property.  In such a case, a licensee is in a strong position to resist any concessions or compromises that other stakeholders in an insolvency may attempt to force upon it, or at the very least demand a high price for such concessions.

On the other hand, if the licensor’s support and maintenance services are integral to the licensee’s continued use of the intellectual property, the licensee will have a greater incentive to waive some of its continued use rights in return for a new licensing arrangement, perhaps with a new licensor, that assures continued maintenance of that property.  

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Marketing intellectual property despite the amendments

Insolvent companies often attempt to sell large portions of their assets as part of their restructuring efforts. By making licensed intellectual property less marketable to potential third party purchasers, the Amendments may frustrate an insolvent company’s restructuring efforts. This is the balance that has been struck between the rights of licensors and licensees. Nothing in the Amendments precludes a straight assignment of a licensing agreement to a new licensor. To the degree that assignment provisions can be built into a licence agreement, this would be of assistance in marketing intellectual property in a restructuring.  Again, however, this would not dispense with the licensee’s continued right to use or exclusive use.   

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Bankruptcy and receivership considerations

As stated above, the Amendments do not provide protection to licensees in a standard bankruptcy or receivership scenario. Nothing in the Amendments prevents a receiver or bankruptcy trustee of the licensor from fully disclaiming a licence.  Generally speaking, this would leave the licensee with only an unsecured claim against the licensor’s estate, which would be worth little or nothing.  

However, some argue that a licence (especially an exclusive and perpetual licence) creates a proprietary right for the licensee in the intellectual property. This would present challenges to a receiver or trustee in bankruptcy who attempts to assign the intellectual property or prevent the licensee’s continued use of it. This issue has yet to be fully considered by Canadian courts.

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Conclusions

The Amendments clearly enhance the bargaining position of licensees in an insolvency scenario. With that in mind, the consequences of insolvency should become a key consideration for both licensees and licensors entering into new licensing arrangements and reviewing existing licensing arrangements.

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Footnotes

1. In the event that consent to the disclaimer is not obtained from both the counterparty to the contract and the CCAA monitor or the BIA proposal trustee, as applicable, the court will be called upon to make a determination on the disclaimer.  The following factors will frame the court's analysis:

i) whether the proposal trustee or monitor approved the disclaimer;

ii) whether the disclaimer would enhance the prospects of a viable proposal or compromise or arrangement being made; and

iii) whether the disclaimer would likely cause significant financial hardship to a party to the contract.

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