The following article, Life after Insolvency, was originally published in The Lawyer’s Daily, March 16, 2017:

Intellectual property rights can be the lifeblood of a company. The insolvency of a licensee or licensor can cause havoc, or at least significant uncertainty with intellectual property rights. Who can continue to use the intellectual property rights, what royalties flow, and can intellectual property rights be licensed or used by someone new are all questions faced during an insolvency.

During an insolvency under the Bankruptcy and Insolvency Act (BIA) or Companies’ Creditors Arrangement Act (CCAA), there is significant power to disclaim or resile from contracts, particularly executory contracts. Since at their core, intellectual property licence agreements are contracts, the terms or the existence of a licence may be altered during this process.

One of the leading cases on this issue, decided prior to the amendments discussed below, held that an exclusive licence to use certain technology “only creates a contractual agreement as between the parties” and does not provide any property interest so assets could be transferred to a third party free and clear of the licence terms.

Both the BIA and CCAA were amended in 2009 to include provisions relating to intellectual property but the provisions had not yet received much judicial discussion. Both the BIA, in s. 65.11(7), and the CCAA in s. 32(6) have the same language: “If the [company/debtor] has granted a right to use intellectual property to a party to an agreement, the disclaimer or resiliation does not affect the party’s right to use the intellectual property — including the party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the party extends the agreement as of right, as long as the party continues to perform its obligations under the agreement in relation to the use of the intellectual property.”

The Saskatchewan court in Golden Opportunities Fund Inc. v. Phenomenome Discoveries Inc. 2016 SKQB 306 was required to determine if certain technology of a debtor could be transferred free and clear by a court-appointed receiver to a third party. The licensor of the technology to the debtor sought to stay the vesting order until its interests in the property of the debtor that were being sold, could be determined.

The court found that the provisions of the BIA and CCAA did not apply to court-appointed receivers stating that “licences are simply contractual rights.” The aggrieved licensor could pursue monetary claims against the debtor but had no property rights in the assets being vested to the third party and the third party had no obligation to license back to the licensor improvements made on the technology. The terms of the licence would not apply to the third party.

The court distinguished between on the one hand the situation of a court-appointed receiver, and on the other proposals to creditors and arrangements under the CCAA where the above statutory language would apply.

Also last year, the Quebec Court of Appeal in 7158548 Canada Inc. c. Desbiens 2016 QCCA 306, referring to the BIA as well as the terms of the licence agreement relating to assignments, required a purchaser of assets through a proposal to creditors to honour the terms of a patent licence agreement and continue to pay royalties.

In this case, the court also recognized that the purchaser was not a third party but had a common principal with the insolvent company.

Even where the intellectual property provisions of the BIA and CCAA do apply, there is 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?

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, these 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 during an insolvency.