During a bankruptcy or a restructuring, the goal of bankruptcy
law is at odds with the goal of intellectual property law. Recent
developments in bankruptcy law have sought to provide more
certainty to licensees. However, there is still a lot of
Intellectual property laws are designed to promote the
dissemination and implementation of new technology. On the other
hand, bankruptcy law is designed to improve the recovery of funds
to pay out debtors. Accordingly, a trustee in bankruptcy is
generally entitled to walk away from a contract if the contract is
onerous or if the trustee believes that the value of an asset may
be increased by repudiating a contract.
A patent license may provide a licensee with a critical
technology to enable a product to be manufactured or a process to
be operated. A licensee may invest substantial amounts to build a
plant or to develop and tool a product. The loss of the license may
result in the now former licensee having to shut down a product
line or even an entire plant and to accordingly lose its
unamortized investment. For this reason the dissemination and
implementation of technology via a patent license can be
jeopardized if a trustee who takes over the operation of a licensor
has the right to terminate a license agreement.
In 2009, the Canadian Bankruptcy and Insolvency Act
(BIA) and the Companies' Creditors Arrangement Act
(CCAA) were amended to address this issue. Section 65.11 of the BIA
provides that a debtor, who has filed a proposal to restructure may
disclaim any agreement. However any such disclaimer "does not
effect [a licensee's] right to use the intellectual property so
long as [the licensee] continues to perform its obligations in
relation to the use of the intellectual property." A similar
provision was introduced to the CCAA. While this was an
improvement, it does not apply to a receivership. Further, the
debtor is relieved of its obligations, such as the provision of
on-going maintenance support or allowing the licensee to have
access to software upgrades. Accordingly, the value of the license
may be significantly diminished since the licensee must continue to
pay the full royalty rate or else lose the license.
In the United States, upon bankruptcy, a debtor licensor may
elect to either preserve its obligations under a patent license
agreement and continue on as if nothing had changed, or reject the
license and seek relief from its obligations under the contract
(§365(a) of the U.S. Bankruptcy Code). If the license
is rejected by the licensor, the licensee will still have recourse
under §365(n) to retain the license. However, this will not
always guarantee the full set of rights under the original license
agreement. For example, debtor-licensors are not required to
continue future obligations which include maintenance, technical
support, marketing, research and development. Furthermore,
§365(n) only considers the rights of the licensee at the time
of bankruptcy. Therefore, licensees may not be entitled to upgrades
to the licensed technology made after that date, even if they were
set out in the license. Finally, §365(n) does not protect
trademarks, as the definition of "intellectual property"
in the Code excludes trademarks.
The rights of a licensor upon bankruptcy vary from country to
country. Further, the interplay of the laws of different countries
can be quite complex as has occurred in the recent bankruptcy of
Germany-based DRAM producer, Qimonda AG, which owns and had
licensed many patents that were incorporated into standards set by
JEDEC relating to DRAM chips. In this case, litigation is ongoing
in both the United States (as it relates to the U.S. patents of
Qimonda AG) and in Germany, the home of Qimonda AG. In the United
States, the court held that the license of the U.S. patents was
still enforceable since "deferring to German law, to the
extent it allows cancellation of the U.S. patent licenses, would be
manifestly contrary to U.S. public policy." This decision is
Concurrently, in German litigation, the regional court in Munich
recently ruled that the rights licensed to Infineon Technologies AG
have not lapsed as a result of Qimonda's insolvency
proceedings. In this case, the regional court was able to reach
this conclusion by holding the license had been fully performed and
therefore §103 of the German Insolvency Code that permitted
cancellation of a license agreement did not apply. This decision
could be appealed.
The Qimonda AG is not a normal case as it involved patents that
relate to industry standards and therefore there are significant
public policy considerations. Such considerations will not apply in
most cases and therefore the outcome may be much more
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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