Where a technology license carries with it an obligation to pay
royalties based on revenues, how does the licensor determine if the
revenues are accurately reported? The sales are known to
the licensee, but the licensor has no way of
determining what those sales are. Many license agreements impose
reporting obligations on the licensee, so that monthly or
quarterly sales are reported to the licensor, to enable accurate
royalties to be calculated. In the recent decision in XY, LLC
v. Zhu , 2013 BCCA 352 (CanLII), the BC
Court of Appeal dealt with a licensee who breached the terms of the
technology license agreement, and committed the "tort of
deceit" (that's how lawyers say "they
In this case, the licensee did not only underreport or withhold
information, they actively falsified records and thus substantially
underpaid the royalties owed to the licensor. The tort of
deceit is made up of these elements:
a false representation or statement made by the defendant,
the statement was knowingly false,
the statement was made with the intention to deceive the
the statement materially induced the plaintiff to act,
resulting in damage.
A damage award of over $8 million was awarded
by the court, as an assessment of the amount would put the licensor
in the position it would have been in, if the licensee had
performed its obligations and paid the propert amount of
One interesting twist on appeal was whether the employees
of the licensee should be personally liable. Employees are
not generally held responsible for the wrongs committed by the
employer. After reviewing the law, the Court of Appeal decided that
the claims of deceit should be available against certain employees,
and those employees were not shielded merely because they were
employees acting in the course of their duties. Since these
employees were actively devising ways to deceive the other side,
they were acting outside the scope of regular duties, and the
"just following orders" defence was not
accepted by the court.
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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A recent Saskatchewan Court of Queen's Bench decision allowed a court-appointed receiver to sell and transfer intellectual property rights free and clear of encumbrances, finding that a license to use improvements of an invention was a contractual interest and not a property interest.
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