Canada: Insolvent Licensors - New Legislation May Protect Licensees

Last Updated: February 22 2006

This article was originally published in Blakes Bulletin on Intellectual Property - February 2006

Article by Linc Rogers, ©2006 Blake, Cassels & Graydon LLP

On November 25th, 2005, Bill C-55, which proposes sweeping changes to Canada’s principal insolvency statutes, received Royal Assent – the final step in the Canadian legislative process before a bill is proclaimed in force. Prior to dissolving Parliament and calling a Federal election for January 23, 2006, the Liberal Government gave assurances to the Senate Committee on Banking, Trade and Commerce, which is charged with oversight and review of Bill C-55, that it would not proclaim the Bill in force prior to June 30, 2006 (it is not known whether the new Conservative Government will honour this commitment). If enacted in its current form, the amendments will have a material impact on the rights and obligations of various participants in formal insolvency proceedings in Canada. One of the most important provisions seeks to protect the rights of a licensee of intellectual property during a court-supervised restructuring.

Currently, the general tenor of Canadian jurisprudence is that restructuring debtors have a broad power to terminate or “disclaim” contracts that are no longer economically beneficial to the debtor’s estate. In a typical example, a debtor selling goods pursuant to the terms of a long-term contract at less than current market rates may terminate the supply contract and seek to renegotiate a new agreement with its purchaser on more favourable terms. The purchaser may assert an unsecured claim for damages in the insolvency proceeding resulting from the termination of the supply agreement but generally will not be able to insist on performance of the contract.

A debtor’s ability to disclaim contracts in this manner has caused significant concern for intellectual property licensees, especially those that depend on crucial licensed intellectual property for operation of their businesses. The concern is that an insolvent licensor may disclaim the licence and seek to prohibit the licensee from continuing to use the licensed intellectual property, even if only to negotiate terms more favourable to the licensor. Although the disclaimer could potentially cause the failure of the licensee’s business, the licensee may be left with the inadequate remedy of simply being entitled to assert an unsecured claim for damages arising from the termination of the licence.

Bill C-55 contains a protection providing that, in a reorganization under the Bankruptcy & Insolvency Act or the Companies’ Creditors Arrangement Act, the disclaimer of a licence does not affect the licensee’s right to use the intellectual property licensed thereunder, so long as that licensee continues to perform its obligations in relation to the use of the intellectual property, such as the continued payment of royalties, etc.

This provision is similar to one found in the United States. To understand the Canadian provisions, it is instructive to consider the manner in which this issue has been addressed in the United States Bankruptcy Code (the U.S. Code) as the two insolvency regimes utilize a similar approach. The U.S. Code allows debtors to disclaim “executory” contracts. Executory contracts are contracts where parties on both sides of the contract have unfulfilled obligations. An ongoing supply contract, where one party has an obligation to supply and the other an obligation to purchase such supply, is a classic example of an executory contract. An example of a non-executory contract is a term loan where the entirety of the loan has been advanced and the only remaining obligation is the obligation of the debtor to repay the loan.

The protection in the U.S. Code for intellectual property licences is in the form of an exception to the general right to disclaim executory contracts.

Bill C-55 also protects licensees by providing an exception to a general right to disclaim contracts, but, does not use the term executory. The drafters were concerned about litigation in the U.S. about what constituted an executory contract and the resulting uncertainty. The drafters wanted to avoid similar uncertainty in Canada. Accordingly, Bill C-55 provides a general right to a debtor to disclaim “agreements” subject to a number of exceptions including intellectual property licences.

Another distinction between the two regimes is that the U.S. Code provision does not incorporate licences of trade-marks in the protection granted to licensees from the disclaimer of contracts. The proposed Canadian counterpart, on the other hand, does not distinguish between categories of licensed intellectual property and would include trade-marks.

Also of note, Bill C-55 does not include express language found in the U.S. Code that confirms that a licensee may enforce exclusivity rights, notwithstanding any disclaimer by the debtor. Therefore, the window is open for a restructuring Canadian debtor to argue that although it cannot prevent a licensee from continuing to use the licensed intellectual property, the debtor is free to ignore any contractual exclusivity and licence the intellectual property to a third party. Any resulting damage to the licensee, the debtor would argue, should simply be an unsecured claim against the estate.

Given this seeming omission in Bill C-55, licensees may wish to draft licence agreements containing an express provision which provides not only that the parties intend that the licensed intellectual property be subject to the protections set out in Bill C-55, but also that the parties intend such protection to extend to any exclusivity provision contained in the agreement. It should also be made clear that the parties intend any such protection to extend to any ancillary agreements such as source code escrow agreements. In light of Bill C-55, careful consideration should also be paid to the wording of default provisions upon the occurrence of an “Insolvency Event” in connection with the licensor and the remedies available to the licensee upon such occurrence.

Although not perfect, the inclusion of protection for licensees in Bill C-55 is an appropriate acknowledgement of the true value of licensed intellectual property in today’s marketplace. Hopefully, Canadian courts will interpret this protection and the licence agreements which are subject to it, in a manner that is consistent with this commercial reality.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

12 Nov 2018, Other, Toronto, Canada

Stories aren’t falsehoods. Stories are the root of all effective human communications: they motivate, animate and clarify. If you aren’t telling stories, you probably aren’t getting your point across.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions