Originally published in May 2006
The technology explosion, the dot-com boom and its subsequent demise, and the continuing expansion of the North American economy – the constant thread through the last two decades has been the ever-increasing reliance by almost all businesses and industries on licensing intellectual property, technology and other forms of intangibles for one purpose or another. This is so even though reliance on technology licensing is not new – as early as 1996, North American corporations earned over $66 billion in royalty income by licensing technology to unaffiliated entities.
Thus, it is rare for a bankruptcy of a commercial enterprise not to involve a licence of technology in one form or another. Yet, one of the most overlooked areas in negotiating licences is the possible bankruptcy of the licensor. Unfortunately, Canadian insolvency law has been ineffective in providing commercial certainty to licensors and licensees and, in turn, their lenders in the event of a bankruptcy. Thankfully, Parliament has finally acted on this problem, but more remains to be done.
CLARITY IN THE UNITED STATES
Some protection is given to licensees of intellectual property under the United States Bankruptcy Code.
A licensee of rights to intellectual property can elect one of two sets of consequences upon rejection or disclaimer of the contract. The licensee can treat the rejection as a termination of the licence, leaving the licensee with its various rights as a contract creditor under the Bankruptcy Code, including its breach of licence (rejection) damage claim. Alternatively, it can elect to retain its rights under the licence, in which case the licensee must continue making any royalty payments due, without right of set off. This is intended to strike a balance between the interests of the debtor licensor and a licensee of the debtor’s intellectual property.
THE CANADIAN LANDSCAPE
In Canada, it is less than clear how the insolvency of a licensor will affect a licence and a licensee’s rights. There is little legislative protection in Canada, although amendments to the Bankruptcy and Insolvency Act ("BIA") and the Companies’ Creditors Arrangement Act ("CCAA") have been proposed to address the problem. As a result, both licensors and licensees must look to the common law and traditional concepts of property in determining the rights of parties under a licence.
The nature of a licence is important because, upon bankruptcy, the debtor’s property devolves to a trustee. Courts have characterized this situation in two different ways. If the licensing contract provides for an assignment of technology to the licensee, arguably the debtor licensor no longer has an interest in it, leaving nothing to devolve to the trustee. Such a result would support the licensee’s right to continue to operate its business in reliance on the technology unfettered. On the other hand, most licences of intellectual property are properly construed as merely allowing a licensee to do what is otherwise prohibited. This latter characterization has prevailed in many court decisions. Consequently, intellectual property licensees have been trying to structure contracts to strengthen their property rights without which the rights will devolve to a trustee in bankruptcy leading to the very real possibility of termination.
While this possibility has been doubted by academics, last year the B.C. Court of Appeal in New Skeena Forest Products Inc. v. Don Hill & Sons Contracting Ltd.,  B.C.J. No. 546 addressed the issue and concluded that trustees have the power to disclaim contracts which would include intellectual property licences.
RESTRUCTURINGS UNDER THE CCAA
Notwithstanding the lack of any statutory provision in the CCAA with respect to the disclaimer of executory contracts, a standard CCAA order provides for a debtor to terminate contracts, including intellectual property licences, if there is an economic advantage in doing so. Accordingly, a debtor can disclaim a contract, terminating its obligation to perform and thereby relegating the licensee’s claim to that of an unsecured claim in damages. Therefore, as in the context of a trustee in bankruptcy, a licensee is left particularly vulnerable in the event of a restructuring under the CCAA.
PROPOSED LEGISLATIVE REFORM – BILL C-55
Bill C-55 is the culmination of the Canadian insolvency law reform process that began in 1997. Later this year, it is expected that the BIA and the CCAA will both be amended to permit a debtor or trustee to disclaim agreements, with some exceptions. In the case of licences of intellectual property, the BIA and the CCAA will protect the continued use of intellectual property by licensees, notwithstanding the disclaimer, so long as the party continues to abide by the obligations for its use.
Interestingly, the proposed amendments do not purport to give a court the authority or discretion to balance the parties’ interests, even in circumstances in which a licensee’s business will not be adversely affected. It is for this reason, in part, that the National Bankruptcy and Insolvency Law Section of the Canadian Bar Association has criticized the proposed amendment.
The significance of technology licensing to business is immeasurable, as is the importance of ensuring a continuing right to use businessreliant technology. While it remains to be seen what the future holds for the proposed legislation, it is likely that Canadian licensees will finally receive some protection and will no longer be exposed to the potentially devastating loss of technology rights upon termination of a licence following the insolvency of the licensor.
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