Canada: Federal Government Proposes Reforms To How Intellectual Property And Licences Are Handled During Insolvency

Last Updated: November 16 2018
Article by Nicolas Mancini and Michael Shortt

On October 30, 2018, the Canadian government introduced the Budget Implementation Act, 2018, No. 2 into Parliament (we'll call it the "Bill" for ease of reference). An important part of the Bill was a number of changes to Canada's intellectual property laws, many of which had not been previously announced or discussed. One area of change involves new rules for intellectual property applicable in insolvency contexts. These new rules will apply in virtually all types of insolvency proceedings, from notices of intention to file a proposal and proposals, to bankruptcies and receiverships under the Bankruptcy and Insolvency Act ("BIA"), as well as proceedings under the Companies' Creditors Arrangement Act ("CCAA").

If the amendments are adopted in their current form, then they will generally guarantee that licensees of intellectual property (including exclusive licensees) remain protected even if the IP owner begins BIA/CCAA proceedings. Specifically, the amendments guarantee that in an insolvency situation, a licensee's right to use the intellectual property will not be impaired by a sale or disposition of the intellectual property to a third party, nor will it be extinguished if the agreement is terminated by the insolvent licensor, the trustee in bankruptcy or a receiver. In the case of exclusive licensees, they would also retain the right to enforce their exclusivity against third parties.

The need for these amendments arises from the sometimes precarious rights of licensees and other IP users in the context of restructuring or liquidation of an insolvent licensor. For example, in the context of a disposition of assets in an insolvency context, it is common practice for the debtor to obtain a vesting order from the Court declaring that the assets will "vest" in the purchaser free and clear of any rights, titles, interests or other in personam or in rem rights that may relate to the assets. In such a context, a vesting order may be used in the context of a sale of IP in order to "vest out" any underperforming licenses such that the purchaser may purchase the IP free and clear of these underperforming agreements. That of course could leave licensees with no right to use the intellectual property.

The Bill also statutorily integrates the 2009 amendments to the BIA and CCAA relating to intellectual property into the provisions relating to bankruptcies and receiverships.1 These 2009 amendments limited the rights to disclaim or resiliate agreements in contexts of BIA proposals and CCAA proceedings only, and Courts have been reluctant to extend these limitations into other insolvency contexts,2 affirming that in these other situations, licensees only had contractual rights such that as a result of the vesting order, the intellectual property can be transferred to the purchaser free and clear from any IP rights the party might have had pursuant to an agreement with the debtor.3 The amendments brought by the Bill will ensure a uniform application of these provisions in all insolvency contexts.

However, a licensee's "right to use the intellectual property" under the Bill is not absolute. In order to benefit from the statutory protection of its right to use the intellectual property, the user must continue to perform its obligations under the agreement to the extent that those obligations are "in relation to the use of the intellectual property". It will therefore be interesting to see how the Courts will determine which obligations constitute those "in relation to the use of the intellectual property", and whether certain IP users with insolvent co-contractants will now limit the performance of their obligations to those deemed "in relation to the use of the intellectual property" in order to benefit from the agreement.

To take a simple example, consider a software licence which includes two payments to a now-bankrupt company: a flat licensee fee (which has already been paid pre-bankruptcy), plus an ongoing fee in exchange for technical support. If the licensor goes bankrupt, can the licensee cease paying the technical support fee, or is it an obligation "in relation to the use of the intellectual property"?

The answer to this question may seem obvious in the above example, but more complex scenarios can easily become unmanageable. Suppose two companies enter into a joint venture agreement with a number of different obligations on each side, including mutual IP licences, production guarantees, a non-compete, non-solicitation clauses, arbitration, etc. If one party to the joint venture enters CCAA protection, how does the other party determine which of its obligations are "in relation to the use of the intellectual property" developed by the joint venture? Complex transactions like joint ventures are often package deals that include a great many offsetting concessions and obligations for each side. This makes unbundling such transactions a difficult task, yet such unbundling is built into the new IP provisions.

It will be interesting to see how Courts will reconcile these new provisions with the ever-growing scope of vesting orders in insolvency contexts. After all, the amendments have the direct effect of limiting a debtor's much needed flexibility regarding the disposition of its property, which in turn may impact the proceeds that can be distributed amongst the mass of creditors stemming from such disposition.

Finally, this task of reconciliation may be made more difficult by proposed amendments to the Patent Act. These amendments bind the acquirer of a "standard-essential patent" (i.e. a patent that is essential to an industry-wide standard like 5G cellular networks) to honour licensing commitments made by the previous holder of the patent "despite any other Act of Parliament and any decision or order made under such an Act". It remains to be seen whether vesting orders under the BIA and CCAA will be subordinated to the special rules for standard-essential patents.

The new amendments are not yet in force, but since they are included in a budget measure, they will likely be adopted sometime early in the new year.

Footnotes

[1] Bankruptcy and Insolvency Act, RSC 1985, c B-3, art 65.11(7).

[2] Golden Opportunities Fund v Phenomenome Discoveries Inc, 2016 SKQB 306.

[3] Royal Bank of Canada v Body Blue Inc, [2008] OJ 1628 (SCJ [Commercial List]).

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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