At long last, amendments to the Bankruptcy and Insolvency
Act (BIA) and the Companies' Creditors
Arrangement Act (CCAA) have come into force,
providing licensees of intellectual property (IP) with some
additional level of protection.
Prior to the amendments, the right of debtors to disclaim
(terminate) contracts in a restructuring under the CCAA
was explicitly recognized by the courts, the rationale behind the
contract disclaimer regime being to permit debtor companies to shed
uneconomic contracts that present obstacles to a viable
restructuring of the debtor. If a business licensed software from a
supplier who sought protection under the CCAA to deal with
its insolvency, the supplier could disclaim the software licence
─ leaving the licensee with nothing but a damages claim.
For businesses dependent on licensed software for their operations,
a damages claim would only provide very limited relief.
The amendments expressly permit debtors to disclaim contracts in
a restructuring process under the CCAA or a proposal made
under the BIA, but the disclaimer will not affect the
licensee's right to use the IP so long as the licensee
continues to perform its obligations under the agreement related to
the use of the IP (for example, the payment of royalties).
Under the amendments, the right to use the IP lasts for the
duration of such contract, and for any extensions or renewals
permitted under the contract. This right also includes the right to
enforce any exclusivity provisions in the contract.
McCarthy Tétrault Notes:
While these changes in Canadian bankruptcy laws are welcomed by
licensees, the amendments raise a number of issues as to their
Meaning of IP — The amendments do
not define IP. Does it include, for example, trade secrets and
trade-marks? In the United States, the bankruptcy legislation has a
narrow definition of what constitutes IP, which expressly excludes
Meaning of use — It is not clear
whether rights that are ancillary to the right to use, such as the
rights to modify, copy or distribute, the right to enforce
confidentiality covenants, and the right to sublicense, are
included within the meaning of "use." It is likely that
the legislators did not want to go into a long enumeration of all
the possible iterations of IP rights, but it will be up to the
courts to determine the scope of the current language.
Continuing obligations of the licensee
— There is some uncertainty as to the nature and extent
of the licensee's obligations if those obligations are
contingent upon the debtor's performance of certain functions
and the debtor has disclaimed the obligations. For example, if a
licensor terminates its obligation to provide ongoing technical
support or maintenance, it is not clear whether the licensee would
still have to continue making full fee payments. It might also
prove difficult to calculate the correct fee that a licensee must
pay to maintain its rights. Since the licensee's right to use
the IP is contingent upon its performance of its obligations under
the agreement, the licensee could potentially lose the right to use
the IP if the licensee failed to make the correct payments.
We can also question whether, in the context of a licence for
sophisticated technology, it will make any sense for a licensee to
continue its use of a software without being able enforce the
ancillary obligations of the debtor (regarding maintenance, support
and upgrades) for anything other than a transitional period while
the licensee finds a replacement supplier.
Moreover, the amendments do not address the preservation of the
licensee's rights following the transfer of the IP assets under
licence to a third-party purchaser. Indeed, as a licence is usually
considered to be a personal right granted by the licensor, as
opposed to a real right related to the underlying IP, a purchaser
of such IP could claim, in the absence of a specific undertaking to
assume the licences or in the case the sale is made free and clear
of any liens, that he or she is not bound by the licences granted
by the previous owner.
In light of the uncertainties, licensees should consider:
proactively reviewing the existing licence agreements to ensure
that the language regarding their licensor's financial
difficulties is appropriate, e.g., does not provide for automatic
termination of the licence upon the licensor's insolvency;
taking security or proprietary interests in the IP;
creating a bankruptcy remote entity (discussed in more detail
another article) to bolster the statutorily protected
breaking down the fees payable under a licence agreement to
separate the royalties for use from the payments for other services
such as maintenance and support; and
entering into source code escrow agreements with
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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