Canada: New Protection For Licensees Of IP — BIA And CCAA Amendments Come Into Force

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 interpretation:

  • 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 trade-marks.
  • 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 in another article) to bolster the statutorily protected rights;
  • 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 licensors.

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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