IP Licenses and Canadian Insolvency Law:

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IP Licenses and Canadian Insolvency Law

• The Sexiest Intersection on Bankruptcy Boulevard

Gabor G.S.Takach
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OVERVIEW

• The Status of licensees in the event of licensor
  bankruptcy
• Judicial characterization of licenses do they
  transfer a proprietary interest
• Recommendations for legislative correction
• Assignment of contracts in the face of a
  non-assignment provision

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• What is a license? A covenant not to sue
• no provisions in the Canadian Bankruptcy and
  Insolvency Act, R.S.C. 1985, c. B.3, authorizing
  a trustee to reject executory contracts
• trustees ability to breach a contract is
  unaffected by bankruptcy and insolvency
  legislation
• the crucial issue following breach is the scope
  of available remedies.

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• A claim for damages against the bankrupts estate
  is an insufficient remedy, not only because it is
  unlikely to be satisfied in full, but more
  importantly because it does not permit the
  licensee to continue to make use of the rights
  transferred under the licence agreement.

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• What are the arguments that might be used that a
  license contract should be afforded different
  treatment?
• In a pre-bankruptcy setting, specific performance
  is available to restrain breach of contract where
  the subject-matter of the agreement is such that
  damages would be an inadequate remedy

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• Damages are presumptively inadequate compensation
  for breach of negative covenants
• Whether this equitable remedy is available
  against a trustee in bankruptcy is uncertain,
  although an argument could be made that specific
  performance is justified by reference to the
  general principle that the property of a debtor
  vests in the trustee subject to any outstanding
  equities

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• There are no instances where injunctive relief
  has been enforced against a trustee to prevent
  the breach of negative covenants in
  pre-bankruptcy agreements.
• If a licensee is unable to obtain an equitable
  remedy in the form of specific performance in
  order to enforce the licence agreement against
  the trustee, the licensee may argue in the
  alternative that the rights acquired pursuant to
  the licence agreement are proprietary rather than
  contractual in nature and thus do not form part
  of the debtors estate

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• Erin Features 1 (Re) (1991), 8 C.B.R. (3d) 205
• Erin Features is the first Canadian decision to
  address the status of licensees under bankruptcy
  law
• The factual background in Erin Features was
  identical to that in Lubrizol
• exclusive marketing rights in Canada for a film
• Court summarily applied a property law analysis
  without first analyzing the nature of the
  agreement.

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• Heap v. Hartley (1889), 42 Ch. D. 461
• Heap considered the question of whether an
  exclusive licensee had an independent right to
  sue for patent infringement
• narrow question of whether an exclusive licensee
  had an independent right to sue for patent
  infringement
• It denied standing to sue for infringement as an
  exclusive licence did not amount to an assignment
  of the proprietary interest

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• Sugarman v. Duca Community Credit Union Ltd.
  (1999), 120 O.A.C. 333.)
• a nursing home license is in the nature of a
  proprietary right and can be the subject of a
  security interest
• At issue was whether regulatory licenses
  constitute intangible person property for the
  purposes of provincial personal property security
  legislation.
• court showing flexible approach to the issue of
  proprietary interests licenses.

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• Eli Lilly Co. v. Novopharm Ltd., 1998 2
  S.C.R. 129
• adopted the relevant passage from Foxs text
  wherein he states that a patent licence transfers
  not merely a right of use, but a beneficial
  interest in the patent itself
• A licence is the transfer of a beneficial
  interest to a limited extent, whereby the
  transferee acquires an equitable right in the
  patent

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• Eli Lilly Co. v. Novopharm Ltd., 1998 2
  S.C.R. 129 (cont.)
• A licence prevents that from being unlawful
  which, but for the licence, would be unlawful it
  is a consent by the owner of a right that another
  person should commit an act which, but for that
  licence, would be an infringement of the right of
  the person who gives the licence. A licence
  gives no more than the right to the thing
  actually licensed to be done. (Harold G. Fox,
  Canadian Law and Practice relating to Letters
  Patent for Inventions (4th ed. 1969) at 285

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• Eli Lilly Co. v. Novopharm Ltd., 1998 2
  S.C.R. 129 (cont.)
• cannot be interpreted as the Courts endorsement
  of a proprietary approach to licence agreements,
  particularly given its emphasis on the
  characterization of a licence agreement as a
  negative covenant on the part of the licensor

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• Re T. Eaton Co. (1999), 14 C.B.R. (4th) 288
• motion for specific performance against a
  bankrupt debtor in relation to the terms of both
  an exclusive credit card licence and service
  agreement
• First, the Court distinguished the case law
  dealing with regulatory licenses for the purposes
  of provincial personal property security
  legislation, holding that the precedents were
  both inconclusive and limited to the PPSA
  context.

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• Re T. Eaton Co. (1999), 14 C.B.R. (4th) 288
  (cont)
• Second, the Court examined the allocation of
  property rights within the text of the card
  agreement itself, noting that nothing in the
  agreement purported to transfer a proprietary
  interest either directly or indirectly to
  National Retail.
• Court relied on the traditional distinction in
  Heap between a bare licence and a licence coupled
  with a grant in concluding that the card
  agreement did not transfer any proprietary rights
  to National Retail

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• Re T. Eaton Co. (1999), 14 C.B.R. (4th) 288
  (cont)
• the decision is further evidence of the continued
  relevance of the distinction between a bare
  licence and a licence coupled with a grant
• The decision undermines all of the arguments that
  might have been available to distinguish the
  procedural cases in light of the increasing
  commercial value of IP to licenses
• The alternative of a license coupled with a grant
  is not likely to be adopted by licensors as an
  alternative except in cases of extreme need

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• Re Skeena Cellulose Inc. (2002), 5 B.C.L.R. (4th)
  193 (B.C.S.C.)
• the court examined the ability of a company in
  CCAA proceedings to disclaim agreements which,
  under provincial legislation, were evergreen
  licenses that could not be terminated and were
  automatically renewed at the expiry of the
  license term so long as the company in CCAA
  protection held its timber franchise
• The court held that the licenses, like other
  contracts, could be disclaimed in order to
  facilitate a restructuring of the debtor company

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• One of the consequences of the uncertainties of
  the law in this area is to give competitive
  advantage to US based licensors
• But for tax implications one full proof solution
  involves the grant of the rights to a US based
  affiliate and the licensing by the affiliate back
  to the Canadian user.
• This would satisfy the requirement of the grant
  of a proprietary right without the risk of losing
  control over the subject matter of the license

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• Even where a solution is ultimately found, the
  uncertainties in the law represent significant
  additional legal costs
• The preferred solution, given the extent of
  cross-border licensing in which Canadian business
  are typically licensees of U.S. companies, is
  legislative reform harmonizing Canadian
  bankruptcy law with the U.S. approach, i.e.,
  licensees may elect to retain their rights under
  rejected contracts so long as the required
  royalty payments are maintained.

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• The Licensing Committee of ("IPIC") report
• recommends that the BIA be amended to include an
  express right of disclaimer (with a limited right
  of disclaimer for trade-marks ), together with
• a clear definition of the types of contracts that
  a trustee in bankruptcy may disclaim
• a clear statement of the rights arising as a
  result of disclaimer of a contract and
• a provision similar to that adopted in the US
  Bankruptcy Code permitting a licensee of
  intellectual property to retain those rights.

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• Assignment of Contracts in the Face of a
  Non-Assignment Provision
• It is generally believed that a
  trustee-in-bankruptcy does not have any power to
  override a restriction on assignment in a
  contract
• Until recently, it was believed that provisions
  restricting the assignment of a contract would be
  fully enforceable in a CCAA proceeding.

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• Re Playdium Entertainment Corp. (2001), 31 C.B.R.
  (4th) 302 (Ont.S.C.J.)
• it was held that the court could override an
  otherwise enforceable contractual restriction on
  assignment in the context of a CCAA proceeding
  where the court is satisfied that the assignment
  of the contract is an integral part of the
  restructuring of the debtor company and that the
  assignment is necessary to complete the
  transaction

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• It is possible that the reasoning in Playdium
  could be extended to a receivership proceeding or
  to a BIA proposal in the appropriate
  circumstances.
• Contractual restrictions which contemplate the
  granting of general security interests and the
  further assignment by receivers except to
  competitors may be treated better under this line
  of attack on the freedom of contract

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