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Do You Really Have an Enforceable License?

June 12, 2012

During a bankruptcy or a restructuring, the goal of bankruptcy law is at odds with the goal of intellectual property law. Recent developments in bankruptcy law have sought to provide more certainty to licensees. However, there is still a lot of uncertainty.

Intellectual property laws are designed to promote the dissemination and implementation of new technology. On the other hand, bankruptcy law is designed to improve the recovery of funds to pay out debtors. Accordingly, a trustee in bankruptcy is generally entitled to walk away from a contract if the contract is onerous or if the trustee believes that the value of an asset may be increased by repudiating a contract.

A patent license may provide a licensee with a critical technology to enable a product to be manufactured or a process to be operated. A licensee may invest substantial amounts to build a plant or to develop and tool a product. The loss of the license may result in the now former licensee having to shut down a product line or even an entire plant and to accordingly lose its unamortized investment. For this reason the dissemination and implementation of technology via a patent license can be jeopardized if a trustee who takes over the operation of a licensor has the right to terminate a license agreement.

In 2009, the Canadian Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) were amended to address this issue. Section 65.11 of the BIA provides that a debtor, who has filed a proposal to restructure may disclaim any agreement. However any such disclaimer “does not effect [a licensee’s] right to use the intellectual property so long as [the licensee] continues to perform its obligations in relation to the use of the intellectual property." A similar provision was introduced to the CCAA. While this was an improvement, it does not apply to a receivership. Further, the debtor is relieved of its obligations, such as the provision of on-going maintenance support or allowing the licensee to have access to software upgrades. Accordingly, the value of the license may be significantly diminished since the licensee must continue to pay the full royalty rate or else lose the license.

In the United States, upon bankruptcy, a debtor licensor may elect to either preserve its obligations under a patent license agreement and continue on as if nothing had changed, or reject the license and seek relief from its obligations under the contract (§365(a) of the U.S. Bankruptcy Code). If the license is rejected by the licensor, the licensee will still have recourse under §365(n) to retain the license. However, this will not always guarantee the full set of rights under the original license agreement. For example, debtor-licensors are not required to continue future obligations which include maintenance, technical support, marketing, research and development. Furthermore, §365(n) only considers the rights of the licensee at the time of bankruptcy. Therefore, licensees may not be entitled to upgrades to the licensed technology made after that date, even if they were set out in the license. Finally, §365(n) does not protect trademarks, as the definition of “intellectual property” in the Code excludes trademarks.

The rights of a licensor upon bankruptcy vary from country to country. Further, the interplay of the laws of different countries can be quite complex as has occurred in the recent bankruptcy of Germany-based DRAM producer, Qimonda AG, which owns and had licensed many patents that were incorporated into standards set by JEDEC relating to DRAM chips. In this case, litigation is ongoing in both the United States (as it relates to the U.S. patents of Qimonda AG) and in Germany, the home of Qimonda AG. In the United States, the court held that the license of the U.S. patents was still enforceable since “deferring to German law, to the extent it allows cancellation of the U.S. patent licenses, would be manifestly contrary to U.S. public policy.” This decision is on appeal.

Concurrently, in German litigation, the regional court in Munich recently ruled that the rights licensed to Infineon Technologies AG have not lapsed as a result of Qimonda’s insolvency proceedings. In this case, the regional court was able to reach this conclusion by holding the license had been fully performed and therefore §103 of the German Insolvency Code that permitted cancellation of a license agreement did not apply. This decision could be appealed.

The Qimonda AG is not a normal case as it involved patents that relate to industry standards and therefore there are significant public policy considerations. Such considerations will not apply in most cases and therefore the outcome may be much more uncertain.

Philip C. Mendes da Costa, B.Sc. (Chem. Eng.), LL.B., is a partner with Bereskin & Parr LLP and is the head of the firm's Patent practice group. He can be reached in Toronto at 416.957.1695 or pmdcosta@bereskinparr.com.

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Author(s):

Philip Mendes da Costa Philip Mendes da Costa
B.Sc. (Chem. Eng.), LL.B.
Partner
416.957.1695  email Philip Mendes da Costa