Dealing with Intellectual Property during Bankruptcy and Insolvency
By Ian McMillan, Paul Blizzard, and Leanne Young, Bereskin & Parr LLP
Intellectual property (IP) plays a central role in the innovation economy. IP rights help foster innovation by providing inventors and creators with incentives to invent and create, and to share their inventions and creations.
As the innovation economy continues to grow, the importance of IP is likely to grow. In 2019, 59% of Canadian companies reported some level of contribution of IP to business performance, for example, in increased revenue or strengthened long-term business prospects.1 IP assets constitute an increasingly significant fraction of the overall value of many Canadian businesses. Accordingly, dealing effectively with IP assets will be important in many bankruptcy and insolvency scenarios.
This article describes IP issues that can arise in the context of bankruptcy and insolvency.
To illustrate some of these issues, consider an example licensor company ACo and an example licensee company BCo. Assume ACo is a Canadian company that develops widgets, that is, a product for sale. ACo’s IP portfolio includes a granted US patent for widget X and a method of manufacturing widget X. ACo has a valid license agreement with BCo, a US-based company, which permits BCo to make, use, and sell widget X in exchange for ongoing royalty payments to ACo.
BUSINESS INTERESTS AT STAKE
IP licenses play an important role in the innovation economy by encouraging market competition while also protecting IP owners’ rights. To make, sell, or market their goods or services, many businesses rely upon IP licenses. Licensed insolvency trustees (LITs) dealing with IP assets should understand the business interests at stake for the parties to an IP license.
IP licensing can be important for both licensors and licensees. For instance, licensors can generate revenue from royalty payments owed under license agreements. Licensing can allow licensors to enter new markets more easily. For example, being based in Canada, ACo may lack the resources to build and maintain a factory in the US to make its widgets or the market presence in the US to sell its widgets. By providing BCo with a license to make, use, and sell widget X, however, ACo can more easily—in terms of time, resources, and risk—enter the US market.
Some license agreements may require the licensee to assign or license to the licensor any improvements to the licensed technology. This may enable licensors to develop their licensed technology and extend their IP ownership without expending additional resources.
License agreements can be critical to licensees as well. Licenses allow the licensee to legally use the IP without the worry of being sued by the licensor for such use. In the case of patents, the IP right granted to a patent owner can be understood as a limited term monopoly. Remedies for patent infringement can include damages, accounting of profits, and equitable remedies such as injunctions, and delivery up or destruction of infringing items. In some fields, IP licenses may be—practically speaking—required to be a player in that field. IP licensing can enable licensees to “test the waters” with a new technology before heavily investing in it or becoming highly reliant on it.
The treatment of IP licenses in insolvency can significantly affect the parties involved. For instance, BCo will want to ensure that it can continue to make, use, and sell widget X pursuant to its license if ACo becomes insolvent. Perhaps BCo’s business operations have become heavily reliant on widget X. If BCo loses its rights under the license agreement through ACo’s insolvency proceedings, BCo’s operations will be significantly impacted.
Such a risk to licensees—the risk of losing its rights under a license agreement due to the licensor’s insolvency—could have a chilling effect on IP licensing due to the upfront risk licensees would face.2
CONSTRAINTS ON LITs BY THE BIA AND CCAA
The BIA and CCAA amendments that came into force in 2019 constrain how LITs can deal with IP. In 2009, amendments to the BIA and CCAA expressly allowed debtors to disclaim agreements in BIA commercial proposals or in CCAA restructuring proposals while also adding protections for IP licensees of a licensor debtor by specifying that the licensee could still use the IP covered by the license so long as the licensee continued to meet its obligations under the license. These protections, however, did not protect licensees in all insolvency contexts.
The 2019 amendments filled some of these gaps, extending licensee protection to additional transactions such as when a court orders the sale or disposition of a debtor’s assets, and sales or dispositions by a trustee in bankruptcy. For example, suppose ACo assigns itself into bankruptcy and ACo’s LIT sells its entire IP portfolio to CCo, a Canadian competitor. BCo would retain its right under its license to use widget X for the duration of the license agreement as long as BCo continues to perform its obligations under the license. Under section 246.1 of the BIA, this extended licensee protection similarly applies to a sale or disposition of licensed IP by a receiver, or a disclaimer or resiliation of an IP license by a receiver during a receivership.
For certain types of licenses such as exclusive and sole licenses, the BIA and CCAA provisions have the practical effect of barring LITs from disclaiming the IP license in order to enter into a more lucrative license agreement to increase the value of the debtor.
Uncertainties remaining in the legislation may also impact the way LITs deal with IP. For instance, the IP subsections of the BIA and CCAA refer to “intellectual property” but do not define the term. The precise types of IP that are covered by the statutes therefore remains unclear. For example, it is unclear whether “intellectual property” includes trade secrets, which may be considered a “soft” IP right (i.e., not protected by Canadian legislation). LITs should identify the types of IP rights covered by each license agreement or owned by the debtor and consider whether and how each type of IP is addressed by the BIA and CCAA.
The legislation provides the licensee a “right to use” the licensed IP. It is unclear however, what scope of “use” is intended and whether it encompasses more than mere “use”. IP licenses often grant broader rights than merely “use”, including the right to make, sell, import, and export. IP licenses may additionally be one part of a larger contractual arrangement that includes ancillary rights such as technical support from the licensor, sharing of upgrades and improvements, or maintenance of the IP. If the scope of “use” in the BIA and CCAA refers strictly to mere use, then LITs may be able to disclaim the broader rights and ancillary rights of IP licenses without the licensee retaining such rights.
It is also not clear what is required for a party to “perform its obligations under the agreement in relation to the use of the IP”. For instance, if an IP license is part of a larger contractual arrangement that provides for an overall royalty payment that covers more than the IP license, it can be unclear what the licensee is required to do to meet its obligations.3 LITs may need to consider whether a licensee’s actions (or lack thereof) indicate a failure to perform its obligations.
CROSS-BORDER IP LICENSES
When considering cross-border IP licenses in an insolvency context, LITs should be aware of cross-border implications. Suppose ACo’s LIT wishes to disclaim the IP license with BCo, as permitted under the BIA, resulting in a Canadian order that the license is disclaimed. Then, since the patent protecting widget X is a US patent and BCo is based in the US, ACo’s LIT will need to consider cross-border implications.
To enforce ACo’s order approving the license disclaimer in the US, for instance, ACo’s LIT would probably be required to ensure that BCo, as a licensee of the US IP asset covered by the license agreement, be treated in the manner required under the US Bankruptcy Code.4
Even if ACo’s LIT meets the Canadian statutory requirements to disclaim the license agreement with BCo, in order to enforce the judgment in the US, ACo’s LIT likely would also need to ensure that BCo has the option of either treating the license as terminated or retaining its rights under the license to continue using the IP for the remainder of the IP license term, as required by section 365(n) of the US Bankruptcy Code.
Similar requirements may arise in cross-border license agreements involving IP assets protected in other foreign jurisdictions. Accordingly, LITs should be aware of the cross-border nature of any international IP license agreements to ensure any foreign requirements are met.
PENDING IP PORTFOLIOS OF INSOLVENT ASSIGNEES
Assume ACo’s IP portfolio also includes a patent application filed with the Canadian Intellectual Property Office (CIPO) for widget Y. What happens to the pending patent application once ACo becomes insolvent?
Patent prosecution is the process of obtaining a granted patent from a patent application. It can be an expensive and uncertain process depending on the prior art in the field and the Patent Examiner assigned to the application. There may be a tension between continuing prosecution, which could increase the value of the debtor’s IP assets and abandoning the application because patent prosecution can be expensive.
Different factors may be relevant in determining whether pending patent applications are worth the expense of continued prosecution. Such factors may include the expected value of the patent if granted; the probability that the patent will be granted; the expected costs of prosecuting the patent application to get the patent granted; the expected lifecycle of the technology (e.g., whether it is likely to maintain its value for 15-20 years, or is likely to become obsolete within 5 years); whether the subject matter of the patent application is a good candidate for licensing if granted; and how developed the technology is (e.g., whether it would be ready to go to market if the patent is granted).
Now assume that ACo’s pending patent application with CIPO was filed in joint ownership with JCo, a Canadian company in a joint venture with ACo. Once ACo becomes insolvent, who becomes responsible for continuing (or abandoning) the prosecution of the patent application?
Like the previous example, in the case of joint ownership, ACo’s LIT must consider whether to assign ACo’s joint ownership in the application or whether it would be more beneficial to continue prosecution. In the case of continued prosecution, it may come down to the joint venture agreement between ACo and JCo to determine each party’s responsibility in maintaining the application.
MAINTAINING IP ASSETS
Some IP assets have maintenance requirements that must be met to preserve the IP rights. For example, Canadian patents and patent applications, and US patents have recurring maintenance fees. If maintenance fees are not paid in a timely manner, the patent rights will lapse.
Patent offices will typically issue objections to pending patent applications, responses to which must be filed with the corresponding patent office in a timely manner to continue prosecution. If a response is not timely filed (typically within 3-6 months of the patent office’s correspondence), the patent rights will lapse.
As another example, trademarks have a “use it or lose it” requirement. LITs should consider whether any Canadian trademarks assets being dealt with have been used in Canada in the preceding three years. If not, the trademark could be at risk of being expunged.
LITs should therefore be aware of the requirements of maintaining IP assets. A debtor’s IP assets can lose much or all their value if not properly maintained.
PRIORITY OF IP ASSIGNMENTS AND TRANSFERS DURING INSOLVENCY PROCEEDINGS
Trademark, copyright, and patent rights can be assigned or transferred under the respective Canadian statutes. The Copyright Act and the Patent Act impose transfer priority rules. Assume that ACo’s IP portfolio, in addition to the patent rights mentioned above, also includes a Canadian registered copyright for its widget X user manual. Suppose ACo assigns (rather than licenses) its entire IP portfolio to BCo. ACo later assigns itself into bankruptcy and ACo’s LIT sells its IP portfolio to CCo as part of the bankruptcy proceedings. ACo’s LIT should be aware of which assignment has priority for each IP right.
Assignments of copyright may be registered under the Copyright Act. Any assignment of copyright will be void against any subsequent assignee for valuable consideration without actual notice unless the prior assignment is registered under the Copyright Act prior to the subsequent assignee’s registration. That is, registered assignments have priority in the order of registration and have priority over unregistered assignments.5 Between unregistered assignments, the rule suggests that the subsequent assignment has priority if taken for valuable consideration without actual notice of the earlier assignment.6
Accordingly, BCo’s interest in the copyright has priority over CCo’s interest if BCo registers its assignment before CCo registers its assignment. If BCo does not register its assignment, CCo’s interest will take priority if taken for valuable consideration without actual notice of BCo’s assignment.
One court decision, however, suggests that the Copyright Act does not actually establish the above priority regime and a first assignee’s registration may in fact be subject to provincial property and civil rights laws.7 In common law provinces, nemo dat quod non habet (i.e. one cannot give what they do not have) would apply such that BCo’s interest prevails whether it registers its assignment or not. This court decision, however, has been criticized,8 and has neither been followed nor reconsidered by any court on this point of law.
The Patent Act provides that a patent transfer or patent application transfer that is not recorded under the Patent Act is void against a subsequent transferee if the subsequent transfer has been recorded. Thus, BCo’s interest in the patent and patent application should prevail over CCo’s interest if BCo registers the transfer. If BCo does not register its transfer and CCo does register its transfer, then CCo’s interest in the patent and patent application should prevail.
IP assets and licenses have a prominent role in commercial operations and economic growth. Accordingly, IP may be an important aspect in many insolvency proceedings. LITs should be aware of the issues that may arise when dealing with an insolvency matter involving IP.
1 “Table 33-10-0271-06 Contribution of intellectual property to business performance” (released 25 March 2021), online: Statistics Canada <https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3310027106&pickMembers%5B0%5D=3.101>.
2 Anthony Duggan and Norman Siebrasse, “The Protection of Intellectual Property Licenses in Insolvency: Lessons from the Nortel Case” (2015) 4:1 Penn St JL & Intl Aff 489.
3 Alan Macek, “Intellectual Property Licenses in Bankruptcy Scenarios”, Slaw (17 July 2019), online: <http://www.slaw.ca/2019/07/17/intellectual-property-licenses-in-bankruptcy-scenarios/>.
4 Jaffe v Samsung Electronics Co, 737 F3d 14 (4th Cir 2013).
5 Duggan and Siebrasse, supra note 2 citing David Vaver, Copyright Law 248 (2000).
7 Poolman v Eiffel Productions SA (1991), 35 CPR 3d 384 at para 24.
8 Duggan and Siebrasse, supra note 2.