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IP Licenses and Canadian Insolvency Law:

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Sugarman v. Duca Community Credit Union Ltd. ( 1999), 120 O.A.C. 333. ... agreements which, under provincial legislation, were 'evergreen' licenses that ... – PowerPoint PPT presentation

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Title: IP Licenses and Canadian Insolvency Law:


1
IP Licenses and Canadian Insolvency Law
  • The Sexiest Intersection on Bankruptcy Boulevard

Gabor G.S.Takach
2
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

3
  • 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.

4
  • 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.

5
  • 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

6
  • 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

7
  • 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

8
  • 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.

9
  • 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

10
  • 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.

11
  • 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

12
  • 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

13
  • 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

14
  • 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.

15
  • 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

16
  • 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

17
  • 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

18
  • 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

19
  • 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.

20
  • 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.

21
  • 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.

22
  • 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

23
  • 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

24
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