THE IMPACT OF INSOLVENCY ON IP LICENSES Association of Corporate Counsel - Ontario Chapter Program Minden Gross LLP 145 King Street West, Suite 2200 Toronto, ON October 9, 2013

THE IMPACT OF INSOLVENCY ON IP LICENSES Overview –What is IP?, BIA and CCAA –What to do when Licensor is insolvent? –What to do when Licensee is insolvent? –Lessons and Options

IP, BIA and CCAA IP not defined in BIA or CCAA –What is included? Pre-Amendments –Executory contracts

The Amendments –Ability to disclaim contracts –S (7) of BIA if the debtor has granted a right to use intellectual property to a party to an agreement, the disclaimer or resiliation does not affect the party’s right to use the intellectual property – including the party’s right to enforce an exclusive use – during the term of the agreement, including any period for which the party extends the agreement as of right, as long as the party continues to perform its obligations under the agreement in relation to the use of the intellectual property.

IP, BIA and CCAA Forced assignments S of BIA On application by a trustee and on notice to every party to an agreement, a court may make an order assigning the rights and obligations of a bankrupt under the agreement to any person who is specified by the court and agrees to the assignment. S of CCAA Receivers powers under BIA to assign Consent of licensor not required

When Licensor is Insolvent Stay of proceedings No disclaimer of IP license agreement by licensor New Skeena Forest Products Inc. v. Don Hill Sons Contracting Ltd. –Trustee has ability to disclaim executory contracts –Unclear whether IP license agreement is included in “executory contracts”

When Licensor is Insolvent Re Erin Features No. 1 Ltd. –Assumption that trustee has ability to disclaim –Court held that license agreement could not be disclaimed –Wrongly decided?

When Licensor is Insolvent Re T. Eaton Co. –Licensee not entitled to specific performance –Repudiation of license –Compensate in damages –Decided differently today? –License agreement does not pass any proprietary rights –Cited with approval in 2008 – RBC v. Body Blue Inc.

When Licensor is Insolvent RBC v. Body Blue –IP sold by receiver to third party pursuant to vesting order –Action commenced by licensee for tortious interference, unjust enrichment and declaratory relief –Holding – purchaser acquired IP subject to licensee’s contractual interest –License does not create proprietary rights

When Licensee is Insolvent Issues: –Fate of license –“Use” Use During Restructuring –Stay of proceedings –Payment on C.O.D. basis Re Allarco Entertainment –No authority for court to alter license agreement –Right to terminate or disclaim contracts is subject to judicial oversight What constitutes “use”?

Assignment of License without Consent of Licensor Re Nexient Learning Inc. –Assignment of agreement to competitor of licensor –The test Re Playdium Entertainment Corp. Purpose and spirit of CCAA Adverse effects “Other factors” –Court does not “rewrite” contract

Assignment of License without Consent of Licensor Ford Credit Canada Ltd. v. Welcome Ford Sales –Forced assignment of dealer agreement –“Personal” rights in agreement

“Bock from the Dead” Re Bock Inc. –Court revived a terminated dealership agreement Could a terminated license be revived in CCAA?

International Comparisons U.S. – s. 365(a) of U.S. Bankruptcy Code –Lubrizol case U.K. –Insolvency Act 1986 and Companies Act 2006 European Union can be different

Foreclosure? Parties may transfer agreement by private enforcement Transfer of IP without court process Transfer to related party/shareholder

Lessons and Options The Licensee -Solutions that transfer or secure IP -Software source code in escrow -Transfer IP into holding company -Partial assignment to licensee -Trust or security interest over IP -Separate license agreement

Lessons and Options The Licensor -Reporting obligations or automatic termination clauses based on early warning signs of insolvency -Minimum amount of “use” -Over-arching agreements that connect co- dependant license agreements Free-standing right of first refusal

Things to Discuss with Insolvency Advisor Use CCAA or BIA when principal asset is IP? Nexient –“Appropriateness” of proposed forced assignment –Enhance goals of restructuring –Keeping with spirit of CCAA and impact on third parties –Loath to interfere with terms of contract Failing to take assignment of all licenses Ongoing “use” of IP