Implementation of the Federal Government’s Intellectual Property Strategy -  Effects of Bankruptcy and Insolvency on IP Licenses

The federal government’s budget implementation bill, Bill C-86[1], received Royal Assent on December 14, 2018. An aspect of the budget implementation bill is the amendment of various legislation, including the Patent Act, the Trademarks Act, as part of the government’s implementation of its intellectual property (“IP”) strategy.  Our coverage of some of these legislative changes can be found in our blog posts here and here.

In addition to amendments of the main IP legislation, bill C-86 further proposes amendments to Canada’s bankruptcy and insolvency legislation, namely, the Bankruptcy and Insolvency Act (the “BIA”) and the Companies’ Creditors Arrangement Act (the “CCAA”) to address concerns raised by Canadian businesses during the consultation of the federal government’s IP strategy. The proposed amendments, which are not yet in force, are intended to cover additional circumstances in which IP license rights are preserved in the face of the bankruptcy or insolvency of the licensor.

Background

In 2009, amendments to the BIA and CCAA came into force that expressly provided a regime for disclaimer of agreements, including IP licenses, to which the debtor is a party. Prior to these amendments, the scope of the right to disclaim was not clear under the legislation.  The 2009 amendments also introduced a provision that preserved the licensee’s rights to use licensed IP as long as the licensee continues to perform its obligations in relation to the use of the IP. While the 2009 amendments provided a clear disclaimer framework, the amendments had certain gaps, such as the lack of a definition of “intellectual property” and the preservation of a licensee’s rights not being applicable to individual debtors who are IP licensors, to receivership situations, and to situations where creditors petition the licensor into bankruptcy.

The gaps in the 2009 amendments can be seen the decision of Golden Opportunities Fund Inc. v Phenomenome Discoveries Inc., 2016 SKQB 306, (“Golden Opportunities”). In this case, the licensee was unable to rely on the BIA to preserve its right to continue using IP licensed from a bankrupt licensor as the court-appointed receiver was seeking a vesting order to allow it to sell the licensor’s assets (including the licensed IP) free of encumbrances. The court specifically held that “Section 65.11(7) of the BIA has no bearing on a court-appointed receivership” (para 21).

In addition, the licensor may decide to sell the IP assets that are licensed to a third party and the sale may lead to the licensee’s loss of its rights to use the licensed IP. This is an area that was not addressed in the 2009 amendments.

In Royal Bank of Canada v. Body Blue Inc., 2008 CanLII 19227 (ONSC) (“Body Blue”), Herbal Care licensed certain technologies from Body Blue Inc. Body Blue subsequently went into receivership and the licensed IP was sold to a new owner. The Ontario Superior Court of Justice held that the new owner obtained the licensed IP “free and clear” of any claim from Herbal Care on the basis that the IP license agreement did not give the licensee Herbal Care any property rights in the licensed IP.   

Legislative Amendments

As noted earlier, during the federal government’s consultation of its IP strategy, various stakeholders raised the issue of gaps in the BIA and CCAA with regards to the rights of IP licensees. To address these gaps, the proposed amendments under C-86 included the following:

  • new section 65.13(9) of the BIA and section 36(8) of the CCAA would provide that a sale or disposition of the IP assets of an insolvent licensor, authorized by a court, does not affect a licensee’s right to use the licensed IP, as long as the licensee continues to perform its obligations set out in the terms of the license;
  • new section 72.1 of the BIA would preserve a licensee’s use rights in the context of disclaimers, or sales or dispositions by a trustee in bankruptcy; and
  • new section 246.1 of the BIA, once in force, would preserve a licensee’s use rights in the context of disclaimers, or sales or dispositions by a receiver. The court’s decision in Golden Opportunities may have a different outcome if new section 246.1 was in force at the time.

While the proposed BIA and CCAA amendments, upon coming-into-force, would be helpful to IP licensees, some of the existing concerns remain.  For instance, the term “intellectual property” continues to be undefined in both the BIA and CCAA and so it is unclear what exactly the term encompasses. Furthermore, the concept of a “right to use” the licensed IP is used pervasively in these provisions, but IP licenses often grant rights that are broader than just “use”, including the right to make, import, export, etc.  Accordingly, to the extent any licensed IP is significant or mission critical to operation of a business and there is a real risk of bankruptcy of the licensor, traditional structures and strategies addressing bankruptcy risks, such as partial ownership, escrow arrangements, etc., should still be considered. 

For prospective purchasers of IP from bankrupt or insolvent companies, the proposed BIA and CCAA amendments would affect the purchasers’ ability to obtain such IP free and clear of all encumbrances, which may affect the ultimate value of such IP.

 

 

[1] Budget Implementation Act, 2018, No. 2, SC 2018, c 27

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