License purchases can be excluded from the insolvency administrator’s right to reject or assume contracts

The Federal Court of Justice (Bundesgerichtshof – “BGH”) on 21 October 2015 issued a landmark decision that is of utmost importance to restructuring and the intellectual property law (case no. I ZR 173/14, available here). According to the BGH, in principle, insolvency administrators are no longer capable of electing to reject or assume contracts referring to license buy-outs once the mutual obligations of the parties to the license agreement have been fulfilled.

Underlying facts

The plaintiff — ECO-SOIL Süd GmbH (a German law limited liability company) — demanded that the defendant — ECOSOIL Holding GmbH — refrain from infringing on its community trade mark and company symbol. The defendant claimed that a license had been granted by the former parent company free of charge, entitling the defendant and the remaining subsidiaries of the parent company to the right to use the designations. After the license had been granted and the insolvency proceedings had opened over the assets of the parent company, the plaintiff acquired the immaterial assets of the parent company, including the rights to the trade mark “ECOSOIL”. Based on this acquisition, the plaintiff started to enforce its claims against the defendant.

Question raised

From a shared restructuring and IPT perspective, the case is of particular interest. This is due to the fact that it has given rise to the question as to whether the licensee loses the right to use the license once the insolvency proceeding is opened over the assets of the licensor. In that regard, the BGH issued this landmark decision because it held for the first time that under certain circumstances the insolvency administrator of a licensor cannot issue a decision by which the licensee effectively loses the license. This holds true in spite of the fact that the licensor has filed for insolvency proceedings, and regardless of the fact that the trademark has been transferred to another enterprise. License agreements are treated in accordance to the provisions governing a permanent lease of rights, Sections 108 and 112 of the German Insolvency Code. In fact, Section 103 of the German Insolvency Code is thus of no relevance to this particular case, the BGH held.

Quotes taken from the decision, recitals 44, 45:

“The appellate court was correct in holding that Section 103 of the German Insolvency Code was inapplicable in this case. This is due to the fact that before the insolvency proceedings were opened, the mutual obligations under the license agreement had been completely fulfilled by both the obligor/licensor and the licensee. Thus, the opening of the insolvency proceedings did not entitle the insolvency administrator to reject the fulfillment of the license agreement.

In cases of license purchases, in general, a license agreement is completely performed by both parties (Section 103 para 1 of the German Insolvency Code) when the mutual main obligations have been fulfilled, i.e. once the licensor has granted the license and the licensee has paid the purchase price. In the pending case, due to the lack of a payment agreement, the license was not granted on the basis of a typical purchase contract. In fact, it was an exchange contract of genuine nature, stipulating that on the one hand, in the interest of a common market appearance, the defendant and the other companies belonging to the parent organization were obliged to use the trade mark Ecosoil, while on the other hand, the obligor was demanded to grant the corresponding usage rights free of charge for the duration of the existence of the Ecosoil company group. This reciprocal contract, however — and this is the deciding matter — was completely fulfilled by both parties prior to the opening of the insolvency proceeding. The obligor had granted the corresponding license prior to the opening of the insolvency proceedings, and the defendant then used that license as agreed upon. There is no sign that there were any auxiliary obligations not fulfilled yet by either parties to the license agreement that would have rendered Section 103 of the German Insolvency Code applicable. Furthermore, contrary to the plaintiff’s opinion, the license granted to the defendant did not end merely because the Ecosoil concern group seized to exist.”

Conclusion

This landmark decision needs to be taken into account when negotiating trademark license agreements in relation to Germany and to companies (licensors and/or licensees) who would have their centre of main interests (“COMI”) in Germany. In the event a licensor or licensee has its COMI in Germany, German insolvency courts would have jurisdiction and German insolvency law would in principle apply to the insolvency debtor.