It is sometimes easy to forget that intellectual property (including the rights of inventors, authors and certain designers) are species of personal property. Such property is clearly not tangible, but the conception of personal property - as reflected in the personal property security legislative regimes of Canadian jurisdictions - encompasses intangible property, and intangibles are subject to most of the same rules pertaining to the taking, protecting and realization of tangible personal property security. We also sometimes forget that all Canadian personal property security legislation provides that it is the substance of an arrangement between the affected parties, not the "form" of the arrangement, which is determinative of whether or not the arrangement is or evidences a secured transaction within the meaning of the legislation. This is illustrated by the statutes specifying that it doesn't matter if the secured party retains ownership or "title" to the affected personalty, or the secured party conveys ownership or "title" to the debtor who then "grants" a security interest in same back to the secured party. In both cases, if the objective is to better assure the creditor of getting paid what the debtor owes by providing an interest in the affected personalty to the secured party, the arrangement creates or provides for a security interest. That then results in the secured party (as well as the debtor) becoming subject to certain rules relating to the respective rights, interests and obligations of the immediate parties to the transaction (the secured party and the debtor), as well as of "interested" third parties, such as other secured creditors, purchasers and various debtor "representatives" under the Canada Bankruptcy and Insolvency Act (and other similar legislation).
In the recent (judgement given March 6, 2015) British Columbia Court of Appeal Contech Enterprises Ltd. v. Vegherb, LLC case, hereinafter the "Contech Case", it appears that the Chambers Judge overlooked some of the above concepts. In 2013, Vegherb entered into a sale and purchase agreement with Contech whereby Contech purchased all of Vegherb's assets except for Vegherb's intellectual property (the "IP"). Contech paid a portion of purchase price at closing (cash and some of Contech's shares), and agreed to pay the balance over the next five years. By a separate "licence agreement", Vegherb licenced Contech to enable it to utilize the IP in connection with Contech's carrying on of business (utilizing Vegherb's other assets it purchased, as aforementioned). The licence agreement provided that:
- It would terminate on the earlier of Contech paying the balance of what it owed under the purchase and sale agreement, and, Contech defaulting on its payment obligations owed to Vegherb; and
- Where termination occurred by reason of Contech paying all that it owed to Vegherb, Vegherb would then be obliged to transfer the IP to Contech, but, where termination occurred by reason of Contech's default, the licence would end and the IP would simply continue to be owned by Vegherb.
In addition to the licence agreement, Contech entered into a general security agreement with Vegherb which granted a security interest in all of Contech's presently held and after-acquired personal property, including "intangibles", this to secure payment by Contech of the balance of what it owed to Vegherb. Vegherb filed a financing statement giving notice of its security interest in the (British Columbia) Personal Property Registry claiming (as it was entitled to do) a "purchase money security interest".
Subsequently, Contech defaulted in making payment to Vegherb and that default was not remedied. Shortly thereafter, Contech made a proposal (the "Proposal") in bankruptcy under the Canada Bankruptcy and Insolvency Act. The Proposal was approved by the Chambers Judge, and it essentially extinguished Vegherb's ownership rights in the IP, vesting them in the Proposal's trustee for the benefit of Contech's creditors generally.
The Chambers Judge held that the 1998 Supreme Court of Canada case Re Giffen applied to the facts of the Contech Case. In Giffen, the ownership rights (title retention) of a conditional seller to a buyer under an agreement which provided that the buyer would not be entitled to ownership until it had paid all of what it owed to the seller, were extinguished in favour of the buyer's trustee in bankruptcy. The Court of Appeal stated that it did not disagree with the result in the Re Giffen case, but that the facts in the Contech Case were different, and that Vegherb's rights in and to the IP should be confirmed to it. The Court's reasoning emphasized, among others, these particular differences from the Re Giffen case facts:
- Vegherb's security interest was a perfected purchase money security interest. In Re Giffen, the secured party had not perfected its security interest.
- The Chambers Judge had relied on Section 20(b)(i) of the B.C. Personal Property Security Act to extinguish or terminate Vegherb's rights and interests in the IP. Section 20(b)(i) does provide that an (unperfected) security interest is "not effective" against a "trustee in bankruptcy", but not only was Vegherb's security interest perfected, but here, it was the trustee under the Proposal that was challenging Vegherb's position, not a trustee in bankruptcy.
There are other elements of the Contech Case judgement that should be of interest to secured creditors and their counsel, namely:
- Vegherb had argued that its licence agreement with Contech was just that, namely a licencing arrangement (which contemplated that ownership of the IP at all times remained with Vegherb so that consequently, upon termination of the licence agreement, Contech would cease to have any rights or entitlements pertaining to the IP, and that Vegherb's ownership interest would continue in the same manner as if the licencing agreement had never been entered into). The Court disagreed and held that (confirming the Chambers Judge's decision) the licencing agreement was in substance a security agreement. The main purpose of the licencing agreement was to give some assurance to Vegherb that Contech would pay the balance of what it owed to Contech. Thus, when Contech defaulted, Vegherb could not simply "take over" ownership of the IP (foreclose upon it), but had to comply with the requirements of the (B.C.) Personal Property Security Act applicable to a secured party who wishes to realize upon the subject matter of its security. In this regard, note that:
- Although Vegherb did not consider the licencing agreement to be a security agreement, and consequently did not register a financing statement describing the IP as secured collateral, Vegherb's general security agreement financing statement was duly registered and that security agreement covered all presently held and after-acquired personalty of Contech which, combined with the application of the rule (found in most Canadian Personal Property Security Acts) that a single financing statement is sufficient, if worded appropriately, to cover multiple security agreements, meant that Vegherb's rights and interests as a secured party under the licencing agreement were duly registered; and
- If the licencing agreement secured the IP, what role did Vegherb's general security agreement play in respect of asset coverage? The Court appears to have concluded that the GSA extended to Contech's licencee rights and interests in and to the IP.
- The Court noted that "No argument was advanced to the effect that a security interest in the IP could not, because of the federal jurisdiction over trademarks and patents, fall under the PPSA". What if such an argument had been put forward? It appears that the PPSA security regimes do apply to intellectual property, with such property falling under the description and definition of "intangibles" in the legislation. Arguably, the provincial jurisdiction (exercised by enacting personal property security legislation), is not ousted by the federal government's jurisdiction over/with respect to certain species of intellectual property (patents and copyrights in particular), because the federal legislation dealing with such intellectual property does not include or even contemplate rules respecting the taking of security interests in such intellectual property. There are of course some practical difficulties in dealing with a provincially governed security interest in intellectual property which is also governed by federal legislation, and it is probably necessary for a secured party to both take the steps required to constitute an enforceable and perfected security interest in the intellectual property, as well as taking certain additional steps to comply with the federal legislation's requirements with respect to the assignment of intellectual property.