Termination of Licence Agreements
The ongoing crisis in the German media and entertainment industry reached a peak with the insolvency of numerous companies which formed part of the Kirch Group. The ensuing financial disorder prompted increased legal discussion about the application and scope of German insolvency law, which was substantially reformed in 1999. The insolvency of a party to a film licence agreement and its effects on the contract have been the subject of particular debate, especially given that no court decisions have yet been issued on this matter.
Studios, distribution companies and other licensors who have licensed or are planning to license film or similar rights should be aware that in certain circumstances it may be difficult, if not impossible, to terminate licence agreements with German licensees.
Termination of Licence Agreements
The enactment of the new Insolvency Act introduced Section 112 into German insolvency law. This provision stipulates that lease and rental agreements cannot be terminated on the grounds of the lessee's default in payment, or deterioration of the lessee's financial condition, if a petition to commence insolvency proceedings has been filed.
Section 112 was incorporated into the Insolvency Act in order to protect insolvent companies and to facilitate rescue measures. On the basis of Section 112, the administrator in charge of an insolvent company (not the lessor) will decide whether to fulfil any obligations under rental or lease agreements which the insolvent company has entered into. This provision also applies to copyright licence agreements, as under German law these contracts are viewed as substantially similar to lease agreements. As a result, the licensor may only terminate a licence agreement on the grounds of the licensee's default or inability to pay before a petition to commence insolvency proceedings is filed. Once the petition has been filed, any termination of the licence agreement on these grounds will be void.
Section 119 further provides that any agreement or contractual provision which would exclude the application of Section 112 is ineffective. Therefore, termination clauses as they are usually contained in film licence agreements are ineffective to the extent that the licensor may terminate the agreement if insolvency proceedings are commenced or applied for. Contractual termination clauses in film licence agreements should thus be revised in order to provide a termination right in the event of default in payment or substantial deterioration of the licensee's financial condition until such time as a petition to commence insolvency proceedings is filed.
Significantly, the Insolvency Act has retroactive effect and thus applies not only to licence agreements entered into after its adoption, but also to those created before its enactment.
Even where the parties to a film licence agreement have agreed on a governing law other than German law, it is likely that the courts will apply Sections 112 and 119 of the Insolvency Act. This issue has not yet been decided by a German court. However, these provisions are considered mandatory German law. Since they are designed to preserve and maintain the administrator's capacity to act, the choice of foreign law as a workaround solution would be considered ineffective.
Therefore, the licensor's termination right in the case of the licensee's insolvency in an agreement subject to, for example, California law would very likely not be upheld by a German court. As a consequence, the German licensee or its administrator could insist on the continued use of the licence granted during the licence term. The licensor has no cause of action to enjoin the licensee from further use or exploitation of the licence, and cannot claim damages based on illegal continued use of the licence.
A foreign licensor might be more successful if it obtains a judgment against the licensee in its own country and undertakes enforcement measures in Germany. A German court would have to consider whether the foreign judgment could be recognized and enforced in Germany. In the absence of any legal impediments, the German court will not deny the enforcement of a foreign judgment. Such legal impediments would be assumed if German public policy was violated. In order to satisfy the requirements for a public policy violation, the results of recognition would have to be determined a flagrant contravention of fundamental principles of German law. However, it remains to be seen whether a German court would find it a violation of German public policy just because a foreign court refuses to apply provisions considered mandatory in Germany.
For further information on this topic please contact Stefan R Oeter or Ruth Herzog at Nörr Stiefenhofer Lutz by telephone (+49 30 2094 2000) or by fax (+49 30 2094 2094) or by email ([email protected] or [email protected]).