Recent insolvency proceedings in the entertainment industry in Germany caused various legal problems under the revised German Insolvency Act. One of the issues under discussion is whether the rights licensed under a film licence agreement revert automatically to the licensor should the licensee become insolvent.

Under general insolvency law and in line with a decision handed down by the German Federal Supreme Court, the insolvency of a contractual party does not cause the termination of the licence agreement. Instead, the court held that the contract remains in full force. However, due to the insolvency the parties are unable to enforce their respective claims under the agreement until the administrator of the insolvent party's estate decides whether to render performance under the contract.

This right is based on Section 103 of the Insolvency Act. In accordance with this provision, the administrator may opt to render or to refuse performance based on the film licence agreement, unless one of the contractual parties had already performed its respective contractual duties in whole at the time the insolvency proceedings commenced. If the administrator chooses to proceed with the contract, the licence agreement remains unaltered and the licensee may continue to exploit the film rights granted. If the licence agreement is disadvantageous to the insolvent licensee, the administrator may decide to refuse any further performance under the licence agreement. Arguably, the administrator's refusal to render performance provides a solid basis for the reversion of rights in and to the film back to the licensor.

However, in light of the Supreme Court ruling mentioned above, neither the commencement of insolvency proceedings nor the administrator's decision to discontinue performance under the film licence agreement results in the restructuring or termination of the contract. The administrator's refusal of performance merely confirms the legal status quo of the agreement at the time the insolvency proceedings commenced. Thus, based on insolvency-related events, the film rights do not revert back to the licensor automatically. The only immediate effect of the administrator's refusal to perform is the insolvent licensee's waiver of its right to demand the licensor's performance of the contract itself.

This situation would be peculiar. If the licensee refuses to exploit the film rights and the licensor has no right to exploit the film rights, the film could be exploited neither by the parties to the film licence agreement nor by any other third party. Therefore, legal discussion has centred on theories to establish the licensor's access to the film rights in such circumstances. By analogy to Section 9 of the German Publishing Act, some argue (backed by a single court decision) that the rights should revert automatically to the licensor in spite of the contrary position under the Insolvency Act. Pursuant to Section 9 of the Publishing Act, the rights granted to the publisher revert back to the author upon termination of the publishing contract. This provision is a rare exception to the principle of abstraction which is generally applicable in German law. In short, this doctrine distinguishes between contractual duties valid only with respect to the contractual parties, and rights which are enforceable against any third party. In accordance with Section 9 of the Publishing Act, the author may demand the termination both of the contractual duties and of the rights granted.

The fundamental problem with this approach is that in the chain of rights granted with respect to the exploitation of a film, the parties to film licence agreements are generally not entitled to copyright protection because German law does not provide a copyright for the producer's work. The producer is entitled merely to a neighbouring right, under Section 94 of the German Copyright Act, since German copyright law does not recognize the US-style 'work made for hire' doctrine. Thus, the producer's legal position with respect to the licensee is not comparable to the author's legal position with respect to the publisher. In turn, the termination of a film licence agreement is different from the termination of a publishing contract with regards to the underlying rights of the respective licensor. Therefore, in the event of the licensee's insolvency, an automatic reversion of rights to the producer does not appear to resolve the situation appropriately.

Instead, the licensor would have to take action against the administrator in order to reclaim the film rights, based on an unjust enrichment theory. The insolvent estate cannot assert any defences in order to prevent the transfer of the rights, unless the licensee had entered into a sublicence agreement with a third-party sublicensee prior to the commencement of insolvency proceedings. As the German principle of abstraction applies, the winding-up of the licence agreement would have no legal effects regarding the rights granted to a sublicensee on the basis of such licence agreement. However, the licensor could arguably bring forward payment claims against the administrator should the licensee still collect licence fees or other payments from the sublicensee. In order to avoid the consequence of the sublicensee's continued right to exploit the film rights, the only secure route to proceed seems to be an explicit exclusion of the German principle of abstraction in the licence and sublicence agreements.

For further information on this topic please contact Stefan R Oeter at Nörr Stiefenhofer Lutz by telephone (+49 30 2094 2000) or by fax (+49 30 2094 2094) or by email ([email protected]).