A lot is written about structuring robust intellectual property licensing programs, whether from the perspective of licensors or licensees of intellectual property rights. This requires a careful consideration of legal, tax and regulatory issues that impact on the licensing arrangement.

The legal risks can’t always be managed adequately through the careful negotiation and drafting of a licence agreement. Some of these risks need to be managed independently of the drafting of any agreements.

One example of this is the risk to the licensee of the licensor (owner of the intellectual property rights) becoming insolvent. This is an issue that has become particularly relevant in recent years with an increase in insolvencies.

In some countries, such as the United States there is limited bankruptcy protection for licensees of intellectual property - so-called Section 365(n) protection under the Bankruptcy Code. Care needs to be exercised in relying on this, even in the United States, as the definition of  “intellectual property” under the Code refers to trade secrets, U.S. patents and patent applications, copyrights and mask works. It does not include trade marks and certain other categories of intellectual property.

How best to manage this issue

The licensee should firstly consider the principles that govern the validity of licensing arrangements after insolvency/bankruptcy in the jurisdictions in which the licensor and the licensee are based. If the licensee is concerned about the survival of the licence, beyond the insolvency of the licensor, then consideration can be given to including provisions in the licence agreement to secure survival of the licence beyond insolvency. It is not always possible to draft enforceable provisions dealing with these issues. As a result many licensees resort to requiring that the licensor deposit the intellectual property into an insolvency remote Special Purpose Vehicle (“SPV”). This is a model that is becoming increasingly popular amongst leading brand and technology licensees.