As we reported last week, on November 1, 2019, amendments to both the Bankruptcy and Insolvency Act (the “BIA”) and the Companies’ Creditors Arrangement Act (the “CCAA”) came into force that, amongst other things, address the rights of intellectual property (“IP”) licensees. Pursuant to the Budget Implementation Act, 2018, No. 2, these amendments protect IP licensee rights upon the insolvency of IP licensors, clarify acceptable business practices, and prevent the misuse of IP rights. While the BIA and the CCAA do not provide a statutory definition of IP, Canadian IP rights are defined in IP statutes, as well as in other regulations and supporting jurisprudence.
The new legislation creates a significant change for licensed IP rights in the insolvency context. Under the previous legislation, highly valuable IP assets of a company could encourage the company to take advantage of gaps in statutory protection that provide incentives to choose specific restructuring forums to exploit the value of the licensed IP. Under the new provisions of the BIA and the CCAA, at least in theory, the treatment of licensed IP rights should be substantively identical, regardless of the type of insolvency or bankruptcy proceeding that occurs.
Prior to the recent amendments to the BIA and the CCAA, a 2009 amendment to the BIA and the CCAA limited a debtor’s right to disclaim IP license agreements if a notice of intention or a proposal was filed and the licensee continued to perform its obligations under the agreement in relation to the use of the IP. For receiverships and bankruptcies, IP license obligations were left to be determined by the common law. The outcome was that courts viewed IP licensing agreements within the receivership context as simply creating contractual agreements between parties, rather than establishing any form of property rights.
The common law approach to licensed IP rights during a receivership was outlined by the Ontario Superior Court of Justice (Commercial List) in the case of Body Blue Inc. In Body Blue Inc., title to certain IP was transferred by a receiver to a new owner pursuant to an approval and vesting order. The new owner moved for an order declaring that title to the IP was appropriately conveyed and that certain outstanding contractual or licensed rights ended. Another party, Herbal Care, claimed that they had an exclusive license for the manufacture and sale of the IP, and that the license was not affected by the approval and vesting order. The court noted that Herbal Care put forth no evidence to support any property interest in the IP and stated the following:
However, even if established, a licence agreement only creates a contractual agreement as between the parties. Even if the grant to Herbal Care to market and sell were construed as a traditional licence, it is not the case that Herbal Care acquired a property interest in such a right.
The court determined that the new owner held the IP free and clear of the alleged licensed rights, and concluded that Herbal Care did not hold any property rights in such IP.
Effect of Amendments
The new provisions of the BIA and CCAA alter the above historical process whereby receivers could disclaim IP licenses upon approval and vesting orders being granted for the transfer of IP ownership to third parties. In contrast to the previous common law method, the new provisions of the BIA and the CCAA provide more certainty to IP licensees by closing legislative gaps in insolvency or restructuring proceedings. In particular, the new provisions extend protection for IP licensees’ rights to all types of liquidation proceedings, including bankruptcies, receiverships, and asset sales, whereby there is an exception of contractual disclaimer rights granted to a debtor. The recent amendments attempt to create certainty for IP licensees, specifically as the license right will continue no matter how the licensed IP is handled, including if the IP is sold, disposed of, disclaimed, or resiliated, pursuant to any insolvency or restructuring proceedings under the BIA and the CCAA.
However, the protection provided by the new provisions of the BIA and the CCAA does have its limits. While these new provisions extend the protection of IP license rights, licensees should be aware that the new provisions won’t necessarily guarantee protection for the value of the licensed IP. For instance, a licensee may hold a non-exclusive license granted by the owner of a trademark for use of such trademark. If the trademark owner becomes the subject of proceedings under the BIA or the CCAA, protection of the licensee’s rights to continue to use the trademark under the terms of the license is granted by the new legislation. However, if the ownership of the trademark is sold to a buyer who then uses that trademark in association with goods and/or services that are inferior to those it was originally associated with, the value of the trademark itself could diminish. Therefore, the licensee of the trademark may find that while it can still use the licensed trademark, the value of such trademark may suddenly be less than it was previously.
IP licensees should still exercise caution if they suspect the IP licensor is at risk of becoming insolvent, as the new legislative amendments will not be able to preserve the value of the licensed IP in all situations. The new provisions do, however, mark a step towards greater certainty for an IP licensee that their rights will subsist in a greater number of proceedings under the BIA and the CCAA.