Three Tips for Intellectual Property Licensees & Licensors Managing Counterparty Insolvency Issues

To address the economic upheaval and uncertainty stemming from the COVID-19 pandemic, many organizations may be considering insolvency and restructuring options. When intellectual property (IP) is involved, it’s important for both licensees and licensors to understand the implications and contractual issues involved. Here are three strategies for IP licensors and licensees managing the impact of insolvency on their respective counterparties to consider.

1. In the event of IP licensee insolvency, IP licensors cannot rely on insolvency clauses or failure to pay pre-filing license fees as grounds to terminate IP licences.

Many IP licences contain clauses providing the licensor with the right to terminate the licence in the event of the licensee becoming bankrupt or insolvent or initiating proceedings under certain insolvency statutes. Unfortunately for licensors, licensees who initiate restructuring proceedings under the CCAA or Division I of Part III of the BIA are protected against licensors being able to terminate IP licenses by reason of: (a) the fact of licensee insolvency alone and (b) failure by the licensee to pay pre-filing license fees.

2. In the event of IP licensor insolvency, IP licensees can continue to use the licensed IP so long as they comply with their licence obligations.

Amendments to the CCAA and the BIA in 2009 and 2018 enhanced the protection of rights of IP licensees by specifically providing that licensees can contain to enjoy IP licence rights regardless of licensor insolvency (so long as the licensees comply with their licence obligations).

3. IP licence agreements cannot be disclaimed in insolvency proceedings.

Unlike leases and many other agreements, IP licence agreements cannot be disclaimed in insolvency proceedings. In order to enhance protection of IP licence rights, Parliament has specifically restricted the application of the disclaimer remedy applicable to most other contracts in the event of counterparty insolvency.

The MLT Aikins insolvency & restructuring group comprises 18 lawyers practicing in six offices across all four western Canadian provinces. Our insolvency and restructuring experience helps our clients preserve value, capture business opportunities and resolve disputes across various sectors of the western Canadian economy.

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Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.