On September 18, 2009 a number of important amendments to the Canadian Bankruptcy and Insolvency Act (“BIA”) and the Companies’ Creditors Arrangement Act (“CCAA”) went into effect. For businesses that licence patented inventions, software and other copyright protected works, trade-marks and other intellectual property rights, no change is more significant than the addition of Section 65.11 to the BIA and the equivalent provision in the CCAA. Section 65.11 states, in part:
“(1) A debtor, other than an individual, in respect of whom a notice of intention has been filed under Section 50.4 or a proposal has been filed … may … disclaim or resiliate any agreement to which the debtor is a party on the date the notice of intention or the proposal was filed by giving 30 days notice to the other parties to the agreement in the prescribed manner.
(5) If the debtor has, in any agreement, granted the use of any intellectual property to a party to the agreement, the disclaimer or resiliation of the agreement does not effect the party’s right to use the intellectual property so long as that party continues to perform its obligations in relation to the use of the intellectual property.”
Prior to the enactment of Section 65.11, if a Canadian licensor of intellectual property filed a Notice of Intention or a Proposal in bankruptcy, it was arguable that the Trustee in Bankruptcy could validly disclaim an existing licence of intellectual property even if the licensee was fully compliant with the terms of the licence and even if the licensee would suffer severe consequences as a result of such disclaimer. Consider, for example, a situation where a licensee had fully paid a one-time licensee fee for the right to use mission critical application software and continued to pay annual fees for maintenance and support services. Prior to the enactment of Section 65.11, a Trustee in Bankruptcy of the licensor could have taken the position that it was entitled to disclaim the software licence, even though the licensee had already paid its license fee in full and was ready, willing and able to continue paying for maintenance and support.
A similar state of uncertainty used to exist in the United States prior to 1985. In 1985 the decision in Lubrizol Enterprises Inc. v. Richmond Metal Fisheries Inc. held that a Trustee in Bankruptcy of a U.S. licensor could terminate all of the non-exclusive licences for a metal coating process, in order to increase the value of the sale of that technology to another company. This decision was criticized for the commercial uncertainty it created. As a result of that criticism, the United States Bankruptcy Code was amended soon after by the creation of Section 365(n). This provision provides that if a Trustee in Bankruptcy rejects an intellectual property licence, the licensee has the option of retaining its rights under the licence as they existed prior to the bankruptcy for the remainder of the term of the licence, as well as for any periods for which the licensee has the right to extend the licence.
There are several limitations to Section 365(n) of the United States Bankruptcy Code including:
- the definition of intellectual property excludes trade-marks, so trade-mark licensees cannot take advantage of this provision;
- the licensee’s rights at the time of the bankruptcy cannot be expanded, for example to include upgrades or new inventions;
- an exclusive licensee can maintain its exclusivity but cannot sue for specific performance if the licensor is in breach of such exclusivity; and
- there is no right of set-off in favour of a licensee if a licensor is in breach of the terms of the licence.
Section 65.11 of the BIA includes a number of similarities to Section 365(n) of the Bankruptcy Code but also some interesting differences. The major features of Section 65.11 can be summarized as follows:
- intellectual property is not a defined term and therefore arguably includes trade-marks as well as patents, copyrights, mask works (integrated circuit topographies) and industrial designs, but arguably does not include trade secrets (including know-how) as these are generally not considered to be property under Canadian law;
- the trigger is a debtor filing either a Notice of Intention to make a Proposal or a Proposal in Bankruptcy. The Trustee in Bankruptcy is able to disclaim most agreements, including executory contracts, to which the debtor is a party on the day the notice of intention or proposal is filed, but intellectual property licences are exempted in that the licensee can continue to use the intellectual property. Presumably, however, the Trustee can still disclaim other agreements between the licensor and licensee, such as maintenance and support agreements, which can potentially have the effect of making the licensed intellectual property useless to the licensee;
- the licensee can enforce the exclusive right to use the intellectual property so long as it still performs its obligations under the terms of the licence;
- the exception for intellectual property licences does not appear to apply to situations where creditors petition the debtor into bankruptcy as opposed to the debtor voluntarily filing a Notice of Intention or a Proposal;
- the exception for intellectual property licences does not apply to individual debtors who are licensors of intellectual property; and
- the exception for intellectual property licences does not apply to receivership situations.
The increased clarity brought to the table by the addition of Section 65.11 to the BIA and the equivalent provision in the CCAA is certainly welcome news for licensees of intellectual property in Canada, as are certain of the differences over the equivalent United States Bankruptcy Code provisions. There are, however, as noted above, certain gaps in the Canadian legislation and the significance of these gaps will become more apparent as creditors, debtors, Trustees in Bankruptcy and the Courts grapple with these issues in the coming months and years. As always, careful drafting of licences involving intellectual property is advisable, taking into account the effect of these changes.