THE
STATUS OF INTELLECTUAL PROPERTY LICENCES IN INSOLVENCY PROCEEDINGS
1. Introduction
If
an intellectual property owner grants a licence and subsequently becomes
insolvent, can the insolvency administrator disclaim the licence? Or,
alternatively, can the insolvency administrator sell the intellectual property
free and clear of the licence? Norman Siebrasse and I explored these questions
in depth in a report we wrote for Industry Canada in 2013 and in an article,
based on the report, which was published in the Annual Review of Insolvency Law in 2014.[1] The questions recently
came up for consideration in Golden
Opportunities Fund Inc. v. Phenomenome Discoveries Inc.,[2] where the court overlooked
nearly all the key points.
2.
The
disclaimer of intellectual property licences
Section
65.11 of the Bankruptcy and Insolvency Act[3] provides for the
disclaimer of contracts in BIA proposal proceedings. Section 32 of the
Companies’ Creditors Arrangement Act[4] is a parallel provision
which applies in CCAA proceedings. BIA, s.65.11(7) and CCAA, s.32(6) apply to
intellectual property licence agreements where the debtor is the licensor and
they provide that disclaimer of the agreement does not affect the licensee’s
right to use the intellectual property during the term of the agreement,
provided the licensee continues to perform its obligations under the agreement.
These provisions are loosely based on s.365(n) of the United States Bankruptcy
Code.[5] Their immediate purpose is
to protect the licensee’s reliance interest, but the larger objective is to
preserve the licensing system as a means of sharing and exploiting intellectual
property rights.
Inexplicably,
there are no corresponding provisions for bankruptcy proceedings or
receiverships. The GOFI case involved
a receivership and the court held that the above provisions were inapplicable.[6] The court went on to hold
that, in the absence of any relevant statutory provisions and subject to any
relevant provisions in the receivership order, a receiver is not bound by the
debtor’s contracts and is free to disclaim them.[7] This is subject to the
exception that “a receiver cannot disclaim a contract that has granted a
property right”.[8]
However, in the GOFI case the court,
following Royal Bank of Canada v. Body
Blue Inc.,[9]
held that a licence “does not confer any interest or property in the thing
being licensed” and so the licensee’s rights are purely contractual.[10] The implication is that
if the receiver in the present case had sought to disclaim the licence
agreement, the court would have upheld its right to do so and it would further
have ruled that the disclaimer precluded the licensee from continuing to use
the intellectual property.[11]
But
this is wrong as a matter of both law and policy. It is a mistake to think of
the issue in terms of property rights. Disclaimer of a contract in insolvency
proceedings is a breach of contract, not rescission. The essence of a licence
agreement is that the licensor promises not to sue the licensee for
infringement, provided the licensee observes the terms of the licence. Outside insolvency,
if the licensor sued the licensee for infringement even though the licensee was
in compliance with all its obligations under the licence agreement, the
licensor would be in breach of its primary obligation under the licence
agreement and the court would disallow the action. In principle, the position
should be the same in insolvency proceedings. In other words, disclaimer of a
licence should not prevent the licensee from continuing to use the intellectual
property; if the insolvency administrator sues the licensee for infringement,
the court should disallow the action, just as it would have done outside
insolvency.[12]
Furthermore, as indicated above, there are strong policy reasons for not
allowing disclaimer. These policy reasons apply regardless of the form the
insolvency proceedings happen to take. The court in the GOFI case overlooked these
points and the case is open to criticism on this score. But more importantly,
perhaps, this aspect of the decision serves to underscore the unforgivably
patchwork nature of Canada’s insolvency laws. The rules governing disclaimer of
contracts should be the same across the board both in the interests of
consistency and to discourage forum shopping (picking and choosing between
insolvency regimes to take advantage of discrepancies between the regimes).
3.
Asset
sales and licensee’s rights
As
it happens, the receiver in the GOFI case did not seek to disclaim the licence
agreement. Instead, it applied to the court for approval to sell the
intellectual property (a patent) free and clear of the licence. BIA, s.65.13
governs asset sales in BIA commercial proposal proceedings and CCAA, s.36 is a
parallel provision applicable in CCAA proceedings. There is no corresponding
provision for receiverships, but the courts have developed a similar set of
criteria for approving asset sales in a receivership, including a requirement
that, in deciding whether to approve a sale, the court should take account of
third party interests.[13] In the GOFI case, the court held that even though the
licensee had no proprietary interest in the patent, it did have a contractual
right (presumably in the form of a damages claim) which it was entitled to pursue
against the sale proceeds.[14] The court framed the
question in terms of whether it would be unfair to permit this right to be
extinguished and on the facts of the case, it concluded that this question
should be answered in the negative. Specifically, the court found that the
licensor and licensee companies were both, in effect, alter egos of the same
human actor (Dr Goodenowe) and that Goodenowe had years previously bargained
away the licensee’s rights.
This
conclusion seems plausible as far as it goes, but it must be stressed that it
turns on the particular facts of the case. Furthermore, even if the facts had
been different and the court had found in the licensee’s favour, on the court’s own reasoning this
would have served only to keep alive the licensee’s claim for damages and the claim, being a
provable one, would be poor compensation for loss of the licence. In this
connection, the policy considerations are the same as in the context of
disclaimers: an order approving the sale
free and clear of the licence would be detrimental to the licensee’s reliance
interest and, if the licence is central to the licensee’s business, it might
trigger the licensee’s own insolvency. Furthermore, the risk that the licence
may be defeasible in the licensor’s insolvency proceedings could have a
significantly chilling effect on intellectual property licensing activity at
large. In this respect, too, the GOFI case points to the incoherence of the Canadian
insolvency laws: it makes no sense to enact provisions aimed at giving effect
to these policies in the disclaimer context, but to leave the licensee exposed
to the very same risk in the context of asset sales.
In
the GOFI case, the court overlooks the possible application
of the registration and priority rules in the Patent Act.[15] At least until recent
amendments, the Patent Act clearly required exclusive licences to be registered[16] and it further provided
that that an “assignment” was void against a subsequent assignee unless
registered.[17]
It was unclear (1) whether “assignment”
included an exclusive licence; (2) if
so, whether the provision meant that the holder of a registered licence had
priority over a subsequent purchaser of the patent; and (3) if not, what the governing
priority rule might be.[18] The disputed agreement in
the GOFI case was a non-exclusive licence and, as such,
it was clearly not registrable. But it is still not clear how the priorities
should be determined. Poolman v. Eiffel Productions [19] suggests that the federal
intellectual property registration provisions do not establish priority regimes
and that priorities between competing interests in intellectual property are
subject to provincial law, not federal law.
On
the other hand, the correctness of Poolman has been doubted. For example
Professor Vaver argues that the federal statutes do determine priorities, at
least as between registrable interests, and that there is no room for the
application of provincial laws.[20] But Vaver’s reading of
the provisions leaves open the question of how to determine the priorities
where one or more of the competing interests is an unregistrable interest.[21] Perhaps the answer is that, at least in the
case of a non-exclusive licence, the licensee
has no proprietary claim and so no question of priorities arises. In any event, to the extent that federal laws
apply to determine priorities between competing interests in intellectual
property, they should be equally relevant inside and outside insolvency
proceedings. This means that, in considering third party interests when
deciding whether to approve an asset sale in insolvency proceedings, the court
should not confine itself to asking
whether the asset sale is “fair” to the third party; it should also ask whether
and, if so, how, the federal intellectual property laws might apply.
In
the broader scheme of things, there is a strong case for reforming the
intellectual property laws to establish a modern and comprehensive system for
the registration of intellectual property interests and a coherent set of
priority rules, along the lines of the provincial Personal Property Security
Acts. If the government were to grasp
that nettle, the new priority provisions would clearly be front and centre in
any asset sale proceedings involving intellectual property.
Anthony Duggan,
Hon. Frank H.
Iacobucci Chair,
Faculty of Law,
University of
Toronto
[1]
Anthony Duggan and Norman Siebrasse, The Treatment of Intellectual Property Rights
in Insolvency : Report to Industry
Canada (September, 2013); “The Protection of Intellectual Property Licences
in Insolvency: Lessons from the Nortel Case [2014] Annual Review of Insolvency Law 19.
[3]
RSC 1985, c.B-3 (“BIA”).
[4]
RSC 1985, c.C-36 (“CCAA”).
[5] 11USC s.365 (n) (2012)
[6] At
[21].
[7] At
[23], quoting from an unreported judgment of Meschishnick J. in the same
proceedings (July 19, 2016) at paras 8-10 which, in turn, cites Bennett on Receiverships (Toronto: Carswell, 1999) at 341.
[8] Ibid.
[9]
(2008) 42 CBR (5th) 125, 2008 CanLII 19227 (Ont. SCJ).
[10]
At [18].
[11]
As it happens, the receiver did not seek to disclaim the licence agreement, but
instead applied for approval to sell the intellectual property free and clear
of the licence (see further below).
[12]
Duggan and Siebrasse [ARIL], supra note 1 at 33.
[13]
See Toronto-Dominion Bank v. 101142701
Saskatchewan Ltd 2012 SKQB 289, quoted
in the GOFI case at [27].
[14]
At [25].
[16]
Section 50(2), now replaced by s.49(3).
[17]
Section 51, now replaced by s.49(4), replacing “assignment” with “transfer”.
[19]
(1991) 35 CPR (3d) 384 (Fed.TD). Poolman was a copyright case, but its reasoning seems
equally applicable in the patents context.
[20] David
Vaver, Copyright Law (Toronto: Irwin
Law, 2000) at 248.
[21]
Duggan and Siebrasse at 45.
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