SITUATION UNDER CONTROL" by Veikko Myller. AIPPI Forum Helsinki 2013 IP Licensing & Insolvency Bernt Juthström

Transcription

1 SITUATION UNDER CONTROL" by Veikko Myller AIPPI Forum Helsinki 2013 IP Licensing & Insolvency -

2 Why a (patent) license? Manufacture of a product in accordance with a certain standard may require a license Inclusion of new feature in a product based on technology invented by other. Wish to respect other s IPR Maybeacquired in a swap of technologies, i.e. a cross-license deal Right to use patented technology invented by someone else without fear of infringement proceedings, injunctions or other intervention

3 License agreements rarely take into account insolvency aspects, except for in the termination clause. Example of a typical termination claue: This agreement may be terminated in writing by either party, with immediate effect upon the other party: (i) becoming insolvent; (ii) filing for any form of bankruptcy; (iii) making any assignment for the benefit of creditors; (iv) having an adminstrative receiver appointed over its assets; (v) ceasing to conduct business; or. In case of the insolvency of the licensor it is not in the interest of the licensee to terminate, but that the license is continued regardless of the insolvency. In case of the insolvency of the licensee, it may be in the interest of the licensor to terminate, but is the provision enforceable?

4 Questions What will happen if the licensor or licensee becomes insolvent? Will the license be available according to its terms or will mandatory provisions of insolvency laws kick in? What can the licensor or licensee do to protect its position?

5 Forms of insolvency proceedings in Finland Bankruptcy (Bankruptcy Act) Compulsory liquidation/winding up of an insolvent company in order to satisfy its creditors claims in compliance with the relevant provisions of creditors priority. Company administration (Administration Act) Restructuring/rehabilitation of an insolvent company in order to enable it to continue its operations as a going concern in order to repay a larger part of its debts than would be possible in bankruptcy. A voluntary, contractual debt restructuring is also possible under Finnish law.

6 1st scenario: The insolvency of the Licensor

7 Will the insolvency of the licensor lead to the loss of the license? Bankruptcy Yes, this could happen in Finland. The situation may vary from jurisdiction to jurisdiction. Administration No.

8 Licensee s risk position in case of a premature termination of the license may vary depending on the circumstances. More to loose Less to loose

9 Continuity of pre-insolvency contracts Bankruptcy In the event of bankruptcy, the bankruptcy estate will replace the bankrupt company as the contractual counterparty. The bankruptcy estate has the right to continue agreements which have not been fulfilled, but the estate does not have an obligation to continue ( cherry picking ). Administration The administration will not, in principle, have direct impact on the continuity of the contracts involving the company in administration. In situations where the insolvent company is the licensee, the license may be terminated by the administrator by observing a short notice period.

10 Continuity of pre-insolvency contracts It would appear to be the prevailing view that a bankrupt company cannot be forced to continue a license. Bankruptcy law s principal objective is to sell all assets of the bankrupt company and use the net proceeds to satisfy, to the extent possible, all creditors of the debtor. The liquidator has an obligation towards the creditors to sell the assets of the bankrupt company in a way that yields the best possible net proceeds in the curcumstances.

11 The licensor s bankruptcy estate s right to step into the license on the one hand and lack of obligation to do so, means in practice that the bankruptcy liquidator may pick and choose which contracts to assume and reject. However, it is the liquidator s duty to try to achieve as good economical outcome to the creditors as possible.

12 How a Finnish bankruptcy liquidator may look at various options in the licensor s bankruptcy - In case of running royalties, the liquidator may want to step into the license to secure and collect the future revenue stream. - Sell patents subject to existing encumbrances (the lisence) or sell the future license revenue as well. - Alternative: negotiate a lump sum royalty with the licensee to allow the estate to wind-up all business. - If there is no future revenue stream (license being fully paid up), the liquidator may choose to not step into the license. - Sell the patents free of encumbrances (if license interest not registered) - Licensee s claim for damages because of premature termination is an unsecured bankruptcy debt.

13 What can the licensee do to prevent a termination of the license in case of licensor s bankruptcy? The licensee may record its interest in the license with the Finnish Patent Register (or equivalent register for other IPs). The registered license interest can be invoked against a bona fide new transferee of the patent, including the creditors of the licensor in case of a bankruptcy. Unregistered licenses are not protected against bona fide new transferees. Although it would be a recommendation to register licenses of Finnish patents, it is very rare that licenses are registered in the patent register! Perceived as an administrative burden.

14 The possibility that an unregistered license may be extinguished for the benefit of a bona fide transferee or the licensor s creditors is far from satisfactory to the licensee and different from the situation in many other countries. E.g. in Sweden it seems that an unregistered licensee gets protection against later transfers or licenses on the basis of time priority according to the date when the license/transfer was made. Rationale: To protect licensee s investments in the licensed technology.

15 Time priority without registration a better solution? Time priority approach (without need for registration of license) was used in old Proposal for a Council Regulation on the Community Patent (COM/2000/0412) Article 15.4: Subject to Article 6(1), a transfer shall not affect rights acquired by third parties before the date of transfer This approach was also advocated by IP interests in conjunction with the revision of the Finnish Bankruptcy Act, but did not lead to a change of current rules. Or would the best solution be to have compulsory registration of licenses? This would make it possible to always obtain public information on the free licensing potential of an IP, but would be a huge administrative burden for the industry.

16 Task for AIPPI? Map the provisions on continuity of license in case of bankruptcy in different countries? Advocate for the introduction of clear rules on continuation of licenses in case of licensor s bankruptcy. License agreements normally concern worldwide IP portfolios common worldwide approach on clearer rules welcome. Time priority rule (without need to register interest in license with local patent registrar) could be a workable solution? But would not resolve all problems. Time priority rule is already accepted in some jurisdictions.

17 What else can the licensee do to prevent a termination of the license in case of licensor s bankruptcy? Pay any royalties that are due pursuant to the license. Failure to do so will give the insolvent licensor/estate the right to terminate the license. If the liquidator does not pay the renewal fees in respect of the license, this may jeopardise the continued existence of the IP right, which may be problematic in some industry sectors. The licensee may consider obtaining step-in rights to pay renewal fees in the event the liquidator threatens not to pay or alternatively the licensee may consider purchasing the IP.

18 2nd scenario: The insolvency of the Licensee

19 Issues for a licensor with an insolvent licensee Unpaid royalties accrued upto the bankruptcy date/date of commencement of administration. Are there mandatory provision under insolvency laws that make provisions of the license unenforceable? Can the license be terminated because of the insolvency in accordance with its provisions on termination? If not, who will pay the royalties post-commencement of insolvency proceedings. If not, can the licensor be sure that the provision of the license that prohibits the licensee to assign the license to a third party will be enforceable and that the liquidator will not sell/assign the license to an unwanted licensee?

20 Unpaid royalties Unpaid royalties are ordinary unsecured debts in the bankruptcy and administration proceedings unless the licensee has provided a security for the payment of the royalty.

21 Continuation of license Under the Finnish Bankruptcy Act, the bakruptcy estate has the right to enforce continuation of agreements whose obligations have not been fulfilled at the commencement of the bankruptcy proceedings by (i) notifying the counterparty of its wish to continue; and (ii) providing the counterparty sufficient security for the liabilities of the bankruptcy estate. The counterparty may object to such continuation only on grounds that the agreement involves such personal qualities or other specific reasons that the continuation would be unreasonable. Similar provision in the Administration Act.

22 Continuation of license Any provision in a license agreement that gives the solvent party the right to terminate the agreement because of the insolvency of the other party is, as such, unenforceable. Rationale: termination upon insolvency as such removes further value from the insolvent company and reduces the chances of any sort of value rescue. If the liquidator is still able, and willing, to make payments (and puts up security) due under the license, why should the licensor terminate? The licensor would still have the right to terminate the license if the bankruptcy estate would breach the license.

23 Unwanted licensees Licensors can often be sensitive as to the identity of their licensees. They may not want competitors to end up as their licensees by way of assignment of the license or a purchase of the licensee. Licensors may therefore want to ensure that the licence cannot be assigned without their consent. Licensors may also want to have a change of control provision in the license, allowing them to terminate where the control of the licensee is transferred to a third party.

24 Unwanted licensees; provisions to be considered under Finnish law Patents Act, Section 43: License assignable only if agreed that it may be assigned. In effect this means that the bankruptcy estate and the administrator cannot assign the license to a third party unless the license provides for this. Bankruptcy Act, Chapter 5, Section 3: A contractual condition restricting the right of the debtor to assign movable property to a third party shall not be binding on the bankruptcy estate..

25 Unwanted licensees; provisions to be considered under Finnish law The Finnish Copyright Act (s. 28) and Design Act (s. 26) contain similar provision on prohibition to assign a license unless otherwise agreed, but allow assignment in case of a business transfer of substantially all of the licensee s assets. The Patent Act is silent on business transfers. It has been regarded by some academics, that a contractual provision restricting the right for the licensee to assign the patent license in a business transfer is not enforceable in a bankruptcy sale (as is the case with copyrights and designs). The legal situation is unclear with regard to patents - no case law on assignment of patent licenses in forced sale.

26 Another task for AIPPI? The unclarity on enforceability of non-assignability and change of control provisions in patent license agreements is unsatisfactory from the licensors point of view probably also outside Finland. Reason for AIPPI to map the situation and form a view? Licensor s right to decide on the identity of its licensees is fundamental. Setting aside this right for the benefit of facilitating the liquidator s possibilities to sell the bankrupt s assets as a going concern could in the worst case lead to a strategic license ending up with a fierce competitor.

27 Conclusion Parties to agreements expect that the agreement will be enforceable according to its terms. Insolvency proceedings of a licensor or licensee of an IP license agreement may lead to unpleasant surprises. To some extent it is possible to avoid such surprises, but mandatory rules cannot be contracted out. Register the license with appropriate national IP offices (Finland) Monitor and manage important license relationships to identify early warning signs of insolvency gives possibility to be proactive and react before the mandatory insolvency laws kick in. The conflict between provisions in IP laws and insolvency laws may lead to unclear collision situations. Clearer rules for such situations would be welcome.

28 Thank you! WASELIUS & WIST ETELÄESPLANADI 24 A HELSINKI FINLAND TEL FAX "Man of Justice II" by Veikko Myller