Mary-Rose McGUIRE; Jan DOMBROWSKI, Clemens HEUSCH, Oliver SCHERENBERG, Christian STOLL, Lea TOCHTERMANN

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1 Question Q241 National Group: Germany Title: IP licensing and insolvency Contributors: Mary-Rose McGUIRE; Jan DOMBROWSKI, Clemens HEUSCH, Oliver SCHERENBERG, Christian STOLL, Lea TOCHTERMANN Reporter within Working Committee: Mary-Rose McGUIRE; Date: 30. May 2014 Questions I. Current law and practice 1) Does your country have a registration system for IP licenses? At present German IP-law takes an ambivalent position with regard to registration of licenses: first the rules on whether a license can be entered into the register differ with regard to the IPR concerned, second even if such registration takes place it is of limited effect. With regard to patent law Sect. 30 (4) PatG (Patent Act) provides that on request of the patentee or the licensee the Patent Office shall enter the grant of an exclusive license, if the applicant furnishes prove on the agreement between both parties concerned. However, the context of the provision and in particular the subsequent sentence 1 suggest that the main function of the entry is to clarify the existence of an exclusive license with regard to licenses of right and compulsory licenses, as both naturally are not available if an exclusive license is in place. 2 This purpose at the same time explains why registration is limited to exclusive licenses and why a similar rule is contained in Sect. 28 (5) SortenSchG (Plant Variety Act) and applicable to utility models (cf. Sect. 20 GebrMG (Utility Model Act)), whereas other IP statutes do not contain similar rules applicable to trademarks, designs or semiconductors. This assessment is further confirmed by the fact that the entry is of very limited effect. As the patent register in general only has declaratory effect neither the licensee can derive any rights from the entry nor may a transferee or potential further licensee rely on a clear register to ascertain the ability of the patent holder to grant a valid license. 1 Sect. 30 (4) 2 Patent Act reads: A request under sentence 1 shall not be admissible for the duration the willingness to grant a license of right is declared. 2 Schulte-Rudloff-Schäffer, Patentgesetz (2014) 9, 30 PatG, note 54. 1

2 2) Describe the type or types of bankruptcy and insolvency proceedings that are available in your country. The rules on insolvency originally were contained in the Konkursordnung (KO) of 1877 (Bankruptcy Act), which has been replaced by the Insolvenzordnung (InsO) 1999 (Insolvency Act), which entered into force on January 1 st, Although its main purpose remains to be the common realization of the liability of the debtor's property the concept of insolvency has undergone major changes. With regard to the current questions three of them should be highlighted: first that insolvency proceedings are now much more determined by the autonomy of the creditors, second that the possibility of self-administration of the debtor has been introduced and third a debtor may, if he is a natural person, achieve a discharge from all remaining obligations after six years (cf. Sect. 287 (2) InsO: so called 'Restschuldbefreiung'). Further it should be mentioned that the aim of reorganization (instead of liquidation) has found its way into the InsO 3 and to this end has broadened the discretion of both the court and the administrator. However, this further aim is not mirrored by a separate type of proceedings. The current InsO therefore only provides one type of insolvency proceedings, which may be adapted to particular needs. This for instance applies in case of minor remaining means (so called simplified insolvency proceedings) or in case the debtor qualifies as a consumer in the meaning of Sect. 13 BGB (Civil Code) (so-called consumer insolvency proceedings). By contrast the so-called preliminary insolvency proceedings are not a separate category but only provide particular rules in order to institute insolvency proceedings at an early stage. However, all these particular rules in the end are only specific expressions of a uniform type of insolvency proceedings. 3) Does the law that governs bankruptcy and insolvency proceedings in your country address IP rights or IP licenses as distinct from other types of contracts, assets, and property rights? The InsO does not expressly regulate the effects of insolvency on a license contract. The current IP statutes only contain a single rule on license contracts and are equally devoid of a rule on the impact insolvency of one of the parties will have on the respective contracts. The only rules to the point are that the insolvency of the right holder on application of the insolvency administrator or upon request of the insolvency court can be entered into the register (cf. Sect. 29 (1) MarkenG (Trademark Act), Sect. 30 (3) DesignG (Design Act)). This at least clarifies that insolvency will also encompasses IP-rights. Lacking further specific rules for IP we therefore have to turn to the general rules, which may be derived from the InsO and the BGB. The InsO relies on the general categories and rules of private law, which are molded by the BGB. According to the BGB s general structure, which differentiates between rights in rem and contractual rights, it provides corresponding rules on the treatment of assets and contracts. The InsO in this regard only contains more particular rules insofar as the legislator held that the application of the general structure would not lead to fair results or would neglect public or individual interests of higher rank. A good example may be found in Sect. 108 InsO, which provides that the general rule on disposal of the administrator (i.e. Sect. 103 InsO) is restricted with regard to tenancy contracts for apartments/private housing in the event of the lessor s insolvency. According to the general rule laid down in Sect. 103 InsO the administrator may terminate any contract, unless at least one party has fully discharged its duty before the proceedings were instituted. This general rule will apply to all contracts unless an express exception is provided for. 3 Sect. 1 InsO [Objectives of the Insolvency Proceedings] reads: The insolvency proceedings shall serve the purpose of collective satisfaction of a debtor's creditors by liquidation of the debtor's assets and by distribution of the proceeds, or by reaching an arrangement in an insolvency plan, particularly in order to maintain the enterprise. Honest debtors shall be given the opportunity to achieve discharge of residual debt. 2

3 The fact that license contracts are not within the enumerated list of contracts explicitly set out by the BGB has for many years lead to a discussion on how they could be categorized according to the latter s structure. The fact that license contracts are long-term contracts has spiked the discussion whether they will come under the heading of rent and lease contracts. The pre-dominant legal opinion and the standing judicature for almost hundred years in fact have qualified license contracts as (quasi-)lease contracts. Accordingly the predominant opinion has without much discussion applied the specific rules contained in Sect. 21 KO to license contracts. This also explains why German scholarship for many years did not pay any attention to our present problem; and why there are no reported cases of relevance. However, in the course of the reform the rule on preferential treatment of lease and rent contracts previously contained in Sect. 21 KO has been limited by the current version of Sect. 108 InsO to contracts concerning immoveable property. Accordingly, they can independent of whether license contracts are lease contracts no longer be applied to license contracts. Despite an ongoing discussion, whether the omission of license contracts by the new law was a chosen restriction or an accidental gap, the InsO at present does not include any specific rules addressing license contracts. 4) Please answer the following sub-questions based upon the law and jurisprudence in your country that governs bankruptcy and insolvency proceedings: a) Describe the law and its effects on a bankruptcy administrator s ability to adopt, assign, modify, or terminate an IP license. The general rule with regard to contracts may be found in Sect. 103 InsO. 4 It states that the administrator may choose whether he wants to uphold or terminate contracts, which at the time of instituting the insolvency proceedings have not yet been fully performed by both parties. Lacking more specific rules for license contracts the recent judicature 5 and the predominant legal opinion 6 hold that the same rule applies to license contracts. The application of Sect. 103 InsO has two main requirements. First, it must be a mutual contract, i.e. impose reciprocal rights and obligations on both parties and second, these obligations must not have been fully discharged by either party at the time insolvency proceedings are instituted. If these requirements are met Sect. 103 InsO will apply irrespective of whether the insolvent party is licensor or licensee. The administrator has a right to choose between either continuing the license agreement, i.e. retain his rights and fulfill all the obligations resulting from it, and the rejection to further perform the license agreement, i.e. riding the debtor of his duty to perform and waive his right to counter-performance. If the insolvency administrator opts for performance, then the original agreement becomes enforceable again. The solvent licensor remains obliged to grant the license and the debtor s fees will constitute a preferential debt; the solvent licensee remains obliged to pay license fees, which will flow into the insolvency estate. The respective claim for performance will become a preferential debt of the estate. In case the administrator later disposes of the IPR, the license will remain unaffected by the transfer. 4 Sect. 103 InsO [Option to be Exercised by the Insolvency Administrator] reads: (1) If a mutual contract was not or not completely performed by the debtor and its other party at the date when the insolvency proceedings were opened, the insolvency administrator may perform such contract replacing the debtor and claim the other party's consideration. (2) If the administrator refuses to perform such contract, the other party shall be entitled to its claims for nonperformance only as an insolvency creditor. If the other party requires the administrator to opt for performance or non-performance, the administrator shall state his intention to claim performance without negligent delay. If the administrator does not give his statement, he may no longer insist on performance. 5 BGH, GRUR 2006, 435, 436 (Softwarenutzungsrecht). 6 McGuire, GRUR 2012, 657, 657; Berger, GRUR 2004, 20, 21. 3

4 If by contrast performance is rejected the contract will be suspended and thus is unenforceable. Although there has been some controversy on the underlying mechanism, i.e. whether the license falls back ipso iure or whether it has to be retransferred, 7 it is widely accepted that the administrator s rejection to perform de facto leads to a lapse of the license, the claim for counter-performance is replaced by a right to claim damages for non-performance, para 103 (2) InsO. The solvent party in turn will depending on whether it is the licensee or licensor be released from his duty to grant use to his IPR or pay the fees respectively. The fact that Sect. 103 InsO only applies in case the contract has not yet been fully performed by one party has spiked the discussion, whether license contracts can be protected by means of advance performance of one party. It is suggested that the licensee for instance by making a lump sum payment and waiving all entitlements arising from the licensor s secondary contractual obligations could avoid the administrator s right of rejecting performance 8. However, this concept appears to be in an open conflict with the concept that a license contract is a long-term contract. Lacking established judicature on this question it at present thus cannot be stated whether this is a route to protection. Looking at the provision from the perspective of the administrator it must be emphasized that under Sect. 103 InsO his options are restricted to adhering to the contract or rejecting performance, whereas he is not entitled to modify it according to his needs. In practice of course the administrator can hint at his power to reject performance and use this as an incentive to renegotiate the contract. With regard to assignment it may be added that the question whether the IPR or the license may be assigned will be governed by the respective IP-statute and not by the InsO. According to the general rules the fact that a license has been granted will not impede the transfer or the IPR as such. The interests of the licensee in this case are protected by the rules on the so-called protection against succession, i.e. the license will remain in place and entitle the license vis-à-vis the new right holder. 9 Similarly the question whether the license is transferable is governed by the general rules. According to the predominant opinion an exclusive license is transferable unless otherwise provided by the contract, whereas the exact opposite applies in case of a simple license. 10 Please note that the considerations outlined above represent the prevailing opinion. Different views in this regard are mentioned under 4 f) and 4 h). b) Are equitable or public policy considerations relevant to how an IP license is treated? No, Sect. 103 InsO applies and leaves the discretion to the administrator, who will take his decision in the best interest of the insolvency s estate. 11 The priority of his duty to augment the debtor s ability to settle his financial debts is underlined by the administrator s liability to all parties of the proceedings, including the creditors involved. 12 c) Is the law different for different types of bankruptcy and insolvency proceedings in your country? No, as stated above (cf. no. 1) the InsO just provides for one type of insolvency proceedings. 7 Accordingly it is recommended to include a fall back clause relieving the uncertainty. Such fall back clause is considered permissible, because it does not interfere with the administrator's right under Sect. 103 InsO, cf. Schmoll/Hölder, GRUR 2004, 743, BGH, GRUR 2006, 435, 436 (Softwarenutzungsrecht). 9 For more specific explanations on the effects on the different parties involved, cf. no BGHZ 62, 272 (Anlagengeschäft); Ingerl/Rohnke, MarkenG (2010) 3, 30 note 14. Haedicke/Timmann, Handbuch des Patentrechts (2012), 4 note 99 ff. 11 Braun, InsO (2012), 103 note Cf. Sect. 60 InsO. 4

5 d) Does the law require, or give preference to, IP licenses that have been registered according to a registration scheme? No, as stated above (cf. no. 1) the possibility to register licenses is restricted to exclusive patent, utility model and plant variety licenses and has no effect on their treatment in case of insolvency. e) Would the existence of a pledge of or security interest in the IP rights for the benefit of the licensee affect application of the law in the case of an insolvent licensor? Yes. As mentioned above (cf. no. 3) the InsO provides for different rules on rights in rem on the one hand, and contracts on the other. Whereas contracts are at the disposal of the administrator by virtue of Sect. 103 InsO, rights in rem as a general rule are protected by Sect. 47 InsO. The latter entitles the holder of rights in rem to separate the assets from the estate. If there is a pledge or security interest granted with respect to the IP right in favor of the licensee, it would accordingly entitle him to separate the IP right from the assets of the insolvent party. The administrator could no longer exploit the IPR. Thus he would be entitled to reject the performance of the license contract, but due to the security interest in the IPR the former licensee might still be entitled to use the IP right as of his own right. With regard to a pledge in the IPR it would entitle the pledgee to demand transfer of ownership of the IPR. With such transfer the entitlement of the administrator to dispose of the IPR, of course, must end. However, it must be emphasized that these possibilities are rarely used as the right holder in general will not be willing to grant a security interest or pledge to the licensee, as they will not pertain to the license, but rather to the IPR as such. Accordingly, the realization of the right in rem would lead to a far-reaching entitlement of the licensee going well beyond the rights resulting from the license contract. f) Is the law limited to or applied differently among certain types of IP rights (e.g., patents versus trademarks or copyrights)? If yes, please explain. The answer to this question spikes the need for a clarifying remark. As neither the InsO nor the respective IP-statutes contain any detailed provisions on the issue of insolvency there is no basis for a distinction whether the IPR entangled by insolvency is a patent, trademark or copyright. Despite the fact that the statutory rules applicable to licenses in insolvency are similar for all IPRs it however must be stated that both in legal doctrine and in judicature some discrepancy has arisen between copyright, trademark and patent law. It in particular concerns the question what entitlement a license confers on the licensee, i.e. whether it is merely a contractual position or goes beyond such and resembles a (quasi-)right in rem. The predominant position on this question differs between the disciplines. For instance some authors have argued that an exclusive patent license confers a right in the asset in the meaning of Sect. 47 InsO 13. The same has been argued with regard to copyright, where this rule is supposed to apply to both exclusive and simple licenses 14. However, it should be emphasized that this position does neither imply that a distinction should be drawn with regard to the type of IPR concerned, but merely reflects the focus of the respective author s preoccupation with a specific IPR, nor has such differentiation been supported by current judicature. In practice some difference, of course, may result from the fact that copyrights under German law are non-transferable. Accordingly, the options of the parties for contractual arrangements are limited. In particular the prohibition of transfer naturally entails the fact that no pledge or security interest can be vested in a copyright. g) Does the law apply differently to sub-licenses versus main licenses? 13 Ganter, NZI 2011, 833, Scholz, GRUR 2009, 1107,

6 In general Sect. 103 InsO and the principles mentioned above (cf. no. 4 a) apply to all contracts and thus do not differentiate between licenses and sub-licenses. This means that the administrator has the same option with regard to all contracts be it a license or a sub-license contract to which the debtor is a party. However, the fact that Sect. 103 InsO applies to both a main license and a sub-license contract also implies that the administrator of the main licensee, i.e. the middle piece of a license chain, may exercise his right to uphold or terminate the respective contract independently. This has spiked some discussion whether the refusal of performance of the main contract will have any effect on the refusal of the sub-license. Assuming that the right holder (A) has granted a license to the main licensor (B), who in turn granted a sub-license to the sub-licensee (C) this will produce the following results: If right holder A, party to an exclusive main license contract, becomes insolvent the administrator may reject to perform the main license with the licensee at the same time sub-licensor B. Not being party to the sub-license contract he, however, cannot interfere with the latter. Whether the sub-license is inflicted by the fact that the main license has been terminated is a matter of controversy. According to recent judicature the rejection to perform the main license will not have any impact on the sub-license. 15 Thus the sub-licensee C remains entitled to use the license. The licensee/sub-licensor B will then be obliged to assign the claim for the sub-license fee to A s administrator. If the insolvent party is B, i.e. the licensee of the main license and sub-licensor with regard to C, the administrator with regard to both contracts has the right to choose between the continuation and the rejection of the further performance and is not obliged to exercise the right in the same way. This means the administrator in theory can, for example, continue the main license with the right holder (A), but rejects to perform the sub-license (C) and vice versa. If the administrator decides to reject the further performance of the main license (A B) but to continue the sub-license (B C), the rejection in respect to the main license does not necessarily result in the termination of the sub-license. Again the administrator, however, will be obliged to assign all income from the remaining sub-license to the right holder (A), as he without justification generates income from the exploitation of an IPR attributed to the right holder. h) Does the law apply differently to sole or exclusive licenses versus non-exclusive licenses? According to the prevailing opinion in legal theory the rules apply uniformly independent of the type of license concerned. A differentiation only has been favored by those authors who argue that exclusive licenses by their legal nature confer more than a contractual entitlement (cf. no. 4 f). The outline of their argument is as follows: Granting a license is supposed to be a partial transfer of the IP-right as such. Accordingly, the licensor fulfils his obligation at the time of the grant. If he later defaults he has already fully discharged his obligation. Sect. 103 InsO would not be applicable because the requirement of mutually undischarged obligations is not met (cf. no. 4 a). This concept has gained ground with regard to software license contracts, which contain a buyout-agreement, i.e. contracts that from an economic perspective would be a full transfer/sale if such were not prohibited under German Copyright Law. But apart from this specific situation the Federal Court has repeatedly confirmed that a license agreement consists of the licensee s right of use or exploitation regarding an IP-right and his corresponding running duty to pay license fees. As these obligations persist for the entire duration of the contract Sect. 103 InsO does apply to license contracts BGH July 19th, 2012 I ZR 24/11 (Take Five) = GRUR 2012, 914, I ZR 70/10 (M2Trade) = GRUR 2012, 916, and I ZR 153/06 (Reifen Progressiv) = GRUR 2009, Cf. BGH, NJW 2006, 915,

7 i) Does the law apply differently if the bankrupt party is the licensee versus the licensor? In general the same law and the same provisions apply in both cases. However, the legal consequences might differ (cf. no. 4 a). 5) Would a choice of law provision in an IP license agreement be considered during a bankruptcy or insolvency proceeding in your country? Is this affected by the nationalities of the parties to the IP license or by the physical location of the assets involved? In order to answer this question a distinction must be drawn between first the question whether a choice of law provision will be respected and second, whether it will have any impact on the treatment of licenses in insolvency. The question whether a choice of law provision will be respected is a contractual question. The rules on conflict of law with regard to contracts are contained in the Rome-I-Regulation. 17. According to Art. 3 Rome-I the parties are free to choose the applicable law. As the administrator acts on behalf of the debtor he is bound by the contract as it has been concluded by the latter. Hence, if the choice of law provision in a license contract for example calls for the application of French law with respect to the contract, this choice is respected. However, whether and to what extend a contractual stipulation for the case of insolvency will have the force to alter the treatment in case one of the parties default is not a matter of contract law, but of mandatory insolvency law. 18 In fact the effect of the insolvency proceedings on the license contract as a whole has to be determined, before the impact of a specific contractual provision is analyzed. Therefore the first step in an insolvency proceeding with cross border elements is to determine the law applicable to the insolvency proceeding. According to Art. 4 European Insolvency Regulation 19, the applicable insolvency law is that of the Member State within the territory of which such proceedings are opened (lex fori principle). If insolvency proceedings are opened in Germany, German insolvency law will apply as the lex fori. As stated above (cf. no. 3), the German InsO heavily relies on the general categories and rules of private law as provided for in the BGB. According to these categories the only relevant question is whether the rights conferred on the parties are contractual or (quasi-)rights in rem. The question which contract law governs a specific contract is a contractual question and therefore irrelevant. This would even be the case if the respective chosen legal order contains specific rules on the treatment of licenses in insolvency, as the rule of Sect. 103 et seq. InsO is mandatory and cannot be replaced by a choice of law. Just for the means of clarity it should also be mentioned that a choice of law provision is of no relevance for the question of a third-party-effect of a license contract; and more specifically whether it is protected in the event of an insolvency. According to the concept of the German InsO this questions is not attributed to the field of contract law, but to the field of IP law. Here, according to the principle of territoriality the law of country of protection is mandatory. 20 Thus, if the license contract concerns a patent granted for Germany, the effect of the license agreement on third parties will be determined according to Sect. 15 PatG. If the same license contract cov- 17 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I). 18 Such as Sections 103 et seq., 112, 119 InsO, cf. infra no Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings. 20 Staudinger-Fezer/Koos, EGBGB/IPR, Internationales Wirtschaftsrecht, Internationales Immaterialgüterprivatrecht (2010), note

8 ers patents which are granted for other jurisdictions their respective patent law will be taken into consideration. For all these considerations, the nationality of the parties to the IP license or the location of the assets involved is without relevance. 6) Would a clause providing the solvent party in an IP license agreement the right to terminate or alter an IP license be considered enforceable during a bankruptcy or insolvency proceeding in your country? Would the answer be different if the clause provides for automatic termination as opposed to an optional right to terminate? In the event that the licensee becomes insolvent, the licensor may wish in many cases to terminate the license agreement because the licensee's ability to fully perform the license agreement is limited after insolvency proceedings are opened. By contrast it is rather unlikely that the solvent licensee would wish to terminate the license agreement. As stated above (cf. no. 3) there is some discussion on whether a license contract can be qualified as a lease contract. As the Insolvency Act comprises specific rules on the termination of lease contracts in the case of insolvency of the lessor, we also with regard to license contracts have to distinguish whether the licensor or the licensee defaults. Sect. 112 InsO sets forth that lease agreements may not be terminated by the lessor after the lessee filed a petition in insolvency in case the termination is based on the lessees financial crisis. Although it does not explicitly mention license agreements, however, the prevailing opinion is that license agreements are covered by this statutory law provision. 21 In consequence, the mere fact of the licensee s nonperformance of its payment obligation under a license agreement would not allow the licensor to terminate the license agreement, in case this nonperformance takes place after the petition in insolvency. Any contractual stipulation deviating from this prohibition, i.e. granting the licensor a right to terminate the contract due to non-payment of license fees, would be null and void according to Sect. 119 InsO which prohibits the circumvention of any statutory provisions explicitly including Sect. 112 InsO. The same applies to a condition subsequent in case of the insolvency of one of the contractual parties. By virtue of Sect. 119 InsO the same will apply in case it is the licensee who defaults. Whether the same applies to a clause providing for an automatic termination remains a matter for discussion. In fact, section 112 InsO does not address automatic terminations but only explicitly talks of a notice of termination. Accordingly it could be argued, that a clause providing for the automatic termination of license agreements after the petition in insolvency is enforceable. 22 However, the prevailing opinion takes a different approach: The range of interests between a clause providing for the right to terminate and a clause providing for an automatic termination are very similar and the end of the day. In both cases the licensee will be disenabled to use the licensed IPRs which may be his major source of income and would therefore aggravate his financially severe situation. The purpose of Sect. 112 InsO however is to preserve to the defaulting party the right and chance to keep its business running and not to be separated from its only and most valuable source of income. Therefore it may be assumed that clauses providing for an automatic termination of a license agreement in case the licensee files a petition in insolvency are not valid and enforceable. 21 Cepl, NZI 2000, 357, 359; Abel, NZI 2003, 121, 123; Bartenbach, Patentlizenz- und Know-how-Vertrag (2013) 7, note Some say that the explicit wording as well as the history of the legislative act provide arguments for the enforceability of such a clause: cf. Uhlenbruck-Sinz, InsO (2010) 13, 119 note 13 with further references; Klauze, Urheberrechtliche Nutzungsrechte in der Insolvenz (2006), 97 et seq. 8

9 However, it is important to mention that Sect. 112 InsO does not bar a termination on the basis of a breach of any further obligations, which the insolvent party is not performing. 23 Thus a termination based on the licensee s nonperformance of further substantial obligations, such as breach of quantity requirements or quality control, may very well entitle the licensor to terminate the agreement. If the conduct of the licensee s administrator gives rise to such a cause for termination, the licensor is entitled to terminate the license agreement even after opening of the insolvency proceedings. 7) Would a clause in an IP license agreement that restricts or prohibits transfer or assignment of the IP license be considered enforceable during a bankruptcy or insolvency proceeding in your country? The issue in question is whether a licensee or his administrator may transfer the license to a third party in case the licensee defaults. As there are no specific rules for the case of insolvency the answer will depend on whether in general the licensee is allowed to contractually dispose of his license. In practice this issue usually is covered by express contractual stipulations in the license agreement, which would be respected also in case of insolvency. As far as this issue is not addressed by the parties the following applies: Regularly an exclusive license may be transferred by the licensee, whereas a non-exclusive (simple) license is non-transferable. However, this may depend on the IPR concerned and on the circumstances of the individual case. 24 As transferability as a general rule is left to the parties it is also held to be permissible to restrict or prohibit the transfer or the assignment of a license, unless they aim is to evade the provisions of the InsO. Accordingly, a provision that restricts or prohibits the transfer of a license particularly in the event of pending insolvency proceedings would not be valid and enforceable. 8) In the event of a transfer or assignment of an IP license resulting from a bankruptcy or insolvency proceeding, what are the rights and obligations between the transferee and the remaining, original party or parties to the IP license? Does it matter if the insolvent party is a licensor, a licensee, or a sub-licensee? First, if the licensee of an exclusive license is insolvent, his administrator may choose to transfer the exclusive license to a third party in the course of the termination of the debtor's estate. Even if the licensee is entitled to transfer his license this requires a mutual contractual agreement between all parties involved, which will determine the contractual rights and obligations between all parties. Second, it has to be clarified that under German law, a transfer or assignment of an IP license may aside from the situation of a mutual contractual agreement between all parties involved occur in the situation that the IP right itself is transferred or assigned in the course of the insolvency proceedings to liquidate the debtor s estate. In case the administrator disposes of the IPR, the license will remain unaffected by the transfer, ref Sect. 15 (3) PatG. Although the unanimous opinion allows the transfer there is some dispute about the legal consequences, which is mainly due to the view that the license and the license contract are two distinct things. The predominant opinion holds that in case the right holder (A) has granted a license to licensee (B) and now transfers the underlying IPR to a transferee (C), all contractual rights remain between A B, whereas B will be entitled vis-à-vis C to use the licensed right. However there are two statutory rules in the area of copyright, 25 which suggest that in case of a transfer of an IPR not only the duty to endure the use will pass to the transferee, but that he in fact will take over 23 BGH, GRUR-RR 2009, 284 (Nassreiniger); Cepl, NZI 2000, 357, 360, For details see German AIPPI report Q 190, no Cf. Sect. 34 (5) UrhG, Sect. 36 VerlagsG (Publishing Act). 9

10 the entire bundle of contractual duties, taking a position corresponding to the assignment of a claim. In the latter case all rights and duties before the date the transfer becomes effective will rest between A B, whereas all rights based on events after the transfer of the IPR will vest in B C. However, lacking an explicit statutory provision, apparently exactly this result in practice is achieved by an additional agreement between A C. It seems that because this is common practice, it has rarely been tested before courts what would happen in case no such agreement has been concluded. Yet, academics argue that the traditional approach does neither meet the parties expectations, nor is it workable, as it is well established case law that the license albeit distinct from it cannot survive a terminated license contract. 26 Concerning the protection of sub-licenses, in two recent and widely discussed cases 27 the Federal Court of Justice has ruled that a sub-license will remain valid even if the main license is terminated (cf. no. 4 g). The core results of the ruling in case of insolvency are: If the licensee defaults and the licensee s administrator terminates the main contract (A B), he is still allowed to choose to perform on the contract with the sub-licensee (B C). In this case the sub-licensee retains his right to use the IPR and owes the license fees to the insolvency administrator of licensee (B). Because the insolvency administrator of licensee (B) in this case receives remuneration from the sub-licensee (C) in return for a right, which he is no longer entitled to, he is obliged to release all earnings to the right holder (A) under the law of unjustified enrichment. In order to understand the reasoning of the Federal Court of Justice it further is important to note that the court traditionally distinguishes between the license contract and the license, i.e. the right to use. Finally, if the insolvent party is a sub-licensee, the general rules apply, i.e. the administrator may choose to terminate or continue the license contract. In case he chooses performance, the original rights and duties from the license contract remain unaffected. 9) In the event an IP license is terminated during a bankruptcy or insolvency proceeding in your country, would the licensee be able to continue using the underlying IP rights (and if so, are there any limitations on such use)? Does the (former) licensee have a claim to obtaining a new license? No, under current law the question of performance or termination is at the sole disposal of the administrator, who will exercise his discretion in the interest of the insolvency estate. Unless the former licensee is entitled by a license of rights or a compulsory license, he will not have any claim to obtain a new license. 10) If IP rights that are jointly owned by two parties have been licensed to a licensee by one or both of the joint owners, and one of the joint owners becomes insolvent, how would the IP license be treated in a bankruptcy or insolvency proceeding in your country? Could the IP license be terminated even if this would result in termination of an agreement between the solvent, joint rights owner and the solvent licensee? This specific constellation has not been subject to case law or discussion in the literature yet. However, in such constellation there are two parties affected by the bankruptcy or insolvency: the joint owner of the IP right on the one hand and the licensee on the other hand. The general rule for an IPR owned by two parties may be found in Sect. 741 et. seq. BGB. According to Sect. 741 BGB both parties are co-owners unless otherwise agreed upon. 28 Such coownership at the same time establishes a right to separation according to Sect. 47 InsO. 29 In case the co-owner successfully claims the separation pursuant to Sect. 47 InsO the IP right is not part of the insolvency estate anymore. As a result, the bankruptcy administrator is not entitled to ex- 26 For details see McGuire/Kunzmann, GRUR 2014, 28, 30 et seq. 27 BGH July 19th, 2012 I ZR 24/11 (Take Five)= GRUR 2012, 914, I ZR 70/10 (M2Trade) = GRUR 2012, BGH, GRUR 2005, 663 (Gummielastische Masse II). 29 Hess, Insolvenzrecht I (2007) 2, 47 note

11 ploit the IP right and, consequently, to decide whether to terminate the respective IP license. Therefore, as the co-ownership constitutes a right to separation according to Sect. 47 InsO it creates an opportunity to remove the IP and the corresponding license from the insolvency estate. The latter will be deprived from the exploitation right resulting from the (co-)ownership, but of course will in turn receive compensation under the rules on separation of co-ownership. Thus, the licensee may benefit from a separation announced by the solvent co-owner as the license agreement is then excluded from the insolvency estate. If, by contrast, the solvent co-owner does not claim separation it is questionable, whether the IPR as such or only the respective share in the IPR are part of the insolvency estate. Applying the general rules (Sect. 744 BGB) this would lead to the result that the insolvent party s administrator may only use the IPR or dispose of his share in it, but not of the IPR as such. Accordingly, he could without the consent of the other co-owners neither dispose of the IPR nor terminate an existing license agreement relying on Sect. 103 InsO. With respect to the default of the licensee a co-ownership does not affect the legal questions in relation to the status of a license agreement in case of bankruptcy or insolvency. 11) Are there non-statutory based steps that licensors and licensees should consider in your country to protect themselves in insolvency scenarios, e.g., the creation of a dedicated IP holding company, creation of a pledge or security interest in the licensed IP for the benefit of the licensee, registration of the license, and/or inclusion of certain transfer or license clauses? If the administrator chooses non-performance under Sect. 103 InsO, the licensee is prevented from exercising his license rights due to the insolvency of the licensor, which may jeopardize the licensee's investments. This fact has been heavily and repeatedly criticized. In German case law and legal literature therefore various models have been discussed how the licensee can be protected if the licensor becomes insolvent: In one well known case the license agreement was supplemented by assigning and transferring the licensed IPR to the licensee under the condition precedent that the license agreement is terminated. 30 The Court held that the transfer of IP rights was valid, as by virtue of the condition precedent the assignment was already agreed prior to the opening of the insolvency proceedings. It however must be emphasized that it was explicitly made a requirement that the right to terminate the contract was not triggered by the licensor's insolvency as such, but that the right to terminate was linked to a fundamental breach of contract by the licensor. As a result of the valid transfer, the rights to use were already no longer a part of the licensor's assets when the insolvency proceedings were opened. However it must be emphasized that the legal basis for the continuing right to use the IPR no longer was the license, but the fact that the licensee had acquired ownership. Since an IPR can only once be assigned by a licensor, such solution is practically only possible in cases where the licensor is the right holder and an exclusive license is granted. A potential alternative model to protect the licensee is to substitute the license agreement by a purchase and sale of the 'licensed' IPR, which contains collateral obligations of the parties similar to a license agreement, e.g. with respect to the payment model and the buyer's obligation to use assigned IPRs. Under such a purchase agreement, the IPR would be transferred to the 'licensee' by means of a sale pursuant to Sect. 453 BGB. The 'icensee' would pay a purchase price, which may be structured similar to a license fee payment, e.g. a revenue based purchase price. In addition the licensee may undertake to maintain the transferred IPR and to use best efforts to market products falling within the scope of the IPR. If the agreement is drafted properly, the 'licensor' has fulfilled all its obligations under the purchase agreement by assigning the IPR to the 'licensee', 30 BGH, GRUR 2006, 435 (Softwarenutzungsrecht). 11

12 accordingly Sect. 103 InsO is no longer applicable. 31 However, this requires that the transfer of rights has to be final and not only of temporary nature. 32 Furthermore, in order to be recognized as a true purchase agreement, it is required that the contract does not impose any secondary obligations on the licensor. 33 As mentioned above (cf. nos. 4 g and 8) in a recently decided case 34 the BGH held that a sublicense may remain valid even if the main license agreement between the licensor and the licensee is terminated and argued that the interests of the sub-licensee usually outweigh the IP holder's interests to acquire a right that is free of sub-licenses. Although the decision was made with respect to a copyright license, the rationale of this decision also applies to other IPRs. As a result of this case law, the parties to a license agreement may permit the licensee to grant sub-licenses, e.g. to its affiliated companies, which sub-licenses would then be protected if the main license agreement is terminated or if the administrator of the licensor refuses performance of the main license agreement. In practical terms, the parties thus can structure the license agreement by inserting an IP holding company as a further link adding up to a chain of license contracts instead of a single contract. If the licensor becomes insolvent in this structure, the administrator of the licensor may refuse performance of the main license agreement with the IP holding company, but this would not affect the validity of the sub-licenses granted by such IP holding company. This consequence has been explicitly confirmed by the BGH in the M2Trade case. 35 It has to be noted, however, that there are dissenting opinions in legal literature 36, which argue that M2Trade cannot be interpreted in a sense that sub-licenses continue to be valid in the event of the licensor's insolvency. To protect the licensee, the parties may further agree that the proprietor of the licensed IPRs transfers these to a dedicated IP holding company owned by the licensor. 37 As a next step the IP holding company would then enter into a license agreement with the licensee. Because the IP holding company has no business other than the administration of IPRs, the IP holding company will not be affected by the insolvency of the licensor and there is only a remote risk that the IP holding company will become insolvent itself. In an alternative construction, the licensee and the licensor both become partners or shareholders of the IP holding company. In this case the articles of association of the IP holding company may provide that an insolvent partner or shareholder has to leave the company under the condition that he receives appropriate compensation so that his shares fall to the other partners. 38 Such cooperation, however, is only conceivable if the number of participants is limited. A further option may be derived from a recent decision of the Higher Regional Court of Munich 39, where the seller of an IPR in the course of the transfer retained a license in the transferred IPR such that the 'retained' license does not fall within the insolvency estate. The court held that the administrator of the licensor was not entitled to refuse performance pursuant to Sect. 103 InsO because the rights held back had never become part of the estate. The license 'retained' by the seller could thus not be challenged by the insolvency administrator. Whether this is a workable solution, however, for the time being cannot be predicted with certainty as the decision is under appeal to the BGH and has spiked some criticism in legal literature Berger, GRUR 2013, 321, FG Münster, DStRE 2011, 1309 ff. 33 Berger, GRUR 2013, 321, BGH, GRUR 2012, 916 (M2Trade). 35 Hauck, GRUR-Prax 2013, 437, McGuire/Kunzmann, GRUR 2014, 28, 32 ff. 37 Schmidt/Kampshoff, GRUR-Prax 2009, 50, Münchener Kommentar GmbHG-Strohn, 2010, 34 Rn. 53 ff. 39 OLG München, GRUR-Prax 2013, 408 (Quimonda). 40 McGuire, Anm. zu OLG München, GRUR 2013, 1125, 1133 f. 12

13 Legal literature has also discussed the option to double up the license by the grant of an usufruct (a use right in rem) in the licensed IPR. Such usufruct, if valid, would give the licensee a right in rem, which as stated above can be separated from the insolvency estate (Sect. 47 InsO). The grant of an usufruct as a right in rem in the licensed IP right is, however, in most cases unsuitable for licensing purposes as such right again would go far beyond the entitlement conferred by a license. 41 II. Policy considerations and proposals for improvements to your current system 12) If your country has a registration system for IP licenses, is it considered useful? Is it considered burdensome? Are there aspects of the system that could be improved? As mentioned above (cf. no. 1) Germany at present has no comprehensive scheme on registration of IP licenses. However, within a current research project it was proposed to strengthen the function of the register in order to further streamline German IP law with European Community law. 42 The main intention of this proposal is, that a registration system would foster legal security both for the licensee and a potential acquirer of an IPR. An effect vis-à-vis a third party would depend on registration and in turn a blank register would verify the value as an unburdened IPR and perhaps make registered IPRs a more interesting credit security. However, it must be emphasized that the concept relies on a voluntary registration, i.e. the validity between the parties will not depend on entry, as there may be other reasons, which militate against publicizing the fact that an IPR has been licensed out or on disclosing who the licensee is. 13) If the law that governs bankruptcy and insolvency proceedings in your country does not address IP rights or IP licenses as distinct from other types of contracts, assets, and property rights, should it do so? If yes, should the law be statutory? Of course the core concept of insolvency is to equally distribute any loss that has occurred. Yet, it is particularly hard on a licensee, because his operating efficiency depends on performance of the full contract period. A licensee has to invest upfront and his calculation usually is based on the possibility to write off his expenses during the entire lifespan of the license. If the licensor defaults before his expenses have been counterbalanced the termination would be particularly harsh on the licensee. But there is also a public interest in protecting licenses. IPRs are monopolies and therefore by their very nature have some anti-competitive effects. With regard to technical IPRs we even can say that strong IPRs may have a negative effect on innovation. The legislator usually strikes a balance between the aims of providing an incentive for innovation by granting IPRs and guaranteeing free circulation of inventions by promoting dissemination of knowledge. Now licenses, whether based on contract or on a compulsory grant, of course are the most important means of disseminating IP and transferring technology. It is therefore in the public interest to provide an attractive and workable licensing law. As mentioned above at present the InsO does not explicitly address IPRs or IP-licenses. Even though the German legislation operates on a high level of abstractness and therefore typically avoids specifications where general terms would leave room for interpretation and the application of the laws by the courts, there would be many advantages of having specific rules for IPRs and licenses explicitly in a new statutory provision. In fact the present gap has lead to some insecurity 41 McGuire/von Zumbusch/Joachim, GRUR Int. 2006, 682, Cf. Model Law on Intellectual Property (2012), Sect. 143 (book 1), according to which a transfer, grant of a right in rem or the grant of a license will only have effect vis-à-vis third parties after entry in the register, unless such third parties knew of the prior disposal at the date on which the rights were acquired. A similar rule may be found in Artt. 17(6), 23 Community Trademark Regulation, Art. 33 Community Design Regulation, Art. 23(4) Community Plant Variety Regulation. By contrast Art. 7 European Patent Regulation leaves this issue to be resolved by national law. 13