Regional Group Central America and the Caribbean

Question Q241 National Group: Title: Contributors: Reporter within Working Committee: Regional Group Central America and the Caribbean IP licensing and insolvency Leticia CAMINERO Dominican Republic (Green) Danilo RODRIGUEZ VILLAMIL and Edy Guadalupe Portal El Salvador (Blue) [Please insert name last name in CAPITAL letters please] Date: May 19 th, 2014 Questions I. Current law and practice Groups are invited to answer the following questions under their national laws. If both national and regional laws apply to a set of questions, please answer the questions separately for each set of laws. Please number your answers with the same numbers used for the corresponding questions. 1) Does your country have a registration system for IP licenses? If yes, please describe this system. The registration system concerning Industrial Property licenses is before the National Office of Industrial Property (ONAPI), which grants public knowledge to the license agreement, but does not affect its validity. Regarding the provisions of a license agreement, as established in the Law No. 20-00 of Industrial Property, if the parties do not agree otherwise the following will apply: (1) the license covers all acts that could be lawfully performed by the holder, and during the entire term of registration; (2) the prohibition of granting license over the given license; (3) the prohibition to sub-license the granted license; and (4) If not evidently stated the license is not exclusive. But if the license is agreed to be exclusive the holder shall not give other licenses and shall not exploit the trademark or patent for itself. Concerning copyright, the Law 65-00 establishes that the license covering such rights may be registered before the National Office of Copyright (ONDA). Regarding the licence agreement, the law establishes that the provision governing transfer of copyright may rule when there is not a contradictory and express provision. Furthermore, the different uses of the copyright work are independent, therefore the authorization over one use, does not transcend to any other use. The effects of the license only affect the expressly licensed rights and for the time and jurisdiction agreed. The interpretation of said license is restrictive and only comprehends what was specifically contracted. If present in an agreement the following will be regarded as void: (1) global agreement over all the future productions (only determined works are allowed); (2) obligation to not produce or to limit production, even if only for a certain amount of time. 1

In El Salvador we do not have a unique system covering only IP licenses. IP Licenses are governed by two local Laws. The Trademark Law and Other Distinctive Signs and The Intellectual Property Law. The first one applies to trademarks and the second one to patents. Regarding Trademarks, each license is recorded against the registration record for each mark. 2) Describe the type or types of bankruptcy and insolvency proceedings that are available in your country. The current legislation ruling bankruptcy is the Dominican Commercial Code and the Law 4582 of 1956 which requires insolvency for the declaration of bankruptcy. This often occurs when there are more liabilities than assets. On commercial entities the Law 479-08 (as amended) establishes that the liquidation shall be mainly ruled through the bylaws or shareholders agreements. Before the liquidation the commercial entity shall be dissolved. For limited liability companies (most commonly used entity) one of the causes for dissolution is the loss of at least half of the social capital. In our country a person or company can request that all their assets be sold in order to pay to its creditors. The bankruptcy and insolvency is not used in our country due to the fact that most of the creditors prefer to file lawsuit in order to obtain payment. It is regulated on the Commerce Code, the provisions of the bankruptcy are in Articles 498 to 511 and other articles from this legal Act. Bankruptcy only applies to corporations. 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? If yes, is the law statutory, regulatory, or based on precedent? Please identify any relevant statutes or regulations. No. However, IP rights in order to be treated as assets shall be recorded and presented in the financial statements as such and have valid registration in the Dominican Republic. The license does not have to be registered to be valid. Moreover, following my request on an official letter ONAPI explained that they do not have competence to decide on the legal situation of bankruptcy of trademark holders. No, there are no provisions that regulate IP rights or IP licenses within the Insolvency Laws. 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. Once the process of bankruptcy or liquidation begins the assets are no longer in control of the holder. The administrator has the obligation to pay the creditors and share the remaining amounts. Concerning commercial entities, the administrator of the liquidation may not continue or begin businesses for the needs of the liquidation, unless authorized by the shareholders or by judicial decision. Our Law does not regulate this scenario. It is important to mention that an IP right is only vulnerable when the company is liquidated and all their assets are sold. 2

b) Are equitable or public policy considerations relevant to how an IP license is treated? No. c) Is the law different for different types of bankruptcy and insolvency proceedings in your country? Yes, there are different procedures for financial intermediation entities, insurance entities, entities of the energy sector and pension risk administrators. No. The only provisions regarding bankruptcy are in the Commercial Code and there are no different types of bankruptcy. d) Does the law require, or give preference to, IP licenses that have been registered according to a registration scheme? The registration of licenses only grants public knowledge of the agreement between parties. The DR-CAFTA establishes that no party may require registration of trademark licenses to establish the validity of the license, to assert any rights in a trademark, or for other purposes. No. 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? The privileged creditor may collect the debt by executing the pledge or security interest in the IP rights from the moment that the bankruptcy or liquidation begins. Yes. As stated before a license will be only vulnerable when the licensor (debtor) has to liquidate his assets, before that, the rights remain the same. The secured party can request the payment of the debt through the IP assets that are secured. However, the Judge will determine whether this petition is admitted or not, depending on other debts to third parties. 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. There are different provisions regulating industrial property and copyright. See answer No. 1 Yes. The treatment for trademarks is different from the treatment of patents. License of trademarks are more flexible. In patents, there are some limitations for granting a license agreement. 3

N/A g) Does the law apply differently to sub-licenses versus main licenses? No. Sublicenses are not regulated but they are acceptable. The clauses of the sublicense must be in accordance with the main license; this is the only requirement for sublicenses. However, this is not actually a provision in the Law, it is customary for the secondary contracts to relate to the main contract. h) Does the law apply differently to sole or exclusive licenses versus nonexclusive licenses? For exclusive licenses, the Law No. 173 regarding the protection of Importer Agents of Goods and Products (as amended) as well as the DR-CAFTA concerns any agreement on distribution, license, franchising, representation, agency, and others related to product or service manufacturers outside or inside the country. To be under the regime established by Law No. 173, the agreement must be registered before the Dominican Central Bank within 60 days of its signing or being in force. The benefits are: the agreement may only be terminated for a just cause, i.e. defiance to an essential obligation or for action or omission that affect or may affect the concessionaire; prohibition to unilateral termination of the agreement; prohibition to unilateral rejection to renew the contract; the person receiving the license has indemnity right when the agreement is terminated without just cause; the person receiving the license has the right to prevent the importation of the products covered in the agreement; among others. While for the DR-CAFTA regime: when the contract does not have a termination date a written communication informing the finalization of the agreement with six months in advance; indemnity right only occurs in the cases, forms, manners and quantities agreed by the parties and based on actual damages; termination date is considered just cause for finalization of the agreement and so on. No. The law applies in the same way for both kinds of licenses. i) Does the law apply differently if the bankrupt party is the licensee versus the licensor? We may conclude that it applies to the owner of the right. No. None. j) Please explain any other pertinent aspects of this law that have not been addressed in the sub-questions above. 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? It would apply to the IP registered in Dominican Republic. As stated before, the bankruptcy proceeding is in disuse in our country. In any case, we believe that the location of the assets will apply in such scenario. 4

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? Concerning commercial entities, the administrator of the liquidation may not continue or beging businesses for the needs of the liquidation, unless authorized by the shareholders or judicial decision. Not applicable since this proceeding is in disuse. In general terms, the clause granting the right to terminate should be admitted. 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? As stated in answer No. 6. There are no cases that we could use to provide an accurate opinion in this scenario. Nevertheless, according to our local regulation for contracts, the clause could be 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? If it is a commercial entity, once the liquidation is complete the entity will no longer be a legal person subject to rights and obligations. The entity will cease to legally exist. No, it does not matter. The assets of any debtor could be sold or transferred depending on the type of action that can be pursued. 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? If the license is terminated the licensee will no longer be authorized to use the IP rights. Moreover, if for example the former licensee requests the registration of the trademark (after the holder has lost its registration) it may be inadmissible. Since the cancelled or expired trademark may not be registered unless one year have passed from its cancellation or expiration. Since there is no bankruptcy proceeding we could not provide you with an answer to this scenario. 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 5

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? There are not express provisions on this regard. However on co-ownership the Law 20-00 on Industrial Property states that when the parties do not agree otherwise: each co-holder can exploit or use the industrial property object of the application or title, but must equitably compensate the co-holder that does not exploit or use said object or that did not grant the license in the absence of an agreement the compensation shall be set by the competent court; the transfer of the application or title shall be agreed by every co-owner, however the transfer of each co-holder right may be assigned separately but the other co-owner has the right to first offer which lasts for 60 days starting from the day of the notification of the assignment intention; each co-holder may grant to third parties a non-exclusive licence for exploitation or use of the invention, utility model, industrial design or distinctive sign with equitable compensation to the others; an exclusive license may only be granted by common agreement among all owners; waiver, reduction, limitation or voluntary cancellation (complete or partial) shall be commonly agreed; any co-holder shall notify when abandoning its part of the application or title, the abandoned part is distributed in proportion to their respective portion; among others. Since there is no bankruptcy proceeding we could not provide you with an answer to this scenario. 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? Either an IP holding company or pledges or securities in the IP rights may protect such rights in the event of liquidation. However, it will depend on the interest of each of the companies. Please bear in mind that the Dominican Republic does not have a restructuring system, therefore once a company declares insolvency, liquidation is the most common path to follow. No. The best course of action to avoid a termination of a license agreement due to a bankruptcy is creating a pledge or security interest against the IP assets. Even though security interests are usually ordered by a Judge, the parties can create a pledge against the IP assets. This way, in a bankruptcy procedure the licensee can argue the IP asset pledge. 6

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? The registration of the IP license before ONAPI only grants public knowledge of the agreement. While the registration under the previously explained Law No. 173 may grant benefits to the national party receiving the license both registration processes are often simple, requiring presentation of the agreement or certification of the agreement. Not applicable since we do not have a unique registration system for licenses. Indeed, it would be recommendable to establish an organized system of IP licences. Yes, it can be considered useful. Registration of license agreements is not compulsory. The license agreement is enforceable against third parties even though the contract is not registered. As long as the parties have the contract duly signed and legalized the agreement is enforceable for the parties and for others. One of the main policies is that the Licensee is entitled to defend trademark infringements by third parties infringers. 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? IP rights shall have their distinct provision, however such legal provisions shall rule when the parties do not agree otherwise. Yes, we consider that our country should have an effective bankruptcy proceeding and also create a separate statutory law that regulates IP rights or IP licenses. The Intellectual Property law should be amended by adding a bankruptcy chapter, so that intellectual property rights are specifically regulated, rather than amending the Law that governs bankruptcy in general. 14) With regard to a bankruptcy administrator s ability to adopt, assign, modify, or terminate an IP license under the current law of your country, are there aspects of this law that could or should be improved to limit this ability? Should equitable or public policy considerations be taken into account? The administrators obligation is to settle every unsolved matter. Until the Dominican Republic has a law that allows the restructuring of a bankrupted company the administrators obligation is to prepare the company for the end. Indeed, it is necessary to have a specific regulation regarding these issues. Usually, on a dissolution process for a company, these considerations are ruled by the Shareholders Decisions and the by-laws. The bankruptcy administrator is the competent Judge, in this case a Civil and Mercantile judge. The ability of the Judge to adopt, assign, modify or terminate an IP license agreement definitely must be improved. In fact, all the scheme of bankruptcy in El Salvador must be 7

amended. Unfortunately the bankruptcy procedure lacks effectiveness. Therefore, bankruptcy procedures are rare. 15) Are there other changes to the law in your country that you believe would be advisable to protect IP licenses in bankruptcy? If yes, please explain. As stated before, we have to implement an effective bankruptcy proceeding. In general terms, license agreement treatments are included into the treatment of other kinds of contracts in the Commerce Code. However, since the licensee is interested in continuing with the effects of the contract for royalties purposes, it is advisable for this type of agreements to receive a different treatment from other contracts. III. Proposals for substantive harmonisation The Groups are invited to put forward proposals for the adoption of harmonised laws in relation to treatment of IP licenses in bankruptcy and insolvency proceedings. More specifically, the Groups are invited to answer the following questions without regard to their existing national laws. 16) Is harmonization of laws relating to treatment of IP licensing in bankruptcy and insolvency proceedings desirable? Many private and public entities are fighting to have a new law for bankruptcy in general, which will provide a system for restructuring a company while avoiding its liquidation. However, IP assets are not treated differently or have any express provision on these drafts (so far). Yes it would be very helpful to harmonize the treatment of IP rights and IP licenses in bankruptcy and insolvency proceedings. 17) Please provide a standard that you consider to be best in each of the following areas: a) What restrictions, if any, should be placed on a bankruptcy administrator s ability to adopt, assign, modify, or terminate an IP license in the event of bankruptcy of a party to that license? Should these restrictions be statutory? A general restriction should be not to accept new or renew obligations that the bankrupted entity will not have the possibility to comply. Also, the actual value of the IP rights and license should be closely regarded and safeguarded in every transaction. Indeed, we believe that the restrictions must be statutory. The Judge should observe whether the parties have complied with the contract terms. The Judge should verify if the Licensee has earned a retribution from the investment that it has in publicity and other expenses derived from the business and commercialization of the IP assets. The restrictions should be statutory. 8

b) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon pre-bankruptcy registration of the IP license? Registration of the right should be required but not registration of the license. We do not believe necessary to place restrictions to the administrator upon pre-bankruptcy registration. The restrictions in any case, must be established without the requisite of registration. The Trademark Law does not impose a compulsory registration of a license agreement. Accordingly, there is no need to request the registration of the agreement to apply new rules. However, as stated before, it is recommendable to record a license agreement for other benefits. In regard to patents and copyrights, the restriction depends on the registration of the license agreement. c) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon whether the bankrupt party is the licensor or a licensee? Both parties should be equally protected when facing bankruptcy, balancing both rights and obligations. We do not believe that the restrictions needs to depend on which party is in the process. The Judge should observe the clauses of the license agreement. It does not matter whether the bankrupt is the licensor or the licensee. Any of the parties can take a legitimate interest in continuing or terminating the contract. The licensee can request the continuance of the license agreement for royalty purposes, while the Licensor can request the termination of the license based on the goodwill of the IP assets, arguing that the bankruptcy of the licensee is damaging the reputation of the IP assets. d) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon whether the licensee has a security interest in the underlying IP rights? As a security entails an outstanding protection, these cases should have a different consideration and should be handled as any other security. We do not believe that the restrictions need to depend on the existence of security interest. If a license agreement has a security interest on IP rights, then the Judge who is carrying the bankruptcy should respect the security interest by granting the IP assets to the Licensee or the Licensor, depending on who the bankrupt is. e) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon whether the license is a sub-license or a main license? Every manifestation of the license should be similarly treated, without discarding the possibility of connecting the subsequent licensors. 9

We do not believe that the restrictions need to depend on which type of license exists. The Judge should observe the clauses of the License Agreement in order to verify if the Licensor or the Licensee of the sub-license have earned royalties derived from the license of use contract. f) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon whether the license is sole, exclusive or nonexclusive? The exclusive nature of the license shall provide greater protection as it may represent greater risk or loss. We do not believe that the restrictions need to depend on which type of license exists. The Judge should observe who the first Licensee is and according to this he should take the decision of keeping the licensing of the IP assets in order to pay debts, once the debts have duly been paid he should decide on the second Licensee. g) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon the type or types of IP rights that are licensed in the IP license? The type of IP right should not change the provision on their protection, as long as the right is protected according to the Dominican laws. Indeed, it becomes necessary to divide restrictions depending on the specific IP right (trademark, patent, copyright, etc.). h) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon equitable or public policy considerations? We do not believe that the restriction needs to depend on these issues. If the restriction is based on a compulsory License Agreement of a patent, then the Judge should grant the compulsory license for the benefit of the affected people. Accordingly, if a license agreement is compulsory then the licensor or the licensee should observe other ways to acquire the payment of the debts. i) With regard to sub-paragraph 17(a) above, to what degree, if at all, should such restrictions depend upon the language of the license itself, e.g., a right to terminate upon insolvency or a prohibition against assignment? Agreement between the parties should be the first reference while the legal provision should come second. We do not believe that the restrictions need to depend on these issues. 10

The clauses of the contract should be respected by the Judge, but he should also evaluate the effect that the bankruptcy has on the parties. Based on both considerations the judge will decide whether to terminate the License Agreement or order the continuance of the License. j) In the event a bankruptcy or insolvency proceeding in your country involves treatment of an IP license between a domestic entity and a foreign entity, which national bankruptcy laws should be applied? Should this depend on the choice of law clause in the IP license? Should this depend on the physical location of the entities or the assets involved? The choice of law clause in the IP license shall rule in such cases, however, there should be a provision allowing or affording a choice of law when bankruptcy or insolvency occurs. As stated before, we could not provide you with an accurate opinion since in our country the bankruptcy proceeding is in disuse. In general terms, the choice of law in the contract must apply. The bankruptcy procedure is governed by the domestic Laws. However, if the License Agreement reflects a clause in which the parties agreed to resolve any conflict according to foreign Laws, then such clause should be applied. 18) To the extent not already stated above, please propose any other standards that you believe would be appropriate for harmonization of laws relating to treatment of IP licenses in bankruptcy and insolvency proceedings. Mainly treating IP rights differently than other assets, considering the economic value of the affected IP rights, protecting the bankrupted owner and licensor against the licensee that would like to profit from the IP right once the agreement is terminated, freedom to decide (either by the owner itself or via the administrator) what to do with the IP right especially when the liquidation is imminent, mandatory public record of liquidated companies that used to hold IP rights (establishing if the right ceased or continues through another owner) Not Applicable. The bankruptcy Law is very short, only some articles of the Commerce Code reflect this issue. Therefore, the bankruptcy must be regulated in a separate Law, which can include regulations regarding IP assets. The Groups are invited to comment on any additional issues concerning any aspect of IP law and insolvency that they deem relevant. 11