New Treatment of IP Licences in Canadian Bankruptcy Law in Force

A major overhaul of Canada’s bankruptcy laws was finally proclaimed into force on September 18, 2009. Important changes relate to the disclaimer of contracts and intellectual property licences, and stem from amendments passed in 2005 and later amended in 2007. Section 65.11 of the Bankruptcy and Insolvency Act (BIA) and section 32 of the Companies’ Creditors Arrangement Act (CCAA) have codified the somewhat controversial common law right of a trustee in bankruptcy under the BIA, or of a debtor company with approval of a monitor under the CCAA, to disclaim certain contracts to which the debtor is a party. When a trustee or monitor elects to disclaim the contract, the rights of the other party are limited to seeking damages as an unsecured creditor. In the case of an intellectual property (IP) licence, this could involve the licensee losing its rights to use the licensed IP, even if it is willing to continue to pay all amounts required by the licence. However, of great importance to IP licensees, the amendments now provide an exception for IP licences so that the election to disclaim an IP licence does not affect the licensee’s right to use the licensed property as long as the licensee continues to perform its obligations under the agreement. In addition, the licensee has the right to enforce any exclusive use clause. While these changes regarding IP licences include provisions that are similar to those of Section 365(n) of the US Bankruptcy Code, they do not provide all the same rights to licensees that the US Code does, such as ensuring the enforceability of escrow provisions. For the proclamation, see: http://www.gazette.gc.ca/rp-pr/p2/2009/2009-08-19/html/si-tr68-eng.html For the text of the amendments, visit: http://laws.justice.gc.ca/en/ShowFullDoc/an/2005_47//20091017/en; and http://laws.justice.gc.ca/en/ShowFullDoc/an/2007_36/en Summary by: Tom Feather and Lea Epstein