Archive for October, 2018

What happens to IP on bankruptcy?

By Richard Stobbe

The government introduced changes to some of the rules governing what happens to intellectual property on bankruptcy. If it becomes law, Budget Bill C-86 would enact changes to the Bankruptcy and Insolvency Act  (BIA) and the Companies’ Creditors Arrangement Act (CCAA) to clarify that intellectual property users can preserve their usage rights, even if:

  • intellectual property rights are sold or disposed of in the course of a bankruptcy or insolvency proceeding, or
  • if the trustee or receiver seeks to disclaim or cancel the license agreement relating to IP rights.

If the bankrupt company is an owner of IP, that owner has licensed the IP to a user or licensee, and the intellectual property is included in a sale or disposition by the trustee, the proposed changes in Bill C-86 make it clear that the sale or disposition does not affect the licensee’s right to continue to use the IP during the term of the agreement. This is conditional on the licensee continuing to perform its obligations under the agreement in relation to the use of the intellectual property.

The same applies if the trustee seeks to disclaim or resiliate the license agreement – such a step won’t impact the licensee’s right to use the IP during the term of the agreement as long as the licensee continues to perform its obligations under the agreement in relation to the use of the intellectual property.

These changes clarify and expand the 2009 rules in Section 65.11(7) of the BIA  and a similar provision in s. 32(6) of the CCAA. In particular, these amendments would extend the rules to cover sale, disposition, disclaimer or resiliation of an IP license agreement, whether by a trustee or a receiver.

This will solve the problem encountered in Golden Opportunities Fund Inc. v Phenomenome Discoveries Inc., 2016 SKQB 306 (CanLII), where the court noted that section 65.11(7) of the BIA was narrowly construed to only apply to trustees, and thus has no bearing on a court-appointed receivership.

Stay tuned for the progress of these proposed amendments.

Related Reading, if you’re into this sort of thing:

 

Calgary – 07:00 MST

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Cryptocurrency Decision: Enforcing Blockchain Rights

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By Richard Stobbe

A seemingly simple dispute lands on the desk of a judge in Vancouver, BC. By analogy, it could be described like this:

  • A Canadian purchased 530 units of foreign currency #1 from a Singapore-based currency trader.
  • By mistake, the currency trader transferred 530 units of currency #2 to the account of the Canadian.
  • It turns out that 530 units of currency #1 are worth $780.
  • You guessed it, 530 units of currency #2 are worth $495,000.
  • Whoops.
  • The Singaporean currency trader immediately contacts the Canadian and asks that the currency be returned, to correct the mistake.

Seems simple, right? The Canadian is only entitled to keep the currency worth $780, and he should be ordered to return the balance.

Now, let’s complicate matters somewhat. The recent decision in Copytrack Pte Ltd. v Wall, 2018 BCSC 1709 (CanLII), one of the early decisions dealing directly with blockchain rights, addresses this scenario but with a few twists:

Copytrack is a Singapore-based company which has established a service to allow copyright owners, such as photographers, to enforce their copyrights internationally. Copyright owners do this by registering their images with Copytrack, and then deploying software to detect instances of online infringement. When infringement is detected, the copyright owner extracts a payment from the infringer, and Copytrack earns a fee.  This copyright enforcement business is not new. However, riding the wave of interest in blockchain and smart contracts, Copytrack has launched a new blockchain-based copyright registry coupled with a set of cryptocurrency tokens, to permit the tracking of copyrights using a blockchain ledger, and payments using blockchain-based cryptocurrency.  Therefore, instead of traditional fiat currency, like US dollars and Euros, which is underpinned by a highly regulated international financial services industry, this case involves different cryptocurrency tokens.

When Copytrack started selling CPY tokens to support their new system, a Canadian, Mr. Wall, subscribed for 580 CPY tokens at a price of about $780.  Copytrack transferred 580 Ether tokens to his online wallet by mistake, enriching the account with almost half a million dollars worth of cryptocurrency.  Mr. Wall essentially argued that someone hacked into his account and transferred those 530 Ether tokens out of his virtual wallet.  Since he lacked control over those units of cryptocurrency, he was unable to return them to Copytrack.

The argument by Copytrack was based in an old legal principle of conversion – this is the idea that an owner has certain rights in a situation where goods (including funds) are wrongfully disposed of, which has the effect of denying the rightful owner of the benefit of those goods.  With a stretch, the court seemed prepared to apply this legal principle to intangible cryptocurrency tokens, even though the issue was not really argued, legal research was apparently not presented, the proper characterization of cryptocurrency tokens was unclear to the court, the evidentiary record was inadequate, and in the words of the judge the whole thing “is a complex and as of yet undecided question that is not suitable for determination by way of a summary judgment application.”

Nevertheless, the court made an order on this summary judgement application. Perhaps this illustrates how usefully flexible the law can be, when it wants to be. The court ordered “that Copytrack be entitled to trace and recover the 529.8273791 Ether Tokens received by Wall from Copytrack on 15 February 2018 in whatsoever hands those Ether Tokens may currently be held.”

How, exactly, this order will be enforced remains to be seen. It is likely that the resolution of this particular dispute will move out of the courts and into a private settlement, with the result that these issues will remain complex and undecided as far as the court is concerned. A few takeaways from this decision:

  1. As with all new technologies, the court requires support and, in some cases, expert evidence, to understand the technical background and place things in context. This case is no different, but the comments from the court suggest something was lacking here: “Nowhere in its submission did Copytrack address the question of whether cryptocurrency, including the Ether Tokens, are in fact goods or the question of if or how cryptocurrency could be subject to claims for conversion and wrongful detention.”
  2. It is interesting to note that blockchain-based currencies, such as the CPY and Ether tokens at issue in this case, are susceptible to claims of hacking. “The evidence of what has happened to the Ether Tokens since is somewhat murky”, the court notes dryly. This flies in the face of one of the central claims advanced by blockchain advocates: transactions are stored on an immutable open ledger that tracks every step in a traceable, transparent and irreversible record. If the records are open and immutable, how can there be any confusion about these transfers? How do we reconcile these two seemingly contradictory positions?  The answer is somewhere in the ‘last mile’ between the ledgerized tokens (which sit on a blockchain), and the cryptocurrency exchanges and virtual wallets (using ‘non-blockchain’ user-interface software for the trading and management of various cryptocurrency accounts). It may be infeasible to hack blockchain ledgers, but it’s relatively feasible to hack the exchange or wallet. This remains a vulnerability in existing systems.
  3. Lastly, this decision is one of the first in Canada directly addressing the enforcement of rights to ownership of cryptocurrency. Clearly, the law in this area requires further development – even in answering the basic questions of whether cryptocurrency qualifies as an asset covered by the doctrines of conversion and detinue (answer: it probably does). This also illustrates the requirement for traditional dispute resolution mechanisms between international parties, even in disputes involving a smart-contract company such as Copytrack. The fine-print in agreements between industry players will remain important when resolving such disputes in the future.

Seek experienced counsel when confronting cryptocurrency issues, smart contracts and blockchain-based rights.

Calgary – 07:00 MST

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