By Richard Stobbe

When a company goes through bankruptcy, it’s a process that can up-end all of the company’s contractual relationships. When that bankrupt company is a licensor of intellectual property, then the license agreement can be one of the contracts that is impacted. A recent decision has clarified the rights of licensees in the context of bankruptcy.

In our earlier post – Changes to Canada’s Bankruptcy Laws – we reviewed changes to the Bankruptcy and Insolvency Act (BIA) back in 2009. These changes have now been interpreted by the courts, some seven years later.

In Golden Opportunities Fund Inc. v Phenomenome Discoveries Inc., 2016 SKQB 306 (CanLII),  the court reviewed a license between a parent and its wholly-owned subsidiary. Through a license agreement, a startup licensor, which was the owner of a patent covering an invention pertaining to the testing and analysis of blood samples, licensed a patented invention to its wholly-owned subsidiary, Phenomenome Discoveries Inc. (PDI). PDI, in turn was the owner of any improvements that it developed in the patented invention, subject to a license of those improvements back to the parent company.

PDI went bankrupt. The parent company objected when the court-appointed receiver tried to sell the improvements to a new owner, free and clear of the obligations in the license agreement. In other words, the parent company wanted the right to continue its use of the licensed improvements and objected that the court-appointed receiver tried to sell those improvements without honoring the existing license agreement.

In particular, the parent company based its argument on those 2009 changes to Canada’s bankruptcy laws, arguing that licensees were now permitted keep using the licensed IP, even if the licensor went bankrupt, as long as the licensee continues to perform its obligations under the license agreement. Put another way, the changes in section 65.11 of the BIA should operate to prohibit a receiver from disclaiming or cancelling an agreement pertaining to intellectual property. The court disagreed.

The court clarified that “Section 65.11(7) of the BIA has no bearing on a court-appointed receivership.” Instead the decision in “Body Blue continues to apply to licences within the context of court-appointed receiverships. Licences are simply contractual rights.” (Note, the Body Blue case is discussed here.)

The court went on to note that a receiver is not bound by the contracts of the bankrupt company, nor is the receiver personally liable for the performance of those contracts. The only limitation is that a receiver cannot disclaim or cancel a contract that has granted a property right. However, IP license agreements do not grant a property right, but are merely a contractual right to use. Court-appointed receivers can disclaim these license agreements and can sell or dispose of the licensed IP free and clear of the license obligations, despite the language of Section 65.11(7) of the BIA.

Calgary – 10:00 MT