IP Licenses and Bankruptcy

What happens when a licensor becomes insolvent?

When Body Blue Inc., a Canadian consumer products company, stumbled financially, a receiver was appointed in Canada under the Bankruptcy and Insolvency Act.  In its attempt to restructure the company and satisfy creditors, the receiver sold the company’s assets in May, 2006 for $7 million to a competitor consumer products company.  The assets expressly included certain technology which was the subject of an earlier license to Herbal Care, a US health products company. 

Herbal Care argued that its license remained unaffected.  However, a Canadian Court can allow a trustee to transfer the technology assets of a bankrupt company free and clear of any existing license.

In the final decision in Royal Bank of Canada v. Body Blue Inc., 2008 CanLII 19227 (ON S.C.), the Canadian Court affirmed that the new owner acquired the transferred assets free and clear of any claim of Herbal Care.  Herbal Care lost its license when the assets were transferred during the bankruptcy.

This result can be contrasted with Synergism Arithmetically Compounded Inc. v. Parkwood Hills Foodland Inc., 2000 CanLII 22781 (ON S.C.), where certain intellectual property assets – in this case, an insolvent company’s trade-marks and franchise agreements – were the subject of a security agreement.  A secured creditor stepped in, enforced its security, and acquired all the insolvent company’s trade-marks and franchise agreements.  Because the trade-marks were acquired by the secured creditor outside the bankruptcy, they never passed through the hands of the trustee, and they were transferred with the license rights intact.  Thus the new owner was entitled to sue for breach of the license, and trade-mark infringement, since it had acquired those rights along with the trade-mark assets.

As always, careful drafting and preventive steps can mitigate these risks.

Links to the case decisions:

Royal Bank of Canada v. Body Blue Inc.

Synergism Arithmetically Compounded Inc. v. Parkwood Hills Foodland Inc.
Calgary – 10:00 MST


2 Comments so far

  1. Richard Stobbe October 8th, 2009 2:23 pm
  2. […] 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.) […]

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