Deceit in a Licensing Agreement

Where a technology license carries with it an obligation to pay royalties based on revenues, how does the licensor determine if the revenues are accurately reported? The sales are known to the licensee, but the licensor has no way of determining what those sales are. Many license agreements impose reporting obligations on the licensee, so that monthly or quarterly sales are reported to the licensor, to enable accurate royalties to be calculated.  In the recent decision in XY, LLC v. Zhu , 2013 BCCA 352 (CanLII), the BC Court of Appeal dealt with a licensee who breached the terms of the technology license agreement, and committed the “tort of deceit” (that’s how lawyers say “they lied”).

In this case, the licensee did not only underreport or withhold information, they actively falsified records and thus substantially underpaid the royalties owed to the licensor. The tort of deceit is made up of these elements:

  1. a false representation or statement made by the defendant,
  2. the statement was knowingly false,
  3. the statement was made with the intention to deceive the plaintiff, and
  4. the statement materially induced the plaintiff to act, resulting in damage.

A damage award of over $8 million was awarded by the court, as an assessment of the amount would put the licensor in the position it would have been in, if the licensee had performed its obligations and paid the propert amount of royalties.

One interesting twist on appeal was whether the employees of the licensee should be personally liable. Employees are not generally held responsible for the wrongs committed by the employer. After reviewing the law, the Court of Appeal decided that the claims of deceit should be available against certain employees, and those employees were not shielded merely because they were employees acting in the course of their duties. Since these employees were actively devising ways to deceive the other side, they were acting outside the scope of regular duties, and the “just following orders” defence was not accepted by the court.

Calgary – 07:00 MST

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