Canada gets US-flavoured update for IP licence/bankruptcy

I've just received an email circular from Paul Jones (Jones & Co, Toronto) which contains a succinct summary of the amendments of Canada’s (i) Bankruptcy and Insolvency Act and (ii) Company Creditors Arrangements Act. These amendments come into effect this Friday, 18 September. Writes Paul:

"One provision will have a significant and positive effect for the licensing of intellectual property.

The official version of the package is here. The amendments are based on the amendments made to the US Bankruptcy Code after the Lubrizol case in 1985. When a proposal for restructuring is made, Trustees in bankruptcy have the authority to disclaim (or terminate) ongoing contracts of the bankrupt entity. Lubrizol lost the right to work the technology that it had licensed from Richmond Metal Finishers and through no fault on its part. Afterwards Section 365 (n) was inserted to allow the licensee to affirm an intellectual property license that had been disclaimed by a bankruptcy trustee, and thus continue to use the technology and paying royalties. “Intellectual property” was defined to include “copyrights, patents, trade secrets and mask works.”

Canada has now decided to copy this provision, but with some differences. Here is the new provision Section 65.11 with respect to IP:

(7) If the debtor has granted a right to use intellectual property to a party to an agreement, the disclaimer or resiliation does not affect the party’s right to use the intellectual property — including the party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the party extends the agreement as of right, as long as the party continues to perform its obligations under the agreement in relation to the use of the intellectual property.

The differences are that the term “intellectual property” is not defined in the amendments or the existing legislation. Thus it can include trade-marks, something not included under the US Bankruptcy Code. Trade-marks differ from copyrights or patents in that they are indicators of source and difficult to disconnect from the original owner, in this case the bankrupt company.

Secondly the basis for the protection of trade-secrets in the US and Canada differ. In the US 41 states have laws defining and protecting trade secrets. In Canada the are no such statutes and the protection is derived from the common law, usually based on contractual obligations. Generally in Canadian law it is not as clear that trade secrets can be considered as “property.”

Parties to license agreements for the use of intellectual property in Canada should first of all be aware of these changes when dealing potentially insolvent parties. The strategic options will be different. When drafting such license agreements the obligations of the licensee should be considered and defined more carefully as these may determine the ability of the licensee to continue to use the intellectual property in the event of the licensor becoming insolvent.

And if the license agreement includes trade secrets or know-how the parties may wish to emphasis either these as contractual obligations or property depending on their interests".