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Biotechnology, Health and Business in Canada, the United States and Worldwide

If You License IP in Canada, You Need to Know About Recent BIA/CCAA Amendments

Adapted from a bulletin by my colleagues Evan Cobb and Brad Newman:

In the U.S., Section 365(n) of the bankruptcy code provides protection to licensees in the event their licensor becomes insolvent.  Canadian law has not historically had that protection, forcing licensors to set up dedicated IP holding companies or other bankruptcy-remote structures to protect their licensees.  However, recent amendments to Canada’s insolvency legislation provide a solution for licensees, at least in the case of intellectual property licensors that are restructuring under the Companies’ Creditors Arrangement Act (“CCAA”) or Bankruptcy and Insolvency Act  (“BIA”) proposal regime.

Under the amendments, even if an intellectual property license has been successfully disclaimed by an insolvent licensor, the licensee’s right to use, or its ability to enforce a right of exclusive use of, the licensed intellectual property is not affected for the duration of the license agreement (which includes any rights of renewal).  The right to continued use is conditional upon the licensee’s continued performance of its obligations under the license agreement in relation to that usage.

Some cautionary notes regarding the Canadian amendments:

  1. The amendments do not provide protection to licensees in a standard bankruptcy or receivership scenario. If a receiver or bankruptcy trustee of the licensor were to sell the licensed intellectual property and terminate the license associated therewith, licensees would generally be left only with an unsecured claim against the assets of the licensor. 
  2. The exact definition of “intellectual property” is uncertain.  Under the U.S. Bankruptcy Code, “intellectual property” is defined specifically (and excludes trademarks).  A similar definition may be adopted in Canada, but at the moment the application could be quite broad.
  3. Obligations “in relation to” use of the intellectual property that the licensee has to comply with may be uncertain in some circumstances.  License fees that aggregate payments for all usage, exclusivity rights and maintenance services may be problematic in light of the amendments. Precise delineation of obligations under a license agreement that are attributable to use of the licensed intellectual property would be a prudent drafting response to the amendments.

Read the whole bulletin for more analysis of the amendments’ implications for IP licensors and licensees.

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