Category Archives: News

Life after Insolvency

The following article, Life after Insolvency, was originally published in The Lawyer’s Daily, March 16, 2017:

Intellectual property rights can be the lifeblood of a company. The insolvency of a licensee or licensor can cause havoc, or at least significant uncertainty with intellectual property rights. Who can continue to use the intellectual property rights, what royalties flow, and can intellectual property rights be licensed or used by someone new are all questions faced during an insolvency.

During an insolvency under the Bankruptcy and Insolvency Act (BIA) or Companies’ Creditors Arrangement Act (CCAA), there is significant power to disclaim or resile from contracts, particularly executory contracts. Since at their core, intellectual property licence agreements are contracts, the terms or the existence of a licence may be altered during this process.

One of the leading cases on this issue, decided prior to the amendments discussed below, held that an exclusive licence to use certain technology “only creates a contractual agreement as between the parties” and does not provide any property interest so assets could be transferred to a third party free and clear of the licence terms.

Both the BIA and CCAA were amended in 2009 to include provisions relating to intellectual property but the provisions had not yet received much judicial discussion. Both the BIA, in s. 65.11(7), and the CCAA in s. 32(6) have the same language: “If the [company/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 Saskatchewan court in Golden Opportunities Fund Inc. v. Phenomenome Discoveries Inc. 2016 SKQB 306 was required to determine if certain technology of a debtor could be transferred free and clear by a court-appointed receiver to a third party. The licensor of the technology to the debtor sought to stay the vesting order until its interests in the property of the debtor that were being sold, could be determined.

The court found that the provisions of the BIA and CCAA did not apply to court-appointed receivers stating that “licences are simply contractual rights.” The aggrieved licensor could pursue monetary claims against the debtor but had no property rights in the assets being vested to the third party and the third party had no obligation to license back to the licensor improvements made on the technology. The terms of the licence would not apply to the third party.

The court distinguished between on the one hand the situation of a court-appointed receiver, and on the other proposals to creditors and arrangements under the CCAA where the above statutory language would apply.

Also last year, the Quebec Court of Appeal in 7158548 Canada Inc. c. Desbiens 2016 QCCA 306, referring to the BIA as well as the terms of the licence agreement relating to assignments, required a purchaser of assets through a proposal to creditors to honour the terms of a patent licence agreement and continue to pay royalties.

In this case, the court also recognized that the purchaser was not a third party but had a common principal with the insolvent company.

Even where the intellectual property provisions of the BIA and CCAA do apply, there is some uncertainty as to what is meant by the term “intellectual property” as that term is not defined. There is also uncertainty relating to the scope of the “right to use the intellectual property” referred to in the legislation. Patent licences, for example, typically include the right to make, use and sell the invention, not just the “use” specified in the legislation. Similarly, if the licence included the right of the licensee to grant further sublicences, would those rights continue?

Often, intellectual property licences are wrapped up into larger contractual arrangements, perhaps involving ongoing technical support, the sharing of improvements, or ongoing maintenance of the intellectual property. If only the portion of the contract relating to the “use of the intellectual property” is covered by the legislation, this may leave the licensee in an undesirable situation if other aspects of the contract are disclaimed. Also, it may leave the parties unclear as to what is required to “perform its obligations under the agreement in relation to the use of the intellectual property” if, for example, the royalty payment covers multiple aspects, only one of which is the intellectual property.

For companies entering into licence agreements, particularly where there is a concern of an insolvency by one of the parties, these sections of the BIA and CCAA should be reviewed having regard to the licence and contractual terms. According to the jurisprudence, if ownership in the intellectual property has been transferred, the transfer cannot be disclaimed during the insolvency. Therefore carefully structuring the intellectual property ownership is one way to provide additional certainty in the event of an insolvency. If access to source code is important to the licensee, it may be advisable to have a copy placed into escrow as part of the licence arrangement.

Insolvency, restructurings and proposals always involve uncertainty but for third party licensees who have relied on a long-term licence arrangement, the effects can be devastating. Intellectual property licence agreements have been recognized as being different than other contracts giving some reassurance that the licences will be recognized during an insolvency.

Alan Macek practises intellectual property law and litigation at DLA Piper in Toronto. Intellectual property rights can be the lifeblood of a company. The insolvency of a licensee or licensor can cause havoc, or at least significant uncertainty with intellectual property rights. Who can continue to use the intellectual property rights, what royalties flow, and can intellectual property rights be licensed or used by someone new are all questions faced during an insolvency.
During an insolvency under the Bankruptcy and Insolvency Act (BIA) or Companies’ Creditors Arrangement Act (CCAA), there is significant power to disclaim or resile from contracts, particularly executory contracts. Since at their core, intellectual property licence agreements are contracts, the terms or the existence of a licence may be altered during this process.

One of the leading cases on this issue, decided prior to the amendments discussed below, held that an exclusive licence to use certain technology “only creates a contractual agreement as between the parties” and does not provide any property interest so assets could be transferred to a third party free and clear of the licence terms.

Both the BIA and CCAA were amended in 2009 to include provisions relating to intellectual property but the provisions had not yet received much judicial discussion. Both the BIA, in s. 65.11(7), and the CCAA in s. 32(6) have the same language: “If the [company/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 Saskatchewan court in Golden Opportunities Fund Inc. v. Phenomenome Discoveries Inc. 2016 SKQB 306 was required to determine if certain technology of a debtor could be transferred free and clear by a court-appointed receiver to a third party. The licensor of the technology to the debtor sought to stay the vesting order until its interests in the property of the debtor that were being sold, could be determined.

The court found that the provisions of the BIA and CCAA did not apply to court-appointed receivers stating that “licences are simply contractual rights.” The aggrieved licensor could pursue monetary claims against the debtor but had no property rights in the assets being vested to the third party and the third party had no obligation to license back to the licensor improvements made on the technology. The terms of the licence would not apply to the third party.

The court distinguished between on the one hand the situation of a court-appointed receiver, and on the other proposals to creditors and arrangements under the CCAA where the above statutory language would apply.

Also last year, the Quebec Court of Appeal in 7158548 Canada Inc. c. Desbiens 2016 QCCA 306, referring to the BIA as well as the terms of the licence agreement relating to assignments, required a purchaser of assets through a proposal to creditors to honour the terms of a patent licence agreement and continue to pay royalties.

In this case, the court also recognized that the purchaser was not a third party but had a common principal with the insolvent company.

Even where the intellectual property provisions of the BIA and CCAA do apply, there is some uncertainty as to what is meant by the term “intellectual property” as that term is not defined. There is also uncertainty relating to the scope of the “right to use the intellectual property” referred to in the legislation. Patent licences, for example, typically include the right to make, use and sell the invention, not just the “use” specified in the legislation. Similarly, if the licence included the right of the licensee to grant further sublicences, would those rights continue?

Often, intellectual property licences are wrapped up into larger contractual arrangements, perhaps involving ongoing technical support, the sharing of improvements, or ongoing maintenance of the intellectual property. If only the portion of the contract relating to the “use of the intellectual property” is covered by the legislation, this may leave the licensee in an undesirable situation if other aspects of the contract are disclaimed. Also, it may leave the parties unclear as to what is required to “perform its obligations under the agreement in relation to the use of the intellectual property” if, for example, the royalty payment covers multiple aspects, only one of which is the intellectual property.

For companies entering into licence agreements, particularly where there is a concern of an insolvency by one of the parties, these sections of the BIA and CCAA should be reviewed having regard to the licence and contractual terms. According to the jurisprudence, if ownership in the intellectual property has been transferred, the transfer cannot be disclaimed during the insolvency. Therefore carefully structuring the intellectual property ownership is one way to provide additional certainty in the event of an insolvency. If access to source code is important to the licensee, it may be advisable to have a copy placed into escrow as part of the licence arrangement.

Insolvency, restructurings and proposals always involve uncertainty but for third party licensees who have relied on a long-term licence arrangement, the effects can be devastating. Intellectual property licence agreements have been recognized as being different than other contracts giving some reassurance that the licences will be recognized during an insolvency.

Ex parte injunction against author, Go Daddy and Google dissolved

It just came to my attention that an ex parte injunction against the author of allegedly defamatory works, Go Daddy as the domain name provider and Google for providing search functionality, which I previously reported, has been dissolved.

The British Columbia Court in Nazerali v. Mitchell, 2011 BCSC 1846, heard submissions on extending the injunction. The judge considered the defenses to defamation raised by the individual defendant and the breadth of the injunction in the decision.

Continue reading Ex parte injunction against author, Go Daddy and Google dissolved

Article on Voltage Pictures litigation

The Lawyers Weekly has published an article I wrote about the Voltage Pictures litigation against peer-to-peer downloaders (Voltage Pictures LLC v. Jane Doe, T-1373-11). I have previously blogged about the litigation when the Federal Court required ISPs to provide identifying information of the defendants and about the evidence provided to the court.

[Updated: Here is a copy of the article is it originally appeared in the March 9, 2012, issue of The Lawyers Weekly published by LexisNexis Canada Inc.]

Movie studio puts a “Hurt” on downloaders

Some peer-to-peer movie downloaders may get an unpleasant surprise in the mail from Voltage Pictures LLC, which has brought an action in the Federal Court against various “Does” — unidentified users of peer-to-peer networks who downloaded unauthorized copies of its Oscar winning film The Hurt Locker.

Voltage Pictures obtained an order from the court requiring non-party Internet service providers, Bell Canada, Cogeco Cable Inc. and Videotron, to provide the contact information of unnamed  defendants that Voltage Pictures had identified as downloading the movie.

Peer-to-peer software, in this case BitTorrent protocol, is used by individuals to upload and download electronic files. An initial user shares, or seeds, a file onto the network. Other users seeking the file may download it from the initial user or can download all or part of it from others who have already downloaded the file. In this way, each user who downloads a file from the network is also uploading the file to others.

The challenge for copyright owners is identifying the users of the peer-to-peer network and showing to the satisfaction of a court that they violated the work’s copyright by reproducing it. Forensic software may be able to identify the IP address or number associated with a computer on the network but cannot typically identify the actual user. The IP address is a number associated with each computer connected to a network and is typically assigned by an Internet service provider (ISP). It may be impossible to identify an actual user of a peer-to-peer network, as a single IP address may be shared between several individuals.

Voltage Pictures brought a motion last summer to reveal the identities of the subscribers of the identified peer-to-peer network IP addresses by way of a non-party discovery order against the ISPs. Justice Michel Shore of the Federal Court granted Voltage Pictures’ order on the basis that the company was not able to identify the defendants in any way other than by the court order and had a legitimate claim against the defendants.

The court referred to the 2005 decision of the Federal Court of Appeal in BMG Canada v. Doe where a similar situation was considered related to downloading music but had come to the opposite result. In the BMG Canada proceeding, the ISPs had resisted providing the customer information, claiming it violated their subscribers’ privacy rights. Justice J. Edgar Sexton wrote that: “Although privacy concerns must also be considered, it seems to me that they must yield to public concerns for the protection of intellectual property rights in situations where infringement threatens to erode those rights.”

In BMG Canada, the copyright owner’s motion was ultimately dismissed as the evidence was not from the people who had conducted the forensic investigation and therefore determined to be inadmissible hearsay evidence. Such concerns were not raised in Voltage Pictures’ motion as it was unopposed and an affidavit of a forensic investigator who had conducted the inquiries to identify the IP addresses was submitted as evidence connecting the reproduction of the works to the identified IP addresses.

There are reports that a number of the Canadian Internet subscribers identified as a result of Voltage Pictures’ motion have now received letters from the company’s lawyers. According to the court file, Voltage Pictures had until March 2, to identify defendants and propose a schedule for further steps in the action.

Voltage Pictures has brought a similar action in the United States against approximately 25,000 peer-to-peer IP addresses but recently voluntarily dismissed many of those defendants likely because they settled or they could not be identified from the IP addresses. Some defendants have been identified and are now defending the copyright infringement allegations.

The role of ISPs is especially significant in these types of cases. The Supreme Court of Canada in the 2004 Tariff 22 decision identified ISPs as intermediaries who make telecommunications possible and it made clear that they were not liable for copyright infringement for merely supplying software and hardware to facilitate use of the Internet.

ISPs hold the keys connecting public activity on the Internet with the private activity of subscribers in the homes or businesses. In BMG Canada, the Federal Court of Appeal addressed the balance of privacy with copyright enforcement, limiting any disclosure to only information related to the copyright infringement. The court also considered the timeliness of the information as there is a risk that if there is a lengthy delay, the information as to identity of the subscribers may be inaccurate.

The next step in the Voltage Pictures proceeding was the identification of any defendants by the March 2 deadline and then the filing of defences to the allegations of copyright infringement by those defendants. Statutory damages for copyright infringement can run as high as $20,000 per work so many defendants may choose to settle and avoid the costs for litigation and a possible order against them.