[Guest post] How should intellectual property licences be treated in insolvency? Some critical reflections on the Commission Proposal 2022/0408/COD

The IPKat has received and is pleased to host the following guest contribution by Guillem Gabriel-Pizarro (PhD candidate, European University Institute) on the recent proposal for an EU directive in insolvency law and how it relates to IP licences. Here’s what Guillem writes:

How should intellectual property licences be treated in insolvency? Some critical reflections on the Commission Proposal 2022/0408/COD

by Guillem Gabriel-Pizarro

On 7 December 2022, the European Commission released the Directive Proposal 2022/0408/COD, which aims to harmonize certain aspects of insolvency law. The proposal focuses on three main goals: (i) the recovery of assets, (ii) the efficiency of proceedings, and (iii) the predictability and fair distribution of the recovered value.

Insolvent Kat 😿

One notable innovation introduced by the proposal is the pre-pack arrangements. These procedures involve organizing and negotiating the sale of a debtor's business (or part of it) before the formal initiation of insolvency proceedings.

From an IP perspective, the proposal is highly relevant as it recognizes the importance of IP licences as ‘key components of the operations of the business being sold’, and provides, for the first time, specific regulation for IP licences in insolvency. It seeks to harmonize certain substantive issues in the assignation (27.1) and termination (27.2) of those contracts in the pre-packs proceeding, while the remaining issues are governed by the law of the Member State where the liquidation phase has been opened (27.3):

Article 27 Assignment or termination of executory contracts

1.Member States shall ensure that the acquirer of the debtor’s business or part thereof is assigned the executory contracts which are necessary for the continuation of the debtor’s business and the suspension of which would lead to a business standstill. The assignment shall not require the consent of the debtor’s counterparty or counterparties.

The first subparagraph shall not apply if the acquirer of the debtor’s business or part thereof is a competitor to the debtor’s counterparty or counterparties.

2.Member States shall ensure that the court may decide to terminate the executory contracts referred to in paragraph 1, first subparagraph, provided that one of the following conditions applies:

(a)the termination is in the interest of the debtor’s business or part thereof;

(b)the executory contract contains public service obligations for which the counterparty is a public authority and the acquirer of the debtor’s business or part thereof does not meet the technical and legal obligations to carry out the services provided for in such contract.

Point (a) of the first subparagraph shall not apply to executory contracts relating to licenses of intellectual and industrial property rights.

3.The law applicable to the assignment or to the termination of executory contracts shall be the law of the Member State where the liquidation phase has been opened.

This short note will critically assess those substantive issues, followed by a conclusion.

Assignation: suppressing consent to maximize creditors' value recovery

Providing effective mechanisms to maximize creditors’ value is one of the priorities of the Proposal and the crafting of the assignment section goes in this direction. It allows the debtor to transfer without consent those necessary executory contracts for the business or part of it to be sold. This feature is present in some Member States (Spain), while in others (Germany) it represents a paradigm shift.

The capacity to transfer is limited to those licences ‘necessary’ to run the business in question. Unlike the previous Directive (pre-insolvency procedures), the Commission has now shifted the characterization from ‘essential’ to ‘necessary’ licences, thus lowering the threshold. However, the term ‘necessary’ might still carry a certain degree of uncertainty, requiring national courts to adapt it to their own traditions and practices.

The Commission has also addressed the needs of counterparties and included limitations on the assignment of licences when the acquirer is a competitor of the debtor counterpart. Nevertheless, some critical issues might arise in practice. The term ‘competitor’ would be hard to deal with and in some industries too narrow due to the actors’ interconnection and the limited number of players. In this sense, the proposal might benefit from refinements and reconsidering the competitors’ defence by narrowing it down to promote its effectiveness.

A patchwork provision: limiting termination without adequate safeguards

The termination of licences in insolvency has been a critical issue for practitioners, judges, and scholars alike since the Lubrizol case in the 1980s. Thus, it is interesting to see what the Commission has proposed.

The Proposal prohibits the termination of IP licences necessary for the business to be sold, inspired by the US approach. However, there are three key differences that shift the outcome.

First, in the US, the licensor-debtor cannot terminate any licence, while the Proposal only forbids termination upon necessary licences for the debtor, leaving other scenarios to the Member States. Licensees who made upfront payments or investments expecting long-term returns are generally not covered. The licensees' protection in the event of a licensor insolvency is left to national law.

Second, while the US bans termination, it offers to the licensor-debtor the capacity to reject it (§ 365 [n]). By rejecting, the licensor shields herself from further obligations (as updating the licensed technology), while the licensee-creditor keeps access to such rights. The Proposal borrows the ban, but it does not offer any safeguards to licensors in debt to minimize their obligations.

Third, the provision applies to both licensor and licensee as debtors, preventing an insolvent licensee from terminating necessary licenses, even if it is in their interest. This may cause unjustified damages to both parties, as the licensee-debtor cannot offer their business discharged of burdening contracts, and the licensor risks under-exploitation of their IP rights.

In the end, the current drafting is a patchwork provision, borrowing elements from several jurisdictions without also incorporating their safeguards. It fails to properly address the licensees' need for access to IP rights in insolvency while not alleviating burdens for the licensor-debtor. The total ban is inflexible for licensees in debt. Regaining control of IP rights and receiving monetary compensation should be sufficient. The licensee as a debtor should be excluded from the prohibition to terminate.

Conclusion

The proposed treatment of IP licences in the pre-packs procedures brings highly innovative elements in the EU legislation. Indeed, the capacity to transfer without consent is new for some Member States and it should facilitate the desired recovery of assets. However, refinements are needed, particularly in narrowing down the competitor's defence.

The specific ban on termination of IP licences poses more significant challenges. The idea is compelling due to the particular needs of licensees in licensors’ insolvencies; yet, the current patchwork might create undesired effects regardless of who the insolvent party is. The Commission would benefit from delving into countries that have implemented such ban for much longer. A more nuanced approach, with the inclusion of safeguards, would better address the needs of licensees and licensors in insolvency situations.