Ontario Superior Court of Justice, 2008-04-22, case no. 06-CL-6416:
Royal Bank of Canada vs. Body Blue Inc.(1)
Body Blue Inc. had licensed rights in certain patent assets to Herbal Care. After Body Blue Inc. had become insolvent, its assets were sold by the receiver to Body Blue 2006 Inc. (‘Body Blue 2006’) under an Approval and Vesting Order (the ‘AV Order’).
Body Blue 2006 moved for an order declaring that the title to the intellectual property it had acquired under the Order ended all contractual or licensed rights Herbal Care may have had with respect to the said intellectual property.
The court ruled held that the AV Order had terminated Herbal Care’s license rights and that the latter’s only claim was one for damages. The judge recalled the precedent set by the case Re T. Eaton. Co. (2):
The true nature of an (exclusive) licence is leave or permission to do such a thing, which would otherwise be unlawful (and a contract not to give leave or permission to anyone else to do the same thing). It confers no interest or property in the thing.
The judge concluded that Herbal Care’s claim was against their own licensor, Body Blue Inc., with whom they had contracted. The Order had the effect of conveying title in the technology to Body Blue 2006, free and clear of any rights asserted by Herbal Care. Any of the latter’s claims were not binding on Body Blue 2006 or any of their successors in title.
There are two laws providing protection to companies in financial difficulty. Under the Companies’ Creditors Arrangement Act (‘CCAA’), a corporation owing more than $5 million, in an attempt to restructure its financial affairs and avoid bankruptcy, may apply to the court for protection from creditors. Upon such application, the court issues an order protecting the company from its creditors for a period of thirty days (which delay can be extended by the court) to file a plan of arrangement. The procedure is overseen by a court-appointed monitor, whose functions are similar to those of a trustee.
Under the Bankruptcy and Insolvency Act (‘BIA’) a company may file a Notice of Intention to file a proposal to its creditors. (This procedure is available, regardless of the amount of indebtedness, to physical persons as well as companies.)
During these periods, under both legislations, no legal action can be taken against the company. After the plan of arrangement or the proposal is filed, the creditors vote on it. If not accepted by the majority of creditors, the company is forced into bankruptcy.
Both the BIA and CCAA have provisions enabling the trustee or monitor to resiliate or disclaim agreements to which the debtor was a party on the day of the filing of a notice of intention under the BIA or the filing of an application under the CCAA. Where protection has been applied for under the BIA of CCAA, the resiliation or disclaimer, the new legislative dispositions provide that such resiliation or disclaimer:
… 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. (3)
Effect of the Amended Legislation
These new provisions provide some protection to licensees of intellectual property when their licensor runs into financial difficulty. However, these provisions apply only to proposals under the BIA and restructurings under the CCAA. In a bankruptcy or receivership, case law will still have to be relied on. The precedent set by the Body Blue case continues to apply. (Although the Body Blue case was rendered by the Ontario courts, this precedent applies throughout Canada as the BIA and CCAA are both federal legislation.)
One shortfall to the new provisions is that the term ‘intellectual property’ is not defined in either legislation. Furthermore, neither of the legislations specifies that it applies to registered intellectual property. (In Canada, it is not mandatory that trademarks, patents and copyright be registered; however it is highly recommended.)
A second major shortfall is that the wording of the legislation refers only to the licensee’s ‘right to use’ the intellectual property, and not to the licensee’s other rights under the licence agreement, such as the right to sub-license. In this regard, it is questionable whether these provisions extend to the rights of existing sub-licensees, as the latter have no agreement with the original licensor. This also leaves the question of how a situation of a sub-licensor who is filing for creditor protection would be handled vis-a-vis the sub-licensee.
Drafting Licence Agreements
In view of the limits in the legislation, as well as the lack of remedies in cases of bankruptcy and receiverships for situations such as the one in the Body Blue, careful drafting is required when representing a licensee.
In any case, a license agreement should clearly set out consequences of insolvency or restructuring of either party. Moreover, licensees should constantly keep an eye on the development of the proceedings if their licensor becomes insolvent.
Andrè Begin , IDI agency and distribution expert for Canada.
(1) Published as (2008), 42 C.B.R. (5th) 125 (Ont. S.C.J.)
(2)  O.J. No. 4216 (S.C.J.)
(3) Section 65.11 (7) BIA; Section 32(6) CCAA