Licence creates contractual right only

Saskatchewan decision affirms licensee's intellectual property rights in solvency proceedings
A RECENT SASKATCHEWAN Court of Queen’s Bench decision allowing a court-appointed receiver to transfer intellectual property rights free of encumbrances puts a further dent in the growing jurisprudence undermining licensees’ rights in insolvency proceedings.

“The ruling in Golden Opportunities Fund v. Phenomenome highlights the difficulties licensees face if they are building a business based on IP,” says Brian Gray of Norton Rose Fulbright Canada LLP in Toronto. “Their expectations are usually that the licence will continue even if the licensor goes under.”

Generally speaking, court-appointed receivers have the right to disclaim contracts into which the debtor has entered, but they cannot disclaim property rights. In this case, Justice A.R. Rothery, relying on the Ontario Superior Court of Justice’s 2008 decision in Royal Bank of Canada v. Body Blue, ruled that the licence in question created only a contractual right.

Courts have divided on the issue. Both Body Blue and the Ontario Superior Court of Justice’s 1999 decision in Re T Eaton Co found that licence agreements granted contractual rights. The British Columbia Supreme Court, on the other hand, found in its 1999 ruling in Re Erin Features #1 that exclusive marketing rights to a film were in fact property rights.

“This is a difficult issue, because there is a conflict between a debtor’s right to disclaim and the need to protect the expectations of the IP rights holder,” Gray says.

Golden Opportunities involved a novel method of using spectrometry to analyze biological samples. The inventor assigned the patent to Yol Bolsum Canada Inc. (YBCI), of which he was the controlling shareholder and president. YBCI granted Phenomenome Discoveries Inc. (PDI), its wholly owned subsidiary of which the inventor was also president and CEO, an exclusive licence to use the invention. In return, PDI granted YBCI a non-exclusive 99-year license to use any improvements to the invention. The agreement provided that, if PDI wound up or entered into receivership, YBCI could terminate the agreement and demand an assignment of all improvements made to the invention.

Golden Opportunities Fund Inc. (GOFI) was an investor in PDI, owning about 10 per cent of its equity. In December 2015, GOFI called in its debenture, which put PDI into receivership. The receiver effected a sale and sought court approval for the sale of PDI’s assets free of encumbrances, including its obligations to YBCI.

The court approved the sale on the receiver’s terms, finding that statutory protections for licensees found in the 2009 amendments to the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act applied only to proposals made to creditors and not to the actions of court-appointed receivers.

“In short, Body Blue continues to apply to licences within the context of court-appointed receiverships,” Rothery concluded. “Licences are simply contractual rights.”

YBCI’s only recourse, then, was to pursue a claim for the value of its licence against the sale proceeds.

But even where courts find a contractual right exists, all may not be lost for licensees.

“Judges still have the right to decide whether particular contractual rights should or should not be stayed or disclaimed,” says Jeff Lee of MLT Aikins LLP in Saskatoon, who with colleague Paul Olfert of Winnipeg represented GOFI.

In this case, Rothery refused to exercise her discretion to allow YBCI to pursue its rights against the purchaser of the assets. In doing so, she noted that YBCI had brought its application at the “eleventh hour” and that the inventor had bargained away YBCI’s rights to the improvements when he signed an agreement giving PDI the ownership of all improvements.

As Gray sees it, courts have applied “relatively practical business sense” in those cases where they have allowed disclaimers. “Among other things, the courts will look at hardship, such as situations where the licensee has built the bulk of its business on the expectation that the licence would continue,” he says. “Seen in that way, the decision in Golden Opportunities doesn’t seem totally unreasonable.” Gray advises licensees to negotiate for a property interest accompanying the grant of the license.