Licenses at risk

Christopher Weber is Counsel at the international law firm Bird & Bird in Düsseldorf. He specializes in patent law and intellectual property protection.

With the reform of the Bankruptcy Act to a modern insolvency law, the legislature has created a pitfall for licensees. All attempts to address this problem through legislation have so far failed. Meanwhile, the Federal Court of Justice has made the matter more complicated with a series of decisions. But what does this mean for licensors and licensees?

1. Licenses in insolvency

Hardly any company today operates without licenses. This can range from the well-known shrink-wrap license for computer operating systems, to licenses for the use of trademarks, to complex patent portfolio licenses. Not least, tax considerations, such as in the context of a so-called "Patent Box," can also play a role (see Frase, page 10).

For licensors and licensees, this is usually good business: one can monetize their intellectual property additionally, while the other gains access to this property and can use it to supplement and improve their own products. But what happens if – more often than one would like – the licensor encounters financial difficulties and even enters insolvency proceedings?

Under the old bankruptcy law, the situation was clear: the insolvency administrator, who takes control of the insolvent licensor, could only terminate the license agreement with the consent of the licensee. However, this special regulation was already swept away some time ago by the legislature with the new insolvency law (InsO). All that remains is a general rule that the insolvency administrator can either fulfill or refuse to fulfill mutual contracts that were not fully performed at the time of the opening of insolvency proceedings. This somewhat cumbersome wording of § 103 InsO means, in plain language, that the insolvency administrator has a right of choice to terminate the license agreement. If the administrator exercises this right, the former licensee, now without a license, can only register a potential claim for damages due to non-fulfillment of the license agreement in the insolvency estate. Economically, this is unlikely to be promising in most cases.

In practice, insolvency administrators often use this regulation to first terminate license agreements and then renegotiate them under more favorable conditions for the insolvency estate.

This unsatisfactory situation has recently been further complicated by the Federal Court of Justice (BGH): In a series of decisions, under the keywords "M2Trade," "Take Five," and "Reifen Progressive," the BGH clarified that a sublicense remains in effect even if the main license is terminated due to insolvency. This means that the sublicensee is better off than the original licensee. An unexpected consequence that some can only reconcile with their sense of justice with difficulty.

2. Proposed solutions

In the meantime, several proposals have been discussed to circumvent this problem. Because it is a problem for both sides: a license that can be challenged in this way is, for example, highly unattractive if the licensor is experiencing liquidity issues. It will then be very difficult for him to monetize his intellectual property, which may be urgently needed.

- On the one hand, it has been argued that the license could be "sold" against a one-time payment. The contract would then be considered fulfilled and no longer terminable. However, this overlooks (or deliberately ignores) that the license is granted on an ongoing basis. It was not granted permanently with a one-time sale and is therefore still terminable according to § 103 InsO.

- Against the background of recent case law, it has also been proposed to introduce an intermediary licensing company, thereby making the licensee a sublicensee and thus isolating him from possible insolvency. This raises a whole range of practical problems, not least: how to isolate the licensing company itself from insolvency if, for example, it is owned by the licensor?

- Finally, the transfer of intellectual property rights while retaining a license is being discussed. The licensee would become the owner of the intellectual property, but the licensor would retain a license to it. In this sense, the Munich Higher Regional Court (OLG) has so far decided positively in a single case. The appeal to the BGH is pending, so a legally secure solution cannot yet be claimed here either.

3. Outlook and recommendations for action

Among the options discussed so far in expert circles, none provides final certainty, neither for the licensee nor for the licensor. If the BGH does not follow the opinion of the Munich Higher Regional Court and develops clear guidelines, this situation will likely remain. After several failed legislative initiatives, few observers expect a solution from the legislature. However, this does not mean that there cannot be a solution in specific individual cases that satisfies both licensors and licensees. For the licensee, this is yet another reason to carefully review license agreements concerning important intellectual property.

Author

Christopher Weber is Counsel at the international law firm Bird & Bird in Düsseldorf. He specializes in patent law and industrial property rights.