There are few businesses around that do not rely to some extent on rights which are licensed to them by others. These may be rights to use software, to publish or republish literary or artistic works or to use someone else’s trademark in order to help sell goods and services. What happens if the person who has licensed you these rights goes into insolvency?
Most standard licenses will contain a clause dealing with insolvency, but often it refers only to the insolvency of the licensee and allows the licensor to terminate the licence if the licensee gets into financial difficulties. Often little is said, however, about the insolvency of the licensor. There is nothing in the Copyright, Designs and Patents Act or the Trade Marks Act about the termination of a licence in such circumstances, and in the absence of anything to the contrary in the licence itself the licence will continue notwithstanding the licensor’s problems.
This may or may not be good news for the licensee. In the absence of a clause terminating the licence where the licensor is insolvent, the licensee can, initially at least, rely on the fact that his licence will continue, but on the other hand he will find himself tied under the terms of the license to a licensor who may not be able to carry out any continuing obligations he may have, such as maintaining software or re-writing or editing a literary work. If the licensor fails to carry out his continuing obligations then eventually the licensee may be able to terminate the licence for breach of contract, but in practice the position may not become clear for some time after the licensor has got into difficulties.
As a result, a key provision for a licensee under a licence is to have the right to terminate the licence on the licensor’s insolvency, but such termination should not be automatic. Whether it is in the interests of the licensee to see the license continue for a period, or whether to get out of the deal immediately, will depend very much on the precise circumstances and the licensee needs to be able to choose.
Even if the licensee wishes to see the licence continue, and there is no provision in the licence to the contrary, the licensee may still see his licence taken away from him in certain circumstances after the licensor’s insolvency. For example, a liquidator has the right to disclaim “onerous contracts”, and so if the liquidator feels that a particular licence is not in the interests of the licensor company he will have the right to terminate it. This could leave a licensee in a very tricky position indeed.
If the rights are key to the business of the licensee it may be appropriate to insert into a licence the right for the licensee to purchase the rights in their entirety in the event that the licensor gets into financial difficulty. However, this can raise difficulties under insolvency law for the unwary. Broadly speaking, a contract entered into by a company which subsequently goes into insolvency can be set aside by the court if it is entered into at an undervalue – in other words, if it was not a good deal for the company, and its creditors are now going to suffer as a result, the court can undo the deal. As a result, great care needs to be taken in structuring how, and in particular for what value, rights can be purchased by the licensee in such circumstances.
As a result, licensees of intellectual property rights should always check the precise terms used in the licence that permit termination in case of insolvency and ensure that those terms give the licensee maximum flexibility.
© Taveners April 2010