Intellectual property rights in an insolvency and as security – Erik Ficks and Hanna Tilus as expert speakers

In these times of COVID-19, many companies face serious financial challenges and some become insolvent and even go bankrupt. In many cases, a significant proportion of the assets in the bankruptcy estate comprises intellectual property rights (IPR) and know-how protected as trade secrets. Therefore, the following questions are highly relevant: What happens to the IPR and know-how in a bankruptcy? What should solvent parties consider when entering into agreements regarding IPR and know-how in order to avoid difficulties in case either or even both of the parties go bankrupt?

Our IPR experts Erik Ficks and Hanna Tilus were recently invited as experts on this topic to speak at a seminar arranged by The Swedish Association for the Protection of Intellectual Property Rights (Svenska Föreningen för Immaterialrätt, SFIR), where they shared both insights into the legal issues at stake and extensive practical experience of advising clients on such matters.

Limited legislation and case law require innovative and practical solutions in contract drafting

First of all, it should be said that there is limited legislation and case law in this area. Instead, guidance is to be found in legal commentaries.

As a starting point, according to the prevailing view of legal commentators, the bankruptcy estate is permitted but not compelled to enter into the debtor’s agreements. This becomes an issue since, once the bankruptcy is ordered by the court, the company (the debtor) turns into a new legal entity (the bankruptcy estate), which is managed and controlled by a bankruptcy trustee. There is no explicit legal basis for the bankruptcy estate to modify or terminate an IPR license agreement without entering into the agreement and, in the event the bankruptcy estate enters into the agreement, it should be applied in full, with no “cherry picking” allowed.

In cases where the debtor was an IPR licensor and the bankruptcy estate does not enter into the license agreement, the licensee still has the right to “use” the licensed IPR. However, it is somewhat unclear what such right to “use” the IPR actually entails in practice. Know-how protected as trade secrets, or any rights acquired under marketing law, are treated differently since they are not considered as “assets” in the same way as IPR.

Sub-licenses require certain considerations

Things become even more complicated if the IPR license agreement is a so-called “sub-license”. The general view (at least if the main licensor and the main licensee are not in the same corporate group nor have a similarly close connection) is that a sub-license follows the main license, meaning that the sub-licensee cannot make any claims against the main licensor unless the main license includes a triparty agreement for the benefit of the sub-licensee.

Therefore, one way to secure the rights of the sub-licensee in an insolvency situation could be to include a so-called “kick-in license”, which is a direct license granted by the main licensor to the sub-licensee that is latent until e.g. a default situation arises. It could also be considered to include a kick-in license in a security agreement relating to a loan, where e.g. a non-assignable and non-sublicensable license is transformed into an assignable and sublicensable license in the event of the licensor’s default. However, care should be taken when drafting such a kick-in license given that there is e.g. a prohibition against forfeiture clauses (Sw. förfallopant) in Section 37 of the Swedish Contracts Act.

Contractual obligations are probably not binding on third parties

A distinction must also be drawn between actual licenses and mere contractual obligations having a similar effect, e.g. a trademark co-existence agreement or a patent non-assert agreement. This is because such contractual obligations, unlike an actual license, are probably not binding on third parties. Therefore, a mutual license might be a better solution, assuming that a license is still an encumbrance valid against third parties in the event the underlying IPR is transferred due to bankruptcy or the enforcement of security.

The enforcement of ipso facto clauses

As to so-called “ipso facto” clauses, the predominant view of legal commentators is that such clauses are not enforceable once the debtor is actually declared bankrupt. The EU Directive on restructuring and insolvency (2019/1023), which is to be implemented in Sweden in 2021 (but can be postponed by one year), stipulates that ipso facto clauses cannot be enforced in a restructuring (Sw. företagsrekonstruktion). However, it is still unclear how ipso facto clauses will be handled in a bankruptcy. Based on Swedish case law from the Supreme Court (the case reported on page 617 in NJA 2010), a clause providing for a reservation to terminate the contract (Sw. hävningsförbehåll) will be enforceable if the contract is terminated prior to the bankruptcy.

Conclusions

There are many uncertainties regarding IPR in an insolvency (especially a bankruptcy) and as security. It is therefore highly important to consider the consequences of a bankruptcy or a default event under a security arrangement when drafting the contract.

We are happy to assist you in all IPR-related matters.

Author

Erik Ficks 
Partner
Stockholm
Hanna Tilus 
Senior Associate
Stockholm