Introduction
One of the major criticisms of the 1999 reform of the German Insolvency Code concerned the provisions regarding license agreements for Intellectual Property Rights (IPRs). Prior to the reform, insolvency or bankruptcy of German companies was governed by a statute dating from 1877 in which there were no specific provisions regarding license agreements to IPRs. However, case law developed over the years had applied the provisions concerning tenancies to license agreements and had concluded that license agreements would remain in force even after the licensor had gone into administration.
The 1999 reform replaced this case law with a new section (§ 103) under which the administrator or liquidator of the company could continue to abide by the license agreement or could chose to cancel the agreement with the licensee. In the event that the administrator or liquidator no longer wished to continue the license, then the licensee had a claim against the liquidated company for damages. This claim would, however, be rarely successful due to lack of assets. The licensee would then be in the unenviable position of not having the right to use the licensed intellectual property and no opportunity to claim for damages.
There was much criticism at the time of this provision and over the years the legislator has made several proposals for reform. The first proposal was to provide that a license agreement would continue to have effect in the event that a company went into liquidation. This proposal was criticised, however, because the administrator would have had little opportunity to obtain any value out of the property and was therefore deemed to be detrimental to any creditors
The German legislator has now proposed a new provision and is currently consulting with interested parties. A copy of the proposed legislation is available at here
New Section § 108a
The draft law on reform of the insolvency code includes a new provision §108a on licenses. Paragraph 1 states that a licensee can demand a new license agreement from the administrator (or the legal successors of the company) in the event that the company in liquidation refuses to honour the provisions of the original license agreement. The level of remuneration payable to the licensor for use of the IPRs will be based on a reasonable participation of the advantages accruing to the licensee for use of the IP right but taking into account the level of expenses incurred by the licensee in preparation for the use of the license.
The explanatory memorandum attached to the draft provisions explains that this wording has been chosen in analogy to section §23 of the German Copyright Act which also provides for a reasonable level of remuneration under certain circumstances. The legislator explained that there was existing case law that could be used for the interpretation of this provision.
Paragraph 3 of the new provision 108a states that the licensee is entitled to use the IP right under the provisions of the original agreement until a new license agreement is signed. Should, however, no agreement be reached with three months, then the licensee may only continue to use the IPR if the licensee continues to pay remuneration and files a claim in court for a decision regarding the conclusion of a license agreement. Should no claim be filed, then the licensee will no longer be able to use the IP right.
Finally, paragraph 2 of the new section states that any sub-licensees also have the right to request a license agreement from the holder of the IP right (and not just from the contractual party to their license agreement).
The German legislator has argued that this proposal corresponds with the provisions of 365 (n) US Bankruptcy Act. There is, however, one major difference between the manner in which licenses are currently regulated under the US bankruptcy code in comparison to the proposed provisions under the German insolvency code. Section 365 (n) does not require the licensee to file a claim in court for the continuation of the license, whereas the German provisions will require a claim to be filed if no agreement on a license is reached with the administrator.
The legislator explains that it is in everybody’s interest that the assets of a company in liquidation or administration should be maximised. The legislator therefore expects that a licensor should be able to obtain additional revenue by renegotiating a licence agreement, which will be beneficial to the creditors of the company. Whilst this is certainly advantageous for the company in liquidation, it could make life more difficult for the licensor.
One example outlined in the explanatory memorandum for the proposed changes is the example of a cross-license agreement. The legislator explains that the new provisions would enable an IPR holder to obtain financial compensation for the use of the IPRs in future, rather than merely obtaining the rights to use the licensee’s intellectual property. While it is certainly true, that an insolvent licensor no longer require the use of the licensee’s intellectual property, the new provisions may well affect the financial return of the licensee in commercially exploiting the IPR and thus it may no longer become economically feasible for a company to continue to exploit the IPR of the insolvent company. The legislator thinks that the requirement to negotiate an agreement before filing a claim in court will enable both parties to arrive at a suitable compromise. It remains to be seen how this will play out in practice.
Conclusion
The German government is still looking for comments on the proposed provisions of the German insolvency code. The proposals certainly represent a major benefit to a licenses in that they may continue using the intellectual property of an insolvent company in the future and no longer face the risk that the administrator or liquidator will terminate the license agreements. It may have been desirable to have adopted similar provisions to those found in the United States under which the license agreement would continue quasi-automatically. However, the previous discussion in Germany seems to suggest that such a provision will not be accepted by some of the major players in the marketplace.
