How insolvency impacts intellectual property licenses

Virtually every business in the country uses software under licences from providers such as Microsoft. Industries as diverse as pharmaceuticals, electronics and communications are often dependent upon licensing of technologies needed to produce their complex products and avoid infringing third party rights.

Consumer goods such as food, clothing and homewares frequently take licences of famous properties from the worlds of entertainment and design – from Barbie-branded spaghetti hoops, through Mandalorian soft toys to the latest Thierry Mugler X H&M collaboration.

Intellectual property rights which can be used under licence can be crucial to a business’s continuity. Conversely, a company might be a licensor with a healthy income stream from licensees. But unless a business has taken steps to prevent its interests, it could face serious consequences if its licensee or licensor were to go through insolvency proceedings.

Companies could lose their licence and be blocked from using important technologies or selling products. Key technologies might end up in the hands of competitors, and branded products could end up sold in discount outlets at rock-bottom prices.

Making arrangements to protect business interests is good practice even in the best of economic climates. In the current challenging circumstances, taking such steps now is strongly recommended – especially if a business becomes aware that a licensor or licensee partner is struggling financially.

Taking action to protect business operations

Licensors of intellectual property should seek to prevent their rights being sold on by insolvency officeholders to parties, such as competitors, that would not otherwise be given access to your rights. Licensors should also maintain their revenue streams and avoid these being tied up for a lengthy period. They should try to control their rights and their use, preventing relevant products from being ‘dumped’ in discount environments, which can tarnish a brand’s reputation.

Using rights under a licence from a third party, licensees should try to carry on using the licensed right in their businesses and avoid being prevented from making and selling products using such rights. They should avoid making payments if a licensor is not performing its contractual obligations, such as support and maintenance provision, and stop the rights being sold on by insolvency officeholders. This will prevent the rights being bought by a competitor which would then have rights of inspection and audit of a business’s operations.

Pre-emptive insolvency measures

There are a whole range of actions which can be taken to protect a business, some of which are very simple and cheap. For example, licensees can register their licenses against the relevant registered intellectual property right at the UK Intellectual Property Office by filling in a short and simple form and paying a £50 fee.

The benefits of doing so can be critical, making the difference between retaining licences – and business continuity – or losing it with no warning. Organisations that use patents, trade marks or registered designs under licence should urgently review whether they have registered their rights. This simple and quick measure could be crucial in protecting business continuity.

For other remedies, however, caution and specialist legal advice is recommended in order to make them enforceable. Insolvency officeholders have broad powers to set aside or disclaim contracts.  One method for licensees to seek to protect their rights to use a licensed right is to have the relevant right assigned to it, under an assignment-and-licence-back arrangement or a suspended assignment, triggered on an insolvency event.

Such arrangements need to be drafted with the utmost care, however, in order to minimise the risk of these being set aside by an insolvency officeholder as an unlawful 'preference' or 'transaction at an undervalue'. Success is not guaranteed due to the strong powers of insolvency officeholders.  However, if carefully drafted, this type of arrangement can give a licensee practical help in negotiations with insolvency officeholders to obtain continued use of key rights.

It is also wise to businesses to review the terms of their key licences, to check the provisions around termination and insolvency. It is better to carry out this exercise now, rather than in a last-minute panic when news breaks that a licensee or licensor has appointed administrators.

This exercise is particularly useful for licensors who have a contractual right to terminate a licence at an early-stage insolvency event, such as non-payment of royalties or seizure of assets. This allows astute licensors to move quickly to terminate a licence at an early opportunity, rather than waiting until officeholders are appointed and having to engage in protracted negotiations.