Licensees entering into intellectual property licence

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1 Protect your IP rights from insolvency What are the risks for licensees when a licensor becomes insolvent? Hamid Rashidmanesh, David Naylor and Adam A Lewis compare procedures under US and English law, and provide some tips on how to minimize risk Licensees entering into intellectual property licence agreements should be aware of the risks and consequences of a licensor subsequently becoming insolvent. Insolvency laws in the US and England (as well as elsewhere) give liquidators very wide ranging powers to dispose of an insolvent company s assets. A licensor s trustee in insolvency will, for example, have the power to assign or sell ownership of the IP rights which are the subject of the licence. This could result in a third party (which may even be a competitor) purchasing the insolvent licensor s intellectual property and thereafter interfering with or compromising the licensee s continued use of the licensed technology. Alternatively, and by way of a further example, the licensor s trustee in insolvency may have the option of either performing the contract or treating it as disclaimed or rejected. If the latter occurs, the licensor s obligations under the contract cease and the licensee may have a claim for damages against the bankrupt estate but will lose its right to use the licensed technology. These risks are a major concern in the current economic climate, which has witnessed the insolvency of various technology developers, and will be particularly worrying for businesses which depend on licensed technology. A claim for damages against a bankrupt estate, behind any secured creditors, will be little consolation for a licensee whose business relies on and needs the licensed technology to continue its business. Technology licensees and their advisors should be aware of the risks involved with a licensor s insolvency and should plan ahead (preferably at the licensing stage) with a view to minimising its consequences. This articles examines and contrasts the different risks and protections afforded to a licensee under US and English insolvency law, and identifies the steps that can be taken to minimise those risks. Hamid Rashidmanesh Insolvency laws in the US and England give liquidators very wide ranging powers to dispose of an insolvent company s assets US bankruptcy laws Under the US Bankruptcy Code (the Code), a US company that files for bankruptcy protection can choose either a liquidation under Chapter 7 of the Code or a reorganization under Chapter 11 of the Code. In the case of a Chapter 7 liquidation, the business shuts down and a bankruptcy trustee is appointed to take charge of the company affairs and assets, as well as the resolution of claims against the company. His job is to marshal the company s assets to pay creditors in their order of priority. In the case of a Chapter 11 reorganization, the company s management normally remains in charge of the company s affairs (thus the company is called the debtor in possession), but the conduct of those affairs and the disposition of assets is governed by the Code and bankruptcy courtsupervised. The goal in such situations is to confirm a plan of reorganization that allows the company to continue in business through reduced payments on debt and other arrangements that still return to creditors more than they would get in a Chapter 7 case. The Code grants Chapter 7 bankruptcy trustees and Chapter 11 debtors in possession (hereafter, for the sake of May

2 SCHEDULE Extracts from US Bankruptcy Code 365 Executory contracts and unexpired leases (n) (1) If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect (A) to treat such contract as terminated by such rejection if such rejection by the trustee amounts to such a breach as would entitle the licensee to treat such contract as terminated by virtue of its own terms, applicable nonbankruptcy law, or an agreement made by the licensee with another entity; or (B) to retain its rights (including a right to enforce any exclusivity provision of such contract, but excluding any other right under applicable nonbankruptcy law to specific performance of such contract) under such contract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law), as such rights existed immediately before the case commenced, for (i) the duration of such contract; and (ii) any period for which such contract may be extended by the licensee as of right under applicable nonbankruptcy law. (2) If the licensee elects to retain its rights, as described in paragraph (1)(B) of this subsection, under such contract (A) the trustee shall allow the licensee to exercise such rights; (B) the licensee shall make all royalty payments due under such contract for the duration of such contract and for any period described in paragraph (1)(B) of this subsection for which the licensee extends such contract; and (C) the licensee shall be deemed to waive (i) any right of setoff it may have with respect to such contract under this title or applicable nonbankruptcy law; and (ii) any claim allowable under section 503(b) of this title arising from the performance of such contract. (3) If the licensee elects to retain its rights, as described in paragraph (1)(B) of this subsection, then on the written request of the licensee the trustee shall (A) to the extent provided in such contract, to such contract, provide to the licensee any intellectual property (including such embodiment) held by the trustee; and (B) not interfere with the rights of the licensee as provided in such contract, to such contract, to such intellectual property (including such embodiment) including any right to obtain such intellectual property (or such embodiment) from another entity. (4) Unless and until the trustee rejects such contract, on the written request of the licensee the trustee shall (A) to the extent provided in such contract to such contract (i) perform such contract; or (ii) provide to the licensee such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law) held by the trustee; and (B) not interfere with the rights of the licensee as provided in such contract, to such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment), including any right to obtain such intellectual property (or such embodiment) from another entity. 101 Definitions (35A) intellectual property means: (A) trade secret; (B) invention, process, design, or plant protected under title 35; (C) patent application; (D) plant variety; (E) work of authorship protected under title 17; or (F) mask work protected under chapter 9 of title 17; to the extent protected by applicable nonbankruptcy law 42 convenience, referred to collectively as the estate) various powers, and imposes restrictions on those powers. The most relevant for IP licences are the provisions of Section 365 of the Code relating to executory contracts and unexpired leases; and subsection (n) in particular relating to intellectual property licences. The main provisions of Section 365 of the Code are: Subsection (a), which sets out the basic principle that the estate may assume or reject any executory contract or unexpired lease of the insolvent company assumption meaning that both the estate and the non-debtor party to the contract must complete performance, and rejection constituting a breach of the contract by the estate (even if a prior breach had not occurred) giving rise to a claim for damages to be asserted in the bankruptcy case. Subsection (b), which requires the estate to cure any May 2003 default in the contract or lease and to provide adequate assurance of future performance if there has been a default (other than defaults relating to the company s financial condition or filing of bankruptcy) before the estate may assume the contract. Subsection (c), which prohibits the estate from assuming or assigning a contract or lease if another provision of general law excludes the other party from accepting the company s performance or requires consent for an assignment. Subsection (d), which places time limits on assumption and rejection. In a Chapter 7 case, and in all cases with respect to commercial real property leases under which the company is a tenant, the estate must assume the contract within 60 days unless the court extends or shortens that deadline. In Chapter 11 cases for contracts other

3 than commercial leases to the company, the deadline is the date upon which a plan is confirmed unless the bankruptcy court sets an earlier deadline. If not assumed by the applicable deadline, the contract or lease is deemed rejected. Subsection (e), which invalidates clauses that automatically terminate or modify the company s rights under the contract or lease or permit the other contracting party to terminate the contract or lease in the event of the company s bankruptcy or based upon the company s solvency or financial condition (these clauses are commonly called ipso facto clauses). Subsection (f), which partially invalidates restrictions on assignment of contracts or leases by the estate to a third party. This subsection imposes two restrictions on the estate: (i) it must first assume the contract or lease, subject to all the restrictions on assumption found in the section (this is a logical first step as assumption and assignment often are accomplished through the same proceeding), and (ii) adequate assurance of future performance by the prospective assignee must be provided to the other contracting party. Subsection (k), which relieves the estate of liability for a breach of an assigned contract or lease that occurs after assignment (this is also effectively true for pre-assumption defaults under an agreement that is being assumed since the non-debtor party must assert his pre-assumption defaults in connection with the assumption proceeding in order to have them cured, otherwise they will be deemed cured and cannot be asserted later). Subsection (n), which provides that, if the estate of a licensor of intellectual property rights (as defined in the Code) rejects an executory licence agreement, the licensee has the choice either to: (i) treat the contact as terminated or (ii) continue to perform the contract and retain its rights to the licensed intellectual property. If the licensee selects the first option and agrees to treat the contract as terminated, the licensee will lose its right to use the intellectual property but will have the right to bring a claim for damages against the estate for its loss (of course, how much on the dollar it will be paid on its claim is altogether another question). If, on the other hand, the licensee opts to continue the contract, the licensee will be entitled to use, without interference, all the intellectual property rights granted by the contract and in existence at the date of filing for bankruptcy, but must pay the royalties or other licence fees as set out in the licence agreement and will lose its right to actual performance of other provisions of the agreement (such as the right to updates or support) and must waive any right of set-off it may have with respect to the contract arising out of its loss of these other rights (although it will be able to assert a damage claim for that loss). A full copy of Section 365(n) of the Code is set out in the Schedule. The protection afforded by Section 365(n) is invaluable to licensees. It was included as an amendment to Section 365 of the Code in 1988 following growing pressure to recognize the reliance that businesses have on licensed software and other intellectual property. That pressure grew out of a federal appellate court decision that when a licensor rejected an intellectual property licence, the licensee lost the right to use the technology. The significance of Section 365(n) is that, while the estate initially has the right to decide whether to assume or reject the licence, it protects the non-debtor party from being deprived of its bargainedfor access to the technology if that is its wish, access around which it may have built its entire enterprise. There are, however, some important limitations to the protection afforded by Section 365(n). The first is that Section 365(n) only applies to those licence rights that exist on the date that the licensor files for bankruptcy protection, regardless of any attempt to provide otherwise in the licence agreement. This means that, even if Section 365(n) is relied on to continue the licence, the licensee will not have any rights in updates, modifications or enhancements created by the licensor after the bankruptcy filing and the bankrupt licensor may elect to discontinue its maintenance and support obligations. This might not be a problem for some licensees, but will have a major impact where ongoing support and upgrades are required for the continued use of the technology. Furthermore, if the licence agreement does not grant the licensee the right to modify the licensed technology, then the licensee will only be able to use the technology in the condition delivered to the licensee by the licensor. To protect against these risks, a licensee should seek to ensure that (1) the grant of rights to use the intellectual property is a present grant and not a grant as at some time in the future and (2) the licence grants the licensee the right to modify and otherwise maintain the technology upon the bankruptcy of the licensor, inclusive of (where relevant) access to the source code. Access to the source code itself or other technology can be reserved under escrow agreements, and such agreements will be enforceable against the estate as Section 365(n) expressly makes enforceable arrangements designed to give the non-debtor party better access to the technology upon the occurrence of events such as the licensor s bankruptcy. The second limitation is that, as noted above, the licensee loses the right to receive other potentially important benefits under the agreement, such as updates and technical support. The third is that the benefits of Section 365(n) are available only for licence agreements that are executory. Not defined in the Code, the meaning of executory contract, for the purposes of Section 365, has been clarified by US case law. The prevalent judicial definition is that an executory contract is an agreement under which the obligations of both parties are so far unperformed that the failure of either to complete performance would constitute a material breach of contract. There must be outstanding obligations on both parties (re Stein & Day, Inc (1988)) and a mere obligation to pay money or perform a guarantee will be insufficient (re May

4 44 Bankruptcy and insolvency English insolvency law is not codified in the same fashion as the Code, but its principal provisions are set out in the Insolvency Act 1986 (IA 1986). Technically speaking, under English law, the term bankruptcy refers to an individual who (1) is unable to pay his debts as they fall due (or whose liabilities exceed his assets) and (2) has been adjudicated bankrupt by a court of law. It does not cover companies. The term insolvency is used instead to refer to a company in a similar position. For the sake of convenience, however, in this article the terms bankruptcy and insolvency are used interchangeably. Leibinger-Roberts, Inc (1989)). In the context of a licence agreement, it has therefore been held that a licence is not executory under Section 365 where the licensee may be obligated to pay a royalty and the other party must defend and hold the licensee harmless against any patent infringement action brought against the licensee (re Richmond Metal Finishers, Inc). On the other hand, it has been held that a licence will be treated as executory under Section 365 where: (1) the licensor has a continuing obligation to notify the licensee of any infringements of the licensed intellectual property, together with an obligation to institute proceedings, at its own expense, for third party infringements and keep the licensee indemnified from suits made against it for its use of the licensed products and (2) the licensee, in return, has an obligation to provide the licensor with accounts and pay royalties and to assist with the protection of the licensor s rights in the intellectual property (re Chipwich, Inc (1985)). Finally, another hurdle to overcome in order to rely on the protection afforded by Section 365(n) is that the licensed technology must fall within the narrow definition of intellectual property set out in the Code. Section 101(35) of the Code (a copy of which is set out in the Schedule) defines intellectual property as including trade secrets; inventions processes and designs; US patents and patent applications; and works protected by US copyright law; but intentionally excludes trade marks. Nor does it protect licence rights regarding non-us patents and non-us copyrighted works (each outside of US jurisdiction) even if the licensor is a US company. English insolvency laws Under English law, upon the bankruptcy of an individual, there is an automatic assignment of all the bankrupt s property (including any rights under agreements) to his trustee in bankruptcy. Upon the insolvency of a company, on the other hand, the assets of the company remain vested in it, but control and management of the company shifts from its directors to the liquidator. As with US law, once the assets of the insolvent company are vested with the liquidator, the liquidator has the option of either performing May 2003 the contract or seeking to disclaim it or set it aside. If the trustee or liquidator wishes to perform a contract, he must perform the bankrupt s part of the contract, as and when the bankrupt should have done so himself (Gibson v Carruthers (1841)), otherwise a failure to do so within a reasonable time will entitle the other party to treat the contract as abandoned (Lawrence v Knowles (1839)). Thus, like Section 365(d) of the Code referred to above, English law imposes time limits on the liquidator, although the time limit is the more flexible (but uncertain) requirement to reject or perform within a reasonable time rather than within 60 days. Unlike US law, however, English law does not distinguish between licence agreements and other contracts there is no specific provision for intellectual property licences as with Section 365(n) of the Code in the US. Intellectual property licences are dealt with just like all other contracts under English law. Furthermore, an English liquidator can only reject a contract on certain grounds. A trustee or liquidator may, for example, only disclaim a contract (that is, treat it as terminated) if it is an onerous contract; by which is meant an unprofitable contract, or a contract relating to property which is unsaleable or not readily saleable, or which gives rise to a liability to pay money or perform any other onerous act (Section 315(2) IA 1986). In the case of licences, such an agreement may, for example, be deemed onerous and hence disclaimed where it does not produce sufficient royalties (that is, it is an unprofitable contract) or if it includes provisions for maintenance and support or upgrades and enhancements which are costly to perform. Whether a contract is onerous (and can therefore be disclaimed) is a matter of fact and will vary from case to case depending on the circumstances in that case. In addition to the right to perform or disclaim an existing contract, a trustee or a liquidator (as the case may be) may also challenge or seek to set aside a previous contract or an existing contract (with a view to making them unenforceable against the bankrupt s estate) in the following situations: Transactions at an undervalue (Section 238 IA 1986) where a company (1) makes a gift of any property or charges no consideration for the transaction; or (2) enters into a transaction with any person for a consideration significantly less than the value of the consideration provided by the company. Transactions amounting to a preference (Section 239 IA 1986) where a company does anything or suffers anything to be done which has the effect of putting a person who is one of the company s creditors, or a surety or guarantor for any of the company s debts or other liabilities, into a position which, in the event of the company s insolvency, is better than the position he would have been in if that thing had not been done. Transactions amounting to an extortionate credit transaction (Section 244 IA 1986) where the terms of the

5 transaction require grossly exorbitant payments to be made or the transaction otherwise grossly contravenes ordinary principles of fair dealing. Transactions defrauding creditors (Section 423 IA 1986) where a transaction is entered into at an undervalue and the person entering into it (1) makes a gift to the other person or otherwise enters into a transaction with the other on terms that provide for him to receive no consideration; (2) enters into the transaction with the other in consideration of marriage; or (3) enters into the transaction with the other for a consideration the value of which is significantly less than the value of the consideration provided by himself. If a licence agreement falls into any of the above categories, then there will be a risk that the licence agreement will be set aside by the trustee or liquidator and hence the other party to the agreement will not be able to enforce its terms. If the trustee or liquidator does disclaim or set aside the contract, the licensee will have little remedy other than proving its injury as a debt in the winding up proceedings. In such proceedings, there is no guarantee that the licensee will recover any money as its debt will rank behind that of any secured creditors of the bankrupt estate. This will be little consolation to a licensee that relies on the licensed technology to enable it to trade or conduct its business. If the trustee or liquidator does not disclaim or seek to set aside the licence agreement, the innocent party has the following three options under English law: It may continue to perform its obligations under the licence agreement and hope that the bankrupt does likewise. It may terminate the licence agreement if the terms of the licence agreement itself provide for termination in the event of insolvency. The licensee will then have to prove any damages to which it may be entitled as a debt in the bankruptcy. Penalty or similar provisions applying in the event of termination or the insolvency of a party will not be enforced under English law unless they are proved to be liquidated damages (that is, a genuine pre-estimate of the loss of the innocent party). It may apply for a court order rescinding the licence (or discharging obligations under it) on such terms as to payment by or to either party of damages for the nonperformance of the licence or otherwise as may seem equitable to the court, and any damages payable under the order to any such person will have to be proved by him as a debt in the bankruptcy proceedings (Section 345 IA 1986). What is lacking from the above list of remedies is a right for the innocent licensee to require specific performance of the contract or to require that the bankrupt s estate complies with the terms of the licence, making available the licensed technology without interference. This is quite arguably a deficiency in English insolvency law and is in direct contrast with the protection afforded to licensees in the US under Section 365(n) of the Code. At least Section 365(n) gives licensees the ability to choose whether they Before deciding to continue with a licence agreement on the insolvency of a licensor, the licensee should consider the value of the licence wish to continue using the licensed technology (subject to the limitations referred to above), in which case the bankrupt licensor s estate must permit use of the IP rights in existence as at the date of insolvency. Steps to mitigate bankruptcy risk Having summarised the basic principles of US and English bankruptcy laws in the event of the insolvency of a licensor and highlighted the key differences between the two, this section considers the possible steps that a licensee may take to protect its position under a licence for intellectual property rights in the event that the licensor subsequently becomes insolvent. Acquisition or assignment of the IP As seen above, a licence carries the risk that the trustee of the bankrupt licensor will subsequently seek to reject it, disclaim it or otherwise set it aside (for example, if the licence agreement is unprofitable or costly). An assignment, on the other hand, does not impose the same degree of risk. This is mainly because assignments tend not to be executory contracts and so will not be subject to the same rules on setting aside. As long as fair market value is paid and the assignment is negotiated on arm s-length terms, there is little risk that the transaction will be set aside. An assignment will, of course, also have the added advantage of creating a revenue stream for future exploitation. Although an assignment is often preferable to a licence, this will not always be possible: the proprietor may not be prepared to or able to grant an assignment as it may require the intellectual property for its own purposes (in which case it may be worthwhile offering a licence back to the current owner) or the licensee may not have sufficient money to buy the intellectual property in question. Structure licence to fall within Section 365(n) As discussed above, Section 365(n) of the Code offers the licensee legislative protection, giving the licensee the option of either treating the contract as terminated or preserving the licensee s access to the licensed technology. Wherever possible, it is worth trying to structure the licence to fall within the remit of Section 365(n): its governing law should be the law of one of the states of the US, it should include continuing obligations on both parties so that it is May

6 How to minimize risks Although there are certain risks for a licensee in licensing technology from a licensor who subsequently becomes insolvent, it is possible to plan ahead for this eventuality and structure the transaction and draft the licence in such a way as to minimize those risks. The strategies referred to in this article are not unique to dealings with US or English parties, and can be considered in all licence negotiations. There may also be other solutions available to the parties depending on the circumstances of each case. As discussed, the main risk for the licensee in the event of a licensor s insolvency is the fact that it might lose its rights to the licensed technology. Under both US and English insolvency law, the trustee of a bankrupt estate will have the option of either performing or rejecting contracts which form part of that estate, and the innocent party has certain protections in such an event. Under US law, the licensee has the protection afforded by Section 365(n) of the Code to determine whether to accept or reject the termination proposed by the trustee. Under English law, the licensee is protected by the rule that the trustee may only disclaim or set aside the contract or licence agreement on certain grounds if it is an onerous contract, a transaction at undervalue, etc. As between the two systems of laws, however, it can be argued that a licensee under English law has more exposure to risk; the reason being that a licensee under English law has no absolute entitlement in the event of the licensor s insolvency to retain its rights under the licence agreement, even if the licensee continues to pay the royalties required under the licence, whereas a licensee under US law has the right to require continued use of the licensed technology under Section 365(n). Of course, the above analysis is based on the premise that the licensed technology is valuable to the licensee and that it will want to continue with it. This may not always be the case. Before deciding to continue with a licence agreement on the insolvency of a licensor, the licensee should consider the value of the licence: is the technology itself valuable; will it remain valuable if it is not updated or maintained by the licensor; is substitute technology available and at what cost? A further factor to consider is whether the licensee will be able to recover its damages or a substantial portion thereof from the bankrupt estate as an unsecured creditor if it or the trustee decides not to continue with the licensee? The licensee will need to consider each of these factors carefully and should not automatically presume that it should go for performance. These are factors, however, that cannot always be determined at the outset and so the negotiations for a licence agreement should seek to reserve the rights of a licensee in the manner set out in this article, in case they need to be relied upon at some stage in the future. 46 deemed to be an executory contract, it should be a present grant of the licensed rights rather than a future grant, and it should include IP rights which fall within the definition in the Code. Of course, the protection afforded by Section 365(n) is subject to limitations (as discussed above), but this is an option worth contemplating. Escrow arrangements The licensee may request that the licensor enters into an escrow agreement pursuant to which the licensor places the key components of the licensed technology (for example the source code in the case of software licences) and the documentation relating thereto with a third party acting as escrow agent. The escrow agreement will need to specify the events of default or triggering events very carefully, but it is common practice to give the licensee the right to receive the escrow materials upon the insolvency or filing for bankruptcy protection of the licensor, thereby permitting the licensee to continue using the licensed technology. When drafting the escrow agreement, it is advisable for the licensee also to seek the right to modify and maintain the licensed technology and, for the purposes of US law, it should ensure that the escrow agreement is drafted as a present grant to use the escrowed materials and not just a licence right becoming effective upon bankruptcy. As noted above, escrow agreements are expressly enforceable under Section 365(n). Security interest A licensee may seek to protect its position by having the licensor grant the licensee a security interest in the underlying May 2003 intellectual property. Whilst the existing credit facilities of a licensor may restrict this type of security, this option is worth considering particularly where the licensee is required to pay a large up-front premium for use of the licensed technology. The grant of a security interest has the advantage that it will rank ahead of unsecured claims, allowing the licensee to exercise its claim by seizing the property that has been charged. It also has the advantage of encouraging performance by the licensor by making non-performance less attractive. As with any other secured claim, the security interest should be registered or otherwise perfected as against third parties in the normal manner. Restrictions of assignment A licensee under English law might seek to include restrictions in the licence agreement on assignability and chargeability. This is advisable because, if the licence agreement is silent on these points, it can be freely assigned under English law to any third party by the liquidator without the licensee having any input in this process. Furthermore, if a licensee has a particular concern about the intellectual property falling into the hands of a competitor, it can request a provision restricting assignments without consent or (if that is resisted) restricting assignments to named competitors only. In the US, Section 365(f) permits the liquidator to ignore such restrictions on assignability. However, there is some US jurisprudence that indicates that unless the licensor has expressly consented, a non-exclusive licensee of a patent or copyright cannot assign (or even assume) the licence.

7 Licensor to be non-trading entity A licensee might request that the licensor ring-fences its intellectual property by transferring it to a non-trading entity and keeping it as separate as possible from the other assets of the group. The idea here is to create an entity that is unlikely to file a bankruptcy (in the US, this is commonly called a bankruptcy remote entity). If this option is to be pursued, the licensee would want to see that the memorandum and articles of association (or by-laws) of the company owning the intellectual property restrict it from incurring debts or otherwise charging the intellectual property and there should also be a restriction on variations and alterations to its constitutional documents. The problem with this option is, however, that it is largely untested and the estate of the conveying former owner might seek to set it aside as an unlawful attempt to put assets outside of the reach of creditors. Payment terms As far as a licensee is concerned, it may be helpful if the amounts to be paid to the licensor under the licence agreement are sub-divided in respect of each right or service provided or granted by the licensor. Rather than pay one large premium for the licence, it makes sense for the licence to specify various payments, fees or royalties for different matters: for example a basic royalty fee or fees, a certain fee for support and maintenance, a certain fee for upgrades. By separating out these payments, the licensee can avoid paying for services that it might not receive after the licensor s estate enters into bankruptcy. Termination Standard termination provisions in relation to the insolvency of the parties should be carefully considered, including the description of insolvency events, as a filing for Chapter 11 (or sometimes even Chapter 7) protection will not be caught by usual UK insolvency event wording. A licence carries the risk that the trustee of the bankrupt licensor will subsequently seek to reject it, disclaim it or otherwise set it aside Furthermore, the licensee should consider wording to ensure that the licence does not terminate automatically in the event of insolvency of the licensor, but only at the option of the licensee. Section 365(e) of the Code invalidates automatic termination provisions, but there is no equivalent under English law. Transfer or option A licensee might seek to protect its position by requiring the licensor to transfer to it all the licensed intellectual property in the event of the licensor s insolvency. Such a provision may, however, be resisted by the trustee in insolvency, especially if no or minimum consideration is to be given for the transfer, as the trustee has an obligation to maintain the assets and secure maximum value for them. As an alternative, a licensee might consider including an option or provision which would give the licensee a right of first refusal to buy the intellectual property, but it would still have to pay market value to acquire the intellectual property, otherwise the transaction risks setting aside for being at undervalue. Morrison & Foerster Hamid Rashidmanesh is an associate and David Naylor is a partner in the London office of Morrison & Foerster; Adam A Lewis is a partner in the firm s San Francisco office Every Monday, MIP sends out a FREE newsletter with all the latest IP news and developments from our correspondents around the world. MIP Week covers the latest cases, new legislation, major IP deals, company and people news. Are you missing out on the latest IP news? To subscribe, visit our website,, and click on News by May