Germany: Recent case law on cross-licenses and insolvency law – Sec. 103 InsO as a risk for the use of necessary technologies
By Dr. Claudia Milbradt und Florian Reiling
The handling of IP-licenses in an insolvency of the licensor still is one of the hot topics of German IP-law. At a first glance, this subject merely seems to be a question of bankruptcy and insolvency law. However, the topic also touches on IP-matters as the insolvency of the licensor can have a significant impact on the business of the licensee having in-licensed IP rights that are necessary to run the licensee’s business. This article gives an overview of the current situation in Germany and outlines the framework of potential legal solutions.
The question of whether IP-licenses are stable in an insolvency scenario has been one of the hot topics of German IP-law for quite some time. At a first glance, this subject merely seems to be a question of bankruptcy and insolvency law. However, as many companies deal with commercial products including IP rights that are in-licensed by a third party, the insolvency of the licensor can have a significant impact on the business operations of the licensee. This is particularly true if the company undertakes costly and time-consuming efforts to develop its products that may even require regulatory approval. As soon as the underlying technology is no longer available, the company is forced to stop using the respective IP-rights, thereby being required to discontinue the production of the products. This scenario illustrates the importance of the controversial legal issues surrounding this topic based on several judgments that German courts have recently delivered.
Connection between license agreements and the German InsO
The underlying legal questions are covered by the German Insolvency Statute (InsO) that entered into force in 1999 and contains special stipulations as regards the performance of contracts and transactions after the opening of insolvency proceedings. Under the predecessor statute of the InsO, the so-called Konkursordnung, obligations resulting from a license agreement have been treated like continuing obligations under quasi lease/rent contracts and, thus, the contractual effects survived an insolvency of the licensor. The reformed law brought an end to this survival mechanism. The corresponding section literally only applies to contracts that relate to immovable goods or premises. Thus, the application as regards license agreements has been excluded and licenses have been exposed to the risk of being terminated in case of insolvency of the licensor.
In 2012 the German government published a draft bill inter alia dealing with the destiny of in-licensed rights in the case of bankruptcy of the licensor. The draft bill included a newly drafted Sec. 108a InsO that addressed the issue of securing licenses in an insolvency scenario and outlined certain conditions whereunder the licensee, possibly following an adaption of the licensing terms, is allowed to make continuous use of the in licensed rights. However, in the further course of the legislative procedure, Sec. 108a InsO was struck off the list of fundamental reform issues. Accordingly, there is no specific section in the current version of the German InsO specifically addressing the problem of how to guarantee the licensee’s access to the necessary IP rights given the licensor entering into bankruptcy.
Today, license agreements are assumed to fall in the scope of the general rule of Sec. 103 InsO; this section stipulates that if a mutual contract at the moment of the opening of insolvency proceeding is “not or not completely performed” by the parties, the insolvency administrator may terminate such contract, replace the debtor and claim the other party’s consideration. In case the administrator terminates the agreement, the other party shall be entitled to claims for non performance only as an insolvency creditor. This allows the administrator who chose not to perform the contract to maximize the assets for all creditors.
Typical scenarios involved
The typical illustrative scenario can be described as follows: two companies dealing with commercial products or methods including IP-rights are contracting partners and have in licensed IP rights on the basis of cross license agreements. After the insolvency of one of the parties along with the initiation of the insolvency proceeding, the appointed insolvency administrator wishes to terminate the license agreement in accordance with Sec. 103 InsO. The termination of the license agreement puts the insolvency administrator in the position to better commercialize the IP rights because any “license free” IP is easier to dispose of than IP rights that partly belong to a third party. The question of whether or not the insolvency administrator is in a position to execute his rights under Sec. 103 InsO depends on the character of the license agreement.
Licenses and not or not completely performed contracts in the sense of Sec. 103 InsO
The subject at issue is when, precisely, a license agreement is deemed to be “completely performed”. What is crucial to answer this question is whether a license agreement creates a “continuing obligation” (Dauerschuldverhältnis) or rather a “one-off obligation”.
Continuing obligations are not only typical for employment- and rent/lease agreements, but also for license agreements. Each day the license agreement is in force, the licensor is obliged to maintain and defend the IP-rights in order to further allow the licensee to use the respective IP-rights. In return, the license fee is paid, that is the obligations under the agreement are carried out continuously. Accordingly, the obligations under such contracts cannot be qualified as being “completely performed”.
However, this is just half the story. License agreements can also be regarded as an “on-off performance” rather than constituting a “continuing obligation”. If one takes the example of an exclusive license scenario, it is common sense that not only a simple contractual right to use is granted, but rather a “right in rem” (absolutes Recht) that is assigned from the licensor to the licensee. In such cases it might be argued that by assigning the right to the licensee the license agreement is “completely performed”, that is, the obligations under the agreement have been carried out comprehensively with the consequence that Sec. 103 InsO would not be applicable. However, even if an exclusive license is given there might be other ongoing obligations, such as an ongoing cooperation of the parties as regards the enforcement of the licensed rights, the payment of the patents maintenance fees and existing information obligations. The following examples shall help to shed light on the question of when a license agreement is to be seen as being “completely performed”
Regional Court of Munich (LG München, 7 O 11811/12)
In August 2014, the Regional Court of Munich decided a case on a so-called “freedom to operate” (FTO)-license in the form of a cross-license. The court looked at a license agreement that granted unlimited rights to use the jointly developed technology for an indefinite period of time.
The court stated that the freedom to operate protection granted under the agreement constitutes the main interest of the parties and not the contractual right to make use of the IP rights. The court further stressed that neither the validity of the IP-rights nor the qualification of the usage rights as contractual rights or “rights in rem” is of high importance to the parties; the core concern of the parties is rather the factual possibility to operate their business and thereby the protection offered by the FTO-license. Consequently, once the licenses are granted and the consideration (a back-license in the form of a cross license or a payment) is performed, all contractual obligations are executed and, thus, the contract is “completely performed”. As a result, Sec. 103 InsO is not applicable and the granted licenses do not become part of the insolvency estate. The court further differentiated between FTO licenses on the one hand and so called “umbrella licenses” (Schutzschirmlizenzverträge) creating continuing obligations on the other hand. In the scenario of an “umbrella license” the licensee intends to secure his contractual right to act under the scope (“umbrella”) of the in licensed IP-rights and to make profit from the legal exclusivity it provides. Hence, ongoing contractual obligations exist that allow an application of Sec. 103 InsO.
Higher Regional Court of Munich (OLG München, 6 U 541/12)
In this particular case (which has also been handled by the German Federal Supreme Court but has meanwhile been withdrawn by the parties (BGH; BGH – X ZR 94/13)) two license parties founded a third company (that became finally insolvent) that both cross-licensed respectively transferred existing and future patent rights. It was agreed that the original patent owners should maintain an irrevocable, non-exclusive, timely and geographically unrestricted right to use.
According to the Higher Regional Court of Munich, this scenario cannot be described as a transfer of the entire right combined with a back-license; it should rather be treated as a partial assignment in the sense of Sec. 15 para. 1 sent. 2 German Patent Code (PatG). Thus, the licenses to the patent rights in question never became part of the insolvency estate, and hence, Sec. 103 InsO does not apply in such a scenario. In addition, the court stated that even if the patent rights had not been assigned and licensed back on a non-exclusive basis, the license agreement would still qualify as a “completely performed” agreement since an irrevocable license was granted and the licensor thereby renounced his exclusive rights as patent owner following from Sec 9 PatG. Once the usage rights irreversibly become part of the licensee’s assets no further obligations vis-a-vis the licensor remain with the licensee. Accordingly, a “completely performed” license agreement in the sense of Sec. 103 InsO is given.
Outlook and solutions
To date, the German Federal Supreme Court has not delivered a decision explicitly dealing with the widely assumed applicability of Sec. 103 InsO to license agreements. The recent court decisions, however, have helped to better understand the concept of Sec. 103 InsO in the context of license agreement scenarios. Nevertheless, certain aspects of the discussion still remain untouched. Until those aspects have not been clarified and as long as the BGH has not made a general statement with respect to the relation of Sec. 103 InsO and IP-licenses, the existing case law has to be considered before entering into IP-(cross-) license agreements. The following strategic considerations and practical solutions may help to work-around the currently unsatisfying legal situation:
- IP Holding Entity: One possible solution could be the establishment of a trust structure. The license (including the option to purchase a “right in rem”) is held by a trustee who then licenses the right to the licensee. It has not yet been clarified whether such structure would “survive” the insolvency of the licensor as an insolvency practitioner might argue that the trust structure violates Sec. 119 InsO establishing that any agreement limiting the insolvency practitioner’s rights resulting from Sec. 103 to Sec. 118 InsO shall be void.
- Usufruct Agreement: Against this background, parties involved in a comparable scenario should consider entering into a usufruct agreement as regards the in licensed IP rights. In case of insolvency where the contractual rights to use no longer exist, the licensee may choose to activate his similar rights to the in licensed IP under the usufruct agreement. However, the parties should pay attention to the wording of the triggering clause of the usufruct agreement. In case the usufruct is activated by the mere fact of bankruptcy of the licensor such construction may again be seen as a work-around of the regulations in Sec. 103 to Sec. 118 InsO and may, therefore, be void.
- As soon as a company deals with commercial products depending on IP rights that are in-licensed by a third party, the insolvency of the licensor can have a huge impact on the business of the licensee. As an ultimate consequence, the company may be forced to stop its entire business activity.
- German law does not provide for explicit legal provisions addressing the issue of how and when license agreements might be terminated in an insolvency scenario. There are only general provisions and, therefore, legal uncertainty as regards different legal constructions like cross-, FTO- or umbrella licenses and partial assignments or assignments including back-licenses.
- Until a decision of the German Federal Supreme Court has not been delivered interim solutions to protect the licensee in case of an insolvency of the licensor might be the establishment of a trust structure (IP holding entity) or by entering in a usufruct agreement to be able to use the IP rights on an “in rem”-basis.