On July 25, the Higher Regional Court (Oberlandesgericht) of Munich ruled that an irrevocable license does not become unenforceable in German insolvency proceedings. The judgment concerned the rejection of a cross-license by an insolvency administrator. Cross-license agreements play a significant role in industries with a high concentration of patents, such as the semiconductor, biotechnology, software, and internet industries. To minimize the risks of patent violations, market participants grant to each other rights of use in patents, patent applications, and know-how in specific areas. An appeal against the Munich judgment has already been filed with the German Federal Supreme Court (Bundesgerichtshof, or "BGH"). Whether the decision will be upheld remains to be seen. This Commentary provides a brief update on the situation.
Legal and Commercial Background
In German insolvency proceedings, mutual contracts with respect
to which the obligations of the debtor and the counterparty have
not been completely performed are governed by §103 of the
German Insolvency Code (Insolvenzordnung, or
"InsO"). Such contracts are automatically unenforceable
unless the insolvency administrator elects the performance of the
contracts. If the administrator rejects a contract, i.e., elects
not to perform a contract, the counterparty will be limited to a
claim for nonperformance. This claim is merely an insolvency claim,
so only payment of a—typically low—dividend can be
expected.
License agreements are usually treated similarly to lease
agreements over movable assets, so they fall within §103 InsO
as well. An insolvency administrator of the licensor will often not
be interested in electing performance if realizing the intellectual
property right without the license or granting a new license will
be favorable to the insolvency estate. The situation becomes more
complicated if the license agreement concerns foreign intellectual
property rights, e.g., patents registered abroad. The
licensee's interest in turn is to uphold the license agreement,
in particular if it has made substantial investments based on the
license. Other than a lessee, the licensee often has no possibility
to substitute the licensed rights by entering into a license
agreement with another party.
Court Rulings—From Software Usage Right to Patent Cross-Licenses
Software Usage Right
(Softwarenutzungsrecht).
The first, and still important, decision by the BGH on the
topic dates from 2005. The case concerned a license agreement over
a software usage right. The BGH confirmed that license agreements
fall within §103 InsO. But the licensee was protected
nevertheless, as the court accepted a conditional transfer of the
software usage right to the licensee in case of a termination for
cause, even if the termination by the licensee occurs in insolvency
proceedings. By rejecting the license agreement, the administrator
could not prevent the transfer. The software usage right decision
might still show how a conditional transfer of rights may possibly
protect the licensee.
Reifen Progressiv. The much discussed
Reifen Progressiv case of 2009 did not, at least not
directly, deal with an insolvency administrator's right to
reject license agreements. It concerned the question whether a
nonexclusive sublicense will survive if the exclusive main license
is called back. The BGH held that this was the case, strengthening
the rights of sublicensees. But the court also mentioned that both
exclusive and nonexclusive rights of use have "in rem
character," and that the licensor does not have to convey the
right of use continuously to the licensee. It was this statement by
the court that led legal scholars to believe that at least
copyright licenses would now be considered
insolvency-proof.
Take Five and
M2Trade. This perception changed with two
decisions by the Federal Supreme Court, Take Five and
M2Trade (both on the same day in 2012). Both court rulings
further strengthened the position of sublicensees. The BGH held
that sublicenses continue to exist despite of a termination of the
main license agreement. With regard to the administrator's
right to reject license agreements, in the Take Five case,
the court probably made a statement by not mentioning an
"in rem character" of a license
again.
The M2Trade decision, however, includes an important
passage with regard to license agreements in insolvency
proceedings. The Federal Supreme Court mentions the case that an
insolvency administrator of the main licensee rejects the main
license, but not the sublicense agreement. With this statement, the
BGH confirmed again that license agreements fall within §103
InsO. The court does not distinguish between exclusive and
nonexclusive licenses. As a result of the judgment, licensees may
consider to use a sublicense as a means of protection against the
risk of insolvency.
Patent Cross-Licenses.
In a recent decision dated July 25, the Higher Regional Court of
Munich had to deal with the rejection of a patent cross-license by
an insolvency administrator. The court decided against the
administrator. It held, among other things,1 that a
license that is granted irrevocably does not become unenforceable
in insolvency proceedings. An appeal against the decision is
pending.
In a similar case of 2012, the Superior Court of Justice
(Kammergericht) of Berlin ruled that nonexclusive license
agreements are subject to the insolvency administrator's
rejection right and are not insolvency-proof.
Deviating Views and Contractual Workarounds
A number of German legal scholars take the view that licenses
are insolvency-proof under the law that is currently in place.
While their reasoning differs, there are valid arguments against
each of these views. One should therefore not rely on any of the
positions, particularly in light of the Federal Supreme Court
judgments mentioned above.
In light of the risks to license agreements in insolvency
proceedings, various contractual workarounds, such as a purchase of
rights, contractual trust arrangements, or an easement are
suggested. Since none of these have been court-tested yet, they
should not be relied on either.
Legislative Initiatives
The concerns regarding the insolvency administrator's right
to reject license agreements prompted the German legislator to deal
with the issue.
Government Draft Bill of 2007. The first attempt
to resolve the matter led to the government draft bill of 2007. It
provided that a license agreement over an intellectual property
right with the debtor as the licensor remains effective in
insolvency proceedings. The draft further gave the insolvency
administrator the possibility to demand an adjustment of the
remuneration if it was not at arm's length. The draft bill was
criticized for a number of reasons and was ultimately not
enacted.
Ministerial Draft Bill of 2012. At the beginning
of 2012, the German Ministry of Justice
(Bundesjustizministerium) took another attempt to resolve
the matter by a change of the Insolvency Code. Other than the draft
of 2007, the ministerial draft bill did not affect a right of the
insolvency administrator to reject a license agreement. Instead,
the licensee could have demanded the conclusion of a new license
agreement at appropriate terms. Due to criticism that came in
particular from the German industry, the plan was
abandoned.
Conclusion
In light of the M2Trade ruling of the Federal Supreme
Court and the failed attempt by the German legislator to change the
Insolvency Code, there is currently no certainty that a license
agreement cannot be rejected in German insolvency proceedings. This
applies to both exclusive and nonexclusive licenses. The
contractual workarounds suggested by legal scholars may not be
relied on either. One possible way out might be to design the
license agreement strictly in accordance with the software usage
rights decision of the BGH. Further, groups of companies may try to
take advantage of the fact that sublicense agreements are better
protected than main license agreements. If the recent judgment of
the Higher Regional Court of Munich on cross-licenses is appealed
against, the respective decision of the Federal Supreme Court may
provide further clarity.
Footnotes
1. The decision is further based on the case-specific argument that the insolvent company never owned the intellectual property rights in full, but only "reduced" by the rights of use of the plaintiff. The intellectual property rights in question had been transferred by the plaintiff to the insolvent company in the course of a spin-off. The plaintiff had retained rights of use.
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