(Cross-)License Agreements in German Insolvency Proceedings: An Update
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, 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.
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.
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.
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 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.