Termination of intellectual property licences – are you at risk?

With a growing number of business insolvencies, Maureen Kelly advises how to ensure that your IP licences adequately protect your business assets in the event of termination.

When licensing your intellectual property, you may have given little thought to ending that licensing arrangement but, as with all contracts, it is important to plan for the exit too.

Typical triggers for terminating in an IP licence include:

• a material breach that has not been remedied after notice
• insolvency and related events
• challenging the other parties’ IP rights
• a change of control of the licensee.

Some parties may seek to be able to terminate "at will", but this should be resisted or limited where the other party has significant costs in entering into the licence relationship.

It is important to ensure that termination can only be by written notice and that it is specified when the notice takes effect; either immediately or within a specified number of days.

The economic downturn has prompted greater scrutiny of the termination provisions in intellectual property licences, following a growth in insolvencies and business disputes, and two recent cases have clarified a couple of problem areas.

Termination on insolvency

What is your position if one of your licensees becomes insolvent?

An intellectual property licence well drafted in favour of the licensor will usually contain a provision enabling the licensor to terminate the licence in the event that the licensee becomes insolvent. These provisions are particularly important in the case of exclusive licences where the licensee is the only source of income from the technology.

Until recently, there was some doubt whether such a provision would be enforceable. The concern was that it might be "trumped" by an insolvency law called the anti-deprivation rule" which exists to ensure that creditors are paid off fairly in the event of insolvency.

In the case of Butters v BBC Worldwide [2009], the Court of Appeal confirmed that a provision enabling an intellectual property licensor (or any licensor) to terminate a licence in the event of a licensee’s insolvency is enforceable and does not breach insolvency laws.

This is a welcome clarification for licensors that a termination provision triggered by the licensee’s insolvency will normally be enforceable.

The meaning of "perpetual"

Can you end a perpetual licence?

In BMS Computer Solutions v AB Agri [2010] the High Court held that the word "perpetual" can carry different meanings:

• "never-ending" that is, never being brought to an end; or
• "operating without limit of time" which, in this context, meant to grant a licence of indefinite duration but subject to any terms governing termination of the licence.

In this case, the judge favoured the latter interpretation and concluded that a "perpetual" licence will not necessarily last forever. If you wish to put in place a never-ending licence, clarify how the grant relates to any termination wording in the licence and/or consider alternative wording such as "irrevocable".

Before you start, make sure that the duration of the licence is clear if the licence is not intended to be perpetual or irrevocable.

Careful planning for termination

Generally termination is dealt with in two clauses: the first sets out the parties respective rights to terminate; the second stipulates the consequences of termination. Do not assume that these two provisions should be identical for all parties. Instead, they should be customised to the circumstances of the deal taking into account the financial and other risks being assumed by each of the parties as well as their respective bargaining strength.

If you are the stronger party, of course you will optimise your position in relation to termination. However if you make the agreement too readily terminable by you, the other party may be less willing to invest in the relationship in the future.

Of course, it is important to seek the advice of a specialist intellectual property lawyer in drawing up the agreement at the outset. In agreeing the clauses related to termination, you should consider the following items in advance:

• Will any of the licences granted continue after termination, for example the right to use related know-how after the expiry of all licensed patents?
• Should the licensee have a run-off period to sell inventory?
• What provision should be made for the return or destruction of any remaining inventory?
• Do you need to provide for the return or destruction of materials, confidential information and anything else which is not with its rightful owner?
• Consider whether you would like the right to request that a senior executive confirm that the above two items have been complied with.
• If you are a sub-licensee, seek a directly enforceable right to obtain a direct licence from the head-licensor in the event that the head-licence terminates due to the actions of the head-licensee.
• If you are a licensee, consider seeking advice as to the effect upon you if the licensor’s obligations are disclaimed as by an insolvency practitioner in the event of the licensor’s insolvency – the advice will vary depending upon where the licensor is incorporated.
• Provide for the parties to co-operate to update registers where licences of registered rights have been registered
• Which clauses will continue to have effect after termination? These often include confidentiality, indemnities and governing law.
• Specify that termination does not affect accrued rights and liabilities