The protection of intellectual property (IP) has been a recurring theme in the news lately. From developing nations wanting restrictions on environmental IP lessened, to western nations wanting to bolster protection on their technological IP, there is no shortage of debate in the IP sector.

One of the longest running issues is what happens to intellectual property ownership when bankruptcy occurs? While the answer differs slightly on either side of the Canadian and United States border, both countries do have federal legislation in place governing the obligations and expectations around IP and bankruptcy. However, there are vague areas and loopholes that have created lengthy legal battles over intellectual proprietorship.

Intellectual property right

When bankruptcy occurs, the intellectual property licenses are considered property of the bankruptcy estate. IP is defined by the Bankruptcy Code to include: trade secrets; patents; patent applications; and copyrights.

New legislation

In 2009, Canada amended the Canadian Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA). Part of the changes included clarifications for businesses that license patented inventions, software and other copyright protected works, trademarks and other intellectual property rights on what happens to intellectual property licenses in the case of bankruptcy.

“If the debtor has, in any agreement, granted the use of any intellectual property to a party to the agreement, the disclaimer or resiliation of the agreement does not affect the party’s right to use the intellectual property so long as that party continues to perform its obligations in relation to the use of the intellectual property,” the amendment states.

The new legislation sought to protect licensees who were unfairly penalized in the bankruptcy process. Previously, licensee contracts and rights were often a secondary concern, falling behind creditors and outstanding debts, despite a licensee having fully paid licensing fees for the right to use the intellectual property. A Trustee in Bankruptcy of the licensor could take the position that it was entitled to refute the IP license, even though the licensee had already paid its license fee in full and was ready, willing and able to continue paying for maintenance and support.

Cases: Ikea and RadioShack

In 2011, a Nova Scotia court upheld Ikea’s right to intellectual property exclusivity and protection when Scanwood Canada Ltd., a furniture manufacturing company, filed for bankruptcy. Ikea and the furniture company had an exclusive agreement that once furniture was manufactured, it could not be sold or distributed to any entity except Ikea. When the company filed for bankruptcy they had approximately 4,000 dressers slated for Ikea stores. However, Ikea did not want to purchase them. Scanwood filed a motion to then be able to sell the dressers and Ikea countered citing their IP contract. The court ruled Ikea was not obliged to purchase the dressers and ordered them destroyed.

Ikea
photo credit: Ikea / Flickr

Intellectual property and bankruptcy can mean big business to the right investor, as Tyler Burns, Director of Investor Relations at WiLAN, an intellectual property management firm based in Canada, points out. “Earlier this year, the RadioShack name and customer information sold at auction for 26 million dollars,” noted Tyler Burns.

RadioShack
photo credit: Radio Shack / Flickr

Not only did the RadioShack name go up for auction, so did the vast array of their exclusive patents. This isn’t the first time just a name racked in millions of dollars. “In 2008, CBGB’s intellectual property rights sold for 3.5 million dollars,” said Burns. “IP is often more profitable than the business itself, as we have seen in both these cases.”

Takeaway

Intellectual property is more profitable than ever, and Tyler Burns recommends seeking out a professional to make sure your IP is fully protected. He also implores that IP proprietors carefully think through all scenarios when drafting intellectual property contracts. Had Scanwood Canada had a clause in their contract with Ikea, they could have sold the 4,000 dressers and paid off some of their outstanding debts.