What happens when a licensor becomes insolvent?

When Body Blue Inc., a Canadian consumer products company, stumbled financially, a receiver was appointed in Canada under the Bankruptcy and Insolvency Act.  In its attempt to restructure the company and satisfy creditors, the receiver sold the company’s assets in May, 2006 for $7 million to a competitor consumer products company.  The assets expressly included certain technology which was the subject of an earlier license to Herbal Care, a US health products company. 

Herbal Care argued that its license remained unaffected.  However, a Canadian Court can allow a trustee to transfer the technology assets of a bankrupt company free and clear of any existing license.

In the final decision in Royal Bank of Canada v. Body Blue Inc., 2008 CanLII 19227 (ON S.C.), the Canadian Court affirmed that the new owner acquired the transferred assets free and clear of any claim of Herbal Care.  Herbal Care lost its license when the assets were transferred during the bankruptcy.

This result can be contrasted with Synergism Arithmetically Compounded Inc. v. Parkwood Hills Foodland Inc., 2000 CanLII 22781 (ON S.C.), where certain intellectual property assets – in this case, an insolvent company’s trade-marks and franchise agreements – were the subject of a security agreement.  A secured creditor stepped in, enforced its security, and acquired all the insolvent company’s trade-marks and franchise agreements.  Because the trade-marks were acquired by the secured creditor outside the bankruptcy, they never passed through the hands of the trustee, and they were transferred with the license rights intact.  Thus the new owner was entitled to sue for breach of the license, and trade-mark infringement, since it had acquired those rights along with the trade-mark assets.

As always, careful drafting and preventive steps can mitigate these risks.

Links to the case decisions:

Royal Bank of Canada v. Body Blue Inc.

Synergism Arithmetically Compounded Inc. v. Parkwood Hills Foodland Inc.
Calgary - 10:00 MST

A recent survey shows that departing employees are leaving the office with more than the photos of their kids - they’re walking off with trade secrets and confidential company information. A majority of the survey respondents said they burned confidential information onto a CD or DVD, around 40% dragged it to a USB drive or e-mailed documents to themselves. 

In Canada, the Supreme Court of Canada recently weighed in on this area of law. In RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54 , virtually all of the investment advisors at an RBC branch walked out one day (without notice) and joined RBC’s competitor, Merrill Lynch.  RBC sued its departing employees and also sued Merrill Lynch and its manager.  The case went up through trial, to the BC Court of Appeal, and was appealed up to the Supreme Court of Canada.  The court decided that the departing employees owed a duty of “good faith” to RBC, but that none of them was a “fiduciary”  - a special category which applies to employees with a special relationship to the corporation, such as senior managers, executives, directors and officers.  In the absence of a non-competition clause or fiduciary relationship, the departing employees had the legal right to leave RBC and to compete with their former employer. However, the court was clear that a departing employee might be liable for specific wrongs, such as improper use of confidential information of the former employer. 

Watch for our seminar on this and other topics at our Events page.

Calgary 11:30 MST