Woolworths’ Woolly IP Agreements Don’t Hold Value

Case Digest: Butters and others v BBC Worldwide Ltd and others [2009] EWHC 1954 (Ch), 20 August 2009

A dispute between the Woolworths administrators and the BBC, born of the failure to agree an appropriate basis to value Woolworths' shares in a Joint Venture (JV), landed both parties in the High Court recently. The dispute itself regarded the validity of a provision contained in a Master Licence Agreement (MLA) and highlights potential problems that can arise when a JV shareholder licenses intellectual property rights to a JV.

Factual Background

This case involved a Joint Venture Agreement (JVA) setting up a company called 2 Entertain Limited (2e). 2e had a subsidiary, BBC Video Limited, which was the licensee under the MLA, which in turn was conditional upon the JVA. BBC Video Limited, which the MLA protected, was a subsidiary of the JV vehicle and the licence contributed substantially to its net worth.

The MLA terminated upon the happening of an ‘Insolvency Event’. If an Insolvency Event occurred within the Woolworths Group, BBC Worldwide could serve a notice in accordance with the JVA, requiring the Woolworths’ shareholder in 2e to sell its shares in 2e to BBC Worldwide; they did just this. The result was that the MLA had terminated and the valuation was to be determined on that basis. The effect of this provision was to allow the solvent JV partner to force the other partner to transfer its shares in the JV vehicle for a price that was discounted so as to reflect the loss of the licence.

Insolvency Deprivation Principle

This common law principle is the equivalent of s.107 of the Insolvency Act 1986 and r.4.181 of the Insolvency Rules 1986. Both sections ensure that the assets of an insolvent company are dispersed in line with the shareholders’ and creditor’s share of their interests in the company. It is against public policy to permit a company to contract out of this principle in order to favour one shareholder or creditor above all the others.

The High Court held that clauses in the MLA, which terminated the MLA upon the insolvency of a member of the licensee's group, were void as a matter of public policy because their effect was to deprive the creditors of the insolvent JV partner of the value of the licence upon the occurrence of an ‘Insolvency Event’. In doing so they expressly declined to follow the decision to the contrary in Perpetual Trustee Co Ltd v BNY Corporate Trustee Services and others. [2009] EWHC 1912 (Ch).

The key lesson for IT, IP and commercial lawyers is not that automatic termination of licences upon insolvency offends the principle, but that the termination cannot be linked to any mechanism that enables the licensor to benefit as a creditor/shareholder from the fall in value in the licensee as a result of the termination of the licence.

Watch this space...

Mr Justice Peter Smith has granted permission to the Administrators to appeal and to BBC to cross-appeal in relation to the deprivation principle. Further, judgment was handed down in Perpetual Trustee Co Ltd (see above) on 28 July 2009. This case also involved the deprivation principle and has also been given permission for appeal by the Chancellor. Expect this to be a live issue over the coming months.

Canada gets US-flavoured update for IP licence/bankruptcy

I've just received an email circular from Paul Jones (Jones & Co, Toronto) which contains a succinct summary of the amendments of Canada’s (i) Bankruptcy and Insolvency Act and (ii) Company Creditors Arrangements Act. These amendments come into effect this Friday, 18 September. Writes Paul:

"One provision will have a significant and positive effect for the licensing of intellectual property.

The official version of the package is here. The amendments are based on the amendments made to the US Bankruptcy Code after the Lubrizol case in 1985. When a proposal for restructuring is made, Trustees in bankruptcy have the authority to disclaim (or terminate) ongoing contracts of the bankrupt entity. Lubrizol lost the right to work the technology that it had licensed from Richmond Metal Finishers and through no fault on its part. Afterwards Section 365 (n) was inserted to allow the licensee to affirm an intellectual property license that had been disclaimed by a bankruptcy trustee, and thus continue to use the technology and paying royalties. “Intellectual property” was defined to include “copyrights, patents, trade secrets and mask works.”

Canada has now decided to copy this provision, but with some differences. Here is the new provision Section 65.11 with respect to IP:

(7) If the debtor has granted a right to use intellectual property to a party to an agreement, the disclaimer or resiliation does not affect the party’s right to use the intellectual property — including the party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the party extends the agreement as of right, as long as the party continues to perform its obligations under the agreement in relation to the use of the intellectual property.

The differences are that the term “intellectual property” is not defined in the amendments or the existing legislation. Thus it can include trade-marks, something not included under the US Bankruptcy Code. Trade-marks differ from copyrights or patents in that they are indicators of source and difficult to disconnect from the original owner, in this case the bankrupt company.

Secondly the basis for the protection of trade-secrets in the US and Canada differ. In the US 41 states have laws defining and protecting trade secrets. In Canada the are no such statutes and the protection is derived from the common law, usually based on contractual obligations. Generally in Canadian law it is not as clear that trade secrets can be considered as “property.”

Parties to license agreements for the use of intellectual property in Canada should first of all be aware of these changes when dealing potentially insolvent parties. The strategic options will be different. When drafting such license agreements the obligations of the licensee should be considered and defined more carefully as these may determine the ability of the licensee to continue to use the intellectual property in the event of the licensor becoming insolvent.

And if the license agreement includes trade secrets or know-how the parties may wish to emphasis either these as contractual obligations or property depending on their interests".

The Sale of Databases as Assets in Insolvency

Databases

Many companies will be in possession of a list of clients and this client list will normally be in the form of a computerised database. This database is potentially an asset, which can be sold or licensed for the benefit of the insolvent company.

Because such databases contain personal information the seller usually will run into difficulties under the Data Protection Act 1998 (“DPA 1998”) if the individuals included in the database were not told in the first instance that their information could potentially be passed on to other organisations. However the DPA 1998 will not prevent the sale of such a database, provided that certain requirements are met. Some of these requirements are detailed below.

For what purpose was the information originally collected?

When personal information is collected from individuals (“data subjects”), the DPA 1998 requires it to be made clear to the data subjects what the data will be used for. When a database is sold, the Official Receiver should make sure that the buyer understands that it can only use the information for the purposes for which it was originally collected. Selling it to a business for a different use is likely to be incompatible with the original purpose and therefore go beyond the expectations of the data subjects. Although this means that your number of potential buyers for the information is reduced, it also means you have a unique selling angle as the information is by default ‘tailored’ for your prospective clients’ needs.

The buyer of a database will often seek to use it to send marketing material. Whether it will be able to do so will depend on the basis on which the personal information concerned was originally gathered. The general rule is that unsolicited marketing can be sent to data subjects where they have agreed to this or where this is nevertheless likely to be within their reasonable expectations.

The buyer should also establish whether data subjects would only expect to receive marketing via a particular medium, for example via the postal system. Particular care should be taken when there is an indication the data will be used for telephone or email marketing and the special rules governing electronic marketing should be complied with. Unsolicited marketing emails should only be sent to individuals who have consented and buyers should not assume consent if an individual does not respond.

When they have established that they can use the personal information for marketing, the buyer should only market products and services which are similar to those that the information has been used to market previously. Before selling databases to potential buyers the Official Receiver should point out any restrictions imposed by the DPA on the use of marketing material.

The Official Receiver has a responsibility to ensure that the personal information being sold on is used properly. As a result any potential buyer should be notified they can only use the personal information contained within the database for the purposes it was originally collected. In doing so, the Official Receiver will need to inform any buyer what these purposes were. If the buyer then expresses a wish to use the personal information for a new purpose, the Official Receiver should advise the buyer that it must gain consent from all the individuals concerned before it can use it in any other way.

This is not the only circumstance in which the new owner of the information will have to contact the individuals contained within the database. If the database is sold it is then the responsibility of the buyer to ensure all individuals contained within it are informed of the details of the new owners and should receive confirmations that the information will only be used in the same way as before. This is not as daunting a task as it first seems, as it is highly likely all the contact details needed to meet this task will be within the database itself. Before selling the database, the Official Receiver should ensure that the buyer undertakes to inform all individuals that it now holds the information.

Can information be held on databases indefinitely?

Any personal information held should be adequate, relevant and not excessive, and it should not be kept for longer than necessary. The Official Receiver should inform the potential buyer that it is required to decide how much of the information supplied it needs to keep and any unnecessary personal information should be deleted. It is important that personal information is not held in the hope that it one day might be useful.

What happens if the database cannot be sold?

If no potential buyers can be found for a database or if the Official Receiver so orders, the information held should be deleted and/or destroyed immediately.

Insolvency, Registered and Unregistered Design Rights

There are two types of design rights (“DRs”): registered design rights (“RDRs”), which are principally governed in the UK by the Registered Design Act 1949 (“RDA 1949”) and unregistered design rights (“UDRs”) introduced by the Copyright, Designs and Patents Act 1988 (“CDPA 1988”). There are rules on qualification for protection by both citizenship of the designer and place of design. Qualifying countries in addition to the UK include the European Economic Area and British overseas territories. Since RDRs afford greater protection for designs than UDRs, the value of the right is likely to be affected accordingly, making it essential to establish what kind of DRs the insolvent company may have.

UDRs
UDRs are saleable assets but do not subsist in designs made before the commencement of the CDPA 1988. UDRs are similar to copyright in that they exist automatically when a new design is created. However, unlike copyright, the length of protection is much more limited. The right lasts for 10 years after the date that an item made to the design is first marketed, or up to a limit of 15 years from the creation of the design and is only exclusive for the first five years. A licence of right to make and sell articles copying the design is available during the last five years of the UDR's life (s. 237 CDPA 1988).

UDRs differ from RDRs in that they do not give a total right of design ownership; instead giving a simpler form of protection against copying. This makes the subject of maintaining licences very important for an insolvent company who has an interest in UDRs. Further information regarding copyright and insolvency can be found at my earlier post accessed from this link.

RDRs
Once a design is registered the RDA 1949 makes clear that RDRs shall vest by operation of law in the same way as any other personal property. Therefore RDRs owned by a company subject to a winding up order will belong to the company in liquidation. By registering a design the owner of the right will have exclusive use of a design in the territory in which it is registered. In the UK and EU this period is 25 years and design registrations are renewable every 5 years. Any disposition of RDR’s must be made in writing and signed by all parties to the transaction. The UK IPO has a database of RDRs which can be accessed here.

RDRs may also be subject to a secured loan by way of a mortgage and enquiries should be made to establish whether there are any licensees or mortgagees of the right in order that they can be informed of the making of the Insolvency Order and asked to note the Official Receiver’s interest. Instead of contacting the Land Registry the way you would to check if land was subject to a mortgage, the Official Receiver should contact the UK IPO. Information may also be found in the insolvent company’s accounting records and/or by searching at the UK IPO.

Exceptions to RDRs
There are many exceptions to protection offered by RDRs, which include, but are not limited to: parts of a design necessary to connect to another article (“must fit” designs), to methods and principles of construction or to those parts of a design which are dependent on the appearance of another article, or where that article and the article that the design right applies to is an integral part of the second article (“must match” designs) and to surface decoration. RDRs also don’t apply if a design is not original, and a design is essentially defined as not being original if the object so designed is already commonplace. If a right is not covered by RDRs, it may be still be subject to other forms of IP protection such as copyright and UDRs.

Ownership of DRs
S.215 CDPA 1988 stipulates that the first owner of a UDR is the designer, except in the circumstances that the design is created under a commission or in the course of employment, in which case the commissioner or employer is the first owner. In the case that the owner of a UDR is also the owner of a RDR, it is assumed that any assignment of the UDR also includes an assignment of the RDR, unless a contrary intention is shown.

The Official Receiver should establish ownership of any RDRs from the insolvent’s records and/or by carrying out a search of the information held at the UK IPO (whose database can be found here). Where RDRs vest in the company in liquidation they may be sold with the assignment being signed by the liquidator as assignor. In such a case the UK IPO should be informed of the change in ownership (s.19 RDA 1949).

Does more than one person own the RDRs?
Joint entitlement to ownership of RDRs will usually arise in two situations; either where there are co-designers or if a share of the design is sold. Where a design is registered to two or more persons they are entitled, unless there is agreement to the contrary, to equal undivided shares. The interest of each would survive his death as part of his estate. Importantly, joint owners may not sell their interest to a third party without the consent of the co-owners. Therefore if the Official Receiver is able to establish any RDRs, they should also be aware of other interested parties and ensure that they do not breach their rights by attempting to sell or license the design.

Royalties
In addition to the sale of the rights themselves, royalties may be paid by a third party to the owner of RDRs in exchange for exploiting that right. The royalties may be payable under the terms of a licence, with the owner retaining the RDRs. Where a winding up order is made against the owner of a registered design, the Official Receiver should contact the third party paying the royalties and ask it to pay any royalties due to the liquidator.

If the company in liquidation holds any licences, those licences are also saleable property and any assignment of such a licence should be in writing and signed by the parties. In such an instance the UK IPO should be informed of the transfer.

It may be the case that a liquidated company is in receipt of royalties as a condition of the sale of RDRs. In this case the royalties cannot be claimed as an asset as the right does not vest in the company in liquidation. Instead, the royalties should be treated as income and can be claimed under an income payments agreement or an income payments order.

How to Protect RDRs
If an insolvent company owns RDRs, the UK IPO should be informed of the winding up order and asked to note the Official Receiver’s interest in the design. The UK IPO should also be asked to provide details of the remaining “life” of the registration as this could materially affect the value and details of any renewal fees outstanding.

Enquiries should always be made to establish whether there are any licensees or mortgages of the right in order that they can be informed of the making of the insolvency order and asked to note the Official Receiver’s interest.

European Community RDRs
The rules governing the procedures, processes and requirements for European Community (EC) design registration are largely the same as those relating to the UK registration process. The guidance above can be followed in respect of an insolvent that owns any EC design registration, with the exception that the relevant authority will not be the UK IPO. It will instead be the Office for the Harmonisation of the Internal Market (OHIM), which maintains a searchable online register which can be accessed here.

Valuation of DRs
The valuation of intellectual property is a complicated and sometimes controversial area and the value will very much depend on the circumstances. It is unlikely that the Official Receiver will have experience in this field and should exercise discretion as to whether to employ specialist advice such as forensic accountants. A specialist in designs may be contacted through The Chartered Institute of Patent Attorneys.

Patently saleable?

Patents can be bought and sold like any other property. But patents differ from other forms of IP in that they can be expensive and time-consuming to maintain. Therefore it may be more attractive to sell an asset such as a patent in insolvency than maintain it. The flip-side of this is that there may be some good bargains to be had from an insolvent company if you know what you are looking for.

What is the life of the patent?
If an insolvent company owned a patent, the Patent Office should be informed of the winding-up order and asked to note the Official Receiver’s interest in the patent. The Patent Office should also be asked to provide details of the remaining “life” of the patent, as this could materially affect the value and details of any renewal fees outstanding.

The patent is effective from the date of publication of the specification of the invention by the Patent Office, which is approximately 18 months after the filing date.

Maintaining your patent
A patent must be maintained or its registration may lapse and it will then become worthless. The first renewal date is the end of the calendar month of the fourth anniversary of the application filing date and renewal fees are then due every year for the remaining 15 years that the patent remains in force (some pharmaceutical and agrochemical patents can obtain extension through supplementary protection certificates for up for five additional years).

You should pay your renewal fees to the Patent Office. Fees can be paid any time between 3 months before the due date for payment and one month after, without attracting penalty charges for late payment. If the renewal fee is not paid within six months of the due date then the patent will lapse and the invention will not be protected.

What happens if the patent lapses?
If the patent is not renewed in time it is possible to restore the patent rights by application to the Patent Office as long as that application is made within 19 months of the missed renewal payment. It is necessary for the applicant to satisfy the Patent Office that it intended to pay the renewal fee on time. But you must provide evidence such as a witness statement and any other evidence you may have, setting out the circumstances in which the renewal fee was not paid.

It is possible for the Official Receiver to ask the Patent Office to confirm that the time limit for restoration has not expired. However, the Patent Office cannot give any indication on the likely success of such an application. If the Official Receiver is considering making an application to restore a patent in order to sell it, the costs of the application should be taken into account in the negotiations relating to the sale and should not exceed the potential sale proceeds.

What might prevent the sale of a patent?
Enquiries should be made to establish whether there are any licensees or mortgagees of the patent in order that they can be informed of the making of the Insolvency Order and asked to note the Official Receiver’s interest.

By virtue of s.30(2)&(3) Patents Act 1977 (“PA 1977”) patents, like real property, can be subject to a secured loan by way of a mortgage and will vest by operation of law in the same way as any other personal property; thus a patent owned by a company subject to a winding-up order would belong to the liquidation estate. Bu, instead of contacting the Land Registry, the Official Receiver should verify ownership of a patent by contacting the Patent Office. Information can also be found in the insolvent company’s accounting records and/or by searching at the Patent Office.

Where a patent vests in the liquidation estate, the patent may be sold with the assignment being signed by the liquidator of the liquidation estate. S.30(6) details that the Patent Office should be informed of any change in ownership.

Licences and royalties
But it is not just the patent itself that can be sold. It may be financially beneficial to grant a licence to use the patent. However, such licences need be maintained; the Official Receiver should consider whether such an obligation can be met before such a licence is granted. As when transferring the patent itself, any assignment of a licence should be in writing and signed by the parties; the Patent Office should be informed of the transfer.

Royalties may be paid by a third party to the owner of a patent in return for the right to exploit that patent. The royalties may be payable under the terms of a licence, with the owner retaining the patent. In circumstances where a winding up order is made against the owner of a patent, the Official Receiver should make contact with the third-party and ask them to pay any royalties due to the trustee.

A liquidated company may be in receipt of royalties as a condition of the sale of a patent. In this case, the royalties cannot be claimed as an asset, because the patent does not vest in the liquidation estate. Instead, the royalties should be treated as income and can be claimed under an income payments agreement or an income payments order.

Deciding whether to buy, sell, maintain or licence a patent is a commercial decision. And remember, your patent is worthless if you are unable to defend it against infringement and defending it can be an expensive process in itself. Companies are looking to exploit their patents and other IP rights in the current economic downturn as a way of protecting assets and taking other player out of the market. A report by Freshfields Bruckhaus Deringer found that nearly 40 per cent of the largest corporations "are actively looking to litigate" to protect their rights. In such a climate as this does a liquidated company really have the financial means to protect and maintain patents? If the answer is no, there may be some bargains to be had for the rest.

Software: Precautions Against Supplier Insolvency

What would you do if the supplier of your critical systems went insolvent?

In times of economic uncertainty, industries associated with software and technology services are highly likely to suffer. They are heavily reliant on solvent customers themselves, and on those with a sufficient degree of disposable budget to spend on non-essential work, such as software developments and updates (as opposed to rent, bills, wages, etc...). If the software companies are vulnerable, so too are their clients; and -- like it or not -- almost every business is the client of a software company.

Computer software is commonly used and found in most businesses and for every software program there is a source code without whch the software cannot be sold. Importantly this code enables the software to be revised and maintained. Source code is mostly protected by copyright.

Software may be developed by a third party for a client exclusively, or it may be licensed. More often than not it is leased or purchased ‘off the shelf’ and not owned by the business using it. As most of a business’s software is licensed, it will not be transferable and it will probably not available for assignment by the official receiver as liquidator or trustee. Further, as discussed in my previous articles [see note on Tuesday articles in the right hand side-bar], companies should be aware that the official receiver can disclaim onerous property under the Insolvency Act 1986; and that includes licences which may be a critical part of your business.


“But wait”, I hear you say “I own the IP in my software because it was developed for me. That means I’m safe doesn’t it?”. Not necessarily; even when bespoke software is developed exclusively for a company, the software company may still own the IP rights to some or all of the code behind the product. In such circumstances the official receiver should consider the agreement entered into with the supplier in light of both restrictions on assignments and the ownership of copyright. If a software supplier has 'invented' the software for the insolvents use it is likely that they will own it and not the insolvent.

If the software has been developed within the business this may give rise to problems as the individual designing the software may be a contractor rather than an employee. If that is the case the agreements by which that contractor is engaged should be carefully examined to determine who owns any IP rights created.


As a business you should establish at a minimum: (1) who holds the IP rights for your critical software; and (2) where would you find that source code should the company that developed it go bust. Number 2 is easier said than done. The owners or creators of software should not be relied upon to provide information on the location of software they have developed for you after they have gone into liquidation and it is unlikely that the official receiver will know where to begin.

One way of ensuring you know exactly where your code is and how to get to it is to have an escrow agreement built into any software agreement you enter into. Escrow agreements allow code (and other property) to be held upon agreement of the parties by a neutral third party. Code subject to the agreement will they only be released according to the agreement upon the fulfilment of its terms.

You should ensure that the conditions which stipulate the release of source code are looked at in order to determine when and in what way they can be enforced. You should also ensure the agreement allows the beneficiary to request a third party verify the code subject to the escrow is complete and this right should be exercised! You may view verification as an unnecessary expensive, but it can be invaluable. If the escrowed code is defunct it is essentially worthless and by the time you find out it is worthless, the liquidated company may not be in a position to help you locate the correct code.

Many businesses value critical transactions and contracts by value. However, this can be fatal when reviewing your software contracts for criticality. You may find that a critical software package that controls you payment systems cost almost nothing to develop, but consider for a moment wht would happen if that software stopped working and the company which developed it went into liquidation; it may have huge knock-on consequences to your business revenue.

In fact a low value contract is likely to be related to a smaller vendor and smaller vendors are more likely to be impacted by the economic downturn and have insufficient safety mechanisms when they do. Therefore your low value contracts may be the critical ones when reviewing your software safeguards in the economic downturn.

So it is not just the criticality of your contracts that you should be managing; you should also ensure that you are aware of the financial state of your suppliers. This way you can direct your resources to deal with the suppliers controlling your critical IP that are financially exposed.

Before a company goes into liquidation, look out for the warning signs that they are in trouble. For instance, has there been a drop in service provided by the company to your business? Have their accounts and annual returns been posted late? In times of financial difficulty, the accounts department will often be distracted by other pressures and overlook accounts filing deadlines. Often when a business is getting into financial difficulty, VAT and PAYE/NIC payments are regularly made late as available cash is being used to pay suppliers to keep the business running. In such cases HMRC will often apply for a business to be wound up if crown debts are continually left unpaid. To protect your interests make sure that if you are aware your supplier of software may go bankrupt ensure you follow the company closely and involve yourself in the insolvency proceedings.

And finally, a note to those dealing with insolvent companies. It has recently been reported that former employees of Factor 5 Inc in the US, who declared Chapter 7 bankruptcy in May, are being sued by former employees for fraudulently hiding assets before declaring bankruptcy in order to avoid paying employees and other debtors. The company ran into trouble when Brash Entertainment, whom it had signed a publishing deal, fell victim to its own financial difficulties and went under, which ended funding for Factor 5's project and eventually forced it to close down as well. The suit alleges that prior to the bankruptcy, the founders of Factor 5 created a new company called Blue Harvest, to which they "fraudulently transferred assets, including source code and other intellectual property," including a partially-completed version of Star Wars: Rogue Squadron for the Wii. It is alleged in the complaint that Factor 5 and White Harvest are essentially the same company. When dealing with an insolvent's estate it may be worth checking, have the rights to code and other IP rights been transferred ‘on mass’ just prior to liquidation? This is easy enough to see when directors transfer houses to their spouses, but may not be as apparent with unregistered rights such as copyright.


Tomorrow I’ll be popping along to give a talk at Winston & Strawn’s Bootlaw Session with my colleague Ian Silcock from Hardwicke Building. It’s free of charge to attend and if you would like further details you can have a look at Bootlaw’s Meet Up page.