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Leveraging Knowledge Assets

7.1              Introduction

Licences are a very important means of exploiting IPRs. This Part deals with a number of issues relating to licences and security interests therein which are relevant to both a provincial and federal approach.

7.2              Ordinary course licencing transactions

7.2.1        Introduction

The existing provincial personal property security regimes provide that a transferee of an interest will take clear of a prior security interest in certain defined circumstances, the most important of which is when the subsequent interest is acquired in the ordinary course of business. Both the Revised Article 9⁹³ and the proposed changes to the Model PPSA⁹⁴ extend this rule to licensees. As Adams and Takach argue, the arguments in favour of this priority rule are compelling, at least for ordinary course licensees of mass-market software.⁹⁵ We recommend that this rule be adopted in either a provincial or federal system.

Where exactly the line should be drawn is a matter of more controversy. As with the ordinary course rule in existing provincial personal property security regimes, and as with the definition of exclusive licences, experience will be needed to flesh out the precise contours of the rule.

7.2.2        Nature of the Rule

The precise nature of the ordinary course rule needs to be resolved. In PPSA jurisdictions the ordinary course purchaser only takes clear of security interests granted by the seller, whereas in Quebec the ordinary course purchaser takes clear of all security interests, including those granted by predecessors in title to the seller. In a provincial system the applicable provincial rule would apply to intellectual property as it would to other property. In a federal system a decision would have to be made as to whether the PPSA rule or the Quebec rule would be adopted. The two rules differ in their results when the debtor transfers to a purchaser/retailer not in the ordinary course and the retailer then transfers to an ordinary course purchaser. The disadvantage of the PPSA rule is that imposes a risk of an undiscoverable security interest by the remote debtor on the ordinary course buyer. The disadvantage of the Quebec rule is that reduces the SP’s security. The secured party is not entirely unprotected, as it would have a continuing security interest in the proceeds (though of course these might be dissipated) and it has some possibility of monitoring its debtor to detect the bulk sale. Monitoring may well be difficult, but that difficulty should be contrasted with the position of the ordinary course purchaser of ordinary goods, who has no possibility of detecting the security interest. In the IPR context it would be possible in principle for the ordinary course purchaser to discover the prior interest by an asset description search, but it is exactly this type of search which the ordinary course rule is designed to preclude. On the whole, we recommend the adoption of the Quebec rule, but this is a weak recommendation, as we do not see conclusive arguments on either side.

7.2.3        Scope of the Rule

Should the rule that ordinary course licences take clear of prior interests apply to exclusive licences or assignments as well as to non-exclusive licences? In existing personal property security regimes the ordinary course rule currently applies to outright assignments and a straightforward analogy would apply the rule to assignments and exclusive licences of IPRs. But the existence of an ownership registry for IPRs is important. In this respect IPRs are like land, for which an ordinary course subordination rule has never been applied or even suggested.

In their extensive discussion Adams & Takach suggest that the ordinary course be limited to “results of production” as distinct from the “tools of the trade” as best reflecting the expectations of all parties. In particular they suggest that “where the debtor owns copyrights or patents, any disposal of ownership rights by the debtor. . .cannot be assumed to be in the debtor’s ordinary course of business.”⁹⁶ This might be appropriate in the case of non-exclusive licences, but we feel it does not adequately address problems raised by exclusive licences and assignments.⁹⁷

We would go further and recommend that the ordinary course rule not apply to any interest which requires registration in order to maintain priorities against subsequent transferees. This is not simply a matter of a presumption against finding an ordinary course transaction involving registrable interests; rather it is a prohibition on applying the rule to such interests, so that a subsequent assignee or exclusive licensee would never take clear of a prior registered security interest without a subordination agreement. This is necessary to maintain the integrity of the title registry. If we permit exclusive licences granted in the ordinary course take clear of a prior interest holder then the state of title cannot be determined from the face of the register: in order to determine state of title a purchaser from secured creditor on realization needs to know whether licence was granted in the ordinary course. This might be considered acceptable with respect to the initial purchaser, who has some means of discovering the context of the licence, but a subsequent purchaser from that initial purchaser would face the same problem. As a corollary, a title guarantee system could not be implemented, since the registrar could not adjudicate on whether every exclusive licence was granted in the ordinary course.

Further, it is unlikely that an exclusive licence would be granted in the ordinary course. The justification for subordinating the prior secured party is implied consent, and keeping in mind that exclusive licences are those which have a significant impact on the value of the IPR (so that we consider them matters of importance to potential subsequent interest holders), it is unlikely that a prior secured party would consent to that type of licence in the ordinary course. It is possible that it might happen on occasion; but in that case an express subordination agreement could be obtained. In that way the integrity of the title register would be maintained, and since such transactions would tend to be high value, the added transactions costs should be acceptable. For these reasons we recommend that the ordinary course rule should not apply to exclusive licences. This accords with the position in the Revised Article 9.⁹⁸

This suggests that it might be convenient to if exclusive licences and ordinary course licences were defined in a complementary fashion, so that any licence which did not have to be registered to bind subsequent grantees would also take free of subsequent interests. But convenience is not sufficient. While non-exclusive licences might often be granted in the ordinary course, so there is no doubt considerable practical overlap between the two concepts, the definitions are conceptually different, with the concept of exclusive licence looking to the reasonable expectations of subsequent grantees, and the ordinary course licences looking to the expectations of the licensee and secured party. Nor would any practical problem arise with respect to licences which are neither exclusive nor in the ordinary course of business. Such licences would not have to be registered to bind subsequent purchasers, but they would nonetheless be subordinate to subsequent transferees. An assignee of the non-exclusive licence would not be able to tell from the face of the record whether its interest was clear of the prior security interest, but if the interest was valuable enough to worry about, an acknowledgment of the assignment could be sought from the secured party.

7.3              Security interest in licensee’s interest in licence

7.3.1        Validity

The first issue is that of the validity of security a licensee’s interest in a licence. The Ontario Court of Appeal case of National Trust v. Bouckhuyt⁹⁹ challenged the validity of security interests in licences. The case has been universally criticized as wrongly decided. Proposed revisions to the Model PPSA would make is clear that security interests may be granted in licences. Though Bouckhuyt concerned a regulatory licence and IPR licences might well be distinguishable the case has nonetheless cast doubt on the validity of security interests in IP licences. In either a federal or provincial system reforms similar to those proposed for the Model PPSA should it be implemented to make it clear that a security interest in a licensee’s interest in a licences is valid.

7.3.2        Anti-Assignment

The validity of a security interest in a licence is a different issue from the enforceability of an anti-assignment clauses in the same licence. Note that in view of the public policy concerns regarding the control of the identity of licensees by licencing bodies, the proposed revisions to the Model PPSA would not impair the ability of the licensor to control the transfer of the licence: see s.9(5): “A provision in any other statute which restricts or requires the consent of the grantor to the transfer of a licence or the creation of a security interest in a licence is ineffective but only to the extent that the provision would prevent attachment of a security interest in the license under this Act.” The effect is that the secured party may take a security interest in the licence, which would extend to the proceeds on foreclosure, but the licence cannot be sold at foreclosure without the approval of the licencing body. The secured party may take a security interest in the licence, but the value of the that licence as collateral is subject to the grantor’s assignment policy.

A similar question arises in respect of licences of IPRs.¹⁰⁰ Should a provision in the licence agreement prohibiting transfer of the licence by the licensee be effective? Note that the proposed s.9(5) of the Model PPSA does not address this issue as it refers to “a provision in any other statute” which restricts a transfer of the licence or requires the consent of the grantor to the transfer of a licence. This clearly not cover contractual restrictions on transfer. We take this wording of s.9(5) to reflect the focus on statutorily regulated licences, such a milk production quotas or broadcast licences, which have generated the most controversy regarding security interests in licences, and not to reflect a positive decision by the drafters that contractual restrictions on the transfers of licences should be ineffective. Indeed, the existing s.9(5) is entirely silent on the issue of contractual restrictions on assignment.

Our view is that licensors of IPRs have legitimate interests in controlling the identity of licensees. For example, if a software developer granted an exclusive licence for a certain geographical region to a particular marketer, it would not want to see the licence acquired by its major competitor on foreclosure by the marketer’s SP on default. For this reason we recommend that it be made clear that the policy of the Model PPSA in respect of regulatory licences be applied to all licences. That is, contractual restrictions on assignment of the licence should be ineffective but only to the extent that they would prevent attachment of a security interest. The licensor could rely on restrictions to refuse to recognize the rights of a non-approved purchaser on foreclosure. This policy is also reflected in the Revised Article 9.¹⁰¹

7.4              Security interest in licensor’s interest in a licence

7.4.1        Anti-Assignment

A related issue is the status of anti-assignment clauses in the licence agreement. Anti-assignment clauses in an agreement between an account debtor and an assignor are ineffective against third parties under the PPSA (**Quebec?). The right of a licensor of IPRs to assign its right to royalties raises a similar policy question. The analysis is slightly different as a licensor may have ongoing obligations under the licence agreement (e.g. software support obligations) and some concern has been raised that the licensor will have less incentive to fulfill those obligations once the right to payments is assigned. But these arguments are not persuasive. The licensor may wish to assign its right to royalties precisely in order to raise money to carry out its obligations. And it is in the assignee’s interest as well to ensure that the obligations are carried out, since breach of the obligations will normally entitle the licensee to stop or reduce its payments, and this will normally be effective against the assignee. We therefore recommend that provisions prohibiting a licensor from assigning its right to royalty payments be ineffective against third parties, as is the case with other types of accounts under the PPSA. This is also the result under Revised Article 9.¹⁰²

7.4.2        True licence v financing licence

The dividing line between assignment and the grant of security in intangible assets is not always an easy one to draw even if one uses a substance of the transaction test. This characterization challenge is one reason why the drafters of the PPSAs and the CCQ decided to apply roughly the same publicity, priority and enforcement rules to both the assignment and hypothecation of security in intangible claims. A similar issue arises in respect of IPR licences. When is a licence a security interest? A licence has some prima facie similarities to a security interest: a licensee often owes an obligation to make ongoing payments to the licensor, like a debtor does to a secured party; and the licensee’s interest can be ‘repossessed’ by the licensor for failure to make those payments.¹⁰³

The issue is more important under the provincial approach, where registration in the wrong venue could render the interest ineffective against third parties. Presumably this would normally be overcome in practice by dual registration in cases of doubt. The issue is much less significant under the federal approach. True exclusive licences and financing licences might have different formal registration requirements – a financing statement versus full document registration – but so long as the interest was registered in one form of the other, subsequent parties would be put on notice. The distinction might be significant at the enforcement level. If there was a distinction in the formal registration requirements then a true assignment which was incorrectly registered as a security interest should not be ineffective against third parties.¹⁰⁴ Rather, a less drastic solution of a requirement of registration in the proper form should be implemented. In either case, the diminished significance of this distinction is a point in favour of the federal approach.