Licensee Rights in Case of Licensor Bankruptcy Hiroki Saito MAX Law Offices

Current Law Status n Article 59(1) of Bankruptcy Law –If the bankrupt and the other party have not yet both completed performance of a bilateral contract at the time of adjudication of bankruptcy, the trustee in bankruptcy may, at his option, either rescind the contract, or perform obligations of the bankrupt and demand of the other party performance of obligations. n A license contract of intellectual property is thought to be a “bilateral contract performance of which has not yet been completed by either party” unless the licensee has paid up all royalties.

Licensee’s Risk under Current Law Licensor Licensee Obligation to pay royalty Obligation to have the IP utilized by Licensee bankrupt Trustee Continuous bilateral obligations May rescind.

US Way – Summary of 11 USC Sec. 365(n) n If the trustee rejects an executory license contract, the licensee may either: –treat such contract as terminated; or –retain its rights (including a right to enforce any exclusivity) under such contract to the intellectual property for the life of contract. n In the case where the licensee elect to retain its rights, statutory adjustments are provided for royalty payment and performance by the trustee.

Japan Realized Reform Is Necessary n Fundamental Principles for Intellectual Property Strategy, June 3, 2002, Intellectual Property Strategy Conference 3-3(3) Promotion of Intellectual Property Transactions 2) Stabilizing and Reinforcing Intellectual Property License Contracts i)By the end of 2003, the GOJ will make necessary amendments to the Bankruptcy Law to protect a licensee in the case where a licensor in the intellectual property license contract has gone bankrupt, provided that the license is effective against a third party. (Ministry of Justice) ii)During the FY 2002, in light of necessity of safeguard for license contracts, the GOJ will also consider reviewing the appropriate measures to protect license contracts. (Ministry of Economy, Trade and Industry)

Proposed Bankruptcy Law Amendments – Japan Choosing Deferent Way n Essential Points Regarding Reform of Bankruptcy Law and Related Acts, September 10, 2003, Ministry of Justice I.1-3(I) of Chapter 3 (1)Article 59 [of Bankruptcy Law] shall not be applicable to any contracts that establish lease rights or any other rights to use and exploit [any property], provided that the other party has completed registration or other requirement that the right be effective against a third party. (2) … Note 2: (1) and (2) will also apply to the case of licensor bankruptcy where the license contract establishes a right of non-exclusive license regarding a patent (see Article 99 of Patent Law) or regarding a trademark right (see Article 31(4) of Trademark Law), or any other right that is effective against a third party. n The corresponding bill will be submitted to the Diet within this year.

What is the “requirement that the right be effective against a third party”? n Under current law: –“Occupation”is enough for lease of building, hose, apartment, or office. –“Registration” for the non-exclusive license of patent or resisted trademark. < Exclusive license of patent or registered trademark, if registered, is thought to be protected even under current Bankruptcy Law. –Not provided for copyright, trade secret, or patent application n The ball is now in the IP Law’s court. n I call the requirement “Requirement to Secure” in the following slides.

Copyright Reform in Controversy n What should we provide as “Requirement to Secure” for copyright licensees? n Suggested Options – Draft Report of Ministry of Education, Culture, Sports, Science and Technology, December 2003 –Introduce “registration” also for copyright licenses; –When introducing “registration”, make the procedure simple and limit information to be disclosed; or –Make “contract in writing”, either with or without time stamp of notary public, sufficient as the Requirement to Secure.

Registration of License Not Actively Used n The number of registration of non-exclusive license right in 2001 –273 for patent, 165 for registered trademark. n Why so few? –Companies prefer to have the licensing deals confidential. –Registration fee is not nominal and charged for every one right (15,000 yen for one patent license). –In many license contracts, the licensed right are not necessarily specified item by item. –Licensee does not have the right to file registration unless the licensor expressly agreed to cooperate. –The risk of licensor bankruptcy has not been widely acknowledged. n Review of Patent Law and other IP Law is now considered by METI.

Trustee cannot always rescind an ongoing bilateral contract even under current law. n Judgment of February 29, 2000, The Supreme Court –Even if a bilateral contract is left executory for both parties, in such case that the other party would suffer from extremely unjust situations if the contract is rescinded, the trustee may not rescind the contract under Article 59(1) of the Bankruptcy Law. n This holding will be applicable to a licensee without Requirement to Secure, even after Bankruptcy Law is amended as planed.