Term, Renewel, Termination and Post Termination Issues: Planning For When the Party's Over
December 1, 2005
When negotiating an intellectual property ("IP") license it is easy to be consumed with the money issues and determining the scope of the license. After all, royalties, milestone payments, and defining the IP being licensed and the field of use for the license are important features of the license. But a deal is not fully considered unless the end of the relationship has been sufficiently contemplated by the parties. The purpose of this paper is to direct attention to the importance of negotiating sound and workable provisions for governing the end of the relationship. As such, this paper deals with four general topics: term, renewal, termination, and post-termination issues in the context of an IP license agreement.
As with other types of agreements, IP licenses will be interpreted by the courts having regard to general contract interpretation1 and principles of equity.
But, while many of the concepts discussed in this paper have application in various types of licensing agreements, the focus of this paper is to review term and termination issues specifically in the context of IP licensing.
The analysis in this paper has been conducted based on a review of Canadian law2 with some discussion of variances with foreign laws. Because many forms of IP are capable of being protected in multiple jurisdictions, multijurisdictional licenses are common. And notwithstanding the choice of Canadian law within a license agreement, the laws of other jurisdictions may apply. Accordingly, advice on the laws of any given jurisdiction may be needed from time to time to ensure that, as best as possible, the desired result is achieved for each jurisdiction.
1 For example, the literal meaning of words is generally applied to the wording of a contract, unless this would result in an absurdity, and the overriding test of the meaning of the provisions in a contract is the intention of the parties by reference to the surrounding circumstances at the time the contract was entered into. See G.H.L. Fridman, The Law of Contracts in Canada, 4th ed. (Toronto: Carswell 1999), at 478.
2 In particular, from the perspective of the common law. The civil laws of the Province of Quebec have been addressed only where specifically noted.
Defining the Term
In creating your license agreement it is important to determine the term, or period, of the license. A license agreement should clearly define the term by specifying both when the license begins (its effective date) and when it is to end (the expiration date), subject to any earlier termination rights that may be exercised pursuant to other terms in the agreement3.
While there are a number of different ways to define the "term" of an IP license, the most common are:
(1) the license is granted for a specific number of years from a set date (e.g. for a period of 5 years from the date of the agreement, or from the date of the issuance of a specific patent);
(2) the license is granted for the term of the intellectual property rights being licensed (e.g. until the patent has either expired or been held invalid in court, or until the last of the patents being licensed has expired);
(3) the license is to continue unless and until one or more specific events occur (e.g. for breaches of obligations by either party, upon notice by either party to the other, or when/if sales of licensed product falls below a specified amount); and
(4) the license is to be perpetual (e.g. where a trade-mark is being licensed to a purchaser of a division of a business for exclusive use in association with that division).
The term of a license should be set having regard to the specifics of the particular IP involved and of the licensing arrangement at hand. In the case of a patent license, in the absence of an express provision governing term, the license will continue until the expiration of the term of the patent and not beyond.4 At the same time, however, Canadian courts have held that the obligation to pay royalties arises by virtue of the license agreement itself and not the patent, trade-mark or copyright.5 Thus a licensee can be held to the terms of the license agreement, including the obligation to pay royalties, beyond the life of the patent.6 It is further worth noting that in Canada the obligations to pay royalties is independent of whether the patent, trade-mark or copyright being licensed is valid.7 Thus a licensee can be held to the terms of a license (and thus to its royalty obligations) even where the patent has been held invalid. It is therefore critical to consider the term of a license in concert with the royalty obligations and termination rights. For example, a licensee may want to ensure that the license agreement expressly states that the term of the license will end if the patent is held invalid. It is thus common in a license agreement to provide for the term of a license to expire in the event of a finding of invalidity of the patent by a court of competent jurisdiction from which no appeal is taken.
Matters are quickly complicated, however, when multiple patents and multiple jurisdictions are at issue. Should the expiration affect only the country in which the court decision is binding? Should the invalidity of one patent affect the term of the license granted for other patents? The answer to these questions will often depend on the particular circumstances, and careful drafting is required in order to achieve the desired result. In addition to these considerations, licensees will want to consider whether the term should expire where a license is granted for pending patent applications which do not issue into patents within a reasonable time period. Also, caution should be exercised when the governing law of a patent license is to be the laws of a jurisdiction outside of Canada, as the courts of other jurisdictions may take (and in the case of the United States, have taken) a different approach than Canadian courts on the issues of the obligation to pay royalties after either the expiration of a patent or a finding of invalidity of a patent. In the United States it has been held that the requirement for payment of a royalty beyond the expiration of a licensed patent is a form of patent misuse and is unenforceable.8
When obtaining a copyright license, licensees should further be aware that the Canadian Copyright Act9 provides that where the author was the first owner of the copyright in a work, there is a reversionary interest in the copyright which devolves to the author’s estate on death.10 The effect of this interest is that no grant or assignment of an interest in the copyright in a work, other than by way of a will, is operative to vest in the grantee or assignee rights beyond the expiration of 25 years from the death of the author, despite the terms of any agreement. So while the term of copyright will typically extend for the period of the life of the author plus 50 years, a copyright license cannot be made for this full term where the author of a work is the first owner of the copyright in a work.11 Note that this restriction on the term of a license for copyright does not apply where the author is not the first owner of the copyright (e.g. in the case of a work made in the course of employment).12
For the licensing of trade secrets, the licensee may want to ensure that the license is only in effect for the period in which the trade secret maintains a defined level of secrecy. Notwithstanding such a condition, where a trade secret is immune from reverse engineering or independent discovery, it may be appropriate to license the secret either in perpetuity or for an indefinite term, subject to express termination rights.
A trade-mark license will often be granted for a specified term or for an indefinite term, subject to express termination rights. However, trade-marks, being theoretically capable of existing in perpetuity, may also be licensed under a permanent grant, subject to the need of the licensor to directly or indirectly control the character and quality of the wares or services with which the mark is used.13 Thus, where a trade-mark cannot be sold to a licensee but must be licensed (perhaps because the mark is associated with other marks which are not being or cannot be sold), the licensee could negotiate some type of exclusive, perpetual term license for the mark (e.g. exclusive for a defined field of use). Such a license could contain suspension rights for the licensor (for breaches by the licensee) but no right to terminate the license granted. For an example of the term and termination rights for such a license, see Schedule A to this paper. Note, however, that there is some question under Quebec law as to whether a perpetual term contract is enforceable as such.14
3 In some cases, the agreement will distinguish between the "term" of the license granted and the "duration" of the license agreement. In this way, the agreement may be designed to expire at some date after the expiration or termination of the license. This can be a useful distinction where the agreement contains obligations which are independent of the license, or where there are obligations under the agreement which should not end when the license ends (e.g. royalty payments, confidentiality and indemnity obligations, audit rights, etc.). In some cases the latter issues can be dealt with through the use of a "survival" clause which provides for the continuance of specific obligations under the agreement after the agreement’s termination.
4 See references cited in Culzean Inventions Ltd. v. Midwestern Broom Co. Ltd. (1984), 82 C.P.R. (2d) (Sask. Q.B.) 175, at 193/194. See also D. Vaver, Copyright Law, (Toronto: Irwin 2000) at 241, re: copyright.
5 Coyle v. Sproule,  3 D.L.R. 126 (Ont. H.C.), Trubenizing Process Corp. v. John Forsyth Ltd. (1943), 3 C.P.R. 1 (S.C.C.), Culzean, supra note 4, and Anne of Green Gables Licensing Authority Inc. v. Avonlea Traditions Inc. (2000), 4 C.P.R. (4th) 289, at para. 69.
6 Coyle and Trubenizing, supra note 5. However, despite clear and express provisions of an agreement providing for the survival of the term of the license (and of royalties) beyond the term of a patent, a court may, in its discretion, invoke equitable principles, such as unconscionability, in avoiding such an outcome by holding such a clause unenforceable. Thus, extending the term of patent license beyond the expiration of a patent should be done only with caution.
7 Trubenizing, supra note 5, and Anne, supra note 5.
8 See in particular Brulotte et al v. Thys Co., 379 U.S. 29 (1964) (U.S. S.C.), where a licensor was unable to recover royalty payments accruing after the last of the patents had expired despite express wording in the contract. Also see Harold Einhorn, Patent Licensing Transactions, (Matthew Bender 2003), at Section 7.06 and discussion therein.
9 Copyright Act (Canada), R.S.C. 1985 c. C-42, as amended.
10 Copyright Act, supra note 9 s. 14(1).
11 Unless the author has granted a license to the residual rights by way of will.
12 And, there is an express exception in the Copyright Act for licenses to publish works as part of a collective work. Copyright Act, supra note 9 s. 13(3) and 14(2).
13 That is, in order to maintain the validity of the trade-mark. See Trade-marks Act R.S.C. 1985, c. T-13, as amended, s. 50(1).
14 The Civil Code of Quebec includes several provisions relating to the duration of certain types of contracts, including leases (see Article 1880 C.C.Q.), which may not exceed 100 years in term. As licenses have been analogized to leases in some cases, it is difficult to know whether a license will be caught by this provision (see also Articles 2085, 2091, 2376, 1123, 1197 and 1272 C.C.Q.).
Survival of Provisions
Regardless of whether the license being granted expires or terminates, it is often necessary for various provisions of the agreement to survive, either in perpetuity or for a specified period, and the agreement should expressly specify which provisions are to survive and for how long. For example, there are often royalties to be paid for product sold prior to, or during a grace period after, the expiration or termination. And where royalties are based on sales or manufacturing figures, a licensor will typically want its rights to inspect the licensee’s records to survive for at least two or more years after the term ends.
Clauses which often survive expiration or termination include the following: (a) the obligation to pay royalties for products sold prior to termination, (b) the right of the licensor to audit the licensee’s records, (c) indemnity, limitation of liability and insurance provisions for the benefit of the licensor, and in some cases, the licensee, (d) confidentiality and non-disclosure obligations, and (e) covenants not to challenge the validity of the IP or the licensor’s title thereto. Consideration should be given as to whether some of these obligations should survive indefinitely (e.g. obligations of non-disclosure) while others should end within a defined number of years.
2. Renewal Issues
In many respects the nature of the licensing relationship will determine whether or not renewal provisions are appropriate for the IP license. Where the license is granted for a very short term (as may be the case in a franchise agreement), renewal rights for the licensee are common. Rights to renew can be created as a one-time right, or as a right that may be exercised indefinitely for successive periods of time. Conditions to the renewal right can be as onerous or minimal as the parties may agree, but licensees should be aware that the general rule in Canada is that complete compliance with the option/renewal conditions is required in order for a renewal right to be exercisable.15 Term renewals can also be drafted to occur automatically, subject to either party providing notice to the other of its desire not to renew (usually by a specified date). A sample of a typical "licensor friendly" franchise agreement renewal clause is attached as Schedule C to this paper.
Care should be taken when renewal rights are being exercised to ensure that the relevant notice provisions are being complied with fully. The failure to provide either notice of renewal within the relevant time period or notice in writing to the address specified in the agreement may result in a renewal not being effected.16
15 Sail Labrador Ltd. v. "Challenge One" (The) (1999), 169 D.L.R. (4th) 1 (S.C.C.), where the Supreme Court enumerated the few exceptions to this general rule.
16 Ross v. T. Eaton Co. (1992), 11 O.R. (3d) 115 (Ont. C.A.) The court held that where the manner of notice is prescribed but not absolutely, service in another manner is adequate if (a) the other manner is no less advantageous; and (b) notice is actually communicated.
While there are many permutations of termination rights, there are essentially two basic categories of such rights: (1) rights of termination exercisable for cause, and (2) rights of termination exercisable without cause. In the case of the former category, a breach of a provision of the agreement has occurred and the parties can provide that the defaulting party does, or does not, have a period of time within which to cure the breach before the termination will be effective. For both categories of termination rights, the parties can determine whether notice of termination must be given in order to effect termination or not, and how long of a period of notice will be required.
In an IP license agreement, the licensor or the licensee may want a right to terminate the license at any time without cause, after a specified period of notice. In such cases, the party against whom such a right may be exercised needs to review the proposed length of notice to ensure that the amount of notice will provide adequate time to enter into an alternate licensing arrangement with another party.
For termination rights based on "cause", there is a plethora of potential circumstances upon which to base these rights. Often only a limited number of these circumstances are grounds for termination by either the licensor or the licensee: for example (1) where the other party is in material breach of an obligation, (2) where the other party is insolvent or otherwise unable to pay its debts17, (3) where the other party is ordered or adjudged bankrupt or is placed into receivership18, or (4) where the other party is wound up, dissolved or liquidated. Because it is often the case that most of the obligations in an IP license are those of the licensee, the vast majority of circumstances will be grounds solely for the licensor to exercise a right of termination. Circumstances in which the licensor may want an express right of termination (either with or without notice and either with or without cure periods) include:
(1) the failure by the licensee to meet specific targets (e.g. sales levels, territorial exposure, manufacturing levels, or any milestones for product development),
(2) the production or sale of licensed products which do not meet specified quality standards or are otherwise not in compliance with the standards set in the agreement,
(3) the licensee taking any actions which may impair the IP rights being licensed or the rights of the licensor thereto (e.g. disclosures of confidential information, or the failure to pay patent or trade-mark registration renewal fees),
(4) unauthorized sublicensing, or unauthorized subcontracting of manufacturing,
(5) actions by the licensee outside of the scope of the field or territory of use granted under the license,
(6) the failure of the licensee to make minimum annual payments or royalty payments when due,
(7) the failure of the licensee to comply with insurance obligations,
(8) the licensee demonstrating a pattern of continual breaches of the agreement, despite the curing of each such breach,
(9) the licensee attempting to encumber its interest, if any, in the IP being licensed to it, or
(10) a change of control of the licensee, or an attempt by the licensee to assign the license agreement to a third party in breach of the terms of the agreement.
Where the licensor has a right to terminate immediately and without a cure period, the licensee should ensure that only very serious breaches are caught within such a right. It is common, however, for termination rights to provide the licensee with a cure period within which to correct many types of breaches. The failure to correct the specified breach within the applicable cure period will often result in the license being terminated automatically upon the expiration of the cure period, or upon further notice by the licensor.
It is also important to note that Quebec courts have held that pursuant to the Quebec Civil Code, regardless of any stipulation to the contrary in a contract, a party is not entitled to termination of a contract if the default of the other party is of minor importance.19 That is, regardless of express wording of a contract providing for a right of termination to one party if the other party fails to perform certain obligations, that party is precluded from exercising that right of termination if the breach, under the circumstances, is not important or serious enough, and as such is seen as abusive and contrary to the duty to act in good faith.20 Therefore, for an IP license agreement governed by Quebec law, a party wishing to terminate that agreement for cause will want to seek advice on these matters first.
Schedule B to this paper contains a sample set of "licensor friendly" termination provisions for an IP license agreement. In contrast, Schedule A provides a sample set of termination provisions which effectively provide that the IP license agreement is not terminable.
Licensors entering into international licensing arrangements need to also consider whether their arrangement creates a de jure employment or agency relationship in any given jurisdiction, which, if created, can result in the imposition of fees or payments for the licensor when termination rights are exercised.
17 But see the discussion on Bankruptcy Issues, infra at p. 9.
18 Supra, note 17.
19 Article 1604 Civil Code of Quebec. See Phoenix Flight Operations Ltd. v. Royal Aviation Inc., J.E. 2000-861 (C.S.), Lacharite Apparel (1989) Inc. v. G.M.A.C. Commercial Credit Corp., J.E. 2000-1912 (C.S.), and Covexco Construction Inc. v. Stasiak, J.E. 99-1162 (C.S.).
20 The duty to act in good faith and not with abuse of right in all contractual matters are well developed concepts under Quebec law. As such, parties to contracts governed by Quebec law must be careful to ensure that they are acting fairly even when invoking any express clause of a contract (see Houle v. Canadian National Bank  3 S.C.R. 122 at 164).
The subject of bankruptcy is the topic of another presentation at this workshop, but the implications of bankruptcy as a possible termination event also requires comment here. The Bankruptcy and Insolvency Act21 creates substantial termination issues for a licensor when its licensee becomes insolvent. Generally, a licensor will want to be able to terminate its agreement if the licensee becomes insolvent. However, the Bankruptcy and Insolvency Act provides that:
"(1) Where a notice of intention or a proposal has been filed in respect of an insolvent person, no person may terminate or amend any agreement with the insolvent person, or claim an accelerated payment under any agreement with the insolvent person, by reason only that
(a) the insolvent person is insolvent; or
(b) a notice of intention or a proposal has been filed in respect of the insolvent person.
(2) Where the agreement referred to in subsection (1) is a lease or licensing agreement, subsection (1) shall be read as including the following paragraph:
"(c) the insolvent person has not paid rent or royalties, as the case may be, or other payments of similar nature, in respect of a period preceding the filing of
(i) the notice of intention, if one was filed, or
(ii) the proposal, if no notice of intention was filed.""22
The effect of this is that, subject to obtaining a court order to the contrary,23 clauses providing for termination rights by reason of insolvency of the licensee in IP license agreements are of no force or effect if a proposal or a notice of intention to make a proposal has been filed. Licenses which contain personal obligations on the part of the licensee may give the licensor additional grounds for termination when a licensee becomes insolvent (i.e. potentially providing grounds for termination other than "by reason only that" the insolvent licensee is insolvent or has not paid royalties). As such, it is usually in the licensor’s interest to emphasize the personal nature of these obligations in the license agreement and to support this position by prohibiting the assignment of the license by the licensee without the prior consent of the licensor.
While the legislation referred to above deals squarely with the case of the insolvency of a licensee, it does not speak to the rights or options of a licensee upon the licensor’s insolvency, if the licensee wants its license to continue. Whether a trustee in bankruptcy or a receiver of an insolvent licensor can disclaim or terminate a license agreement is not clear in Canada. IP license agreements are usually executory contracts (as there are typically ongoing performance obligations on the parties during the term of the license). As such, IP license agreements may be difficult to disclaim. This issue has not yet been settled in Canadian courts, although the possibility of disclaimer by a trustee in bankruptcy has been raised in at least one case.24 Note that in the United States, Section 365(n) of the Bankruptcy Code25 specifically addresses some of the bankruptcy issues for certain types of IP. However, a recent decision in the United States regarding rights in a real property matter has raised the question of whether rights of intellectual property licensees are protected by that Section.26 As a result, licensees will want to consider the consequences of the bankruptcy or insolvency of the licensor and whether escrow and trust arrangements should be established for the IP being licensed.
21 Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 65.1(1) and (2).
22 Supra, note 21.
23 Supra, note 21 s. 65.1(6).
24 See Re Erin Features #1 Ltd. (1991), 8 C.B.R. (3d) 205. Also see Piero Iannuzzi, Bankruptcy And The Trustee’s Power To Disclaim Intellectual Property And Technology Licensing Agreements: Preventing The Chilling Effect of Licensor Bankruptcy In Canada, (2001), 18 C.I.P.R. 367.
25 Bankruptcy Code (USA), 11 U.S.C. § 365(n).
26 Precision Industries, Inc. v. Qualitech Steel SBQ, LLC,  CA7-QL 193 (7th Cir., April 23, 2003). Note that this case has been the subject of some academic criticism (see: Michael St. Patrick Baxter, "Section 363 Sales Free and Clear, of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel," 59 Bus. L. 475 (2004); and Christopher C. Genovese, "Precision Industries v. Qualitech Steel: Easing the Tension Between Sections 363 and 365 of the Bankruptcy Code?" 39 Real Prop. Prob. & Tr. J. 627 (2004).
Implied Termination Rights on Reasonable Notice
An IP license agreement should expressly define the termination rights of both parties. Canadian courts have held that where a contract expressly provides for termination in specified circumstances, they will not imply provisions permitting termination on reasonable notice, even where the contract is for an unspecified period of time.27 This is good news for the company with a well crafted set of termination rights, but what happens when the agreement is silent with respect to the rights of the parties to terminate a license?
Generally, in cases where agreements are for an indefinite term and are silent as to the rights of the parties to terminate, courts will imply a right of termination without cause upon reasonable notice.28 This is certainly the case where the grant in the agreement is in the nature of a mere license,29 as in the case of many patent and trade-mark licenses. However, where a license agreement grants an interest in the IP, for example in the case of an exclusive license in respect of the copyright in a work,30 such an implied right may not exist. What will constitute "reasonable" notice and whether a contract is truly "silent" as to the termination rights of the parties are subjects beyond the scope of this paper. It is important to keep in mind, however, that where the parties truly intend for the license to be non-terminable, or at least irrevocable by one of the parties, the agreement should expressly provide for this. An example of such language is provided in Schedule A to this paper.
27 Cooke v. CKOY Ltd.,  2 O.R. 257 (Ont. H.C.), Shaw Cable Systems (Manitoba) Ltd. v. Canadian Legion Memorial Housing Foundation (Manitoba)  3 W.W.R. 425 (Man. C.A.). Note, however, that under Quebec law, this result may not be the case, given that courts in Quebec have held that the right to reasonable notice for termination is implied in all contracts of indeterminate duration. See E. & S. Salsberg Inc. v. Dylex Ltd.,  R.J.Q. 2445 (C.A.).
28 Martin-Baker Aircraft Co. Ltd. v. Canadian Flight Equipment Ltd.  2 Q.B. 556.
29 Re Treen Gloves & Safety Products Ltd. and Degil Safety Products (1989) Inc. et al, (1989), 33 C.P.R. (3d) at 74, and Bernard-Norman Specialities Co. Ltd. v. S.C. Time Inc. et al, (1989), 31 C.P.R. (3d) at 158.
30 Copyright Act, supra note 9 s. 13(7), where an exclusive copyright license is deemed to constitute the grant of an interest in the copyright by license.
Termination for Breach of a Condition / Fundamental Breaches
Despite the existence of express termination rights in a license agreement, courts have found that there are certain types of breaches of contract which will provide additional rights of termination to the innocent party (provided that such a right does not contradict the intentions of the parties).
Whether the breach of a particular term will entitle the innocent party to terminate a license and/or the license agreement depends on whether the term breached can be said to be a condition as opposed to a warranty. A breach of a condition entitles the innocent party to terminate the contract, whereas if a warranty is breached the contract continues and the innocent party may only sue for damages.31 Whether a particular term is a condition or a warranty depends on the intentions of the parties, having regard to the surrounding circumstances and commercial setting.
Perhaps the most useful question to ask in this regard is whether a breach has resulted in substantial failure of performance. Or, as laid out in the seminal case of Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd.:
"does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole of the benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?"32
The term "fundamental breach" has often been used synonymously with the term "breach of a condition" to describe the above type of situation. However, as the term "fundamental breach" has also been used in the context of controlling the unfair application of exclusion of liability clauses (e.g. where a party in breach could not rely on an exemption of liability clause in a contract if the breach was of the nature of a "fundamental breach"), the term "fundamental breach" often causes confusion.
Examples of IP licensing cases where Canadian courts have held that a breach of a particular term of a license entitled the innocent party to terminate the license are:
- Bayer33, where the licensee of a patent refused to pay royalties;
- DSI Management34 where a licensee failed to use "best efforts" (as required under the license agreement) to promote the sale of the licensor’s product; and
- Prism Hospital Software35 where the licensee rewrote parts of the Licensor’s software and began to use the new version as its own.
In contrast, courts have refused to find that breaches of IP licenses resulted in a right of termination for the innocent party in the following cases:
- Respirex of Canada,36 where a patent license agreement provided that the licensee would employ the licensor under a full-time contract and only a part-time arrangement took place, and
- International Oxide-Fusion,37 where the defendant was to pay royalties for, among other things, secret processes, which the defendant later discovered were not in fact secret after all.
Finally, while the discussion of arbitration and mediation clauses is beyond the scope of this paper, the effect of such provisions on the implementation of termination provisions should be carefully considered.
31 Supra, note 1 at 517.
32  2 Q.B. 26 (C.A.) at 65-6.
33 Bayer Atkiengesellschaft v. Apotex Inc. (1995), 60 C.P.R. (3d) 58 (Ont. Ct.), reversed in part on other grounds on appeal (1998), 82 C.P.R. (3d) 526 (Ont. C.A.).
34 DSI Management Inc. v. A.T.S. Electro-Lube Ltd.,  B.C.J. No. 185 (S.C.).
35 Prism Hospital Software Inc. v. Hospital Medical Records Institute (1994), 18 B.C.L.R. (2d) 34 (S.C.).
36 Respirex of Canada Ltd. v. Flynn (1975), 22 C.P.R. (2d) 104 (Ont. Gen. Div.).
37 International Oxide-Fusion Inc. v. Exolon-Esk Co. (1997), 77 C.P.R. (3d) 458 (Ont. Gen. Div.).
4. Post Termination Issues
Return of Materials
Where a licensor will be providing cell lines, source code, molds, marketing materials, manufacturing manuals or any other materials of a proprietary or valuable nature, provisions should be included in the license for the return of all such items and all copies within the licensee’s control to the licensor within a specified time period, usually at the licensee’s expense. In situations where information or materials may flow both ways between the licensor and the licensee, such provisions can be reciprocal.
In trade-mark licenses, the licensor will want the licensee to agree to terminate or assign to the licensor upon termination all business name and domain name registrations that incorporate any licensed marks. Further, where the licensor has permitted the licensee to incorporate one or more trade-marks into the corporate name of the licensee, the obligation of the licensee to change its name to a name which is not confusingly similar to the licensed marks should be included in the agreement.38
38 Licensors should carefully consider whether to permit a licensee to incorporate the licensor’s trade-mark in a corporate name, as the failure by a licensee to comply with the obligation to change its name after termination may force the licensor to incur the expense of taking legal action against the licensee in order to protect its marks.
In the absence of an express or implied provision within a license agreement, a licensee has no right to sell products (including inventory) after termination which would, but for a license, infringe the IP rights of the licensor. Thus, particularly for patent, trade-mark and copyright licenses, a licensee will usually want a liquidation or sell-off right for some period of time after the termination of the license. Such a period may last for as little as a few days to as long as several years, the length generally being determined by the nature of the particular business. Liquidation rights may be needed to dispose of existing inventory or to manufacture products which are only partially completed or for which binding agreements for sale have been entered into prior to the termination date.
Depending on the type of IP involved, some post-termination right to conduct repairs, modifications, or other services with respect to products sold or licensed by the licensee to end customers may also be appropriate. In some cases, the licensor may want to insert into the liquidation provisions a right for the licensor to elect whether to purchase any inventory of the licensee at cost or to take over any of the licensee’s unperformed contracts in lieu of the licensee obtaining liquidation rights.
A licensor will want to ensure that a liquidation right is not automatic upon any termination but is restricted so as to flow from a termination on a without cause basis or a termination by the licensee for a breach by the licensor. In this way, a licensee that is delinquent in the payment of royalties or in breach of confidentiality or other obligations of the agreement will not receive the post-termination benefit of liquidation rights.
The licensor will want the license agreement to provide that the royalty obligations of the license survive during the liquidation period. The licensee will want to qualify this obligation to avoid the payment of royalties if the license has ended because the term of protection for the IP has ended (e.g. the copyright or patent has expired or the patent or trade-mark has been held invalid). A license agreement will usually provide at the end of the liquidation period that the licensee must deliver-up or destroy any remaining inventory of licensed products and provide sufficient evidence of the same to licensor (typically by way of a written confirmation or certificate).
At common law in Canada, a licensee is estopped from disputing the validity of the IP being licensed for the duration of the term of the license. This is commonly referred to as licensee estoppel and typically arises where a licensor brings legal proceedings for enforcement of the license against the licensee (e.g. where royalties are owing). Licensee estoppel prevents the licensee from challenging the validity of the patent, trade-mark or copyright under which the license was granted.39 However, unless the license agreement clearly contemplates the survival of such a restriction on the licensee after termination, the licensee is free, after termination, to attack the validity of the IP. As such, a licensor will always want to consider including in the agreement a clause providing for the survival of a licensee’s obligation not to challenge the validity of the IP being licensed or of the rights of the licensor to such IP.
It is important to note that the law regarding licensee estoppel differs between the United States and Canada. For example, US courts have, in some cases, held that restrictions on licensees challenging the validity of patents (either during the term of a license or after) are unenforceable.40
39 Bayer, supra note 33, Coyle, supra note 5, and Anne, supra note 5, at paras. 64-66.
40 Lear Inc. v. Adkins, 395 U.S. 653 (1969), but see, for example, Beer Nuts Inc. v. King Nut Co., 477 F. 2d 326 (1973), re: trade-marks.
Statements Re: Termination of Use
Often an IP license agreement will contain an express statement that, subject to any liquidation rights provided therein, the licensee must cease all use of the licensed IP rights immediately after the termination of a license. Under Canadian law it is not necessary to make such a statement, but for business reasons licensors will still often want to make this prohibition express.
A big post-termination issue for IP licenses is: what to do with sublicenses which were granted by a licensee during the term of the head license agreement. If sublicensing rights are to be given to the licensee, the survival or termination of such sublicenses should be directly addressed in the head license agreement. This issue can be addressed by having the parties agree upon a set form for the sublicense agreement, with the licensor deciding whether it will step into the shoes of its licensee or whether it will give the licensee a long-term sublicensing right in order to meet its obligations as licensor under the sublicense agreements. Licensors must be cautious about agreeing to step into the shoes of their licensee as the licensee may have taken on responsibilities or liabilities which the licensor cannot (or does not want to) take over. Further, the licensee may not be performing its own obligations under the sublicense and thus be in breach of any given sublicense agreement when the licensor steps in.
It is hopefully clear (or at least clearer) from the above discussion that the term and termination provisions of an IP license agreement are deserving of careful consideration by both parties. Such planning should lead to a more predictable, and as such, more beneficial, licensing relationship. In such cases, both the licensee and the licensor will have a better idea of what will occur when the party is truly over.
Licensee Friendly Termination Provisions
ARTICLE 10 - TERM
10.1 Term. The term of this Agreement and the rights and licenses hereby granted shall be perpetual.
10.2 Termination. The parties hereto expressly acknowledge and agree that Licensor shall not have or exercise any right, express or implied, to terminate this Agreement, whether with or without cause, on reasonable notice or otherwise.
10.3 Remedies. Licensor and Licensee agree that, in the event of breach of this Agreement by Licensee, Licensor’s sole remedies shall be (i) injunctive relief to enjoin further breach of this Agreement, (ii) specific performance by Licensee of Licensee’s obligations hereunder, (iii) damages, and (iv) recovery of costs associated with seeking and obtaining any of the foregoing.
Licensor Friendly Termination Provisions
(a) This Agreement and the license granted hereunder shall terminate on the expiration of a term of twenty (20) years from the Date of Commencement or the expiration of the last patent obtained pursuant to Article X herein, whichever event shall last occur unless earlier terminated pursuant to Article 11 herein.
11.1 The Licensor may, at its option, terminate the license and this Agreement immediately on the happening of any one or more of the following events by delivering notice in writing to that effect to the Licensee:
(a) if the Licensee becomes insolvent,
(b) if any execution, sequestration, or any other process of any court becomes enforceable against the Licensee or if any such process is levied on the rights under this Agreement or upon any of the monies due to the Licensor and is not released or satisfied by the Licensee within 30 days thereafter,
(c) if any resolution is passed or order made or other steps taken for the winding up, liquidation or other termination of the existence of the Licensee,
(d) if the Licensee is more than 30 days in arrears of royalties or other monies that are due to the Licensor under the terms of this Agreement,
(e) if the Technology (or any Improvements) becomes subject to any security interest, lien, charge or encumbrance in favour of any third party claiming through the Licensee,
(f) if the Licensee ceases or threatens to cease to carry on its business,
(g) if a controlling interest in the Licensee passes to any person or persons other than those having a controlling interest at the Date of Commencement, whether by reason of purchase of shares or otherwise, without the prior written consent of the Licensor,
(h) if the Licensee undergoes a reorganization or any part of its business relating to this Agreement is transferred to a subsidiary or associated company without the prior written consent of the Licensor,
(i) if the Licensee commits any breach of Articles 3.1, 4.1 or 7.2,
(j) if any sublicensee of the Licensee is in breach of its sublicense agreement with the Licensee and the Licensee does not cause such sublicensee to cure such default within 30 days of receipt of written notice from the Licensor requiring that the Licensee cause such sublicensee to cure such default.
11.2 Other than as set out in Article 11.1, if either party shall be in default under or shall fail to comply with the terms of this Agreement then the non-defaulting party shall have the right to terminate the license and this Agreement by written notice to that effect if:
(a) such default is reasonably curable within 30 days after receipt of notice of such default and such default or failure to comply is not cured within 30 days after receipt of written notice thereof, or
(b) such default is not reasonably curable within 30 days after receipt of written notice thereof, and such default or failure to comply is not cured within such further reasonable period of time as may be necessary for the curing of such default or failure to comply.
11.3 If the license and this Agreement is terminated pursuant to Article 11.1 or 11.2, the Licensee shall make royalty payments to the Licensor in the manner specified in Article 4, and the Licensor may proceed to enforce payment of all outstanding royalties or other monies owed to the Licensor and to exercise any or all of the rights and remedies contained herein or otherwise available to the Licensor by law or in equity, successively or concurrently at the option of the Licensor. Upon any such termination of the license and this Agreement, the Licensee shall forthwith deliver up to the Licensor all Technology (and any Improvements) in its possession or control and shall have no further license or right of any nature whatsoever in the Technology (or any Improvements). On the failure of the Licensee to so deliver up the Technology (and any Improvements), the Licensor may immediately and without notice enter the Licensee’s premises and take possession of the Technology (and any Improvements). The Licensee will pay all charges or expenses incurred by the Licensor in the enforcement of its rights or remedies against the Licensee including, without limitation, the Licensor’s legal fees and disbursements.
11.4 The Licensee shall cease to use the Technology (or any Improvements) in any manner whatsoever or to manufacture or sell the Products within five days from the Effective Date of Termination. The Licensee shall then deliver or cause to be delivered to the Licensor an accounting within 30 days from the Effective Date of Termination. The accounting will specify, in or on such terms as the Licensor may in its sole discretion require, the inventory or stock of Products manufactured and remaining unsold on the Effective Date of Termination. The Licensor will instruct that the unsold Products be stored, destroyed, or sold under its direction, provided the Agreement was terminated pursuant to Articles 11.1 (c) - (f). Without limiting the generality of the foregoing, if the Agreement was terminated pursuant to any other Article, the unsold Products will not be sold by the Licensee without the prior written consent of the Licensor. The Licensee will continue to make royalty payments to the Licensor in the same manner specified in Articles 4 and 5 on all unsold Products that are sold in accordance with this Article, notwithstanding anything contained in or any exercise of rights by the Licensor under Article 11.3 herein.
11.5 Notwithstanding the termination of this Agreement, Articles 5 [royalty provisions] and 6 [audit rights] shall remain in full force and effect until three years after
(a) all royalty payments required to be made by the Licensee to the Licensor under this Agreement have been made by the Licensee to the Licensor, and
(b) any other claim or claims of any nature or kind whatsoever of the Licensor against the Licensee has been settled.
Sample of Licensor Friendly Renewal Provisions
5. Unless terminated pursuant to the provisions of this Agreement, the Licensee shall have the option to renew the rights, licenses and privileges granted herein for a renewal term of three (3) years upon the terms and conditions provided for in the Licensor’s then standard form of license agreement existing at the time of renewal, excluding any rights of renewal therein (the "New Agreement"), commencing upon the expiration of the Term, provided that:
(a) the Licensee, at the time of notice of its election to renew hereunder, and at the end of the Term, is not in default of any of the terms or conditions of this Agreement or any other agreement entered into between the Licensor and the Licensee, and the Licensee has complied with the terms and conditions of all such agreements during the Term;
(b) the Licensee executes and delivers to the Licensor, not less than thirty (30) days prior to the expiration of the Term, the New Agreement; and
(c) the Licensee gives to the Licensor written notice of its election to renew not less than twelve (12) months nor more than eighteen (18) months prior to the expiration of the Term of License.
6. The terms and conditions of the New Agreement will conform to those contained in the Licensor’s then standard form of franchise agreement existing at the time of execution of the New Agreement (excluding any rights of renewal therein), but will not contain terms and conditions which are materially more onerous to the Licensee than those contained herein.
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