Legal Qualms in IP Licensing During Insolvency: A Cross-Border Analysis

22nd February, 2025 - 12:06 pm Categories: Intellectual Property Licensing 0 Comments

Introduction:

Insolvency processes present different legal and practical issues, predominantly involving intellectual property (IP) licenses. The treatment of intellectual property licensing can disturb economic relationships and imperil crucial IP rights for enterprises in financial difficulties. A fragmented legal landscape forces players to navigate, making issues more complicated by the absence of a uniform global framework for managing intellectual property rights in insolvency. Licensee protections may be undermined by this uncertainty, preventing them from accessing essential intellectual property and cause licensors to suffer large financial losses. There are issues with cross-border insolvencies because different governments have varied views on intellectual property licenses during bankruptcy. This blog delves into the complexities of IP licensing treatment during insolvency, including understanding key jurisdictions such as India, Europe, Indonesia, and Japan. It explores the impact of insolvency on licensors and licensees, discusses cross-border insolvencies, and provides practical risk-mitigation measures.

Overview of Insolvency and IP Licenses:

During the insolvency process IP licensing is a very complex issue across the jurisdiction. The Bankruptcy Code of the United States under section 365 which allows debtors to reject executory contracts, including IP licenses. In India, the Insolvency and Bankruptcy Code (IBC) lacks legal safeguards, leaving both licensors and licensees vulnerable. The UK generally protects licensee rights, but variations in interpretation can introduce uncertainty. The lack of a cohesive global outline exacerbates these challenges, increasing legal costs and exposing licensees and licensors to significant financial and operational risks[1].

Jurisdictional Insights:

A complicated and developing field of law, the regulation of intellectual property (IP) licensing during insolvency varies greatly throughout nations, including Europe, Japan, Indonesia, and India. The ways that different regions handle intellectual property licenses during bankruptcy proceedings demonstrate the difficulties and room for development in this crucial field[2]

India:

In 2016, India’s significantly reformed its insolvency and Bankruptcy laws, and enacted Insolvency and Bankruptcy (IBC). However, its lack of unambiguous provisions for IP licenses has led to uncertainty. Resolution professionals wield significant discretion, including the authority to disclaim onerous property, which could encompass valuable IP licenses. This absence of clarity may raise concerns about the potential mishandling of IP rights during insolvency proceedings.[3]

Europe:

Europe’s approach in IP licensing include Directive Proposal 2022/0408/COD, which seeks to integrate IP licenses as essential components of business operations during insolvency proceedings. However, the proposal’s definition of “necessary” contracts remains a contentious issue, permitting a range of interpretations that might compromise its efficacy. Furthermore, the circumstances in which intellectual property licenses can still be revoked are up for controversy, with demands for more extensive protections to protect both licensees and licensors[4].

Indonesia:

Indonesia struggles with serious legal loopholes about intellectual property rights during bankruptcy. The country’s present regulations make it difficult to include intellectual property in bankruptcy estates since they are unclear about how to value or transfer such assets. Legal reforms are necessary to close these gaps, and they highlight the necessity of uniform procedures for assessing and transferring intellectual property rights.[5]

Japan:

Japan has taken some positive steps to address some of the setbacks surrounding IP rights in insolvency through amendments to its Copyright Act, providing explicit procedures for managing IP licenses during bankruptcy. But there are still a lot of obstacles to overcome, especially when it comes to cross-border situations involving jointly owned intellectual property[6]. To ensure uniformity and dependability in the treatment of intellectual property rights during insolvency proceedings, global harmonization is essential. Adding IP-specific elements to the UNCITRAL Model Law on Cross-Border Insolvency or adopting international norms could greatly lower these uncertainty. Furthermore, states could gain from exchanging ideas and best practices, as demonstrated by Europe’s harmonization initiatives.

Cross-Border Challenges:

The handling of intellectual property (IP) licenses in cross-border insolvency cases is tough due to the absence of a consistent global framework. This results in differences in state laws and judicial interpretations, particularly in countries such as the United States and India, where substantial legal developments and contentious cases have highlighted the complexities.

In the United States, Section 365(n) of the Bankruptcy Code provides robust protections for licensees as compared to other jurisdictions. This provision allows licensees to retain their rights to use licensed IPs even if the licensor rejects the contract during insolvency. This precaution is critical for organizations that rely on IP as a core asset, enabling to retain operational stability despite financial challenges. The landmark In Re Qimonda[7] case exemplifies the complexities of cross-border insolvency involving IP assets. Qimonda, a German semiconductor manufacturer, had significant IP holdings in the U.S. When insolvency proceedings began in Germany, the question arose whether U.S. protections under Section 365(n) would apply. The American court of upheld U.S. bankruptcy protections for these IP assets, highlighting the importance of maintaining licensee rights. However, cross-border cases reveal gaps in international coordination. For example, different legal interpretations across jurisdictions can result in drawn-out disputes, and inconsistent rulings.

On the other hand, In 2019, Jet Airways was burdened with debts exceeding ₹36,000 crores. Parallel the airline faced bankruptcy in India and the Netherlands, resulting in a jurisdictional dispute. In 2019, the Dutch court declared Jet Airways bankrupt and seized its assets, while India’s NCLT dismissed the Dutch jurisdiction, adhering to its territorial principle, which again create the uncertainty between domestic and International laws limiting.

This case highlights the lack of strong cross-broder insolvency process mechanism in India. Despite provisions in the Insolvency and Bankruptcy Code (IBC) that potentially facilitate international cooperation, these parts have yet to be notified, leaving Indian administrators unable to efficiently recover or manage offshore assets. In contrast, the Netherlands employs a  limited approach, allowing foreign administrators to manage local assets under specific conditions, but this principle lacks consistency due to the absence of binding precedents.

India ought to initiate reforms, such as announcing IBC Sections 234 and 235 and adopting the UNCITRAL Model Law on Cross-Border Insolvency. These steps would enable reciprocity, streamline international cooperation, and ensure equitable creditor treatment. Beyond the legal necessity, such improvements hold economic relevance, potentially conserving jobs, accelerating resolutions, and boosting investor confidence. Addressing these gaps would position India as a leader in global insolvency frameworks, capable of managing the complexities of cross-border cases in an interconnected world[8].

India is now considering adopting the UNCITRAL Model Law on Cross-Border Insolvency, which could provide a standardized way to manage international insolvency cases. However, without explicit rules for handling IP rights, uncertainty persists about how these valuable assets will be treated. Clear legislative guidance is crucial—not only to protect IP assets but also to inspire investor confidence and support fair resolution processes.[9]

Recommendations:

Intellectual property (IP) licensing is a complex sector that is exacerbated by the challenges that insolvency brings. Licensors and licensees must make proactive and deliberate efforts to protect their interests and the integrity of agreements during times of financial uncertainty. A fundamental recommendation is to include contractual protections in licensing agreements. Licensees should seek provisions that prohibit automatic termination of licenses in the case of the licensor’s insolvency. Clauses can be inserted to ensure that licenses stay enforceable or, in some cases, transform into perpetual, royalty-free agreements under certain situations. These measures offer licensees much-needed protection and continuity in difficult times.

Licenses must be registered with authorities to ensure enforcement and safeguard rights during insolvency processes. It ensures that the license is valid and binding even if the underlying intellectual property is sold to a third party. Legal awareness among stakeholders is critical for licensors and licensees in anticipating risks and adapting to regulatory changes. Agreements should limit licensors’ authority to terminate contracts only for insolvency and contain opportunities for renegotiation if unexpected issues develop. These strategies protect relationships and provide avenues for resolving disputes or performance issues without escalating tensions.

Conclusion:

The absence of a global framework makes handling intellectual property (IP) licensing during insolvency a tough task. Different procedures have been created by jurisdictions such as the US, India, Europe, and Japan, which regularly exposes licensors and licensees to operational and financial concerns. This regularly exposes licensors and licensees to operational and financial issues. To avoid these risks, stakeholders should register licenses with the right authorities, include provisions for insolvency in licensing agreements, and keep up with changing legal frameworks. Addressing the uncertainties and forming a more stable environment for IP licensing in insolvency necessitates international collaboration and legal reforms, such as the approval of the UNCITRAL Model Law on Cross-Border Insolvency.

Author: Shashank Soni, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

[1] Lazerowitz, E. and Eisenbach , B. (2022) A guide to navigating bankruptcy’s impact on IP licenses // Cooley // Global Law Firm, // Cooley // Global Law Firm. Available at: https://www.cooley.com/news/insight/2022/2022-08-16-a-guide-to-navigating-bankruptcy-impact-on-ip-licenses (Accessed: 02 January 2025).

[2] Cheung, W., Erica Wu, E. and Pietsch, I. (2024) How insolvency laws impact IP licences, Covington & Burling LLP. Available at: https://www.cov.com/en/news-and-insights/insights/2024/11/how-insolvency-laws-impact-ip-licences (Accessed: 03 January 2025).

[3] Ram Mohan, M.P. and Gupta, A. (2021) Treatment of intellectual property license in bankruptcy, SSRN. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3903011 (Accessed: 07 January 2025).

[4] Ibid

[5] Al Asy’arie, Moh.A., Rahmanda, B. and Prasetyo, K.A. (2024) ‘Transfer of intellectual property right as a company asset in bankruptcy in Indonesia’, Diponegoro Law Review, 9(1), pp. 53–69. doi:10.14710/dilrev.9.1.2024.53-69.

[6] Ibid

[7] Felder, S.A. (2017) Case study: In Re Qimonda, Wiley. Available at: https://www.wiley.law/alert-2112 (Accessed: 03 January 2025).

[8] Lakhotia, S. (2019) Cross-border insolvency problem in India: The Jet Airways Conundrum, NLIU CBCL. Available at: https://cbcl.nliu.ac.in/insolvency-law/cross-border-insolvency-problem-in-india-the-jet-airways-conundrum/ (Accessed: 07 January 2025).

[9] Ho, M.L.C. (2017) Cross-border insolvency: A commentary on the UNCITRAL model law, Fourth edition, Northwestern University. London: Globe Law and Business Ltd. Available at: https://search.library.northwestern.edu/discovery/fulldisplay?vid=01NWU_INST:NULVNEW&docid=alma9980653665902441&context=L (Accessed: 2025).