Buyer beware

Those seeking to acquire the intellectual property rights of a bankrupt company are often faced with a unique set of legal challenges, as exemplified by Thomson Reuters’ recent acquisition of certain intellectual property rights owned by Federated Press.

In early 2016, the company operating as Federated Press went bankrupt and a trustee was charged with selling its assets, which included licence and copyrights in tax publications written by more than 550 authors across Canada. The trustee initiated a sale process in order to sell these intellectual property rights and Thomson Reuters made the best offer. The ensuing transaction illustrated the potential intricacies of intellectual property rights in a bankruptcy context.

Under the Bankruptcy and Insolvency Act, the trustee may, under certain circumstances, assign contracts without the consent of the bankrupt’s co-contracting counterparty. Where a licensee of a copyright becomes bankrupt, the copyright holder — which is often the author — faces the possibility of having the licensee’s rights sold to the highest bidder. In such a context, copyright holders could be faced with the prospect of having an unfamiliar licensee imposed upon them.

Thus, in order to protect the rights of copyright holders of published work, subsection 83(2) and 83(3) of the BIA notably require that:

• the trustee offers each copyright holder the right to purchase manufactured and marketable copies of the copyright work comprised in the estate of the bankrupt, if any, at fair and proper price, terms and conditions (as deemed by the trustee);

• each copyright holder be paid such royalties or share of the profits as would have been payable by the bankrupt licensee; and that

• the trustee obtains the written consent of the copyright holder to the assignment or ensures that any purchase agreement will guarantee the payment of royalties and share in the profits to each copyright holder at a rate not less than the rate the bankrupt licensee was liable to pay.

Depending on the terms of the licence granted to the bankrupt, the written consent of the copyright holder may also be needed to validly assign the resulting rights. In other instances, a notice may be sufficient. The transacting parties must ensure that these requirements are closely followed, so that these intellectual property rights are effectively transferred to the purchaser. This could be a particular challenge where the bankrupt’s assets include a significant number of licence agreements with immaterial individual value.

In this case, the parties agreed to obtain court approval of the transaction involving the purchase of the licence and copyrights in tax publications by exceptionally applying to the court for a vesting order. The parties also applied for an order assigning the rights and obligations of the bankrupt under its various agreements with the authors pursuant to s. 84.1 of the BIA, which required the trustee to give notice to each individual author regarding the motion and the assignment. Accordingly, the trustee had to identify each author and trace their co-ordinates for notification purposes via email (many of which had been altered since the time of the authors’ contribution). Significant research was carried out to locate each and every author. In the circumstances, the court allowed notification via email, considering the unreasonable costs that would have been incurred with other means of notification.

The trustee was largely spared the arduous task of determining the royalties and share of profits due to each author, as the publications in question were largely provided by the authors gratuitously or against one-time payments that had previously been paid by the bankrupt in consideration of the right to publish the author’s work.

The takeaway is that, in order to comply with the requirements of the BIA and other applicable law, transactions involving the sale of certain intellectual property rights, especially licence rights and copyrights, are potentially subject to a unique set of challenges, costs and delays. All parties should be aware of these challenges when structuring their transactions and negotiating the purchase of intellectual property rights.

Gerry Apostolatos, Simon Chénard and Daniel Baum are lawyers with Langlois LLP in Montreal.