Vol 11 (2014) - Issue 4

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Swiss Insolvency Laws and IP Licence Agreements

The situation is a familiar one in times of crisis. Licensor of software, know-how, patents or other IP rights gets into financial difficulties or even insolvency. Licensee wants to know what will happen to its licence. Of course, the answer depends not only on the terms of the licence agreement and the law that governs that agreement, but also on the laws of the place where the insolvent party is located. The protection afforded to a licensee can vary greatly depending on the licensor's location. Whereas a licensee may be shielded to some extent from the consequences of a US licensor's bankruptcy by the US Bankruptcy Code (11 USC Section 365), at least where the licence is exclusive and for patents, copyright or know-how, in many countries the position is not so comfortable for the licensee.
The conditions in Switzerland, the taxation and regulatory regime, are generally favourable for IP holding companies and so licence agreements often involve a licensor located in Switzerland. Where a Swiss licensor becomes insolvent, licensees are often surprised by the provisions of Swiss insolvency law and the difficulties that arise. Recently licensees from Swiss licensors have become even more exposed with the entry into force on 1 January 2014 of an amendment to the Swiss Federal Debt Enforcement and Bankruptcy Act ('Bankruptcy Act'), intended principally to ease the restructuring of companies in financial difficulties, but bringing with it a number of changes of direct relevance for licence agreements.

1. The bankruptcy officer decides whether to enter into the licence, be it in whole or in part or not at all
Under Swiss law, a contract will not automatically be terminated due to the opening of bankruptcy proceedings. Whether or not a contract can be terminated on insolvency, depends on the law and the agreement that covers the contractual relationship. If there is no option for termination, the bankruptcy officer of a Swiss insolvent company may choose whether to enter into a contract or not. If he chooses yes, the counterparty (the solvent party) may request security for its performance. If he chooses not, or if he does not make an express choice, the solvent party is left with a claim that may be filed in the bankruptcy. Any claims that are not for a sum of money are converted into a monetary claim of a corresponding amount. With regard to long-term agreements, which include licence agreements, the solvent party is entitled to file a claim the value of which is calculated from the date the bankruptcy proceedings were opened until the next date of termination or until the fixed contract period expires. Any contractual benefit that is drawn by the solvent party during this period must be deducted from this claim.
The bankruptcy officer typically has an interest in winding down the company as quickly as possible, not in continuing it as a going concern, and so will often choose not to enter into long-term contracts. With the revision of the Bankruptcy Act, a bankruptcy officer has however a further option with regard to long-term agreements. He may decide to enter into part of a contract only (Art. 211a para. 2 Bankruptcy Act). This might mean entering into a patent licence with respect to certain patents or certain territories only, for example. Claims for performance then actually rendered are claims against the bankrupt estate rather than claims in the bankruptcy, and so have a rather higher chance of being paid. Claims for the period before the bankruptcy is declared and claims under the contract that do not relate to performance actually rendered remain as claims in the bankruptcy. A licensee may not have any interest in a licence grant for only part of the patents or territories originally licensed, but has few options other than termination of the agreement as a whole on the basis that it can no longer be objectively expected to continue with the licence relationship, and filing of claims in the bankruptcy for that part of the originally agreed licence that is not performed.