How do we protect the licensee in Germany? A special legal regulation does not – yet – exist. According to established case law, the Federal Court classifies licence agreements as permanent use contracts. This means that section 103 of the German Insolvency Code (Insolvenzordnung) applies. According to this provision, the insolvency administrator has a right of choice if there is a mutual contract which, at the time of the opening of the insolvency proceedings, has not yet been fulfilled or not completely fulfilled by the debtor and the other party. If he decides to perform the contract, the claims arising from the contract continue to exist. If he refuses to perform the contract, this will not render the licence agreement ineffective, but the claims under it will no longer be enforceable. A particular problem is the insolvency of the licensor, as the fate of the licensee often depends on the continued existence of the intellectual property right. Therefore, there is often a clause in the licence agreements that “in the event of the insolvency of the licensor, the rights transferred to the licensee shall remain unaffected”. In the event of insolvency, however, such clause is not effective according to Section 119 of the German Insolvency Code, which provides that the law of the insolvency administrator may not be restricted in advance. The question therefore arises as to whether a right to segregation may derive directly from the licence agreement. But this must be denied. In this respect, the license agreement itself has no effect in rem. In legal practice, there are various approaches to protect licensees. There is the possibility of assignment by way of security; one could grant a usufruct or create a lien which secures the non-fulfilment of the claims under the agreement. But: The licensor will often not want to restrict the right to dispose of his property right, as it is to be used by several persons. In Germany, there is therefore an increasing tendency in case law to protect the licensee in the event of insolvency. The Federal Court adheres to Section 103 of the German Insolvency Code, which means that the decisive factor remains whether or not the licence agreement has already been fulfilled in full before the proceedings are opened. However, he affirms the fulfilment not only in cases of legal purchase, but also in cases of “sales contract-like arrangements” and here he takes a purely economic view. The parties to a licence agreement are therefore advised to follow these principles closely when drafting their agreement so that their licence is also secure in the event of insolvency. Similar to the German insolvency code, the U.S. Bankruptcy Code provides debtors in possession or trustees with the power to reject or assume executory contracts. Executory contracts are contracts where neither party has finished performing. In practice, intellectual property license agreements are considered executory contracts. What’s different from the German insolvency code and the U.S. Bankruptcy Code is that the U.S. Bankruptcy Code in Section 365 provides non-debtor licensees with certain protections when the debtor-licensor rejects the executory contract or intellectual property license agreement. In the event that the debtor-licensor does assume the intellectual property license agreement, this doesn’t create so much of a problem because the assumption is considered to affirm the intellectual property license agreement. And so the obligations remain in place. However when the debtor-licensor rejects the intellectual property license agreement then section 365 paragraph (n) of the bankruptcy code gives the non-debtor licensee two options. The first option is that the licensee can treat the contract as terminated and assert pre-petition claims for damages in the bankruptcy case. The second option is that the licensee can choose to keep its rights under the contract and continue to use the IP rights that are in the contract for the duration of the contract. This includes also being able to enforce exclusivity provisions that are provided in the license agreement. This also however requires the licensee to continue to pay royalty payments among other obligations contained in the agreement. Up until recently there was a split among circuit courts in the United States as to whether a licensee of a trademark license agreement had the option to choose to keep its rights when the debtor-licensor rejected the trademark license agreements. However in May of this year, the Supreme Court handed down a decision affirming that these rights are available to trademark licensees. As a result of the protections provided by the bankruptcy code, the questions of securities when the licensor enters bankruptcy, is not relevant in the context of U.S. bankruptcy cases. Now, let’s see how France deals with this question. Under French law, trademark or patent licensing agreements are contracts involving sequential performance. In the event of the opening of insolvency proceedings in respect of the owner of the trademark or patent, the license agreement is categorised as an ongoing contract. The French Commercial Code establishes the principle that ongoing contracts are pursued despite the opening of safeguard, receivership or judicial liquidation proceedings in respect of one of the contracting parties. This is a provision of public policy, which is binding on the parties, notwithstanding any clause in the contract providing for example automatic termination of the contract in the event of suspension of payments by one of the contracting parties. Then, the insolvency practitioner has an optional right with respect to the continuation of the contract. On the one hand, he may opt to continue the contract, either expressly or implicitly, by simply continuing to perform the contract. On the other hand, he may opt to terminate the contract, either on his own initiative or after being given formal notice. Indeed, the contracting party may give notice to the insolvency practitioner to decide whether or not to continue the contract. If no reply is received within one month, the contract is automatically terminated. In practice, it is not in the interest of the licensee who wishes to continue his licence agreement to make use of this option to give formal notice to the administrator because he takes the risk of facilitating and rushing the termination of the contract. It is possible to provide that damages will be due if the contract is terminated. But this claim for damages will have to be lodged as an insolvency claim in the insolvency proceedings and will not benefit from a preferential payment. Indeed, French law does not have specific provisions concerning the protection of the licensee in the event of an insolvency of the licensor of the trademark or patent. It is therefore up to the licensee to anticipate this situation and negotiate contractual clauses that are favourable to him. For example, it is possible to consider original legal arrangements, such as a dismemberment of the right of ownership, in which the licensor of the patent or trademark will be the bare owner and the licensee will be the usufructuary. As usufructuary, he will have all the rights to exploit the intellectual property right. And if the bare owner is the subject of the opening of insolvency proceedings, the usufructuary retains his rights. Finally, it is possible to use the many securities offered by French law that allow preferential payment to be obtained in the event of insolvency proceedings. In this respect, it is interesting to note that French law has just introduced new legislation, called the Pacte law, which aims to modernise security law and enhance its effectiveness, especially in insolvency proceedings. The law only sets out the main principles for the moment, the details will be known in the coming months. As you can see, upcoming news in security law in the context of insolvency proceedings, in French law, promise to be very rich.