What steps can life sciences licensors take to better protect themselves on counterparty insolvency?

In the third of our series on the effect of insolvency on IP licences in the life sciences sector, we look at the position from the perspective of a licensor if a licensee is insolvent and/or goes into an insolvency process. The earlier articles in this series considered,  “Why licensors and licensees in the life sciences sector need to be aware of counterparty insolvency” and "What steps can life sciences licensees take to better protect themselves on counterparty insolvency?”.

In order for licensors to best protect their position if a licensee is insolvent and/or goes into an insolvency process, their licence review will need to focus on the issues set out below. Ongoing control of the licensed IP is key.

  • The licensor will want to terminate if the licensee is insolvent and this right should be expressed to take effect, not just if the licensee goes into an insolvency process, but also to ensure that the IP it has licensed is fully recoverable if the licence is terminated. However, a licensee may argue that such a clause removes further value from the insolvent company making it more difficult for an insolvency process to effect a sale, particularly where the licensee in an insolvency process is able, and willing, to make payments due under the licence.
  • To avoid the licensee and/or its insolvency practitioner laying claim to the IP, the licence needs to make it abundantly clear that title to the IP (as it develops over time) remains with the licensor and any attempt to secure the IP by the licensee should be resisted by the licensor. This will also make it easier for the licensor to assert its rights in any insolvency process.
  • The licensor may want to permit the insolvency practitioner to continue to use the licensed IP and pay amounts due under the licence, and then permit a new purchaser licensee to take over the licence, subject to sufficient controls being in place. The licensor will want to retain the right to approve an assignment to a purchaser and terminate the licence if an approved purchaser cannot be found to avoid circumstances where, for example, the licensor’s competitor is trying to take an assignment of the IP licence. 
  • Licensors should keep a close eye on credit control as far as their licensees are concerned. They should ensure, as far as possible, that payments are frontloaded and regular and keep a close eye on their collections to mitigate the risk of non-recovery on an insolvency process. Close monitoring of financial performance will also help the licensor be prepared for any insolvency process and possibly give evidence of insolvency (inability to pay debts as and when due) in support of termination, if those grounds exist under the licence. 
  • From a registration point of view, the licensor needs to ensure that the title position is abundantly clear and that any interests noted in favour of a licensee do not suggest that the licensee has a proprietary interest in the IP. The licensor should obtain local advice if required to check/clarify the position.
  • Whilst the licensee may want the IP held in a separate non-trading entity to try and mitigate the risk of the licensor’s insolvency (more on this in our second article), the licensor will want to retain ownership. To the extent that the licensee holds the commercial leverage to force through that suggestion, the licensor should retain full investment and executive control over the IP-holding entity.
  • As mentioned in previous articles, there may also be related rights to consider such as marketing and other authorisations. The licensor should retain control over these to the extent possible, although will need to bear in mind that in some jurisdictions marketing authorisations need to be applied for and held locally. Local legal advice may therefore be needed to ensure that the licensor is adequately protected. Furthermore, if a marketing authorisation has been obtained in the name of the licensee then the licensor should consider the impact on that authorisation of the licensee’s insolvency and whether the authorisation can be assigned to the licensor or a new licensee.

In our final article in this series, we will consider what happens if a contracting party to an IP licence goes into an insolvency process, both from a practical and legal perspective.

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