Why licensors and licensees in the life sciences sector need to be aware of counterparty insolvency

In this first of a series of short articles on the implications of insolvency on life sciences transactions, we look at the effect of a counterparty’s insolvency on intellectual property (IP) licences.

It is a time of disruption and economic uncertainty, which inevitably creates financial distress in all sectors. The life sciences sector is not immune and all life sciences businesses should consider the potential impact of the insolvency of counterparties in each agreement that they enter into, particularly licences of IP that they grant or are granted. There will be different issues and priorities to consider whether you have granted a licence (as a licensor) or have had a licence granted to you (as a licensee).

Life sciences entities may well have one or more crucial agreements on which their businesses depend (such as the licence in of a key technology or product patent) and should consider carefully what the impact would be on their ability to continue to exploit the relevant IP in the event that the other party becomes insolvent.

The US has a statutory regime in place that provides for the protection of licensees' interests in certain circumstances upon a licensor's insolvency. This often leads licensees to assume that a similar regime will protect their interests in the UK. However, this is not the case.

The commencement of an insolvency process will not, in itself, cause a licence to terminate unless the terms of the licence expressly provide for that. There may be express rights to terminate where the licensee becomes insolvent.  However, an insolvency process in respect of the licensor will give rise to a number of immediate risks to the licence for a licensee to consider and for which it should look to get protection under the licence terms.

Another point to bear in mind is that an entity being insolvent is not the same as that entity going into an insolvency process. A licensee should be pressing for the ability to enforce its rights if the licensor is insolvent, which may or may not result in an insolvency process.

Why? Because if the licensee cannot enforce its rights until after the licensor has gone into an insolvency process then it may be too late. If that insolvency process is administration then parties cannot enforce their rights without the permission of the administrator or order of the court, which may involve substantial time and cost.

Licensees, in particular, should therefore be reviewing their key licences to have a better idea of where those documents leave them if their licensor gets into financial difficulty, whether that results in an insolvency process or not.

Insolvency and event of default clauses are not therefore simply “boiler plate” provisions that sit at the end of a precedent, never to be debated or amended. It is understandable, at the start of a business relationship, that the parties are focussed on success and a lucrative future relationship. However that should never be at the expense of protection if things do not go to plan.

It will also be important to consider the impact of insolvency on related rights in a life sciences transaction. If the licence is over an authorised drug then what is the impact of a licensor’s insolvency on any marketing or other authorisation? Can a licensee secure a transfer of the authorisation such that it can continue to lawfully distribute the drug in relevant markets?

In our next article, we will look at the steps that licensees can take to better protect themselves on licensor insolvency. Later articles will consider the steps that licensors can take to better protect themselves on licensee insolvency and what happens if a licensee or licensor goes into an insolvency process, both from a practical and legal perspective.

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