Intellectual property in insolvency

QUT Law School and Professor Rosalind Mason hosted a talk by US Professor Jason Kilborn of John Marshall Law School, Chicago, on 19 July 2018, in Brisbane. His topic was Technology and Regulatory Black Holes: Issues in Protecting IP Rights in Insolvency for Both Licensors and Licensees.

As his paper explained, intellectual property (IP) rights are often among a business’s most valuable assets, “sometimes indeed the nucleus around which a small business’s vitality revolves”, and which are of increasing importance as intellectual property rights and the incidence of business insolvency rise. Law in the US, and elsewhere, has not foreseen “the rise of intellectual property licensing as a mainstay of modern entrepreneurship”. As he explained, US law was drafted in pre-internet days and needs a revision.

Professors Kilborn, Mason and Rimmer

The same applies generally in Australia.

Professor Kilborn referred to a recent article on intellectual property in bankruptcy law in Australia, where copyright, for one, can be an asset of the estate.

That article in fact raises an issue that the statement of affairs in bankruptcy, and no doubt the report as to affairs in corporate insolvency, make no particular mention of the insolvent’s IP rights as owner, and the IP rights as licensee. These can be substantial rights and assets which the insolvent must disclose.

Bankruptcy has particular rules, in s 138 Bankruptcy Act, one aspect of which, historically, was to address the circumstance of an author who had sold his copyright on a royalty basis to a publisher.  The publisher ended up bankrupt and the author was only entitled to damages for breach of contract, as a claim in the estate: Re Grant Richards [1907] 2 KB 33.  Section 138 now provides that the trustee cannot exercise those rights except upon condition that royalties are paid to the author.

Consequently, IP rights are items for close attention by insolvency practitioners.  This was raised in an international text on contracts under Australian insolvency law, the authors saying that simply accounting for the IP of a business within its goodwill is inadequate and an insolvency practitioner appointed to such a business must be careful not to overlook any IP, and to separate out its value.

As IP Australia explains “intellectual property (IP) can add up to a substantial percentage of a business’s total value and it can be much greater than the value of physical assets.

Examples of identifiable intangible assets include:

  • patents, trade marks and brand names
  • copyright and industrial designs
  • franchises and licences
  • distribution agreements
  • newspaper mastheads/publishing rights
  • government quotas
  • covenants not to compete
  • secret processes and formulae
  • information databases
  • computer systems software
  • core technology”.

IP Australia refers to the fact that Australian accounting standards have strict criteria for identifying and valuing IP for accounting purposes. There are also tax-related issues including income and capital gains tax, deductions, depreciation, trade mark taxation, special tax write-offs, withholding taxes (both local and international), GST and stamp duty.

Local and international accounting standards are also relevant.  See IP Australia.

Dr Matthew Rimmer, QUT’s Professor of Intellectual Property and Innovation Law also spoke to Professor Kilborn’s paper and on IP rights generally.

Ipso facto rights

Visiting fellow Michael Murray spoke on the impact of the new restrictions on the exercise of ipso facto laws in insolvency, in relation to IP contracts and licences.  These restrictions will help particularly with regard to the exploitation of trade marks.  Note that there is an exception from the restriction for IP escrow arrangements which commonly found in software development contracts: see “reg 5.3A.50(2)(t)  a contract, agreement or arrangement for the keeping in escrow of: (i)  code, or passwords, for computer software; or (ii)  material directly associated with such code or passwords”.

Inquiries welcome.  See the event as advertised.

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