Risk Prevention Related to the Bankruptcy of the Licensor in the Performance of a Patent Licensing Contract

In the fierce competition, it is not uncommon to find that some enterprises have gone bankrupt. However, when signing a patent licensing contract (“PLC”), the relevant parties would seldom be aware of the risk related to the bankruptcy of the counter party. In fact, if the licensor has gone bankrupt, whether the licensee can continue to use the related patent? If the patent has been implemented continuously, what are the risks?
The answer is uncertain.

“Contract Law” has not stipulated the specific provisions on dealing with bankruptcy. However, according to “Bankruptcy Law” Article 18, the administrator shall have the right to decide to rescind or continue to perform a contract that is concluded before the acceptance yet remains to be fulfilled by both parties, which means that the administrator shall have the right to decide to perform a contract continuously or not, however, the licensee is not endowed with such right. If the administrator chooses to rescind PLC, the licensee cannot implement the relevant patent, which will cause the waste of the previous investment, and the claim for breaching a contract from a third party. In addition, according to the practical rules of the relevant judicial authorities, the licensee can only file for the creditor’s right for the loss arisen from the rescind of PLC, and the real loss is the ceiling for maximum amount of compensation. Since this is a kind of ordinary creditor’s right, the licensee might obtain nothing upon the completion of the liquidation. If the administrator decides to perform PLC continuously, according to the relevant laws, if the licensor provide a guaranty, the licensee must have to perform PLC continuously. Although the licensee can implement the patent continuously, however, the licensor may fail to perform its rest responsibilities, such as the technical support, training, dealing with the infringement related to the relevant patent, or the licensor may demand more from the licensee.

Thus, in the absence of the laws and regulations which can regulate such activities, it becomes an important topic for the licensee to eliminate such risks arisen from the bankruptcy of the licensor by applying some protection measures in advance.

In order to eliminate such risks, in view of the “Contract Law” and “the Bankruptcy Law”, the licensee could take the following suggestions into consideration:

Firstly, in order to avoid executing the long term patent licensing contract with the counterparty with poor credit and unstable state of operation, the licensee can conduct a due diligent on the licensor’s financial situation, credit, and etc., before entering into such patent licensing contract.

Secondly, some issues shall be stipulated in PLC, including but not limited to: (1) To stipulate the royalty fee and the other fees, such as the training fee independently. In order to protect the licensee from being forced to perform PLC continuously, it would be better to stipulate the remedial measures when the licensor fails to perform its responsibilities; (2) To stipulate the follow-up settlement for PLC when the licensor has gone bankrupt, such settlement may include the payment, improvement of the patent and etc.; (3) To stipulate the specific and reasonable period for the licensor to inform its decision on whether it will perform PLC continuously, which can prevent the licensee from the unexpected termination or abnormal performance of PLC; (4) To stipulate the licensee’s presumptive right to purchase the relevant patent where the licenser goes bankrupt.

Finally, during the execution of PLC, the licensee should keep an eye on the licensor’s state of operation, and take action when it finds the sign of bankruptcy, such as amend the relevant contracts, or find the alternative patent and etc..