COVID-19 can be problematic for intellectual property licensing arrangements, especially with respect to the performance of duties owed under common provisions for royalties and sales requirements. The operational and financial hardships imposed by COVID-19 can make fulfilling these duties immensely difficult. Often, intellectual property licensing agreements contain a force majeure clause by which nonperformance of contractual obligations may be excused for certain events beyond a contracting party’s control, such as natural disasters, restrictive laws or regulations, or acts of god. Likewise, traditional doctrinal defenses to nonperformance, including the doctrines of impossibility, impracticability, and frustration of purpose, may also be available.
Force majeure clauses are commonly used to avoid issues with the traditional doctrinal defenses, but these clauses also have shortcomings. Often, courts interpret them narrowly such that they excuse performance only in the circumstances specifically listed in the clause or circumstances of the same kind or nature as those listed. Identifying force majeure clauses, and consulting with an attorney to evaluate their scope, can be helpful for businesses experiencing difficulties with fulfilling contractual obligations during the COVID-19 pandemic.
Another important consideration with respect to intellectual property licenses during the pandemic is the impact of a party commencing bankruptcy. A core concern in bankruptcy is whether the intellectual property license at issue is an executory contract. If so, a debtor can generally assume or reject the license. If assumed, the debtor can then continue performing its obligations thereunder or assign the license to a third party. Non-executory contracts, by contrast, are considered an asset or obligation of the bankruptcy estate and must be treated accordingly. A contract is generally “executory” whenever unperformed, material obligations remain for both contracting parties. Hence, a provision in an intellectual property license stating that failure to perform an obligation thereunder is a material breach may render the license executory. Contrarily, if the parties’ performance was due concurrently therein, and any indication of a breach being material was omitted, the license may not constitute an executory contract. Alternatively, an intellectual property license may provide that it terminates upon the licensee commencing bankruptcy, but the efficacy of such a provision may vary by jurisdiction. Given the increase in bankruptcies caused by the COVID-19 pandemic, the foregoing provisions of intellectual property licenses are particularly important to identify and evaluate during licensing negotiations or when either party to a license is experiencing financial instability. Recognizing the complexity of these matters, parties to an intellectual property license should consider consulting with an attorney knowledgeable and experienced in conducting such evaluations.
Additionally, companies in the pharmaceutical and healthcare industries face a unique risk with respect to compulsory licensing. Under 35 U.S.C. § 203, United States government agencies can compel licensing of federally-funded patents to third parties if certain conditions are satisfied, some of which concern licensing terms and compliance therewith. Although no federal agency has exercised its authority under 35 U.S.C. § 203, in light of COVID-19, companies that own federally-funded patents to healthcare and pharmaceutical inventions, or have rights pursuant to a license therein, should be aware of the potential breadth of 35 U.S.C. § 203 and its interplay with their current licensing arrangements, as, among other things, the risk of compulsory licensing may make investors more hesitant.
In sum, licensees and licensors can benefit by evaluating and understanding their current intellectual property licensing arrangements, and contemplating the impact COVID-19 might have on those arrangements. When in doubt, consulting with an attorney knowledgeable in the intellectual property license at issue may help with making strategic and informed decisions in licensing intellectual property rights or complying with obligations under an existing license.
This information is provided by Bailey & Company, Attorneys & Counselors, P.A. (“Bailey & Company”), solely for informational purposes. This information does not form, nor should it be construed to form, an attorney-client relationship, or any other fiduciary relationship, with Bailey & Company or any attorney, agent, or employee of Bailey & Company. For additional information about the topic of this article, contact Drew Bailey.