Patent Licensing And Cross-Border Insolvency
Kevin Nachtrab
LES International
A patent license, like any contract, may be either purely domestic, that is to say, it may be limited to parties and patent rights that are all situated in the same country, or it may have an international character, that is to say, it involves parties and/or patent rights that exist in more than one country. In this day and age, patent licenses are commonly of the latter type: patent licenses that are international in scope, involving Patent Rights situated in many different countries and/or involving parties that are situated in different countries.
As such, those patent licenses are subject to private international law1 which provides us with a set of procedural rules that determine which legal system and which jurisdiction we should look to for guidance as to which country will have jurisdiction and which national law will apply when a contractual issue arises.
Private international law holds that such patent licenses may be governed by the law of the jurisdiction selected by the Parties: the so-called governing law.2 A principle of private international law is that contracting parties have the autonomy to contractually set the law that is most appropriate to govern their transaction.3 In other words, the parties have the power to contractually determine the governing law that is applicable to their contract. When this happens, one needs to look to the law of that country (the governing law) to determine how the contract should be treated (or interpreted).
Nonetheless, there are exceptions to this freedom to contract. The primary exception concerns contractual terms or situations where adherence to the law of another jurisdiction would contravene an overriding mandatory rule of the lex fori4 or would otherwise result in an outcome that would be considered as being either fundamentally immoral or offensive or as being contrary to public morals or public order (“Ordre Public”).5
Examples of such terms/situations are those that fall within the scope of competition law, family law,6 employment,7 insurance,8 agency, import-export matters and securities regulations and laws.9
Another such example is insolvency.10
As such, whether a particular patent license is subject to an insolvency proceeding in a particular country is not determined by the governing law of the contract but, rather, by the law of the country that has jurisdiction over the insolvency proceeding. To determine this, one must look to the country where the debtor has its “Center of Main Interests” (CoMI). In most cases (as will be discussed herein), this will be the country where the insolvent party has its “center of main interest” (usually, but not always, where it has its registered office). Once one knows where the debtor's CoMI is located, one needs to look to the law of that country to know how the patent licenses will be handled in an insolvency situation, that is to say—whether they can be terminated, sublicensed or assigned and whether or not express terms in the license concerning termination, sublicensing and assignment will be respected or valid.
For example, a worldwide patent license agreement between a Belgian registered entity and an American registered entity (each having its center of main interests in the country in which it has its registered office) that is governed by Dutch law will be interpreted under Dutch law, but whether the patent rights are vested in the bankrupt estate, how that contract will be treated during the insolvency, and whether express terms in the license will be enforceable will likely be determined according to either Belgian law or U.S. law, depending upon which party is bankrupt.
International Basis for Jurisdiction of Cross- Border Insolvencies
Traditionally, it has been difficult to know which country would have jurisdiction over a bankruptcy and over what assets of the bankruptcy party that jurisdiction would actually extend. In many cases, each country would claim jurisdiction over the insolvent's assets that were located in that country in order to resolve the outstanding claims of creditors that may exist in that country, regardless of whether the bankrupt party had any other connection whatsoever with that jurisdiction. This led to confusion, contradictory results and encouraged parties to “offshore” their assets in countries where they had little business, so as to shield them from insolvency.
To address this problem, two primary supranational efforts have been made.11 One is the UNCITRAL Model Law on Cross-Border Insolvency and the other is the European Council's Regulation on Insolvency Proceedings.
1. The UNCITRAL Model Law on Cross- Border Insolvency
The UNCITRAL Model Law on Cross-Border Insolvency (“the Model Law”)12 arose from the mandate of the United Nations Commission on International Trade Law (UNCITRAL) to harmonize and unify the national laws regarding international trade. The Model Law was drafted by UNCITRAL's Working Group on Insolvency Law, the text having been adopted on 30 May 1997.13 The Model Law was not intended to, nor did it attempt to, harmonize local insolvency law and regulations. Rather, its goal is to secure mutual co-ordination, cooperation and judicial recognition of foreign proceedings involving the same debtor, foreign creditor's rights and the rights and duties of foreign insolvency administrators in different countries.14
The Model Law is not binding on any country. To the contrary, it relies on local adoption and implementation and member states are free to adapt it as they see fit. Accordingly, the law is not identical in each of the member states which have adopted it.
To date, national legislation based on the Model Law had been adopted by nineteen countries, including the United States.15
2. The European Insolvency Regulation
The European Council Insolvency Regulation (“the EC Regulation”)16 is an initiative of the European Commission. The origins of the EC Regulation predate, and served as the inspiration for, the Model Law. The EC Regulation is directly applicable in the member states of the European Union, with the sole exception of Denmark. Its provisions apply to cross-border insolvencies within the European Union.
The provisions of the EC Regulation only apply to insolvency proceedings opened after 31 May 2002.17 Thus, “Acts done by a debtor before the entry into force of this Regulation shall continue to be governed by the law which was applicable to them at the time they were done.”18
Proceedings Under the Regimes
Both the Model Law and the EC Regulation provide for a main proceeding and for non-main (or secondary) proceedings.
In both regimes, main proceedings are those that take place in the country where the debtor (for example, the Licensor) has its “centre of main interests” (CoMI)19 and non-main or secondary proceedings are those that take place in other countries where the debtor has an “establishment.”20 In this manner, under each regime, the proceedings are envisioned to be universal in scope encompassing all the debtor's assets.21
1. Proceedings Under the UNCITRAL Model Law on Cross-Border Insolvency
Under the Model Law, the main proceedings are called “Foreign Main Proceedings” and the non-main proceedings are called “Foreign Non-Main Proceedings.”22
The general principle of the Model Law is that the law of the country of the Foreign Main Proceeding is intended to be determinative as to whether the patent license forms part of the Bankrupt's estate and as to whether express contract provisions concerning termination, and restrictions on sublicensing and assignment of the patent license are valid and enforceable in all applicable jurisdictions.23 The designation of a proceeding as a Foreign Main Proceeding invests in the court overseeing it the power to issue judgments concerning assets in both the jurisdiction where the Main Proceedings are occurring, as well as where Foreign Non-Main Proceedings are occurring. However, the foreign recognition of such judgments is not automatic.
However, in granting, extending or modifying relief to representatives in Foreign Non-Main Proceedings, the court overseeing the Foreign Main Proceedings must be satisfied that the relief relates to assets that, under the law of that foreign country of the Non- Main Proceedings, should be administered in the Foreign Non-Main proceeding or concerns information required in that proceeding.24 If not, the court overseeing what would be the Non-Main Proceedings can modify or terminate order of the jurisdiction of the Main Proceedings (that is to say, not enforce it) if it is inconsistent with local law.25
Thus, while the insolvency administrator may make an application for the Law of the CoMI to apply, it is possible that various issues in relation to the property itself would still have to be dealt with in accordance with the law of the country in which the asset is located.26
2. Proceedings Under the European Insolvency Regulation
Under the EC Regulation the main proceedings are called “Main Proceedings” and the non-main proceedings are called “Secondary Proceedings.”27
The general principle of the EC Regulation is that the law applicable to insolvency proceedings and their effects are those of the country in which proceedings are opened (that is to say, the country of the Main Proceeding)28 and that the Main Proceedings should be opened in that country in the EU in which the insolvent party has its “centre of main interest.”29
The EC Regulations clearly mandate that if Main Proceedings are opened in a member state (such as Belgium), then it is the law of that member state which determines whether or not that asset forms part of the insolvency estate.30 Judgments concerning the course and closure of the insolvency proceedings, including other matters in the insolvency proceedings, are given automatic recognition and enforceability in other member states of the European Union31 pursuant to the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters.32 Indeed, courts in the country of the Secondary Proceedings are not even entitled to enforce measures permitted by their own laws relating to the assets of the debtor that are situated there if the laws of the country of the Main Proceedings do not authorize those same measures.33
The rule concerning the recognition of judgments issued in the course of Main Proceedings is so strong that it extends not only to jurisdictions in which Secondary Proceedings are pending but also to jurisdictions where there are no proceedings pending at all.34 However, this power does have its limits. In particular, a court in a Main Proceeding cannot join to the proceedings parties who have their CoMI is another member state.35
Under the EC Regulation, the law of the country of the main proceeding will be determinative as to whether express contract provisions concerning termination, and restrictions on sublicensing and assignment of the patent license are valid and enforceable.36 These include the power of the liquidator to terminate, sublicense or assign patent licenses to which the debtor is a party, as well as whether express contract provisions concerning termination and restrictions on sublicensing and assignment of the patent license are valid and enforceable.37 The Court of the Main Proceeding immediately has the substantive power to issue judgments concerning assets in both the jurisdiction where the (Foreign) Main Proceedings are occurring, as well as where the Secondary Proceedings are occurring.38
Contrary thereto, insolvency orders from “Secondary Proceedings” only gives the relevant officeholder the power to deal with assets within that foreign jurisdiction in which they take place.39
Centre of Main Interests (CoMI) Test
Both the Model Law and the EC Regulation provide for main proceedings to be held in the country where the debtor has his/her “Center of Main Interests” (CoMI). 40
1.Center of Main Interests (CoMI) Test Under the UNCITRAL Model Law on Cross-Border Insolvency
According to the Model Law, a proceeding will be a “foreign main proceeding” if it is taking place in the state where the debtor has his centre of main interests.41 Thus, the determination of the debtor's CoMI is essential. Unfortunately, the Model Law does not supply a definition of what is meant by “centre of main interest.” However, it does provide for the presumption that “in the absence of proof to the contrary, the debtor's registered office, or habitual residence in the case of an individual, is presumed to be the centre of the debtor's main interests.”42
Having said that, there have been differences in the approach taken between countries operating under the Model Law as to how to determine a debtor's CoMI, be it for corporations or individuals.
For Corporate Debtors
In the case of companies, the courts in Australia,43 Canada44 and England,45 have ruled that, like under the EC Regulation (see below), there is a strong presumption that a party's CoMI lies where it has its registered office and that this presumption may be rebutted only by factors, which are both objective and ascertainable by third parties, that enable it to be established that the actual situation is different. Indeed, the English courts have explicitly stated that “centre of main interests” should have the same meaning as in the EC Regulation and have placed an emphasis on the ascertainability element (that is to say, the facts are readily ascertainable by the public), as opposed to the United States.46
Canada takes a slightly different tack. In Canada the courts look to the following principal factors, considered as a whole, to determine a debtor's centre of main interests: (a) where are the debtor's principal assets or operations are found, (b) where does the management of the debtor takes place, and (c) is this readily ascertainable by creditors. While, in many cases, these factors will all point to a single jurisdiction as the centre of main interests, in some cases, a more careful review of the facts is required with a greater or lesser weight being accorded to certain of the factors, depending on the circumstances of the case. In all cases, however, the review is designed to determine that the location of the proceeding corresponds to the debtor's true seat or principal place of business, consistent with the expectations of those who dealt with the enterprise prior to commencement of the proceedings.47
The United States has this same presumption.48 However, in the United States, the burden of proof lies with the person asserting that the particular proceeding is a “main proceeding,” and not on the person opposing that contention.49 In this regard, traditionally, United States courts have followed the view that the debtor's CoMI is comparable to the concept of its principal place of business50 using the factors enunciated in the Bear Stearns case of: (1) the location of those who manage the debtor; (2) the location of the debtor; (3) the location of the principal assets; (4) the location of a majority of creditors; and (5) the jurisdiction whose law applies to most disputes being controlling.51
The United States courts have further held that the expectations of creditors and other interested third parties should be taken into consideration when determining where the debtor has its CoMI, that is to say, whether the debtor's centre of main interests is ascertainable to third parties.52
In doing so, the court looks at many factors, no single one of which is determinative53 and the ascertainability element seems to have little influence.54 Indeed, many of the factors relied upon by U.S. courts would never be able to be ascertained by creditors (for example, location of other creditors).55
An unaddressed issue is what happens where the evidence is such that it results in conflicting decisions between two jurisdictions as to where a debtor's centers of main interests lies. Unfortunately, the Model Law does not appear to provide for any mechanism to resolve such a conflict.
For Individual Debtor
Individuals, of course, do not have a registered office or a principal place of business. However, and as is recognized in the Model Law, “In the absence of proof to the contrary, the debtor's registered office, or habitual residence in the case of an individual, is presumed to be the centre of the debtor's main interests.”
Unfortunately, neither the Model Law nor the EC Regulation defines what they mean by an individual's “habitual residence.”56 Nonetheless, the following are relatively settled principles of private international law in this regard relative to “habitual residence”: (i) it should not be treated as a term of art but should be accorded the ordinary and natural meaning of the words it contains; (ii) it is a question of fact to be decided by reference to the circumstances of each particular case; and (iii) several factors are relevant to determining it, including the duration and continuity of the residence.57
Indeed, it appears that the courts have generally followed this line of logic. For example, the courts in Australia have held that proceedings against a debtor foreign national in his country of citizenship, whose habitual residence was not in his country of citizenship, could not be considered as a main proceeding.58 Similarly, in New Zealand, a debtor was not considered to have his habitual residence in the UK, even though he had both New Zealand and UK passports and carried on business in England and sometimes lived in England, the court deeming his New Zealand activities to be more important.59
1. Center of Main Interests (CoMI) Test Under the EC Regulation
The EC Regulation stipulates that the Main Proceeding should be where the debtor has its “centre of main interests”60 at the time the application is made to open the proceedings, even if that CoMI later changes before the procedure actually opens.61
In doing so, the EC Regulation apparently does not distinguish between corporate and individual debtors when applying this test.
While the EC Regulation does not supply a definition of what is meant by “centre of main interests,” like Article 16 of the Model Law, it does provide that, “In the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary.”62 (emphasis added).
Further, the EC Regulation states that “the centre of main interests should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.”63 (emphasis added).
Nonetheless, what actually constitutes an insolvent party's CoMI is probably the most litigated aspect of the EC Regulation, with what kind and quality of proof being needed to rebut the presumption and what makes a CoMI ascertainable to third parties being two particularly litigious points.
The seminal cases as to what constitutes a party's Centre of Main Interests are Eurofood IFSC Ltd (“Eurofood”)64 and Interedil Srl v. Fallimento Interedil Srl, Intesa Gestione Crediti SpA, (“Interedil).65
The Eurofood case involved the insolvency of Eurofood, a wholly-owned Irish incorporated subsidiary of Parmalat SpA. Eurofood had no business of its own, having been established for a specific purpose within Parmalat's holding structure. Importantly for the case, Eurofood had its registered office in Dublin, an element that proved determinative in identifying its CoMI.
In late 2003/early 2004, concerns about the solvency of Parmalat, a large Italian food conglomerate became public. On 27 January 2004, prompted by a concern that Eurofood might be trying to move its center of main interests to Italy, an Irish creditor of Eurofood presented an Irish court with a petition for winding-up Eurofood. The Irish court declared Eurofood insolvent and appointed a provisional liquidator to preserve its assets.
On 9 February 2004, Eurofood was admitted to the extraordinary administration of Parmalat in Italy. On 20 February 2004, the Italian court opened insolvency proceedings against Eurofood, holding that its center of main interests was in Italy and appointing an extraordinary administrator. In this regard, the evidence presented was that Eurofood was merely a financial vehicle for Parmalat. This was done over the objection of the Irish court-appointed provisional liquidator, who asserted that the Irish court's earlier ruling should be determinative.
On 23 March 2004, the Irish court issued a windingup order against Eurofood, appointing the provisional liquidator as liquidator. In doing so, the Irish court determined that: (1) insolvency proceedings had been opened in Ireland on 27 January 2004 (the date on which the petition was presented); and (2) Eurofood's registered office, and hence its center of main interests was in Ireland and that, as such, the Italian court did not have jurisdiction to open insolvency proceedings against Eurofood.
Accordingly, the Irish court declined to recognize the Italian court's decision of 20 February 2004 on the grounds that it was in breach of the principle of due process and was therefore contrary to Irish public policy. This decision was upheld by the Irish Supreme Court on 27 July 2004.66
In its decision, the Irish Supreme Court held that Eurofood's center of main interests was in Ireland, because: (i) Eurofood conducted its business lawfully and regularly in Ireland and had complied fully with all the legal and regulatory requirements under Irish law; (ii) Eurofood's creditors believed that they were engaging with a company whose center of main interests was in Ireland; and (iii) the Appellant‘s arguments that Eurofood was merely a financial vehicle for Parmalat was unpersuasive, as there could be “very serious implications for the future of international corporate structures if it were to be accepted that the test for centre of main interests were to be ultimate financial control by a parent company rather than legal or corporate existence.”67
On appeal to the European Court of Justice (“ECJ”) sided with the decision of the Irish courts. In doing so, the ECJ first determined that the location of a company's registered office is key to determining its centre of main interests (COMI). The ECJ then went on to point out that the registered office presumption in Article 3 of the EC Regulation can be rebutted only if factors, which are both objective and ascertainable by third parties, lead to a conclusion that the COMI is not in the same location as the registered office.68 As an example of such a case, the court cited letterbox companies that do not carry out business in the EU member state in which their registered office is situated.69
The ECJ also held that, where a company carries on business in the member state in which its registered office is situated, the mere fact that its economic choices are or can be controlled by a parent company in another member state is not enough to rebut the registered office presumption.70 Thus, the fact that Eurofood may have merely been a financial vehicle for Parmalat was not considered as being enough to overcome the registered office presumption.
However, what the Eurofood case lacked was guidance on what facts the ECJ felt could be used to rebut the registered office presumption. This was provided by the ECJ in the Interedil case. In Interedil, the ECJ gave guidance as to what type and quality of facts would be needed to successfully rebut the registered office presumption.
Interedil involved a case of an Italian company having its registered office in Italy. On 18 July 2001, Interedil transferred its registered office to London, United Kingdom. On the same date, it was removed from the register of companies of the Italian State. Following the transfer of its registered office, Interedil was enrolled in the United Kingdom register of companies, being designated as an ‘FC' (Foreign Company).
At the same time as it was transferring the locale of its registered office, Interedil was engaged in negotiations that resulted in it being acquired by the British group Canopus. Shortly after the transfer of Interedil's registered office, the title to properties it owned in Italy were transferred to Windowmist Ltd, as part of its acquisition. Interedil was subsequently removed from the United Kingdom register of companies on 22 July 2002.
On 28 October 2003, a petition was filed with the Tribunale di Bari for the opening of bankruptcy (‘fallimento') proceedings against Interedil.
Interedil challenged the jurisdiction of the Italian court on the ground that, as a result of the transfer of its registered office to the United Kingdom, only the courts of the United Kingdom had jurisdiction to open insolvency proceedings against it. On 24 May 2004, taking the view that Interedil was insolvent and the objection alleging that the Italian courts did not have jurisdiction was manifestly unfounded, the Tribunale di Bari rejected Interedil's challenge and ordered that Interedil be wound up. That decision was appealed to the Corte suprema di cassazione.
On 20 May 2005, the Corte suprema di cassazione held that the Italian courts had jurisdiction. In doing so, the Italian Supreme Court took the view that the presumption in the second sentence of Article 3(1) of the Regulation that the centre of main interests corresponded to the place of the registered office was a rebuttable one that had been successfully overcome by the evidence of the case: the presence of immovable property in Italy owned by Interedil, the existence of a lease agreement in respect of two hotel complexes, a contract concluded with a banking institution and the fact that the Bari register of companies had not been notified of the transfer of Interedil's registered office.
On referral by the Tribunale di Bari, the ECJ upheld the decision of the Italian Supreme Court that the presumption of Article 3(1) of the EC Regulation could be rebutted.
In doing so, the ECJ noted that “Where the bodies responsible for the management and supervision of a company are in the same place as its registered office and the management decisions of the company are taken, in a manner that is ascertainable by third parties, in that place, the presumption in that provision [the second sentence of Article 3(1) of the Regulation] cannot be rebutted.”71
However, the ECJ noted where a company's central administration is not in the same place as its registered office, then a comprehensive assessment of all the relevant factors must be done to determine if the company's actual centre of management and supervision and management of its interests is located in that other Member State in a manner that is ascertainable by third parties.
The ECJ then went on to state that factors to be taken into account include, in particular, all the places in which the debtor company pursues economic activities and all those in which it holds assets, in so far as those places are ascertainable by third parties, “… must be assessed in a comprehensive manner, account being taken of the individual circumstances of each particular case.”72
In doing so, the ECJ found that the presence of immovable property owned by the debtor in respect of which it had concluded a lease agreement in a Member State other than that in which the registered office is situated, as well as the existence in that other Member State of a contract concluded with a financial institution were such objective factors that, in the light of the fact that they are likely to be matters in the public domain, are ascertainable by third parties. However, such factors, by themselves and without such comprehensive assessment would not be sufficient to rebut the presumption.
From the Eurofood and Interedil cases, it appears that the rule that main proceedings may only be commenced in a member state which is different from where the debtor has its registered office can only be overcome if there is clear evidence that third parties (such as creditors) would consider that the debtor's CoMI was located elsewhere than where the registered office is located.
This is the case even for subsidiaries, that may or may not have its CoMI is in the same place as its parent company. While every case will turn on its facts, what is clear is that, where a company carries on its business in the territory of the Member State in which its registered office is situated, the fact that its economic choices are, or can be, controlled by a parent company established in another Member State is not enough to rebut the presumption laid down by the Regulation.
For Individual Debtors
As was noted before, individuals do not have a registered office or a principal place of business. But, like the Model Law, the EC Regulation explicitly states that, where individuals are concerned, actions should be bought where they have their “domicile” or “habitual residence.”73 However, only guidance provided by the EC Regulation in this regard is its stipulation that “The ‘centre of main interests' should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.”74
Further while, the EC Regulation does not define what is meant by an individual's “habitual residence.”75 The aforementioned relatively settled principles of private international law in this regard relative to “habitual residence”: (i) it should not be treated as a term of art but should be accorded the ordinary and natural meaning of the words it contains; (ii) it is a question of fact to be decided by reference to the circumstances of each particular case; and (iii) several factors are relevant to determining it, including the duration and continuity of the residence should be followed.76
The Public Policy Exception
Perhaps the primary reason cited for refusing to enforce the judgments of courts overseeing the main proceedings in a bankruptcy under both the Model Law and the EC Regulation, is the so-called “Public Policy” (or “Public Ordre”) exception.
1. Application of Public Policy Exception Under the UNCITRAL Model Law on Cross- Border Insolvency
According to the Model Law, “Nothing in this Law prevents the court from refusing to take an action governed by this Law if the action would be manifestly contrary to the public policy of this State.”77 However, and as is pointed out in the UNCITRAL Guide, this public policy exception should be interpreted restrictively.78 Many countries, such as Canada79 and Korea,80 adhere closely to the restrictive interpretation of the Public Policy exception.
The United States had also long restrictively interpreted the public policy reception.81 Traditionally, three principles were considered relevant to the analysis of whether an action taken in a Chapter 15 proceeding was manifestly contrary to the public policy of the United States under §1506 [Article 6 MLCBI]:82
(1) The mere fact of the existence of a conflict between foreign law and United States law, absent other considerations, was insufficient to support the invocation of the public policy exception;
(2) Deference to a foreign proceeding should not be afforded in a Chapter 15 proceeding where the procedural fairness of the foreign proceeding was in doubt or could not be cured by the adoption of additional protections; and
(3) An action should not be taken in a Chapter 15 proceeding where doing so would frustrate United States court's ability to administer that proceeding and/or would severely impinge upon a constitutional or statutory right, particularly if a party continued to enjoy the benefits of the Chapter 15 proceeding.
Based on those criteria, exceptions had only been granted in rare cases, for example, when a foreign representative had introduced a “mail interception order” that would have potentially violated United States Law.83
However, this changed with the District Court's recent decision in In re Qimonda84 wherein a decision of a German Court to permit the German liquidator for a debtor/licensor to terminate patent licenses in spite of 35 USC §365 was not enforced by the U.S. courts on the grounds that:
1. The licensees would not be “sufficiently protected” in accordance with section 1522 of Chapter 15 [article 22 MLCBI] if they were not afforded §365 protection.
In this regard, the court found that §1522 required the court to “tailor relief...so as to balance the relief granted to the foreign representative and the interests of those affected by such relief.” And, after balancing the interests of creditors and the debtor, the court found that denying §365 protection to the licensees would impose a significant burden on them since they had already made significant investments in their technology and manufacturing infrastructure in reliance on the licenses they held from the debtor. Accordingly, the court held, §365 should apply to the Chapter 15 proceeding in order to “sufficiently protect” the interests at stake.
2. On the question of whether applying German insolvency law to deny patent licensees the protection of §365 was “manifestly contrary” to the public policy of the United States, the court concluded that the public policy in favor of technological innovation was one of the most fundamental policies of the United States, and accordingly, the failure to protect was manifestly contrary to the public policy of the United States.85
2. Application of the Public Policy Exception Under the European Insolvency Regulation
The Public Policy exception can be found in Article 26 of teh EC regulation. Article 26 states, “Any Member State may refuse to recognize insolvency proceedings opened in another Member State or to enforce a judgment handed down in the context of such proceedings where the effects of such recognition or enforcement would be manifestly contrary to that State's public policy, in particular its fundamental principles or the constitutional rights and liberties of the individual.”
However, as was shown in the case of MG Probud Gdynia sp. z o.o., this exception has its limits and does not extend to, for example, orders from a court in where Secondary Proceedings are ongoing that are based on fears that the orders of the Main Proceedings would permit the debtor to escape public obligations such as, its social security obligations.86
In theory, achieving recognition and enforceability in another member state is relatively straightforward. Indeed, the EC Regulation states that “no further formalities” are required for the judgment opening proceedings to produce like effects in another member state to those that are produced in the state of opening of proceedings.87 An officeholder's appointment is only required to be evidenced by “a certified copy of the original decision appointing him.”88 If an application needs to be made to a court at all, the administrator can apply to the court having jurisdiction over the main proceedings or the country where the asset is situated, invoking the EC Regulation and the local law implementing it, just as if the property were situated in CoMI.89 In this respect the EC Regulation differs from the Model Law.
From the foregoing it can be seen that the Model Law and the EC Regulation both provide relatively comprehensive regimes for permitting licensor's and licensees to know which law will govern their IP licenses in the event of a bankruptcy of one of them. Further, they substantially mirror each other in their terms, with each regime mandating that parties must look to the country where the debtor has its Center of Main Interests to determine which country's laws would govern the treatment of the IP licenses.
Nonetheless, there are differences in approach and application of the two regimes.
In the application of the EC Regime the presumption that a corporate debtor's CoMI is where it has its registered office is stronger than that accorded by the Model Law, and the EC Regulation has greater reliance on factors which are ascertainable to third parties to rebut that presumption. Further the application of the Public Policy Exception is more restricted than that of the Model Law.
Finally, perhaps owing to the fact that all decisions of the EC Regulation are subject to review and are decisions issued by a single court—the European Court of Justice—the application of the EC Regulation has been far more uniform than that of the Model Law.
Commonly referred to as “Conflict of Laws” in common-law countries, such as the United States and International Private Law in many German-speaking civil law countries (as well as Russia and Scotland), Private International Law is a set of rules and procedures to determine: (1) which nation’s courts have jurisdiction over disputes involving a foreign element and the conditions that need to be satisfied for judgments of foreign tribunals and courts to be recognized and enforced within a country (“jurisdiction and the recognition and enforcement of judgments”); and (2) which nation’s laws are to be applied to govern the substance of legal relationships involving a foreign element (“governing law”) in order to regulate conduct between private parties. See World Intellectual Property Organization, “The Role of Private International Law and Alternative Dispute Resolution,” retrieved from http://www.wipo.int/copyright/en/ecommerce/ip_survey/chap4.html. See also http://en.wikipedia.org/wiki/Conflict_of_laws.
Within the European Union, this is set forth in Convention 80/934/EEC on the law applicable to contractual obligations opened for signature in Rome on 19 June 1980 (“the Rome Convention”) where, in article 3, it states that: “A contract shall be governed by the law chosen by the parties.The choice shall be made expressly or clearly demonstrated by theterms of the contract or the circumstances of the case. By theirchoice the parties can select the law applicable to the whole or topart only of the contract.”See also Paragraphs 11-14 of the European Council Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 (“Rome I”).
See Johnston, Robert, “Party Autonomy in Contracts Specifying Foreign Law,” 7 William and Mary Law Review, 37 (1966), http://scholarship.law.wm.edu/wmlr/vol7/iss1/3, retrieved from http://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=3090&context=wmlr&sei-redir=1&referer=http%3A%2F%2Fwww.google.com%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3Dautonomy%2520to%2520contract%26source%3Dweb%26cd%3D4%26ved%3D0CD8QFjAD%26url%3Dhttp%253A%252F%252Fscholarship.law.wm.edu%252Fcgi%252Fviewcontent.cgi%253Farticle%253D3090%2526context%253Dwmlr%26ei%3Dg7mQUdL0HaLU0QWx04CQCg%26usg%3DAFQjCNEsAUfxyBk9kF_LYoSSb91D7R5E7A#search=%22autonomy%20contract%22. See also, Grundmann, Stefan, “Information, Party Autonomy and Economic Agents in European Contract Law,” Common Market Law Review 39: 269–293 (2002).
The law of the forum.
Levin, Morris, “Party Autonomy: Choice of Law Clauses in Commercial Contracts,” Georgetown Law Journal, 1957-1958, p 264, Para 2: “Courts are reluctant to apply the law of another jurisdiction when its enforcement would be contrary to the public policy of the forum. Conflict of Law, by its nature, is inherently concerned with public policy, and if any foreign rule of law is incompatible with the public policy of the forum, it will not be used.” See also, Paragraph 37 of Rome I and Johnston, supra, at pages 38-48.
See Article 1(2) of the Rome Convention.
See Article 10 of the EC Regulation.
See Article 3 of the Rome Convention.
For example, see Article 1(2) of the Rome Convention.
See Article 1(2)(e) of the Rome Convention.
There have been others, perhaps most notable among them being the Bustamante Code established by the Havana Convention of 1928 which was adopted by 15 Latin American countries and the Nordic Council (Copenhagen) Convention, 28 UNIT 113 (7 November 1933).
Model Law on Cross-Border Insolvency, adopted by the United Nations Commission on International Trade Law on 30 May 1997, approved by resolution of the United Nations General Assembly on 15 December 1997 and published in Official Records of the General Assembly, Fifty-second Session, Supplement No 17 (A/52/17, annex I)(UNCITRAL Yearbook, Volume XXVIII: 1997, Part 3).
While UNCITRAL’s adoption of the Model Law preceded adoption of the EU Regulation, the EU Regulation’s origin and the concepts underpinning it were developed prior to UNCITRAL’s formulation of the Model Law. See Jay Westbrook, MultinationalEnterprises in General Default: Chapter 15, The ALI Principles, and the EU Insolvency Regulation, 76 Am. Bankr. L.J. 1, 2-3 (Winter 2002) (“Beyond doubt, an important factor in [creating the Model Law] was the expertise developed by the delegates from the EU member states in the course of creating the EU Regulation”). The EU Regulation can be located at http://europa.eu.int/eur-lex/lex/LexUriServ/LexUriServ.do?uri=CELEX:32000R1346:EN:HTML.
See the Preamble to the Model Law: The purpose of this Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:
Cooperation between the courts and other competent authorities of this State and foreign States involved in cases of cross-border insolvency;
Greater legal certainty for trade and investment;
Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
Protection and maximization of the value of the debtor’s assets; and
Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.
Australia (2008), British Virgin Islands (2005), Canada (2009), Colombia (2006), Eritrea (1998), Great Britain (2006), Greece (2010), Japan (2000), Mauritius (2009), Mexico (2000), Montenegro (2002), New Zealand (2006), Poland (2003), Rep. of Korea (2006), Romania (2003), Serbia (2004), Slovenia (2007), South Africa (2000), and the United States of America (2005). See UNCITRAL Texts and Statuses retrieved from http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html#$35287.
EC Council Regulation 1346/2000 of 29 May 2000 that came into force on 31st May 2002.
See Article 2(b) of the Model Law and Article 3(1) of the EC Regulation.
See Articles 3(2) and (3) and Recital 12 of the EC Regulation and Article 2(c) of the Model Law. In the EC Regulations, such proceedings are also called “winding-up” proceedings. See Article 3(3) of the EC Regulation. See also, Article 2(f) of the Model Law which states that: “Establishment” means any place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services.”
See, for example, Recital 12 of the EC Regulation.
See Article 17(2) of the Model Law wherein it is stated that: “The foreign proceeding shall be recognized:
As a foreign main proceeding if it is taking place in theState where the debtor has the centre of its main interests; or
As a foreign non-main proceeding if the debtor has anestablishment within the meaning of subparagraph (f) ofarticle 2 in the foreign State.”
See Articles 20, 21 and 29 of the Model Law under which licenses, as assets, would be subject to the same powers as other assets of the debtor.
Article 29(c) of the Model Law. See also Article 21(3) of the Model Law.
See Article 29 of the Model Law. In this regard, it is interesting to note that, in Australia, the local court will even permit the Foreign Representative to avail itself of measures which, while available in Australia, are not available to the Foreign representative in the country where the main proceedings are taking place. See Tucker, In the matter of Aero Inventory (UK) Limited (No. 2), New South Wales District Registry, No. NSD 1285 of 2009, Federal Court of Australia (10 December 2009).
See Steven Williams vs Alan Geraint Simpson, no. CIV 2010- 419-1174, High Court of New Zealand (19, 22 and 29 September 2010, 12 October 2010) wherein the New Zealand court refused to enforce an interim order seeking relief in the form of examining persons to determine ownership of certain assets on the grounds that such an order was not necessary.
See Articles 3(2) and (3) of the EC Regulation.
See Article 4 of the EC Regulation.
See Articles 3(1) and 4 of the EC Regulation.
See Article 4 of the EC Regulations.
See Articles 16 and 25 of the EC Regulation.
Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1968 which has now been replaced by Council Regulation (E.C.) 44/2001 on Jurisdiction and the Recognition of Judgments in Civil and Commercial Matters dated 22 December 2000 which came into force on 1 March 2002.
See MG Probud Gdynia sp. z o.o., ECJ Case C-444/07 (21 January 2010), wherein, since Polish law, the law of the main proceedings, did not authorize attachment of funds by a national authority to pay workers and social security taxes due in Germany, the German law permitting such attachment could not be applied by the German court even though permitted under German law. The text of the decision of which can be found at http://eur-lex. europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62007CJ044 4:EN:HTML.
See Seagon v. Deko Marty Belgium NV, ECJ Case C-339/07 (12 February 2009). See also, MG Probud Gdynia supre, wherein the ECJ held Articles 3, 4, 16, 17 and 25 of the EC Regulation must be interpreted as meaning that after the main insolvency proceedings have been opened in a Member State the competent authorities of another Member State, in which no secondary insolvency proceedings have been opened, are required, subject to the grounds for refusal derived from Articles 25(3) and 26 of that regulation, to recognize and enforce all judgments relating to the main insolvency proceedings and, therefore, are not entitled to order, pursuant to the legislation of that other Member State, different enforcement measures relating to the assets of the debtor that are situated in its territory when the legislation of the State of the opening of proceedings does not so permit and the conditions to which application of Articles 5 and 10 of the regulation is subject are not met.
See Rastelli Davide e C. Snc v Jean-Charles Hidoux, in hiscapacity as liquidator appointed by the court for the company Médiasucreinternational, ECJ Case C-191/10 (Judgment of 15 December 2011) wherein, on the grounds that the liquidator’s application was not intended to open insolvency proceedings against Rastelli but to join it to the judicial liquidation already opened against Médiasucre, the it was attempted to make an Italian Defendant who did not have an establishment in France, a party to the French insolvency proceedings on the ground that its property was intertwined with that of the insolvent party, so that, under Article L. 621-2 of the Commercial Code, the court which has jurisdiction to rule on the application for joinder is the court before which the proceedings were initially brought.
See Article 4 and, in particular, Article 4(2), and Article 28 of the EC Regulation. See also Recitals 21 and 23 of the EC Regulation.
See, generally, Article 4(2) in conjunction with Article 18 of the EC Regulation.
See Article 16 and 17 of the EC Regulation.
See Article 3(2) of the EC Regulation.
See Recital 12 and Article 3(1) of the EC Regulation and §§2(1) and 17(2)(a) of the Model Law.
Articles 2(1) and 17(2)(a) of the Model Law, supra.
Article 16(3) of the Model Law.
See Ackers v Saad Investments Company Limited (in officialliquidation), no. NSD 1168 of 2010, Federal Court of Australia (22 October 2010).
Lightsquared LP (Re), No. CV-12-9719-00CL, Superior Court of Justice, Ontario (6 July 2012)(Canada).
See In the matter of Stanford International Bank Limited,et al., High Court of Justice, Chancery Division, (UK) Case Nos. 13338 and 13959 of 2009, (3 July 2009).
See In the matter of Stanford International Bank Limited, etal., supra. in contrast with In re Bear Stearns High-Grade StructuredCredit Strategies Master Fund, Ltd., 74 B.R. 122 (Bankr. S.D.N.Y., 2007), affirmed on appeal In re Bear Stearns, Nos. 07-12383 and07-12384, (Bankr., S.D.N.Y., 22 May 2008).
Lightsquared LP (Re), supra, citing and refining MassachusettsElephant & Castle Group, Inc. (Re), No. CIV-11-9279-00CL, Superior Court of Justice, Ontario (11 July 2011).
11 U.S.C. §1516(c).
See In re SphinX, Ltd., No. 06-11760 (RDD), 06 Civ. 13215(RWS) (S.D.N.Y, 3 July 2007) and In re Tri-Continental ExchangeLtd., 349 B.R. 629 (Bankr. E.D. Cal., 2006). See In re: Bear Stearns,supra, affirmed on appeal in In re Bear Stearns, supra, for an example of a case where the presumption was rebutted.
See In re Tri-Continental, supra, and In re SphinX, Ltd., supra.
See, In re Bear Stearns High-Grade Structured Credit StrategiesMaster Fund, Ltd., supra. See also In re Klytie’s Developments,Inc., Klytie’s Developments, LLC, 07-22719-MER, (Bankr. D.C. Colorado, 8 February 2008).
In re Fairfield Sentry Ltd., 440 B.R. 60 (Bankr. S.D.N.Y. 2010); Lavie v. Ran (In re Ran), 607 F.3d 1017 (5th Cir. 2010), 1025; Inre Betcorp Ltd., 400 B.R. 266 (Bankr. D. Nev 2009), CLOUT case No. 927 and Re Millennium Global Emerging Credit Master FundLimited, No. 11 Civ. 7865 (LBS)( Bankr., S.D.N.Y., 25 June 2012).
See In re Betcorp Limited, supra, wherein the court held that the location of the debtor’s creditors did not overcome the fact that 91.4 per cent of the debtor’s shareholders resided in Australia, that 67.2 per cent of its shares were held by Australian residents, and that all but five of its directors resided in Australia (and none in the United States).
See In the matter of Stanford International Bank Limited,et al., supra., and In re Tradex Swiss AG, Nos. 07-17180-JBR and07-17518-JBR (Bankr., D.C. Mass., 12 March 2008).
Article 16(3) of the Model Law and Article 3(4)(b) of the EC Regulation.
Dicey and Morris on the Conflict of Laws (13th edition) (edited by Albert V. Dicey, C.G.J. Morse, McClean, Adrian Briggs, Jonathan Hill, & Lawrence Collins). London: Sweet & Maxwell 2000.
Gainsford, in the matter of Tannenbaum vs Tannenbaum, no.QUD 216 of 2012 (Federal Court of Australia, 24 August 2012).
Steven Williams vs Alan Geraint Simpson, supra.
Article 3(1) of the EC Regulation.
See Staubitz-Schreiber, ECJ Case C-1/04, (17 January 2006) http://curia.europa.eu/juris/showPdf.jsf;jsessionid=9ea7d2dc30db5fd6741832784b56aebfdf8636f09830.e34KaxiLc3qMb40Rch0SaxuKaNr0?docid=64087&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=3518014, wherein the ECJ overturned a ruling of the Amtsgericht-Insolvenzgericht Wuppertal (which was upheld by the Landgericht Wuppertal) that the German courts did not have jurisdiction because the insolvent party who was resident in Germany at the time of the opening of insolvency proceedings had later moved her CoMI to Spain before the proceedings actually opened.
Paragraph 13, Recitals to the EC Regulation.
Eurofood IFSC Ltd., ECJ Case C-341/01 (2 May 2006), the text of the decision of which can be found at http://curia.europa.eu/juris/document/document.jsf?text=&docid=49122&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=2178683.
Interedil Srl v. Fallimento Interedil Srl, Intesa GestioneCrediti SpA, ECJ Case C-396/09 (20 October 2011), the text of the judgment in this case can be found by reference to http://curia.europa.eu/juris/document/document.jsf?text=&docid=111587&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=2198421.
A copy of the Irish Supreme Court decision in In re EurofoodIFSC Limited, 147/04 (July 27, 2004) can be found at http://www.odce.ie/en/court_insolvencies_article.aspx?article=bac54653-5625-4595-b52f-7ebc16dd5042.
In re Eurofood at 22.
Eurofood, supra, at paragraph 34.
See Eurofood, at paragraph 30, wherein the ECJ stated that, “…each debtor constituting a distinct legal entity is subject to its own court jurisdiction.”
See paragraph 59 of the Interedil decision.
Interedil at paragraph 52.
See §3(4)(b) of the EC Regulation.
See Recital 13 of the EC Regulation.
Article 3(4)(b) of the EC Regulation.
See Article 6 of the Model Law. See also, Article 26 of the EC Regulation wherein it is stated that, “… the effects of such recognition would be manifestly contrary to its public policy, and in particular, its fundamental principles or the constitutional rights and liberties of an individual.”
See Guide to the Enactment of UNCITRAL Model Law on Cross Border Insolvency at paragraphs 86-89.
See Hartford Computer Hardware Inc. (Re), No. CV-11-9514-00CL, Superior Court of Justice, Ontario (Commercial List)(15 February 2012) (Canada).
Seoul Central District Court, 2007 GOOKSEUNG 1 (18October 2007) (Korea).
Indeed, language to this effect is in the legislative history of United States law adopting the Model Law (see 11 U.S.C. §1506, Article 6) as well as in the case law. See, for example, In re: NorthAmerican Steamships Ltd., No. 06- 13077 (RDD), (Bankr., S.D.N.Y.,25 January 2007) and In re Ephedra Products Liability Litigation (MuscletechResearch and Development, Inc., et al), Nos. 04 MD 1598 (JSR), 06 Civ. 538(JSR), 06 Civ. 539(JSR), (Bankr., S.D.N.Y., 11 August 2006) wherein the court noted that exceptional circumstances must justify a finding that recognition would be “manifestly contrary” to national public policy considerations, In re Gold & Honey, Ltd., 410 B.R. 357 (Bankr. E.D.N.Y. 2009), CLOUT case No. 1008. and more recently In re Millennium Global Emerging Credit Master FundLimited, No. 11 Civ. 7865 (LBS), (Bankr., S.D.N.Y., 25 June 2012).
In re Qimonda AG Bankruptcy Litigation 433 B.R. 547, 568; CLOUT case No. 1212 (Bankr., E.D. Va., 19 November 2009, 28 October 2011). On interpretation of §1506, the court also cited Inre Tri-Continental Exchange, Ltd., 349 B.R 627, CLOUT case No. 766; In re Ephedra Prods. Liability Litig., 349 B.R. 333 (S.D.N.Y. 2006), CLOUT case No. 765 . See also, In re Metcalfe & MansfieldAlt. Invs., 421 B.R. 685 (Bankr. S.D.N.Y. 2010), CLOUT case No. 1007; and In re Gold & Honey, Ltd, 410 B.R. 357 (Bankr. E.D.N.Y. 2009), CLOUT case No. 1008.
See In re Dr. Juergen Toft, No. 11-11049 (ALG) ( Bankr., S.D.N.Y., 22 July 2011) wherein the court, after analyzing the application of the public policy exception in section 1506 of Chapter 15 [article 6 MLCBI] in some detail, observed that this was one of the rare cases which called for its application, finding that the relief sought exceeded the traditional limits on the powers of a trustee in bankruptcy under United States law, constituted relief that was banned by statute in the United States and might subject those who carried it out to criminal prosecution. The court also found that providing such relief without notice to the debtor would also be contrary to United States law.
In re Qimonda AG Bankruptcy Litigation, supra.
In re MG Probud Gdynia sp. z o.o., it was clear that the German court’s motivation for not enforcing the order of the Polish Court was the fear that, as insolvency proceedings had been opened in Poland, there was reason to fear that those responsible within MG Probud would shortly collect the sums payable and transfer the corresponding amounts to Poland in order to prevent the German authorities from having access to them.
See Article 17(1) of the EC Regulation.
Article 25 of the EC Regulation. See also, Seagon v. DekoMarty Belgium NV, supra, the text of the decision of which can be found at http://curia.europa.eu/juris/document/document.jsf?text=&docid=76240&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=2185311, wherein the ECJ held that the German courts had the power to order a Belgian entity to repay certain monies that were transferred to it by the debtor prior to bankruptcy.