Amin Hosseini is an IPilogue Writer and an LLM Candidate at Osgoode Hall Law School.

On Friday, November 11, 2022, FTX. Shortly after that, filed for bankruptcy, and a Japanese exchange called Bitfront shut down. FTX is a global, centralized cryptocurrency exchange based in the Bahamas. It enables customers to exchange their digital currencies for other digital currencies or regular money. Sam Bankman-Fried ("SBF”) was the CEO of FTX.

The collapse came when FTX. is the cryptocurrency exchange with the highest daily trading volume of cryptocurrencies globally. On November 9, Binance it would no longer purchase FTX, mentioning reports of mishandled funds and regulatory investigations. Since then, the price of has plunged by more than 90%. The FTX's native token is called . It is generally used as collateral for future positions and to lower trading fees.

��According to a report by , on November 2, Alameda Research ("Alameda”), the cryptocurrency trading firm led by SBF, was found to have an unusually high stockpile of FTT. FTX and Alameda's connections may have been more complex than had been previously disclosed, raising the question of whether FTX moved customers’ assets to Alameda. Since Alameda and FTX owned most of the FTTs, the other business would suffer severe financial consequences if one of them is compelled to sell or transfer its FTT holdings.

On November 6, that it would sell its FTT tokens. The value of FTT fell, triggering investors to race to sell their holdings in FTX out of concern that it would collapse like other cryptocurrency corporations. FTX rushed to execute withdrawal requests, but could not pay. As a consequence, FTX filed for bankruptcy.

John J. Ray, the new CEO of FTX, believes such a disaster is due to a lack of supervision and poor record-keeping. He numerous mismanagements leading to the disaster, including concealing misuse of customers' funds through software, using unprotected group emails, and communicating using applications with auto-delete features that restrict access to FTX records.

Platform customers, unsecured creditors, must wait in line to receive whatever assets the court may take from FTX based on priorities established by equitable principles. The bankruptcy has highlighted an $8 billion shortfall. After the fall of FTX, it will be more difficult for crypto exchanges to gain trust.

Industry experts are now predicting a "". The cryptocurrency market has long battled to win over investors and authorities. Investor trust in digital assets has weakened in the fallout of FTX, which will likely lengthen the impending crypto winter.

The FTX collapse underscores the lack of investor fund regulation in cryptocurrency markets. The cryptocurrency industry requires more stringent regulation to be rid the market of manipulation, fraud, mismanagement, cyber security risks, and money laundering. What steps will be taken to address these concerns will remain to be seen.

Further Reading:

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On November 21, 2012 the U.S. Bankruptcy Court for the Southern District of New 91��ɫ����Hostess' motion, and the company began the process of selling their assets.

The market for well established brands appears to be quite good.�� In 2009,����bought Polaroid^TM��adding to their collection of well-established brands��bought from companies in bankruptcy.�� Armed with the brands, Gordon Brothers and Hilco remarketed goods to consumers by changing the underlying business models, which failed, into ones that work.�� By acquiring these well-established brands, companies such as Gordon Brothers and Hilco can capitalize on the consumer recognition of the product without needing to be burdened by any of the original company`s mistakes.

In the food market especially, selling food with a recognized brand appears to be crucial.�� With grocery stores only stocking shelves with their highest selling products, it is becoming harder for midsize food companies to compete.�� The result is that companies which offer fewer food products are selling their product brands to larger food companies.�� One example, from earlier in 2012, is Proctor & Gamble who sold the��^TM��brand and related assets to Kellogg’s for $2.695 billion dollars.

There are several food industry giants that might be willing to purchase the Hostess brands.�� One obvious candidate is Flowers Foods (hereafter “Flowers”), a rival of Hostess, whose����have jumped since the announcement of Hostess’s bankruptcy proceedings.�� In 2011, Flowers����the Tasty Baking Company when that company was in a similar financial state as Hostess.�� With the purchase, Flowers gained access to the Tastykake^TM��brand, another fine example of a cream-filled confection. ��When asked to comment about the purchase,��, Chairman and CEO of Flowers Foods, said that “We recognize that consumers hold Tastykake in very high regard when it comes to product quality and freshness”.�� Clearly, Mr. Deese recognized the advantage of purchasing an established brand.�� Perhaps Flowers will end up taking the same view when it comes to the Twinkie^TM, or other Hostess brands, should they decide to purchase any of their brands. ��However, Flowers has yet to comment about the possibility of purchasing Hostess brands.

The drawback from buying brands rather than buying all assets of a bankrupt company is that employees are inevitably left without jobs.�� During the winding down process, Hostess only intends to����about 3,200 employees of the former 18,500 to assist in the process.�� Of those that��, 94% will find themselves unemployed within the first 16 weeks of the year-long process. ��Since Flowers Foods recently acquired all assets of the Tasty Baking Company, it is doubtful that they would attempt to buy the Hostess assets as a whole as well.�� If they decide to purchase any assets of Hostess, it will probably be limited to brands, and former employees of Hostess will be out of work.

Although it may not be Flowers, it does seem likely that Hostess brands like Twinkie^TM��will be bought by some other food company.�� Those people who are thinking of buying boxes of Twinkies on eBay can relax - The Twinkie probably isn’t going anywhere anytime soon.

Adam Stevenson is a JD Candidate of Western University, faculty of law.

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The Bankruptcy and Insolvency Act (BIA) and Companies’ Creditors Arrangement Act (CCAA) were recently amended. One of the amendments provides IP licensees with more certainty regarding the fate of their licenses when licensors restructure. While that amendment is a positive development for licensees, it also creates other significant uncertainties.

Background

The BIA and CCAA permit financially troubled debtors to continue operations while restructuring and making deals with creditors to service their debts. The CCAA applies only to companies with more than $5 million in debt. The BIA and CCAA respectively require a debtor to prepare a proposal or plan of arrangement specifying how the debtor intends to pay off its debts.�� Before the amendments, both acts allowed debtors to “disclaim” (i.e. terminate) contracts such as licenses as part of the restructuring, the logic being that debtors should be able to shed contracts that obstruct viable restructuring.

Before the amendments came into effect on September 18, 2009, if a license was disclaimed, the licensee no longer had permission to use the IP covered by the license. A licensee’s only remedy was to file a claim seeking damages suffered due to the license’s termination. Practically, the licensee usually had little chance of recovery, since typically the licensor had secured creditors whose claims would take priority and deplete the licensor’s assets, if any.

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The Good: The Amendments

The BIA and CCAA amendments still permit disclaimers of all contracts in a restructuring, including licenses. However, a licensor’s ability to disclaim a license is now restricted by BIA subs. 65.11(7) and CCAA subs. 32(6). The BIA provision reads:

If the debtor has granted a right to use intellectual property to a party to an agreement, the disclaimer or resiliation does not affect the party’s right to use the intellectual property – including the party’s right to enforce an exclusive use – during the term of the agreement, including any period for which the party extends the agreement as of right, so long as the party continues to perform its obligations under the agreement in relation to the use of the intellectual property.

The CCAA provision reads the same, except the word “debtor” is replaced by “company”.

Because of the amendments, a licensor’s disclaimer of a license will not affect the licensee’s right to use the IP so long as the licensee continues to meet its obligations under the license (e.g. royalty payments).�� The license continues for the duration of the agreement and any extensions/renewals specified in the agreement. Licensees can also enforce any exclusivity provisions in the license agreement. ��The provisions only apply in a restructuring, not bankruptcies or receiverships where the common law applies.

��

The Bad: The Uncertainties

While the BIA and CCAA amendments improve the position of licensees, they also create ambiguities, including:

1. What IP is captured by the amendments? Neither the BIA or CCAA define intellectual property. Thus, it is unclear what types of IP are captured by the amendments, and whether the amendments apply only to registered IP rights or include unregistered rights.
2. What is the meaning of “use”? It is unclear whether rights ancillary to the right to use the licensed IP are captured by the term “use”.
3. Can the licensor disclaim other obligations? The amendments are silent on whether licensors can disclaim other obligations such as enforcing or maintaining IP, indemnities, quality control provisions in trade-mark licenses, and tech support services in software license agreements.
4. What exactly are the licensee’s continuing obligations? It is uncertain what a licensee’s obligations are if the obligations depend on the debtor’s actions and the debtor has disclaimed its obligations to perform those actions. E.g. if ��a software licensor disclaims technical support, maintenance and upgrade obligations, and the license does not apportion the royalty between the license to use the software and the fees for technical support, maintenance and upgrades, can the licensee pay a reduced royalty and still use the IP? The answer is no based on the amendments’ wording, but a court may interpret the amendments differently.
5. Can a court sell the IP to a third party free and clear of the license? The relevant BIA and CCAA provisions do not preclude or prohibit sale of the licensed IP. ��It therefore appears that the IP subject to the disclaimed license could be sold to a third party, despite the licensee’s ability to use the licensed IP under the BIA and CCAA amendments.

Unless the BIA and CCAA are amended to address the foregoing questions, it will be up to the courts to decide the answers.

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The Ugly: When It May Not Make Sense to Continue a License

In some circumstances, it may be impractical for a licensee to continue a license beyond an interim period where the licensee transitions to a new licensor. Those scenarios include:

1. Software licenses, where the licensor has disclaimed its obligation to provide any support, maintenance or upgrades and the license agreement does not split the royalty between the fee for using the software vs. support, maintenance and upgrades. ��If the licensee decides to pay a reduced royalty to reflect the lack of technical support, it would breach its obligations under the license and not be entitled to use the software under the BIA and CCAA provisions. If the licensee does pay the royalty, the licensee is arguably overpaying due to the lack of tech support that may be required for the software’s continued function and operation.��
2. The licensor fails to maintain any relevant registrations and value. As in (1) immediately above, the licensor could very well be paying too high a royalty for the IP. As in (1) above and based on the amendments’ wording, the licensee’s unilateral reduction of the royalty would terminate the license.
3. The licensor disclaims quality control provisions in a trade-mark license. The exercise of such control is necessary to ensure distinctiveness.
4. The sale of the IP to a third-party purchaser. Given that a license is often considered a personal right granted by the licensor, the purchaser could claim that it does not have to honour the license in the absence of an agreement to do so. The result? The licensee will lose the right to use the IP.

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What Can Licensees Do to Protect Themselves?

While the BIA and CCAA amendments are an improvement for licensees, licensees still face significant uncertainties and risks if a licensor restructures. Consequently, licenses should address the potential consequences of the licensor’s insolvency. Ideally, licensees should attempt to protect themselves by negotiating contractual provisions that address possible scenarios if the licensor restructures (e.g. apportioning royalties between IP and technical support in software licenses, upfront payment of maintenance fees for patents and registration fees for trade-marks) or by participating as a shareholder in a bankruptcy remote entity (BRE), a subsidiary of the licensor whose sole purpose is to own and license IP. BREs are structured to minimize insolvency and thus the risk that the license will be disclaimed.��

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