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Butters in court, as IP deal trumps public policy

By Johanna Gibson, David Pearce, Jeremy Phillips and Ilanah Simon.

A news flash from London-based law firm Herbert Smith brings tidings that the Court of Appeal for England and Wales has today reversed the decision of Mr Justice Peter Smith in Butters and others v BBC Worldwide Ltd and others (noted here on IP Finance, with a short summary of the facts). The trial judge had held that contractual provisions in a joint venture agreement, when taken together with termination provisions in an IP licence, were void since their effect was to deprive creditors' access to assets on an insolvency and was therefore contrary to public policy.

The trial judge sought to apply what is known as the "anti-deprivation principle". By this principle there cannot be a valid contract that a man?s property shall remain his until his bankruptcy but that, on the happening of that event, the propertyy goes over to someone else, and be taken away from his creditors. In the judge's view the interlinking of (i) a provision in a joint venture agreement that, on the occurrence of the insolvency of one JV partner or a member of its group, the other JV partner was entitled to serve a notice to acquire all of the shares in the joint venture company, with (ii) a provision that terminated a valuable IP licence on the service of that notice, had the effect of depriving assets from creditors and were therefore void.

The Court of Appeal disagreed, saying that these interlinked provisions were unobjectionable, even if it took effect after the insolvency of the licensee, since their operation merely involved the termination of the licensee's limited interest. The provision in the JVA provided for the shares to be acquired, in effect, at market value, which could not be objectionable. On the basis that each provision was independently acceptable, their combination could not be objectionable merely by virtue of their coexistence. The Court of Appeal added that the anti-deprivation rule does not apply where the deprivation has been effected by the time the winding-up (or administration) order is made against the company which is deprived. In other words, the anti-deprivation rule can in any event be avoided by careful drafting.

The authors of this news flash note the statement of the Court of Appeal that it was ultimately up to Parliament to legislate against anti-deprivation devices in the insolvency field, as it has already done in sections 238 (transactions at an undervalue) and 239 (preferences) of the Insolvency Act 1986.

Says the IPKat, while careful drafting can side-step the anti-deprivation principle, this is just the sort of thing that can be missed during the adrenalin rush to sign the JV which drives its parties, dragging their lawyers in their wake, towards the first document that appears to reflect the main items on which agreement has been reached. Says Merpel: tricky issue, trial judge reversed on appeal, public policy issues relating to the protection of creditors -- does anyone fancy an appeal to the Supreme Court?

This decision had not yet been posted on BAILII at the time the news flash was received and this item posted.

Anti-deprivation here (not for the hard-hearted)
Monetary deprivation here
Sensory deprivation for $50 an hour here

Full post as published by IPKat on January 26, 2010 (boomark / email).