Ontario Court of Appeal Opines On Technology Licences In Receivership Case

Renée Brosseau and Andrea Rush are partners at Heenan Blaikie LLP and were counsel for GeoDigital International Inc. in the appeal in Canrock Ventures LLC v. Ambercore Software Inc. and Terrapoint Canada (2008) Inc.

The sale of a business in the context of a receivership occurs on an “as is where is” basis. The would-be purchaser of intellectual property is buying a mystery because ordinary rights clearance queries and reassurances are not available. This sense of the unknown generates hardship for the purchaser whose business depends on uninterrupted operation of its computer systems. 

In an ordinary commercial transaction, due diligence inquiries are made prior to sale.  These inquiries pertain to ownership, subsistence, duration of rights, enforceability and resulting value.

The types of routine due diligence which characterize intellectual property audits are not open to purchasers in an insolvency setting. Yet, valuation of intellectual property is accepted as a critical part of a receiver’s “to do list”.  Unless the intellectual property has been valued, reasonableness of the sale, and indeed the receiver’s conduct, can be questioned.

As a technical matter, access to the source code and programmer’s notes is necessary for repairing and upgrading software.  In Canrock Ventures LLC, the court-appointed receiver, acting on behalf of Terrapoint USA Inc. and its related company, Ambercore Software Inc., sought approval of a sale of Terrapoint’s assets and licence of Ambercore technology to GeoDigital International Inc. As part of the terms approved by the Superior Court of Justice, the source code would be delivered on closing to the purchaser of the software licence.

All parties recognized that the operation of the purchaser’s business depended upon access to the seller’s intellectual property, including the object code and source code.  The proposed sale was challenged, in part because the source code would be delivered on closing. The technology license agreement, subject to the sale, provided that the purchaser would own any improvements that it may make to the licensed intellectual property in the defined field of use.  The salient terms of the licence are reproduced at para. 21 of the Superior Court decision:

Under the proposed Technology License Agreement, the Receiver, in its capacity as receiver of Ambercore, would grant to GeoDigital a non-exclusive world-wide, perpetual, irrevocable, royalty-free, fully paid up licence to use and integrate into any of its products and services the Ambercore IP. GeoDigital would be permitted to sublicense the Ambercore IP as part of its own services or products, but only in the stipulated “Field of Use” and provided any produce containing the Ambercore IP was not made available for the principal purpose of offering for sale the Ambercore IP. The definition of  “Field of Use” in the Technology License Agreement is intended to restrict the use of the Ambercore IP to the scope of services and products falling within Terrapoint’s business. All parties recognize that the operation of Terrapoint’s business depends upon access to the Ambercore IP.

Two reports, which were filed and formed part of the record, concerned the general industry practice by commercial computer lawyers regarding ordinary commercial transactions with the object of resisting delivery of software.  The receiver submitted in response that the source code was required to maintain the software functionality particularly because the licensor would not be required to maintain or upgrade the licence nor would it have that ability in the future.  The Ontario Superior Court approved the Purchase Agreement with GeoDigital, and declined the request to impose a term on the licence given that the purchaser in an insolvency situation pays a flat fee and further, in this context made it clear: “no source code, no deal”.

Accommodation for commercial necessity in the electronic environment finds examples in the “real” property world. Repairing code is similar to developing and maintaining a bridge, or a car part.  The balance between owners and users finds application in each case because authorization is required from the owner of copyright to reproduce and modify plans to repair a bridge, a car – or a computer program.  In each of these examples, the need to modify would have been contemplated by the parties at the time of agreement.  The Supreme Court of Canada, in Netupsky v. Dominion Bridge, held that an implied licence of copyright to repair the bridge shielded the City of Ottawa from copyright infringement. The decision in Canrock Ventures LLC,  upheld by the Ontario Court of Appeal, follows that path.

IP Osgoode: 

Some additional facts were summarized by Justice David M. Brown in the trial level decision, Canrock Ventures v. Ambercore Software, 2011 ONSC 2308.  In addition to para. 21, quoted above, the Court stated that

The Technology License Agreement includes within the ambit of licensed software both the object and source code for the Ambercore IP, so that on closing a copy of the source code would be delivered to GeoDigital.

Finally, the Technology License Agreement provides that GeoDigital will own any improvements which it makes or creates to the Ambercore IP and GeoDigital may use such improvements in the defined Field of Use. (paras. 22-23 of the trial decision)

The objection regarding the Technology License Agreement was raised by Quorum Oil & Gas Technology Fund Limited (QOGT), a secured creditor of Ambercore and Ambercore’s wholly-owened subsidiary, Terrapoint, to the effect that GeoDigital should not be provided with a copy of the source code for the Ambercore IP, but only a copy of the object code. The argument was that the source code constitutes a confidential trade secret. The Receiver argued that the source code is required “to i) maintain the software’s functionality; and ii) to further develop the [specific software at issue] and to complete development of other software under development, particularly given that Ambercore was not required to maintain or upgrade the software under licence nor may it have that ability going forward” (para. 37 of the trial decision).

An affidavit of Mr. Rebeiro filed by QOGT, offered some views about what might happen if a transaction fell outside of the ordinary course of business:

At most, a software owner may, if commercial circumstances dictate, sometimes be prepared to agree with its licensee that it will put a copy of the source code into ‘escrow’ with an escrow agent who keeps the source code stored in a confidential depository. These arrangements usually work whereby the software owner, the licensee and the escrow agent enter into any agreement where, in certain agreed circumstances such as the material failure of the software owner to provide maintenance and support in accordance with an agreed support and maintenance contract, the licensee, needing access to the source code, can apply to the escrow agent in pre-agreed circumstances to obtain access to the source code to enable it to make the required developments/upgrades to the software itself. (para. 38 of the trial decision)

The Court concluded that “the circumstances in which Mr. Rebeiro opined that it would be reasonable to provide the licensee with access to the source code strike me as precisely those in which Terrapoint now finds itself – the provider of its software, Ambercore, may not be able to repair or maintain the Ambercore IP’s functionality on a go-forward basis” (para. 39 of the trial decision).

Justice Brown’s decision in was upheld by the Ontario Court of Appeal in Canrock Ventures LLC v. Ambercore Software Inc. and Terrapoint Canada (2008) Inc., 2011 ONCA 414.