How Does Covid-19 Affect IP Contracts?

The Covid-19 crisis has had a devastating impact on every pretty much industry. With businesses struggling to operate under the shadow of shelter-in-place orders, many parties are in the difficult position of not being able to meet their contractual obligations. The business entities that are experiencing this struggle are seeking solutions in their contracts and hoping that they have provisions that can excuse a breach of contract during these unprecedented times. 

Some contracts that have been implicated are IP licenses, which can contain agreements with sales minimums or royalty agreements that are difficult, if not impossible to fulfill during this time of cancellations and business closures. Both licensees and licensors have recourse to excuse or enforce provisions due to the coronavirus. Because the events of Covid-19 will not automatically apply to excusing a nonperformance of a contract, you must first look at the specific license to determine the possibility. 

Does the License have a Force Majeure Clause? 

Many licenses have “force majeure” (superior force) clauses that expressly relieves a party from performance or postpones performance when events or “acts of God” that are beyond their control occur. Although it may seem that the unpredictable environment of Covid-19 is tailor-made for the applicability of a force majeure clause, it depends on the specific license and the ensuing circumstances as to whether the force majeure excuses a given type of nonperformance. 

When analyzing the specific language of the contract, look at the following:

  • The definition of force majeure: Some will mention a pandemic or epidemic specifically, but the contract may still excuse Covid-19 related occurrences if it mentions quarantines or travel restrictions or there is a “catch-all” provision which defines force majeure broadly. However, some majeure provisions are limited to the events mentioned.
  • Identify the performance that the force majeure refers to: Establish whether the clause applies to the type of breach being contemplated. Also, some clauses are drafted to excuse liability that concerns not only nonperformance, but also underperformance. 
  • Any preexisting conditions that must be met: A party might have to complete a prerequisite before the clause is invoked as a nonperformance excuse.  

When there is no force majeure provision or it doesn’t apply, then the parties must rely on the common law contract doctrines of frustration of purpose and commercial impracticability. Unfortunately, they usually don’t result in excusing the performance. However, it’s possible that nonperformance may be excused on “impracticability” or “impossibility” grounds due to an unforeseen change in circumstances due to Covid-19.

Bankruptcy Issues

The coronavirus also triggers issues for IP licenses, such as the potential for bankruptcies and pledges of non-enforcement of IP rights. If there is bankruptcy of a licensor, the license might be rejected by the licensor, making the licensee to either force compliance or pursue a breach. On the other hand, if a licensee declares bankruptcy, some IP licenses have clauses that attempt automatic reversion or termination of IP rights. 

Talk to an Attorney about IP Issues

The Covid-19 crisis will continue to impact business and how contracts are performed. If you’re concerned about how your intellectual property issues are handled during the pandemic, then you may want to talk with a MOWK Law attorney who is well-versed in IP law. Contact us today for more information on how we can help you.