Licences in Insolvency: German Law, the New EU Directive, and What Licensors and Licensees Must Do Now

The German Legal Gap

Two legislative attempts have already failed. A proposed § 108a InsO, which would have preserved licence agreements for the benefit of the insolvency estate, was rejected by the Bundestag in 2007. A 2012 initiative by the Federal Ministry of Justice to grant licensees a statutory claim to a new licence agreement upon rejection by the administrator never made it to a government bill.

What remains is a framework built on general rules never intended to govern intellectual property. The administrator's right of election under § 103 InsO applies to licence agreements in principle, and the central consequence is that licensees have no reliable assurance that their licence will survive the licensor's insolvency. In the pharma and biotech sectors, where the development of a single compound routinely requires investments measured in hundreds of millions of euros over a decade or more, this exposure is untenable.

The comparative picture makes Germany's inaction all the more striking. Section 365(n) of the US Bankruptcy Code has since 1988 given licensees the statutory right to retain their licensed rights when the licensor's trustee rejects the licence agreement. Similar protections exist in other major jurisdictions. Germany's failure to provide a comparable statutory framework leaves its licensees at a measurable disadvantage in cross-border negotiations and investment decisions.

The constructs that practitioners have developed to insulate licence positions from insolvency risk — usufruct structures (Nießbrauch), transfers to insolvency-remote vehicles, sublicence structures, dual-trust arrangements (Doppeltreuhand) – are without exception imperfect. None of them provides complete legal certainty, and all add transactional cost and complexity that sophisticated counterparties in other jurisdictions do not face. 

The new Directive represents not a genuine overhaul, but rather a confirmation of the existing system, with only targeted adjustments required in areas where German law already diverges from the new Union minimum standards. However, the licence issue is one of those areas where German law has not yet reached even the minimum that the Directive encourages.

The Licensor's Position: Insolvency-Triggered Termination and Its Limits

Licensors in IP-intensive industries have an obvious interest in being able to exit a licence agreement when their counterparty becomes insolvent. Know-how loses its value if secrecy cannot be maintained in a crisis; trademarks can be damaged or rendered vulnerable to cancellation for non-use when an insolvent licensee loses the ability to use them properly. The commercial rationale for insolvency-triggered termination clauses is clear.

The legal position is more nuanced than licensors might hope. In its judgment of 27 October 2022 (IX ZR 213/21), the BGH held that no general rule can be derived from the InsO that insolvency-dependent termination clauses are always invalid. Where a contract is terminable for cause, the parties may validly designate the opening of insolvency proceedings as such cause, provided the clause does not undermine the administrator's specific powers under the InsO. For licence agreements, however, the practical scope of this ruling remains constrained. The BGH had previously classified licence agreements over copyrights and registered industrial property rights as lease-equivalent continuing use agreements within § 112 InsO, and clauses that terminate contracts in favour of the monetary creditor upon the debtor's insolvency are regularly struck down. In a licence agreement, the licensor is that monetary creditor. The practical consequence is that the very mechanism licensors rely on to protect their position in a counterparty's insolvency is the one most likely to be held unenforceable.

The BGH's October 2022 judgment has therefore created only partial clarity. The line between a permissible and an impermissible ipso facto clause in a patent licence agreement remains contested. In a licensee's insolvency, the licensor still has no reliable exit and no clear answer on reversion – a gap that the Directive still does not address.

The Licensee's Position: Article 30(4) and the Protection It Could Offer

Article 30 of the Directive operates in a specific and limited context: the pre-pack sale, where the debtor's business or part of it is transferred to a buyer as part of an insolvency proceeding. Article 30(1) requires Member States to ensure that executory contracts necessary for the continuation of the debtor's business pass to the buyer without the counterparty's consent. Article 30(4) then gives Member States the option to go further: they may provide that licence agreements over intellectual and industrial property rights, where the debtor is the licensor, cannot be terminated without the licensee's consent as part of that transfer. Recital 47 explains the rationale plainly: protecting licensed rights in a licensor's insolvency encourages investment in the development of those rights.

It is important to be precise about what Article 30(4) does and does not cover. It does not create a general rule protecting licensees in every licensor insolvency. It applies specifically where a pre-pack sale is taking place and the licence agreement is being transferred to the buyer as part of that transaction. Outside that scenario, for instance where the administrator rejects the licence agreement under § 103 InsO without any asset deal, Article 30(4) offers no protection.

Within its scope, however, the provision is practically significant. Pre-pack sales are precisely the proceedings in which licensees are most exposed: the business changes hands rapidly, often before the licensee has an opportunity to assess its position, and the new owner may have very different intentions regarding the licensed IP. For pharma and biotech licensees holding rights to patented compounds or platform technologies, a requirement that the licence cannot be terminated without their consent in this context would remove one of the most acute risk factors that deal teams and investors currently price into transactions with German licensors. It would also benefit licensors: a more secure licensed position encourages continued investment by the licensee, sustaining the royalty and milestone payment streams that licensors depend on.

Critically, however, Article 30(4) is optional for Member States. Germany may choose not to implement it. Even if it does, protection will be confined to the pre-pack context; the much more common scenario of a licensor insolvency without a pre-pack sale, or a licensee insolvency, is entirely unaddressed.

The Tension with the Administrator's Right of Election

A consent requirement sits awkwardly alongside the administrator's right of election under § 103 InsO, which is designed to give the administrator unilateral control over executory contracts. That tension is real but manageable in the pre-pack context: the Union legislature made a deliberate choice that, where a business is being sold as a going concern, continuity of key licences is a legitimate objective that can proportionately qualify the administrator's discretion.

The more pressing issue lies outside Article 30's scope entirely. In a licensee's insolvency, the licensor still has no reliable exit and no clear answer on reversion. And even in a licensor's insolvency that does not involve a pre-pack sale, the licensee has no statutory protection. Enacting Article 30(4) would be a meaningful step, but it would leave the underlying asymmetry of the German regime largely intact. Implementation of the Directive should therefore be paired with broader domestic reform.

What Licensors and Licensees Must Do Now

The Directive's transposition deadline of 22 January 2029 creates a three-year window during which the German legislator will determine how – and whether – to address the structural gaps described above. But three years is a short time in the context of long-term licence agreements. Licence agreements signed today will be operative when the transposition legislation is enacted. Structures put in place now will determine risk allocation for the next decade. Both licensors and licensees should be acting immediately, on two fronts, namely with regard to contractual and structural risk management (which is available now, regardless of legislative outcomes), and engagement with the legislative process (which is available only during the transposition window).

ToDos for Licensees:

• Audit existing licence portfolios for insolvency exposure. Every licence agreement under which a licensee holds material rights governed by German law should be reviewed against the risk scenarios described above. The key questions are: What does the agreement say about insolvency? Does it contain an ipso facto clause (and if so, is it in the licensor's or the licensee's favour)? Is there a pre-pack risk? Is there a mechanism for the licensee to continue exercising its rights if the administrator elects not to perform?
• Negotiate protective provisions into new and renewed agreements. The practitioner constructs noted above remain the best available tools pending legislative reform, but their limitations are well documented. For high-value licences, a dual-trust structure or a transfer of the IP right to an insolvency-remote vehicle should be seriously considered. For licences where this is not commercially feasible, the agreement should at minimum address: the consequences of an administrator's election not to perform; the licensee's right of access to technical documentation and embodiments; and a mechanism for continued royalty payment in exchange for continued use.
• Monitor the transposition process and engage with it. The German legislator's choices during transposition – In particular whether to implement Article 30(4) and whether to go further with broader licensee protection – will directly affect the legal framework applicable to existing and future licences. Licensee-side industry associations, particularly in pharma and biotech, have a strong interest in the legislative outcome and should be engaging with the Federal Ministry of Justice during the transposition process. The window is open now.

ToDos for Licensors

• Review termination clauses in light of the BGH's October 2022 judgment. Ipso facto clauses in existing licence agreements should be assessed for enforceability under the principles set out in BGH IX ZR 213/21. Where such a clause is the licensor's primary protection against a licensee's insolvency, the risk that it may be unenforceable — particularly in a licence classified as lease-equivalent under § 112 InsO — should prompt urgent reconsideration of the licensor's overall risk position.
• Distinguish between licence types. The legal and commercial risks to a licensor differ materially depending on whether the licence is a patent licence, a trademark licence, or a know-how licence. For trademark licences, the licensor's ability to control quality - and therefore to protect the mark against cancellation – Is directly dependent on the licensee's continued proper performance. For know-how licences, secrecy is everything. Licences in these categories warrant separate contractual treatment and, where possible, more granular termination and reversion provisions.
• Address the reversion question contractually. In the absence of a statutory rule, licensor-side counsel should ensure that agreements contain explicit provisions addressing what happens to the licence upon rejection; whether sublicences survive rejection; and what rights the licensor has to recover technical documentation, data packages, and know-how embodiments. These provisions should be drafted with the specific insolvency mechanics of § 103 InsO in mind.
• Engage with the transposition process from the licensor's perspective. The transposition of the Directive will not only affect licensee protection. The choices Germany makes in implementing the pre-pack framework, and in particular any decision to introduce broader statutory protection for licensees, will directly affect licensors' ability to protect their IP assets in a licensee's insolvency. Licensor-side interests — including the case for validated narrow termination clauses in trademark and know-how licences — need to be represented in the legislative debate.

Conclusion

German pharma and biotech companies operate in a global market where legal frameworks are compared and transaction costs matter. A clear statutory regime for licences in insolvency would materially improve Germany's position as a jurisdiction for high-value IP licensing. Article 30(4) addresses part of the problem; the remainder requires domestic legislative action.

For licensors and licensees alike, however, the message is unambiguous, or more specifically, the question of what happens to a licence in an insolvency is not a theoretical one, and it cannot safely be left to the default rules of the InsO. Licence agreements, therefore, should be reviewed and contractual and structural protections should be put in place now. Engagement with the legislative process should begin as early as possible as the cost of inaction will be far greater than the cost of addressing these risks while there is still time to do so.