Executive Summary
In a pivotal ruling, the Israeli Supreme Court has affirmed that patents sold in the context of judicial insolvency proceedings are considered “assets” under Section 34a of the Israeli Sale Law. This classification ensures that buyers in judicial insolvency proceedings obtain “clean title” to the patent, free from existing claims. This decision brings greater certainty to buyers of intellectual property assets in distressed situations, but leaves ambiguities regarding the treatment of pre-existing licenses and obligations tied to Israel Innovation Authority (IIA) funding. Prospective buyers of patent assets must assess the risks and opportunities this ruling presents to make informed strategic decisions.
Summary of Case
4052/19 ISM Construction Ltd. v. Tadbik centered on the sale of a patent as part of insolvency proceedings, where the buyer invoked Section 34a of the Sale Law to secure protection. This provision ensures that assets sold under court supervision are transferred to buyers without prior claims. Appellants argued that they were the true inventors of the invention claimed by the patent and sought its transfer to their ownership. They argued that issues related to patent validity and investor ship identity fall outside the scope of protection afforded by Section 34a and should not be shielded by its provisions. The Court, however, held that Section 34a applies to patent assets, granting the buyer secure ownership free from prior claims. However, the court emphasized that this protection does not insulate the patent from challenges to its validity.
The Court’s decision clarifies several key aspects of Israeli law regarding patents in distressed sales:
- Patents as Assets under Section 34a:
- The Court affirmed that patents qualify as “assets” within the meaning of Section 34a, thus extending “clean title” protections to intellectual property. Buyers of patent rights through court or governmental proceedings acquire these rights free from previous ownership claims.
- Validity Challenges Remain:
- The Court clarified that while Section 34a resolves ownership disputes, patents remain open to validity challenges. Third parties can contest a patent on grounds such as lack of inventiveness or improper inventorship. Buyers should note that owning a patent does not guarantee its enforceability.
- Encouraging Market Participation:
- The decision enhances transactional certainty, making patents sold in insolvency scenarios more attractive to buyers. It aims to facilitate the efficient liquidation of distressed assets by reducing the legal risks associated with ownership disputes.
Where the Case Is Ambiguous: Licenses and IIA Obligations
While the ruling provides crucial clarity on patent ownership under Section 34a, it leaves significant questions unanswered, particularly regarding pre-existing licenses and obligations linked to Israeli Innovation Authority (IIA) funding.
1. Treatment of Existing Licenses. Section 34a is ambiguous, and the court did not expressly address, whether the “clean title” it provides extends to pre-existing licenses or covenants not to sue associated with the sold patent. As such, it remains unclear whether licenses granted by the previous patent owner persist post-sale, allowing licensees to maintain their rights under the new ownership.
2. Funding Obligations: Intellectual property developed with Israeli government funding from the Israeli Innovation Authority are often subject to significant obligations, including mandatory repayment of grants and limitations on transferring or licensing the patent outside of Israel without prior approval. The Court’s decision does not clarify whether the “clean title” provided under Section 34a would release buyers from these obligations. We note, however, that the position of the IIA seems to be that a court-supervised sale does not sever these funding conditions.
Given these ambiguities in the court decision, buyer should always conduct rigorous due diligence on the purchase of intellectual property assets, especially to investigate whether the patent is encumbered by existing licenses or IIA obligations. In addition, buyer should seek indemnities or contractual protections in acquisition agreements to manage potential liabilities.
Conclusion
This landmark ruling brings clarity to the treatment of patents in insolvency sales, making the Israeli market for distressed intellectual property more accessible and predictable. However, unresolved questions regarding licenses and IIA funding obligations introduce potential risks. Buyers should consult with legal advisors to address these uncertainties.
This publication is provided as a service to our clients and colleagues, with explicit clarification that each specific case requires individual examination and discussion in writing.
The information presented here is of a general nature and is not intended to answer the unique circumstances of any individual or entity. Although we strive to provide accurate and available information, we cannot guarantee the accuracy of the information on the day it is received, nor that the information will continue to be accurate in the future. Do not act on the information presented without appropriate professional advice after a comprehensive and thorough examination of the specific situation.
