Technology: Licensee transferability rights are unique under the law

Avoiding M&A surprises

This series addresses the needs the legal community has for technology licensing knowledge by laying out basic concepts, identifying traps for the unwary and offering drafting and negotiating tips Click here to read parts one, two, three, four and five.

Most contract rights are transferable, absent an express anti-transfer prohibition in the agreement (or if the transfer would materially burden the other party). Additionally, in a statutory merger, the contract rights of the parties generally are deemed automatically vested in the surviving entity without the need for an assignment.

Inbound IP license agreements, however, are treated quite differently under the applicable federal common law. 

The first difference is that the federal courts have consistently held that the licensee position in a non-exclusive patent or copyright license is by default (i.e., when silent as to transferability) not transferable by the licensee. This would, of course, also be the result if the agreement contained an anti-transfer or anti-assignment provision.

The second difference, and probably more significant for practitioners, is that in many mergers an inbound license agreement will be deemed transferred in a manner that would trigger applicable anti-transfer restrictions (either explicit restrictions in the agreement or the default prohibition when the agreement is silent). Many licensees, therefore, will need permission from their licensors prior to the consummation of a merger to avoid an impermissible transfer of the license.

A recent 6th Circuit case, Cincom Sys., Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009), provides a good illustration. The technology vendor, Cincom Systems, licensed its software to Alcan Rolled Products Division (Alcan Ohio) in 1989. In 2003 Alcan Ohio was merged into an affiliate and, after further internal corporate restructuring, the surviving entity became known as Novelis. Throughout these transactions the software remained on the same computers in the same physical location. Once Cincom Systems learned of these corporate changes it sued for breach and copyright infringement. 

Novelis responded, in part, by asserting there was no transfer of the license because the applicable merger statute provided that “the surviving or new entity possesses all assets and property . . . all of which are vested in the surviving entity or new entity without further act or deed.”  

The 6th Circuit disagreed, stating that: “A transfer is no less a transfer because it takes place by operation of law . . . Federal common law, and the actual language of the license in this case is clear: the only legal entity that can hold a license from Cincom is Alcan Ohio. If any other legal entity holds the license without Cincom’s prior approval, that entity has infringed Cincom’s copyright because a transfer has occurred.”

Drafting Tip for Licensees: Seek a broad right to transfer that includes successors pursuant to acquisition by stock or asset sale, merger, consolidation or other corporate restructurings or reorganizations.

Drafting Tip for Licensors: Since the transfer of non-exclusive license rights can sometimes lead to significant unintended consequences (such as transfer to a competitor), consider a broad “deemed transfer” clause that would require your permission prior to any change of control by stock sale, merger or the like.

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