Licenses Do Not Automatically Transfer in the Merger or Sale of a Business

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October 29, 2009


A recent decision by the U.S. Court of Appeals for the Sixth Circuit underscores the danger of assuming you can transfer IP licenses in a merger or business sale without the express consent of the licensor.

In Cincom Systems Inc. v. Novelis Corp., Cincom granted a license to Alcan Ohio to use its database management software. The license stated that it was “non-exclusive and nontransferable,” that the software was “the proprietary and confidential information of Cincom,” and that Alcan could “not transfer its rights or obligations without the prior written approval of Cincom.”

Several years later, Alcan reorganized through a series of mergers to become Novelis. While the licensed software remained on the same computer and site as specified in the license, Alcan failed to seek Cincom’s permission to continue using the software before engaging in the reorganization.

The Sixth Circuit affirmed the finding by the U.S. District Court for the Southern District of Ohio that Novelis committed copyright infringement because the software license had not been properly transferred to Novelis.  The court stated that it was applying federal common law to hold that “in the context of intellectual property, a license is presumed to be non-assignable and non-transferable in the absence of express provisions to the contrary.” The court further explained that it would have reached the same result had the license been silent as to the issue of transfers. The court rejected Novelis’ argument that the federal common law was developed to prohibit transfers to a licensor’s competitor and should not be applied to a “friendly” reorganization.

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The case is significant in that the court also rejected Novelis’ argument that, based upon the language of Ohio’s merger statute, Novelis had accomplished the reorganization through affiliate mergers that did not result in a transfer or an assignment. Ohio’s merger statute was amended to be consistent with the Model Business Corporation Act (MBCA), which in comments interpreting the relevant language explicitly states that a merger is not to be considered a conveyance, transfer, or an assignment. Construing the amendment as “cosmetic,” the court found that the legal entity had changed as a result of the merger and concluded that “if any other legal entity holds the license without Cincom’s prior approval, that entity has infringed Cincom’s copyright.” The relevant language of the Ohio statute is identical to that of a large plurality of other jurisdictions whose laws are heavily influenced by the MBCA, including Delaware.

Conclusions

Licensees entering into corporate transactions, including internal reorganizations, should anticipate having to get the licensor’s consent unless an unambiguous clause provides authorization in the license. In entering into licensing arrangements, licensees should carefully draft license terms that relate to assignment, transfer, and merger.  Provisions that merely address assignments in terms of asset sales and do not address mergers, while frequently used in the context of other commercial agreements, could prove costly to licensees under the Cincom decision.

For more information, please contact Jay MacDonald, 215.864.8733 or [email protected], or Robert Baron, 215.864.8335 or [email protected].


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