Take 5 and enjoy your sublicence rights

If you have sharp antennae you may have registered the noise surrounding two recent German Federal Court decisions on sublicensing.  The cases, known as the Take 5 case and the M2Trade case, are discussed thoughtfully on pages 7 to 10 of this German law firm’s newsletter, which also gives references for the cases.  These decisions confirmed that, under German law, a sublicence of copyright continues after the head licence has been terminated.

Although decided in the division of the court that deals with copyright and trade marks, the court  consulted with the division that deals with patents before issuing its decision, and the latter division raised no objection.  It is thought, therefore, that the decisions are applicable to all types of IP.  However, the article linked above raises some doubts about whether the case would apply to patent licensing.

Readers who wish to stay calm while reading about this outrageous state of affairs may wish to play the jazz classic Take 5 (so named because of its unusual quintuple – 5/4 – time) on their computer while reading this article  – available on YouTube here. At their own copyright risk, of course.

The conventional English law view is that a sub-licensee can have no more rights than his sub-licensor is entitled to grant, so that when the sub-licensor’s rights come to an end, for whatever reason, so do the sub-licensee’s.  The sub-licensee has no contractual relationship with the IP owner and cannot enforce any rights against him.

Although there is very little case law on the point, support for this view is given by an old pair of English cases, the Austin Baldwin cases (1925) 42 RPC 454.  (But equity may intervene in some situations: see Fomento (Sterling Area) Ltd v Refill Improvements [1963] RPC 163.)

The position under US law is stated by the learned authors of Drafting Patent License Agreements (Brunsvold et al., 6th edition, BNA Books, at page 52) to be as follows:

Unless the agreement with the licensee provides otherwise, an authorized sublicense will continue despite the early termination of the license agreement.*

*But see Rhone-Poulenc Agro, 284 F.3d at 1333 (finding that a sublicensee was not entitled to continue as a bona fide purchaser after the license agreement was rescinded by the licensor because of fraud by the licensee).

IP Draughts is scratching his head over whether “the agreement with the licensee” in this context means the head licence agreement or the sublicence agreement.  If the head licensor can cause a sublicence to terminate by a term in the head licence agreement, then perhaps the position in the US is not so different from the English law position.  But IP Draughts suspects this quoted text is referring to a term in the sublicence agreement.

Thus, the position seems to vary between countries.  How is a licensor supposed to deal with this international uncertainty and protect his interests?  A number of alternatives spring to mind:

  1. The licensor requires prior approval of all sublicence agreements, to ensure that they deal explicitly with what happens on termination of the head licence.  Possible alternatives might include (a) stating that the sublicence terminates, or (b) stating that the sublicence continues as an agreement with the head licensor.
  2. The licensor does not attempt to directly control the content of sublicence agreements, and instead merely requires the head licensee to include provisions such as those referred to in item 1(a) or (b) above in the sublicence agreement.  Perhaps the right to sublicense should be stated to be conditional upon such provisions being included.  However, it is not clear to IP Draughts whether this would have any effect on the rights of the sublicensee in those jurisdictions where a sublicensee’s rights continue, unless (perhaps) it could be shown that the sublicensee was aware of these provisions and somehow agreed to them.  In any event, a head licensor should be very cautious about agreeing to be bound by a relationship with a sublicensee, and sublicensing terms, that he has not seen in advance and approved.
  3. The licensor doesn’t even go as far as item 2 above, and merely states in the head licence agreement that one of the consequences of termination of the head licence is that sublicences also terminate.  It seems doubtful whether this provision would work under German or US laws, if the commentaries referred to above are correct.
  4. If the head licensor wishes to clarify the terms on which any sublicence agreement would continue after termination of the head licence, he could enter into a side agreement with the sublicensee, eg at the same time as the sublicence agreement is signed, to deal with these points.

While item 1 above seems to be the strongest of the first three alternatives to protect the interests of the head licensor, it may be considered impractical in some licensing relationships, eg because the head licensor lacks either the bargaining power or the resources to manage sublicence agreements in this way.  Do readers agree with these thoughts?  Do you have any other suggestions?

5 Comments

Filed under Contract drafting, Intellectual Property, Licensing

5 responses to “Take 5 and enjoy your sublicence rights

  1. theContractsGuy

    Mark: I was intrigued, so I checked in with one of my IP partners. Here’s his response:

    Regarding the two US cases cited, I believe there is a clear distinction.
    With a license voidable by fraud, it is as if the license never occurred, and thus there was never any power to sublicense.
    With a terminated license, there was once a power on the part of the licensee to sublicense. The continuing power to grant licenses is what is terminated. Hence, those sublicenses, once authorized and within the licensee’s power to grant, continue on after termination of the main license.

    • Brian, putting the second half of your comment together with some of the other comments in the Brunsvold book, the idea that the sublicence continues under US law looks to me like it might be based on an agency theory, ie the IP owner is granting the licensee an authority to enter into sublicences and in exercising this authority the licensee acts as the IP owner’s agent to commit the IP owner to continue the sublicence even after the head licence is terminated.

      • I am sorry the text of Drafting Patent License Agreements (6th Ed) is confusing on this point. I believe in context it is clear that a sublicense would continue despite early termination of the license agreement unless there is a provision to the contrary in the main or head license agreement. Obviously, if such a provision is in the main license, it should be carried forward to the sublicense agreement and it would be good practice for the licensor to require the licensee to include such a provision in any sublicense agreement. This principle is supported by commentators but there seems to be no judicial decision in direct support. The agency rationale you present is probably best — authorized contracts entered into by an agent remain in effect and are binding on the principal in accordance with their terms even after termination of the agency. But, if the sublicense continues after termination of the license, without specific provisions in the sublciense, under what principle does the sublicensee thereafter render performance to the licensor who is not a party to the sublicense agreement (third party beneficiary?)?

      • Thanks, Pat. I think Drafting Patent License Agreements is a great book, by the way.

        The agency theory puzzles me, and raises the interesting question that you put. I haven’t come across this theory in English law. Whatever the theory, we seem to be in the territory of a (sub-)licensee having a quasi- or actual property right that survives termination of a contractual relationship. Which brings us back to the issues we discussed in relation to licences and covenants not to sue, which is the subject of a separate posting.

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