What happens to a sub-licence when the head licence is terminated?

Photo taken by IP Draughts from London Eye during London Olympics 2012

Photo taken by IP Draughts from London Eye during London Olympics 2012

You can wait ages for a bus, and then several arrive at the same time.  Similarly, you can wait decades for any case law on the rights of a sub-licensee when the head licence terminates, and then find several cases in short succession.

This blog has reported on a pair of recent German cases where it was decided that a sub-licence of copyright survived termination of the head licence.  The comments to that posting discuss a similar position under US laws, apparently based on the law of agency.  However, for English authority, IP Draughts has had to dredge up the 1925 case of Austin Baldwin v Magnetic Car Company (1925) 42 RPC 454, which was understood to confirm that a sub-licensee has no greater rights than the head licensee, so that when the head licence terminates, so does the sub-licence.

Now, at last, we have a modern, English case on the subject.  In VLM Holdings Limited v Ravensworth Digital Services Limited [2103] EWHC 228 (Ch), decided on 13 February 2013 and reported here, Mann J has considered the rights of a sub-licensee of software in just this situation.

In essence, Mann J considered that there was no one-size-fits-all answer to this question.  He was not prepared to follow the submission of the IP owner’s counsel, that the legal maxim nemo dat quod non habet should be followed.  (IP Draughts is surprised to see Latin in an English court judgment.  He thought Lord Woolf had banned Latin from being used in the English courts.  A rough translation of this expression would be “no-one can give what he doesn’t own”.)

In Mann J’s judgment:

The real question is …as to the scope of the authority given by the head licensor to the sub-licensor.  That depends on all the facts. If the authority is sufficiently wide to allow the grant of a sub-licence which is capable of surviving the termination of the head licence, then the head licensor (copyright owner) must be taken as giving the ultimate permission himself, on normal agency principles.

The facts of this case had some distinctive features.  The IP owner and the head licensee were both in the same group of companies and had the same directors.  Mann J considered that the conduct of the IP owner was such as to grant agency authority to the head licensee to bind the IP owner to the terms of the sub-licence.  Mann J also considered various other legal principles put forward by counsel for the sub-licensee, including estoppel.

don't panicIP Draughts’ sense is that IP owners as a class should not panic as a result of this case, which turned largely on its distinctive facts.  IP owners should continue to include in their licence agreements a provision that states that sub-licences automatically terminate when the head licence terminates (obviously this is only appropriate if sub-licensing is allowed in the head licence agreement).

The key point is that English law is now less absolute than it was before, and perhaps a little closer to US law on this subject.  Parties should address the question of whether sub-licences survive in the contract, rather than make assumptions.

5 Comments

Filed under Contract drafting, Licensing

5 responses to “What happens to a sub-licence when the head licence is terminated?

  1. Below is a comment I received by email from Professor Norman Siebrasse:

    I believe that if this situation had arisen in the US, 11 USC §365(e)(1) would have prevented Holdings from terminating UK’s licence simply because of UK’s insolvency. That would have answered the ultimate question at issue, namely whether Holdings was in breach of the Ravenworth licence because it was not exclusive. As to whether the Spicerhaart’s licence survives, the question would be whether the trustee for UK could disclaim Spicerhaart’s licence. That is governed by §365(n) which provides that Spicerhaart can elect to retain its rights so long as it continues to make any royalty payments. One of the main reasons for this provision is to protect the reliance interest of the licensee; in effect, the US legislature has accepted the reasoning that Mann J expressed at ¶ 64 and codified the result. In the end, I think the result would have been the same, though on a statutory basis. I am not an expert in US law (particularly US bankruptcy law), so my analysis may not be entirely accurate, but these provisions would at least be relevant.

    Norman

  2. vrkoven

    I’m curious that you would advise IP owners as a matter of course to terminate sublicenses when the prime one terminates. Often the license in question is part of an OEM or reseller arrangement, in which case the marketability of the license in the first place is predicated on the licensee’s ability to deal with end users. Fine to have the right to issue new sublicenses end when the prime license agreement expires/terminates, but most such agreements in my experience explicitly state that previously granted sublicenses to end users continue. One doesn’t, after all, want to alienate the end user base.

    • Fair point, Vance, and I am thinking of a different set of facts to the ones you indicate. Perhaps I should say that IF you want the sublicence to terminate when the head licence terminates, then you should say so in the head licence agreement, and require the head licensee to include such a provision in the sublicence agreement, rather than assume that it will so terminate (which one might have been tempted to assume under English law, prior to this case being decided).

  3. gina.bicknell@freshfields.com

    Great post, Mark.

    ________________________________

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