Assignment
Licence agreements
Software escrow
Comment
Until the amendment to the Copyright Act entered into force in October 2020, copyright licensees were unable to assert their licences against new copyright holders in Japan. Due to the amendment, this is now possible. This article discusses the implications of the amendment from the perspective of a copyright holder or licensor.
Since copyright licensees can now assert their licences against new copyright holders, new copyright holders will obtain a copyright with their licences. Therefore, potential purchasers of a copyright are likely to conduct due diligence to ascertain whether there is a licence associated with the copyright in question. It is also likely that potential purchasers will request that the copyright holder represent and warrant, in a copyright assignment agreement, that there are no copyright licences associated with the copyright in question if no licences are found during the due diligence process. Therefore, copyright holders must properly manage the status of licences and exercise due care not to grant a licence accidentally (eg, by accepting a provision under which a broad copyright licence is granted).
Further, during the due diligence process, it is likely that licence agreements will need to be disclosed to potential purchasers. If a licence agreement provides that the content thereof constitutes confidential information that must not be disclosed to a third party without the other party's consent, the licensor may need to obtain the consent of the licensee. In order to avoid having to obtain the licensee's consent, it would be advisable to include a clause that allows the licensor to disclose the content of the licence agreement to a potential purchaser of the licensed copyright.
The first question that arises in relation to the amendment is what it means for copyright licensees to assert their licences against new copyright holders. Clearly, a new copyright holder cannot exercise the copyright in question against the licensee within the scope of the licence. However, whether the licence agreement will be assumed by the new copyright holder remains open to debate as there is no case law addressing this issue. There are many theories in this regard, ranging from no assumption at all to complete assumption, with many variants of partial assumption in between.
From a practical point of view, it is safer to consider that licence agreements will not be assumed and to prepare licence agreements based on this assumption. Therefore, from the standpoint of the existing copyright holder or assignor, it would be desirable to set out in the licence agreement a clause which provides that on the assignment of the licensed copyright, the licensee agrees that the licence agreement will be assumed by the new copyright holder and that the current copyright holder or assignor will exit therefrom. It would be cumbersome for the current licensor or assignor to remain the licensor; for example, if the current licensor or assignor had to receive periodic royalty payments from the licensee and subsequently pay them to the new copyright holder or assignee. In such a case, the copyright assignment agreement must stipulate that the assignee assumes the assignor's contractual status under the licence agreement. Supposing that the licence agreement will be assumed by the assignee, it may be prudent not to grant a sublicensable right and an exclusive licence if there is a possibility that the licensed copyright will be assigned in the future because sublicensable rights and exclusive licences tend to be disfavoured by copyright assignees and could become an obstacle to assignment.
That being said, since the moral rights of authors are inalienable under the Copyright Act, a copyright assignee is not in a position to promise that it will not exercise the moral rights of authors against the licensee even if the assignee assumes the contractual status of the licence agreement from the assignor. Therefore, if there is a provision relating to moral rights in the licence agreement (typically, a covenant not to exercise moral rights), it is likely that the licensee will request that the assignor remain liable for the provision. This can be dealt with by executing a short memorandum between the assignor and the licensee or by stipulating in the licence agreement that the assignor or licensor will remain responsible for the provision.
Software escrow has not been commonly used in Japan. One reason for this is that prior to the entry into force of the amendment to the Copyright Act in October 2020, upon the bankruptcy of a licensor – a typical case in which software escrow is used – the trustee of the licensor was generally able to terminate the licence agreement in question under bankruptcy law. If the licence agreement is terminated, the licensee loses the right to use the source code of a computer program held in escrow, thus rendering software escrow meaningless. Under the Bankruptcy Act, a trustee may be able to terminate a licence agreement unless the licensee is able to assert its licence against a third party.
Because the amendment to the Copyright Act has made licensees eligible to assert their copyright licences against a third party, trustees are no longer able to terminate copyright licence agreements due to a licensor's bankruptcy. Accordingly, software escrow upon a licensor's bankruptcy may no longer be meaningless and the use of software escrow may increase. An increase in the use of software escrow – under which licensors must deposit their source code and related documents, which are likely to constitute important trade secrets – may not always be unfavourable to licensors. On account of copyright licences possibly not being protected when licensors become bankrupt prior to the entry into force of the amendment to the Copyright Act in October 2020, it was often the case that potential licensees requested assignment of the copyright in question rather than obtaining a licence, especially when a potential licensor looked economically vulnerable (eg, if it was a start-up company). Now, a potential licensor may argue that assignment is unnecessary since the potential licensee may be protected by software escrow, securing the right to use the source code after the potential licensor becomes bankrupt.
As the change in the status of copyright licensees is new, the development of related practice must be carefully monitored. It is hoped that this change will facilitate copyright licensing transactions in Japan, as the unstable status of licensees has often been an obstacle in licensing transactions.
For further information on this topic please contact Hiroyuki Kikuchi at Nishimura & Asahi by telephone (+81 3 6250 6200) or email ([email protected]). The Nishimura & Asahi website can be accessed at www.nishimura.com.