First published in LES Insights
Unable to obtain the licensor's consent to assign the license agreement—a requirement of the agreement—the licensee transferred to a third party all its interests for the entire term of the license, except for one day, and labeled the transfer a "sublicense." Looking beyond the "sublicense" label and finding the retention of the single day inconsequential, the Eleventh Circuit used Florida law that requires reviewing case-specific factors rather than a bright-line test and concluded that the transaction was an assignment and thus a breach of the license agreement.
License agreements often include provisions governing whether the licensee can assign or sublicense its interests in the agreement. Depending upon the particular provisions, a licensee may have an incentive to characterize a transfer of interests in the license agreement as either an assignment or a sublicense. In a recent case, MDS (Canada) Inc. v. Rad Source Techs., Inc.,1 (11th Cir. 2014), the U.S. Court of Appeals for the Eleventh Circuit applied law from the Supreme Court of Florida that no bright-line rule exists for determining whether a transfer of interests in a license agreement is an assignment or a sublicense. Rather, many context-specific factors, key among them the intention of the parties, control.
Rad Source and Nordion signed a license agreement under which Rad Source licensed a group of patents covering blood irradiation technology to Nordion. The license was to expire simultaneously with expiration of the last patent. The license required Nordion to obtain Rad Source's consent before assigning its interests in the agreement to another entity, but no such requirement existed for Nordion's grant of a sublicense. Unable to obtain Rad Source's consent to assign the license, Nordion transferred to Best all of its interests for the entire term of the license, save one day, and labeled the transfer a "sublicense agreement." The same year, under an asset purchase agreement between Nordion and Best which included the licensed patents, Nordion agreed to leave the blood irradiation business. In addition, while Nordion remained liable to Rad Source under the license agreement, Nordion obtained a full indemnification from Best under the sublicense. Rad Source began marketing a new product related to the licensed technology. Nordion and Best sued Rad Source for allegedly breaching a non-compete clause in the license agreement. Rad Source countered that Nordion was in breach for its improper assignment to Best. After receiving guidance on relevant Florida law from the Florida Supreme Court, the Eleventh Circuit decided whether the transfer to Best was an assignment without consent—and thus a breach of the agreement—or a sublicense.
The MDS Decision
The Supreme Court of Florida rejected the use of a bright-line rule to determine whether a license agreement is an assignment or a sublicense and outlined several factors for the Eleventh Circuit to apply in its determination. Chief among them was the intention of the parties, as set forth in the original license agreement. The Eleventh Circuit reasoned that Rad Source and Nordion never intended that Nordion could circumvent the consent requirement for assignment by transferring its entire interests in the license agreement, save only one day, and labeling it a sublicense. Thus, this key factor indicated that the transfer to Best was an assignment. Additionally, because the last of the patents expired simultaneously with expiration of the license agreement, Nordion essentially transferred to Best all substantial rights in the patents for their entire term, save only one day. The court declared the retention of one day "inconsequential," particularly given that Nordion was required to leave the blood irradiation business entirely. That Nordion transferred all substantial patent rights to Best for the remaining life of the patents strongly indicated that the transfer to Best was an assignment. Moreover, the court found that the fact that Nordion named the transaction a sublicense did not control as the substance of the agreement, rather than the label that the parties affixed to it controlled. Finally, the court identified two factors which, under different circumstances, could indicate that the transaction was a sublicense. First, Nordion remained liable to Rad Source under the license agreement. Nordion, however, never had the legal ability to divest itself of liability without Rad Source's consent, and it even obtained a full indemnification from Best. Second, Nordion retained the right to use the licensed technology after the conclusion of the license agreement. But, the court noted, the patents were to expire simultaneously with the license agreement, rendering any such retention inconsequential.
Strategy and Conclusion
This case serves as an example of a court refusing to place form over substance. Though the licensee retained one day of the license term and characterized the transaction as a "sublicense," the court found that the transaction was substantively an assignment. The case also shows that the intention of the parties is a key factor to interpreting licensing provisions. Lastly, this case illustrates the importance of keeping both short- and long-term business goals in mind when entering into license agreements and drafting provisions that clearly reflect the intention of the parties.