A recent decision of Mr Justice Mann in VLM Holdings Limited v Ravensworth Digital Services Limited [2013] EWHC 228 (Ch) held it is possible that termination of a head licence on insolvency of the licensor does not necessarily mean a sub-licence becomes ineffective.

What was it all about?

VLM Holdings Limited (“VLM”) owned copyright in online software which was used to design printing materials. VLM granted an informal licence to its subsidiary, VLM UK Limited (“VLM UK”); this licence permitted the licensing of the software to other companies in the UK. A sub-licence was granted to the estate agent, Spicerhaart, to allow it to print property details. The reason Spicerhaart wanted the licence was to give itself some protection should supplies of printing from VLM UK be disrupted for whatever reason.

VLM UK went into liquidation which led VLM to terminate the informal licence between VLM and VLM UK. VLM then decided to grant an exclusive licence for the use of the software to Ravensworth Digital Services Limited (“Ravensworth”), which provided printing services to former clients of VLM UK. One of these clients was Spicerhaart and Ravensworth attempted to require Spicerhaart to purchase printing generated using the software licensed by VLM. However, Spicerhaart sought to rely on its continuing sub-licence and argued that it did not need authorisation from Ravensworth.

Ravensworth sought to claim that Spicerhaart’s supposed sub-licence negated its own exclusivity and claimed that this amounted to a material breach of the exclusivity agreement it had with VLM. The result was that Ravensworth stopped paying royalties and sought to terminate its licence with VLM. VLM counter-claimed that Ravensworth’s actions were in breach of contract.

The crux

The decision for the Court was whether or not Spicerhaart’s sub-licence with VLM was capable of surviving the termination of the informal head licence between VLM and VLM UK. If the sub-licence could be said to have survived, VLM would then be in breach of the terms of its exclusive licence with Ravensworth.

What was the result?

The judge did not agree with VLM’s submission that a sub-licence automatically terminates upon termination of a head licence. Mr Justice Mann said that as a licence was a permission to do something that would otherwise, in the absence of such a licence, be unlawful, the answer depended on a number of factors including the terms of the head licence, the terms of the sub-licence and consideration of what was actually terminated.

The judge was of the opinion that the implied authority of the licence between VLM and VLM UK was sufficiently wide to allow for the grant of a sub-licence to Spicerhaart which was capable of surviving any termination of the head license to VLM UK. The points which influenced his decision were that:

  • VLM and VLM UK had common directors.
  • VLM UK was the trading company and VLM’s directors allowed it to do what was necessary to exploit the software.
  • The sub-licence with Spicerhaart was something that the directors of both VLM and VLM UK wished to have in place to exploit the software further.
  • It was known to both VLM and VLM UK that the sub-licence was in place to protect Spicerhaart from disruption to its use of the software which was fundamental to its business. Immediate termination of the sub-licence would of course frustrate this intended purpose of the sub-licence.
  • The terms of the sub-licence stated that VLM UK was the owner of the copyright. VLM allowed the directors of VLM UK to make this statement and were happy to do so.

What followed was an examination of the rules of agency and it was held that as Spcierhaart was unaware that VLM UK was not the owner of the copyright, VLM was to be treated as an undisclosed principal and therefore under normal agency rules the permission of the sub-licence to Spicerhaart should be treated as permission by both VLM UK and VLM.

The final conclusion of the judge was that the Spicerhaart licence could indeed survive and therefore Ravensworth’s actions could not be considered as a breach of contract as VLM had in fact breached its agreement with them by not offering them exclusivity.

Implications

Organisations need to pay special attention to any intra-group licensing agreements. More often than not these may not be recorded in writing; alternatively, insufficient care may be taken to ensure that they are effectively well-drafted. Any intra-group licence should be formalised in an agreement and should provide that sub-licences: (i) disclose the identity of the head licence and (ii) state expressly that the sub-licence will terminate upon termination of the head licence. In addition, as a licensor, when licensing a work to a publisher or distributor, care should be taken to provide expressly for what happens in the event that the head licence comes to an end or is terminated.

This issue is not restricted to English law. Some foreign courts have been more sympathetic to the obvious potential injustice in the strict application of the termination of a sub-licence upon a head licence being revoked. A notable case before the German Federal Court, ‘M2Trade’ (GRUR 2012 pg 916), determined that despite the fact a head licence was terminated due to non-payment of an agreed licence fee, the sub-licence was capable of surviving. The court took a different approach to VLM and was of the opinion that, unless there is an explicit agreement otherwise, a sub-licence should not automatically terminate upon the cancellation of a head licence. A way in which parties can protect their position is to ensure that any sub-licence agreement contains adequate provisions detailing what is to happen, should the head licence fall away for whatever reason.

Further, it is noted that sub-licences may continue to subsist despite the occurrence of an insolvency event. Insolvency advice and measures should therefore be tempered accordingly.