“It’s not what you don’t know that causes all the trouble, it’s what you know for sure that isn’t so”. That quote, variously attributed to Mark Twain, Walt Whitman and Satchel Paige is true in life, but is particularly true in law, and the recent decision of the United States 6th Circuit Court of Appeals, in Cincom Systems Inc. v. Novelis Corp (“Cincom”), is the perfect illustration. The case provides a valuable lesson to intellectual property (“IP”) owners and their lawyers that assumptions about the law that may relate to a transaction have the potential to cause no end of trouble.
In Cincom, a software licensee corporation (Alcan) became part of a new entity (Novelis) through a series of mergers and internal restructurings. When Novelis continued to use certain software originally licensed by Alcan, Cincom sued Novelis for infringement, as the terms of the licence provided that it was non-exclusive and non-transferrable without prior consent from Cincom. No such consent had been sought because, under Ohio state merger laws (which the lawyers assumed was the appropriate law as all the corporations were under Ohio law), the assets of Alcan would immediately vest in (or “flow” to) the surviving entity, Novelis. Surprisingly, the Court held that the transfer was impermissible and Novelis was liable for software infringement.
In formulating its decision, the Court differentiated between IP licences and other types of licences. It held that, although state contract law generally governed the interpretation of a licence and whether a merger results in a transfer, U.S. federal common law governed questions relating to the assignment of copyright licences. The rationale was primarily a policy-driven one, suggesting that unauthorized assignability of a licence by a licensee discouraged IP creators from licensing their technology if licensees could then transfer it to third parties, such as a licensor’s competitors, without the licensor’s consent. The decision in Cincom, therefore, suggests that under U.S. law, a non-exclusive IP licence is presumed to be non-assignable and nontransferable in the absence of express provisions to the contrary.
Canadian licensees of U.S. IP that are contemplating corporate reorganizations should closely scrutinize those agreements for anti-assignment provisions and seek the appropriate permission prior to completing a merger to ensure that licensing rights are not inadvertently diminished or lost or that unintended infringement of the licensor’s rights has not taken place as a result of the reorganization. More generally, where a Canadian corporation has an interest in any foreign intellectual property, whether from the U.S. or any other country, it should check with counsel in all those jurisdictions to ensure that any corporate transaction that is being contemplated will not have some unexpected impact on its IP rights.