The High Court recently decided that a sub-licensor’s relationship to a superior licensor is that of an agent and principal. Therefore, provided a sub-licensor has sufficient authority, further sub-licences it grants may bind a superior licensor.

In VLM Holdings Ltd v Ravensworth Digital Services Ltd, the Claimant (“TopCo”) had granted an informal licence to its subsidiary (“SubCo”), which in turn granted a sub-licence to a third party (“Spice”). When SubCo went into liquidation, TopCo terminated its licence with SubCo and claimed to terminate any licence that SubCo had granted.  TopCo then granted a new and exclusive licence to a seperate third party (“Raven”).

Spice continued to rely on its sub-licence, and Raven claimed that there was a material breach of its exclusivity. As a result of this breach, Raven said it was entitled to terminate its licence with TopCo and cease paying royalties. TopCo then brought an action against Raven for breach of contract, and Raven counter-claimed for the same.

The question for the Court to decide was whether Spice’s sub-licence survived the termination of the TopCo/SubCo licence and/or SubCo’s liquidation and, if so, was the subsequent breach of Raven’s supposed exclusivity material and/or remediable.

The only English authority on the issue of a sub-licence surviving termination of an original grant is Baldwin v Magnetic Car Company (1925) 42 RPC 454. There it was held that the termination of a superior licence also brought a sub-licence to an end. However, in that case the decision rested on the terms of the licence and thus it was confined to its facts.

In the present case, the Court examined the nature of a licence, which is a contractual permission rather than a proprietary right. The question then becomes ‘who has permitted whom to do what’. The answer to a sub-licence’s survivability therefore depends on the sub-licensor’s authority, i.e. was there sufficient authority for the sub-licensor to grant a licence which survives termination of the original grant?

In examining the nature of the sub-licensor’s authority, the Court turned to the principles of agency. On the facts, TopCo had not only been aware of the grant of a sub-licence to Spice, but had actually implicitly consented and authorised SubCo to grant it. Spice itself was not aware that TopCo was the ultimate licensor; however the principles of undisclosed agency meant that in granting a sub-licence to Spice, SubCo had been acting with the authority of an agent to bind TopCo as its principal. Consequently, the licence survived TopCo’s purported termination of SubCo’s licence and the latter’s liquidation.

Further, the Court also found that the breach was material and had not been remedied. It dismissed TopCo’s claim while granting Raven’s counter-claim.

Comment: The decision in VLM is an interesting one and, despite the prima facie issue of privity of contract, the Court has adopted a sensible and logical route to establish a contractual relationship between an original licensor and a sub-sub-licensee using the principles of agency. Whether there is authority will of course depend on the facts, and licensors should be very careful when granting a sub-licensable licence that the terms on which they do so are clear and express so as to avoid an agency relationship being implied.

The full text of VLM Holdings Ltd v Ravensworth Digital Services Ltd [2013] EWHC 228 (Ch) (13 February 2013) can be found here: http://www.bailii.org/ew/cases/EWHC/Ch/2013/228.html