VLM Holdings Limited –v- Ravensworth Digital Services Limited [2013] EWHC 228 (Ch)

Précis – In February 2013, the High Court ruled that businesses are permitted to use software under a sub-licence if the head licensee’s business is terminated or becomes insolvent. This ruling, however, is dependent upon the “scope of authority” given to the sub-licensor by the head licensor.

What?

VLM Holdings Limited owned copyright in online software for the design and despatch of printing materials. VLM Holdings Limited granted an informal licence to its subsidiary, VLM UK Limited (“VLM UK”), to license this software to other companies in the UK. VLM UK granted a sub-licence to Spicerhaart, a UK estate agency, providing Spicerhaart with the right to use the software under certain terms.

VLM UK became insolvent and VLM Holdings Limited claimed to terminate any licence VLM UK had granted under the software. VLM Holdings Limited then granted an exclusive licence for the use of the software to Ravensworth, which provided printing services to former clients of VLM UK (including Spicerhaart). Spicerhaart, however, wanted to rely on its continuing licence. Ravensworth claimed that this amounted to a material breach of exclusivity with regards to its licensing agreement with VLM Holdings Limited. As a result, Ravensworth stopped paying royalties and sought to terminate its licence. VLM Holdings Limited claimed that Ravensworth’s actions were a breach of contract.

The High Court ruled that Ravensworth’s actions did not amount to a breach of contract and were justified on the basis that the original licence granted to Spicerhaart survived VLM UK’s insolvency. In the judgment, Mr Justice Mann also explained that the fact that the parent and subsidiary had common directors implied that VLM Holdings Limited was bound by its subsidiary’s sub-licensing agreement with Spicerhaart. The sub-licence survivability was determined by looking at whether the sub-licensor had sufficient authority to grant a licence that survived the circumstances in the case. The High Court looked at the principles of agency and determined that VLM Holdings Limited had authorised VLM UK to grant the sub-licence.

So what?

The case highlights that owners of intellectual property rights, particularly in large organisations, need to pay particular attention to intra-group licensing agreements or sub-licences. They should be keenly aware that important issues, such as the licensing chain in the event of an insolvent subsidiary, should be addressed expressly and in detail. If these details are not addressed within a formal agreement, the principles of agency are likely to be implied and may result in an unwanted consequence. Despite a parent company and subsidiary being treated as separate corporate entities under the law, the common aim in this particular case (i.e. the licence of copyright) was sufficient for the High Court to treat them as acting in tandem.

This decision is also of commercial significance to insolvency practitioners who should be aware that some intellectual property agreements may survive, despite the termination of a business, particularly if it is part of a larger organisation.

A full judgment of the case is available here.