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Nov 2009
03
November 03, 2009

Intellectual Property Licenses in Mergers and Reorganizations - Don't Pay For Your Software Twice

Are you considering a merger transaction? Or perhaps you are considering a merger of affiliated entities to accomplish a reorganization of your corporate structure? Whatever the purpose of the merger transaction or reorganization, you need to beware to not inadvertently make a prohibited transfer of software, trademark or other intellectual property licenses in the transaction. The consequences of not carefully considering this issue can be problematic to your business and very expensive.

Under state laws, merger transactions were generally understood to not result in a transfer or assignment of a license agreement to the merged entity. Rather, a license agreement was understood to automatically vest in the merged entity by "operation of law." As a result, license agreements that generally disallow transfer or assignment without the consent of the other party, or that are silent on the issue, were believed to be automatically vested in the merged entity without any further action by the parties to the contract, including seeking consent from the other party. A recent decision of the Sixth Circuit Court of Appeals makes it clear that for intellectual property licenses, including software and trademark license agreements, this is not the case.

In the decision of Cincom Systems, Inc. v. Novelis Corp., the Sixth Circuit Court of Appeals held that a corporate reorganization involving a series of merger transactions resulted in a prohibited transfer of an intellectual property license to the merged entity. The court concluded that federal law imposes a presumption that intellectual property licenses are "non-assignable and nontransferable in the absence of express provisions to the contrary." "[W]here state law would allow for the transfer of a license absent express authorization, state law must yield to the federal common law rule prohibiting such unauthorized transfers."

The Cincom decision instructs that, unless an intellectual property license expressly permits transfer or assignment (most do not), consent of the licensor is required in a merger transaction. Absent consent, the transfer of the license resulting from a merger transaction is prohibited. The practical and bad consequences can be that use of the licensed intellectual property is no longer permitted or that the licensor can charge an entirely new fee, often substantial in amount.

When considering a merger transaction with a third party or for a corporate reorganization, the following are important:

  • Each intellectual property license agreement, including software or trademark agreements, of the parties to a merger or reorganization must be reviewed by your lawyers to determine whether assignment or transfer is freely permitted, whether advance consent is required, or whether the agreement is silent on the issue. In most cases, consent of the licensor will be required.

  • For license agreements requiring consent or which are silent on the issue, the consent of the licensor should be obtained. This can be problematic because the licensor is in a position to hold a transaction hostage by withholding consent, requiring a large transfer fee or insisting on the purchase of a new license.

If you have questions, please contact Charlie Goode (616.752.2176 or cgoode@wnj.com) or Jeff Battershall (616.752.2169 or jbattershall@wnj.com) or any member of the WNJ Business and Corporate or Technology and Intellectual Practice Groups.

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