Monday, 5 October 2009

What Happens to a Sublicence When the Main License Comes to an End?

We once again delve into that most murky of IP licensing topics--sublicensing. When one considers the number of trees, if not entire groves, that have been felled to provide the paper needed for books and articles on licensing, then a mere tree or two is all that has been required to publish the entire corpus on sublicensing (full disclosure--at least one or two branches have been devoted to my own publications on the topic).

Perhaps the most interesting legal issue that arises out of sublicensing is the question of what happens to the validity of a sublicence if the main licence comes to an end. After all, while the IP rights being sublicensed derive from the licensor and not from the licensee/sublicensor, the sublicence agreement itself is between the sublicensor and sublicensee; as a contractual matter, the licensor is absent.

I remember that when I first began to examine the question, I asked a local colleague--who stated, with complete confidence, that the sublicence must come to an end with the termination of the main license. I then contacted a distinguished IP colleague abroad, who opined with absolute assurance that the termination of the main licence had no affect on the validity of the sublicence. Neither pointed me to any case law that has dealt with the issue on a principled basis. More to the point, surely both cannot be right. So what are the points for and against each of these contrary positions?

Sublicense Terminates with the Termination of the Main Licence

1. If the sublicensee is assumed to take rights of use in the IP through its agreement with the licensee, and the scope of the sublicence is bounded by the scope of the main licence, then when the main licence comes to an end, the basis for the grant of sublicence no longer exists. If that is the case, then the sublicensee is in breach of its use of the IP rights that were with the subject of the sublicence. The licensor can chose not to exercise its negative right against the "unauthorized" use of its IP rights; but, if it does choose to exercise its rights against the sublicensee, the sublicensee has no defence based on the erstwhile sublicence.

Comments

The parties can attempt to avoid this result by agreement. Thus the sublicence agreement can include a provision that the sublicence survives the termination of the main license. Query: does the licensor also need to be a signatory or otherwise to express its consent to such a clause?
Sublicence Does Not Terminate

1. It has been argued that when a sublicensee has lived up to the terms of its sublicence, then it would be inequitable that the sublicence be deemed to have been revoked, especially when the sublicensee has invested materially in the performance of the sublicence (see Ellis, Patent Licenses (3d ed. 1958).

2. The sublicence is in essence an agreement between the licensor and sublicensee, the validity of which is unaffected by the status of the main licence (see Brunsvold and O'Reilly, Drafting Patent License Agreements, 4th ed.)

Comments

i. The difficulty with the first point is that its appeal to equitable principles may be limited to common law jurisdictions. Also, it requires a case-by-case determination,which makes it unsatisfactory as a basis to support the general proposition.

ii. As for the second point, there is no compelling basis to support the conclusion that the default position is that the fundamental relationship is between the sublicensee and licensor.

iii. With respect to a trade mark licence governed by the law of a jurisdiction where quality control is required, the licensor may have relied upon the licensee to carry out the quality control function. If so, the licensor may not be in a position to ensure continuing quality control if the licensee is no longer tied contractually to the licensee.

The upshot of the foregoing is that there does not appear to be any single position on the question that can be viewed as being the better one. In such a circumstance, the sublicensee that wishes to protect itself is advised to cover the issue in its sublicence agreement, it being recognized that, unless the licensor also explicitly agrees to this result, the ultimate enforceability of such a provision cannot be assured.

2 comments:

Jackie Hutter, Intellectual Property and Patent Business Strategist and "Recovering Patent Lawyer" said...

Neil

As a patent attorney at a prestigious law firm, I, too, had an opinion on the topic of licensing and sublicensing. However, after seeing a number of poorly drafted licenses for my IP strategy clients, I now believe that "nobody knows nothing" about the effect of licenses and sub-licenses. Put simply, a patent license is an attempt to predict the future, where the people doing the "predicting" have a narrow world view that is dictated by one-off situations--that is, lawyers who work from "must have" provisions based upon fact patterns that occurred in court cases from many years ago. At the end of the day, a patent license is only as good as the number of bad licenses that the drafting attorney has litigated or corrected during her years of practice.

Also, there are so many aspects of patent licenses that can be assessed as being "personal" to the owner, that the act of sublicensing must necessarily be fraught with uncertainty.

I believe the only way to ensure that a sublicense continues after termination of the license is for the putative sublicensee to obtain the agreement of the owner. Alternatively, the original license should say "right to sublicense where such sublicenses shall continue after termination of this license." Otherwise, we must rely on the expense and uncertainty of litigation to resolve the issue, which is a poor place to be for a sublicensee to be. This might not even work, however: if the patent owner wishes to get rid of the sublicensee, he certainly can litigate the issue. At the end of the day, patent licenses might be considered a "full employment act" for lawyers.

Mark Anderson said...

For an English case holding that a sub-licence will terminate on termination of the head licence, see A Baldwin & Co Ltd v Magnetic Car Co Ltd (1925) 42 RPC 454. See also Fomento (Sterling Area) Limited v Refill Improvements (Ri-Co) Co Ltd [1963] RPC 163.

Coming back to first principles, a UK patent licence may be only be sub-licensed "to the extent the [head] licence so provides" (section 30(4)(a), Patents Act 1977). Therefore the extent to which a sub-licence can be granted, including its duration, depends on the proper construction of the head licence.

I agree that the head licence should make clear whether sub-licences survive termination of the head licence and, if so, how (as a direct agreement with the IP owner?).

In the absence of any specific provisions, and any factual matrix suggesting that the IP owner agreed that sub-licences would continue, my view is that sub-licences will automatically terminate on termination of the head licence.

Quite possibly there are some general maxims from property law that may be relevant, eg as to the grant of sub-leases. Nemo dat quod non habet may (just) be pertinent. How can a licensee grant any greater or longer-term rights than he has himself, unless the IP owner has expressly or implicitly agreed to this?

National laws seem to vary as to whether a licensee is entitled to grant sub-licences (discussed in Drafting Agreements in the Biotechnology and Pharmaceutical Industries (OUP 2008) from the point of view of English, German, French, Spanish and Swedish laws), so I am quite prepared to believe that the question of duration of sub-licences also varies from jurisdiction to jurisdiction.