Legal Briefing

New security for sub-licensees?


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Real Estate | 01 April 2013

The conventional view in the UK has been that a sub-licensee has no greater rights than their sub-licensor and so a 
sub-licence ends when the sub-licensor’s rights terminate, in accordance with the principle of nemo dat quod non habet (no one gives what he doesn’t have).

This was questioned by the recent case of VLM Holdings Ltd v Ravensworth Digital Services Ltd [2013], when the UK court decided that a sub-licence for the use of software survived the termination of the head licence under which it had been granted. 


This is an important decision for anyone involved in licensing, particularly existing sub-licensees and rights holders that 
are considering a licence permitting a sub-licence of software or other IP assets. However, its effect will probably be limited to sub-licences given by a subsidiary of the rights holder, and careful drafting should eliminate the risk of this occurring where it is not desirable.

FACTS

The claimant in the present case, VLM Holdings, owned the copyright in certain software which facilitates online printing services. In late 2006/early 2007 it granted an informal licence to exploit the copyright in the UK to its subsidiary VLM (UK) Ltd, its trading arm in the UK. In December 2007, VLM (UK) in turn granted a sub-licence to an estate agency (Spicerhaart) so that it could use the software to print its various property particulars etc. The directors of VLM (UK) who negotiated and agreed the sub-licence were also directors of VLM Holdings. When VLM (UK) went into liquidation, its parent company VLM Holdings terminated VLM (UK)’s licence, and said that this terminated any existing sub-licence that VLM (UK) had granted, including its licence with Spicerhaart.

The parent company VLM Holdings subsequently granted an exclusive licence to the defendant printing company, Ravensworth, in March 2009. Spicerhaart had been using Ravensworth to do some of its printing, but then moved to a different provider using the software on the basis that its licence from VLM (UK) remained fully effective.

In response, Ravensworth wrote to Spicerhaart in October 2009 stating that it had acquired rights to the software, as a result of the exclusive licence granted by VLM Holdings. It explained that, although it had been happy to allow Spicerhaart to continue using the software while print services were sourced from Ravensworth, Spicerhaart’s indication that it would be moving to a different printing provider meant that Ravensworth’s consent to the continued use of the software was terminated. Ravensworth wanted Spicerhaart to stop using the software and deliver it up. Spicerhaart responded, pointing out that its licence ran until April 2013 and was terminable after that only by the licensee giving notice. Spicerhaart was, in other words, asserting its licence.

Also in October 2009 Ravensworth failed to pay one of the instalments it owed under the licence and VLM Holdings sought to terminate the licence agreement. Ravensworth claimed that the continued existence of the licence with Spicerhaart was in breach of the exclusivity provision in its licence granted by VLM Holdings, entitling Ravensworth, among other things, to end its obligation to pay royalties.

VLM Holdings issued proceedings against Ravensworth for breach of the licence agreement, and Ravensworth counterclaimed. Each party claimed to have terminated the licence. Mann J at paragraph 50 of the judgment explained that if:

‘… [VLM] Holdings is right it has terminated the agreement and has the unfettered right to use and license the software, and since Ravensworth has continued using it (which it has) [VLM] Holdings has a claim to damages for infringement of copyright and other relief. If Ravensworth is right then it is not obliged to pay royalties and is entitled to the software.’

The key issue the court had to decide was whether Spicerhaart’s sub-licence had survived the termination of VLM (UK)’s head licence (following VLM (UK)’s liquidation): if it had, then VLM Holdings would have breached the exclusive licence granted to Ravensworth; if it hadn’t survived, Ravensworth would have been in breach for failing to make payments under the licence.

CURRENT LAW

Although in the UK it has generally been accepted that a sub-licence would come to an end on the termination or expiration of the relevant head licence, in VLM v Ravensworth Mann J commented that the counsel before him had identified only one case where the point had actually been considered: Austin Baldwin & Co Ltd v Magnetic Car Company Ltd [1925]. Mann J summarised that it seemed to be the:

‘… essence of [the Austin Baldwin] decision that the terms of the licence to the sub-licensor entitled its own licensor to bring the whole arrangement to an end, thus terminating sub-licences, and that the ultimate sub-licensee must be taken to have known that.’

Although he accepted that this was ‘correct in principle’, he said that the:

‘…case must be taken as turning on its own facts. The case does not explicitly lay down or identify any particular principles. Nothing else useful can be extracted from it.’

Mann J viewed the key question as being one of simple agency:

‘The real question is therefore as to the scope of the authority given by the head licensor to sub-licensor… If the authority is sufficiently wide to allow the grant of a sub-licence which is capable of surviving the termination of the head licence, then the head licensor… must be taken as giving the ultimate permission himself, on normal agency principles.’

Mann J’s summary perhaps does not do sufficient justice to the principles underlying the decision in Austin Baldwin. Although expressed principally in terms of actual or imputed knowledge, theAustin Baldwin judgment reflected essentially 
the same agency principles as underlie Mann J’s judgment. Eve J (misnamed by Mann J as ‘Lloyd Jacob J’) specifically contemplated that a head licence might confer a power upon the licensee to grant sub-licences protecting sub-licensees 
from the consequences of termination 
of the head licence. However, if this 
had not been done, the power of the 
sub-licensor was only to permit acts 
which they themselves were permitted 
to perform. Accordingly, as the licensee/
sub-licensor would not be permitted to perform the relevant acts after termination, they could not authorise the commission of such acts by their sub-licencee.

In 1963 Lloyd-Jacob J dealt with a related issue arising at an interlocutory stage in Fomento (Sterling Area) Ltd v Refill Improvements (Ri-Co) Co Ltd [1963]. The (slightly simplified) facts were that the claimant had granted a licence of its 
patent to ‘Stephens’, who in turn granted 
a sub-licence to the defendant. While the sub-licence remained in effect, the claimant and Stephens agreed to vary the terms of the licence to eliminate Stephens’ right to sub-licence. The claimant sought an injunction to restrain the sub-licensee 
from continuing to manufacture on the basis that the sub-licence had been terminated as a result of the variation to the head licence.

Lloyd-Jacob J refused to grant the injunction. He decided that on these facts there were two possibilities: the rights under the sub-licence may have continued, in which case there would be no question 
of granting the injunction; or alternatively the sub-licence may have terminated. 
Lloyd-Jacob J observed that should the 
sub-licence have terminated, it would have done so as a result of a tortious conspiracy given the facts, and therefore the claimant did not come to the Court with ‘clean hands’ and was not entitled to equitable relief by way of the injunction sought.

The Court of Appeal upheld Lloyd-Jacob J’s decision to refuse the application for an injunction but did not base the decision on the ‘clean hands’ argument, preferring not to express a concluded view on that point. Instead, it decided that the balance of convenience dictated that the injunction not be granted because the patent would expire before the trial date and the defendant had offered to continue payment of the royalties due under the sub-licence.

Although no authoritative decision was made upon the point, the first possibility contemplated by Lloyd-Jacob J, namely that the rights under the sub-licence continue, can be reconciled with bothAustin Baldwin and VLM v Ravensworth on agency principles. The authority to sub-licence is limited by the express terms of the licence as they exist at the time the sub-licence was given. Having authorised the sub-licence, the licensor, as principal, is bound by its terms even if it subsequently agrees with its licensee (the sub-licensor) to amend the licence in a manner not otherwise compatible with the terms of the sub-licence.

The Fomento case was not discussed in VLM v Ravensworth. Counsel did direct Mann J’s attention to two fascinating recent 2012 German Federal Court decisions addressing the same issue of whether sub-licences survive termination of the head licence, known as the ‘Take Five’ case and the ‘M2Trade’ case. These decisions confirmed that, under German law, a 
sub-licence of copyright can continue after the head licence has been terminated, but this seems to have been on the basis of the application of the German principle of ‘succession protection’ to the area of intellectual property. Neither counsel nor Mann J considered the cases in detail.

DECISION

Mann J decided that the Spicerhaart licence survived and so there was a breach of the exclusivity provision of the Ravensworth licence.

Termination of the informal licensing arrangements between VLM Holdings and VLM (UK), brought about by VLM (UK)’s liquidation, did not bring Spicerhaart’s licence automatically to an end. The judge was quite clear that it is possible to imagine a situation in which a sub-licence would survive the termination of the head licence, namely when there are express terms permitting sub-licences which endure for a specific period of time and which are clearly expressed as being capable of surviving the termination of the head licence. The maxim nemo dat quod non habet also did not hold much sway with Mann J and he declared that it was ‘best left alone’.

The judge reached his decision on the basis of a number of material facts. First, he focused on the fact that VLM Holdings and VLM (UK) had common directors, who allowed or procured that VLM (UK) do what was necessary to exploit the intellectual property rights held under the informal licence between VLM Holdings and VLM (UK). VLM Holdings also wanted to have the sub-licence with Spicerhaart in place in order to fully exploit the software in the UK. As stated in paragraph 63(iv) of the judgment:

‘… although they were distinct bodies in law, they both had a common aim and it would be wholly artificial to distinguish between them for these purposes.’

The directors of VLM Holdings had consented to the sub-licence, and in doing so had impliedly authorised VLM (UK) to grant it. On the basis of ordinary agency principles, the licence therefore came from VLM Holdings as well as VLM (UK). Spicerhaart itself did not know that it was actually VLM Holdings who owned the copyright in the software, because the licence it was entering into held out VLM (UK) as the copyright owner. VLM Holdings should therefore be treated as an undisclosed principal, and, on the basis of the law of agency, Spicerhaart was entitled to hold it to the licence. The judge made clear that the present facts did not go as far as to bind VLM Holdings on the whole contract, which is the normal application of the principle of agency, however VLM Holdings had given authority to enter into the licence and that should be upheld.

Furthermore, the deal was important to both VLM companies, to promote the highly important Spicerhaart relationship. Both companies knew that the underlying purpose of the sub-licence was to protect Spicerhaart’s business and so being able to terminate at will frustrated this purpose. This cannot have been the intention of the sub-licence.

The judge in conclusion stated that:

‘… the permission in the licence was one which bound both VLM companies. Bringing to an end the informal licensing arrangements between [VLM] Holdings and [VLM] (UK) would not be capable of affecting the permission already given by [VLM] Holdings under the Spicerhaart licence, so the licence persisted.’ (emphasis added)

Alternatively, should his contractual and agency analysis be wrong, Mann J held that in these circumstances, VLM Holdings was estopped from denying that the sub-licence remained in effect. He offered a line of estoppel cases which would reach the 
same result, including the case of Pickard 
v Sears [1837].

Finally, the judge held that the breach by VLM Holdings was material and had not been remedied, thus entitling Ravensworth to terminate its licence. He therefore dismissed VLM Holdings’ claim and granted Ravensworth’s counterclaim.

COMMENT AND PRACTICAL APPLICATION

The issue in VLM v Ravensworth highlights the conflicting nature of the rights and expectations of a head licensor and 
sub-licensee. On the one hand, a 
sub-licensee should not be deprived of those rights for which they have contracted with the sub-licensor. However, on the other hand, it would be unfair to hold the head licensor to an agreement to which it was not a party and of which it was possibly not even aware.

The ruling in VLM v Ravensworth appears at first glance to be a departure from what was commonly accepted as the position in the UK, ie that sub-licensing arrangements did not survive termination of the head licence. Despite the fact that VLM Holdings had not been privy to the sub-licence agreement between Spicerhaart and VLM (UK), it seems that the judge, on the facts of this case and on the basis of ordinary agency principles, was determined to find in favour of Ravensworth and hold that the sub-licence had survived.

It should however be noted that this case is very fact specific – VLM Holdings and VLM (UK) had common directors so that, although the sub-licence came from VLM (UK) only, Mann J found that in reality it came from VLM Holdings as well as VLM (UK), and thus removed any justification for its termination. It also seems to have been material that it was not stated to Spicerhaart that it was taking a sub-licence, and VLM (UK) was held out as the copyright owner, strengthening the case for undisclosed agency.

It may be that the decision would have been different had the parties between whom the head licence subsisted not been so closely related, and in particular had the head licensor not been completely aware of, and actively behind, the granting of the sub-licence.

Thus sub-licensees should be aware of 
this decision, but before assuming that 
their sub-licence will always be ring-fenced from the termination of the main licence, they should bear in mind that this outcome 
is likely to be limited to cases where the head licence is between parent and subsidiary or other closely related parties. Whether the outcome of this case is followed in the context of licensing arrangements agreed at arms’ length, remains to be seen.

So, what practical drafting lessons can be drawn from this case? We suggest the following:

  1. It is in the interests of all concerned if the licence makes clear if the rights are being granted directly by the IP owner, or via an intervening licensee of the IP owner.
  2. Merely stating that the licensee may not grant sub-licences, or that the licensee may only do this with the IP owner’s prior written consent may give a strong basis for a claim against the licensee if this is breached, but, on the basis of the cases discussed here, may not necessarily mean the sub-licensee does not receive a grant of subsisting rights which will survive termination, especially if it dealt in 
good faith with the licensee and 
was not aware of the rights of the IP owner.
  3. If the IP owner wishes to have 
absolute control over the granting of sub-licences, we believe the best course is that it should provide that the licensee may only do this with its prior written consent, and that any such consent shall be conditional on such sub-licences containing a provision that they will terminate when the main licence terminates.
  4. The main licence should explicitly state that no agency relationship is implied between the parties.
  5. Ideally the main licence should also annex a fully drafted form of sub-licence, or at least key terms to be included in any sub-licence, one of which is that the sub-licence is coterminous with the main licence; and require the licensee to use that form/include those key terms.

As stated above, the decision in VLM v Ravensworth will be of interest to anyone involved in licensing and will apply to all sorts of IP rights. It is also an interesting case for those involved in insolvency work, as the events were triggered by VLM (UK)’s liquidation.