Copyright License Transfer in Mergers-- Common Misunderstandings

Suppose Company A had a copyright license, then it was acquired by another company. What happens to A's license? The answer is simple: A's license was effectively terminated upon its ownership change. A's continuing use of the licensed material would constitute copyright infringement.

This question has risen in two copyright cases: SQL Solutions, Inc. v. Oracle Corp., No. C-91-1079 MHP, 1991 WL 626458 (N.D. Cal. Dec. 18, 1991) and Cincom Sys., Inc. v. Novelis Corp., No. 1:05CV152, 2007 WL 128999 (S.D. Ohio Jan. 12, 2007). Both copyright cases follow the rationale of PPG Indus., Inc. v. Guardian Indus. Corp., 597 F.2d 1090 (6th Cir. 1979), a patent case.

In SQL Solutions, SQL obtained a license to certain Oracle Corp software. SQL was then acquired by Sybase Inc., in a reverse-triangular merger, so that SQL continued to operate as a seperate company. The Oracle software stayed with SQL. In this case, Judge Patel found that SQL's acquisition by Sybase constituted a transfer of the copyright license due to its change of ownership. Such transfer is prohibited by federal copyright policy. 
Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir. 1984).

In Cincom, Cincom granted Alcan Ohio a license to use Cincom's software. Alcan Ohio then merged with Alcan Corp, which then merged into its subsidiaries. The Cincom's software stayed on the same former Alcan Ohio computers at the same manufacturing plant. The only change was ownership. The Cincom court found that an impermissible transfer of the copyright license had occurred, and defendant is liable for copyright infringement.

The reason for prohibiting transfer of the intellectual property license is simple. Due to the nature of intellectual property, the owner of intellectual property must have control of its access and use. If a licensee could transfer a license without permission, the owner of the intellectual property would lose control of the intellectual property. "His ability to monitor use would be jeopardized by allowing sublicensing without notice. In fact precisely such a scenario underlies this litigation."
Harris at 1334.

What if the SQL and Cincom cases do not apply? That would only mean the original licensee continued to possess the license after it was acquired. But this was misunderstood by some lawyers and judges.

In the case of
NETBULA, LLC v. SYMANTEC CORP., 516 F. Supp.2d 1137 (N.D.Cal. 2007), Netect LTD, an Israeli company, bought one user license for PowerRPC. Netect LTD was then acquired by BindView, which was then acquired by Symantec Corp. The software licensed to one Netect LTD user had been copied and used by many Symantec programmers in India and US, and distributed all over the world.

Former U.S. District Judge Martin J. Jenkins found that there was no copyright infringement by BindView and Symantec. One of his "rationale" was: there was no transfer of the license from Netect LTD to BindView entities, depicted above. 
See attached PDF file for an analysis of this ruling.

In the case of
Netbula, LLC v. Storage Technology Corporation et al., 2008 U.S. Dist LEXIS 4119 (N.D. Cal., January 18, 2008), Netbula granted StorageTek eight licenses for PowerRPC software. StorageTek was acquired by Sun Microsystems in 2005 via a reverse-triangular merger. Under SQL, StorageTek's license was effectively terminated upon its ownership change.

Again, former U.S. district judge Martin J. Jenkins found that there was no infringement. The "rationale": the non-transferability of the license was a contractual covenant.

Sometimes, it takes more time to explain the obvious... Stayed tuned...

Analysis of a ruling that misinterpreted the case law
BindView Transfer

Equal Justice » Commentary » Copyright License Transfer in Mergers-- Common Misunderstandings
Analysis of a ruling that misinterpreted the case law
BindView Transfer