Mergers: Intellectual Property Considerations
The Sixth Circuit Court of Appeals recently addressed the effect of mergers and internal corporate restructuring on intellectual property licenses in a decision that has implications in drafting and interpreting license agreements as well as in advising entities who are considering whether to restructure or merge a corporate entity.
In Cincom Systems, Inc. v. Novelis Corp., 6th Cir. No. 07-4142, 2009 WL 3048436 (6th Cir., Sept. 25, 2009), the Court considered whether an internal corporate merger resulted in an improper transfer of a copyright license. It determined that an internal merger may result in a transfer and that the transfer is improper unless it is expressly authorized by the licensor.
Cincom Systems granted Alcan a software license, which was “non-transferable” without Cincom’s prior written approval. Alcan, a wholly-owned subsidiary of a Canadian corporation, later created a separate corporation, Alcan Texas, and the two subsidiaries merged. The surviving corporation, Alcan Texas, simultaneously merged into itself and its three subsidiaries. After several name changes, the corporation became Novelis. None of the entities ever sought or received Cincom’s approval to continue to use the software license. In the resulting copyright infringement action, the district court granted summary judgment to Cincom, finding that the merger with Alcan Texas was an improper transfer of the software license under the Sixth Circuit’s decision in PPG Industries, Inc. v. Guardian Industries, Corp., 597 F.2d 1090 (6th Cir. 1979) (the “PPG” decision). The court awarded Cincom $460,000 in damages for the infringement.
In PPG, the Sixth Circuit held that a statutory merger automatically transfers patent licenses from the constituent corporations to the successor corporation. Applying federal law, the Court concluded that a license is presumed to be non-assignable and non-transferable in the absence of express provisions to the contrary. Because there was no express provision allowing the transfer, the Court ordered judgment in favor of the licensor.
Novelis argued that (1) the PPG decision was inapplicable in the context of internal corporate reorganizations where there was no concern that the license would be acquired by a competitor and (2) no transfer occurred under current Ohio law.
In rejecting these arguments and affirming the district court’s decision, the Sixth Circuit first clarified the applicable law and addressed the interplay between federal and state law in the intellectual property context. According to the Court, federal law governs the assignability of patent and copyright licenses and creates a presumption that a license is non-assignable and non-transferable. Federal policy favors allowing the copyright or patent owner to control the use of his creation, so it is immaterial whether the transfer is to a competitor or not. State law governs the interpretation of a license’s language and whether the merger results in a transfer of the license. State law must yield to federal law, however, if it would allow a license to be transferred without express authorization from the licensor.
Interpreting Ohio law, the Court held that “in the context of a patent or copyright license, a transfer occurs any time an entity other than the one to which the license was expressly granted gains possession of the license.” Unless there is express language in the intellectual property license permitting the transfer, it is improper, and the corporation that acquires the license may be liable for infringement.
Under the Court’s decision, a corporate entity may be liable for patent or copyright infringement if it acquires and uses a license from a separate entity through an internal merger without the express authorization from the licensor. Thus, corporations that are considering any kind of merger or internal restructuring should check all intellectual property licenses held by the involved entities to determine whether the licenses are assignable or whether the licensor’s permission must be obtained prior to effectuating the merger.
