What Happens to a License in a Statutory Merger?

Cincom Systems v. Novelis Corp.

Most contracts are assignable, unless they say otherwise (or the assignment would materially burden the other party). But intellectual property licenses — including software licenses — are an exception: they are generally not assignable unless they expressly provide to the contrary.

This doesn’t mean that every change of control is a problem: if the owners of a software licensee sell their stock to new shareholders, while the licensed entity is otherwise unchanged, this should be fine. However, the September 2009 6th Circuit case, Cincom Systems v. Novelis Corp. (92 USPQ2d 1085), reminds us that a statutory merger that results in a new entity using technology that was originally licensed to the merged entity may be deemed a transfer which, if done without licensor permission, can get the successor in trouble … even if state law appears to say otherwise.

The plaintiff in this case, Cincom Systems, had licensed two software programs to Alcan Rolled Products Division (“Alcan Ohio”), an Ohio corporation wholly owned by Alcan, Inc. Alcan Ohio organized Alcan of Texas and was eventually merged into it. After a further restructuring and three name changes, the surviving entity became known as Novelis. Thus, although the software Alcan Ohio licensed from Cincom remained on the same computer in the same location the entire time, ultimately that computer was owned by Novelis, not Alcan Ohio.

Upon learning of these corporate changes, Cincom sued for breach and infringement. The district court agreed, finding that this series of mergers resulted in a prohibited transfer of the software that Cincom had licensed to the former Novelis subsidiary. Novelis appealed on various grounds, including that Ohio’s amended statute on statutory mergers states: “The surviving or new entity possesses all assets and property of every description… all of which are vested in the surviving or new entity without further act or deed.” Novelis argued that this language should be interpreted to mean that no “transfer” of the license occurred as a result of the merger.

However, said the Court of Appeals, quoting prior case law,

“A transfer is no less a transfer because it takes place by operation of law rather than by a particular act of the parties. … Federal common law, and the actual language of the license…, is clear: the only legal entity that can hold a license from Cincom is AlcomOhio. If any other legal entity holds the license without Cincom’s prior approval, that entity has infringed Cincom’s copyright because a transfer has occurred.”

In short, the transfer of a license by statutory merger may constitute a prohibited assignment, which is invalid, and/or a breach giving rise to infringement, unless the licensor grants approval.

The lesson: If you want to be sure a licensee has a right to transfer a license in connection with a corporate restructuring (or otherwise), state this in the license agreement. If the license agreement is silent (or expressly prohibits assignment), get permission for a “transfer” to the surviving entity before you restructure.

For more information on IP licensing assignability, please contact the author Howard G. Zaharoff.

Article tools

Contact author | Print | Bookmark | Send to friend

Return to top of page

Return to Technology & IP Resources index