Tuesday 26 August 2008

Effect of merger on IP licensees in the US: where state law can't be ignored

In "License to merge: special precautions may be required to preserve IP licensing rights", Cozen O’Connor lawyers Scott B.Schwartz and Justin B.Wineburgh write:
"Despite a long history of case law relating to mergers, one area remains unclear, especially in the entertainment industry: the effect of mergers on intellectual property (“IP”) licensing agreements. Recent case law contributes to this uncertainty and suggests that certain precautions may be necessary to preserve valuable IP licensing rights".
As usual -- and it seems remarkable that this warning should still need to be given -- the reader is reminded of the need for foresight [ie why not think about the risks/benefits of possible mergers before the licence is signed?] and vigilance [ie keep an eye on what goes on after the licence is signed]. The authors then focus on an annoying problem for those of us who like our licence provisions cut-and-dried, or at least predictable in terms of their outcome and effect. They explain:
"... the practice of having contracts transfer as a matter of law, even if prohibited by the express terms of the contracts without consent, may no longer be reliable in the context of transferring IP content and licenses.

While the impact of a merger on the assets of the parties to the merger is governed by state law, IP licenses are also governed by a body of statutory and judicial federal law. More recent case law points to a trend of IP law starting to impact how traditional state merger laws treat IP rights as different than that of other assets. However, the trend is neither uniform nor consistent".
In one 2004 decision-- Evolution, Inc. v Prime Rate Premium Finance Corp., Inc., 2004 U.S. Dist. LEXIS 25017 (D. Kan. 2004) -- a court has concluded that “whether a merger effectuates an automatic assignment or transfer of license rights is a matter of state law.” But other recent federal court decisions have held that the licensing agreement, rather than the applicable state merger statute, determines whether the licence can be transferred to the surviving company without the consent of the licensor. Thus unless the licence agreement clearly permits assignment of the IP rights without the licensor's consent, that licensor may well be able to challenge the right of a surviving company in a merger to operate as the licensee -- even though state merger law transfers all the rights under the licence as a matter of law.

Reading this article, I found myself wondering about the extent to which a prudent licensee -- or anyone seeking to buy his business -- should make an effort to obtain advice concerning the operation of state law as well as federal law, factoring this advice into the structuring of its business transactions.

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