Thursday 23 July 2009

What Exactly Is a "Pass Through" Licence?

What happens when we find it difficult to fit standard licensing law principles into a common form of commercial relationship? This question arises in the context of a provision that I encounter from time to time, especially in the context of software licensing, namely, the reference to a “pass through” licence.

While there is no single circumstance in which a so-called “pass through” licence is granted, the typical situation in my experience involves a software product, the right of use of which goes from software developer to middleman/OEM/distributor to end user. In such a situation, we sometimes find that the developer grants to the middleman a “pass through” licence, the ultimate recipient of which is the end user.

So what is the problem? From the pure licensing vantage, the issue is clear—there is no such legal relationship as a “pass through” licence. Legally speaking, the party granting the licence can either do so directly to the licensee, or indirectly via a right of sublicense to the middleman. The “pass through” licence does not fit well within either possibility. It is not a direct licence from the manufacturer to the end user; rather it is the authorization of the manufacturer to the middleman to “pass” the licence right on to the end user (whatever that means). There is no privity between the manufacturer and the end user. Further, it does not appear to be a proper sublicence. This is because the “pass through” licence usually lacks the back-to-back grant of rights, first from manufacturer to middleman, and then from middleman to end user, as required under the basic principles of sublicensing law.

“Wait a minute”, you may ask. The grant of rights embodied in the licence, and the sublicence respectively, do not need to be identical. All that is required is that the licensee/sublicensor be authorized by virtue of the main licence to grant the rights that the sublicensor then grants to the end user.

True enough but, even under that test, the “pass through” would seem to fail to satisfy the requirements for a valid sublicence. That is because (again, based on my experience), the grant of rights from the manufacturer to the middleman are different than those that the middle purports to pass on to the end user. Stated otherwise, the grant of the “pass through” licence runs afoul of the principle that one cannot grant to a third party a right that it has not previously been granted by the original grantor. As such, it cannot be viewed as a proper sublicence.

But Is There a Valid Licence?

If the foregoing is correct, the following points then come to mind:

1. Is the “pass through” a valid licence?

2. If so, who can enforce it, and under what grounds?

3.Even if it is not a valid licence ab initio, does the conduct of the parties create a valid licence de facto, or the least provide a valid defence, in equity or otherwise, against a claim of infringement?

Dear readers—the floor is now yours. All comments are welcome.


Mark Anderson said...

What it is depends on the wording of the head licence agreement. Unfortunately that wording is not always clear. The two obvious routes are: (1) a sublicence, or (2) a direct licence from IP owner to end-user, with the head licensee acting as the IP owner's agent to enter into the licence. I suppose, if necessary, other legal principles might be brought in, eg estoppel.

I am not sure why you say that one cannot grant a third party a right that has not previously been granted by the original grantor. If I grant you the right to license someone else on defined terms, I am "previously" granting you a right that you can then pass on. Surely it is irrelevant that I am separately granting you your own rights with respect to the software.

Sometimes, these licences are not well-explained in software agreements. This may be something to do with the commercial pressures in the software sector and limited patience for "legal details".

Jordan Hatcher said...

Just a quick note to say that several open licenses (such as Creative Commons or the Open Database License) don't have sublicenses (they are direct) while others explicitly structure the relationships as sublicenses.

Anonymous said...

I am not familiar with the software industry and have never seen such pass-through licenses before, so the following is just licensing guess...for fun.

Also, I am not sure to understand who is the licensor party to the pass-through license with the end-user, i.e. from which party does the end-user receive its license (developer or middleman) ?

If that party is the middleman, then it is probably a right to sublicense that is granted by the developer to the middleman.

However, I seem to understand that it might not be the case, and that the party to the pass-through license with the end-user is the developer. In such a case, it seems that the right granted to the middleman might then be a mere right to act as a representative of the developer in licenses that are in fact "executed"
between the developer and the end-user. Contrary to the apparent meaning of the wording "pass-through license", there would then be no IP rights effectively licensed to the middleman, but only a right to sell products containing a license between the developer and the end-user.

If the situation is different, then it would maybe be useful to clarify it first in order to (maybe) get more meaningful comments.

Neil Wilkof said...

Dear Anonymous,

Thanks for the thoughtful comments. Maybe we can continue this discussion off-line for the moment (