In its September 2009 decision, Cincom Systems, Inc. v. Novelis Corp., the Sixth Circuit ruled that although it is state law that determines whether a transaction transfers a patent or copyright license, federal law prohibits the transfer of such a license without the express consent of the license’s originator. In Cincom, the court held that federal law prohibits the assumption of a non-exclusive, non-transferable patent or copyright license as part of an internal corporate restructuring. The court did not address the assignability of trademark licenses. According to the Sixth Circuit, the fundamental policy of the federal patent system is to encourage innovation and reward intellectual property creators. Such a policy is undermined by state laws that permit the free assignability of intellectual property licenses. Federal courts, particularly the Sixth, Seventh, and Ninth Circuits, presume patent and copyright licenses to be non-assignable and non-transferable in the absence of express authorization of transfer from the license’s originator. In the case of Cincom, where the transfer was internal as part of a restructuring, the court declined to treat these transfers to neutral entities any differently than assignments or transfers to competitors or parties hostile to the interests of the license’s originator. This ruling seems to suggest that a transfer occurring as a result of a reverse triangular merger is impermissible as well.
Since Cincom, no federal appellate court has disagreed with the position that patent and copyright licenses are not transferable without the express consent of the owner of the intellectual property subject to the license. The acquiring company in an asset purchase or the surviving company in a merger should obtain written consent from the originator when the acquiring or surviving company intends to assume, or be assigned, a patent or copyright license as part of the transaction.
In transactions involving the acquisition or disposition of patent or copyright licenses, it is important for the parties to determine (1) whether the governing state law will affect a transfer of the license to the surviving or acquiring company, and, if such a transfer is facilitated by state law, (2) whether there is clear language within the license allowing transfer or assignment; otherwise, federal law will bar the acquisition or assumption of a license that is presumably transferred under state law. Unfortunately, patent and copyright licenses of target companies do not always explicitly specify the conditions for assignment and present ambiguity about its transferability. Should a company seek to acquire or assume a patent or trademark license that is silent on transferability or assumption, or outright prohibits such conveyances, the company should negotiate, or force the target to negotiate, the terms of the license separately with the license originator before acquiring the license and consult with counsel.
We hope you find this information helpful. If you have any questions, please contact any member of our Transactions Practice Team or your regular Baker Hostetler contact.
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