If you use computers in your day-to-day business operations, chances are high that your computers run with licensed software. Your might even be running some very specialized software unique to your industry or certain business functions. Either way, your company has probably entered into at least one software licensing contract.
Do you know what those contracts provide? Most of us don’t. If the software was downloaded over the Internet, we clicked on all the boxes necessary to receive our download. We didn’t always read that tiny razor sharp small print even though when we clicked on the box we say we did. As long as we gained access to the software and our business rocked on, we probably didn’t care too much.
However, a fairly recent case from the 6th Circuit (covering the states of Michigan, Ohio, Kentucky, and Tennessee), Cincom Systems, Inc. v. Novelis Corp., points out why it’s a good idea to pay attention to the small print dealing with contract assignability.
Assignability refers to the right to transfer your contractual obligations to someone else. If your business is the one providing the service, restricting assignability can be a good thing because you want to make sure that the recipient of your services has the resources to pay for them. If you’re the recipient of the services, you might want to restrict assignability if the services being acquired are personal. For example, you hire a well known financial planner to manage your portfolio and you don’t want them to outsource the work or assign the project to a summer intern. As you can see, both sides have valid reasons for wanting to restrict assignability.
Smart businesses also recognize that there may be times were their risk exposure is so small if the agreement is assigned that to require prior written approval is more trouble than it’s worth. One such scenario is if one of the parties is undergoing an internal reorganization. The creditworthiness of the entity doesn’t really change because the new entity is acquiring substantially all of the assets, but the name of the organization may get a face lift to reflect a new business direction or philosophy.
An internal reorganization is the situation Alcan Rolled Products Division (“Alcan Ohio”) found itself in. Alcan’s software agreement with Cincom was “non-transferable,” allowing the software only to be installed on a specific computer in Alcan’s Oswego, New York facility. Assigning those rights required Cincom’s prior written consent. As you might have guessed by now, that prior written consent didn’t happen.
Alcan Ohio experienced several internal reorganizations and when it was all said and done, the Alcan division was merged out of existence while the software was still very much alive and well on a computer being used by the surviving entity – Novelis Corp. Cincom sued Novelis for copyright infringement and won, even though state law allowed the assignability of a license agreement without express authorization. The amount of damages was $459,530. The damages were predetermined by the contract itself which said that copyright infringement damages would be the amount of the original license fee.
How could all this happen? Well, the court said that when it comes to intellectual property there is a presumption of non-assignability and non-transferability UNLESS the contract expressly provides to the contrary.
While this case appears to be limited to the transferability of software licenses during internal reorganizations, the reach of court’s decision may be far broader. The court noted that when it comes to patents or copyright licenses, a transfer occurs whenever an entity other than the one who signed the contract gains possession of it. If your business has entered into intellectual property licenses, it pays to:
? Understand what restrictions a license agreement imposes before you sign it. If the flexibility of assignability is important to you it helps to negotiate that up front instead of when it becomes a stumbling block to your reorganization or expansion plans.
? Recognize that silence is not golden. Just because the agreement does not mention assignability, doesn’t mean there are no restrictions if other courts adopt the 6th Circuit’s presumption of non-assignability and non-transferability unless a contract expressly provides otherwise.
? Be mindful of who signs the contract and who the contracting entity is. A division? The main company itself? Or a parent company?
? Be aware of the relationship between the contracting entity and where the licensed software is ultimately used. Make sure it’s in synch with the legal rights and duties under the contract.
? Know the cost of infringement before the bad thing happens.