The Sixth Circuit Court of Appeals recently issued an opinion which should serve as both a warning and a reminder to corporate counsel about the pitfalls of intellectual property in the context of mergers and acquisitions.  In Cincom Systems, Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009), a software licensee was found to have violated restrictions on the transferability of the software following a series of corporate mergers. 

The licensor, Cincom, granted a nonexclusive license of its software to Alcan Rolled Products Division, an Ohio corporation.  The license specifically prohibited any transfer of the rights granted under it.  Alcan installed the software on a single computer in a facility it owned in New York state.  Years later, Alcan created and then merged into a separate corporation known as Alcan of Texas.  Following a further merger of Alcan of Texas with its subsidiaries, and a few subsequent name changes, Novelis emerged as the sole surviving corporate entity.  Through all this corporate activity, Cincom’s software remained installed on the single computer located in New York state, now owned by Novelis.

Cincom sued, alleging that the various mergers had effected a transfer of its nonexclusive, nontransferable license to a separate entity in violation of the license agreement.  Novelis contended that no transfer occurred because Ohio statutory merger law does not not explicitly effectuate a “transfer” of assets from a predecessor to a successor corporation, instead providing merely that the surviving entity “possesses all assets and property of the predecessor corporation.”

The Sixth Circuit rejected this restrictive interpretation, holding that “in the context of a patent or copyright license, a transfer occurs any time an entity other than the one to which the license was expressly granted gains possession of the license.”  Thus, Novelis breached the license because “the only legal entity that can hold a license from Cincom is Alcan Ohio.
. . . Alcan Ohio no longer exists.”

The case should serve as a reminder to mergers and acquisitions counsel of the importance of thorough due diligence to identify any existing copyright licenses and to determine whether a particular corporate reorganization or merger might result in an unauthorized transfer.  In such a case, the licensee would be well advised to seek permission from the licensor to transfer the license as part of the contemplated merger in order to avoid post-merger liability.

The case is also interesting because of the Court’s heavy reliance on patent precedent and federal common law rather than copyright law in support of its holding.  The license agreement included an explicit prohibition on transfers, and it is generally agreed that under the Copyright Act, a nonexclusive license like the one at issue here is not transferable.  Yet, citing a patent case, the Court relied on federal common law for the proposition that “in the context of intellectual property, a license is presumed to be non-assignable and non-transferable in the absence of express provisions to the contrary.”  Though an essential element of the Court’s reasoning was that “where state law [of corporate mergers] would allow for the transfer of a license absent express authorization, state law must yield to the federal common law rule prohibiting such unauthorized transfers,” state law would similarly give way to the federal Copyright Act.