Intellectual Property Licenses Do Not Automatically Transfer To Surviving Entities

Wednesday, October 26, 2005

Daniel Mitz, Nancy Yamaguchi, Stephen Gillette, and Spencer Simon Jones Day, M&A Lawyer, http://

Abstracted from: License Agreements In Merger Transactions:
Why Licenses May Not Vest In The Surviving Entity

By: Daniel Mitz, Nancy Yamaguchi, Stephen Gillette, and Spencer Simon Jones Day, Menlo Park, CA

M&A Lawyer - Vol. 9, No. 2, Pgs. 12-17

Overview:
Explains why the target's intellectual property licenses do not automatically pass to the acquiror in a merger. Provides guidelines to consider in analyzing whether the transfer of a license will require the consent of the licensor.

Intellectual property law.
Federal statutes protect three types of intellectual property: copyrights, patents, and trademarks. The primary purpose of these statutes is to foster innovation by protecting the rights of those who develop intellectual property. Though inexperienced M&A practitioners often assume the contrary, the federal laws protecting intellectual property generally trump the state statutes governing property rights in merger transactions. Under both copyright and patent law, attorneys Daniel Mitz, Nancy Yamaguchi, Stephen Gillette, and Spencer Simon explain, the exclusive license of intellectual property to a single licensee is equivalent to the transfer of ownership. Consequently, an exclusive licensee may assign the license unless the original license prohibits it from doing so. A licensee as a general rule cannot transfer a nonexclusive copyright or patent license without the prior consent of the licensor; in contrast, neither an exclusive nor a non-exclusive patent license may be transferred without the licensor's consent.

Forward mergers.
A deal structured as a forward merger calls for the seller to merge into the buyer, which becomes the surviving entity. Because a different entity will be holding the license after the forward merger, the authors explain, courts are more likely to require the consent of the licensor for the license transfer. Even if the license agreement does not expressly require consent for assignment, patent and copyright law do not permit the transfer without the licensor's consent. The Sixth Circuit took this position in PPG Industries v. Guardian (1979), finding that a nonexclusive patent license would not automatically transfer to the surviving entity in a forward merger even though the state merger statute provided that the rights and assets of each merged entity would automatically vest in the survivor. The court determined that the license is not assignable without consent unless the contract explicitly permits transfers and assignments.

Reverse mergers.
In a reverse merger, the buyer merges into the seller so that the seller is the surviving entity. Many M&A lawyers assume this structure will ensure that the surviving entity can continue to hold the IP license, even without the consent of the licensor. However, even in a reverse merger, courts have found that the license has been transferred, the authors warn. In SQL Solutions Inc. v. Oracle Corporation (1991), a California district court disallowed the use of a nonexclusive copyright license by the company surviving after a reverse triangular merger. The court determined that the license had been transferred to what constitutes a new entity, reasoning that post-merger, an entity controlled by a competitor of the original licensor was holding the license.

Practical advice.
The authors advise M&A practitioners to consider adverse impacts on the licensor when determining whether the IP license will vest with the post-merger surviving entity without the licensor's consent. An adverse impact is likely to be found when the licensor is a competitor of the party controlling the surviving entity. Consider as well what type of intellectual property is being licensed and whether the license is exclusive or nonexclusive. The license agreement itself may contain specific provisions governing assignment and change in control.

Abstracted from M&A Lawyer, published by Glasser LegalWorks, 150 Clove Road, Little Falls, NJ 07424.

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