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Insolvency of software sub-licensor did not end firm's rights of use under that licence, rules High Court

Businesses can retain the right to use copyrighted software under sub-licences awarded by head-licensees  in circumstances where those head-licensees are subject of a termination or  become insolvent, the High Court has said.

Whether or not sub-licensing agreements become void upon the insolvency of a head-licensee  depends on "the scope of the authority" given by the lead licensor to the head-licensee to sub-licence the use of its software on its behalf, the Court said.

"If the authority is sufficiently wide to allow the grant of a sub-licence which is capable of surviving the termination of the head licence, then the head licensor (copyright owner) must be taken as giving the ultimate permission himself, on normal agency principles," Mr Justice Mann said in a new ruling.

Mr Justice Mann ruled that a company that had been granted an exclusive licence to copyrighted software for the purpose of provide printing services to users of the copyright owner's services had had their exclusivity  materially breached. This was  because a previous licensing deal struck on behalf of the copyright owner by a subsidiary enabled a user of the software to utilise the software despite the grant of this later exclusive licence by the lead licensor following the insolvency of its subsidiary..

"This case is important to insolvency practitioners and licensors and licensees as it finally provides clear English authority as to the status of sub licences in the event of the termination or insolvency of a head licensee, as the question of whether a material breach had occurred  turned on this issue," litigation expert Julian Sladdin of Pinsent Masons, the law firm behind Out-Law.com, said.

"Surprisingly, despite the commercial importance of licensing arrangements this point   only appears to have only been considered once before, in 1925 when it was decided that the termination of a licence higher up a chain  brought the bottom one to an end," he added.

" Mr Justice Mann held that this earlier case was fact sensitive as the terms of the sub licence provided for this eventuality and  the sub licensee had full knowledge of the licensor’s rights to collapse the whole arrangement. Following the reasoning in this earlier judgment he determined that, where  a sub licence is granted with the blessing of the licensor and on terms which do not provide for its collapse on the termination or insolvency of the head licensee, the licensing agreement is capable of surviving despite these events being triggered," Sladdin said.

Tthe present day case considered by Mr Justice Mann  involved VLM Holdings Limited (Holdings), which owned the copyright in online software which was used by businesses to  design and despatch materials for printing by its subsidiary VLM UK Limited. Holdings gave VLM UK the right to licence to others the right to use the software within the UK.

VLM UK contracted with estate agency Spicerhaart and gave it the right to use the software under certain terms. However, VLM UK then entered liquidation and Holdings decided to terminate its subsidiary's intellectual property (IP) rights. Holdings claimed that this termination, or alternatively the subsequent insolvency of VLM UK, put an end to Spicerhaart's rights under its licensing agreement.

Holdings entered into an agreement which gave  Ravensworth the exclusive licence to use  its software. Ravensworth used Holdings' software to provide printing services to former customers of VLM UK, including Spicerhaart. However, when the estate agency said that it intended to use the software for the purpose of diverting its  printing to another firm on the basis that it was permitted to do so under the terms of its original sub- licence agreement  Ravensworth held  Holdings in  material breach of its own exclusive licensing deal.

Holdings rejected the claim and when Ravensworth stopped paying it royalties, Holdings argued that the non-payment itself amounted to a material breach of contract by the printing provider.

In determining  the case Mr Justice Mann considered whether Holdings had authorised VLM UK to enter into a sub-licensing deal with Spicerhaart and, if so, whether the rights Spicerhaart enjoyed under that arrangement survived the liquidation of VLM UK and the stripping of the subsidiary's IP rights by Holdings.

The judge said that the "common directorship" shared by Holdings and its subsidiary had led to Holdings giving its implied consent to VLM UK's sub-licensing arrangement with Spicerhaart. He said that Holdings was "bound" into the sub-licensing agreement with Spicerhaart as a result and that its decision to withdraw VLM UK's IP rights had not rendered that deal void.

Mr Justice Mann also ruled that there was nothing in the terms of Spicerhaart's sub-licensing deal which gave rise to its rights under that sub-licence ending upon the insolvency of VLM UK.

Because Spicerhaart retained the right to use the Holdings software despite VLM UK's insolvency and the withdrawal of the head-licensee's  IP rights, Mr Justice Mann ruled that Holdings had breached the terms of its exclusive licensing arrangement with Ravensworth.

The judge ruled that the breach had been "very material" in nature because Spicerhaart's ability, under its sub-licence, to choose a different print provider  had "deprived Ravensworth of a very substantial amount of income". The decision by Ravensworth to enter into its exclusive licence agreement with Holdings was to obtain Spicerhaart's business, he said.

Because the breach went "unremedied", Ravensworth therefore had a right of beneficial ownership to the copyright subsisting in Holdings' software "in accordance with the terms of its licence", Mr Justice Mann ruled.

Pinsent Masons acted for Ravensworth in the case.

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