In Cincom Sys., Inc. v. Novelis Corp., 92 USPQ2d 1085 (6th Cir. 2009), Cincom agreed to license two of its software products to Alcan Ohio, a subsidiary of Alcan, Inc. The license was non-exclusive and non-transferable, and granted Alcan Ohio the right to use one copy of the software, which was installed on a computer in Oswego, New York. Furthermore, transfers of the license required written authorization from Cincom. Starting in 2003, AlcanOhio underwent a series of mergers with aTexas subsidiary of Alcan, Inc. The resulting entity was subsequently renamed Novelis. UnderOhio state law, all property of a corporation is deemed to be transferred to and vested in the new merged entity. Thus, while the software remained on the computer inOswego, the computer (and the software stored on it) that was owned by AlcanOhio before the mergers became the property of the new entity Novelis after the mergers. Cincom sued for copyright infringement, asserting that the transfer of the software license from AlcanOhio to Novelis according toOhio law was impermissible.
The district court granted summary judgment for Cincom, and the Sixth Circuit affirmed. The district court, and the Sixth Circuit in affirming the decision, relied upon a prior Sixth Circuit case, PPG Industries Corp. v. Guardian Industries Corp., 597 F.2d 1090 (6th Cir. 1979). That case involved two glass fabrication companies. PPG, the plaintiff, granted a non-exclusive, non-transferable license of a new technology to Permaglass Corporation. Permaglass subsequently merged with Guardian Industries, the defendant. The Court ruled in that case that the license did not survive the merger.
As the Court explained, certain intellectual property licenses are an exception to the general rule that state law will determine whether a merger effects a transfer of an intellectual property (or other) license. The purpose of intellectual property is to encourage innovation and expression by granting inventors and authors exclusive rights to their creations. However, permitting state law to allow free assignability of intellectual property licenses would run counter to this goal, as any entity desiring a license could obtain a license from either the inventor/author or a licensor. Thus, every licensee would also be a potential competitor of the inventor, because the licensee would be free to license the invention to a competitor (even if the licensee is not itself a competitor). To avoid this problem, the Sixth Circuit ruled that federal law pre-empts any state law which would effect a transfer of an intellectual property license without express authorization. The Sixth Circuit therefore found that the license to Permaglass did not survive the merger with Guardian Industries, since PPG had not authorized the transfer of the license from Permaglass to Guardian Industries.
The Sixth Circuit applied the same reasoning to Novelis. The original license granted a non-exclusive and non-transferable right to AlcanOhio. When AlcanOhiounderwent the series of mergers that resulted in the creation of Novelis, Cincom was not given the opportunity to approve of the transfer from AlcanOhioto Novelis. Therefore, because Cincom did not authorize the transfer, the subsequent use of the software by Novelis was copyright infringement.
The Sixth Circuit rejected Novelis’ arguments to the contrary. Novelis argued that the Ohiomerger law had changed since the PPG decision. The Sixth Circuit noted, however, that the change (which deleted the word ‘transferred’) was largely cosmetic, and still resulted in a transfer of the license from Alcan Ohio to Novelis without prior authorization from Cincom. The Sixth Circuit also distinguished the cases cited by Novelis. Those cases did not involve intellectual property licenses. The decision by the Sixth Circuit only addresses intellectual property transfers; federal intellectual property law does not pre-empt state law in other circumstances.
Significance to Intellectual Property Licensees
Unlike many other agreements, the transfer of intellectual property rights is not automatic and is entirely dependant on the scope of licensee defined in the intellectual property license. If the scope does not expressly cover sub-licensees, mergers, related companies, there is no presumption that the license extends to such parties. In Cincom, the court took a broad view of what constitutes a transfer and concluded that transfers should include a merger. Thus, organizations contemplating mergers should review their licensing arrangements prior to the merger in order to determine what restrictions there are on who is defined as a licensee for purposes of the license, and whether an express agreement from the licensor is needed to effectively transfer the license to the new merged entity. A failure to conduct such a review and obtain the permission of the licensor could result in a hefty liability for infringement of the licensor’s copyrights as occurred in Cincom Sys., Inc. v. Novelis Corp.