Cincom v. Novelis: Federal Copyright Law Trumps State Merger Law

Contract boiler plate – or the lack thereof – can be an Achilles heel in a software licensing transaction.  Case in point:  Cincom Systems, Inc. v. Novelis Corp., No. 07-4142 (6th Cir. Sept. 25, 2009).  Affirming the decision of the lower federal court, the U.S. Sixth Circuit Court of Appeals last week held that copyright infringement occurred where there was a failure to obtain the software licensor’s consent to an assignment of a software license agreement that resulted by operation of law under the Ohio merger statute.

This is true even though Cincom’s software continued to be used in the same business operation, at the same facility and on the same computer system as before the merger.  In 2003, Alcan Ohio completed an internal reorganization through a series of mergers in which its operations in Oswego, New York where the Cincom software had been used, ultimately was spun off into a new company, later renamed Novelis Corporation.  The license agreement between Cincom and Alcan Ohio stated that the license was personal to Alcan Ohio, that it was non-transferable and that no transfer was permitted without the prior written approval of Cincom. 

Novelis, as the successor to the subject portion of the former Alcan Ohio business, believed that the Ohio merger statute should control whether a transfer took place.  By Novelis’ reasoning, a transfer by operation of law and the vesting of the former entity’s license rights in Novelis was not the type of transfer sought to be prohibited under the license agreement.  While this might be true with other property, the Sixth Circuit agreed with the lower court that this is not the case with respect to copyrights or patents, transfers of which are controlled by federal law.  Bottom line:  if any entity other than the authorized licensee holds the license without permission of the licensor then the licensor’s copyright has been infringed.

While the assignability of license rights is always a matter of negotiation, assignment clauses in software license agreements frequently include terms that expressly allow assignment to a successor in interest to the business unit that originally licensed the software.  Where such language is not present, counsel reviewing a contract after the fact in preparation for a merger will sometimes take comfort that an assignment of a property interest by merger is one that occurs by operation of law and, thus, third party consent, if otherwise necessary, is not normally required absent an express prohibition against assignment or transfer by operation of law.  Such comfort is misplaced if licenses of patents and copyrights are involved.  In this context, silence is anything but golden and unless you include express permission in the license or obtain consent, copyright infringement will occur.    

Link to Decision:

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