Earlier this year, the High Court handed down a judgment in VLM v Ravensworth  EWHC 228 (Ch) to the effect that a sub-licence of copyright survived the termination of the head-licence, and even the liquidation of the sub-licensor.
While this result may seem surprising to all but the most observant eye, it is not the judgment on these facts which is likely to be most interesting to practitioners in the long run, but the impact which it may have on the approach to structuring and drafting licences and sub-licences.
The background to the case was essentially a love triangle between VLM Holdings and its subsidiary VLM UK, Spicerhaart (their customer) and Ravensworth (a competitor). VLM UK was, as the name suggests, the UK branch of the VLM business which provided various printing services. The companies had almost identical boards of directors. One of VLM UK’s services was the provision of its ‘VS’ software, which automated the input of various details into a pre-set format for printing. Copyright in the software was owned by the Irish parent company VLM Holdings. The business operated on the basis of an informal, not written, licence granted by VLM Holdings to VLM UK.
The software had a particular stronghold in the property market, where estate agents, such as Spicerhaart, would use it to prepare particulars and other fixed-format documents for various properties. Once the document was prepared, the estate agent despatched it electronically to VLM UK for printing. Typically the VS software was based on VLM UK’s own servers and was accessed remotely by the estate agent. However, in Spicerhaart’s case, due to concerns over relying on a third party for such a business critical system, it negotiated a sub-licence from VLM UK so that it could hold its own copy of the software (in case the connection to VLM UK’s servers failed).
VLM UK hit financial problems. Despite efforts to save the business, the decision was taken to liquidate VLM UK. The informal licence from VLM Holdings to VLM UK was expressly terminated. VLM Holdings took an alternative route to market by granting an exclusive licence of the VS software to Ravensworth, a competitor provider of printing services in the UK. The intention was that, after collecting three years of royalties, the software would be assigned to Ravensworth. The agreement also provided that, should VLM Holdings commit a material breach, the assignment would take early effect at that point. Ravensworth welcomed the deal as it gave them access to a wider base of customers which, up to that point, they had been barred from entering because of the customers’ reliance on the VS software.
So it came to be that Spicerhaart’s custom moved to Ravensworth. However, some time later Spicerhaart decided to move its business elsewhere. Ravensworth consequently reminded Spicerhaart that it now had an exclusive licence of the VS software and that Spicerhaart was not permitted to use it anymore. Spicerhaart objected, saying that the rights granted to it under the sub-licence from VLM UK continued. Ravensworth relied on this as a material breach of its exclusive licence from VLM Holdings (on the basis that, if Spicerhaart’s rights continued, then its own licence was not ‘exclusive’), stopped paying royalties and claimed the benefit of the early assignment. In turn, VLM Holdings alleged that Ravensworth was in material breach of the exclusive licence for failure to pay the royalties.
Ultimately, the dispute came down to whether or not Spicerhaart’s sub-licence remained in force. The key factors in the decision were that: (a) a sub-licence of IP rights is not akin to a lower proprietary right dependent upon a higher right as in land law (such as a lease, under a freehold) - it is simply a permission to do something; (b) the terms of the head-licence are key to what is permitted by the sub-licence and, in this case, the relevant permission under the informal head-licence from VLM Holdings to VLM UK was no more than a permission to grant a sub-licence; (c) the sub-licence was granted, in effect, on an agency basis, and the fact that the permission to grant a sub-licence comes to an end does not affect those which have already been granted; and (d) similarly, the sub-licensor’s liquidation does not affect the position that, when it comes down to it, the permission was ultimately granted by the head-licensor, VLM Holdings.
Therefore, Spicerhaart retained the right to use the VS software (technically, it may not be accurate to say that a ‘sub-licence’ continued), and VLM Holdings was in material breach of the exclusive licence granted to Ravensworth.
No ‘one size fits all’
A number of important practice points are highlighted by this judgment. There is no ‘one size fits all’ solution to licensing arrangements, and it may be that in the right circumstances the parties intend a sub-licence to survive termination of the head-licence. But, as in any area, IP practitioners would be well advised to deal with that question directly one way or the other, including the following considerations:
- As many others have done, this case highlights the need to ensure that the right licences are in place, even (or especially) between companies in the same corporate group. If VLM Holdings might have foreseen the consequences of its intra-group relationship with VLM UK, and its sub-licensing relationship with Spicerhaart, then it may have wished to put in place a more formal head-licence. If it had done so, it could have expressly catered for a number of the following issues, rather than rely on more nebulous informal licence terms to be determined by the courts.
- The main thing to come out of this case is confirmation that, depending on the circumstances, a sub-licence is capable of surviving termination of the head-licence. The court construed the Holdings-to-UK head-licence to be a fairly unlimited right to grant sub-licences. In appropriate circumstances, IP owners may wish to restrict such a right to grant sub-licences that may subsist only for so long as the head-licence subsists.
- Similarly, in appropriate circumstances, the head-licensor may wish to stipulate that any sub-licence is granted on the express basis that it will terminate automatically upon the sub-licensor’s insolvency (or at least upon notice by the head-licensor). However, there are commonly good commercial reasons for the ultimate sub-licensee to resist such a term, and so more flexibility may be required here.
- If either or both of the two points above are taken, the head-licensor may wish to oblige the sub-licensor to communicate this to the sub-licensee as a term of the sub-licence. Not only will this help to manage the sub-licensee’s expectations, it will also play a vital role in ensuring that those termination provisions are enforceable as against the sub-licensee.
- Not expressly addressed in this case were the other contractual consequences of the sub-licensor’s liquidation. While the permission to use the IP under licence was granted by VLM UK effectively as agent for VLM Holdings, the contract through which that permission was given was always a contract between VLM UK and Spicerhaart. VLM Holdings was not a party to it. So what happens to the contractual terms surrounding the licence, such as royalties? This brings fundamental issues of privity of contract into play, and something more creative may be required if a head-licensor wishes, for example, to step in and obtain the right to receive royalties in these circumstances.
Jim McDonnell is senior associate at DLA Piper