IP Licenses: Restrictions

on Assignment and Change

of Control
Elaine D. Ziff and John G. Deming,
Skadden, Arps, Slate,
Meagher & Flom LLP This Practice Note is published by Practical Law Company
on its PLC Intellectual Property & Technology web services
at http://us.practicallaw.com/3-517-3249.

This Note discusses US law relating „„Parties negotiating license agreements must consider clauses
that are necessary to prohibit or permit the transfer of the
to the transferability of agreements agreement under various future circumstances, for example, a
corporate reorganization or a sale of the business.
that contain intellectual property „„Buyers and sellers of companies must consider the effect a
proposed transaction may have on existing agreements so that:
(IP) licenses. It includes guidance „„if the target will lose its license rights, the buyer can
on evaluating assignability, dealing either require that the licensor’s consent to the transfer
of the agreement be a condition precedent to closing or,
with non-assignable licenses in M&A alternatively, negotiate other adjustments; and
„„the parties can appropriately tailor the purchase or merger
transactions and drafting tips for agreement and related disclosure schedules to address
agreements that require licensor’s consents for transfer.
assignment provisions in favor of a
This Note discusses US law relating to the transferability of agreements
licensor or licensee. It also considers that contain IP licenses and includes guidance on evaluating
assignability, dealing with non-assignable licenses in M&A transactions
issues relating to the transferability and drafting assignment provisions. It also considers issues relating
to the transferability of IP licenses in the context of bankruptcy and
of IP licenses in the context of secured transactions, and change-of-control provisions.

bankruptcy and secured transactions

TRANSFERABILITY OF CONTRACTS
and change-of-control provisions.
DEFAULT RULES: CONTRACTS GENERALLY
The transferability of intellectual property (IP) license agreements Under basic contract law, a contract that is silent on assignment is
requires special consideration because the default rules differ from generally freely transferable unless either:
the treatment of many other agreements. In particular, a licensee’s „„A statute or public policy provides otherwise.
rights are generally not assignable unless the license agreement
„„There are material adverse consequences to the non-assigning
expressly permits assignment or the licensor otherwise consents. party.
Understanding whether a particular IP license is transferable is (Restatement (Second) of Contracts § 317(2) (1981); see also
important for two reasons: UCC § 2-210 (1)(a) (2003).)

1 Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.
 IP Licenses: Restrictions on Assignment and Change of Control

A personal services agreement is an example of a contract McCarthy, Trademarks and Unfair Competition §§ 6:2-6:3 (West,
where public policy weighs against assignment of the service 2011) (McCarthy) and Sony Corp. of Am. et al. v. Universal City
provider’s obligations. Studios, Inc., 464 U.S. 417, 439 n. 19 (1984) (Sony)).

The underlying policy distinction between patents and copyrights

DEFAULT RULES: IP LICENSES compared to trademarks could theoretically support different
Where an IP license is silent on assignability by the licensor, default rules on the assignability of the licensee’s rights. However,
the licensor can generally assign its rights, subject to the same many courts and commentators considering the issue have held
considerations as other types of contracts. Absent special that trademark licenses are to be treated similarly to patent and
circumstances, the licensed IP, not the licensor’s identity, is copyright licenses (see, for example, In re XMH Corp., 647 F.3d
the main attraction of the license to the licensee. This benefit 690, 695 (7th Cir. 2011) (XMH); see also In re N.C.P. Mktg. Grp.
presumably can be provided by whoever owns the IP. In cases Inc., 337 B.R. 230, 235-236 (D. Nev. 2005) (N.C.P.)).
where a license grant was found binding against a subsequent
owner of the licensed IP, courts have not addressed whether CONTRACTING AROUND THE DEFAULT RULE
public policy precludes this result (see Am. Dirigold Corp. v.
Dirigold Metals Corp., 125 F.2d 446, 452 (6th Cir. 1942) (Am. Parties can always contract around these default rules (see
Dirigold), Sanitec Indus. v. Micro-Waste Corp., No. H-04-3066, Drafting Considerations). Contract terms expressly allowing or
2006 U.S. Dist. LEXIS 86803, at *106 (S.D. Tex. Nov. 28, 2006) prohibiting transferability are generally enforceable.
(quoting Am. Dirigold); see also ICEE Distribs., Inc. v. J&J Snack Even if an IP license includes provisions addressing assignment,
Foods Corp., 325 F.3d 586, 593 (5th Cir. 2003)). questions may still arise concerning the transferability of a
By contrast, where an IP license is silent on assignability by the licensee’s rights:
licensee, the majority of courts have found that a licensee’s rights are „„If the assignment provision is ambiguously drafted.
presumed not assignable without the licensor’s express consent. „„If the type of transaction at issue, such as a merger or stock
sale, is not expressly contemplated by the applicable provision.
Federal Policy Reasons „„In the bankruptcy context, where an anti-assignment clause is
Authors and inventors enjoy protection under the Constitution. typically read out of the agreement under Section 365(c) of the
Congress has the power to promote the progress of science and the Bankruptcy Code (see Bankruptcy Issues).
useful arts by securing to authors and inventors the exclusive rights
to their respective works and inventions for a limited time (U.S.
Const. art. I, § 8, cl. 8). Copyrights and patents give authors and EVALUATING ASSIGNABILITY ISSUES
inventors these rights under the federal copyright and patent laws. In addition to the express language of any clause addressing
Federal policy derived from these constitutional rights favors a assignment or change of control, several other factors are relevant
copyright proprietor’s or patentee’s ability to control the identity of when analyzing a licensee’s ability to transfer its rights without the
its licensees. As a result, courts have treated patent and copyright licensor’s consent:
license agreements similar to personal services contracts (see „„The application of federal versus state law (see Federal versus
Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 284 F.3d 1323, State Law).
1328 (Fed. Cir. 2002) (patent license), Harris v. Emus Records Corp., „„The nature of the IP involved and the exclusivity of the license
734 F.2d 1329, 1334 (9th Cir. 1984) (copyright license) and In re (see Type of IP License Agreement).
Buildnet, Inc., No. 01-82293 et al., 2002 Bankr. LEXIS 1851, at *15-
„„The type of transaction purporting to effect the transfer (see
17 (Bankr. M.D.N.C. Sept. 20, 2002) (Buildnet) (software license)).
What Corporate Transactions Constitute an Assignment?).
Trademarks have different legal underpinnings. Trademarks are „„Other factual considerations (see Factual Considerations).
protected under:
„„The federal Lanham Trademark Act.
„„State laws covering unfair competition and other business torts,
FEDERAL VERSUS STATE LAW
state trademark registration statutes, consumer protection A threshold issue to the determination of assignability is whether
statutes and common law. federal or state law applies.

Any Constitutional basis for trademark protection stems from the

Commerce Clause (U.S. Const. art 1, Section 8, cl.3; see generally
FEDERAL LAW GENERALLY GOVERNS ASSIGNABILITY
In re Trade-mark Cases, 100 U.S. 82, 93-95 (1879)). Unlike State law generally governs the assignability of contracts. However,
patents and copyrights, the purpose of trademarks is primarily because most IP is established under federal law, the majority of
to prevent customer confusion and to protect the public’s modern courts have held that federal common law governs the
expectation as to the source and quality of goods or services, assignment of IP licenses (see, for example, Cincom Sys., Inc. v.
rather than advancing technology or creativity (see J. Thomas Novelis Corp., 581 F.3d 431, 436 (6th Cir. 2009) (Cincom) (patent

Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 2
and copyright licenses), Gardner v. Nike, Inc., 279 F.3d 774, 780- Fewer cases have addressed the assignability of the licensee’s
81 & n.5 (9th Cir. 2002) (Gardner) (copyright license), N.C.P., at rights under exclusive licenses.
235-36 (trademark license) and Everex Sys., Inc. v. Cadtrak Corp.
It can be argued that an exclusive license represents the grant of
(In re CFLC, Inc.), 89 F.3d 673, 677 (9th Cir. 1996) (CFLC)).
a property interest to the licensee rather than a mere contractual
Trade secret licenses are an exception because trade secrets right to use the licensed IP. Nevertheless, the licensor has a similar
are protected by state law (see Trade Secret Licenses). However, interest in controlling the identity of its licensees, whether the
agreements licensing trade secrets often include licenses to other license is exclusive or non-exclusive. For this reason, an increasing
types of IP. number of recent decisions appear to ignore the distinction
between exclusive and non-exclusive licenses or find it irrelevant to
A few courts, particularly in California, have held that state law
the default rule, with the exception of copyright licenses.
applies to the assignability of IP licenses (see, for example,
Superbrace, Inc. v. Tidwell, 21 Cal.Rptr.3d 404, 407, 409-10 (Cal.
Ct. App. 2004) (Superbrace) (patent license); see also White v. PATENT LICENSES
Hitachi, Ltd., No. 3:04-CV-20, 2007 U.S. Dist. LEXIS 68765, at
*20 (E.D. Tenn. Sept. 17, 2007) (Hitachi)). If state law applies, Non-exclusive Patent Licenses
then the court may engage in a factual analysis of whether the On the basis of federal policy protecting the patent owner, non-
particular license is analogous to a personal services contract exclusive patent licenses have been found to be presumptively non-
(see, for example, Superbrace, at 414-416). assignable by the licensee (see, for example, CFLC, at 679-80, PPG
Indus., Inc. v. Guardian Indus. Corp., 597 F.2d 1090, 1093-94 (6th
In the context of trademark licenses, the US Court of Appeals for
Cir. 1979) (PPG) and Board of Regents v. BASF Corp., 2007 U.S. Dist
the Seventh Circuit observed, in dicta, that the debate over federal
LEXIS 82492, at *36-37 (D. Neb. Nov. 5, 2007) (Board of Regents)).
versus state law is irrelevant because, whether the law governing
the assignability of trademark licenses is state, federal or foreign, the
default rule favoring non-assignability is the same (XMH, at 695 ).
Exclusive Patent Licenses
The trend is moving toward treating exclusive patent licenses the
STATE LAW GOVERNS WHETHER AN ASSIGNMENT same way as non-exclusive licenses concerning non-assignability
OCCURRED of the licensee’s rights (see, for example, ProteoTech, Inc. v.
Unicity Int’l, Inc., 542 F. Supp. 2d 1216, 1219 & n.2 (W.D.
The question of whether a license in fact has been assigned
Wash. 2008) and In re Hernandez, 285 B.R. 435, 440-42
is controlled by state law (see, for example, Netbula, LLC
(Bankr. D. Ariz. 2002) (Hernandez)).
v. BindView Dev. Corp., 516 F. Supp. 2d 1137, 1148 (N.D.
Cal. 2007) (Netbula) and Beghin-Say Int’l Inc. v. Ole-Bendt Nevertheless, in Superbrace, a California appellate court, relying on
Rasmussen, 733 F.2d 1568, 1571 (Fed. Cir. 1984)). California Supreme Court precedent from 1957, found that a particular
patent license (which happened to be exclusive) was assignable under
For example, in a merger, the applicable state merger statute or
state contract law principles, noting that there is no reason to exempt
statutes may determine whether the merger causes an assignment
patent licenses from general rules (see also Hitachi, at *20).
of an IP license held by the constituent entities (see Mergers).

COPYRIGHT LICENSES
TYPE OF IP LICENSE AGREEMENT Courts recognize the similar constitutional origins of copyright
The type of licensed IP and the exclusivity of the license grant are and patent law (see Sony, at 439) and have treated copyright and
both factors in evaluating the assignability of an IP license. patent licenses similarly in many contexts. However, the analysis
of exclusive copyright licenses raises distinct issues under the
EXCLUSIVITY GENERALLY Copyright Act (see Exclusive Copyright Licenses).

Regardless of the type of IP, non-exclusive licenses have almost

Non-exclusive Copyright Licenses
unanimously been found non-assignable by a licensee without
the licensor’s consent. This is supported by the federal policy Like patent licenses, non-exclusive copyright licenses have
protecting IP owners (see Federal Policy Reasons). There is also virtually unanimously been found non-assignable without the
an argument that a non-exclusive license is similar to a mere licensor’s consent (see In re Patient Educ. Media, Inc., 210 B.R.
covenant-not-to-sue the licensee for infringement. Courts typically 237, 240, 242-43 (Bankr. S.D.N.Y. 1997) (Patient Educ.), In re
consider covenants-not-to-sue inherently personal to the recipient Golden Books Family Entm’t, Inc., 269 B.R. 311, 314, 316-17
(see, for example, CFLC, at 679 and Murray v. Franke-Misal (Bankr. D. Del. 2001) (Golden Books) and Buildnet, at *14-15).
Techs. Grp., LLC (In re Supernatural Foods, LLC), 268 B.R. 759,
798-802 (Bankr. M.D. La. 2001) (Supernatural Foods)).

3 Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.
 Intellectual
IP Licenses:Property:
Restrictions
Stock
on Purchases
Assignmentand
andMergers
Change of Control

Exclusive Copyright Licenses Non-exclusive Trademark Licenses

The law concerning exclusive copyright licenses is less developed. Non-exclusive trademark licenses have been generally treated
From a statutory perspective, exclusive copyright licenses are the same as non-exclusive copyright and patent licenses (see
distinguishable from non-exclusive copyright licenses. N.C.P., at 236-37).

The Copyright Act defines an exclusive copyright license as a Courts have applied the same deference to a trademark licensor’s
“transfer of copyright ownership” (17 U.S.C. § 101). The owner rights to select its licensees that courts have applied to patent
of any exclusive right in a copyright is entitled to all protections and copyright licensors (see N.C.P., at 236, Tap Publ’ns, Inc. v.
and remedies of a copyright owner (17 U.S.C. § 201(d)(2)). Chinese Yellow Pages (New York) Inc., 925 F. Supp. 212, 218
Because a copyright owner’s rights include the right to transfer (S.D.N.Y. 1996) (Tab Publ’ns); see also McCarthy, § 25:33).
ownership, several cases and a leading copyright commentator
support the position that an exclusive copyright license should be Exclusive Trademark Licenses
freely assignable by the licensee, absent contrary provisions in Recent decisions have included broad pronouncements regarding
the agreement (see Traicoff v. Digital Media, Inc., 439 F. Supp. 2d the presumptive non-assignability of trademark licenses that do
872, 877 (S.D. Ind. 2006), Golden Books, at 318 and 3 Melville B. not distinguish exclusive and non-exclusive licenses (see XMH, at
Nimmer & David Nimmer, Nimmer on Copyright § 10.02 (2010)). 695; see also Miller).
However, the US Court of Appeals for the Ninth Circuit took However, a few courts have treated exclusive trademark licenses
the opposite position in Gardner, which involved the grant of like ordinary contracts concerning their assignability, although
an exclusive sublicense. Based on legislative history, policy the exclusivity of the license did not control the analysis. These
considerations and statutory construction, the court in Gardner decisions allowed the licensee’s assignment of an exclusive
concluded that a licensee must seek a licensor’s consent to trademark license because:
assign an exclusive copyright license to ensure that the licensor
„„In Regal Ware, Inc. v. Global Home Prods. LLC (In re Global
can monitor the use of its copyright (Gardner, at 781)).
Home Prods. LLC) and In re Rooster, Inc. the courts did not
find the trademark license to be similar to a personal services
TRADEMARK LICENSES contract (No. 06-10340, 2006 WL 2381918, at *1 (D. Del. Aug.
In evaluating the assignability of trademark licenses, the concern 17, 2006) and 100 B.R. 228, 233-35 (Bankr. E.D. Pa. 1989)).
is less that a competitor may gain control of the license, thereby „„In In re Rooster Inc. the court also found that the licensor’s
undermining the benefits that the patent or copyright “monopoly” interest in the quality of the licensee’s goods was addressed
is meant to provide to authors and inventors. Rather, the by the licensor’s right to stringently supervise the licensee (see
trademark owner is viewed as having an important interest in the also In re Sunrise Restaurants Inc., 135 B.R. 149, 152-53
party to whom its trademark is licensed so that it can maintain (Bankr. M.D. Fla. 1991)).
the goodwill, quality and value of its product and, therefore,
its trademark (see XMH, at 696, N.C.P., at 236 and McCarthy TRADE SECRET LICENSES
§ 25:33). In Miller v. Glenn Miller Prods., Inc., a presumption
If a license agreement solely covers trade secrets, which are
against sublicensing of trademarks without the licensor’s consent
established under state law, then the relevant state law governing
was extended to rights of publicity on similar grounds (454 F.3d
the agreement should control its interpretation (see Pitney-Bowes,
975 (9th Cir. 2006) (Miller)).
Inc. v. Mestre, 517 F. Supp. 52, 59 (S.D. Fla. 1981) and cases
The uniqueness of trademarks compared to other types of IP cited in that decision). For example, in M.D. Mark, Inc. v. Kerr-
was recognized indirectly by the Supreme Court, when the Court McGee Corp., the US Court of Appeals for the Tenth Circuit upheld
denied a petition of certiorari from the US Court of Appeals for a jury’s finding that the transfer by merger of a non-transferable
the Ninth Circuit’s decision affirming the district court decision trade secret license was prohibited, without reference to federal IP
in N.C.P. (In re N.C.P. Mktg. Grp. Inc., 279 F. App’x 561 (9th Cir. policies (565 F.3d 753, 762-63 (10th Cir. 2009) (M.D. Mark)).
2008)). The bankruptcy issue before the Court was whether a non- For agreements licensing both trade secrets and patents, there
assignable contract is assumable by a debtor-in-possession. Justice may be conflict between federal patent law and state trade secret
Kennedy, joined by Justice Breyer, explained in a statement that law. Based on supremacy principles, federal law should determine
he agreed not to grant certiorari because the contract at issue was the rights under the agreement to the extent that enforcement of
a trademark license (N.C.P. Mktg. Group, Inc. v. BG Star Prods., trade secret law conflicts with the enforcement of patent law (see
Inc., 129 S. Ct. 1577 (2009) (N.C.P. S. Ct.)). This would require Pitney-Bowes, Inc. v. Mestre, 701 F.2d 1365, 1372 n.12 (11th Cir.
the Court to first interpret “antecedent questions under state law 1983)). The same result would be expected in the less common
and trademark-protection principles” (N.C.P. S. Ct., at 1578). case of a hybrid copyright and trade secret license agreement.
By contrast, Justices Kennedy and Breyer noted that patent and
copyright licenses are examples of non-assignable contracts. Trade secret licenses typically contain confidentiality provisions
that limit the use and disclosure of the secrets.

Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 4
Some courts have found that confidentiality provisions provide a If a licensee sells most of its assets but retains the license, then
separate basis to prohibit the assignment of a trade secret license the licensor may argue that this is a de facto assignment of the IP
without the licensor’s consent (see Buildnet, at *4-5, *16; see license because of the change in the character of the licensee.
also M.D. Mark, at 755-64).
However, in General Mills, Inc. v. Kraft Foods Global, Inc., the US
Cases have reached differing outcomes on the assignability of Court of Appeals for the Federal Circuit held an asset sale of this
trade secret licenses based on evaluation of harm to the licensor kind was not an assignment of a covenant-not-to-sue on a patent
arising from the transfer, the interpretation of the applicable because the agreement did not expressly require the retention of
merger statutes and contract construction principles: any assets (487 F.3d 1368 (Fed. Cir. 2007)).
„„The Texas Courts of Appeals noted that, a merger between
related entities did not necessarily constitute a prohibited STOCK SALES
transfer of licensed trade secrets because the contract did
A pure stock sale involves the transfer of the target company’s
not address mergers (TXO Prod. Co. v. M.D. Mark, Inc., 999
shares or other equity interests to the buyer without transferring
S.W.2d 137, 141-43 (Tex. App. 1999) (TXO)).
any of the target company’s assets. Because the target company
„„The Delaware Court of Chancery did not prevent a licensor’s
remains the same legal entity following the transaction, a stock
transfer of a confidential technology and related license agreement
sale is typically not found to cause an assignment of the target
because the alleged harm to the licensee was not related to
company’s license rights (see, for example, Hitachi, at *5, *8-9;
the disclosure of any secrets under that particular transaction
see also PPG, at 1097, Institut Pasteur v. Cambridge Biotech
(Eastman Kodak Co. v. Cetus Corp., No. 12,249, 1991 Del. Ch.
Corp., 104 F.3d 489, 494 (1st Cir. 1997) (Insitut Pasteur)
LEXIS 197, at *16-17 (Del. Ch. Dec. 3, 1991) (Eastman Kodak)).
(patent), and Review Directories Inc. v. McLeod USA Publ’g, Co.,
„„The Massachusetts Superior Court found that a reverse No. 1:99-CV-958, 2001 U.S. Dist. LEXIS 9807, at *7, *10 (W.D.
merger with a subsidiary of the licensor’s competitor did not Mich. July 23, 2001) (Review Directories) (trademark)).
cause an impermissible assignment of trade secret license,
in part, because no disclosure of confidential information to Stock sales generally do not pose an issue where a license agreement
the competitor actually occurred (PharMetrics, Inc. v. Source is silent on assignment or includes a mere prohibition on assignment.
Healthcare Analytics, Inc., No. 054791BLS1, 2006 WL
However, in certain circumstances, a court may find a stock sale
3201065, at *3, *5 (Mass. Super. Sept. 5, 2006) (PharMetrics)).
violates an anti-assignment provision in an IP license, if the sole
„„The New York State Supreme Court of New York County noted meaningful asset of the target company is the license agreement
that an impermissible assignment of the license posed a risk of (see In re Alltech Plastics, Inc., No. 86-23673-B, 1987 Bankr.
irreparable injury that the licensor’s confidential information will LEXIS 2259, at *19 (Bankr. W.D. Tenn. Dec. 30, 1987) and
fall into the hands of a competitor (Biosynexus, Inc. v. Glaxo Westinghouse Elec. & Mfg. Co. v. Radio-Craft Co., 291 F. 169,
Group Ltd., 11 Misc. 3d 1062(A), 816 N.Y.S.2d 693, at *7
173 (D.N.J. 1923)). Outside the IP license context, the prohibition
(Sup. Ct. N.Y. County 2006) (Biosynexus)). of “direct and indirect” transfers of a partnership agreement was
relevant to determining whether the sale of stock of a party to the
WHAT CORPORATE TRANSACTIONS agreement violated the provision (In re Asian Yard Partners, Nos.
95-333-PJW, 95-334-PJW, 1995 WL 1781675, at *7 (Bankr. D.
CONSTITUTE AN ASSIGNMENT? Del. Sept. 18, 1995) and Hake).
The second prong of the analysis of whether an IP license is assignable
A stock sale may trigger a change-of-control provision (see
is the nature of the transaction purporting to effect the transfer.
Change-of-Control Provisions).

ASSET SALES
MERGERS
In an asset sale, the seller transfers specified assets and liabilities to
the buyer. An asset sale that purports to include IP rights that the seller If a license does not include a provision that expressly prohibits
licenses from a third party will violate the related license agreement to mergers, then the evaluation of assignability in a merger context
the extent that it prohibits the assignment of the licensee’s rights. may require an interpretation of state merger statutes (see State
Merger Statutes). The merger structure will also have an impact
If the license agreement is silent on its assignability, or deemed on the evaluation (see Forward Mergers and Reverse Mergers).
silent as a result of the licensee’s bankruptcy (see Bankruptcy
Issues), then analyzing whether the licensee can assign its rights
without the licensor’s consent may depend on the type of licensed
IP and exclusivity of the grant (see Type of IP License Agreement)
and, to a lesser extent, other factual circumstances.

5 Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.
 IP Licenses: Restrictions on Assignment and Change of Control

State Merger Statutes Restrictions on Assignment “By Operation of Law”

Whether a merger effects an automatic assignment or transfer In some cases, an IP license agreement expressly prohibits
of contract rights is a matter of state law (Evolution, Inc. v. Prime “assignments by operation of law” but otherwise does not
Rate Premium Fin. Corp., No. Civ.A. 03-2315-KHV, 2004 WL expressly prohibit a merger. Whether a merger is an assignment
1824389, at *5 (D. Kan. Aug. 13, 2004) (Evolution)). This, in by operation of law depends on the interpretation of the applicable
turn, can depend on the relevant state merger statute (see, for merger statute and the intent of the parties concerning the
example, Netbula, at 1148 and Meso Scale Diagnostics, LLC v. contractual language.
Roche Diagnostics GMBH, No. 5589-VCP, 2011 WL 1348438, at
Courts have not been uniform in their resolution of this issue.
*9 (Del. Ch. Apr. 8, 2011) (Meso Scale)).
Some have held that a contractual limitation on assignment by
Merger statutes are not identical and can vary from state to operation of law can include a merger (see, for example, Tenneco
state. For example, the New York merger statute provides that Auto. Inc. v. El Paso Corp., No. Civ.A. 18810-NC, 2002 WL
all real and personal property assets and causes of action of the 453930, at *2 (Del. Ch. Mar. 20, 2002), Meso Scale, at *12-19
constituent entities “vests” in the surviving corporation without and In re Asian Yard Partners, Nos. 95-333-PJW, 95-334-PJW,
further act or deed (N.Y. Bus. Corp. Law § 906(b)(2)). The 1995 WL 1781675, at *3 (Bankr. D. Del. Sept. 18, 1995)).
Delaware merger statute is similarly worded (Del. Code Ann. The court in PharMetrics held that an IP license prohibiting
tit. 8, § 259(a)). A Kansas federal court noted that, under the assignment by operation of law did not include a reverse merger
Kansas merger statute, rights are transferred to and vested in the because the applicable merger statute’s use of the term “vesting”
surviving entity (Evolution, at *6). was not equivalent to an assignment (see PharMetrics, at *4-5).

In addition, courts can interpret the same merger statute Assignments or transfers by foreclosure or inheritance may also
differently. The US Court of Appeals for the Sixth Circuit be considered assignments by operation of law (see, for example,
determined that “vesting” under the Ohio merger statute is Sky Technologies LLC v. SAP AG, 576 F.3d 1374, 1379, 1381
equivalent to a transfer (Cincom, at 438). The court in TXO (Fed. Cir. 2009)).
held that under the Ohio, Texas, and Delaware merger statutes,
“vesting” is not equivalent to a transfer (TXO, at 143). FORWARD MERGERS
Whether the applicable merger statute or statutes renders the Whether a transaction is a forward or reverse merger also affects
transaction the equivalent of a “transfer” of one or both of the the analysis of transferability.
constituent entities’ contracts is, therefore, a part of the analysis, but In a forward merger, the target company merges into the acquirer.
a detailed examination of this issue is beyond the scope of this Note. The acquirer, now called the “survivor” of the merger, assumes the
target company’s assets, rights and liabilities. In a forward triangular
Determining Which State’s Law Applies merger, the target company merges into a subsidiary of the acquirer.
A further question in determining whether a transfer has occurred as A forward merger is more likely to be treated as equivalent to an
a result of a merger transaction is whether to apply the law governing assignment of the target’s IP license agreements than a reverse
the IP license or the law governing the merger agreement. merger because the target company ceases to exist as a separate
The more common approach is for courts to apply the law entity, for example:
governing the license agreement (see, for example, Netbula, „„Patent. The court in PPG held that a forward merger violated
at 1149 and Nat’l Bank of Can. v. Interbank Card Assn, 507 an anti-assignment clause in a non-exclusive patent license,
F. Supp. 1113, 1123-24 (S.D.N.Y. 1980) (Interbank); see also finding that a transfer by operation of law is still an assignment
PharmMetrics, at *2). (PPG, at 1096; see also Board of Regents, at *47-49).
„„Trademark. The court in Council of Better Bus. Bureaus, Inc.
However, some courts have applied the law of the states whose
v. Better Bus. Bureau, Inc. held a forward merger resulted in
merger statutes govern the transaction. In PPG, the US Court
impermissible assignment of non-exclusive trademark license
of Appeals for the Sixth Circuit held that Ohio and Delaware
that was the sole basis for the licensee’s business (No. 99-CV-
merger statutes determined the effect of a forward merger on a
282, 1999 WL 288669, at *3 (N.D.N.Y. Mar. 30, 1999)).
patent license (PPG, at 1093). The court in Evolution denied a
summary judgment motion because the states of incorporation of „„Copyright (software). In Cincom, a non-exclusive “non-
the merging entities and the law governing the merger agreement transferable” license was breached by the forward merger of
were not identified (Evolution, at *6). the licensee with its sister corporation (Cincom, at 439-40).
„„Trade Secrets (data). The court in M.D. Mark held that a non-
If the merger is equivalent to a transfer under the applicable state
transferable license for seismic data protected as a trade secret
merger statute, then, as with other assignments, the type of licensed IP
was breached by forward merger (M.D. Mark, at 760-62).
and the exclusivity of the grant is relevant to the analysis of whether the
transfer is permissible (see Type of IP License Agreement).

Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 6
REVERSE MERGERS ADVERSE IMPACT ON NON-ASSIGNING PARTY
In a reverse merger, the acquirer merges into the target company and Under state law, an adverse impact on the non-assigning party
disappears. The target company is the survivor of the merger. A reverse is a major consideration in determining whether a contract is
triangular merger structure is the most commonly used version of assignable.
this structure. The acquirer creates a wholly-owned subsidiary which
Some courts have focused on whether the proposed successor
then merges into the target company. As a result, the target company
is a competitor of the licensor. The court in SQL noted that, as a
becomes a wholly-owned subsidiary of the acquirer.
result of the impeding reverse triangular merger, the licensor’s
Because the target company survives the merger, reverse mergers competitor would effectively control the licensee (SQL, at *6; see
are widely assumed not to violate non-assignment provisions in also PPG, at 1095-97 and Biosynexus, at *7). However, the court
the target company’s contracts. in PharMetrics held that a merger where the licensor’s competitor
was the parent of the surviving entity did not breach a license that
There are relatively few cases addressing the effect of reverse was expressly non-assignable to that competitor (PharMetrics, at
mergers, whether or not in the IP license context. In addition, the *4).
existing decisions on this issue are highly fact-specific.
In Interbank, the fact that the combined entity resulting from a
Several case rulings support a reverse merger not constituting a trademark licensee’s amalgamation with another entity was much
transfer of a license agreement: larger in size and asset value than the original licensee was viewed
as an adverse effect on the licensor (Interbank, at 1124-1125).
„„The court in PharMetrics applied the Georgia merger statute to
find that the reverse merger did not effect an assignment of a Where a state statute on the assignment of automobile dealership
data license agreement (PharMetrics, at *3-4.). franchises required the manufacturer’s reasonable consent, a
„„The court in Forry, Inc. v. Neundorfer, Inc. found no transfer court held that the franchisor’s consent was reasonably withheld
of a copyright occurred where the copyright owner was the where the proposed assignee was in less desirable location and
survivor of a reverse merger (837 F.2d 259, 262 (6th Cir. had lower customer satisfaction ratings (In re Van Ness Auto
1988)). Plaza, Inc., 120 B.R. 545, 547-50 (Bankr. N.D. Cal. 1990)).
Several case rulings support the conclusion that a reverse merger Likewise, where the assignment has no discernable adverse
violates an anti-assignment provision in a license agreement: effect, it can influence a court to allow it. In Superbrace, decided
under California state law, a patent license was found assignable
„„The court in SQL Solutions, Inc. v. Oracle Corp. found a reverse
where the original licensee had no particular expertise in
merger violated a non-assignment provision in a non-exclusive
manufacturing the licensed product and the licensor received a
copyright license (No. C-91-1079 MHP, 1991 WL 626458,
fixed payment, rather than royalties based on the licensee’s sales.
at *2 (N.D. Cal. Dec. 18, 1991) (SQL)). While this decision
is unpublished and, therefore, considered not precedential,
it has been given credence over the years by practitioners, CONTINUATION OF THE LICENSEE’S BUSINESS
particularly where California law applies. Courts have also focused on whether the successor licensee will
„„The Delaware Court of Chancery in Meso Scale, in denying effectively continue the original licensee’s business in determining
a motion to dismiss, found a reverse triangular merger may the transferability of an IP license agreement.
violate a non-assignment clause in a consent agreement which
In Syenergy Methods, Inc. v. Kelly Energy Systems, Inc., the
was construed to cover the target’s assignment of its IP and licensee’s retention of the same management was a factor in
licenses. The anti-assignment clause prohibited assignments allowing a non-transferable license to survive the licensee’s
by “operation of law” and, soon after the transaction, the internal reorganization by forward merger (695 F. Supp. 1362,
acquirer caused the target to cease operating, making it 1364-65 (D.R.I. 1988)).
essentially a shell company that held the IP and licenses. The
Court of Chancery found plausible, on contract interpretation Conversely, in Meso Scale, it was critical to the court’s decision
grounds, that “by operation of law” was intended to cover a that a reverse triangular merger may have breached a contractual
merger that effectively operated as an assignment (Meso Scale, prohibition on assignment when, soon after the merger, the
at *13). target company (which was the survivor of the merger) fired its
employees and discontinued its product lines (Meso Scale, at
*13).
FACTUAL CIRCUMSTANCES
Factual considerations have influenced some courts in
determining whether to allow the transfer of an IP license.

7 Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.
 IP Licenses: Restrictions on Assignment and Change of Control

AFFILIATION OF ENTITIES IP License agreements are often considered to be executory

contracts (see Practice Note, IP Licenses and Bankruptcy, Is the
If the licensee and the successor are affiliated entities, this
IP License an Executory Contract? (http://us.practicallaw.com/1-
relationship may influence a court’s determination of whether the
504-3602)). This is because each party generally has duties yet to
transaction violated an anti-assignment clause. be performed, for example the licensor’s duty to refrain from suing
The court in TXO found that a merger of a subsidiary into its parent the licensee for infringement or the licensee’s duty to pay royalties,
did not violate an anti-assignment clause in a non-disclosure indemnify the licensor or maintain quality standards (see, for
agreement (TXO, at 143). Conversely, the court in Cincom held example, Buildnet, at *8-9 and Golden Books, at 311, 314).
that a forward merger of two sibling corporations breached a non- However, there are cases finding that particular IP licenses were
transferable copyright license (Cincom, at 439-40). not executory. For example, in In re Exide Techs., the licensee
acquired a perpetual royalty-free trademark license as part of
PIERCING THE CORPORATE VEIL acquisition of a business (607 F.3d 957, 964-65 (3d Cir. 2010)).
The US Court of Appeals for the Third Circuit held that the license
If the corporate veil between the buyer and the licensee acquired
was non-executory because the licensee was considered to have
in a stock purchase or merger can be pierced under applicable
performed all material obligations.
corporate law, then a court may decide to disregard the separate
existence of the target company and conclude that an assignment
to the buyer occurred. In such a case, anti-assignment clauses ANTI-ASSIGNMENT LANGUAGE UNENFORCEABLE
in the target company’s IP licenses may be deemed violated after In furtherance of the federal policy of allowing the debtor
the fact (see Hitachi, at *22 and Review Directories, at *8-10). to maximize the value of its assets, Section 365(f)(1) of the
Bankruptcy Code renders unenforceable any anti-assignment
language in an executory contract to which the debtor is a party
BANKRUPTCY ISSUES (11 U.S.C. § 365(f)(1)).
The evaluation of assignability of an IP license in a licensee’s
However, under Section 365(c)(1) of the Bankruptcy Code, if
bankruptcy raises considerations comparable to those in a
“applicable law” excuses the other party to the contract from
corporate transaction, but in a different context.
accepting performance from anyone other than the debtor, then
A licensee’s bankruptcy raises conflicting federal policies, namely: assignment of the agreement by the debtor will not be allowed,
whether or not the contractual language prohibits assignment,
„„The policy underlying Chapter 11 of the Bankruptcy Code to unless the other party consents (11 U.S.C. § 365(c)(1)(A)).
maximize the value of the bankrupt’s estate for the benefit of
its creditors (see generally In re Quantegy, Inc., 326 B.R. 467, This opens the door to arguments that IP licenses are, by nature,
470-71 (Bankr. M.D. Ala. 2005) (Quantegy)). non-assignable under “applicable law”, namely federal common
law (see, for example, In re Catapult Entm’t, Inc., 165 F.3d 747,
„„The policy disfavoring the assignability of IP license rights.
754 (9th Cir. 1999) (Catapult), CFLC Inc., at 677, Supernatural
In harmonizing the two policies, a licensor’s consent may Foods, at 759, 792, Patient Educ., at 242, and Hernandez, at
be required before a debtor-licensee may assign or, in some 440-42).
jurisdictions, even assume, its rights under an executory license
agreement, to a similar extent as consent would be required
ASSUMPTION OF IP LICENSE BY DEBTOR LICENSEE
outside the bankruptcy context.
Hypothetical and Actual Tests
EXECUTORY CONTRACTS Before a debtor licensee may assign its IP license rights, it or its
The Bankruptcy Code generally permits a debtor-in- bankruptcy trustee, must assume them.
possession to reject, assume, or assume and assign its
The proposition that a bankrupt licensee’s contractual rights
in furtherance of its right to free itself from burdensome cannot be assigned if contrary to applicable law has led to two
arrangements (11 U.S.C. § 365(a)). approaches when a debtor-licensee moves to assume IP license
Although the Bankruptcy Code does not define “executory agreements in bankruptcy:
contract,” it is generally understood to be a contract where „„Under the “hypothetical test,” the debtor-licensee may not
the obligations of “both the bankrupt and the other party to assume an IP license as a debtor-in-possession, even if it
the contract are so far unperformed that the failure of either does not intend to assign its license rights to a third party, if
to complete performance would constitute a material breach the contract could not otherwise be assigned by the debtor-
excusing the performance of the other” (Vern Countryman, licensee under applicable law (see, for example, RCI Tech.
Executory Contracts in Bankruptcy: Part 1, 57 Minn. L. Rev. 439, Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257,
460 (1973)). 271-72 (4th Cir. 2004) (Sunterra), Catapult, at 747, 752 and In
re W. Elecs., Inc., 852 F.2d 79, 83 (3d Cir. 1988)).

Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 8
„„Under the “actual test,” the debtor-licensee may assume an
IP license as a debtor-in-possession that otherwise cannot be
NON-ASSIGNABLE IP LICENSES IN M&A
assigned under applicable law unless it actually intends to TRANSACTIONS
assign that contract to a third party (see, for example, Institut
Pasteur, at 493-95, In re Aerobox Composite Structures, LLC, LICENSOR CONSENT
373 B.R. 135, 141 (Bankr. D.N.M. 2007) and In re GP Exp. If an acquirer cannot succeed to a target company’s IP license
Airlines, Inc., 200 B.R. 222, 231-33 (Bankr. D. Neb. 1996); rights based on the terms of the agreement or applicable law, then
see also In re Footstar, Inc., 323 B.R. 566, 575-78 (Bankr. seeking consent from the licensor is an option.
S.D.N.Y. 2005) (debtor-in-possession, but not its trustee, may
The obligation to obtain the consent is typically undertaken by the
assume a non-assignable contract)).
seller, who has an existing relationship with the licensor.
In 2009, the Supreme Court, by declining to review the US
Court of Appeals for the Ninth Circuit’s decision affirming N.C.P., Consent may be pursued pre- or post-closing:
bypassed the opportunity to resolve the split in the Circuit „„Pre-closing consent. If the license is material to the target
Courts over the hypothetical and actual tests. In a statement company’s business, then getting the licensor’s consent to the
accompanying the denial of certiorari, Justices Kennedy and transaction may be a condition precedent to closing.
Breyer noted their sympathy for the debtor’s position but that
„„Post-closing consent. If the acquirer is willing to close without
resolving the assumption issue in the context of a trademark
the licensor’s consent, then getting consent may be a post-
license complicated the issues (N.C.P. S. Ct., at 1577-78).
closing covenant on the seller’s part. Where a transaction is
confidential, requiring the seller to seek consent as a post-
Consent to Assignment closing covenant may be the only practical option. The licensor
A licensor’s consent to assignment of the license agreement will understandably want to know the identity of the acquirer
can defeat the operation of Section 365(c)(1) of the Bankruptcy when evaluating the impact of the transfer.
Code, making “applicable law” irrelevant, if the proposed transfer The parties may agree that the seller’s obligation to get the
complies with the consent terms. licensor’s consent to transfer an IP license, whether pre- or post-
closing, requires only the exercise of commercially reasonable
Consent may be within the license agreement itself, such as
efforts.
where assignment is permitted under certain circumstances
which are met (see, for example, Supernatural Foods, at 804-05
and Quantegy, at 470-71). CONTRACTUAL REMEDIES
If the licensor is unwilling or the parties have decided not to
However, in one case, a license agreement that permitted
pursue consent, then the buyer may seek to negotiate contractual
assignment by the debtor-licensee was held not equivalent to
remedies from the seller. These may include one or more of the
consent to the debtor’s assumption of the agreement (Sunterra, at following:
271).
„„A price discount for the lost value of the licensed IP.
Adequate Assurances of Future Performance „„An indemnity for any infringement claims arising from
continued use of the IP.
As a condition of assuming or assigning an executory contract, the
Bankruptcy Code requires that the other party will have “adequate „„Reimbursement of the buyer’s cost for acquiring either a
assurance of future performance” (11 U.S.C. § 365(b)(1)(C)). replacement license or alternate IP.
This condition also applies to IP licenses, for example:
OTHER OPTIONS
„„The court in In re GlycoGenesys, Inc. found that adequate
If the licensor’s consent is not obtained and any remedies offered
assurances existed where the proposed assignee had sufficient
by the seller are inadequate, then the buyer and seller may need
cash to pay licensor’s royalties and patenting costs, as well as
to consider other options.
adequate scientific expertise (352 B.R. 568, 578 (D. Mass.
2006)).
New License
„„By contrast, in In re Luce Indus., Inc., the debtor’s assumption
The acquirer or the licensee’s successor may be able to obtain its
of a trademark license was not allowed where the reorganized
own license from the licensor. It may already have the benefit of a
debtor intended to outsource its manufacturing and sales
license, most commonly where the license concerns commercial
functions to a discount clothing jobber (14 B.R. 529, 531-32
software. Where the acquirer has an enterprise license for its
(S.D.N.Y. 1981)). entire corporate group, the acquirer’s agreement may cover new
affiliates.

9 Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.
 IP Licenses: Restrictions on Assignment and Change of Control

Ceasing Use A multi-step approach may not be possible if the IP license

includes a change-of-control provision, as the transfer of the
The acquirer or successor can elect not to use the licensed IP. This
licensee’s equity interest in the second step may trigger it.
may, however, be difficult to achieve for licensed information and
know-how, which are not always readily separable from other IP.
Transition Services
Sublicense Under a separate transition services agreement between the seller
and the target company (or, in an asset purchase, between the
If the licensee itself is not being sold or merged out of existence,
seller and the acquirer), the seller can agree to provide products
then it may be able to retain its license rights and sublicense the
or services which incorporate the licensed IP, generally on a short-
licensed IP to the acquirer.
term basis, while the target or acquirer transitions to other IP.
To consider this option, the license agreement should expressly
The parties should consider any contractual obstacles to this
allow sublicensing as a licensee’s right to sublicense is not
approach. For example, some license agreements:
necessarily implied (see, for example, Miller v. Glenn Miller
Prods., 318 F. Supp. 2d 923, 933 (C.D. Cal. 2004), Gardner, at „„Limit the licensee’s right to use the licensed IP only for
781, CFLC, at 679, Tap Publ’ns, at 212, 218 and In re Travelot “internal” or other specified purposes (see, for example,
Co., 286 B.R. 447, 455 (Bankr. S.D. Ga. 2002)). Automation by Design, Inc. v. Raybestos Prods. Co., 463 F.3d
749, 758 (7th Cir. 2006) and Storage Tech. Corp. v. Custom
In addition, if the sublicense grants rights and imposes obligations
Hardware Eng’g & Consulting, Inc., 421 F.3d 1307, 1316 (Fed.
which mirror the license, particularly if the sublicensee’s
obligations are pefromed directly for the licensor, then the Cir. 2005)).
sublicense could potentially be recharacterized as an assignment „„Prohibit use of the IP for the operation of a “service bureau” or
and deemed subject to applicable anti-assignment clauses (see for the provision of products or services to third parties.
Biosynexus, at *3-6).

Sublicensing may not be the most desirable option for a seller CHANGE-OF-CONTROL PROVISIONS
because it remains a middleman and may continue to have A common misconception in drafting and interpreting contracts,
liability to the licensor for the sublicensee’s performance of its including IP licenses, is that an anti-assignment clause covers a
obligations under the sublicense. party’s change of control. However, prohibitions on changes of
control are likely not implied from a simple anti-assignment clause
Multi-step Transaction (see Hitachi, at *17-18). Restrictions on changes of control must
Anti-assignment clauses in IP licenses often permit assignment therefore be separately addressed.
to either:
A change-of-control provision gives a party, certain rights in
„„The licensee’s affiliates. connection with the other party’s transaction. Although some
change-of-control provisions purport to void the transaction, the
„„The successor of the relevant business.
more direct approach is to provide that a change of control is
In such a case, a divestiture strategy may be to assign the IP
equivalent to a material breach of the agreement or grounds for
license agreement to a subsidiary, and then sell the stock of the
termination, or both.
subsidiary to the buyer (see, for example, Hitachi, at *5 and
Transamerica Commercial Finance Corp. v. Stockholder Sys., Inc.,
No. 89 C 917, 1990 WL 186088, at *2 (N.D. Ill. Nov. 8, 1990)). DEFINING CHANGE OF CONTROL
The term “change of control” can be defined in several ways, for
However, there is a risk a court may collapse the transactions
example, as one or both of the following:
and view them together as an indirect assignment of the IP
license. There are cases involving other types of agreements „„A transfer of more than 50% of a party’s voting stock.
where this has occurred, for example, in a case involving a right
„„A change in a majority of a party’s board members.
of first refusal and another involving a lease (see Williams Gas
Processing-Wamsutter Co v. Union Pacific Resources Co., 25 P. The Delaware business combinations statute includes a definition
3d 1064 (Sup. Ct. Wyo 2001) and Pioneer Trust & Savings Bank of “control” as the “possession directly or indirectly of the power
v. Zayre Corp., No. 89 C 3773, 1989 U.S. Dist. Lexis 10832 (N.D. to direct or cause the direction of management and policies of a
Ill. Sept. 13, 1989)). In Fina Oil & Chem Co. v. Amoco Production person, whether through the ownership of stock by contract or
Corp., the Louisiana Court of Appeals upheld a multi-step otherwise,” with a rebuttable presumption of control arising from
transaction involving oil field leases, where the divested subsidiary the ownership of 20% or more of the outstanding voting stock
was not created for the acquisition of the contracts at issue and (Del. Code Ann. tit. 8, § 203(c)(4)).
had other assets (673 So. 2d 668 (La Ct. App. 1st Cir. 1996)). As in other cases of contract interpretation, if no statute or
case law is dispositive, a court will need to construe the phrase
“change of control”. For example, in one case, a court used

Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 10
dictionary references to find that it contemplates “a substitution or UCC APPROACH
replacement of [an entity’s] regulating or governing body” (Caffrey
For most contracts, Article 9 of the Uniform Commercial Code
v. Four Oaks Bank & Trust Co., No. 5:10-CV-341-FL, 2011 U.S.
(UCC) resolves the issue. Article 9 was revised in 2001 to make
Dist. LEXIS 70713, at *23 (E.D.N.C. June 29, 2011)).
clear that the grant of a lien does not violate an anti-assignment
clause in a general intangible or accounts. (References to UCC
WHAT CORPORATE TRANSACTIONS CAUSE A CHANGE OF sections in the rest of this section are to the New York Uniform
CONTROL? Commercial Code.)
In the absence of a determinative definition of a change of control
in an IP license: IP Licenses as General Intangibles or Accounts
„„An asset purchase does not appear to be a change of control For a licensee, a license agreement is likely to be considered
because, technically, neither the old nor the new licensee a general intangible under the UCC. The definition of “general
changes its ownership or management in the transaction. intangible” is a catch-all that includes any personal property other
However, there are some change-of-control clauses which than specifically excluded items (N.Y. UCC § 9-102(a)(42)). The
define the sale of substantially all assets as a change of control. term is generally understood to cover most business contracts.

„„A stock sale may or may not cause a change of control, For a licensor, a license agreement may be either a general
depending how much of the stock the buyer is acquiring and intangible or an account under the UCC. The definition of
whether the buyer can actually exercise control over the seller. “account” includes the right to payment of monetary obligations
„„A merger may or may not constitute a “change of control” of for property that has been sold, leased, licensed, assigned or
the target company, depending on the structure of the merger otherwise disposed of (N.Y. UCC § 9-102(a)(2)).
and the resulting stockholders. An analysis of this issue under
the relevant state law is beyond the scope of this Note. Non-assignable General Intangibles and Accounts
The 2001 revisions to the UCC provide that contract terms in
Parent Company’s Change of Control general intangibles or accounts that prohibit or restrict, or require
A change of control of the licensee’s parent company is not the other party’s consent to, either an assignment of the debtor’s
automatically a change of control of the licensee (see, for rights or the creation of a security interest therein are ineffective
example, Former Shareholders v. Browning-Ferris Indus., No. to:
HO27435, 2005 WL 2820594, at *2 (Cal. Dist. Ct. App. Oct. 28,
„„Impair the creation, attachment or perfection of a lien.
2005), Lincoln Fin. Media Co. v. CBS Broad., Inc., 3:07CV062,
2008 U.S. Dist. LEXIS 31041, at *22 (W.D.N.C. Mar. 24, 2008) „„Give rise to any default, breach or right of termination or other
and de Celis v. CAI Wireless Sys., Inc., No. 95-5539, 1996 U.S. remedy on the debtor’s assignment or transfer, or the creation,
Dist. LEXIS 2704, at *9 (E.D. Pa. Mar. 5, 1996)). attachment, perfection or enforcement of a lien in the general
intangible or account.
However, the result may be different if the license agreement
(N.Y. UCC § 9-406(d) (for accounts) and N.Y. UCC § 9-408(a) (for
prohibits “direct or indirect” changes of control or, possibly, even
general intangibles).)
direct or indirect assignments (see Hake, at 335).
To protect the non-debtor party’s interest under the agreement,

LIENS other UCC provisions adopted at the same time limit a lender’s
remedies regarding general intangibles, but not accounts, that
A license agreement may expressly prohibit the granting of a lien, would be considered non-assignable under other law. These
pledge or encumbrance in a party’s rights under the agreement. limitations include that the lien:

Where the license agreement does not expressly address liens „„Is not enforceable by the lender against either the debtor or the
but prohibits assignments, does a licensee’s pledge of its rights non-debtor party to the agreement.
under a non-assignable IP license as collateral for a loan trigger „„Does not impose any obligations on the non-debtor party.
the provision?
„„Does not require the non-debtor party to render to or accept
„„One theory is that the grant of a lien is not an assignment performance from the lender.
because the transfer is conditional, becoming absolute only on „„Does not allow the lender to use or assign the debtor’s rights
foreclosure after an event of default. under the general intangible.
„„An alternate theory is that, because the lien matures into „„Does not allow the lender to use, assign or possess any of the
an absolute assignment on an event of default without a non-debtor party’s confidential information.
further grant on the debtor’s part, the grant of lien should be
(N.Y. UCC § 9-408(c).)
considered an assignment at the outset. By extension, then,
the default rule weighing against a licensee’s ability to assign its In light of these stringent limitations, the primary value of non-
rights may also cover its grant of liens. assignable contracts as collateral lies in the secured party’s ability

11 Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.
 IP Licenses: Restrictions on Assignment and Change of Control

to enforce its lien in the proceeds thereof. If the non-debtor party One consideration is that UCC Section 9-408(a) applies
consents to the sale of the contract to a buyer after an event to contracts that contain “terms” prohibiting or restricting
of default, then the proceeds received by the debtor from the assignment. If the IP license agreement is silent and thereby
transfer will be available to the lender (N.Y. UCC § 9-408 official deemed non-assignable without the licensor’s consent, it is
comments 7 and 8). unclear whether these UCC provisions would apply, even if the
UCC is not preempted by federal law.
NON-ASSIGNABLE IP LICENSES
Article 9 does not necessarily resolve the uncertainties PRACTICAL APPROACH
surrounding granting liens in non-assignable IP licenses. Because Despite the growing body of precedent favoring the UCC over the
the assignability of the licensee’s rights under an IP license is federal IP laws in the area of perfecting liens, many practitioners
widely recognized as a federal law issue, state law, such as the comply with both the UCC rules relating to general intangibles and
UCC, may be preempted. federal IP laws pertaining to recording assignments.

In recognition of this, Section 9-408 of the New York UCC Likewise, many practitioners are concerned that IP license
contains a footnote thought to apply to IP licenses: agreements may not be covered by the UCC provisions that apply
to other non-assignable contracts.
9. Contrary Federal Law. This section does not override
Federal law to the contrary. However, it does reflect an For this reason, security agreements commonly include a “savings
important policy judgment that should provide a template clause” that excludes from the lien any non-assignable contracts
for future Federal law reforms. or contracts that are breached by the grant of security, except
to the extent that the applicable contractual terms would be
(N.Y. UCC § 408, note 9.)
rendered ineffective under UCC Sections 9-406 through 9-408.
No case law appears to address the intersection of UCC Section
If an IP license is extremely material, the lender may require the
9-408 and the federal law applicable to the assignment of IP
licensor’s express consent to the grant of lien and to the lender’s
license agreements.
exercise of foreclosure remedies.
Many cases, however, address whether federal IP laws preempt
Less concern exists among practitioners over whether federal IP
the UCC on the method of perfecting liens in patents, trademarks
laws preempt the UCC concerning a licensor’s grant of a lien in its
and copyrights. These cases have held that the UCC requirements
rights under a license agreement. The federal policies that protect
for filing financing statements are not preempted, at least against
the competing lien of a bankruptcy trustee, except with respect a licensor’s right to choose its licensees do not carry the same
to federally registered copyrights. This is because the federal IP force in the other direction (see Federal Policy Reasons).
laws (except for the Copyright Act) only address assignments, In addition, under many license agreements, the licensor’s rights
but do not address liens (see, for example, In re Cybernetic are primarily financial, that is, the right to receive royalties. A court
Servs., Inc., 252 F.3d 1039, 1058 (9th Cir. 2001) (patents), In may therefore be more inclined to treat a license agreement in the
re Coldwave Sys., LLC, 368 B.R. 91, 97 (Bankr. D. Mass. 2007) licensor’s hands as an ordinary contract or an account.
(patents), Trimarchi v. Together Dev. Corp., 255 B.R. 606, 610 (D.
Mass. 2000) (trademarks) and In re World Auxiliary Power Co.,
303 F.3d 1120, 1125-26 (9th Cir. 2002) (World Auxiliary Power) DRAFTING CONSIDERATIONS
(copyrights)). Parties negotiating IP license agreements typically directly address
By extension, it could be argued that, because the perfection of assignment and, in some instances, changes of control, in the
liens in IP is subject to the UCC provisions that apply to general agreement.
intangibles, the grant of liens in IP licenses should also be subject
to the UCC provisions that apply to general intangibles. LICENSOR-FRIENDLY PROVISIONS
The limitations of the secured party’s remedies under UCC Anti-assignment Clauses
Section 9-408(c) (see Non-assignable General Intangibles and
Accounts), offer a licensor practical comfort that, despite its lien, A licensor generally seeks to prohibit a licensee from assigning
the lender will neither be able to operate as a licensee under a its rights. In its simplest form, an anti-assignment provision states
non-assignable license nor be able to transfer the licensee’s rights that the prior consent of the licensor is required for the licensee’s
to a third party without the licensor’s consent. Accordingly, there assignment of the agreement.
is a reasonable argument that the UCC does not conflict with the
federal policies disfavoring the free assignability of IP licensees
and therefore it should not be preempted.

Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. 12
However, a provision of this nature may not adequately cover all „„The agreement can be assigned to an affiliate of the licensee
types of transactions that the licensor wishes to prohibit. A more but only on one or both the following conditions:
detailed anti-assignment provision may: „„the licensor’s consent remains valid only for so long as the
„„Specify that mergers or stock sales will be deemed a form of transferee remains affiliated with the original licensee; and
assignment that is subject to the restriction. „„the license agreement will terminate in the event that the
„„Prohibit assignments by “operation of law” and “directly original licensee and the transferee are no longer affiliated.
or indirectly”, which could possibly be interpreted to cover
Licensor’s Right to Assign
mergers and stock sales (although this is less direct than
mentioning them specifically). While there appears to be no default rule that prohibits the
licensor’s ability to assign its rights under an IP license that is
„„Prohibit assignments “in whole or in part.” This makes clear
silent on assignability (see Default Rules: IP Licenses), a licensor-
that the agreement cannot be divided in the event that one
favorable assignment provision can expressly permit the licensor
business is sold by the licensee since having multiple licensees
to assign its own rights under the agreement. This would foreclose
can increase the logistical demands on the licensor.
the argument that the license is not assignable by the licensor.
„„Prohibit assignments whether in connection with a single
transaction or a series of transactions, to discourage multi-step Change of Control
transactions.
In drafting licensor-favorable agreements, one can include a
A strict anti-assignment provision should state that any transfer
separate change-of-control provision to add further restrictions on
in violation of the provision is void or constitutes grounds for
the licensee (see Change-of-Control Provisions).
termination of the license. Without this clause, the assignment
may remain effective and the licensor may only have a breach Consideration should be given to the definition of “change of
of contract claim for damages, if any (see Bel-Ray Co., Inc. v. control”, including whether to specify a percentage of equity
Chemrite (Pty) Ltd., 181 F.3d 435, 442 (3d Cir. 1999)) and see also ownership that triggers the provision or to rely on the legal
Pravin Banker Assocs., Ltd. v. Banco Popular del Peru, 109 F.3d interpretation of the phrase under the applicable state law.
850, 856 (2d Cir. 1997), Cent. Trans. Int’l, Inc. v. Global Advantage
Another area for consideration is whether changes in control of
Distrib., Inc., No. 2:06-cv-401, 2007 U.S. Dist. LEXIS 92531, at *
the licensee’s parent company should fall within the scope of the
9-11 (M.D. Fla. Dec. 17, 2007) and Evolution, Inc, at *9).
provision.
In addition, attention should be paid to whether there are
potentially contradictory provisions elsewhere in the agreement, LICENSEE-FRIENDLY PROVISIONS
such as a clause that unequivocally states that the agreement is
binding on the parties’ successors and assigns (see Clubcorp. Inc. A licensee may object to an anti-assignment provision in its
entirety or more likely will seek particular exceptions.
v. Pinhurst, LLC, C.A. No 5120-VCP, 2011 Del. Ch. LEXIS 176 at
*28-20 (Del. Ch. Nov. 15, 2011)). Typical licensee counter-proposals include:

„„Specifying that the licensor’s consent to the licensee’s transfer

Conditions on Assignment
of the license cannot be unreasonably withheld or delayed.
If the licensor agrees to allow certain assignments by the licensee,
„„Expressly permitting assignment to one or more of the
then it can specify in the agreement that:
following:
„„The licensee will provide written notice either before or „„to a successor by merger or “in connection with a merger”;
promptly after a permitted assignment.
„„to the acquirer of, or “in connection with,” the transfer of
„„The transferee will expressly agree in writing to comply with the all or substantially all of the licensee’s assets. In a more
terms and conditions of the agreement. licensee-favorable form, assignment is also allowed in
„„The licensee will remain liable for the transferee’s performance connection with the transfer of the assets associated with
of the obligations under the agreement. the license agreement or with a specific line of business;
„„The transferee cannot be a competitor of the licensor. Note „„to the licensee’s affiliates; or
that while this restriction may be acceptable in principle, it „„to specific third parties or for specific purposes.
can be difficult to draft and negotiate. In particular, it can
„„Permitting assignments “in part” so that the license rights to be
be challenging to define who constitutes a competitor of the
split in connection with the licensee’s divestiture of divisions.
licensor, especially if the transferee’s affiliates are taken into
„„Allowing the licensee to grant liens in its rights under the
consideration.
agreement as collateral to a specific lender or generally, with
the lender being able to assign the rights in connection the
exercise of its remedies (see Liens).

13 Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.
 IP Licenses: Restrictions on Assignment and Change of Control

MUTUAL RESTRICTIONS A licensee may have a legitimate objection to the licensor’s

transfer of a license agreement if the agreement includes
To accommodate a licensee’s request for mutuality, a licensor
obligations to provide services that the original licensor is
may be tempted to restrict its own ability to assign the agreement.
uniquely qualified to provide, such as training, maintenance or
Yet, the identity of the licensor may be immaterial to the
development of new IP.
licensee, if the licensee can continue using the licensed IP on
the same terms (see Default Rules: IP Licenses). Therefore, the Another potential objection to the licensor’s transfer of an IP
licensor may be giving up the valuable right to freely transfer the license (or to the transfer of the related IP) is where the transferee
agreement without a corresponding benefit to the licensee. is the licensee’s competitor. In such a case, the licensee may have
One court has suggested that a broad reading of a mutual anti- concerns about perceived relationship issues, loss of competitive
assignment clause may prohibit the licensor’s assignment of the advantages or the transferee’s commitment to sustaining the IP
licensed IP itself (see Eastman Kodak Co., at *14-15). Therefore, (see, for example, Eastman Kodak, at *18-19).
a licensor that agrees to a restriction on its ability to assign an IP
license agreement should consider expressly reserving its rights to
transfer the licensed IP.

LICENSOR AND LICENSEE PERSPECTIVES ON

ASSIGNABILITY
Licensors and licensees generally have competing perspectives on
the assignability of each party’s rights under a license agreement.

Each party typically favors assignability of its own rights. The

license may be a valuable asset and each party will want to
retain the flexibility to assign it to a third party or an affiliate in
connection with a corporate reorganization.

Licensors typically oppose free transferability of license rights by

licensees for the following reasons:

„„The licensor may have chosen the licensee for its specific
characteristics. For example, the licensee may have a
particular ability to:
„„commercialize the IP;
Practical Law Company provides practical legal
„„enforce the licensor’s rights;
know-how for law firms, law departments and
„„produce high quality goods; law schools. Our online corporate, securities and
„„sustain a certain level of production; finance resources help lawyers practice efficiently,
„„create improvements to the IP; or get up to speed quickly and spend more time on
„„enhance the licensor’s reputation. the work that matters most. This Practice Note is
just one example of the many resources Practical
„„The terms of the license may have also been based on the
particular licensee’s operations, for example:
Law Company offers. Discover for yourself what
the world’s leading law firms and law departments
„„the field of use or territory; or
use to enhance their practices.
„„the pricing and expected volume of sales.
„„A licensor may not want the licensed IP to end up in the hands
of its competitor or the licensee’s bankruptcy trustee.
Licensees generally do not have equivalent concerns over the licensor’s
Contact Us
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