Prohibitions on Assignment: Are They Absolute?
Licensors often seek to limit the assignability of their software licenses to ensure the sanctity of their software, prevent the license from being assigned to a competitor and/or protect the licensor in the event the assignee is not credit-worthy. To that end, software licenses often provide that the license is not assignable. But can licenses containing prohibitions on assignment be assigned? Will a prohibition on assignment be enforced by a court? What happens if a licensee seeks to assign or does assign the license in violation of the non-assignment clause?
Surprisingly, many, courts will permit the assignment and award monetary damages to remedy the breach. To prevent this outcome, prudent licensors should include the following language: “This license may not be assigned or transferred whether by merger, consolidation, operation of law, or otherwise, and any attempt to do so is void.” Including the phrase “operation of law” will prevent any transfer due to a change of control of the ownership structure of the licensee, potentially allowing the licensor to prevent a transfer, or in the alternative charge a transition fee if the licensee is acquired by another company or the licensee seeks to outsource the licensor’s technology. See Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2011 WL 1348438 (Del. Ch. April 8, 2011) (contractual provision prohibiting assignment “by operation of law” may require the other party’s consent prior to transferring contract to the surviving party in merger.)
In Cincom Systems, Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009), the Sixth Circuit held that a nonexclusive, nontransferable license could not be transferred by merger when an affiliate was merged into a sister entity and out of existence as part of a corporate reorganization. The underlying license agreement licensed the software for use on a designated computer and prohibited the transfer of the license without the licensor’s consent. The court emphasized that under federal law, a copyright is unassignable absent express language to the contrary. Id. at 437. Further, it stated “[a] transfer is no less a transfer because it takes place by operation of law rather than by a particular act of the parties.” Id. at 438, citing PPG Industries v. Guardian Industries Corp., 597 F.2d 1090, 1096 (6th Cir. 1979).
If the license agreement does not contain explicit language defining assignment to include mergers, consolidations, and operation of law, a court may not interpret such actions as an assignment because the assignment arose through the operation of law and not a formal written agreement. In such event, the court may allow the assignment to be concluded and award the licensor monetary damages. See Rumbin v. Utica Mutual Ins. Co. et al., 757 A.2d 526 (Conn. 2000) (Anti-assignment clause did not render assignment ineffective but gave other party right to recover damages for breach).
Farsighted licensees should seek to include language in the license to protect their future business needs, such as in the event that a business unit using the software is sold or otherwise transferred. Similarly, prudent licensees should also seek the right to use the software on a “beneficial” basis to provide transition services to a third party purchaser of one of its business units to support the transferred assets.