On September 25, 2009, the Sixth Circuit handed down a decision in Cincom Systems, Inc. v. Novelis Corp. regarding the effect of an internal corporate restructuring on an intellectual property license. Although the court interpreted Ohio merger law, it promulgated broad holdings with regard to (1) the controlling law for the interpretation and assignability of intellectual property licenses, (2) the controlling law for determining whether a merger results in the transfer of an intellectual property license, and (3) the implications of effecting an internal corporate restructuring without obtaining third-party permission to transfer a non-assignable intellectual property license. Furthermore, many states’ merger statutes are nearly identical to the language in Ohio’s merger laws, potentially casting the holding’s net even wider.
Cincom Systems, Inc. v. Novelis Corp., Case No. 07-4142
On July 5, 1989, Cincom Systems, an Ohio-based software developer (”Cincom”), licensed two of its software technologies to Alcan Ohio, an Ohio rolled products corporation that was a wholly owned subsidiary of Alcan, Inc., a Canadian corporation. The license granted Alcan Ohio “a non-exclusive and non-transferable license” to use Cincom’s software. The license also provided that Alcan Ohio could “not transfer its rights or obligations under this Agreement without the prior written approval of Cincom.”
On May 15, 2003, Alcan Ohio created a separate corporation known as Alcan Texas, organized under the laws of Texas, and also a wholly owned subsidiary of Alcan, Inc. On July 30, 2003, Alcan Ohio merged into Alcan Texas, with Alcan Texas remaining as the surviving corporate entity. The entity later changed its name to its current appellation, Novelis Corporation (”Novelis”). Upon learning of the corporate changes Alcan Ohio underwent, Cincom filed suit in a US District Court in Ohio for violation of the license agreement and copyright infringement. The District Court held that Alcan Ohio’s merger with Alcan Texas effected an unauthorized transfer of the license under Ohio law, and awarded Cincom $460,000 in damages. Novelis appealed.
Sixth Circuit Holding
•1. State merger law determines whether a merger results in an intellectual property transfer.
In PPG Industries, Inc. v. Guardian Industries Corp., 597 F.2d 1090 (6th Cir. 1979), the Sixth Circuit addressed the question of whether the surviving or resultant corporation in a statutory merger acquires patent license rights of the constituent corporation. The PPG court answered this question in the affirmative, and stated further that federal common law mandates that an intellectual property license is presumed to be non-assignable and non-transferable “in the absence of express provisions to the contrary”, and state law could not override this presumption. Id. at 1095. The Cincom court found this case controlling. However, despite recognizing the rule that the federal common law governs “questions with respect to the assignability of a patent [or copyright] license,” the court stated that “[s]tate law is not displaced merely because the contract relates to intellectual property,” and that “states are . . . free to regulate the use of . . . intellectual property in any manner not inconsistent with federal law,” and therefore “state contract law will govern the interpretation of a license because a license is merely a type of contract.” Cincom, at p. 6; citing Arsonson v. Quick Point Pencil Co., 440 U.S. 257, 262 (1979); also citing Everex Sys., Inc. v. Cadtrak Corp., 89 F.3d 673, 679 (9th Cir. 1996). Because there is no general federal corporate law, “state law will also determine whether a merger results in the transfer of an intellectual property license.“ Cincom, at p. 7.
•2. The fact that the license didn’t end up in the hands of a competitor is immaterial to the fact that any transfer of a non-assignable license violates that license.
Novelis argued that the reason for any non-assignability federal policy presumption or contractual provision is to keep certain intellectual property out of the hands of competitors, and therefore a transfer of intellectual property internally, or to any non-competitor, does not violate this contractual provision or the federal common law presumption. To this end, the court stated the following:
“While it is true that the primary reason for the federal common law rule prohibiting the transfer of a license without authorization is to prevent the license from coming into a competitor’s possession, this does not translate in to a rule of “no competitor possession, no foul.” See In re CFLC, Inc., 89 F.3d 673, 679 (9th Cir. 1996). The harm is the breach of the terms of the license: the violation of the federal policy (or contract term) allowing the copyright or patent holder to control the use of his creation. The fact that Novelis is not a competitor of Cincom is therefore immaterial . . . If Ohio law served to transfer the license from Alcan Ohio to Novelis as a result of the internal merger, Novelis violated the express terms of its nontransferable license.” Cincom, at p. 8.
•3. If state merger law dictates that a merger results in the unauthorized transfer of a non-assignable intellectual property license, an internal merger has the same effect, and a violation of the license and copyright or patent infringement will result.
Ohio’s merger statute provides that “[t]he surviving or new entity possesses all assets and property of every description . . . all of which are vested in the surviving or new entity without further act or deed.” Ohio Rev. Code Ann. § 1701.82(A)(3)(2009) It also provides that upon a merger, [t]he separate existence of each constituent entity other than the surviving entity . . . shall cease.” § 1701.82(A)(1) The Cincom court held that this language provides that the license once held by Alcan Ohio automatically vested by operation of law in Novelis Corporation, Alcan Ohio’s successor, after the completion of the corporate restructuring. Cincom, at p. 9. Furthermore, it held that “[t]he vesting of the license in the surviving entity could not occur without being transferred by the old entity.” Id. (emphasis added). The court put it bluntly:
” . . . in the context of a patent or copyright license, a transfer occurs any time an entity other than the one to which the license was expressly granted gains possession of the license . . . [because] Novelis now owns the plant and has possession of the license under Ohio law . . . Novelis has infringed upon Cincom’s copyright.” Cincom, at p. 9.
The court affirmed the district court and the award of $460,000 in damages.
This holding should be observed not only by corporate lawyers in Ohio, but by those elsewhere as well. Although the corporate reorganization is generally a low-risk transaction for a corporate lawyer relative to other transactions, and checking the assignability of an intellectual property license is probably low on the checklist in a re-org, this case demonstrates a real consequence of neglecting to check all the boxes. In any merger, even if only an internal restructuring, all intellectual property licenses should be checked for assignability, and third-party permission should be obtained prior to effectuating the merger whenever necessary. Otherwise, a client could be hit with $460,000 (or similar) in intellectual property infringement damages, just like Novelis.