By Morag Peberdy and Jacqueline Clover

In a departure from the normal approach, the English High Court has found that in certain circumstances a copyright sub-licence may survive termination of the head licence. This was the Court’s holding in VLM Holdings Limited v Ravensworth Digital Services Limited [2013] EWHC 228 (Ch). Because of the specific facts of the case, termination of the head licence did not automatically terminate the sub-licence. Consequently, when the licensor subsequently exclusively licensed the same subject matter to another party, the licensor inadvertently put itself in instant breach of the exclusive licence. The case therefore illustrates some of the potential pitfalls for a licensor who does not fully understand what exactly it has permitted the licensee to do.

VLM Holdings does not hand down a rule of thumb that a sub-licence will survive termination of the head licence. The Court was very clear to confine its conclusion to the facts of the case. Notably, the head licensor was the parent of the sub-licensor and the sub-licensee was ignorant of the head licence. Nonetheless, it highlights the care which needs to be taken when drafting or interpreting licences of any kind.

Rights to use a special printing software owned by the claimant, a parent company, were at the heart of the VLM Holdings licensing arrangement. The parent company licensed the software to its subsidiary under an informal, non-explicit arrangement (the head licence). The subsidiary then sub-licensed the software to a real estate agent (the sub-licence). When the subsidiary went into liquidation, the parent company terminated the head licence and, thinking that such termination would trigger termination of the sub-licence, subsequently entered into an exclusive licence of the same software with another printing company.  When the real estate agent refused to stop using the software, and asserted its rights under the sub-licence in response to the printing company’s complaints, the printing company terminated its licence with the parent company on the ground that there was no exclusivity. The parent company then initiated proceedings.

The Court explained that the key to determining whether a sub-licence may survive termination of the head licence lies in the precise scope of the licensee’s authority. Also important is full consideration of the terms of the sub-licence and what is actually being terminated.

On the facts, the Court concluded that termination of the head licence did not terminate the sub-licence because the parent company had itself granted permission under the sub-licence, as well as the subsidiary.  The parent company was therefore in breach of its exclusive licence with the printing company, which under the terms of the exclusive licence triggered an assignment to the printing company of the intellectual property which had been licensed. The Court reached its conclusion via application of agency principles: the sub-licence stated (inaccurately) that the subsidiary owned the printing software and was authorised by the subsidiary’s directors who were also directors of the parent company. And as the real estate agent did not know who actually owned the software, undisclosed principal rules applied to bind the parent company. Notably, the Court also reached the same result by applying estoppel theory. Other material facts included the business purpose of the sub-licence. Both the parent and the subsidiary shared a business interest in the sub-licence, which was to further the business of the subsidiary and to exploit the printing software. This fact in combination with others, including the identities of the companies’ directors, meant that the parent company must have agreed to the subsidiary granting the sub-licence. The Court also found that because the sub-licence was designed to protect the real estate agent from disruptions to the subsidiary’s business, such purpose of the sub-licence would be frustrated if termination of the head licence were capable of bringing the sub-licence to an end.

As noted by the Court, in this context, arrangements of licences and sub-licences should not be analogised to leases and sub-leases. The former are purely contractual grants of authority to do something, whereas the later are interests in property. In the leasehold scenario, since a sub-lease is carved out of a superior property interest, the lease, termination of the lease by forfeiture will bring the sub-lease to an end. By comparison, since the grant of a licence is essentially the grant of permission for another person to do something, there is nothing in principle to prevent a licensor from also contracting to permit the survival of the sub-licence notwithstanding termination of the head licence.