Will There Ever Be Clear Law About the Terminated Sublicence?

Why is it that there is sometimes such a stark disconnect between the centrality of an IP-related question and the seeming inability to provide a durable and reliable solution? I can think of no better example than the treatment of a sublicence in the event of the termination of the main licence. The problem is embedded within the very structure of a sublicence arrangement: the licensor grants a licence to the licensee who in turn grants a sublicence to the sublicensee. On its face, the three parties are somehow related. But in what manner, and how does their relationship determine the answer to the question?

True, it is not everyday that one is involved in a court case in which a sublicensee seeks to continue to enforce the sublicence, even after the main licence has been terminated. But the issue is standard fare in licensing practice. It is inherent in the distribution of software from manufacturer to distributor to end user. It is inherent in the exercise of subsidiary rights in publishing, where the author grants the publisher a licence, with a right of sublicence for such activities as translation and dramatization. It is inherent in multisite franchising, where the master franchiser oversees operations in the territory as the licensee/ sublicensor of the local franchisees/ sublicensees. While not inherent, it increasingly appears in pharma-related patent and know-how licences, especially where distribution and second-sourcing are crucial. Wherever one turns in representing clients commercially in IP, he will encounter the question, sooner (more likely) than later: "what about the rights of the sublicensee if the main licence terminates?"

The question, as stated, seems clear enough,but the answer is more elusive. For those who like chaotic legal variety, what follows is for you.

1. This Kat remembers the first time that he posed the question in a public forum. The almost unanimous response was that the answer is clear: the sublicence terminates. The licensee can only grant whatever IP rights that it enjoys; at the moment that the licence is terminated, the licensee no longer is legally able to grant any IP rights to the sublicensee. If the sublicensee is thereby harmed, let him sue the licensee (or try to reach a new deal with the licensor). But as to the continuing validity of the sublicensee, the crowd-sourced view was clear: the sublicence is no longer valid.

2. Moving on, this Kat then took an interest in the treatment of the question from a (U.S.) patent licensing point of view. What a different position was expressed here. Without relying on any clear case law, the view is nevertheless maintained that the sublicensor is merely the agent of the licensor, which means that in effect the licence agreement is between the licensor and sublicensee. On this basis, termination of the main license has no legal impact on the sublicence. Equity should also be factored in, especially where the licensor has presumably financially benefited from the sublicensee's payment of royalties and termination might well lead to a material hardship to the licensee.

3. Ok, I guess, but what about the omnipresent provision in a licence agreement--"nothing herein shall create an agency relationship between the licensor and licensee"? True, the ultimate test is not what the parties write but what they do. Still, the usual application of the rule is in the reverse situation: have the parties created an agency relationship by virtue of conduct, even in the absence of any explicit agreement to the contrary? In the sublicensing situation, one would have to show that no agency relationship has been created, despite what the agreement says. This seems like a tall legal order. And for those jurisdictions that still require quality control for a valid trade mark licence, more often than not, there will be no entity that will replace the sublicensor in maintaining quality control over the sublicensee 

4. This Kat's understanding of the issue took a new turn upon reading a recent blogpost on The 1709 Blog by the IPKat's friend Monika Bruss. Entitled "Validity of sublicence upon lapse of principal licence" here, the post summarized two recent German cases on the issue, Take Five (1 ZR 24/11) and M2Trade (1 ZR 70/10). The court focused on the importance under German law of protecting a successor of title. [This Kat is not well-versed in German law, but it is interesting than a licensee/sublicensee is treated as a "successor in title". Does this mean than German law views the licensing of an IP right is a form of transfer of a proprietary right?] In any event, the decisions reflect the view that interests of the sublicensee in the continuing validity of the licence will (usually)take precedence over the interest of the licensor/proprietor.

5. That all said, this Kat wonders whether Monika's conclusion --that these cases "have clarified the legal situation not only with regard to copyright sublicences, but to sublicences in other areas of intellectual property as well" --i s a bit overstated. My crowdsourcing sample of one reached the opposite conclusion. Even when there is some rough agreement on the result, the analytical contrast between a sublicence as a form of agency, versus as an instance of the succession of title, is profound. Tacit dismissal of the fact that parties often add "no agency" language to a licence/sublicence is also troubling.

6. Even if we take a feline look into the mirror and recognize that the ultimate reason might simply be that it would not be fair or equitable to deprive the sublicensee of a continued right of use of the IP right, the concern remains. If the issue is so clear to everyone who is involved in IP licensing/sublicensing, why not let the parties resolve the matter contractually? If the parties decide not to do so (and in particular the sublicensee does not explicitly provide for the continuing validity of the sublicense upon the termination), why should the court seek to intervene on the basis of a smorgasbord of various legal rationales?