The conventional view in the UK has been that a sub-licensee has no greater rights than his sub-licensor and so a sub-licence ends when the sub-licensor’s rights terminate. This is questioned by the recent case of VLM Holdings Limited v Ravensworth Digital Services Limited  EWHC 228 (Ch), when the UK court decided that a sub-licence for the use of software survived the termination of the head licence under which it had been granted.
This is an important decision for anyone involved in licensing, particularly existing sub-licensees and rights holders who are considering a licence permitting a sub-licence of software or potentially other IP assets. However, its effect will probably be limited to sub-licences given by a subsidiary of the rights holder, and careful drafting should eliminate the risk of this occurring where it is not desirable.
The claimant, VLM Holdings, owned the copyright in certain software which facilitates online printing services. It granted an informal licence to exploit the copyright in the UK to its subsidiary VLM (UK) Limited. VLM (UK) in turn granted a sub-licence to an estate agency (Spicerhaart) so that it could use the software to print its various property particulars etc. The directors of VLM (UK) who negotiated and agreed the sub-licence were also directors of VLM Holdings. When VLM (UK) went into liquidation, its parent company VLM Holdings terminated VLM (UK)'s licence, and said that terminated any existing sub-licence that VLM (UK) had granted, including its licence with Spicerhaart.
The parent company VLM Holdings subsequently granted an exclusive licence to the defendant printing company, Ravensworth. Spicerhaart had been using Ravensworth to do some of its printing, but then moved to a different provider using the software on the basis that its licence from VLM (UK) remained fully effective.
Ravensworth failed to pay one of the instalments it owed under the licence and VLM Holdings sought to terminate the licence agreement. Ravensworth claimed that the continued existence of the licence with Spicerhaart was in breach of the exclusivity provision in its licence granted by VLM Holdings, entitling Ravensworth, amongst other things, to end its obligation to pay royalties.
The court therefore had to decide whether Spicerhaart's sub-licence had survived the termination of VLM (UK)'s head licence (following VLM (UK)'s liquidation).
Mr Justice Mann decided that the Spicerhaart licence did survive and so there was a breach of the exclusivity provision of the Ravensworth licence.
Termination of the informal licensing arrangements between VLM Holdings and VLM (UK), brought about by VLM (UK)'s liquidation, did not bring Spicerhaart's licence automatically to an end.
The judge reached his decision on two bases. First, he concluded that, because the directors of VLM (UK) who negotiated the sub-licence were also directors of VLM Holdings, VLM Holdings should be taken to have authorised the sub-licence. He stated "the permission in the licence was one which bound both VLM companies. Bringing to an end the informal licensing arrangements between [VLM] Holdings and [VLM] (UK) would not be capable of affecting the permission already given by [VLM] Holdings under the Spicerhaart licence, so the licence persisted". (emphasis added)
Alternatively, Mr Justice Mann held that in these circumstances, VLM Holdings was estopped from denying that the sub-licence remained in effect. He offered a line of estoppel cases which would reach the same result, including the case of Pickard v Sears (1837) 6 Ad & E 469.
Such a ruling is a departure from what was commonly accepted as the position in the UK, i.e. that sub-licensing arrangements did not survive termination of the head licence. It seems that the Judge, on the facts of this case, was determined to find in favour of Ravensworth and hold that the sub-licence had survived.
It should be noted that this case is very fact specific – VLM Holdings and VLM (UK) had common directors so that although the sub-licence came from VLM (UK) only, in reality and on the facts it came from VLM Holdings as well as VLM (UK).
It may be that the decision would have been different had the parties between whom the head licence subsisted had not been so closely related. On that basis, a sub-licensee should be aware of this decision but should also be aware that this outcome (that the sub-licence survives termination of the head licence) is likely to be limited to cases where the head licence is between parent and subsidiary (or other closely related parties).
The case can be read in full here.
If you would like further information, please contact the Edwards Wildman lawyer responsible for your matters or any of the authors linked above.