• The Contract Without End – What the Parties Did

    by  • August 18, 2016 • copyright • 2 Comments

    I previously described a situation where unhappy licensees refused to acknowledge that there was a new licensor. Bruce Kirby, Inc. was the original licensor of the defendants’ rights to build Kirby Sailboats granted in the “Builder Agreements” and then in 2008 Bruce Kirby sold his business to Global Sailing Limited (GSL). The Builder Agreements didn’t expressly prohibit their transfer, but said that “Neither Bruce Kirby nor Kirby Inc. shall assign any rights in the Licensed Design save to an assignee who shall enter into an agreement with Licensee on terms and conditions identical with the terms and conditions of this Agreement.”

    My first thought was the drafting lesson. This agreement was flawed from the start because it set up the possiblity of an impasse – the agreement said there had to be new agreements, and the licensor had to offer the same terms, but it didn’t say that the licensees had to accept their new agreements even if they got the same terms. I also think its a bit odd to require new agreements with terms and conditions that are “identical” to the original agreements – if they have to be identical, why not just make the original agreements transferable?

    But there GSL was, with problematic agreements and the need for a solution. I asked for comments on what you would do, quite sure no one would come up with this solution: GSL and Bruce Kirby entered into a new agreement (the 2011 Agreement) that granted a license back to Bruce Kirby so that Bruce Kirby could be the one to try to bring the boat builders into line. The following is quoting the court; the agreement itself isn’t available on PACER:

    Plaintiffs and GSL stated in the preambular “Background” section to the 2011 Agreement that the “IP agreement [2008 Agreement] has entirely failed to accomplish the intent of the parties,” because “the failure to obtain all the required consents and approvals to transfer the Contracts and certain of the Kirby Sailboat rights” meant that “certain of the Kirby Sailboat rights … remained and still remain in the possession of Kirby.” The parties thereupon recited their “wish to implement the arrangements contemplated in this agreement, in lieu of Kirby [plaintiffs] immediately repaying the Purchase Price [of $2.6 million from the 2008 Agreement] in full, and in return for which Global Sailing agrees not to pursue Kirby for specific performance of Kirby’s obligation to transfer all of the Contracts and the remaining Kirby Sailboat Rights to Global Sailing.” The 2011 Agreement then went on to provide for plaintiffs to pay $1 million to GSL and also to pay to GSL all or a portion of ongoing license fee payments that plaintiffs might receive. In return for these payments, GSL “grants to Kirby [plaintiffs] an exclusive, non-assignable, non-transferrable, royalty free license to use and sub-license the Kirby Sailboat Rights owned by Global Sailing, solely to the extent necessary or desirable for Kirby to fulfill its obligations under the Contracts.” The Kirby Sailboat Rights are described in the 2011 Agreement and consist of intellectual property rights, while the rights under the contracts with third parties are distinguished in the 2011 Agreement as “Contracts rights.” This is the sole transfer of rights mentioned in the 2011 Agreement from GSL to Kirby.

    (Brackets in original.) Bruce Kirby then sent notice it was terminating the Builder Agreements on the basis of non-payment of royalties. I guess that didn’t work out so well, because Bruce Kirby, Inc. (but not GSL) filed a lawsuit against the builders for the breach by non-payment and for “allegedly infringing on plaintiff’s intellectual property rights by continuing to build sailboats and to place racing hull numbers on them after the Builder agreements had been terminated due to their breach.”

    But here’s the problem with the whole 2008 sale/2011 license-back scheme between GSL and Bruce Kirby—standing. After first losing the argument that the 2008 Agreement was invalid for failure to meet conditions precedent (because the 2008 Agreement didn’t have any conditions precedent), the plaintiffs also lost the argument that it was replaced by the 2011 agreement. And the 2011 didn’t transfer enough rights back to Bruce Kirby for it to have standing:

    It is clear to me that the 2011 Agreement did not rescind or undo the 2008 Agreement. Plaintiffs had received $2.6 million for their sale of interests under the 2008 Agreement, and the 2011 Agreement required plaintiffs to pay back less than half that amount ($1 million). The ownership of rights and interests transferred by the 2008 Agreement remained with GSL, and plaintiffs received no more than a license to a subset of those rights for the purpose of servicing existing contracts. Although this license is described in the 2011 Agreement as “exclusive,” and the general rule is that an exclusive licensee may sue others for infringement, the 2011 Agreement makes clear that the license is for the “Kirby Sailboat Rights” and is further limited “solely to the extent necessary or desirable for Kirby to fulfill its obligations under the Contracts.”

    The 2011 Agreement does not assign GSL’s rights under any contracts to plaintiffs (including the rights assigned to GSL by plaintiffs by means of the 2008 Agreement). Although the 2011 Agreement grants a license to plaintiffs, it stops well short of authorizing plaintiffs as licensees to sue third parties for the infringement of intellectual property rights now owned by GSL. In the absence of a contractual re-assignment and in light of the express limitation on plaintiffs’ license (“to use and sublicense the Kirby Sailboat Rights owned by Global Sailing, solely to the extent necessary or desirable for Kirby to fulfill its obligations under the Contracts”), I conclude that the 2011 Agreement did not confer on plaintiffs the right to sue to enforce the contractual and intellectual property rights now owned by GSL.

    Accordingly, because all of plaintiffs’ claims against defendants rely on a common legal predicate—the right of plaintiffs to assert contract and intellectual property rights that belong to GSL—I conclude that plaintiffs have no standing or right of action as to any of their claims against [defendants].

    In my view it’s a little squirrely to base any legal conclusion on generic “intellectual property rights” without evaluating exactly what kind of rights might have been infringed, if any at all. A conclusory statement that the rights weren’t exclusive shouldn’t be good enough for copyright at least: “[T]here would appear to be no limit on how narrow the scope of licensed rights may be and still constitute a ‘transfer’ of ownership, as long as the rights thus licensed are ‘exclusive.'” Hyperquest, Inc. v. N’Site Sols., Inc., 632 F.3d 377, 383 (7th Cir. 2011) (quoting Nimmer). So the court took a bit of a shortcut, although likely a more thorough analysis would have come out the same way.

    But I have no idea how Bruce Kirby and GSL should have repaired the problem. Bruce Kirby and GSL’s first argument was an elide that the requirement in the Builder Agreements, that the underlying rights could only be transferred “to an assignee who shall enter into an agreement with Licensee on terms and conditions identical with the terms and conditions of this Agreement,” was an unsatisfied condition precedent to the 2008 agreement. The court, correctly, rejected the theory because the 2008 agreement wasn’t conditioned on getting the builders’ consent to the transfer. But perhaps it is now the law of the case that GSL owns the rights and, if it does, then there are no rights left to be licensed through the Builder Agreements and the builders are therefore infringing GSL’s rights (whatever they might actually be). I don’t know why GSL isn’t a co-plaintiff; an interesting choice that I have no doubt was made for good reason.

    Bruce Kirby, Inc. v. Laserperformance (Europe) Limited, No. 3:13-cv-00297 (JAM) (D. Conn. Aug. 12, 2016).

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    2 Responses to The Contract Without End – What the Parties Did

    1. Engel Nyst
      August 20, 2016 at 4:19 pm

      An interesting detail here is that the judge didn’t think the assignment back was sufficient for standing, even though it was allegedly “exclusive rights”. In English, I’m reading that Kirby has an exclusive right “to use and sublicense the Kirby Sailboat Rights owned by Global Sailing, solely to the extent necessary or desirable for Kirby to fulfill its obligations under the Contracts”. I can expect that our reader in English will understand that Kirby has enough to fulfill its obligations – including copyright enforcement, if it is the case. That’s what the text says.

      However, considering previous caselaw on copyright exclusive rights necessary for standing, I wouldn’t think it’s enough either. Kirby doesn’t seem to have “enough” to exploit the works himself, in any way but bare enforcement against these licensees. None whatsoever. A narrow right, as you note, would be fine, but this is “bare”. It wasn’t the intention of this agreement that he’d be able to. I guess we can thank Righthaven for this legacy.

      • Pam
        August 21, 2016 at 9:20 pm

        Interesting that you mention Righthaven; I agree with you but it was too much work to make the point! I think Righthaven tightened up the law of standing in a way that may not be good for the rest of us.

        And yes, you would have to be a copyright specialist to realize that the license-back wouldn’t work. An ordinary business lawyer wouldn’t, and may not even really appreciate what ilk the rights conveyed were. I’m not sure that needing a specialist to solve this problem is a good thing either.

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