The Price of a Re-org
by Pamela Chestek • September 30, 2009 • copyright
Some decisions just make me nervous. The Sixth Circuit decision in Cincom Systems, Inc. v. Novelis Corp. is one of them.
Cincom Systems licenses software. In 1989 it licensed software to Alcan Rolled Products Division (Alcan Ohio), a wholly-owned subsidiary of Alcan, Inc. The license was for use of the software on one computer in a facility in Oswego, New York (N.B., the district court opinion used the plural “computers”). The license provided that Alcan Ohio could “not transfer its rights or obligations under this Agreement without the prior written approval of Cincom.”
Alcan, Inc. did some internal restructuring of the company (you see where this is going). Alcan Texas was created and Alcan Ohio merged into it, with Alcan Texas surviving. The next day, Alcan Texas merged with three other Texas subsidiaries and the former rolled products division became a subsidiary of Alcan Texas, called Alcan Fabrication Corporation. The name was later changed to Alcan Aluminum Corporation, then to Novelis Corporation, the defendant. The software remained on the same computer in Oswego throughout. No one asked Cincom for assent to a change of licensee.
Cincom sued, claiming that the computer was no longer licensed for the software and therefore the continued use of the software was a copyright infringement. The parties stipulated that, if there was a copyright infringement, damages were $459,530, the amount of Cincom’s original licensing fee.
A 1979 patent case in the Sixth Circuit, PPG Industries, Inc. v. Guardian Industries Corp., 597 F.2d 1090 (6th Cir. 1979), held that, although state law provided for the automatic transfer and vesting of licenses in the successor corporation in a merger, an intellectual property license is presumed to be non-assignable and nontransferable in the absence of express provisions to the contrary. This is because intellectual property rights are meant to be exclusionary, so that allowing free assignability would undermine the reward for invention.
In PPG Industries, PPG’s new licensee would have been a direct competitor. Novelis therefore argued that an internal reorganization should be treated differently, but without success:
|The fact that the license at issue in PPG ultimately found its way into the hands of a competitor does not serve to distinguish our holding from the present set of facts. 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 into a rule of “no competitor possession, no foul.” 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.|
|when Alcan Ohio merged with Alcan Texas, the license granted by Cincom solely to Alcan Ohio transferred to the surviving corporation, now known as Novelis. Because Novelis did not abide by the express terms of Cincom’s license and gain Cincom’s prior written approval, Novelis infringed Cincom’s copyright. We therefore affirm the judgment of the district court.|
Seriously, was there really a material breach here, justifying a termination of the contract? The computer never moved, the software never moved, the only thing that changed was that the company did some internal organizational housekeeping. It doesn’t look like Cincom lost any part of its bargain – it may not have liked the bargain it struck in 1989 and was looking for a way out, but that doesn’t make every breach material.
And the consequence was draconian. The court just seems to assume that the inevitable consequence of breach of a copyright license is copyright infringement: “If any other legal entity holds the license without Cincom’s prior approval, that entity has infringed Cincom’s copyright because a transfer has occurred.” But there’s no explanation of how the defendant actually infringed any of the exclusive rights of the copyright owner. The lower court’s entire analysis on the subject is this:
|[T]he Court finds that the series of events leading to the creation of Novelis Corporation resulted in an impermissible transfer to Novelis of the License Agreement granted to Alcan Ohio by Cincom. Thus, when Novelis used and copied the software subject to the License Agreement, which it has done since at least January 2005, it infringed upon Cincom’s copyright.|
In the life of a corporate lawyer, the re-org seems like a pretty low risk transaction, and checking assignability of a software license used in operations far down the punch list. What a lesson.
Court of Appeals: Cincom Systems, Inc. v. Novelis Corp., No. 07-4142, 2009 WL 3048436 (6th Cir. Sept. 25, 2009).
Decision below: Cincom Systems, Inc. v. Novelis Corp., No. 1:05-cv-00152-SJD, 2007 WL 128999 (S.D. Ohio Jan. 12, 2007)
© 2009 Pamela Chestek