Software License: Copyright, Joint-Ownership & IP Audit
The Southern District recently held that the parent of a licensee was not authorized to use the copyrighted software without timely assignment from the licensee. Interestingly, the parent of the licensee, ABN, claimed that its subsidiary, IT, was a joint-owner of the copyrighted software that was the subject of the license; an argument the New York court rejected.
ABN’s subsidiary, IT, obtained a license to use a software from CSI and did use the software under the license agreement for about ten years. As is customary, the licensor, CSI, adequately protected its copyright and other IP rights by providing that, “[t]he System and all documentation, and all copies thereof, are proprietary to CSI. All applicable rights to patents, copyrights, trademarks and trade secrets in the System or any modification made at Licensee’s request are and shall remain in CSI…. This Section 9 will survive the expiration or termination of this Agreement.”
However, an additional agreement was later entered into for the purpose of customizing the licensed software. That agreement, however, assigned some copyright ownership over the customized software to IT. It is on that basis that ABN argued that IT independently contributed to the software and that it was deserving of copyright joint-ownership.
Next, ABN sold its subsidiary IT, the licensee, and seemingly failed to properly audit intellectual property rights before the sale. Hence, by the time the deal was made, the license had not been assigned to ABN. While the license agreement authorized the licensee to assign the license to “affiliates”, once the sale took place ABN was no longer an affiliate. It was too late to assign the license to ABN. Then, ABN’s only way of getting their hands on the software was to renegotiate another license agreement directly with the CSI. Naturally, an agreement could not be reached. Hence the lawsuit.
Co-Owner Claim Failed
The court eventually found against ABN, holding that their claim of join-ownership was without merit. In so finding, the court heavily relied on the conduct of the parties, observing that “[h]ad IT believed that it owned some or all of BankTrade [the software], one would not expect a one-way license agreement such as that here, but something akin to a cross-license, or other commercial arrangement. Instead, IT continued to act in all ways as if CSI [the licensor] was the sole owner of the Work.”
Two important takeaways can be gleaned from this case.
I. In the context of software license, when the licensor retains ownership over most of the copyrighted software, while at the same time granting some form of copyright ownership to the licensee, failing to contractually limit joint-ownership rights risks putting the ownership of the whole underlying software (and the revenue streams of the licensor) in jeopardy.
II. When selling a subsidiary make sure your IP rights are preserved (in this case the software license should have been assigned to the parent before the sale of IT, the licensee.)
I. Without Limit, The Licensee Could Be a Joint-Author
Licensees are often granted some form of ownership over the work tailored to the particular business needs of the licensee. Granting some copyright ownership to the licensee while at the same time retaining some ownership oneself creates the potential for joint copyright ownership over the software.
Joint-ownership could be terribly damaging to the licensor for two reasons. First, according to the default rule, as summarized by Professor Nimmer:
“joint authors share equally in the ownership of the joint work. This is true, even where it is clear that their respective contributions to the joint work are not equal.” This means that, absent an agreement, a licensee may acquire copyright ownership over up to half of the underlying software.
Second, each joint-author is entitled to grant license to third parties without obtaining the consent of the other joint-owner. This would of course be very damaging to the licensor’s bottom line.
Accordingly, copyright licensors would be well-advised to include provisions in their licensing agreements limiting the potential for joint-ownership. It seems inequitable that a licensee could receive equal ownership on par with a licensor who most likely performed the lion’s share of the work. Rightfully, courts are often reluctant to allocate equal ownership in such cases. But other courts are not as sensitive to these issues and apply the law in accordance with the default rule.
Is the Licensee Acting Like a Copyright Owner?
In Complex, the court paid attention to the conduct of the parties and noted that all of them “acted as if CSI [the licensor] was the sole owner.” Often, the conduct of the licensee will be so at odds with that of a copyright owner that a claim of joint-ownership will appear inauthentic. This was certainly the case in Complex, where the court was quite vocal about the inconsistent positions held by ABN. ABN argued that CSI’s copyright registration was invalid because the software existed in preexisting versions, all the while claiming joint-ownership. The court picked up on the inconsistency and held it against ABN, which can be seen in the reasoning of the court throughout the opinion.
The Takeaway: The surest way to preempt litigation and licensing fee losses is to limit licensees’ potential claims of joint-ownership contractually.
II. Intellectual Property Audit: Assigning Copyright License To Parent Company.
ABN’s major copyright blunder is its failure to carry out a proper copyright and IP audit prior to the sale of its subsidiary. Simply put, there would be no case had ABN done so. All ABN needed to do to retain access to the coveted software was to assign the license from its subsidiary to itself prior to the sale of the subsidiary. A diligent IP audit would have revealed as much.
The Takeaway: Conduct IP audit before selling subsidiary and assign IP license to the parent when needed and, of course, before the sale is consummated.
Complex Sys., Inc. v ABN Ambro Bank, 2013 WL 5797111 (S.D.N.Y. Oct. 25, 2013)