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Software sub-licence survives termination of head licence

Paul Barton
07/03/2013
In a recent decision, VLM Holdings Limited v Ravensworth Digital Services Limited [2013] EWHC 228 (Ch), the English High Court held that a sub-licence of software was capable of surviving the In a recent decision, VLM Holdings Limited v Ravensworth Digital Services Limited [2013] EWHC 228 (Ch), the English High Court held that a sub-licence of software was capable of surviving the termination of a head licence. 

The facts

VLM Holdings (the claimant) owns the copyright in certain software that facilitates online printing services.  It granted an informal licence to its UK subsidiary VLM (UK) Limited to exploit the copyright in the software.

VLM (UK) Limited granted a licence to use the software to an estate agency ("Spicerhaart") so it could use it to print its property particulars and other documents.  When Spicerhaart started to experience problems with the printing services it received from VLM (UK) Limited and because it considered the software a business critical system it obtained a right to its own copy of the software which it hosted on its servers to promote business resilience.

VLM (UK) Limited went into liquidation and VLM Holdings terminated its informal licence to exploit the software. VLM Holdings then granted an exclusive licence in respect of the software to Ravensworth (the defendant), which was a rival printing company.  Ravensworth sought to exploit its copyright in the software and approached Spicerhaart in this regard.  Spicerhaart responded that it already had a valid licence which it had obtained from VLM (UK) Limited.

Ravensworth complained to VLM Holdings that the existence of Spicerhaart's sub-licence negated its own exclusivity, and claimed that it was a material breach of the terms of the exclusive licence.  It terminated the agreement with VLM Holdings on the ground of that breach.  VLM Holdings then made a claim against Ravensworth for breach of the agreement, and Ravensworth counterclaimed for breach by VLM Holdings.

The key issue in the case was whether Spicerhaart's sub-licence survived the termination of the head licence from VLM Holdings to VLM (UK) Limited.  If the sub-licence survived, VLM Holdings was in breach of the terms of its exclusive licence to Ravensworth.

The Judge's conclusions and decision

Mr Justice Mann rejected VLM Holding's contention that a sub-licence automatically terminates upon termination of the head licence and held, on the facts of the case, that VLM Holdings had granted to VLM (UK) Limited rights that were sufficiently wide to permit the grant of a sub-licence to Spicerhaart which was capable of surviving the termination of the head licence.  In reaching that conclusion, the judge considered the following facts were relevant:

1.                     VLM Holdings and VLM (UK) Limited had common directors.

2.                     As its trading company, VLM Holdings permitted VLM (UK) Limited to do what was necessary to exploit the software.

3.                     The Spicerhaart sub-licence was something that the directors of both VLM (UK) Limited and VLM Holdings wanted in place to further the business of VLM (UK) Limited and for the exploitation of the software generally.

4.                     Both VLM Holdings and VLM (UK) Limited knew that the purpose of the Spicerhaart sub-licence was to protect Spicerhaart from disruption to its use of business critical software and if VLM Holdings could terminate that sub-licence by terminating the informal licence to its subsidiary this purpose would be frustrated.

Spicerhaart was unaware that VLM (UK) Limited was not the actual owner of the copyright in the software. The sub-licence had described VLM (UK) Limited as the owner.  The judge took the view that VLM Holdings was to be treated as an undisclosed principal with the consequence that the permission granted to Spicerhaart was to be treated as a permission granted by VLM Holdings as well as by VLM (UK) Limited.

The judge also said that because VLM Holdings had allowed VLM (UK) Limited to include a recital in Spicerhaart's sub-licence stating that VLM (UK) Limited was the owner of the copyright and also to conduct itself as if it was the owner, VLM Holdings was therefore estopped as against Spicerhaart from asserting its ownership free of the Spicerhaart sub-licence.

The effect of the judge's findings was that the termination of the informal head licence between VLM Holdings and VLM (UK) Limited did not affect Spicerhaart's licence of the software with the judge concluding that the Spicerhaart licence remains in force and that VLM Holdings was in breach of its agreement with Ravensworth by failing to give Ravensworth the exclusivity agreed.

The full judgement can be accessed here: http://www.bailii.org/ew/cases/EWHC/Ch/2013/228.html

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