License to Merge: Precautions for Preserving IP License Rights

Despite a long history of case law relating to mergers, one area remains unclear, especially in the entertainment industry: the effect of mergers on intellectual property licensing agreements. Recent case law contributes to this uncertainty and suggests that certain precautions may be necessary to preserve valuable IP licensing rights. Importantly, entertainment companies should anticipate these issues from the outset and careful consideration should be given when first negotiating a license agreement. Moreover, depending upon the terms of the IP license at issue, when contemplating a merger, companies should be particularly vigilant and may want to consider obtaining consent agreements to ensure that IP licenses will survive the merger.

Under some states' law, following a merger a surviving or resulting company generally succeeds by operation of law to all of the assets and liabilities of the merged entities. As such, when a merger is completed, a company does not have to assign its rights to contracts and other assets to the new or surviving company ' such rights simply transfer automatically. The ability to have such assets transfer automatically by operation of law is often desirable, particularly because license agreements frequently require the consent of the other party before a transfer or assignment of the license may occur.

Accordingly, when attempting to complete an acquisition, entertainment companies might choose to structure the transaction as a merger in order to avoid having to get third-party consent prior to transferring contracts. Importantly, however, the practice of having contracts transfer as a matter of law, even if prohibited by the express terms of the contracts, may no longer be reliable in the context of transferring IP content and licenses.

IP Treated Differently

While the impact of a merger on the assets of the parties to the merger is governed by state law, IP licenses are also governed by a body of statutory and judicial federal law. In recent years, case law points to a trend starting to impact how traditional state merger laws treat IP rights as different than that of other assets. However, the trend is neither uniform nor consistent.

In 2004, in a case addressing the effect of a merger on an IP license, the court found that “whether a merger effectuates an automatic assignment or transfer of license rights is a matter of state law.” (See, Evolution Inc. v. Prime Rate Premium Finance Corp. Inc., 03-2315-KHV (D. Kan. 2004) (citing PPG Indus. Inc. v. Guardian Indus. Corp., 597 F.2d 1090, 1093 (6th Cir. 1979).)

On the other hand, other recent federal court decisions have held that the licensing agreement itself, rather than the applicable state merger statute, determines whether the license can be transferred to the surviving company without the consent of the licensor. This, in effect, means that unless the license agreement clearly permits assignment of the IP rights without the consent of the licensor, a licensor might successfully challenge the right of a surviving company in a merger to operate as the licensee under such license ' despite the fact that under state merger law all of the rights under the license transferred as a matter of law.

IP licenses are treated differently than other assets, including other contractual rights such as leases, due to the fact that the licensor or owner of the content retains a vested interest in the identity of the licensee of the IP. The rationale behind this includes many reasons, one of which is protecting a licensor from being forced, by operation of state law, to have its IP licensed to a competitor without consent.

While the treatment of IP licenses varies from one state to the next, part of the due diligence investigation to be completed prior to a merger should include a consideration of whether or not it will be necessary to acquire consent from content licensors to effectuate the transfer of IP. For example, in California, the state statute provides that “the surviving corporation shall succeed, without other transfer, to all the rights and property of the disappearing corporations.” See, Cal. Corp. Code Sec. 11.07(a) (2003). Of course, after conducting this evaluation, an acquiring company may choose to assume the risk and proceed without obtaining consent, but it would be presumptuous to simply assume that the transfer of IP licensee rights will be effective without challenge simply because the transfer occurred by operation of state law as part of a merger.

Check the Language

Similarly, prior to entering into IP license agreements, parties should examine the plain language of the licensing agreement to accurately assess the intent of the parties and original licensor. If the intent of the parties is to permit IP to be transferable in a merger, this intent should be clearly and explicitly expressed or, alternatively, barred.

While it would be impossible to provide a complete discussion of all of the issues related to the transfer of IP licenses here, the most important lesson to learn is that licensors of IP need to be secure in the rights and be able to determine who may ultimately come into possession of their content. Therefore, when negotiating or analyzing an IP license agreement, a careful determination must include an evaluation of both state merger and federal law, irrespective of which side of the table you are on.

Despite a long history of case law relating to mergers, one area remains unclear, especially in the entertainment industry: the effect of mergers on intellectual property licensing agreements. Recent case law contributes to this uncertainty and suggests that certain precautions may be necessary to preserve valuable IP licensing rights. Importantly, entertainment companies should anticipate these issues from the outset and careful consideration should be given when first negotiating a license agreement. Moreover, depending upon the terms of the IP license at issue, when contemplating a merger, companies should be particularly vigilant and may want to consider obtaining consent agreements to ensure that IP licenses will survive the merger.

Under some states' law, following a merger a surviving or resulting company generally succeeds by operation of law to all of the assets and liabilities of the merged entities. As such, when a merger is completed, a company does not have to assign its rights to contracts and other assets to the new or surviving company ' such rights simply transfer automatically. The ability to have such assets transfer automatically by operation of law is often desirable, particularly because license agreements frequently require the consent of the other party before a transfer or assignment of the license may occur.

Accordingly, when attempting to complete an acquisition, entertainment companies might choose to structure the transaction as a merger in order to avoid having to get third-party consent prior to transferring contracts. Importantly, however, the practice of having contracts transfer as a matter of law, even if prohibited by the express terms of the contracts, may no longer be reliable in the context of transferring IP content and licenses.

IP Treated Differently

While the impact of a merger on the assets of the parties to the merger is governed by state law, IP licenses are also governed by a body of statutory and judicial federal law. In recent years, case law points to a trend starting to impact how traditional state merger laws treat IP rights as different than that of other assets. However, the trend is neither uniform nor consistent.

In 2004, in a case addressing the effect of a merger on an IP license, the court found that “whether a merger effectuates an automatic assignment or transfer of license rights is a matter of state law.” (See, Evolution Inc. v. Prime Rate Premium Finance Corp. Inc. , 03-2315-KHV (D. Kan. 2004) ( citing PPG Indus. Inc. v. Guardian Indus. Corp. , 597 F.2d 1090, 1093 (6th Cir. 1979).)

On the other hand, other recent federal court decisions have held that the licensing agreement itself, rather than the applicable state merger statute, determines whether the license can be transferred to the surviving company without the consent of the licensor. This, in effect, means that unless the license agreement clearly permits assignment of the IP rights without the consent of the licensor, a licensor might successfully challenge the right of a surviving company in a merger to operate as the licensee under such license ' despite the fact that under state merger law all of the rights under the license transferred as a matter of law.

IP licenses are treated differently than other assets, including other contractual rights such as leases, due to the fact that the licensor or owner of the content retains a vested interest in the identity of the licensee of the IP. The rationale behind this includes many reasons, one of which is protecting a licensor from being forced, by operation of state law, to have its IP licensed to a competitor without consent.

While the treatment of IP licenses varies from one state to the next, part of the due diligence investigation to be completed prior to a merger should include a consideration of whether or not it will be necessary to acquire consent from content licensors to effectuate the transfer of IP. For example, in California, the state statute provides that “the surviving corporation shall succeed, without other transfer, to all the rights and property of the disappearing corporations.” See, Cal. Corp. Code Sec. 11.07(a) (2003). Of course, after conducting this evaluation, an acquiring company may choose to assume the risk and proceed without obtaining consent, but it would be presumptuous to simply assume that the transfer of IP licensee rights will be effective without challenge simply because the transfer occurred by operation of state law as part of a merger.

Check the Language

Similarly, prior to entering into IP license agreements, parties should examine the plain language of the licensing agreement to accurately assess the intent of the parties and original licensor. If the intent of the parties is to permit IP to be transferable in a merger, this intent should be clearly and explicitly expressed or, alternatively, barred.

While it would be impossible to provide a complete discussion of all of the issues related to the transfer of IP licenses here, the most important lesson to learn is that licensors of IP need to be secure in the rights and be able to determine who may ultimately come into possession of their content. Therefore, when negotiating or analyzing an IP license agreement, a careful determination must include an evaluation of both state merger and federal law, irrespective of which side of the table you are on.