Creators of original works protected by copyright, patent, and trademark allow others to use those works by way of license agreements. An IP license agreement may grant the licensee the right to distribute goods and services to the public under the licensor’s mark, or the right to utilize certain technology or software. The licensor may have concerns about an opposing party in litigation, or a competitor, acquiring the licensee, thereby gaining access to the licensed rights. To address these concerns, many license agreements prohibit the transfer of the licensed rights without the permission of the licensor. At present, however, many jurisdictions have no clearly controlling authority which establishes whether a merger transaction, and in particular the widely used reverse triangular merger, results in a transfer of licensed rights which would be prohibited by a typical anti-assignment clause. 

A reverse triangular merger is often the structure of choice where the parties desire that none of the target’s assets be transferred.  In a reverse triangular merger, a subsidiary of the acquiring corporation merges with the target, the stock of the subsidiary is converted into the stock of the target, and former shareholders of the target receive the merger consideration in return for their target stock. As a result of the merger, the target becomes a wholly-owned subsidiary of the acquirer. A reverse triangular merger generally requires fewer consents from third parties to agreements because, absent a provision that specifically prohibits assignment in a reverse triangular merger, this type of merger generally does not trigger anti-assignment clauses. However, this general rule may not apply to IP license agreements. 

Unless assignment is specifically prohibited by contract, the presumption in most jurisdictions is that agreements and the rights and duties created by them are assignable. IP rights fall under federal law, however, and courts are split as to whether state or federal law governs the assignability of IP licenses. In a leading case, CFLC, Inc. v. Everex Systems, 89 F.3d 673 (1996), the Ninth Circuit held that federal law governs the assignability of patent licenses, although it noted the split among other courts with respect to the governing law. In another case, Linney v. Cellular Alaska Partnership, 151 F.3d 1234 (9th Cir. 1998), the Ninth Circuit noted that parties to a license agreement are well advised to specifically address the fate of IP license agreements in future mergers.

Practice Pointer

In today’s marketplace, intellectual property rights could be among the most valuable assets acquired in a merger. For this reason, agreements should be carefully drafted so that the fate of these valuable rights in a merger is clear. Licensors should draft assignment provisions that specifically prohibit the transfer of licensed rights in the case of a merger, and conversely, licensees should draft provisions that explicitly permit the transfer of licensed rights in a merger. 

For further information, please contact Jonathan Richter at (805) 879-1822.