German sublicensees enjoy protection even after termination of main licence

The German Federal Court BGH issued two decisions today aimed at protecting investors in intellectual property licences. Both decisions concerned copyright issues in which the copyright owner licensed the copyright to a licensee, but later terminated the license. The licensee had in the meantime sub-licensed the rights to others. The question in both cases was whether the sub-licensees still had a right to use the intellectual property. The court decided yes - the investments made by the sub-licensees justified the continuation of the licence. The court made it clear that its decision also applied to other IP rights, such as patents, trade marks and design rights.

The first decision concerned a software licence. The owner of the copyright had given a company its exclusive rights to a software program. The licensee in turn sub-licensed a further company to use the software. The main licence was cancelled due to non-payment of licence fees. The copyright owner sued for copyright infringement due to continued use of the software. The court decided that the termination of the main licence did not lead to a resultant termination of the sub-licence agreement. The sub-licensee had a continuing right to use the software.

The second decision concerned the rights to the jazz piece “Take Five” from Paul Desmond. The copyright owner assigned the European rights to a music publishing house, which in turn licensed these rights for Germany and Austria to a sub-licensee. The original licence was terminated in 1986 and the court was asked to rule on whether the sub-licensee still had the rights to the music in Germany and Austria. The court agreed that the rights were still in existence, despite the termination of the main licence.

The court came to its decisions by reviewing German Intellectual Property Laws relating not only to copyright, but also to trade marks, design rights and patents. It concluded that there was a principle under German law according to which licences remained in existence, even if the underlying IP right was assigned to another owner. The sub-licensee would have invested on the basis of the existence of the licence. It could normally neither influence nor foresee the termination of the main licence. It might suffer great economic damage or even be threatened in existence if the continued existence was in doubt.

The owner of the copyright (in this case) would not be adversely affected since it could usually require its former licensee to assign the proceeds from the sub-licence to the copyright owner.

What Exactly Is a "Pass Through" Licence?

What happens when we find it difficult to fit standard licensing law principles into a common form of commercial relationship? This question arises in the context of a provision that I encounter from time to time, especially in the context of software licensing, namely, the reference to a “pass through” licence.

While there is no single circumstance in which a so-called “pass through” licence is granted, the typical situation in my experience involves a software product, the right of use of which goes from software developer to middleman/OEM/distributor to end user. In such a situation, we sometimes find that the developer grants to the middleman a “pass through” licence, the ultimate recipient of which is the end user.

So what is the problem? From the pure licensing vantage, the issue is clear—there is no such legal relationship as a “pass through” licence. Legally speaking, the party granting the licence can either do so directly to the licensee, or indirectly via a right of sublicense to the middleman. The “pass through” licence does not fit well within either possibility. It is not a direct licence from the manufacturer to the end user; rather it is the authorization of the manufacturer to the middleman to “pass” the licence right on to the end user (whatever that means). There is no privity between the manufacturer and the end user. Further, it does not appear to be a proper sublicence. This is because the “pass through” licence usually lacks the back-to-back grant of rights, first from manufacturer to middleman, and then from middleman to end user, as required under the basic principles of sublicensing law.

“Wait a minute”, you may ask. The grant of rights embodied in the licence, and the sublicence respectively, do not need to be identical. All that is required is that the licensee/sublicensor be authorized by virtue of the main licence to grant the rights that the sublicensor then grants to the end user.

True enough but, even under that test, the “pass through” would seem to fail to satisfy the requirements for a valid sublicence. That is because (again, based on my experience), the grant of rights from the manufacturer to the middleman are different than those that the middle purports to pass on to the end user. Stated otherwise, the grant of the “pass through” licence runs afoul of the principle that one cannot grant to a third party a right that it has not previously been granted by the original grantor. As such, it cannot be viewed as a proper sublicence.

But Is There a Valid Licence?

If the foregoing is correct, the following points then come to mind:

1. Is the “pass through” a valid licence?

2. If so, who can enforce it, and under what grounds?

3.Even if it is not a valid licence ab initio, does the conduct of the parties create a valid licence de facto, or the least provide a valid defence, in equity or otherwise, against a claim of infringement?

Dear readers—the floor is now yours. All comments are welcome.