We once again delve into that most murky of IP licensing topics--sublicensing. When one considers the number of trees, if not entire groves, that have been felled to provide the paper needed for books and articles on licensing, then a mere tree or two is all that has been required to publish the entire corpus on sublicensing (full disclosure--at least one or two branches have been devoted to my own publications on the topic).Perhaps the most interesting legal issue that arises out of sublicensing is the question of what happens to the validity of a sublicence if the main licence comes to an end. After all, while the IP rights being sublicensed derive from the licensor and not from the licensee/sublicensor, the sublicence agreement itself is between the sublicensor and sublicensee; as a contractual matter, the licensor is absent.
I remember that when I first began to examine the question, I asked a local colleague--who stated, with complete confidence, that the sublicence must come to an end with the termination of the main license. I then contacted a distinguished IP colleague abroad, who opined with absolute assurance that the termination of the main licence had no affect on the validity of the sublicence. Neither pointed me to any case law that has dealt with the issue on a principled basis. More to the point, surely both cannot be right. So what are the points for and against each of these contrary positions?Sublicense Terminates with the Termination of the Main Licence
1. If the sublicensee is assumed to take rights of use in the IP through its agreement with the licensee, and the scope of the sublicence is bounded by the scope of the main licence, then when the main licence comes to an end, the basis for the grant of sublicence no longer exists. If that is the case, then the sublicensee is in breach of its use of the IP rights that were with the subject of the sublicence. The licensor can chose not to exercise its negative right against the "unauthorized" use of its IP rights; but, if it does choose to exercise its rights against the sublicensee, the sublicensee has no defence based on the erstwhile sublicence.
Comments
The parties can attempt to avoid this result by agreement. Thus the sublicence agreement can include a provision that the sublicence survives the termination of the main license. Query: does the licensor also need to be a signatory or otherwise to express its consent to such a clause?
Sublicence Does Not Terminate
1. It has been argued that when a sublicensee has lived up to the terms of its sublicence, then it would be inequitable that the sublicence be deemed to have been revoked, especially when the sublicensee has invested materially in the performance of the sublicence (see Ellis, Patent Licenses (3d ed. 1958).
2. The sublicence is in essence an agreement between the licensor and sublicensee, the validity of which is unaffected by the status of the main licence (see Brunsvold and O'Reilly, Drafting Patent License Agreements, 4th ed.)
Comments
i. The difficulty with the first point is that its appeal to equitable principles may be limited to common law jurisdictions. Also, it requires a case-by-case determination,which makes it unsatisfactory as a basis to support the general proposition.
ii. As for the second point, there is no compelling basis to support the conclusion that the default position is that the fundamental relationship is between the sublicensee and licensor.
iii. With respect to a trade mark licence governed by the law of a jurisdiction where quality control is required, the licensor may have relied upon the licensee to carry out the quality control function. If so, the licensor may not be in a position to ensure continuing quality control if the licensee is no longer tied contractually to the licensee.
The upshot of the foregoing is that there does not appear to be any single position on the question that can be viewed as being the better one. In such a circumstance, the sublicensee that wishes to protect itself is advised to cover the issue in its sublicence agreement, it being recognized that, unless the licensor also explicitly agrees to this result, the ultimate enforceability of such a provision cannot be assured.
