A discussion concerning the transferability of intellectual property agreements. This Legal Update includes drafting considerations to address the default rules concerning assignments of intellectual property license agreements.
The transferability of intellectual property (IP) license agreements requires special consideration because the default rules differ from the treatment of many other agreements. In particular, a licensee's rights are generally not assignable unless the license agreement expressly permits assignment or the licensor otherwise consents.
Parties can always contract around the default rules. Contract terms expressly allowing or prohibiting transferability are generally enforceable.
Licensor-friendly Provisions
In its simplest form, the licensor may seek to include an anti-assignment provision in the license agreement that requires the licensor's prior consent for the licensee's assignment of the agreement. A strict anti-assignment provision should state that any transfer in violation of the provision is void or constitutes grounds for termination of the license. Without this clause, the assignment may remain effective and the licensor may only have a breach of contract claim for damages, if any.
A more detailed anti-assignment provision may address specific issues, such as mergers, stock sales and multiple transactions.
The licensor may instead agree to allow certain assignments by the licensee. In that situation, it should specify limitations on the assignment, such as limitations concerning:
Notice of a permitted assignment.
Compliance with the terms and conditions of the agreement.
The identity and performance obligations of the transferee.
Licensee-friendly Provisions
Typical licensee counterproposals to licensor-friendly provisions include:
Stating that the licensor's consent to the licensee's transfer of the license cannot be unreasonably withheld or delayed.
Expressly permitting assignment to certain specified entities.
Permitting assignments "in part."
Allowing the licensee to grant liens in its rights under the agreement as collateral to a specific lender or generally.
Change of Control
A common misconception in drafting and interpreting contracts, including IP licenses, is that an anti-assignment clause covers a party's change of control. However, prohibitions on changes of control are likely not implied from a simple anti-assignment clause (see, for example, White v. Hitachi, Ltd., No. 3:04-CV-20, (E.D. Tenn. Sept. 17, 2007)). Restrictions on changes of control must therefore be separately addressed.
A change-of-control provision gives a party certain rights in connection with the other party's transaction. Although some change-of-control provisions claim to void the transaction, the more direct approach is to provide that a change of control is equivalent to a material breach of the agreement, grounds for termination or both.