Assignability of IP Licenses in Reverse Mergers: Will SQL Survive? | Practical Law

Assignability of IP Licenses in Reverse Mergers: Will SQL Survive? | Practical Law

A discussion of recent case law addressing the assignability of IP licenses in reverse merger transactions. This Update discusses recent decisions holding that a reverse merger does not violate an anti-assignment clause in an IP license, a departure from a long-standing decision by the US District Court for the Northern District of California in SQL Solutions, Inc. v. Oracle Corp.

Assignability of IP Licenses in Reverse Mergers: Will SQL Survive?

Practical Law Legal Update 6-600-1566 (Approx. 5 pages)

Assignability of IP Licenses in Reverse Mergers: Will SQL Survive?

by Practical Law Intellectual Property & Technology
Published on 17 Feb 2015 • USA (National/Federal)
A discussion of recent case law addressing the assignability of IP licenses in reverse merger transactions. This Update discusses recent decisions holding that a reverse merger does not violate an anti-assignment clause in an IP license, a departure from a long-standing decision by the US District Court for the Northern District of California in SQL Solutions, Inc. v. Oracle Corp.
Intellectual property (IP) specialists have long had the challenging task of informing clients and corporate transaction teams that structuring an acquisition as a reverse merger may not work to avoid triggering an anti-assignment provision in an IP license, at least for copyright licenses, and especially where California law applies.
The case that threw this wrench in the works for M&A transactions involving IP licenses is SQL Solutions, Inc. v. Oracle Corp. (No. C-91-1079 MHP, (N.D. Cal. Dec. 18, 1991)). In SQL, the US District Court for the Northern District of California found that an assignment occurred under California law when a licensee went through a "fundamental change in its form of ownership" as a result of a reverse triangular merger. (In a reverse triangular merger, the buyer creates a wholly owned subsidiary that then merges into the target company, with the target company surviving as a wholly owned subsidiary of the buyer.) The court then applied federal copyright law to find that a reverse triangular merger in which the licensee became a wholly owned subsidiary of a competitor of the licensor violated an anti-assignment clause in a non-exclusive copyright license (SQL, , at *2).
While the SQL decision is unpublished and considered not precedential, courts in several states have cited it. As a result, practitioners have long grappled with:
  • How to address SQL, if at all, in due diligence and merger agreement negotiations.
  • Whether to seek consent from the target's licensors under agreements with anti-assignment clauses in connection with a reverse merger transaction.
Until recently, there were not enough cases addressing the effect of reverse mergers, particularly in the IP license context, to allow practitioners to simply dismiss SQL as an outlier. However, several recent rulings show that courts may finally be trending away from SQL.
The following recent cases apply the law of different states and address different types of IP, holding that a reverse merger does not constitute a transfer of an IP license agreement:
  • In December 2014, the US District Court for the District of Kansas, applying Delaware law, concluded that no assignment of a patent license, by operation of law or otherwise, occurred as a result of a reverse triangular merger (High Point Sarl v. Sprint Nextel Corp., No. 09-2269-CM, , at *6 (D. Kan. Dec. 11, 2014)). The High Point court declined to follow SQL, finding that SQL was not relevant because it applies California law (High Point, , at *5 n.9). Instead, the court followed the Delaware Court of Chancery's reasoning in Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, the first noteworthy ruling contrary to SQL in the IP license context (62 A.3d 62 (Del. Ch. Feb. 22, 2013)).
  • In Meso Scale, the Delaware Chancery Court found that the SQL court's explanation of California law conflicted with Delaware's jurisprudence on stock acquisitions (Meso Scale, 62 A.3d 62 at 87-88). The court concluded that:
    • the language of the Delaware merger statute suggests that the surviving corporation in a reverse triangular merger does not make any assignment; and
    • the reasonable expectation of the contracting parties, based on the weight of commentary, was consistent with a reverse merger not constituting an assignment by operation of law.
  • The US District Court for the Northern District of California, the same court that decided SQL, found that a reverse triangular merger was not an impermissible assignment of an IP and know-how license under California law (Florey Inst. of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers, No. CV 12-6504 SC, (N.D. Cal. Sept. 26, 2013)). In its 2013 Florey decision, also unpublished, the court noted that no California state court had resolved the matter and announced a presumption under California law that like a stock sale, a reverse triangular merger (which leaves intact the acquired corporation) does not effect a transfer of rights from a licensee to its acquirer (Florey, , at *5).
  • The Massachusetts Superior Court, applying the Georgia merger statute, found that a reverse merger with a subsidiary of the licensor's competitor did not cause an impermissible assignment of a data license agreement (PharMetrics, Inc. v. Source Healthcare Analytics, Inc., No. 054791BLS1, (Mass. Super. Ct. Sept. 5, 2006)).
Nevertheless, SQL has shown some signs of life:
  • In its 2013 Florey decision, the Northern District of California court distinguished the facts from those in SQL, which involved a copyright license, noting that the court in SQL found that federal copyright law forbids transfers (Florey, , at *5).
  • In 2012, the US District Court for the District of New Jersey, applying New Jersey law, cited SQL to support its holding that a reverse merger violated a clause that specifically prohibited assignments by operation of law (DBA Distrib. Servs. Inc. v. All Source Freight Solutions, Inc., No. 11-3901 (JAP), (D.N.J. Mar. 13, 2012)). Like the SQL court, the DBA court found that the target underwent a "fundamental change in its form of ownership" when it became a wholly owned subsidiary of the buyer (DBA, , at *4). While the agreement at issue in DBA was an exclusive sales agency contract, there is nothing in the DBA opinion to suggest that the court's finding would not also apply to a prohibition on assignments by operation of law in an IP license.
Whether SQL will regain the vitality it once had remains to be seen. For now, depending on the type of IP and applicable law, IP specialists finally have cases in their arsenal to argue that, consistent with their clients' and corporate transaction teams' expectations, reverse merger transactions do not trigger anti-assignment provisions in IP licenses.
For a complete discussion of assignability of IP licenses in reverse mergers and other types of M&A transactions, see Practice Note, IP Licenses: Restrictions on Assignment and Change of Control.