Software licensing disputes: implied licences and the scope of permitted use

• United Kingdom

• Technology
• Technology, Media and Telecoms - Technology

13-02-2014

Précis:

Software is, more than ever, critical to trading and a business’ success. Given the plethora of IT being licensed, it is important for customers to be correctly licensed. If you supply IT, it is of course important for securing the right and fair revenue stream from such licenses.

In our sector, as we all know, whether you are the licensor or procuring licenses for your business, licensor audits and changes are usually a trigger that commonly lead to disagreements and some disputes. Understanding your rights as early as possible (regardless of what side of the argument you are on) is vital to avoid issues or, if issues do arise, secure the best deal.  A number of recent cases show that both sides are prepared to push harder to get what they want and this mirrors our experience.  The cases also underline that regular and periodic internal reviews by licensees, separate to licensor audits, are advisable and help your business with its budgetary projections.

What?

In Noemalife SpA v Infinitt UK Limited [2013] EWHC 2376 (TCC) the defendant used software licensed to it by its sister company to enable it to perform a contract for the provision of services to an NHS Trust.  The NHS contract was for a term of seven years with an option to extend for a further three years in six month blocks.  At the end of the term the contract was extended by six months and again by a further five six-month blocks – the first extension was in accordance with the mechanism contained within the contract for extending the term whereas the second extension was not.  In the meantime, due to a number of changes in corporate structure, the intellectual property rights in the software had been acquired by the claimant company.  The claimant claimed that, following the expiration of the original seven year term, an implied licence came into effect for which it was entitled to receive a reasonable fee.  The High Court rejected the claim, stating that the parties had not intended to create legal relations and therefore no implied licence existed. 

In UsedSoft GmbH v Oracle International Corporation (C-128/11) Oracle sought to restrain UsedSoft from offering “used” Oracle software licences for sale.  The software in question was downloaded by Oracle’s customers via the internet under a licence agreement stating that, in return for a one-off fee, the customer was granted a non-exclusive, non-transferable right to use the software for an unlimited period of time.  The European Court of Justice ruled that this amounted to a “sale” under Article 4(2) of Directive 91/250/EEC which involved a transfer in the right of ownership in that copy of the software.  Accordingly, Oracle could not prevent the software from being re-sold despite the express prohibition contained within the licensing agreement. 

In VLM Holdings Limited v Ravensworth Digital Services Limited [2013] EWHC 288 (Ch) a parent company granted a software licence to its subsidiary, which then granted a sub-licence to an end user.  The subsidiary later went into liquidation and the licence from its parent company was terminated.  The High Court held that the end user’s sub-licence survived the termination of the head-licence, causing the parent company to be in breach of a separate licence of the same software that it had granted to a third party on an exclusive basis.  

So what?

Of course, the  majority of disputes are dealt with by means other than formal litigation proceedings.  The cases outlined above represent only the “tip of the iceberg” in terms of the frequency with which such disputes arise and many more concern the scope of what is, and is not, licensed.  In order to avoid disputes, licensors and licensees should consider the following practical tips:

• Prohibitions on sub-licensing or assignment can be particularly problematic where the licensor or licensee is part of a group of companies and thought must be given to those arrangements and what should happen to the licensing arrangements in the event of an insolvency.  Standard terms may well not be sufficient.
• The parties should take care to correctly determine who the underlying copyright owner of the software is.  Where a chain of licences does exist, the head-licence should expressly state that sub-licences either survive the termination of the head-licence or not.
• Where agreements are varied it is essential that the contractual procedures for doing so are followed.  In Noemalife SpA v Infinitt UK Limited the failure to do so resulted in the defendant infringing the copyright holder’s rights by using software where no licence existed.  It also caused the defendant to continue to provide services despite being under no obligation to do so. 
• The licensee should ensure that the licensor warrants that it has authority to grant the licence, and also that it provides protection against any third party claims that could impact upon the licensee’s use of the software (such as a claim that the third party’s intellectual property rights are being infringed).  Licensors may wish to manage this risk by including a right to provide replacement, non-infringing software, and/or the right to refund the purchase price if the infringement cannot be resolved – however the licensee should not allow this to be an exclusive remedy as the damage caused may vastly exceed the purchase price.
• A possible consequence of the UsedSoft GmbH v Oracle International Corporation case is that software developers may seek to grant licences that don’t amount to a “sale”; for example by limiting the duration or by requiring payments in regular instalments.  Licensees must carefully consider whether any such measures will impact upon their intended use of the software.
• The scope of the licence is common battleground at audit time, typically revolving around vague definitions. Close scrutiny, consideration and clarification prior to agreement is essential.