Cut off the head but beware that the sub-licence may not die
In the recent High Court decision VLM Holdings Limited v Ravensworth Digital Services Limited  Mann J has ruled that a sub-licence is capable of surviving termination of its head licence in certain (albeit, fact-specific) circumstances.
Licensors concerned by this decision should ensure that where they grant licences permitting sub-licensing, it should be a condition of such permission that the sub-licence includes an express provision for automatic termination upon termination of the head licence.
A European company ("VLM") granted an informal licence to its UK subsidiary ("VLM UK") to use the copyright in its software for an online printing service. VLM UK then granted a sub-licence to a firm of estate agents ("Spicerhaart").
VLM UK went into liquidation. Accordingly VLM terminated its licence with VLM UK.
VLM subsequently granted an exclusive licence to a printing company ("Ravensworth").
An issue arose with Ravensworth's enjoyment of its exclusive rights when Spicerhaart maintained that it still benefited from a valid licence from VLM UK.Ravensworth protested to VLM that, if Spicerhaart were right, its licence could not have been granted on an exclusive basis.
Consequently, a dispute developed between VLM and Ravensworth in which both alleged that the other had breached its obligations under the exclusive licence agreement.
The key issue in deciding who was in breach was whether the sub-licence between Spicerhaart and VLM UK remained intact, despite termination of the head licence between VLM and VLM UK as this had a direct bearing on the purported exclusivity of Ravensworth's licence with VLM.
The Court determined that a licence is a permission to do something that would normally be unlawful, but it does not create a proprietary right. Accordingly, if a licence expressly permits a licensee to grant sub-licences which are expressed as being capable of surviving the termination of the head licence then the sub-licences will survive that termination as it is permitted by the licensor.
Applying this principle, Mann J took the following facts into consideration:
- As a subsidiary, VLM UK had common directors with VLM;
- These directors proactively desired the sub-licence to be in place, as it would benefit both VLM and VLM UK;
- VLM was the trading company rather than VLM UK - it was the company that needed to exploit the copyright;
- The sub-licence was for 6 years, but with a follow-on period that could only be terminated by Spicerhaart and not by VLM UK;
- The sub-licence protected Spicerhaart from disruption to its use of the copyrighted software;
- Both VLM and VLM UK had benefitted from a related agreement from Spicerhaart to give a guaranteed part of its business to VLM UK;
- The sub-licence set out VLM UK as the owner of the copyright. This was consented to by VLM.
Mann J found that the common directorship and aims of VLM and VLM UK meant that VLM was fully aware of and must have approved the Spicerhaart licence. Further, the underlying purpose was to protect Spicerhaart from disruption to its use of the software due to any issues (such as insolvency) connected with VLM UK. If follows that if termination of the informal head licence ended the Spicerhaart licence then the business purpose of the grant would be frustrated.
Further, the Spicerhaart licence described VLM UK as the owner of the copyright and it was plain on the facts that the directors of VLM, in that capacity, allowed VLM UK to make that statement in the Spicerhaart licence and were content that it should do so. In Mann J's view the directors of VLM were not only content that the licence should be granted, they impliedly consented to it, and impliedly authorised VLM UK to grant it. That meant that, as a matter of the application of ordinary agency principles, the licence, as a permission to do that which would otherwise be unlawful, was granted by VLM as well as VLM UK.
Therefore the Court determined that Spicerhaart's licence should be treated as permission granted by both the head and sub-licensors.
This decision highlights that it is not a foregone conclusion that sub-licences cease on termination of the head licence. However, such occasions are limited to fact-specific instances where it can be proved that a direct permission has been granted by the licensor to the sub-licensee independent of the permission granted by the licensee to the sub-licensee.
Such a situation can be simply avoided by expressly contracting for termination of the sub-licence in the event of termination of the head licence. In practice, a well-drafted head licence should always set out what happens to any permitted sub-licences when the head licence is terminated and require that any such sub-licences contain a clause that reflects the same.
  EWHC 228 (Ch)