ACI Worldwide Corp. v. Churchill Lane Associates, LLC is an appeal on the termination of a software technology licence. ACI Worldwide, a payments software company, had licensed fraud-detection software from Nestor, Inc. and paid royalties on the new products it sublicensed to its own customers. After the licensor’s insolvency ACI acquired the remaining rights and declared the licence terminated, aiming to stop paying royalties to Churchill Lane, which had bought the royalty stream from Nestor. In 2017 the Eighth Circuit held that ACI could not strip the post-termination royalties by amendment, but that the termination itself was valid, so royalties stayed due only on sublicences granted before 21 July 2014.[1]
Background
Nestor developed a credit card fraud detection suite called PRISM. In February 2001 it licensed ACI to use, modify, market, sublicense and support parts of it. ACI built new software on it, owned by Nestor under the agreement, and paid Nestor fifteen percent of the fees its customers paid for the new technology. The agreement, governed by New York law, allowed either party to terminate if the other became insolvent or assigned substantially all its assets, and said ACI remained liable for royalties on sublicences granted before termination. It could be amended only with both parties’ consent.[1]
In 2002 Nestor assigned its royalties to investors who formed Churchill Lane for US$3.1 million, and ACI, which had also wanted them, began paying Churchill directly. Churchill signed a later amendment. Nestor became insolvent in 2009 and a receiver sold its rights to American Traffic Solutions, from which ACI bought the remaining rights on 20 July 2014. ACI declared the licence terminated the next day.[1]
The dispute
ACI sued in October 2014 for a declaration that it had validly amended and terminated the agreement and owed no further royalties. Churchill counterclaimed for breach of contract, arguing it was a party or at least a third-party beneficiary or assignee whose consent was needed. The district court granted summary judgment to ACI.[1]
Decision or outcome
The Eighth Circuit held that Churchill was not a full party to the licence, but that as an assignee of the royalties that ACI had acknowledged by paying it directly, it could not be prejudiced by an amendment removing the post-termination royalties without its consent. It rejected ACI’s arguments that the receivership sale extinguished Churchill’s rights and that the licensor and licensee interests merged when ACI bought Nestor’s rights. It nonetheless held the termination valid, because Nestor’s insolvency in 2009 permitted ACI to terminate without Nestor’s, and so without an assignee’s, consent. Royalties therefore remained due on sublicences granted before 21 July 2014, and none on later ones. Judge Beam dissented from the termination holding.[1]
Significance for software licensing and SAM practice
The case concerns a vendor’s inbound licence, not a customer audit, but it illustrates how the grant, the termination triggers and the surviving payment terms interact when a licensed technology and its royalty stream are traded among several parties. It also shows how an acquisition of the licensor’s rights does not, by itself, end payment obligations that were assigned elsewhere.[1]
Lessons learned
- Check whether a licence you depend on has royalty or payment rights assigned to a third party, because that party’s consent may be needed to change them. The court held ACI could not amend away Churchill’s royalties without its consent.[1]
- A termination right triggered by the licensor’s insolvency or asset transfer can still be used years later, so read what events trigger it. ACI terminated in 2014 on the basis of Nestor’s 2009 insolvency, and the court upheld it.[1]
- Buying out the licensor does not by itself extinguish payment obligations that were assigned to someone else. The court declined to apply merger.[1]
- Terms covering what survives termination, such as royalties on existing sublicences, matter as much as the grant. Royalties on sublicences granted before termination continued.[1]