Cincom Systems, Inc. v. Novelis Corp. is a 2009 decision of the United States Court of Appeals for the Sixth Circuit holding that a software customer infringed the vendor’s copyright when, through an internal corporate restructuring, a non-transferable licence passed from the original licensee to a successor company without the vendor’s written approval.[1] The software never left the computer on which it was licensed. The court affirmed summary judgment for Cincom, with damages stipulated at USD 459,530, the amount of Cincom’s initial licence fee.[1]
Background
Cincom, an Ohio software company, licenses rather than sells its programs, for an annual fee. On 5 July 1989 it licensed its SUPRA database management program and MANTIS application development system to Alcan Rolled Products Division (“Alcan Ohio”). The licence named that division as the “Customer” and granted “a non-exclusive and non-transferable license”. The software could be placed only on designated computers listed in a schedule, which named a computer at Alcan Ohio’s plant in Oswego, New York. The licence was governed by Ohio law and said the customer could “not transfer its rights or obligations under this Agreement without the prior written approval of Cincom”.[1]
Alcan Ohio was a wholly owned subsidiary of Alcan, Inc. of Canada. In 2003 the group reorganised: Alcan Ohio created Alcan of Texas, merged into it, and the business then passed by a further merger to a subsidiary that was renamed several times, becoming Novelis Corporation on 1 January 2005. Throughout, the software stayed on the same computer in Oswego, but in a plant now owned by Novelis. Alcan Ohio never asked for or obtained Cincom’s written approval, and it was undisputed that Cincom was not told of the plan.[1]
The dispute
On learning of the changes, Cincom sued in the Southern District of Ohio on 11 March 2005. On stipulated facts, the district court held that Alcan Ohio’s merger into Alcan Texas transferred the licence under Ohio law and granted summary judgment on liability, following the Sixth Circuit’s 1979 decision in PPG Industries v. Guardian Industries on patent licences. The parties then stipulated damages of USD 459,530, equal to Cincom’s initial licensing fee, and agreed that each would bear its own attorneys’ fees even though the licence allowed the prevailing party to recover them.[1]
Novelis appealed on two grounds. It argued that PPG was about a licence that ended up with a competitor, while Cincom’s licence showed no concern with internal reorganisations; and that Ohio’s merger statute had since been amended to remove language saying that property is “[t]ransferred to” the surviving corporation.[1]
Decision or outcome
The Sixth Circuit, in an opinion by Judge Julia Smith Gibbons, affirmed.[1]
Federal and state law. The court explained that federal common law governs whether a patent or copyright licence can be assigned, and presumes such licences are non-assignable “in the absence of express provisions to the contrary”, because free assignability would let every licensee become a competitor of the rights holder. State law governs the interpretation of the licence as a contract and whether a merger transfers property, but must yield where it would allow a transfer that federal law does not. Here, the licence itself expressly prohibited transfers without written approval, so ordinary contract construction gave the answer.[1]
No competitor exception. The court rejected the argument that it mattered that Novelis was not a competitor: the federal rule does not mean “no competitor possession, no foul”. “The harm is the breach of the terms of the license.”[1]
Merger is a transfer. Under the current Ohio statute the separate existence of a merged entity ceases and its property vests in the survivor. “The vesting of the license in the surviving entity could not occur without being transferred by the old entity.” Quoting PPG, the court said a transfer “is no less a transfer because it takes place by operation of law”. It stated the rule broadly: “in the context of a patent or copyright license, a transfer occurs any time an entity other than the one to which the license was expressly granted gains possession of the license.” Because Alcan Ohio no longer existed and Novelis held the licence without approval, Novelis infringed Cincom’s copyright.[1]
The court distinguished a Texas decision holding that a subsidiary’s merger into its parent did not breach a non-assignment clause, because that case did not involve intellectual property.[1]
Significance for software licensing and SAM practice
The decision is binding in the Sixth Circuit and is a leading authority on how corporate reorganisations interact with software licences. Its practical message is that the legal identity of the licensee matters as much as the number of installations:
- Mergers, reorganisations and renamings. A change of legal entity can move a licence even where the business, the site and the computer stay the same. A name change alone was not the problem in this case; the earlier mergers were.[1]
- Default rule. Where a licence is silent, federal common law fills the gap with a presumption that it cannot be transferred without authorisation.[1]
- Remedy. The customer was treated as an infringer, and the parties put the damages at the full initial licence fee, in effect the price of a new licence.[1]
For licence managers, the case supports including software licences in due diligence and integration planning for mergers, internal restructurings and entity changes, and keeping records of the named licensee and any affiliate-use and assignment terms in each agreement. See licence compliance.
Lessons learned
- An internal merger or reorganisation can transfer a software licence by operation of law, even when the software never moves. The court held that Alcan Ohio’s merger into a sister company transferred the licence although the software stayed on the same computer in Oswego.[1]
- Under US federal common law, intellectual property licences are presumed non-transferable unless they say otherwise. The court applied that presumption and noted it would fill the gap even if a licence were silent.[1]
- Check every licence’s assignment clause and named licensee before a restructuring, and get written consent where needed. The licence required prior written approval for any transfer, and none was sought.[1]
- It does not matter that the new holder is an affiliate rather than a competitor. The court held that the fact that Novelis was not a competitor was “immaterial”.[1]