Finding “nemo” – a sub-licence capable of surviving the head licence

“Nemo dat quod non habet,” as the maxim goes. Or more colloquially for those with an aversion to Latin: “You can’t grant rights that you don’t have.” 

So it has long been considered trite law that a sub-licence lapses automatically when the head licence ends.  This principle generally sets a limit for onward licences of entertainment content.  Of course, a head licence can contemplate a sub-licence that survives the expiry of the head licence.  A case in point is a music publisher’s permission to grant “synch” licences that extend beyond the publisher’s retention period.[1]  But that is still consistent with the nemo dat principle: the publisher is validly granting a surviving sub-licence, because the continuing authority will not fall away when the rest of the licence comes to an end.

But as shown by a recent High Court case, VLM Holdings Limited v. Ravensworth Digital Services Limited,[2] this approach to sub-licensing cannot necessarily be taken for granted. 

Licensing structure

The case related to a chain of licences of copyright in online printing software, with three contracting parties involved:

• The head licensor was VLM Holdings, a printing company based in Ireland. 
• The intermediate sub-licensor was VLM UK, a UK subsidiary of VLM Holdings. 
• The sub-licensee was an estate agency called Spicerhaart.

Let’s refer to them as A, B and C.  The head licence was an informal, unwritten licence of copyright in the software from A to B.  A and B essentially shared common directors, and it was taken as read that B was authorised to exploit the software in the UK.  The sub-licence was a formal, written licence from B to C, with a fixed initial period starting in December 2007 and expiring at the end of April 2013, and terminable after that on six months’ notice.  The software was business-critical to C: it relied on the software to design property particulars and other documents on an online system hosted remotely by B, following which B would have the materials printed and delivered to C.  In the recitals of the sub-licence, B was incorrectly described as the owner of the software.

Termination

B began to suffer financial difficulties from 2008.  In March 2009, the head licence was then terminated by resolution of A’s board of directors.  Shortly afterwards, B went into a creditors’ voluntary liquidation.  A then immediately granted a new exclusive licence to B’s competitor, Ravensworth – another digital printing company and the defendant in the proceedings, which we can conveniently call D.  In that licence, A was described as the owner of the software.

C sourced print services from D, which informally consented to C’s continued use of the software.  After six months, C warned D that it intended to move print production to another provider, and D wrote to C, terminating its consent to C’s use of the software.  C sought to rely on the sub-licence, and continued using the software.  D ceased paying royalties to A, claiming that the sub-licence negated D’s exclusivity, representing a material breach of D’s licence (and one that was incapable of remedy).[3]  In December 2009, A served notice of termination of D’s licence, asserting that D’s failure to pay royalties amounted to a material breach.  A then issued proceedings against D, and D counterclaimed.

Decision

The court essentially had to decide two questions.  First, did the sub-licence survive termination of the head licence?  Secondly, if so, how did that affect the licence from A to D?

In giving judgment, Mr Justice Mann found as follows:

1. The sub-licence did survive termination of the head licence.

• The judge rejected A’s contention that a sub-licence automatically falls away on termination of the head licence under the nemo dat principle.[4]
• The only previous authority on the point, Austin Baldwin v. Magnetic Car Company,[5] concerned a sub-licence that provided for the eventuality of termination of the head licence.  That case did not identify any particular principles (except that each case turns on its own facts).[6]
• The judge did not consider himself bound by any earlier case law or the Copyright, Designs and Patents Act 1988 on this issue, considering it a question of fact in each case, and a matter of applying first principles.[7]
• A licence of intellectual property is just a permission to do something that would otherwise be unlawful, and does not create a proprietary right.[8]  Accordingly, the exact scope of the authority to grant sub-licences must be assessed.[9]  The answer depends on all the facts, including the terms of the head licence and sub-licence and what was actually terminated.[10]
• On the facts, A was content to treat B as the owner of the copyright, and the directors of A (in that capacity) had allowed B to make that statement in the sub-licence.  C was unaware that B was not in fact the owner.  So A impliedly authorised B to grant the sub-licence to C.  Under normal agency principles, therefore, the permission came from A as well as B, and A should be treated as an undisclosed principal.  C was then entitled to hold A to the licence – not to the whole contract, but to permission to use the software.  On this analysis, ending the informal head licence did not affect the permission already given by A to C.[11]
• C could also rely on an estoppel as against A, relying not on any direct statement from A, but on the statement in the sub-licence that B was the copyright owner and B’s behaviour as such, both of which A had allowed.  So A would be estopped from asserting its ownership of the copyright free from a licence in favour of C.[12]

2. The survival of the sub-licence amounted to a material breach of A’s licence to D: D needed exclusivity on the facts, and also to be able to require C to take a new sub-licence from D.  So D was justified in terminating its licence from A and succeeded in  its counterclaim.[13]

Comment

Despite first appearances, the nemo dat principle more or less survives intact from this judgment: it is just that the relevant rights-holder was the head licensor (alongside the intermediate sub-licensor).  B was found to have bound A as an undisclosed principal on agency principles.  This created (in licensing terms) a direct relationship between A and C – and so A could not simply terminate the sub-licence by terminating the head licence.  Nor, therefore, did the liquidation of B make any difference, given that the sub-licensed rights were not expressed to end on B’s insolvency (nor could any such term be implied).[14]

The facts are peculiar, and this case does not suddenly throw doubt on the received wisdom.  Each case will turn on its own facts (such as the content and circumstances of the grants of rights).  In many (if not most) scenarios, there may be no agency structure, nor any grounds for estoppel.  It is certainly counter-intuitive to treat permission of a sub-licensor as the direct permission of the head licensor.  A sub-licensor often operates quite independently of the head licensor and cannot easily be said to have granted a licence on behalf of the head licensor: it acts as principal in granting the sub-licence and, if so, can only grant a sub-licence that falls within the scope of the head licence.  It will take special facts to collapse the chain of title (and indeed privity of contract) into a hybrid, direct-cum-indirect licence of the sort found to exist in this case.

The judgment is also exceptional in applying agency principles to a parent-subsidiary relationship. Here, the judge found that, while “distinct bodies in law”, both A and B had a “common aim”, and “it would be wholly artificial to distinguish between them for these purposes”.[15]  The principle of corporate personality is generally robust, however, and courts are usually reluctant to accept that a subsidiary has acted as an agent for its parent (with the effect that the parent is bound under common-law agency principles). 

That said, the case illustrates that there can be exceptions to the straightforward “nemo dat” principle, and the case is not obviously confined to its particular facts (such as the common directorship).  As such, the case has clear implications for licensing best practice:

• The scope of any head licence permitting sub-licences should be carefully prescribed – especially the extent to which sub-licences are to be capable of surviving termination of the head licence (if at all).
• The head licence should expressly disclaim any agency relationship.  A sub-licensor should be prevented (both contractually and in practice) from holding itself out as the owner of copyright.
• The head licensor should reserve a right of prior written approval over sub-licences.  The head licence would preferably append a full form of sub-licence or at least prescribe key provisions to be included in any sub-licence.
• A sub-licensee should be clear that it is entering into a sub-licence (not a head licence), and the sub-licence should expressly clarify that.  The sub-licence should specifically provide that the sub-licence will terminate when the head licence terminates.
• Also, companies within a group structure (along with any other closely related parties) should ensure that their intra-group licensing arrangements are properly documented in a written, arm’s-length agreement and not left to a matter of common understanding, in case that could imply an undisclosed agency relationship in dealing with third-party sub-licensees.

So it transpires that you can find nemo after all.  But it might be as rare as a tropical clownfish.

Ed Baden-Powell

Article written for Entertainment Law Review.

[1] In practice, the music publisher will generally hold the rights as an assignee for a defined period, but the same general principle applies.
[2] [2013] EWHC 228.  Paragraph references below are to paragraphs of this judgment.
[3] In light of the express (and highly unusual) contractual terms of the licence, D also claimed that it had acquired beneficial ownership of the copyright as a result of the breach (which turned the licence into an assignment of copyright).
[4] Para. 60.
[5] (1925) 42 RPC 454.
[6] Para. 54 and 55.
[7] Para. 56 and 58.
[8] Para. 57, following Allen & Hanburys Ltd v. Generics UK Ltd [1986] RPC 203.
[9] Para. 59.
[10] Para. 61.
[11] Para. 65, 66, 71 and 72.
[12] Para. 67 to 70.
[13] Para. 79 to 90.
[14] Para. 73 to 78.
[15] Para. 63(iv).