A recent case before the United States District Court of Appeals demonstrates how important it is for companies to understand their software licenses when planning mergers and reorganizations.  Novelis Corporation learned the hard way when it completed an internal corporate restructuring.  Here’s what happened in Cincom Systems, Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009).

In 1989, Cincom Systems, Inc. licensed two software products to Alcan Rolled Products Division (“Alcan Ohio”), an Ohio-based corporation that would later become known as Novelis. The license Cincom issued listed “Alcan Rolled Products Division” as the “Customer” and granted to Alcan Ohio “a non-exclusive and nontransferable license” to use Cincom’s software. Under its license, Alcan Ohio could only place the software on designated computers at its facility in Oswego, New York.

In the meantime, Alcan executed an internal restructuring under state statutory merger laws.  Although Cincom’s software remained on the same computers located in the same office as when the license was entered, the plant was now owned by  “Novelis.”  Cincom caught wind of the change and sued Novelis, alleging that Novelis’ actions violated the license agreement.  Novelis lost in the lower court, the parties stipulated to damages of $459,530.00 and appealed.

Novelis argued on appeal that under Ohio state merger laws, the change in ownership of the software did not amount to a transfer of the license.  The Court of Appeals disagreed, holding that state law does not control the assignability of patent or copyright licenses and to permit so would “undermine the reward that encourages invention.” The court held that the plain language of the agreement was clear, “no transfers are permissible without express written approval.”  It was a costly lesson for Novelis but it teaches us all that we have to read those software licenses.

–Adam G. Garson, Esq.