Licensees Beware: Assignment Provisions in a License Agreement

by Field Law
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Let’s say a company negotiates a patent license agreement with the patent owner. The agreement includes a clear prohibition against assignment – in other words, for either party to transfer their rights under the agreement, they have to get the consent of the other party.  So what happens if the underlying patent is transferred by the patent owner?

The clause in a recent case was very clear:

Neither party hereto shall assign, subcontract, sublicense or otherwise transfer this Agreement or any interest hereunder, or assign or delegate any of its rights or obligations hereunder, without the prior written consent of the other party. Any such attempted assignment, subcontract, sublicense or transfer thereof shall be void and have no force or effect. This Agreement shall be binding upon, and shall inure to the benefit of the parties hereto and their respective successors and heirs. [Emphasis added]

That was the clause appearing in a license agreement for a patented waterproof zipper between YKK Corp. and Au Haven LLC, the patent owner.  YKK negotiated an exclusive license to manufacture the patented zippers in exchange for a royalty on sales. Through a series of assignments, ownership of the patent was transferred to a new owner, Trelleborg. YKK, however, did not consent to the assignment of the patent to Trelleborg.  The new owner later joined Au Haven and they both sued YKK for breach of the patent license agreement as well as infringement of the licensed patent.

YKK countered, arguing that Trelleborg (the patent owner) did not have standing to sue, since the purported assignment was void, according to the clause quoted above, due to the fact that YKK’s consent was never obtained: “Any such attempted assignment, subcontract, sublicense or transfer thereof shall be void and have no force or effect.” (Emphasis added) In other words,   YKK argued that since the attempted assignment of the patent was done without consent, it was not an effective assignment, and thus Trelleborg was not the proper owner of the patent, and thus had no right to sue for infringement of that patent.

The court considered this in the recent US decision in Au New Haven LLC v. YKK Corporation (US District Court SDNY, Sept. 28, 2016) (hat tip to Finnegan). Rejecting YKK’s argument, the court found that the clause did not prevent assignments of the underlying patent or render assignments of the patent invalid, since the clause only prohibited assignments of the agreement and of any interest under the agreement, and it did not specifically mention the assignment of the patent itself.

Thus, the transfer of the patent (even though it was done without YKK’s consent) was valid, meaning Trelleborg had the right to sue for infringement of that patent.

Both licensors and licensees should take care to consider the consequences of the assignment provisions of their license, whether assignment is permitted by the licensee or licensor, and whether assignment of the underlying patent should be controlled under the agreement.

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