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Case Law on Challenging Conclusion of License Agreements

31.08.2016

Mariia Koval, attorney at Ilyashev & Partners Law Firm
Source: Jurist&Zakon

Conclusion of license agreements has not been losing its relevance for a long time and remains the most attractive form of disposal of its exclusive rights for intellectual property owners.

License agreement allows the copyright holders to grant licenses for use of belonging to them exclusive rights to intellectual property items to the unlimited number of entities, while continuing independent use of the appropriate item.

License agreement is a universal means of disposal of the exclusive intellectual property rights as it has a temporary nature, i.e. does not envisage the irrevocable transfer of exclusive rights to the intellectual property item.

According to the license agreement one party (licensor) grants the other party (licensee) permit to use of the item of intellectual property rights (license) under the conditions specified by mutual consent of the parties taking into account rules of the Civil Code of Ukraine and other law.

It should be noted that the license agreement has some characteristics: the license agreement must specify type of license, specific rights granted under the agreement, methods of use of the said item, territory and term for which the rights are granted, scope, procedure and terms of payment for use of the object of right and other conditions that the parties deem appropriate to include in the agreement.

Moreover, if the agreement does not specify the type of the license, it is considered that a non-exclusive license is granted under the license agreement.

It should also be noted that the rights to use of intellectual property items and methods of their use that are not specified in the license agreement shall be deemed not granted to the licensee.

After analyzing judicial practice, it may be noted that invalidation of the license agreement and violation of obligations under the license agreement are perhaps the most common grounds for lawsuits.

Among the cases regarding non-performance of conditions of the license agreement the most often cause of dispute is failure by the licensee of payments (royalties, lump-sum payment) for use of some intellectual property item. Case law in this regard is in principle sufficiently developed and consistent: upon reviewing the case files, the judges in most cases take the side of the claimant if the claimant provided the proper evidence of performance of its obligations under the agreement.

However, in our opinion, the courts should be more restrictive with respect to licensees regarding failure of the appropriate payments under license agreements as rights holders almost always fulfill their obligations on provision of intellectual property item in use.

At the same time, often not meeting their payment obligations, the licensees are mainly interested in providing them the exclusive licenses only, which precludes the copyright owner from granting the right of use to any third parties and/or use of the item by themselves.

As an example we would refer to the case No. 910/26083 (decision of the Economic Court of Kyiv of June 10, 2013 was cancelled in the primary lawsuit by the court of appeal, the Higher Court upheld the resolution of the court of appeal) in relation to the license agreement on the right to use the software. The claimant in the primary lawsuit sought to recover debts under the license agreement, and the claimant in the counterclaim sought to invalidate the agreement on the ground that the agreement is contrary to acts of civil law, namely that the licensor lacked the appropriate permit at the time of signing the agreement.

The court granted the primary lawsuit on recovery of debt.

Upon analyzing the provisions of the Law of Ukraine ‘On Copyright and Related Rights”, the court concluded that no registration of the work is required for arising and exercise of copyright, and, thus, dismissed the counterclaim.

However, the court of appeal cancelled the decision of the court of first instance in part pertaining to satisfaction of the primary claim, because, having studied the facts of the case, the court found that the case files lack the evidence of sending by the claimant to the defendant in the primary claim of accounts for the amount of debt before filing the said claim to the court.

Despite the obvious, it would seem, mistake of the claimant regarding failure to send to the defendant the amount of debt in the above case, these decisions of the court of appeal and the Higher Court are quite controversial. Firstly, the pre-trial settlement of economic disputes between the parties is optional, and secondly, the licensee was aware of the need to pay fees in favor of the licensor for the right to use the software in accordance with the terms of the agreement.

In our opinion, rights and interests of right holders should be protected as much as possible to avoid abuse on the part of licensees, considering also that non-payment by licensees of the amounts required under the agreement brings additional costs for litigation and loss of time for the licensor.

Another interesting case No. 58/548 (decision of the Economic Court of Kyiv of January 30, 2012, the information about appeal of the decision was not found in the court register) in relation to the license agreement on granting the right to distribution of television and radio program. The claimant in the primary lawsuit sought to recover debt and penalties under the license agreement, and the claimant in the counterclaim sought to invalidate the said agreement on the grounds that the licensor carried out commercial activities on transmission of foreign TV channels in the territory of Ukraine without the appropriate license from the National Council of Ukraine on Television and Radio Broadcasting.

Having examined the circumstances of the case, the court concluded that the licensor is a distributor of television and radio programs, and not a provider of program service or a broadcasting company, and, thus, is not obliged to be licensed. In this regard, the counterclaim was dismissed, and the primary lawsuit was satisfied in full.

There are many examples of litigations, where the claim to invalidate the license agreement is submitted as a counterclaim. It indicates that counterclaims are mostly used as an opportunity to avoid responsibility on fulfillment of terms of license agreements, and, in turn, expend time.

Moreover, in such cases limitation of actions turns to be missed very often.

After analyzing judicial practice in such cases, it may be noted that the licensees are looking for any possible ground for such counterclaims, such as: failure to specify in the agreement the exact list of the rights transferred, failure to specify an exact list of works (certificates, patents, etc.), lack of copyright protection of the licensor, conclusion of a license agreement without the purpose of creating the legal consequences, conclusion of a license agreement as a fraudulent transaction, etc.

Here are examples of court cases demanding invalidation of a license agreement.

In the case No. 910/6326/15-г (decision of the Economic Court of Kyiv of June 18, 2015 was upheld by the court of appeal and Higher court) the claimant sought to invalidate the license agreement on the ground that it is a fraudulent transaction carried out to conceal the franchising agreement.

The court stated that in accordance with the Civil Code of Ukraine content of the agreement constitute conditions (clauses) determined at the discretion of the parties and agreed by them, and conditions that are mandatory in accordance with the acts of civil legislation.

The court concluded that the parties reached agreement on all essential terms and conditions of the license agreement, the representatives of the parties signed and sealed the text and, thus, the agreement was concluded. The claim was accordingly dismissed on the ground that the agreement concluded between the parties in its legal nature is a license agreement and not a franchise agreement.

In the case No. 910/20015/13 (decision of the Economic Court of Kyiv of January 29, 2014 was upheld by the court of appeal) in relation to the license agreement on use of musical works by public performance the claimant based the stated claims on the fact that there was no specific list of works in the agreement, the right to the use of which was transferred to him.

Having analyzed the content of the license agreement, the court concluded that the agreement is not contrary to the Civil Code and other acts of civil legislation, and, consequently, the absence of specific works, the rights to which are transferred under the agreement, is not a sign of invalidity of the agreement.

It should be noted that in cases on invalidation of license agreements in support of their position the courts use the principle of freedom of contract, i.e. the main thing is that the agreement is not contrary to the provisions of the Civil Code and other regulations, including good business practices. Such an approach seems correct and naturally does not create unnecessary restrictions for the parties to licensing agreements in practice.

In cases on invalidation of license agreements the economic courts always take into account that in the case when according to the content the license agreement may be terminated only for the future, such agreement is invalidated and terminated only for the future.

Whereas the rights to use of the intellectual property item, which at the time of conclusion of the agreement were not valid, can not be the subject matter of a license agreement, invalidation of the copyright protection (certificate, patent) entails invalidation of the license agreement.

With regard to challenge of the license agreements the frequent claims are also dissolution of the agreements on the basis of non-performance (improper performance) of their terms. The most common failure of conditions of the license agreement is again failure by the licensee of necessary payments envisaged in the agreement.

CONCLUSION:

After reviewing judicial practice on challenge of the license agreements, the following main points can be highlighted:

– when invalidating the license agreements the courts rely on the general provisions of the Civil Code of Ukraine in respect of invalidity of the agreements (Arts. 203, 215), which set forth an exhaustive list of grounds of invalidity of the agreements;

– invalidation of the copyright protection (certificate, patent) is the ground for invalidation of the license agreement;

– during consideration of cases on invalidation of license agreements the courts apply limitation of actions actively.

In conclusion, it should be noted that, when considering the cases on challenging of the license agreements, it would be desirable for the courts to take into account the specifics of such agreements and intellectual property itself as in accordance with such agreements the exclusive right rather than the material object is granted for use.

It is hoped that with the formation of the Supreme Intellectual Property Court in Ukraine interests of rights holders (often foreign ones) will be protected by the courts as much as possible, which in turn should increase the investment attractiveness of Ukraine.

 
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