Quick! Licensors Re-evaluate Your Non-Assignment Clauses.
"Neither this Agreement nor any of the rights, interest or obligations under this Agreement shall 
be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties..."
This provision or something very similar appears in approximately 100% of license agreements, whether patent, software or something else. It is ubiquitous, well written, rarely discussed and settled, or so you thought.
The Chancery Court of Delaware (them again) recently gave reason to reconsider this provision. In Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, C.A. No. 5589-VCP, Decided April 8, 2011, the Court considered the application of this clause in the context of a reverse triangle merger. For those of you scoring at home, a reverse triangle merger occurs when a wholly owned subsidiary of a parent merges with an unaffiliated entity, with the unaffiliated entity being the survivor. The result is the unaffiliated entity becomes a wholly owned subsidiary of the parent without the necessity of the parent directly purchasing the stock of such unaffiliated entity.
In the instant case, Roche had licensed some technology from Meso and there had been prior controversies and law suits relating to the scope of use that Roche had under the license agreements. Roche had lost some of these battles and had responded by repeatedly acquiring companies that had the technology. One of the companies that had license rights was acquired by Roche by the above described reverse triangle merger method. The result was that such licensee became the wholly owned subsidiary of Roche. The licensors complained that this violated the language and intent of the non-assignment clause as set out above. Roche countered that there was no assignment of any kind and that only the ownership of the licensee changed. Roche filed a motion to dismiss for failure to state a cause of action based partially on their assertion that no assignment had taken place.
The Delaware court said that it wasn't as simple as that. The Court reasoned that even though the non-assignment language did not expressly address a change of control or ownership of the licensee, that did not necessarily mean that it falls outside of the ambit of the non-assignment language. The Court basically said that it felt strongly both ways and both parties had taken reasonable positions and had cited cases supporting their positions, although none were Delaware cases dealing with reverse triangle mergers. The Court also stated that since Delaware had not directly ruled on this issue,therefore, at this early stage of the proceedings, it could not dismiss as a matter of law.
Again, it is important to note that this was in response to a motion to dismiss and the standards are different than in a final adjudication. The Court has not ruled that a reverse triangle merger runs afoul of a non-assignment clause that prohibits assignments occurring "...by operation of law".
The Court's reasoning and some of its dicta indicates that it could ultimately find that a merger, however constituted, is tantamount to an assignment if certain elements are present. How that shakes out remains to be seen.
However, if such an outcome bothers you (whether you are a licensor, licensee, assignor, assignee or something else), you should strongly consider the construction of the language.
A licensor seeking to prevent such an assignment would opt to include specific language about any kind of merger or change of control constituting an assignment that is prohibited. Others (licensees, etc.), seeking more freedom in assignment, should be leery of such language. Companies considering acquisition and doing due diligence should consider whether their proposed transaction would bring any of these issues into play. Let your lawyer know what your plans and purposes are so they can address those issues.
