Intellectual Property Law

Another Landmine for Licensees

By Steve Cosentino

At a time when a sideways economy seemingly coincides with a rise in software compliance audits, licensees have another reason to carefully review their software use.  In  The Compliance Source, Inc. v. GreenPoint Mortgage Funding, Inc. ((2010 WL 4056112, No. 09-10726 (5th Cir. Oct. 18, 2010)), the Fifth Circuit ruled in favor of narrow interpretation of a license agreement when it came to use by a third party on behalf of the licensee.  

GreenPoint had permitted its attorneys to use the licensor's loan documentation software to prepare loans on GreenPoint's behalf.   The district court held that the use by the attorneys on behalf of GreenPoint did not constitute a transfer or sublicense of the agreement in violation of the terms of the license.  The district court also focused on two prior decisions for the proposition that a court can look past the specific license language of the license grant to "absolve a licensee who grants third-party access merely because the access is on behalf of or inures to the benefit of, the licensee."   

The circuit court distinguished the two prior decisions on the basis that the contracts contained language that explicitly permitted limited access by certain third parties.  The circuit court, however, found that the Compliance Source contract did not contain such permissive language from which to extrapolate a more general third party right.   The circuit court instead held that the agreement did not permit use by third parties even if such use is on behalf of the licensee. 

Aside from the obvious compliance issues this case raises, it contains a couple of important practice pointers for licensors as well.  The first is to be precise in drafting exceptions as they can help define the rule.  The Compliance Source agreement has a specific but limited third party use right for originating lenders.  The circuit court specifically mentioned the originating lender language as a specifically tailored provision that precluded the finding of a more expansive implied right.  Also, the circuit court emphasized, in the opinion, that the agreement "expressly prohibited the use of the licensed technology not explicitly permitted by the agreement itself."   Time to dust off the boilerplate. 

Full post as published by The TechKnowledgy Blog on November 07, 2010 (boomark / email).