Intellectual Property
When software use rights are called into question after an acquisition
If software use rights are called into question after an acquisition, the appropriate response differs depending on whether the problem is missing documentation, missing rights or licenses, or a breach of license conditions. First identify which company's activities are affected, then compare the contracts with the implementation and development history. This article addresses investigation of conflicting accounts, securing use rights, resolving issues concerning past use, and coordination with claims against the seller.
Reviewed by Keishi Yoshikawa, Attorney at Law and Patent Attorney (Dai-Ichi Tokyo Bar Association)
Contents
1 Identifying the entities and activities affected
Begin with the form of transaction. In a share acquisition, the target company remains the same legal entity, and licenses to which it is a party generally remain in place. However, separately check provisions requiring notice or consent, or permitting termination, on a change of control. In a business transfer, transfer of a contractual position generally requires the other contracting party's consent. Check whether advance consent was given in the existing agreement. In a company split, rights and obligations pass in accordance with the split agreement or plan, so check the scope of the succession and the relevant contract terms.
The discussion and table below focus on share acquisitions. For a business transfer or company split, distinguish the original contracting party from the company taking over the business.
Next, distinguish the target company's existing use from deployment to the buyer or group companies. Identify who will use which version or function for internal purposes, provision to customers, modifications, or other activities. The authority and conditions to check differ depending on whether the same entity remains the provider after the transaction or a different legal entity receives the code.
For interim measures, identify the legal basis for continued use and the matters still unverified, taking into account any third-party allegations and the impact of suspension. Decide the scope of continued use, the scope for which additional permission will be sought, and the activities to put on hold. Record the assumptions underlying the decision and when it will be reviewed. Preserve relevant materials and check notice deadlines under the acquisition agreement in parallel.
The following table sets out the checks and immediate decisions for each business activity.
| Business activity | Rights and conditions to check | Main materials | Immediate decisions |
|---|---|---|---|
| Existing use and provision to customers by the target company | Scope permitting current use and provision, duration and termination, and unfulfilled conditions. | License agreements, customer contracts, versions in operation or being supplied, and license notices. | Functions and recipients for which use or provision will continue, and whether an interim license or restrictions are needed. |
| New sales or new provision by the target company | Permission covering new customers or new delivery models, and conditions for third-party components. | Planned versions, delivery methods, license terms, and customer contracts and notices. | The scope of new orders, shipments, and releases to proceed with, and items to hold. |
| Modifications, maintenance, or a change of developer | Permission to modify and use modified software, outsource work, and disclose code. | Development and maintenance agreements, source code, change histories, and subcontracting provisions. | Modifications to begin, materials to provide to contractors, and whether further agreement is needed. |
| Use, development, or provision by the buyer or group companies | Covered entities, territories, and purposes; succession to contracts or licenses; and sublicensing. | Lists of items transferred, license agreements, and intragroup transfer and delivery plans. | The scope of transfers, joint development, and provision, and necessary consents or additional licenses. |
The rows do not establish a uniform answer as to whether use is permitted. Existing use and provision also require review, and membership of the same corporate group does not itself authorize use. This analysis assumes Japanese law; also check the governing law of the contract.
2 Comparing contracts and implementation and verifying the basis of rights
The seller's statement that copyright was assigned and the developer's statement that common components were excluded cannot be compared without identifying what each refers to. Start by establishing who is asserting what about which contract, code, and version.
Match the contractual deliverables to what was delivered and to the current implementation. Use the development agreement, specifications, and deliverable lists to identify the delivered code and versions and connect them with the implementation at acquisition and today. Distinguish additional development, pre-existing common components, parts created by subcontractors, and third-party libraries and open-source software (OSS). Work with technical personnel to identify which contract wording corresponds to which part of the implementation. At this stage, also separate additions made after the acquisition from issues existing at acquisition.
Compare contemporaneous records with current explanations and identify support, inconsistencies, and gaps. Arrange development emails, issue-tracking records, delivery lists, acceptance documents, and change histories chronologically and compare them with the accounts given by those involved. Check whether a statement that an item formed part of the initial delivery is consistent with delivery records or whether the item first appears in a later change history. Where records are inconclusive, ask the people directly involved about specific items and periods. Distinguish the existence of a document from whether it supports the assertion made.
For code or other material whose ownership is disputed, examine contributions to creative expression and whether the Japanese rules on corporate authorship of works created in the course of duties apply, in order to identify the author. Matters to check include the corporation's initiative, the person's engagement in its business, creation in the course of duties, and contracts and work rules in force at creation. Do not decide the issue solely from a person's status as a former employee or officer or the name appearing in a change history. For computer programs, publication under the corporation's or other employer's name is not a requirement for corporate authorship.
Starting from that ownership, trace assignments and other succession to identify the current copyright holder. Consider acquisition of copyright by the target company separately from whether necessary licenses exist, and investigate the basis for any license in parallel. If the rights of adaptation and related rights, and the rights concerning exploitation of derivative works, are not specifically identified as the subject of an assignment, they are presumed to have been reserved to the assignor.
Distinguish missing documentation from missing rights and specify the next steps. Classify the findings as established authority, grounds for finding a shortfall, and matters still unclear. Then identify additional documents to obtain, the people from whom explanations are needed, and matters requiring additional agreement or correction of conditions. A current inability to find evidence of assignment is different from a conclusion that no assignment occurred. Payment of development fees or possession of code alone does not establish acquisition of copyright or the necessary permissions.
3 Securing use and separating issues concerning past use
Verify existing licenses and other legal grounds. If further permission is needed, discuss the scope of interim use with a person authorized to grant it. Specify the code and versions, entities using them, recipients, permitted acts, duration, consideration, and transition arrangements on termination. If ownership or past liability remains disputed, distinguish agreed matters from unresolved issues. Also clarify whether the agreement temporarily restrains claims or actually licenses use.
For future use, agree on assignments, additional licenses, or similar arrangements with the developer, former employees or officers, or others holding the necessary rights, or with an entity authorized to license them. If rights are divided among several people, check whether agreement with one person secures the required scope. Identify the necessary uses not only by the target but also by the buyer and group companies, including modification, outsourcing, and provision to customers. When acquiring copyright, also check the scope of rights concerning modification and use after modification; deal separately with delivery of source code and development materials. For modifications, consider exceptions to the author's right of integrity and existing agreements when deciding whether the author's consent or other arrangements are needed. A promise from a seller without licensing authority cannot cure a shortfall in third-party rights.
Deal with past use separately from future permission. Securing the ability to use the software going forward does not necessarily resolve claims relating to earlier use. Also check whether the holder of those claims is the current copyright holder. Identify the periods, user entities, code and versions, and acts of use with the person entitled to assert the claims, and negotiate matters such as settlement of amounts due or waivers of claims. Clarify which claims the agreement resolves and which right holders and claims remain outside it.
If securing the missing rights is difficult, consider replacing the affected parts. Work with technical personnel on the scope, transition period, and treatment of existing customers, and verify rights and license conditions for the replacement and permission during the transition. Replacement alone does not eliminate past issues; preserve the original implementation and its history as well.
For OSS, check the applicable license for conditions governing code transfers or changes in use associated with the acquisition. Treat performance or remediation of those conditions separately from handover of documents and allocation of responsibilities with the seller.
4 Coordinating remediation with claims against the seller
Compare the rights and licenses established by the investigation with the representations and warranties in the acquisition agreement, their relevant dates, and disclosed matters. Also trace post-acquisition modifications and changes in the entities using the software to identify precisely how the actual position differs from the warranted position.
Before entering remediation negotiations with right holders or others, check the acquisition agreement's notice, consultation, and consent provisions. Identify whether seller consent is required, which agreements are covered, and when and what notice must be given, and coordinate these requirements with negotiations for additional licenses or settlement. Distinguish matters on which the seller's cooperation is sought from those to be resolved with right holders or others.
Expenditure by the target company is not necessarily recoverable by the buyer from the seller. Record who incurred the expenditure, for what purpose, and who suffered which loss, and then consider what the buyer may claim under which contractual provision. Clarify the scope resolved by the remediation agreement and the matters preserved for a claim against the seller.
Related article: Breach of representations and warranties in M&A and indemnity claims (requirements and limitations for claims based on breaches of representations and warranties).
Where the seller and developer give conflicting accounts, or agreements on use terms and claims against the seller are being pursued in parallel, consider the facts and negotiating approach together. We advise on investigating ownership and license scope, formulating the company's position, negotiating use terms with right holders, developers, former officers, and others, and coordinating remediation negotiations with claims against the seller.
Related practice area: Legal support for M&A.
Related article: System development disputes (disputes concerning development history, delivery, and handover).
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