Can Your Customer Transfer Their Software as Part of a Reorganization?

Seems like a simple issue, but can your customer transfer your software or licenses to another entity? Well, the right way to address this is up front in your agreement, but this is too often not the case.   Also, when it is addressed, sometimes it does not clearly address every situation (internal transfers, external transfers, reorganizations, mergers, stock sales, assets sales, etc.). This is definitely something to talk to your software attorney about first, but below are some of the things that may come in to play.

What Type of Transfer is it? Who were the users before and who are after? What type of reorganization is it (stock sale, asset sale, merger, internal reorganization, etc.)?

What Does the Contract Say? Does it allow or prohibit transfers and assignments, and in what situations.

What Does State Law Say? Talk to your attorney, but state law usually matters too (i.e. it may overrule or interpret the contractual clause).

What Does Federal Law Say? This matters too, as in the case below, the court ruled that federal law governed (patent and copyright law), and not state law.

I wish the answer was simple, but as an example a recent case in late 2009 essentially ruled that the contract and federal law ruled that day. The customer had transferred the license (which was a license to a specific computer) to another internal entity, even though the contract said that the transfer was not permitted. I suppose the software vendor wanted to charge a fee for this and the customer refused to pay. The case went to court, and at the end of the day, the court ruled that customer had to pay more than $450,000 (in other words re-buy the software) because they violated the license agreement. These cases are very fact and law specific, so watch out and get legal advice. If you want to read more though, a summary of the case is here.   Any software based company should be aware of these issues, and think through them before the customer asks about it (oh yea, talk to your software attorney about it too).