VLM Holdings Ltd v Ravensworth Digital Services Ltd

This case turns on whether a copyright sub-licence granted by a licensee is capable of surviving a termination of a head licence, and if so what its effect is on a subsequent exclusive licence granted by that head licensor. The narrative below might be assisted by a brief outline of the facts:

Holdings is, as its name suggests, the holding company of a group of companies which included UK and VLM Content Ltd (“Content”). The relevant business of the group was the provision of printing services to businesses. The product which is central to this action is one known as the VS system. It operated in the following fashion (and for the purposes of what immediately follows I shall refer to the VLM group generically without distinguishing between the companies, and shall call it VLM. I will have to draw some distinctions later).

A customer who wishes to have some printed material goes online in a standard browser and enters VLM’s site. There it interacts with software on VLM’s servers and is able to design the printed material on-screen. It can also upload any necessary material (designs, text and the like), and that material appears as part of the design. An onscreen version is produced for approval. If the customer approves it a high resolution PDF version is generated by the software on VLM’s servers, which is then automatically sent to digital printers (generally VLM’s) for printing. The principal software which gives effect to this is on VLM’s servers, but an additional small piece of code has to be put on to the customer’s computer to assist in one part of the exercise. This can be best illustrated by taking an estate agency. Such an agency wishes to produce sales particulars, and the details of each property are stored on its own system. The small piece of code which the VS system installs on the customer’s computer automates the procedure for identifying and uploading those details so that they appear automatically in the design. The code burrows around in the customer’s data to achieve that. When all that has been done VLM does the printing, and the resultant product is despatched by post to the customer.

One of the main classes of users of the VS System was indeed estate agents. They used it for printing their particulars and other standard documents. It provided an efficient means of getting batches of property particulars printed. Templates were available to facilitate the uploading of information, and a reasonable degree of automation was achievable. One such agency was known as Spicerhaart, though it traded under a number of different names.

The VS system was the system licensed in the transactions relevant to this action, but two other VLM products play a minor part in the history. They were:

The relevant part of the business of the VLM group was the operation of this software, and the printing of the resultant product. UK was the company which operated in the UK. Holdings, an Irish company, was the holding company, and Content (another Irish company) was incorporated so as to take the benefit of Irish tax concessions for non-trading companies that developed intellectual property (and in particular patents).

Ravensworth was a digital printing company which sought to compete with VLM in areas such as estate agency. It had a product which competed with the VS system, and wished to compete in relation to VLM’s customers, but had difficulty doing so because many of those customers had the VS system so embedded in their systems and business that it was hard to displace VLM. Ravensworth did, however, do some overflow printing for VLM. As the narrative below will show, when VLM could not cope with the printing that its systems were generating, it diverted the actual printing side to Ravensworth; Ravensworth then did the printing (from the digital files generated by the VS system) and despatched the printed product to the customer.

As stated above, Spicerhaart was a substantial estate agency with a large number of branches trading under a number of different names. It used the VS system to generate its particulars and other documents. 175 of its branches used it. It was a very substantial customer of UK and a large part of UK’s turnover came from it. In March 2009 80-90% of UK’s turnover came from the VS system, and a large part of that derived from Spicerhaart.

This was not a case with a lot of relevant disputed primary fact, but I heard evidence from the following witness:

Ravensworth put in other witness statements which were not the subject of cross-examination and which it was agreed I need not consider for the purposes of writing this judgment, save for one matter:

The position in relation to those three non-called witnesses was reached as a result of the distillation of the issues in this case to a few core issues. That meant that the evidence of those witnesses did not have to be tested, though by agreement with the parties the evidence was still treated as being in the case.

In what follows, any recitation of fact should be taken to be a finding of fact by me, unless the contrary appears.

The VS system was developed and written in Java by Mr Markovic between January 2000 and January 2003. At the time he was engaged by another VLM, or VLM-related, company called MPC Data Systems Ltd (“MPC”). Thereafter he maintained and updated it over the years. He also created the HIPS programme between July 2005 and February 2006, and the DPP system between July 2007 and March 2008. He does not, and did not, claim the copyright in any of those items of software. However, he also created something that he calls the PDF Codebase, to which he does claim ownership (and that claim is not contested). It is essential to the full operation of the VS system, and he licensed its use to MPC. In addition to all that, he acted as what he described as a one-man IT department for MPC, carrying out rather more routine IT assignments on its systems.

In January 2003 Mr Markovic was told by Declan Malone that MPC had licensed its intellectual property rights to Holdings, and that thereafter Mr Markovic would be engaged by Holdings and later for a subsidiary to be formed to hold the IP rights. Then from mid-February 2003 he was engaged by Content (which had assumed the role foretold by Mr Malone). In September 2007 he moved to England, and agreed that thereafter he would submit invoices to UK, which was the UK trading company and which was commercially exploiting the software that he had written. Another Irish company, VLM Ltd, was exploiting the VS system in Ireland. There was evidence about the slightly complex invoicing, recharging and reimbursement arrangements that existed within the group, but since the position on ownership is agreed for the purposes of this action none of those details matter. The same applies to the precise circumstances in which MPC, Content and UK came and went as his employers and/or paymasters – the detail does not matter.

In January 2003 MPC gave Holdings an exclusive licence to use the VS system in the EU, and gave an exclusive licence under a patent which is not directly relevant to these proceedings. The actual agreement in evidence was executed but undated, and the “System” which was subject to the licence is not actually described in the schedule which ought to contain that description (according to the definitions) but it was not disputed that this was the effect of the document (if it would otherwise have mattered). Then on 31^st December 2006 MPC assigned the copyright in the VS system, and the benefit of the patent, to Holdings. Thereafter the ownership of the copyright in the VS system was vested in Holdings. Such complications as might otherwise have arisen out of the engagement of Mr Markovic by Content, and the funding for that coming from other VLM companies, do not arise in the light of the sensible concession by Mr Hicks, who appeared for Ravensworth, that for the purposes of this action Holdings can be treated as the copyright owner.

Holdings did not trade. It was essentially, as its name suggests, a holding company. In the UK it was UK that traded. It operated the servers on which the VS system (and the HIPS and DPP systems) were held, and it entered into trading relationships with customers. In this context there was what Mr Malone called an “informal licensing arrangement” between Holdings and UK in relation to the relevant software (including the VS system) – that is how it was referred to in his witness statement. There was a formal licence in relation to an Irish patent held by Holdings (assigned as referred to above), but that had nothing to do with the software. There was no evidence that this informal licensing was in any way explicit. It is apparent enough that it simply happened because there was a sufficient common directorship to allow this to happen, and UK got on with exploiting the software. Mr Malone was cross-examined about this and said (Day 2 pages 63-4):

“Q …First of all, there was no formal agreement in place between VLM Holdings and VLM UK regarding the VS System?

A. It was an informal licence, or arrangement.

Q. Informal licence or arrangement. The way it worked, I suggest to you, was that VLM UK was given a free hand to exploit the VS System in the UK as it saw fit?

A. VLM UK was to exploit the VS System and build its business.

Q. So it was given a free hand to do what it wanted to make the most amount of money it could out of the VS System?

A. It was to exploit the VS System.

Q. And because the directors of VLM UK were also directors of Holdings, if you and your fellow directors of VLM UK thought it was a good idea to do something, you could and would do it, because you were also directors of VLM Holdings?

A. VLM Holdings is a holding company. As a director of VLM UK, we were building that business.

Q. Yes. So if the directorship team, the management team of VLM UK decided to do something, as a practical matter you could do it because you were also directors and controlled the holding company?

A. As a practical matter we could do it because we were directors of VLM UK Limited and it was -- it was a limited company and we were directors and that's what we did.”

At the time the directors of Holdings were Mr Malone, Mr Gerry Malone, a Mr Cafolla and a Mr Post. The directors of UK were the first 3, without Mr Post. There was thus an almost complete identity of directors. Mr Malone was the managing director of both companies.

Spicerhaart was a major customer. In about September 2006 VLM started to experience production problems, and delays in delivery started to occur. Spicerhaart found this position to be unacceptable and began to understand the level of its reliance on the VS system – it was a business-critical system.

Two things were done to mitigate the effect of this dependency. First, Spicerhaart entered into a relationship with Ravensworth which enabled the former to have some printing work diverted to the latter if VLM could not cope. The jobs were still created on the VS system, but at the final stage, when a detailed high-resolution file for printing had been prepared (by the VS system) it was sent to Ravensworth rather than VLM for printing. VLM still did the majority of printing for Spicerhaart, but this gave the opportunity for overspill to go elsewhere to avoid delays for Spicerhaart. UK agreed to this.

The second thing was entering into the licence which is said to give rise to the breach relied on by Ravensworth in this litigation. Spicerhaart proposed that it be allowed to host a copy of the VS system on its own servers, to promote business resilience. This copy would be available to deal with situations where the VLM copy was not available – whether through servers going down, internet connections into those servers being unavailable, or some other “bolt of lightning” occurrence, to use the phrase used by Mr Malone. Mr Malone said that from his perspective it was intended to address technical problems rather than financial problems. However, I am satisfied that he understood that business resilience for Spicerhaart was the key concept. Spicerhaart was very dependent on the VS system and it sought to mitigate the risk to its business by having its own copy of the software so that it was not so dependent on UK’s. When it was needed, the Spicerhaart copy would be addressed by branches over the internet just like the VLM copy.

Mr Malone agreed to grant the licence, but there was a quid pro quo which was attractive to him – Spicerhaart agreed to place a guaranteed volume of its digital print business with VLM.

Negotiations about this started in about October 2006 and dragged on until July 2007, when a draft licence and draft print supply agreement were sent out by VLM. Then nothing was heard about this from Spicerhaart until 7^th December 2007 when Mr Malone received copies of those agreements signed by Spicerhaart. He told them that he would countersign and return them. He must have done so, because plans were made for installing the software on the Spicerhaart servers, but by the time of these proceedings he claimed to have forgotten that the documents had been signed and was only reminded as part of the disclosure exercise. I do not need to make a finding as to whether he really did forget. The important thing, for the purpose of these proceedings, is that the licence agreement existed.

The licence agreement was between UK (not Holdings) and Spicerhaart and it was to remain in force until at least 30^th April 2013 (subject to earlier termination in the event of such things as breach). A licence fee of £6,000 per annum was payable. The relevant terms were as follows:

“Introduction

(A)

The Licensor [viz UK] is the owner of the Software

(B)

The Licensor has agreed to licence the Licensee to use the Software

1.

Interpretation

“Licence Fee” – Stg£6,000 per annum in respect of the Licensee’s right to use the Software under this Agreement;…

“Print Supply Agreement” – the print Supply agreement made between the Licensor and the Licensee on the date of this Agreement;

“Software”- the software of the Licensor as defined in Schedule 1 of this Agreement [i.e. the VS system]

2.

Term

This Agreement shall commence on the 1st May 2007 (“Effective Date”) and shall remain in force until 30^th April 2013 and shall continue thereafter unless the Licensee gives to the Licensor not less than six months written notice of its intention to terminate.

3.

Grant of Licence

3.1

The Licensor grants to the Licensee the Licence for the term of this Agreement and undertakes to support the Software upon the terms and subject to the conditions contained in this Agreement.

3.2

The Licensee agrees to purchase at least 60% of its requirements for print materials from the Licensor under the Print Supply Agreement.

3.3

The Licensor shall host the fail-over server in respect of the software in its facility and shall maintain the same in terms of code base and the data synchronisation.

3.4

the Licensor shall install the Software on one server hosted by the Licensee for a fee in the amount of Stg£4,000 payable in advance of installation.…

4.

Benefits of the Licence

4.1

The Licence enables the Licensee to:

4.1.1

receive one copy of the Software for use on one server plus one backup Server to be hosted by the Licensee, together with the necessary documentation to install and use the Software;

4.1.2

consultancy services [sic] from the Licensor in respect of the use of the Software;

4.1.3

receive the Licensor’s bulletin reports of errors and ‘patches’ and receive such new updates of the Software incorporating the same; and

4.1.4

receive information on upgraded versions of the Software at such cost (if any) as may be notified by the Licensor to the Licensee.

For the purposes of this Agreement, upgraded versions of the Software shall mean any enhancements, improvements or modifications to the Software.…

6.

Issue and use of the Software

… 6.4 The use of the software is restricted to the corporate offices and branch network directly owned by the Licensee.

7.

Licence fee and support charge

7.1

The Licensee shall pay to the Licensor the Licence Fee in respect of each Year of this Agreement, payable in advance… On each anniversary of the Agreement, the Licence Fee shall be increased by [index linking]…

13.

Copyright, Patterns, Trademarks and other Intellectual Property Rights

13.1

The Licensee acknowledges that any and all of the copyright, trademarks, trade names, patterns, source codes and other intellectual property rights subsisting in or used in connection with the Software or the Support Software shall be and remain the sole property of the Licensor. The Licensee shall not during or at any time after the expiry or termination of this Agreement (whether in whole or with respect to support only) in any way question or dispute the ownership by the Licensor thereof …

17.

[Provisions for termination by the Licensor on breach or on the insolvency of the Licensee.]”

The Print Supply Agreement was dated the same date (6th December 2007). It was made between UK and Spicerhaart. Its precise terms do not matter. It is sufficient for present purposes to summarise its effect as follows:

In 2008 UK started to suffer financial difficulties. There were a variety of reasons for this – stiffer competition, the withdrawal of HIPS, a general downturn in the property market, and other reasons. This led to cashflow difficulties for UK, and its service levels declined. It had trouble with its suppliers and could not always pay for the ink that it needed. Mr Steve Lamb at Spicerhaart sent Mr Malone an email on 23^rd December 2008 expressing his concerns and saying that he would thereafter be instructing Ravensworth to take on an increased percentage of the property details and marketing print production in order to ease the workload of UK. This was a blow to UK. Mr Malone countered with his own proposals, including a request for payment in advance on account of orders in order to guarantee supply. Spicerhaart were not prepared to proceed in that manner and on 9^th January 2009 it was agreed that the majority of the Spicerhaart account business would be directed to Ravensworth from the Spicerhaart servers for printing. The technical requirements were such that this redirection had to be carried out by UK’s technicians.

VLM sought to address the financial problems by getting funds from a particular outside funder. Despite indications from time to time that funds would be forthcoming, they never were. On 4^th February 2009 the remaining Spicerhaart print orders were directed to Ravensworth because UK’s printing presses had run short of supplies. This was intended to be temporary, to be reversed if funding had become available. From this time UK was, effectively, not operating.

While the funding was not materialising UK and Holdings considered other options. They discussed with Ravensworth an administration and a pre-pack sale of its business to Ravensworth. In that proposed sale Ravensworth (or its parent, Tangent) would pay £75,000 for an IP and technology licence for the UK, Europe and the USA, and Mr Malone would be retained as a consultant for 6 months. Commission would be payable to UK, and all its print work would be transferred to Ravensworth. Negotiations took place around that sort of deal. As these ideas were discussed over time the idea of a pre-pack sale in an administration was abandoned and the proposal became one to licence the software without such a pre-pack. That is what ultimately happened.

In the course of all this important board meetings were held on 18^th March 2009 to deal with the plight of UK. The minutes have the hallmarks of pre-prepared minutes, but nothing turns on that. There are three sets of minutes:

On 20^th March 2009 Mr Malone emailed Mr Cafolla enclosing signed documentation for the accountants instructing them to place UK into liquidation. He said:

“Tangent/Ravensworth are of the view that [Holdings’] licence with [UK] is terminated on appointment of a liquidator and that the enclosed documents justify termination.”

Mr Malone’s evidence seems to have been that this email was intended to refer to the patent licence, which did indeed contain a provision justifying termination on the winding-up of UK.

Following the board meetings just referred to, Mr Malone telephoned all of UK’s major customers to advise them that UK was to be liquidated. As part of this exercise he telephoned Mr Lamb at Spicerhaart and told him the same, and went on to say that Spicerhaart’s continuing print needs would continue to be met by Ravensworth as they had been over the previous couple of months, and that Holdings were proceeding to reach an agreement with Ravensworth to license exclusively the VS system to Ravensworth. UK entered creditors voluntary winding up on 23rd March 2009.

The agreement which lies at the heart of this case was dated the same day (23rd March 2009). It expressed itself to be made as a Deed and was between Holdings (described as VLM), Mr Malone, Mr Gerry Malone, Mr John Malone and Ravensworth. Although it is both a licence and an assignment, I shall refer to it as the Ravensworth licence. Its relevant provisions started as follows:

“Whereas

(A)

VLM is the proprietor of intellectual property, know-how and technology relating to web-based print solutions.

(B)

VLM has agreed to assign to Ravensworth certain of this intellectual property, and to grant an exclusive licence to Ravensworth to use certain other of VLM’s intellectual property, know-how and technology.

(D)

[sic] This Agreement sets out the terms and conditions of such assignment and licence.”

Clause 1 was the interpretation clause. I do not need to set out any of the defined terms. It is sufficient to note that the VS system is within the defined term “VLM Rights”, as are all its other online offerings such as HIPS and DPP; and the “Effective Date” is the date of the agreement.

Clause 2 contained an assignment for £1 of domain names, server content and website content, goodwill, trademarks and other matters.

Clause 3 contains the relevant grant of licence in respect of the VS system:

Clause 6 provides for royalties on sales made through the VLM software, including the VS system. Royalties are on a net sales basis, and accrue in bands – 10% up to £1m, 12.5% up to £1.5m, 17.5% on the next £500,000 and 20% thereafter.

Clause 7 deals with payments:

“7.

Payments

7.1

in consideration of VLM entering into this Agreement Ravensworth shall pay to VLM a non-returnable one-off licence fee of …£100,000 payable on the Effective Date. It is acknowledged and agreed between the parties that £15,000 of this amount has already been paid by Ravensworth to VLM as at the date of this Agreement and there is thus a balance of £85,000 remaining to be paid by Ravensworth. This licence fee is in addition to the Royalties due on the Net Sales.”

Clause 12 contains warranties:

“12.

Warranties and Indemnity

12.

Each of VLM and [the Malones] warrant that:

12.1.1

it/he has full power and authority to enter into the Agreement and that entry into the Agreement will not infringe the rights of any third party or cause any breach of any obligation to any third party …

12.1.3

all information provided under the Agreement is, to the best of its/his respective knowledge, or information, accurate and complete; and

12.1.4

to the best of its/his respective knowledge or information the VLM rights do not infringe any rights of any third party.”

Clause 14 deals with termination:

“14.

Term and Termination

14.1

this Agreement shall come into effect on the Effective Date, and unless terminated at an earlier date pursuant to clause 14.2 below, shall remain in full force and effect until the triggering of the conditional assignment pursuant to clause 3.4 (the “Term”).

14.2

Either party (the “Initiating Party”) may terminate this Agreement with immediate effect by notice in writing to the other party (the “Breaching Party”) on or at any time after the occurrence of a material breach by the Breaching Party of any of its obligations under this Agreement which (if the breach is capable of remedy) the Breaching Party has failed to remedy within 30 days after receipt of notice in writing from the Initiating Party giving full particulars of the breach and requiring the Breaching Party to do so.”

By an agreement of the same date Mr Malone agreed to provide consultancy services for six months from the date of the agreement. At about the same time Ravensworth made its own arrangements with Mr Markovic to be able to use the PDF Codebase, the need for which had been pointed out by Mr Malone.

Ravensworth started to use the VS system (and the other VLM software which it had acquired) to supply customers. Those customers included Spicerhaart. On 23 April 2009 Mr Cameron of Ravensworth asked Mr Malone for:

“a copy of the Spicer contract that was in place with VLM UK.

I have briefed Tony on the need to put a contract in place with Spicer ASAP…”

In response Mr Malone forwarded to him a copy of the Spicerhaart licence and the print supply agreement. Thus Ravensworth can be said (if it is relevant) to have acquired knowledge of the Spicerhaart licence. It did not raise concerns at that stage.

In the following months Spicerhaart and Ravensworth negotiated the pricing for various digital documents. During this period Spicerhaart continued to use the VS system and it remained very important to its business. It entered into negotiations with Ravensworth in respect of the pricing of digital print products. However, on 13 October 2009 Spicerhaart wrote to Ravensworth without any warning advising that it intended to move its print production from Ravensworth to another print provider.

On 20 October 2009 Pinsent Masons, acting for Ravensworth, wrote to Spicerhaart, referring to the 2 December 2007 agreements and stating that Ravensworth had acquired rights to the software, as exclusive licensee, in March 2009. It stated that Ravensworth had, until then, been prepared to allow Spicerhaart to continue using the software while print services were sourced from Ravensworth, but now that Spicerhaart had stated its intention to move print production to another provider Ravensworth’s consent to the continued use of the software was thereby terminated. It was required to stop using the software and to deliver it up. Spicerhaart responded on the same day pointing out that its licence ran until 30^th April 2013 and was terminable after that only by the Licensee giving notice. In other words, Spicerhaart was asserting its licence

According to Mr Malone, that letter from Spicerhaart came from Mr Lucian Pollington, a director of Spicerhaart who was also a qualified lawyer. He says that Mr Pollington later explained that the letter was written on the basis of an unawareness of the fact that Holdings had withdrawn the right of UK to license software on 18^th of March 2009 so that the Spicerhaart licence had fallen away. Assuming that that is what Mr Malone was told, its correctness is the central issue in this case.

Spicerhaart continued to use the software and maintained its stance that it was entitled to do so by virtue of its licence. It plainly did so in a further letter of 30^th October, and on 16^th November it stated in a letter to Holdings’ solicitors:

“We are advised that our licence is entirely valid, and that any attempt by your client to seek an injunction to prevent our use of the software will be unsuccessful.”

There was a certain amount of correspondence between the various parties. The only correspondence which is of significance now is correspondence in which each of the claimant and the defendant sought to rely on the events as giving rise to a right to terminate the Ravensworth licence. Ravensworth failed to pay a royalty payment of over £32,000 due on 30 October 2009, and Holdings relies on this failure, and subsequent failures to pay royalties, as being a material breach which entitled it to terminate if not remedied. By a letter dated 3 November 2009 its solicitors asserted that this was a material breach, and when it was not paid those solicitors served a letter claiming termination on 4th December 2009. For its part, by a letter dated 26 November 2009 Ravensworth claimed that the existence of the Spicerhaart licence meant that there was a breach of the Holdings/Ravensworth licence (because there was no exclusivity), that the breach was material and that it was irremediable. The letter purported to terminate the licence and required the assignment of the copyright to which it would be entitled in that event (it will be remembered that if Ravensworth was entitled to terminate for material breach, then that triggered an accelerated right to have the copyright assigned to it).

The only later events to which it is relevant to refer are certain events involving Holdings and Spicerhaart, which took place in February 2010. In that month Mr Malone attended a meeting with Mr Pollington and others on 17^th February at Stansted airport. One of the purposes, if not the main purpose, of Mr Malone was, he said, to seek to persuade Spicerhaart that it did not have the licence which it claimed. He says that at the meeting Mr Pollington said he had received independent legal advice on the matter, and Spicerhaart now accepted that the Spicerhaart licence was properly terminated on 18^th March 2009. He accepted that since that date Spicerhaart had been operating under an implied licence from Ravensworth. The result of this was that Mr Pollington wrote a letter containing an analysis to the same effect on 19^th February 2010, thus apparently asserting, or accepting, that the Spicerhaart licence had been terminated by the “insolvency” of UK. Spicerhaart then entered into a further licence dated 2 June 2010, under which it licensed use of the software from Holdings for a period of five years from 1 January 2010.

There is something odd and unsatisfactory about this last set of events. The VS system obviously remained very important to Spicerhaart in the conduct of its business, and it is strange that it should acknowledge openly, and without qualification, that its licence from UK should terminate on the insolvency of UK. That is said to have been done following receipt of independent legal advice. While the point can be treated as being arguable, it is not on any footing absolutely plain (it seemed to have received contrary advice the previous autumn), and, unless it was part of a negotiation, and unless the acknowledgement were part of the price for getting something worthwhile out of the negotiation, it is very difficult to see why Spicerhaart would give that acknowledgement. Mr Malone denied that it was part of such a price, and said that it was apparently a straightforward acknowledgement by Spicerhaart. I find that very hard to accept. If Spicerhaart really thought that there was a problem about its entitlement to operate a business-critical piece of software, it would hardly be volunteering such an acknowledgement. One would have expected it to take the view that it had at least an arguable continuing entitlement (as it had at the end of the previous year). It seems to me that the letter that Mr Malone got from Spicerhaart was something of a contrivance. However, at the end of the day, that does not seem to me to matter. Whether or not the licence came to an end in March 2009 depends on the true construction of documents and the legal effect, if any, of certain acts and events. It does not depend on the views of the parties, it does not depend on subsequent Holdings/Spicerhaart negotiations, and (to deal with a submission of Mr Campbell’s) it does not depend on Ravensworth’s views (or lack of them) when they were first sent a copy of the licence.

Since these events Ravensworth has gradually migrated its VS customers from the VS system to its own system, which it regards as more advanced. The last customer which used that system was migrated in June 2012, when the VS system was switched off completely.

Each of the parties claims to have terminated the Ravensworth licence. If Holdings is right it has terminated the agreement and has the unfettered right to use and license the software, and since Ravensworth has continued using it (which it has) Holdings has a claim to damages for infringement of copyright and other relief. If Ravensworth is right then it is not obliged to pay royalties and is entitled to the software; it claims a declaration that it is the owner of it. Although this area of the print business was described as high turnover/low profit margin, it is plain that substantial seven figure sums are involved in this case.

The following important points are not in issue:

That means that the following are the issues in this action:

It is convenient to take these two issues together because their fate depends on the common question of the nature and effect of a sub-licence such as the Spicerhaart licence. That nature and effect has been summarised in this case by the following question: Since the grant by UK was a grant by a sub-licensor, what is the effect on such a grant of the cesser of the head licence? However, in my view that is not a correct formulation of the question. I do not consider that there is a single answer to a question thus phrased. The effect must, in my view, depend on the terms of the original grant, and on the terms of the sub-licence, though some generally applicable principles will form the framework of the consideration. It also turns on what was actually terminated, or the scope of the termination.

Before dealing with those points I should deal with the only English authority which seems to have considered the point (according to the researches of counsel). That authority is Austin Baldwin v Magnetic Car Company (1925) 42 RPC 454. That case involved a chain of 3 licences and sub-licences granted in relation to a patent. Lloyd Jacob J held that the termination of one up from the bottom brought the bottom one to an end. The reasoning is not at all easy to follow. At page 460 lines 26 to 35 he said:

“[The sub licence] was a licence which, as I have said, involved the provision of a large amount of capital, and I incline to the view…that in all probability [the sub-licensee] did know what was the licence under which the [sub-licensor was] claiming, and under which that company was purporting to make this further grant. Assuming that they did know that, what information were they in possession of as to the powers which the present Plaintiffs had reserved to themselves under the licence to the [sub-licensor]? They must be taken to have known, and, even if they did not actually see the document, I think one must assume that they would realise that, unless the [sub-licensor] discharged the obligations naturally imposed upon them as licensees from the Plaintiffs, the plaintiffs would reserve to themselves a right to put an end to the arrangement.”

It seems to be of the essence of his decision that the terms of the licence to the sub-licensor entitled its own licensor to bring the whole arrangement to an end, thus terminating sub-licences, and that the ultimate sub-licensee must be taken to have known that. If that is the correct analysis then the first relevant question must be to determine the terms of the licence under which the sub-licensor holds its licence. As will appear, that seems to me to be correct in principle. The result in that case must be taken as turning on its own facts. The case does not explicitly lay down or identify any particular principles. Nothing else useful can be extracted from it.

Both counsel told me, and agreed, that German cases had considered situations in which the position of a sub-licence was considered after the termination of the superior licence, but they were sufficiently different to be of no help to me, and I was not shown this authority. I shall therefore have to proceed from principle myself.

I start from the proposition that a licence is a permission to do something that would otherwise be unlawful, and that it does not create a proprietary right – Lord Diplock in Allen & Hanburys v Generics UK Ltd [1986] RPC 203 at 246. It does not create a lower proprietary right carved out of a superior proprietary right in the same manner as a sub-lease is carved out of a head lease. In that latter situation the cesser of head lease by forfeiture brings the lower interest to an end. However, the two situations are not analogous.

Statute has intervened in the licensor/licensee relationship in various ways, but not in any which is germane to the question before me – see for example section 106 of the Copyright, Designs and Patents Act 1988.

Since one starts with the question of permission, it is therefore pertinent to determine who has permitted whom to do what. It is certainly possible to imagine circumstances in which a sub-licence would survive the termination of the head licence. Take, for example, a case in which a copyright owner gives a licence to another, and expressly permits that other to grant sub-licences which (say) endure for a given period and which are clearly expressed as being capable of surviving the termination of the head licence. It seems obvious that the sub-licences would indeed survive that event. The reason for that, in my view, is that the permission extended by the express term means that there was an authority (permission) from the copyright owner to use the copyright material. In effect, the sub-licensor was authorised to give that consent and, to that extent, to bind the owner. This demonstrates that the key lies in the area of authority – what authority was the sub-licensor given by the owner? In my example the answer is plain.

The answer does not, in my view, lie in the simple application of the maxim nemo dat quod non habet. Mr Campbell invited me to apply that maxim, with the automatic result that the sub-licence goes when the head licence goes. In one sense that maxim can apply to at least part of the inquiry, but it does not of itself answer the question, and it is not a helpful formulation. Apart from anything else, before applying the maxim one has to work out what it is that the sub-licensor “habet”. That might be another way of describing at least part of what I consider the relevant inquiry to be, but it does not provide the answer and the maxim is best left alone.

The real question is therefore as to the scope of the authority given by the head licensor to the sub-licensor. That depends on all the facts. If the authority is sufficiently wide to allow the grant of a sub-licence which is capable of surviving the termination of the head licence, then the head licensor (copyright owner) must be taken as giving the ultimate permission himself, on normal agency principles.

I turn therefore to investigate what rights and authority UK had. This depends on investigating the circumstances surrounding the grant (if that is the right word) of the informal licence given to UK and surrounding the grant of the Spicerhaart licence.

The following facts are material:

One important conclusion from this is that the business purposes of the grant of the licence would be frustrated if the termination of the informal licence from Holdings to UK were capable of bringing the Spicerhaart to an end. The informal licence could probably have been terminated at will; and Holdings did want to terminate it on UK’s insolvency. But if either of those things brought the sub-licence to an end the whole purpose of granting it (shared by both VLM companies as well as Spicerhaart) would have been frustrated. This is particularly so in relation to the insolvency of UK. UK’s inability to deliver was one of the reasons that Spicerhaart took the licence in the first place. The cesser of business on liquidation is almost the starkest illustration of the sort of facts that Spicerhaart would want to guard against, after destruction of the VLM servers. All this forms an important part of the background to construing the relationships. They were all facts known to, or knowledge of which should be attributed to, all three parties.

Thus there can be no doubt that the directors of Holdings, wearing their hats as such, were content that the licence should be granted. However, in my view the matter goes farther than that. They actually impliedly consented to it, and impliedly authorised UK to grant it. That means that, as a matter of the application of ordinary agency principles, the licence as a permission to do that which would otherwise be unlawful came from Holdings as well as UK. There was at least implied authority. Of course, that was not actually conveyed to Spicerhaart. Spicerhaart did not know that Holdings was the actual owner of the copyright (not least because it was being told otherwise in the licence), but that does not affect the view that consent was given, and the operation of the principles of the undisclosed principal bridge the gap between Spicerhaart’s belief at the time and the consent given by Holdings. Holdings should be treated as an undisclosed principal for these purposes, and on normal principles Spicerhaart is entitled to hold it to the relevant part of the contract (the permission). This is not the normal application of the principle. The normal application involves the ability of the counterparty to treat the undisclosed (or recently disclosed) principal as the other contracting party and hold him liable on it. The present facts do not go that far, in my view. The authority given by Holdings was not to bind it in the whole contract. But it was an authority to enter into the licence, and the permission granted by the licence should be treated as a permission given by Holdings, as well as by UK.

On this analysis, therefore, the permission in the licence was one which bound both VLM companies. Bringing to an end the informal licensing arrangements between Holdings and UK would not be capable of affecting the permission already given by Holdings under the Spicerhaart licence, so the licence persisted. UK’s licence for the future was revoked, but that did not affect this particular prior act.

Mr Hicks propounded another analysis, namely an estoppel which bound Holdings, arising primarily out of the recital in the Spicerhaart licence. His submissions relied heavily on cases which refer to representations made by a representor to a representee which the former is not allowed to resile from. That sort of case does not, at first blush, assist Mr Hicks because there were no representations made by Holdings which Spicerhaart relied on. The representation in the recital was on its facts made by UK. Of course, if one treats Holdings as an undisclosed principal then it becomes one made by Holdings as well, but in that case one probably does not need estoppel because the implied consent route gets Mr Hicks home.

However, in case that is wrong, there is a line of estoppel cases which would reach the same result. Mr Hicks took me to a statement in Snell’s Equity 32^nd edition, and to one authority, which did not depend on representations apparently being made in that way. At paragraph 12-003 of Snell the editors say:

“Where land or goods were offered for sale and, by standing by and encouraging the sale, the true owner produced the false impression that the person holding themselves out as the seller was their owner, the sale was binding on the true owner.”

On its face that allows standing by without a representation crossing the line between the person claiming the benefit of the estoppel and the estopped person. Such a case was Pickard v Sears (1837) 6 Ad & E 469. In that case a mortgagee of goods had left a mortgagor in possession. They had been taken in execution and sold by the sheriff. Prior to the sale the mortgagee (the legal owner) had engaged in discussions with the agent of the judgment creditor, sometimes in the presence of the mortgagor, referring to the seizure, not asserting a claim to the goods, and sometimes consulting with the agent as to the best way of disposing of the property. It does not appear that there were any dealings between the mortgagee/owner and the ultimate purchaser (the defendant). When the mortgagee asserted his title against the purchaser he was precluded from doing so. Lord Denman CJ said:

“But the rule of law is clear, that, where one by his words or conduct wilfully causes another to believe the existence of a certain state of things, and induces him to act on that belief, so as to alter his own previous position, the former is concluded from averring against the latter a different state of things as existing at the same time; and the plaintiff, in this case, might have parted with his interest in the property by verbal gift or sale, without any of those formalities that throw technical obstacles in the way of legal evidence. And we think his conduct, in standing by and giving a kind of sanction to the proceedings under the execution, was a fact of such a nature, that the opinion of the jury ought, in conformity to [two authorities cited] to have been taken, whether he had not, in point of fact, ceased to be the owner.”

The effect was that the claim of the true owner failed. While Lord Denman refers to conduct which led another to believe that (in that case) the sale was proper, it does not appear from the facts that there were any dealings between the owner and the defendant which would of themselves have led the defendant to that belief. The defendant had his belief as a result of uncommunicated conduct on the part of the plaintiff.

That has an application to the present case. There is no evidence that Holdings as such communicated with Spicerhaart about the grant of the Spicerhaart licence. However, Holdings did allow UK to include a recital as to UK’s ownership of the copyright in the licence, and generally to behave as though it was the owner, and that conduct is very similar to the conduct of the plaintiff in Pickard v Sears. In my view it has the effect that, as against Spicerhaart, Holdings would have been estopped from asserting its ownership free from a licence in favour of Spicerhaart. I accept that it is a little odd making findings about an estoppel when the person with the apparent benefit of it is not present and asserting it, but the point arises in this case and it would be inappropriate not to address it in those circumstances. Nor does the fact that in February 2010 Spicerhaart did not assert it mean that the estoppel did not arise in the first place. Doing the best I can with the evidence, for its own reasons (which have not been investigated) Spicerhaart entered into a separate arrangement with Holdings. It is rather more telling that it felt able to carry on business with the VS system in the period between October and February, and was writing letters asserting that it still had a licence.

For those reasons, therefore, the Spicerhaart licence bound not only UK but also bound Holdings in the sense that the licence operated as a permission from Holdings or Holdings was estopped from asserting that it, rather than UK, was the true owner of the copyright. Each of those analyses has the effect that any termination of the Holdings/UK informal licence would not bring the sub-licence to an end.

It follows, therefore, that the termination of UK’s licence by the Holdings board resolution of 18^th March 2009 did not bring the Spicerhaart licence to an end.

However, Mr Campbell had another argument. He submitted that the winding up of UK terminated the licence. He relied on an implied term in the licence to that effect and drew my attention to Mediterranean Salvage and Towage Ltd v Seamar Trading and Commerce Inc [2009] EWCA 531. That case considered a number of modern authorities on the implication of terms and stressed the test of necessity:

“Is the proposed implied term necessary to make the contract work?” (para 18).

I am not sure why Mr Campbell thought that that authority would assist him. I can see no basis on which the implication of his term would be necessary to make the contract work. In fact, I would have thought that the converse were true – for the contract to work it is must be able to survive a winding up of the licensor, because otherwise the licensee would be seriously affected by an event which is essentially in the control of the licensor and which the licensor (or at least the licensor’s holding company) can bring about at will. There is no case at all based on necessity, or indeed any of the other tests for implying terms.

In this context Mr Campbell drew attention to the fact that the licence was expressly terminable by UK on the winding up of Spicerhaart, and said (in effect) that his implication was justified by symmetry (my word, which I use to summarise his submissions, not his word). Again, the point goes the other way. The fact that the parties have addressed the effect of the winding up of one party and not the other (for entirely understandable reasons) is a good reason for not implying a term about the winding up of the other. Mr Campbell also pointed out that after the liquidation Spicerhaart did not place any business, let alone 60% of its business, with UK, and suggested that that affected the position because Spicerhaart was in breach. I do not consider that it did affect the position. When it went into winding up UK in substance put it out of its power to perform its part of the printing deal. Indeed, it had not been performing it for 2 or 3 months before then. But that is a failure on the part of UK. There is no reason why Spicerhaart should proffer business to someone who cannot carry it out, and every reason why the licence should survive so as to enable it to produce digital documents which could be printed by another. This point has no impact on the effect of the termination of the Holdings/UK licence.

In his opening Mr Campbell seemed to say that the acknowledgment of Spicerhaart in February 2010 that it did not, after all, have a licence from UK after the events of March 2009, and was in fact operating under an informal licence from Ravensworth, was relevant. I have already indicated the unsatisfactory nature of the evidence as to how this acknowledgment came about, and in any event that acknowledgment cannot affect the proper analysis of the nature of the licence that it had and the effect of a termination of UK’s licence on it. Those are legal questions which turn on previous facts. Mr Pollington’s views (assuming that he held them) do not affect the analysis. In his closing submissions Mr Campbell accepted that Spicerhaart’s views were irrelevant, and he was right to do so.

Mr Campbell also relied on evidence which he said showed that Ravensworth thought that any Spicerhaart licence had come to an end. The evidence is not totally clear about this, but I do not need to lengthen this judgment by considering it because on any footing it is irrelevant. If Ravensworth thought it, it was wrong. If it did not, then Mr Campbell’s case is not advanced. Either way, it does not matter.

In the circumstances the winding-up of UK did not bring the Spicerhaart licence to an end either. It follows that the licence survived the events of March 2009 and the answer to issues (a) and (b) is No, in each case.

Since it is accepted that in that event there was a breach, the next question is one of materiality. Ravensworth was only entitled to terminate if the breach was material.

Mr Hicks submitted that it was material. The VS system was critical to Spicerhaart’s business, and was therefore a vital lever in getting that business. Spicerhaart was the largest customer of UK, and Ravensworth had been trying to get more of its business before UK’s problems, and failing because Spicerhaart was so tied in to UK (via the VS system). Of £77,000 of VS system business obtained by Ravensworth in April 2009 (the month after the deal), £45,000 came from Spicerhaart. In the three months from August 2009 to October 2009, Ravensworth’s revenue from Spicerhaart was £154,000, which is about 50% of its total sales from the VS system. The lack of exclusivity in the Ravensworth licence, in this particular respect, meant that a significant customer was lost because it was able to take the printing part of its business elsewhere, having used the software to assemble the document to be printed.

Mr Campbell disputed materiality. He said:

In Phoenix Media Ltd v Cobweb Information, unreported, 16^th May 2000 (Neuberger J) the judge said:

“Materiality involves considering the following: the actual breaches, the consequence of the breaches to [the innocent party]; [the guilty party’s] explanation for the breaches; the breaches in the context of [the] Agreement; the consequence of holding [the] Agreement determined and the consequences of holding [the agreement] continuing.”

This analysis was adopted in Gallagher International Ltd v Tias Enterprises Ltd [2008] EWHC 804 and in Crosstown Music Company v Rive Droite Music [2009] EWHC 600. Both parties were agreed it was a useful checklist in the present case.

In my view the application of that checklist, and all other relevant circumstances, drive one to the conclusion that the breach was plainly material. On the facts of this case the most significant factor is the effect of the breach on Ravensworth. The VS system was, I find, the key to getting a significant amount of business from the estate agencies, and in particular from Spicerhaart and Sequence. Of the two, Spicerhaart was the more significant. As appears above, it was the extent to which the system was “embedded” in estate agencies, and particularly in Spicerhaart, that had prevented Ravensworth making inroads into their business. The Ravensworth licence was the key to getting that business. Once Ravensworth controlled the software, it had a way into the business of those agencies. Spicerhaart was the most important, and was a key customer. If Spicerhaart had not held its own copy of the software with a licence to use it, it would have remained locked in to whoever ran the system – UK before the Ravensworth licence, and Ravensworth thereafter. The volume of business generated by Spicerhaart was obviously a key consideration in Ravensworth’s deal. It was not just another customer; it was the major customer.

Since it had a licence, Spicerhaart was able to use the software and to take its business elsewhere. It was able to walk away at the end of 2009, without damage to its printing arrangements. It still used the VS system after it ceased to place any business with Ravensworth. It is obvious from the timing that it must have been planning the move away from Ravensworth before it announced it to Ravensworth, and the future use of the system enabled it to contemplate that. It obviously remained important to Spicerhaart’s business because it entered into the further licence with holdings in February 2010. Accordingly, the availability of the system enabled it to carry on printing as it did before and take its custom away from Ravensworth.

The size of Spicerhaart as a customer, and its relative significance in the context of the income from the system, made the loss of its business a very significant matter indeed. I have given above some figures which indicate the scale of the business and, therefore, the scale of the loss. This loss is not just material; it is very material. Mr Green gave evidence of the importance to him of the licence. He said that had he been aware of the outstanding Spicerhaart licence before he did the deal, so as to lead to an appreciation Spicerhaart could have used the software and taken its business elsewhere, he would have wanted to enter into a contract directly with Spicerhaart to secure its business “because that’s where the value of the business resided”. I accept that evidence.

That means that the effect of the breach was the loss of a major customer who was the principal reason for the Ravensworth licence and conducting the VS system business. This is a key factor in determining materiality. The explanation for the breach (VLM’s ignorance of the existence of the licence, believing it had gone) has no weight in this context.

Working through the criteria in Phoenix Media, the consequence of holding the breach to be material, thus enabling Ravensworth to bring the licence to an end, is that Ravensworth is no longer party to an ongoing licence arrangement which it would not have wanted to enter into if it had known the true position, albeit that it now has a right to complete the assignment of the copyright. That is a legitimate objective. The consequence of holding that the breach is not material would be that there is a continuing arrangement and Holdings would be able to hold Ravensworth to a deal which was very different from that which it believed it was getting. All this points clearly towards materiality.

Mr Campbell's factors do not assist him. It makes no difference that the Spicerhaart licence was not a licence in favour of a competitor. It was a licence the existence of which deprived Ravensworth of a very substantial amount of income and of a key objective of entering into the Ravensworth licence. The fact that it had been trading with Spicerhaart for six months is beside the point. The original purpose of the Spicerhaart license is also neither here nor there. The licence was not limited in the use that could be made of it. The damage done by the breach (in the sense of damage resulting from the existence of the outstanding licence) is clear and is not at all speculative. The fact that Mr Green was not initially worried about the position is merely a reflection of the fact that its consequences had not been made apparent. The real effect was not apparent until October when Spicerhaart announced it was taking its business away. The "what if" exercise is founded on a fallacy – the liquidator would not have been entitled to terminate the UK/Spicerhaart licence. He certainly could not have done so because of Spicerhaart's failure to give UK 60% of its business - the liquidator was in no position to take that business, and the liquidation took place in a context in which VLM UK had been unable to conduct any such business for two or three months. The liquidator could hardly have claimed a breach of the obligation to put 60% of the business his way when he could not begin to perform his side.

I therefore find that the breach was material.

I can deal with this shortly. The breach might have been remediable. When it came to light it might, in theory, have been remediable if Spicerhaart could have been prevailed upon not to rely on the licence and, indeed, to surrender it. However, there was obviously no prospect of that, and in fact it was not remedied.

I therefore find: