Termination of a License Agreement: Grounds and Legal Consequences

A license agreement is one of the key instruments for disposing of exclusive rights to intellectual property and means of individualization. In accordance with the provisions of paragraph 1 of Article 1235 of the Civil Code of the Russian Federation, under a license agreement, one party - the holder of the exclusive right to an intellectual property or means of individualization (the licensor) - granted or agreed to grant the other party (the licensee) the right to use such property or means within the limits specified in the agreement.

However, like any civil obligation, a license agreement is not perpetual in nature and may be terminated for various reasons. Issues related to the termination of a license agreement are of significant importance to the parties, as they directly relate to property risks, the preservation of rights, the possibility of continued use of the asset, and the recovery of damages.

Legal regulation of licensing agreements is carried out primarily by the provisions of Part Four of the Civil Code of the Russian Federation (Articles 1235-1240 of the Civil Code of the Russian Federation), as well as general rules on obligations and contracts (Articles 450-453 of the Civil Code of the Russian Federation). Depending on the subject matter of intellectual property rights, specific provisions of the relevant chapters of the Civil Code of the Russian Federation also apply.

Grounds for termination of the license agreement

Termination of a license agreement is possible both on general grounds provided for by civil legislation and on special grounds arising from the nature of intellectual rights.

• Expiration of the Agreement. If the agreement is concluded for a fixed term, the parties' obligations cease upon its expiration. It should be noted that the term of a license agreement cannot exceed the term of the exclusive right. In accordance with paragraph 4 of Article 1235 of the Civil Code of the Russian Federation, if the license agreement does not specify a term, the agreement is considered concluded for five years, unless otherwise provided by this Code.
• Agreement of the Parties. The parties have the right to terminate the agreement at any time by mutual agreement. Such agreement is executed in writing and is subject to state registration if the subject of the agreement is a registrable property.
• Unilateral withdrawal from a contract. The possibility of unilateral withdrawal may be expressly provided for in the contract, established by law, or caused by a material breach of the contract by the other party.

For example, the licensor has the right to demand termination of the agreement in the event of a material breach by the licensee of the terms of use of the object, including going beyond the scope of the granted license.

The licensee, in turn, may initiate termination of the agreement if the licensor fails to provide rights in the agreed volume or if there are encumbrances that prevent the use of the object.

• Significant breach of contract. According to Article 450 of the Civil Code of the Russian Federation, a contract may be terminated by a court decision in the event of a material breach by one of the parties. A breach is considered material if it causes damage to the other party, depriving it of what it had the right to expect when concluding the contract.

In the context of licensing relationships, this may be expressed in non-payment or systematic delay in payment of license fees; use of an object beyond the scope of the granted license; violation of product quality requirements, for example, when granting a license for the right to use a trademark; disclosure of confidential information.

• Termination of Exclusive Rights. According to paragraph 4 of Article 1235 of the Civil Code of the Russian Federation, the term of a license agreement cannot exceed the term of the exclusive right to the result of intellectual activity or to the means of individualization. Accordingly, the termination of the exclusive right (expiration of the protection period, invalidation of a patent, early termination of trademark protection, etc.) entails the termination of the license agreement, unless otherwise provided by law or contract.

It is worth noting that if a license agreement is concluded for the duration of the exclusive right, then an extension of the term of legal protection of the relevant object entails an automatic extension of the license agreement, unless otherwise expressly provided by the agreement.

In other words, when the parties formulate the term of the agreement as "The agreement is valid for the entire term of the exclusive right," the term of the agreement is derived from the term of protection of the specific intellectual property. In this case, an additional extension agreement is not required, since the parties initially linked the term of the obligation to the term of the exclusive right.

• Other grounds. Other grounds may include: liquidation of a legal entity (if rights and obligations are not transferred by succession); death of a citizen who is a party to the contract, if performance is related to their person; invalidation of the contract.

Legal consequences of termination of the contract

Termination of a license agreement entails a number of significant legal consequences.

• Termination of the right of use. Upon termination of the agreement, the licensee is obligated to cease using the intellectual property. Continued use will be considered an infringement of the exclusive right, with the possibility of compensation, damages, or other protective measures.
• Settlements between the parties. The parties are obligated to make final settlements as stipulated by the terms of the contract. Termination of the contract does not relieve the party from the obligation to pay accrued remuneration, penalties, or compensation for damages. If the contract is terminated due to a material breach, the injured party has the right to demand compensation for damages.
• Retention of certain obligations. Even after termination of the contract, the following may remain: confidentiality obligations; liability for violations committed during the contract; warranty obligations; provisions on applicable law and jurisdiction.

When does a license agreement not terminate even though it seems like it should?

In practice, situations often arise where one party believes the license agreement has been automatically terminated, but legally it remains in effect. Such errors are particularly risky for licensees, as cessation of payments or continued use of the asset without legal justification can entail both financial and legal consequences.

• Transfer of exclusive rights to a third party. A common misconception is that the transfer of exclusive rights to a property terminates the previously concluded license agreement. However, the law provides otherwise.

According to paragraph 7 of Article 1235 of the Civil Code, the transfer of exclusive rights to the result of intellectual activity or to a means of individualization to a new copyright holder is not grounds for changing or terminating a license agreement concluded by the previous copyright holder.

This means that the new copyright holder becomes a party to the existing license agreement, all rights and obligations of the licensor are transferred to the acquirer of the exclusive right, and the licensee continues to use the property under the same terms. However, the terms of the license agreement may immediately include a clause terminating the agreement if the exclusive right is transferred to a third party.

• Name change or reorganization of a party. A legal entity's reorganization (merger, acquisition, or transformation) does not terminate a license agreement if universal succession occurs. Similarly, a change of corporate name does not in itself affect the validity of the agreement.
• Change of a company's participant or director. It is a misconception that a change in business ownership or CEO affects contractual obligations. It is necessary to take into account that the legal entity remains the same legal entity, therefore the license agreement continues to be valid.

Thus, termination of a license agreement is a legally significant procedure affecting the property interests of both parties. The grounds for termination may be either provided by law or established by agreement between the parties. The legal consequences depend on the nature of the termination and the terms of the specific agreement, but in any case, the key factor is the termination of the right to use the intellectual property.