The U.S. Court of Appeals for the Seventh Circuit ruled that a sublicensee of patent and trademark rights that purchased its sublicensor in order to reduce the royalties it owned to the licensor was not prohibited from buying the company in the absence of a specific prohibition in the original licensing agreement. VDF FutureCeuticals, Inc. v. Stiefel Labs., Inc., Case No. 14-3232 (7th Cir., July 10, 2015) (Posner, J.).

VDF FutureCeuticals owned trademark and patent rights in the name CoffeeBerry for coffee plant extract. VDF had granted a royalty-based license to J&J Technologies to make skin care products based on the CoffeeBerry coffee plant extract. According to the license, J&J was allowed to sublicense its rights. The license required J&J to pay 15 percent of any revenues it obtained from selling the licensed product and of any royalties it received from its sublicenses. Assignment of the license was not allowed without written permission, although the license did not forbid a change of control.

J&J sublicensed to Stiefel Laboratories to use the CoffeeBerry coffee plant extract in its dermatological products. Later, Stiefel bought J&J, making it a subsidiary. J&J then agreed to reduce Stiefel’s royalty obligations, thereby diverting part of the licensing revenue from VDF to Stiefel. According to Stiefel’s internal documents, it bought J&J instead of seeking an assignment of its license in order to avoid seeking VDF’s permission (as would be required for an assignment of the license agreement) and to reduce the royalty costs.

VDF sued Stiefel for breach of contract, claiming the assignment was unauthorized and that the purchase price Stiefel bought J&J for was really a purchase of J&J’s anticipated sales revenue under the sublicense agreement. The district court dismissed both claims, granting summary judgment in favor of the Stiefel. Although other claims remained pending, the district judge certified its ruling for an immediate appeal of these two claims.

The 7th Circuit court affirmed the district court’s decision. With regard to the unauthorized assignment claim, the Court held that a fatal problem with this claim “is that by failing to place any restrictions on who could own its licensee J&J,” the plaintiff “exposed itself to being taken advantage of by a change of ownership at J&J that would result in operating changes and alter its relationship” with the plaintiff. The court explained that had the defendant bought J&J’s license or dissolved the company after the purchase, the terms of the license with the plaintiff would have been violated by obtaining the license without the approval of the plaintiff. But neither of those events happened. Regarding whether royalty was owned on the purchase price the defendant paid for J&J, the court concluded that the license that the plaintiff had granted J&J limited the royalties that J&J would owe  the plaintiff “based on the actual sale of Products by Licensee or sublicensees that was actually collected.” Since J&J sold stock, not products to Stiefel, the 7th Circuit rejected VDF contentions that the royalty provision required a royalty based on the stock purchase price.