License agreement tips: pay attention to the definition of “affiliate”

When licensing a patent, software, copyrightable work or other intellectual property, it’s common for the agreement to license the property to a particular entity and its “affiliates.” The agreement may define the term “affiliates.” But are the parties always sure that the definition includes all parties that they actually intend to include?

Following on the heels of a recent, similar decision from United States District Court for the Central District of California, the Court of Appeals of the State of New York held that a license granted to an entity and its “affiliates” is limited to affiliates that were in existence on the effective date of the license agreement, unless the agreement expressly states otherwise.

Although the licensee typically benefits when the agreement contains a broad definition of affiliates, the new case is unique because it shows that a licensor can also benefit from a broader definition in certain situations.

The New York case, Ellington v. EMI Music, Inc., involved the terms of a royalty provision found in a 1961 copyright renewal agreement between the legendary musician Duke Ellington and a group of music publishers, including the predecessor to EMI Music. The royalty provision established a revenue sharing arrangement under which Ellington (and his heirs) were entitled to 50% of net revenues resulting from sales by EMI and its affiliates.

EMI granted sublicenses to several newly-created, affiliated foreign entities. EMI paid the Ellington heir 50% of the net revenue that it received from these affiliated foreign sublicensees. However, because the entities were affiliates of EMI, Ellington’s heirs argued that they were entitled to 50% of the foreign sublicensees’ net revenues, not just a share of what EMI received from the sublicensees.

The court disagreed with the heirs’ argument, noting that the agreement contained no forward-looking language:

Absent explicit language demonstrating the parties’ intent to bind future affiliates of the contracting parties, the term “affiliate” includes only those affiliates in existence at the time that the contract was executed.

Normally, the licensee is the entity who argues for a broad definition of “affiliates” and other licensed entities. However, the Ellington v. EMI Music case shows that licensors can also benefit from a broad definition if the definition brings a larger number of entities into a more lucrative royalty structure.

[Special thanks to my partner Tris Fall of Fox Rothschild for alerting me to this case and providing the idea for this post.]

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