Despite Lack of Express Right to Terminate, Licensor Was Permitted to Terminate License for Violation of Scope Limits by Licensee

Abstract

In Videri, Inc. v. ONAWHIM (OAW) Inc., the Southern District of New York found that a licensor had the right to terminate a license agreement for the licensee’s material breach even though the termination clause did not expressly include material breach as an enumerated reason to terminate. The court reasoned that under applicable New York law, a party may terminate a contract for material breach absent a provision expressly stating that the contract can only be terminated for listed reasons. 

Background

Videri, Inc. engineers and manufactures digital displays historically categorized into two brands: “Canvases” and “WHIM.” In 2021, Videri bought out its CEO, who went on to lead a spinoff called ONAWHIM (OAW) Inc. As part of the buyout, the companies entered a Cross-License Agreement under which they agreed to divide and conquer the market to avoid direct competition: Videri was only permitted to sell Canvas to businesses, while OAW was restricted to selling WHIM screens directly to consumers (the “ONAWHIM Field”). Under these conditions, the License Agreement extended an exclusive license to use Videri patents and proprietary information in the ONAWHIM Field, and expressly prohibited OAW from using Videri patents and proprietary information outside the ONAWHIM Field. Following OAW’s alleged use of the licensed intellectual property outside the ONAWHIM Field, Videri notified OAW that it was terminating the License Agreement for material breach.

Right to Terminate for Material Breach

Videri sought a declaratory judgment that it had validly terminated the License Agreement, despite the fact that the contract did not explicitly authorize either party to terminate for material breach. Instead, the agreement provided only that it would terminate “upon expiration or termination of this Agreement pursuant to Article IX.” Article IX, in turn, provided for expiration after all of the licensed patents expired, if “ONAWHIM commits a Payment Breach,” or through “mutual written agreement of the Parties.” 

OAW moved to dismiss Videri’s claim, contending that Article IX provided an exclusive list of reasons for which the agreement could be terminated. But the court found that under New York law, an aggrieved party can elect to terminate a contract upon a material breach absent a provision expressly stating that the contract can only be terminated for listed reasons. Without such language, the termination clause cited by OAW was merely a list of events that were sufficient, but not necessary, to trigger termination. The fact that the contract was “negotiated by sophisticated parties at arm’s length” also rendered the court reluctant to assume that the parties had impliedly made the termination clause an exhaustive list of events. For these reasons, the court denied the motion to dismiss, and that aspect of the case will continue.

Strategy and Conclusion

While drafting the termination clauses in license agreements, sophisticated parties must carefully consider whether to expressly limit permissible reasons to terminate the agreement. Without such language, a court might allow broader termination rights based on state contract laws.