• The Security Interest Quiz Answer

    by  • January 20, 2016 • copyright • 0 Comments

    I previously offered a quiz asking you to decide who, between a secured party and a licensee, owned the rights in an improved version of software.

    And the answer is — Pro Marketing, owner of the security interest. I missed it, but it is a straightforward answer.

    The key is that the collateral included rights that Priva “now has or at any time in the future may acquire.” The improvements to the software, even though created after the security agreement was signed, therefore were also collateral securing the loan.

    Cyber Solutions argued that as soon as the modification of the SKSIC tecnology was completed it immediately became the property of Cyber Solutions, so the ownership never passed through Priva’s hands and therefore never became part of the collateral.

    But Cyber’s argument rests on an erroneous reading of the License Agreement. Article 5.2 states that Priva “agrees to assign and agrees to assign in the future” its rights in any modifications to the SKSIC technology. This provision does not instantly grant any rights to Cyber; rather, it implicitly recognizes that Priva itself will acquire rights that it must then assign. See, e.g., Abraxis Bioscience, Inc. v. Navinta LLC, 625 F.3d 1359, 1365 (Fed. Cir. 2010) (“[C]ontract language stating that a party ‘agrees to assign’ reflects a mere promise to assign rights in the future, not an immediate transfer of expectant interests.”).

    The License Agreement, in other words, acknowledges that Priva might develop certain updates, modifications, or improvements to the SKSIC technology, and that, in doing so, it will acquire the rights to those updates, modifications, or improvements. Only after this initial acquisition of the rights does the License Agreement provide for the assignment of those rights to Cyber. The License Agreement therefore contemplates that any rights in updates, modifications, or improvements to the SKSIC technology will in fact first become the property of Priva.

    ….

    This result should come as no surprise to Cyber because it knew at the time that it executed the License Agreement that such an outcome was possible. The License Agreement itself acknowledges the existence of Pro Marketing’s security interest, and the bankruptcy court explicitly noted that Cyber was “assuming the risk” that its rights under the License Agreement “might be disrupted” by Pro Marketing’s Security Agreement.

    Cyber evidently determined that this risk was worth taking, and it cannot escape the consequences of its decision to enter the License Agreement simply because it is now unhappy with the outcome.

    There was a second reason Priva owned TRSS – Pro Marketing’s Security Agreement didn’t permit Priva to give assets away in the first place. The Security Agreement said that Priva could not transfer “any Collateral, any interest therein or any Proceeds thereof, nor waive or release any right with respect thereto, without the prior written consent of [Pro Marketing.]” The definition of “Collateral” includes “Copyright Licenses,” defined expansively in the agreement as

    all agreements providing for the granting of any right in or to any Copyright (whether [Priva] is licensee or licensor thereunder) and the granting of any right in any derivative work based upon any Copyright, together with . . . any other rights or privileges to use or practice any Copyright or arising under, or corresponding or relating to, any of the foregoing.

    Priva therefore did not have the authority to assign ownership of the copyright in TRSS in the first instance.

    Cyber Solutions Int’l, LLC v. Pro Mktg. Sales, Inc., No. 15-1359 (6th Cir. Jan. 11, 2016) (unpublished).

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