Property, intangible

I like the cross-over of different legal disciplines. Ownership issues arise as part of an infringement claim, but also come up in trusts and estates, mergers and acquisitions, taxation, and bankruptcy. These cases can end in an unexpected way, sometimes happening because there is a failure to understand exactly how the various trademark, copyright and patent rights work.

To distill it down to its essential elements, we have a case where a company, defendant Priva Security Corp., had granted to co-defendant Pro-Marketing Sales (PMS) a security interest which included an interest in “Copyrights”:

all copyrights arising under the laws of the United States, … whether registered or unregistered, published or unpublished, now or hereafter in effect and all registrations and recordings thereof …

The  agreement also gave a security interest in “Copyright Licenses,” defined as:

all agreements providing for the granting of any right in or to any Copyright (whether the Company is licensee or licensor thereunder) and the granting of any right in any derivative work based upon any copyright….

Priva, in financial distress and as part of a Chapter 11 reorganization, granted plaintiff Cyber Solutions International, LLC (CSI) a license to its “technology,” which for our purposes was the copyright to a functionality called “SKSIC.”  PMS didn’t object to the license and its senior interest was acknowledged in the license agreement.

The license to CSI was very generous; it gave CSI a worldwide, perpetual license to the copyright and allowed CSI to “pursue” it’s own improvements, although Priva would be the exclusive provider of services for engineering, design and customization. In both cases, whether developed by CSI or Priva, CSI ended up the owner of the copyright.

And there were improvements; a new product, “TRSS,” was developed. Although the court doesn’t describe it using the legal term of art, it appears that TRSS was a derivative work of SKSIC.

Priva didn’t recover from its financial distress so PMS elected to exercise its right to own the technology pursuant to the security agreement. Which is what creates the legal question—who owns the copyright in TRSS? Does PMS, by virtue of its security agreement in the copyrights and/or copyright licenses, or does CSI, by virtue of the express grant of ownership in the license agreement?

The court holds that PMS owns the improvements:

Although the License Agreement purports to grant CSI ownership over improvements to the SKSIC, Priva did not have authority to grant such ownership to CSI in light of the terms of Pro Marketing’s security interest. CSI itself has acknowledged that the TRSS technology is a “derivative product” that is “based upon the SKSIC Technology.” Indeed, as Judge Dales noted, because the Security Agreement defines “Copyright Licenses” to mean “all agreements providing for the granting of any right in or to any Copyright (whether the Company is licensee or licensor thereunder) and the granting of any right in any derivative work based upon any copyright,” Priva’s (or the Trustee’s) authority to grant CSI any interest in the TRSS is itself subject to Pro Marketing’s security interest.

Ok, so we have a bit of apples and oranges here. What the court has done is hold that the derivative work, TRSS, is part and parcel of the original work, SKSIC, when as a matter of copyright law that isn’t the case. According to § 103 of the Copyright Act, “the copyright in a … derivative work … is independent of, and does not affect or enlarge the scope, duration, ownership, or subsistence of, any copyright protection in the preexisting material.” The copyrights in SKSIC and in TRSS are two different properties, so the fact that the security interest agreement limits what can be done with the original work doesn’t necessarily answer the question for derivative works. What matters is who the first owner of the copyright in the derivative work was, Priva (since it was the exclusive service provider) or CSI (because it had the right to develop improvements too and could have done so independently). If the copyright in the derivative work was all CSI’s, then it was never Priva’s property to which a security interest could attach.

Maybe a correct outcome, maybe not. But if it’s right it got there the wrong way, all for lack of awareness of one very short statutory section,  17 U.S.C. § 103.

Cyber Solutions Int’l, LLC v. Priva Security Corp., No. 1:13-CV-867 (W.D. Mich. Feb. 26, 2015).

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