Friday, January 15, 2016

Sixth Circuit decodes claims to encryption technology

By Lisa M. Goolik, J.D.

In an unpublished opinion, the U.S. Court of Appeals for the Sixth Circuit has held that a debtor’s microchip encryption technology was subject to a security agreement that defined the collateral so as to include the debtor’s intellectual property. Although the debtor subsequently licensed the technology, the licensee’s “exclusive license” was subject to the security interest. As a result, the secured lender, Pro Marketing Sales, Inc., had a superior claim and was entitled to the technology after the debtor filed for Chapter 7 bankruptcy protection (Cyber Solutions International, LLC v. Pro Marketing Sales, Inc., Jan. 11, 2016, Gilman, R.).

At issue was microchip encryption technology developed by Pro Marketing and the licensee's mutual borrower, Priva Technologies, Inc. Pro Marketing based its claim on a 2009 security agreement with Priva, whereas the licensee, Cyber Solutions International, LLC, based its competing claim on its 2012 license agreement with Priva.

The security agreement granted Pro Marketing a first-position lien on all of Priva’s assets. The agreement described the collateral to include Priva’s “Intellectual Property,” which was defined as “all rights, priorities and privileges relating to intellectual property . . . , including without limitation the Copyrights, the Copyright Licenses . . . , and all Goodwill associated with or arising in connection with any of the foregoing.” The agreement also limited Priva’s rights with respect to the collateral, providing that Priva could not “sell, transfer, assign, convey or otherwise dispose of, or extend, amend, terminate or otherwise modify any term or provision of any license of [Priva’s] Intellectual Property …without the prior written consent of [Pro Marketing]…”

The license agreement granted Cyber Solutions an exclusive license to the technology and, in return for the second payment, certain rights in future technologies that Priva developed. The agreement established that all “updates, modifications, or improvements” to the technology that Priva developed with Cyber Solution’s funding would be assigned to and owned by Cyber Solution; however, it also expressly acknowledged Pro Marketing’s preexisting security interest in the technology.

Priva subsequently began developing a second-generation technology product at the behest of Cyber Solutions. These efforts resulted in the completion of a new product known as Tamper Reactive Secure Storage (TRSS). Cyber Solutions argued that as the TRSS was completed, it immediately became the property of Cyber Solutions, free of Pre Marketing's security interest.

The Sixth Circuit determined that upon completion of the TRSS technology, Priva—however briefly—acquired the rights to that modification prior to its assignment. As a result, the TRSS became “items of personal property owned . . . or acquired” by Priva, and those rights were included in the security agreement’s definition of “collateral.” Thus, Pro Marketing acquired a security interest in the TRSS technology that was superior to Cyber Solution’s claim to the technology.

Moreover, the court noted that the license agreement itself acknowledged the existence of Pro Marketing’s security interest, and Cyber Solutions was “assuming the risk” that its rights under the license agreement “might be disrupted” by Pro Marketing’s security agreement.

For more information about Cyber Solutions International, LLC v. Pro Marketing Sales, Inc. (6th Cir.), subscribe to the Banking and Finance Law Daily.