Another highly derivative blog post

Does this work for you?
Does this work for you?

We learn from our mistakes.  Far better, however, is to learn from the other guy’s mistakes.  Here by “our” and “other guy” I am referring to people engaged in the practice of commercial law.

Take, for example, this teaching moment, written up by Pamela Chestek:

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all copyrights arising under the laws of the United States, … whether registered or unregistered, published or unpublished, now or hereafter in effect and all registrations and recordings thereof …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

Now that I’ve copied most of Pam’s blog post, the least you could do is click the link to her site (here it is again) to see how the question was answered by a court — which pretty much already tells you someone made a big mistake.  As Pam puts it (this is not a spoiler), “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.”

Yes, it’s the short ones that get you, isn’t it?  The fact is, the situation described isn’t as byzantine as it sounds to those unaccustomed to the charms of technology agreements.

Whichever side of a software development deal a lawyer represents, carefully meting out the bounds of who owns what, under what circumstances and for how long is the difference between “pulling a form” and practicing law.

But how much consideration do most business lawyers with a proper appreciation for intellectual property law put into what was, in this case, a critical aspect of the copyright “bundle of rights” involved:  the original creator of a work’s persistent rights concerning derivative works?

Pam questions whether the court in the case she reports got it right.  It does seem, however, that the court was trying to tease out a result from operative documents that did not provide the answer which they presumably could and — yes, 20-20 hindsight being perfect — should have.

Are you a lawyer who drafts or advises clients involved in software agreements?  When’s the last time you thought about how the division and cycles of ownership interests, securitizations thereof and licenses is affected by basic copyright principles which, absent an explicit term, may affect future iterations of a technology whose permutations and valuations can only be dimly appreciated at the time of contracting?

Live and learn.

 

Ron Coleman

I write this blog.