Opinion ID: 3168481
Heading Depth: 2
Heading Rank: 1

Heading: Priva and the secured loan from Pro Marketing

Text: Priva is a Delaware corporation that, until recently, developed products to store and protect digital information. In 2007, Priva began working on a microchip encryption technology known as the Secured Key Storage Integrated Circuit (SKSIC). Priva required capital to finance the development of this and other products, so it turned to Pro Marketing to obtain a secured loan. The companies executed a document memorializing the loan (the Security Agreement) on April 16, 2009. This agreement grants Pro Marketing a first-position lien on all of Priva’s assets. It defines the “Collateral” for the loan as all types or items of personal property owned by [Priva], whether now owned or hereafter arising or acquired, and wherever located, or in which [Priva] now has or at any time in the future may acquire any right, title or interest, including, without limitation, all of the following property . . . (xv) all Intellectual Property; . . . and (xviii) to the extent not otherwise included, all products and Proceeds of any and all of the foregoing property described above. The Security Agreement then defines “Intellectual Property” to mean “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.” This agreement also limits Priva’s rights with respect to the Collateral. It specifically provides that Priva cannot 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, other than in the ordinary course of business, or other agreement relating to, 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]; provided, [that Priva] may sell or otherwise dispose of items of Collateral which, individually, do not exceed $50,000 in value. 2 Cyber Solutions International, LLC v. Pro Marketing Sales, Inc., No. 15-1359 B. Bankruptcy filing and license agreement with Cyber Priva’s business proved less successful than its owners had hoped. Its creditors began demanding repayment and, in December 2011, Priva filed a petition in the Bankruptcy Court for the Western District of Michigan for relief under Chapter 11 of the Bankruptcy Code. Priva’s bankruptcy constituted a default under the terms of its Security Agreement, which caused Pro Marketing to begin the process of foreclosing on Priva’s assets in March 2012. In the meantime, Priva worked to develop a bankruptcy reorganization plan and to acquire additional assets with which to pay its debts. It consequently began negotiating with Cyber, which was interested both in acquiring the SKSIC technology and in hiring Priva to develop additional technology. The companies eventually signed a Design Service and Intellectual Property License Agreement (the License Agreement) on April 19, 2012. Pursuant to the License Agreement, Cyber made two $200,000 payments to Priva. In return for the first payment, Cyber received an exclusive license to the SKSIC technology and, in return for the second payment, it received certain rights in future technologies that Priva developed. Cyber’s rights to the future technologies are defined in Article 5.2 of the License Agreement, which provides that [a]ny updates, modifications or improvements to the Licensed Technology [i.e., SKSIC] developed by [Priva] and paid for by [Cyber] shall be the property of [Cyber.] [Priva] agrees to assign and agrees to assign in the future (when any such updates, modifications, or improvements to the Licensed Technology are first reduced to practice or first fixed in a tangible medium, as applicable) to [Cyber] all right, title and interest in and to any and all updates, modifications, or improvements to the Licensed Technology (and all proprietary rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by [Priva], either alone or jointly with others, during the period of Design Services engagement with [Cyber]. 3 Cyber Solutions International, LLC v. Pro Marketing Sales, Inc., No. 15-1359 The License Agreement thus establishes that all “updates, modifications, or improvements” to the SKSIC technology that Priva developed with Cyber’s funding would be assigned to and owned by Cyber. Finally, the License Agreement acknowledges Pro Marketing’s preexisting security interest in Priva’s assets. It states that the “SKSIC is subject to certain liens and security interests” and expressly acknowledges that those interests would “continue notwithstanding [Priva’s] entry” into the License Agreement. C. Bankruptcy proceedings On June 20, 2012, the bankruptcy court approved Priva’s First Amended and Restated Combined Joint Plan of Reorganization and Disclosure Statement (the Reorganization Plan). As part of the Reorganization Plan, the court specifically approved the License Agreement that Priva had executed with Cyber. Pro Marketing objected to the Reorganization Plan’s incorporation of the License Agreement. It argued that the License Agreement was not in the interest of either the bankruptcy estate or of Pro Marketing because the Plan did not secure fair value for the SKSIC technology and because it “usurp[ed]” Pro Marketing’s interest in Priva’s assets. The bankruptcy court overruled Pro Marketing’s objections. It noted that although “the technology [was] being licensed to [Cyber], that license [was] subordinate to Pro Marketing Sales’ superior lien.” In addition, the court stated that “if Priva were to default under the terms of the plan such that Pro Marketing could exercise its collateral rights, it would be able to recover . . . the SKSIC technology in whole notwithstanding the license that is being granted as part of this plan.” The court thus concluded that the License Agreement did not jeopardize Pro Marketing’s security interest, making Pro Marketing’s objections unwarranted. 4 Cyber Solutions International, LLC v. Pro Marketing Sales, Inc., No. 15-1359 After the Reorganization Plan was approved, Priva continued its operations and began developing a second-generation SKSIC product at the behest of Cyber. These efforts resulted in the completion of a new product known as Tamper Reactive Secure Storage (TRSS). The parties do not dispute that Cyber provided the funding for the TRSS development and that the TRSS technology constitutes an “update, modification, or improvement” of the SKSIC technology. Cyber and Priva expected TRSS to be a commercial success, but Priva continued to suffer cash shortages and was unable to meet its obligations under the Reorganization Plan. Priva’s board of directors accordingly voted in January 2013 to cease operations and allow Pro Marketing to exercise its rights under the Security Agreement. The two companies thereafter arranged for a “friendly foreclosure” on Priva’s assets. This resulted in Priva surrendering to Pro Marketing the SKSIC technology, the TRSS technology, and the computers containing Priva’s other intellectual property. Contemporaneously, Priva notified Cyber that it was unilaterally terminating the parties’ License Agreement. As grounds for the termination, Priva asserted that Cyber had materially and incurably breached the License Agreement by seeking design services from companies other than Priva. D. District court proceedings Cyber responded to the above events by filing suit against Priva and Pro Marketing in the United States District Court for the Western District of Michigan. It first requested a declaratory judgment that Cyber had not breached the License Agreement and that the License Agreement remained enforceable. Cyber also sought a declaration that, pursuant to the terms of the License Agreement, it owned the TRSS technology. In connection with this claim, Cyber sought a preliminary injunction to prevent Pro Marketing from disposing of either the SKSIC technology or 5 Cyber Solutions International, LLC v. Pro Marketing Sales, Inc., No. 15-1359 the TRSS technology. It also requested an order requiring Priva and/or Pro Marketing to transfer the TRSS technology to Cyber. Pro Marketing counterclaimed with its own request for a declaratory judgment. It asked the district court to declare that Pro Marketing was the rightful owner of both the SKSIC and TRSS technologies and that Pro Marketing was entitled to freely exercise its rights of ownership. The district court referred Cyber’s request for a preliminary injunction to the bankruptcy court. That court concluded that it should “preserve the status quo” to afford additional time for the bankruptcy estate to determine how best to dispose of the disputed assets. Cyber’s request that the SKSIC and TRSS technologies be transferred to it was denied, but the court granted Cyber’s request for a preliminary injunction forbidding Pro Marketing from “taking any . . . steps to sell, market or otherwise dispose” of either technology. With the injunction in place, the parties returned to the district court. Pro Marketing subsequently moved for summary judgment on its counterclaim on the ground that the Security Agreement authorized Pro Marketing to foreclose on and then sell or license both the SKSIC and TRSS technologies. Cyber opposed the motion on various grounds. Of relevance to this appeal, Cyber argued that its License Agreement with Priva precluded any finding that Pro Marketing had any rights in the TRSS technology. Cyber also maintained that Pro Marketing had “unclean hands” with regard to its termination of the License Agreement, thus barring Pro Marketing from seeking equitable relief. The district court rejected Cyber’s arguments and granted summary judgment in favor of Pro Marketing. It thereafter entered an order declaring “that Defendant Pro Marketing Sales lawfully possesses Priva’s collateral pursuant to its Security Agreement, and that Pro Marketing is permitted to market, sell and/or license the SKSIC/TRSS technology.” 6 Cyber Solutions International, LLC v. Pro Marketing Sales, Inc., No. 15-1359 Cyber now appeals the district court’s order. It argues that (1) its rights to the TRSS technology are superior to those of Pro Marketing, and (2) the district court erred by refusing to apply the doctrine of unclean hands as a bar to Pro Marketing’s request for declaratory relief.