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Cyber Solutions International, LLC v. Priva Security Corp.

United States District Court, W.D. Michigan, Southern Division

August 22, 2017

CYBER SOLUTIONS INTERNATIONAL, LLC, Plaintiff,
v.
PRIVA SECURITY CORPORATION, et al., Defendants.

          OPINION

          PAUL L. MALONEY UNITED STATES DISTRICT JUDGE

         This is an action in diversity involving Plaintiff Cyber Solutions International, LLC (“Cyber Solutions”) and Defendants Priva Security Corporation and Priva Technologies, Inc. (collectively “Priva”), and Defendant Pro Marketing Sales, Inc. (“Pro Marketing”) for claim and delivery of approximately 900 semiconductor chips. The matter came before the Court for a bench trial on June 27 and 28, 2017. The Court makes the following findings of fact and conclusions of law in accordance with Federal Rule of Civil Procedure 52(a).

         I. BACKGROUND

         Defendant Priva developed and owned microchip encryption technology known as the Secured Key Storage Integrated Circuit (“SKSIC”), which confirms a person's identity when that person attempts to access data that is stored or in transmission. Defendant Pro Marketing has a first-position lien on all of Priva's assets, including the SKSIC technology.

         On April 19, 2012, Priva entered into a license agreement with Cyber Solutions, and created a second-generation SKSIC product, Tamper-Reactive Secure Storage (“TRSS”), with a new product number, PDS8006-B. (Pl.'s First Am. Compl. ¶ 78, ECF No. 12, PageID.63.) Cyber Solutions also ordered and paid for the manufacture of a wafer in accordance with the National Security Administration (“NSA”) mandated ordering protocols, which included PDS8006-B semiconductor pieces that yielded approximately 900 PDS8006-B semiconductor chips. (Pl.'s Resp. 3, ECF No. 95, PageID.1290.) As of February 2013, Priva possessed the TRSS chips, and Pro Marketing seized them as part of its foreclosure on Priva's collateral. (Pl.'s First Am. Compl. ¶ 81, ECF No. 12, PageID.64; Pl.'s Resp. to Def.'s Mot. for Summ. J. 14, ECF No. 45, PageID.530.)

         This Court previously entered a declaratory judgment that Pro Marketing 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. (ECF No. 48, PageID.851.)

         During the two-day trial, the Court heard testimony from Douglas Benefield, Ed Cheever, and Richard Hall, and received deposition testimony from Adnan Nagarajan (Ex. 30) and Michael Emley (Ex. 31). The Court also received several exhibits from Cyber Solutions and Pro Marketing including the security agreement between Priva and Pro Marketing (Ex. 2), license agreement between Priva and Cyber Solutions (Ex. D), invoices and accounts payable reports (Exs. 15, 17, 18, 19, 20), emails (Exs. 14, 16, 23, 25, 26), Priva's bankruptcy reorganization plan (Ex. A), and the value-added reseller agreement (“VAR agreement”) between Priva and Cyber Solutions (Ex. AA). At the close of Plaintiff's case-in-chief, Pro Marketing moved for a directed verdict under Federal Rule of Civil Procedure 52(c). The Court took the motion under advisement. The Court also ordered supplemental briefing from each party on whether the VAR agreement relates to the issue before the Court. Both parties waived closing argument.

         FINDINGS OF FACT

         The Court makes the following findings of fact with respect to Cyber Solutions' remaining claim for claim and delivery. Priva secured a loan from Pro Marketing. Under the terms of the security agreement, Pro Marketing had a first-position lien on certain Priva assets. The security agreement defines “collateral” as “all types or items of personal property owned by [Priva], whether now owned or hereafter arising or acquired, . . . in which [Priva] now has or at any time in the future may acquire any right, title or interest.” (Ex. 2.) It defines collateral in terms of ownership: if Priva owns or acquires an item of personal property, that property becomes part of the collateral securing Pro Marketing's loan. Cyber Sols. Int'l v. Pro Marketing Sales, Inc., 634 F.App'x 557, 564 (6th Cir. 2016).

         On April 19, 2012, Cyber Solutions and Priva entered into a license agreement and VAR agreement. The license agreement acknowledges Pro Marketing's pre-existing security interest in Priva's assets and expressly provides that this security interest will continue despite the license agreement. Cyber Solutions' rights to future technology, as defined in § 5.2 of the license agreement, include:

[a]ny updates, modifications or improvements to the Licensed Technology [i.e., SKSIC] developed by [Priva] and paid for by [Cyber Solutions] shall be the property of [Cyber Solutions]. [Priva] agrees to assign and agrees to assign in the future (when any such updates, modifications, or improvements to the License Technology are first reduced to practice or first fixed in a tangible medium, as applicable) to [Cyber Solutions] 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 patenable 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 Solutions].

(Def.'s Ex. D.) This agreement establishes that all “updates, modifications, or improvements” to the SKSIC technology that Priva developed with Cyber Solution's funding would be assigned to and owned by Cyber Solutions. Nonetheless, the TRSS technology falls within the scope of Pro Marketing's security interest. The license agreement acknowledges that there may be updates, modifications, or improvements to the SKSIC technology, and that Priva will first acquire the rights to such. After this initial acquisition of rights, the license agreement provides for the assignment of those rights to Cyber Solutions. Thus, the agreement contemplates that any updates, modifications, or improvements to the SKSIC technology-including the TRSS technology-will first become Priva's property, and as such, part of the collateral subject to Pro Marketing's security interest.

         Under the VAR agreement, Priva would sell the SKSIC chips to Cyber Solutions and provide Cyber Solutions with a non-exclusive right to promote, market, distribute, and sell the chips. Then, Cyber Solutions would act as a reseller to market by selling the chips to potential customers, and Priva would be entitled to utilize all proceeds derived from the VAR agreement in its discretion. Mr. Cheever testified that Cyber Solutions entered into this agreement with “the ultimate goal” of selling the physical chips. (Trial Tr. 214:15-19.) He further explained that such agreements are “commonplace in the industry . . . distinct from the licensing agreement [because the] licensing agreement anticipates intangible intellectual property being developed. The licensing agreement does not address the aspects of ordering a product or selling a product or who has ownership.” (Id. at 214:21-215:1.) Mr. Cheever testified that, “[i]f Priva had controlled and owned all intellectual property, it could have been done within the license agreement[.]” (Id. at 217:12-14.) The VAR agreement “specifically covers what happens when you place an order, and it says that [Cyber Solutions] is to respond to whatever protocols Priva has. . . . It also clearly states once the purchase is made, [Cyber Solutions] own[s] that chip. And then this agreement controls whatever aspects we do whatever--whoever we sell it to, not the license agreement.” (Id. at 218:3-10.)

         During cross-examination, Mr. Cheever agreed that Cyber Solutions “believes that once properly developed tested and completed, the TRSS PDS 8006-B product, based upon the SKSIC technology, will generate considerable profits for [Cyber Solutions] as well as significant royalties payable to defendant Priva Tech as obligated under the [license] agreement.” (Id. at 220:24-221:5.) He further explained that “additional consideration in the form of royalty payment, based on [Cyber Solutions'] sales activity, was going to be paid to Priva and that is encompassed within the licensing agreement.” (Id. at 222:24-223:2.) He also testified that the “chips were hand tested at Priva. They were not production certified. They were not to be sold. They were not to go into final products, which is why we are here.” (Id. at 227:23-228:1.) Mr. Cheever admitted that the VAR agreement “specifically referenc[ed] the SKSIC chips as they existed on April of 2012.” (Id. at 213:17-19.) Mr. Cheever disagreed with defense counsel that the VAR agreement did not apply to the TRSS chips, but he was not sure if the VAR agreement discussed modifications, updates, and improvements to the SKSIC chips. (Id. at 231:20-232:12.) Mr. Cheever indicated that if he could take ten minutes to review the VAR agreement, he would be able to point to where it discussed modifications or improvements to ...


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