Professor Ward July 17,1998
Two Hours 8:30 am - 10:30 am


1. This examination contains two equally weighted questions.

2. You are permitted to use your copy of SELECTED COMMERCIAL STATUTES, your copy of UNFAIR COMPETITION, TRADEMARK, COPYRIGHT AND PATENT - SELECTED STATUTES and the class handouts containing the April 1998 Draft of PROPOSED ARTICLE 2B. No other materials may be taken into the examination room. The fact situations in the questions arise in Mainshire, a mythical jurisdiction that has adopted the Official Version of the Uniform Commercial Code. Do not assume the existence of other special state legislation unless the question directs or invites you to do so.

3. Use a pen and write on only one side of the page.

4. Although no page limitation has been imposed, a concise, tightly reasoned answer will receive more credit than one which rambles. Read the questions carefully. Answer only the question or questions asked.

5. Do not write your name on any part of the examination, but be sure to put your examination number on each blue book you turn in. Please write legibly. GOOD LUCK!

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Intellectual Property Under the UCC and the Bankruptcy Code - Final examination

Question # 1
(A Tale of Two Patents)
[Recommended time: I hour]

On January 4, Steel Jacket Corporation hired Prism Engineering to develop a metal testing process for a new alloy used in the aerospace industry. The agreement between the parties provided that Prism:
"hereby grants to Steel Jacket Corporation the full and entire right, title and interest in any invention, discovery, improvement or development (whether patentable or not) made in the course of or under this contract or any related subcontract."

On January 16, First Bank loaned Steel Jacket Corporation $1,000.000 and took a security interest in all the Corporation's "patents and patent applications now owned or hereafter acquired." On January 17, First Bank filed a properly executed financing statement covering all the Corporation's "general intangibles, now owned or after-acquired." First Bank made no other filing or recording.

On February 3, Prism filed a patent application on a metal testing process developed in the course of its contract with Steel Jacket. The February 3 application matured into issued Patent No. 400,400,001 [Patent No. '00 1] on September 2.

On September 4, Prism executed a written assignment of Patent No. '001 to Andy Capp, an engineer and former employee of Prism. Capp was familiar with the terms of the contract between Prism and Steel Jacket. Nevertheless, Capp paid Prism $10,000 for the assigned rights, This September 4 assignment was recorded with the PTO on December 1.

In an unrelated transaction on October 7, Johnson Technologies executed a written assignment of Patent No. 707,707,222 [Patent No. '222] to Steel Jacket in return for $20,000 in cash and Steel Jacket's promissory note for $100,000 payable in equal monthly installments over a two-year term. [Patent No. '222 is on a metal finishing process and is unrelated to the contract between Prism and Steel Jacket.] To secure repayment of the promissory note, Johnson Technologies took back from Steel Jacket a duly executed security agreement covering Patent No. '222. Johnson Technologies filed a proper financing statement describing the collateral as "Patent No. 707,707,222" on October 12. Steel Jacket recorded the assignment of Patent No. '222 with the PTO on October 3 0.

After being prodded by Steel Jacket for several weeks, Prism executed a written assignment of Patent No. '001 to Steel Jacket on October 25. On December 15, Steel Jacket

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Intellectual Property Under the UCC and the Bankruptcy Code - Final examination recorded the October 25 assignment with the PTO,

On December 30, Steel Jacket is in default under its loan with First Bank and its promissory note with Johnson Technologies.

1. Who has priority in Patent No. '001, First Bank or Andy Capp? Explain.

2. Would your answer in 1, above, be different if Andy Capp was not chargeable with notice or knowledge of the terms of the Prism/Steel Jacket agreement? Explain.

3. Who has priority in Patent No. '222, First Bank or Johnson Technologies? Explain.

Question # 2 {A Software Salvage)
[Recommended time: I hour]

Face Time, Inc. is a small manufacturer of cosmetics in Gray Hill, Mainshire. InvenTech, Inc., is a producer and distributor of inventory management software in Portsburgh, Mainshire. InvenTech's basic product is "Inventask," a general purpose inventory management software program that can be adapted to a wide range of industry uses with only slight adjustments in the copyright registered master source code.

On February 1, Face Time entered into a "Software Contract and Licensing Agreement" with InvenTech covering "Inventask/Cosmetics," an inventory management software system adapted to the needs of a cosmetics manufacturer. The duration of the Agreement was five years. Under the terms of the Agreement, InvenTech granted Face Time a nonexclusive license to use "Inventask/Cosmetics" and supplied Face Time with disk copies of the specially tailored program along with related user/training documentation. InvenTech also undertook to train Face Time employees in the use of the system and to service the software if and when problems arose. The agreement also required that InvenTech upgrade "Inventask/Cosmetics" whenever the master program was upgraded and train Face Time employees on the upgrades. Face Time agreed to pay a monthly licensing Fee of $2000 over the five-year term of the Agreement.

The copyright registered source code for the master Inventask program was not made available to Face Time under the Licensing Agreement. However, under a separate Escrow Agreement the master source code and related documentation for Inventask was deposited with

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Intellectual Property Under the UCC and the Bankruptcy Code - Final examination

Safe-Soft, a escrow agent specializing in software escrows. The three-way Escrow Agreement between Face Time, InvenTech and Safe-Soft provided that a copy of the master source code would be held by Safe-Soft under instructions to release the tangible disks to Face Time with permission to use the source code for purposes related to the Licensing Agreement, if and when InvenTech fell into uncontested default under the Licensing Agreement. If no default occurred, Safe-Soft was instructed to return the master source code to InvenTech when the agreement had run its course. InvenTech was obligated to deposit any upgrades of the master source code with Safe-Soft as such upgrades were developed. Although Safe-Soft took physical possession of a copy of the master source code and related documentation, no filing or recording was ever made,

There was only harmony in the beginning. The training sessions went off without difficulty and the software worked perfectly. However, by August 1, InvenTech was in deep financial difficulty because it acquired products from other software producers that turned out to be financial black holes. On September 1, InvenTech filed for protection under Chapter I I of the Bankruptcy Code. On October 1, InvenTech as debtor in possession rejected its February 1 Agreement with Face Time. To add insult to injury, InvenTech, again as debtor in possession, also moved to prohibit Face Time from using the escrowed source code. This motion was based on the theory that whatever rights in the master source code copyright were initially transferred to Face Time under the Escrow Agreement are avoidable under section 544(a)(1) of the Bankruptcy Code.

1. If Face Time elects to retain its rights under section 365(n)(1)(B) of the Bankruptcy Code what parts of the rejected February I agreement can it force InvenTech to honor and what parts of the rejected agreement will yield only a damage claim? Explain.

2. How should the Bankruptcy Court rule on InvenTech's motion to avoid the initial escrow transfer of the master source code copyright? Explain.