Intellectual Property in Secured Transactions


Many intellectual property lawyers believe that the entire subject of secured transactions1 does not concern them. Whether that was ever true, such a belief could be disastrous today. There has been a growing acknowledgement over the last few years among lenders and investment bankers that a company's intellectual property is often its most valuable asset. This is so not just for high tech companies with their portfolios of patents or computer software developers with software copyrights and patents, but equally for entertainment and publishing companies, whose copyrights are at the heart of their businesses. For consumer product companies -- high tech or low -- their trademarks are often their single most valuable asset.

Because of their value, intellectual property often serves as collateral in the various types of financing which are essential to the functioning of today's corporations. In order to provide comprehensive counseling, whether one's specialty is intellectual property, corporate or commercial finance, a lawyer must have at least a basic understanding of how each of the forms of intellectual property can be made the subject of a security interest, how such security interest can be perfected and how to search for existing security interests.

Unfortunately, ambiguous statutes, inconsistent court rulings and administrative difficulties bedevil security interests in intellectual property. The law applicable to security interests in intellectual property is far from settled -- whether in the United States or elsewhere. This paper sets out what a practitioner should look for to avoid the myriad of pitfalls which can create a trap for the unwary.

I. How the Issue Arises

Few businesses today could survive without borrowing money for some business purpose, whether it is a factoring arrangement,2 a revolving credit line or the financing of a major expansion. Whatever the reason for the loan, however, the lender often insists that the company's existing intellectual property (i.e., its trademarks, copyrights, patents and trade secrets), including any after acquired intellectual property, serve as collateral for the financing. When a lender is providing the financing for the acquisition of a business (whether a stock or asset purchase), the intellectual property of the acquired company or division is invariably part of the collateral for the loan.

Now that intellectual property is valued as an important form of collateral, intellectual property lawyers are being asked to opine on the validity and enforceability of rights in intellectual property, both in the United States and internationally. For the skilled intellectual property lawyer, that is not where the pitfalls lie. The most problematic issue -- which affects all others -- is the "perfection" of the security interest; how to accomplish such perfection, and how to determine if a particular intellectual property asset is the subject of a perfected security interest.

Perfection is of paramount importance because a secured party which has perfected its security interest has greater rights than those of an unperfected secured party in case of the bankruptcy of the debtor -- that is, the secured party stands first (or second, etc., depending on priority) in line with respect to the assets in which it has a perfected security interest, rather than at the back, with all the unsecured creditors.

To "perfect" a security interest, generally, the secured party provides public notice of the existence of its interest, by filing notice of its lien in a public file, as provided by applicable law. The applicable law, however, varies both by jurisdiction and by the kind of intellectual property involved.

II. Perfection: Where to Search, Where to File

In the United States, security interests in most personal property are governed by Article 9 of the Uniform Commercial Code ("UCC"), which has been adopted with minor differences in all states and the District of Columbia.3

Section 9-109 of the Code provides that Article 9 (Secured Transactions) applies to "a transaction, regardless of its form, that creates a security interest in personal property . . . ." Among the various types of personal property subject to Article 9 are general intangibles. The Code defines "General intangibles" as

any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The Term includes payment intangibles and software.

UCC ß 9-102 (a)(42). The Official Uniform Comment to UCC 9, states that the term "General Intangible" is

the residual category of personal property, including things in action, that is not included in other defined types of collateral. Examples are various categories of intellectual property and the right to payment of a loan of funds that is not evidenced by chattel paper or an instrument. As used in the definition of "general intangible," "things in action" includes rights that arise under a license of intellectual property, including the right to exploit the intellectual property without liability for infringement.

Under Article 9, a "financing statement" (sometimes referred to as a UCC-1) must be filed against the debtor in order to perfect a security interest. A financing statement must adequately describe the collateral which is the subject of the lien. If only certain intellectual property is serving as collateral, then that collateral must be separately identified. However, language such as "all general intangibles now owned or hereafter acquired by [the debtor company]" is considered a sufficient statement to cover, for example, all trademarks (whether or not federally registered) and all trademarks subsequently acquired by the debtor. There is no requirement under the UCC to separately list or describe the "general intangibles" when the intention is to include all of them.

A. Where the Problem Arises: The Conflict between State and Federal Law

Article 9 also provides, in Section 9-311, exceptions to this State filing requirement. The subsection of particular interest provides:

(a) Security interest subject to other law. Except as otherwise provided in subsection (d), the filing of a financing statement is not necessary or effective to perfect a security in property subject to:

(i) a statute, regulation, or treaty of the United States whose requirements for a security interest's obtaining priority over the rights of a lien creditor with respect to the property preempt Section 9-310(a)

A similar exception appeared in former Article 9 at UCC ß 9-302(3)(a). Section 9-311 of the current Article 9 follows UCC ß 9-909, which replaces former UCC ß 9-104(a)) and which governs the scope of Article 9. It specifically states that Article 9 does not apply to the extent that it is preempted by a "statute, regulation, or treaty of the United States." UCC ß 9-109(c)(1). The Official Comment to UCC ß 9-109 attempts to clarify past misconceptions regarding the relationship between Article 9 and federal law:

Some (erroneously) read the former section to suggest that Article 9 sometimes deferred to federal law even when federal law did not preempt Article 9. Subsection (c)(1) recognizes explicitly that this Article defers to federal law only when and to the extent that it must--i.e., when federal law preempts it.

Certain intellectual property rights are governed by State law -- such as trade secrets and common law trademarks. Other intellectual property rights only exist as a federal right -- patents, copyrights and rights in mask works. Still others are subject to federal statute, and concurrent state jurisdiction -- federally registered trademarks. Because of the exception provided in UCC ß 9-311(a)(1) and UCC ß 9-909(c)(1), there is no certainty about how the various forms of intellectual property are to be perfected, whether under the basic UCC framework or federal law. To make matters more difficult, the issue has infrequently been addressed by the courts, and the few court decisions which do address the issue have created their own sets of problems. The newly revised Article 9 now in effect does not (and could not) resolve this problem. Only federal legislation will solve the pre-emption/perfection issues regarding intellectual property...

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