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Security Interests in Intellectual Property

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© 2003, Gallagher & Dawsey Co., LPA
June 2003

With the value of intellectual property increasing rapidly as the economy becomes more high-tech, businesses are constantly looking for ways to leverage this value. As such, utilizing intellectual property as collateral to secure various forms of funding is becoming extremely common, as are some related problems that can be easily avoided.

The primary issue surrounding the use of intellectual property as collateral is determining exactly what the secured party must do to ensure they have properly recorded their security interest in the intellectual property. Problems often arise from the fact that the method of properly recording a security interest may differ depending on the type of intellectual property.

The most common method of establishing the priority of a secured party is to comply with the Uniform Commercial Code's provisions in a particular jurisdiction. However, the Uniform Commercial Code expressly states, in S 9-311, O.R.C. S 1309.311(A)(1) that Article 9 does not apply, in essence, to a security interest in property subject to 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 preempt relevant state law. Therefore, one must be intimately familiar with federal law, and case law, to know if, and when, federal law preempts state law.


The general concensus is that perfection of a security interest in a patent is accomplished under the Uniform Commercial Code (UCC) and does not require a filing with the United States Patent and Trademark Office (USPTO), see In re Cybernetic Services, Inc. 52 U.S.P.Q. 2d 1683 (9th Cir. 1999). In Cybernetic the Court held that a security interest in a patent is perfected under the UCC and that there is no federal preemption in the patent statute. In reaching this conclusion, the Court noted that the terms "security interest" and "lien" are not included in any of the federal patent laws. The Court contrasted this absence with other federal statutes that expressly include security interests and liens.

It is important to appreciate that recording security interests with the USPTO has several benefits that should not be overlooked. First, recording a lien in the USPTO is necessary to cut off a "subsequent purchaser or mortgagee for valuable consideration, without notice...." 35 U.S.C. S261. In other words, a bona fide purchaser, or mortgagee, that duly records an interest in a patent with the USPTO may defeat a secured creditor that has not recorded their interest in the USPTO. Second, state and federal law may change, thereby undermining the Cybernetic holding. Third, Cybernetic is only controlling precedent in the 9th Circuit. Fourth, recordation with the USPTO puts potential purchasers of the patent on notice of the prior security interest of the creditor. Lastly, a multiple-filing approach reduces the number of arguments that may be raised by potential claimants.

Another issue commonly overlooked is that of maintenance payments. Utility patents have maintenance payments that must be made at 3.5, 7.5, and 11.5 years after the date of issuance. The patents become public domain, and therefore worthless as collateral, if the maintenance fees are not paid. Fortunately, the USPTO accepts maintenance payments up to six months late for a modest fee, and up to two years late, provided such missed payment was unintentional, for a larger fee.


As with patents, the general consensus is that perfection of a security interest in a trademark is accomplished under the UCC and does not require a filing with the USPTO. However, recording a lien with the USPTO may be necessary to cut off rights of "subsequent purchasers for value without notice" 15 U.S.C. S1060. Additionally, recordation with the USPTO puts potential purchasers of the business on notice of the prior security interest of the creditor.

Creditors should also keep in mind that a trademark should only be assigned together with its associated goodwill. Assignments of the trademark alone, separate from the goodwill, are invalid and may threaten the survival of the trademark itself. Therefore, security interests in trademarks must also grant a security interest in the goodwill. Further, additional issues, beyond the scope of this article, surround transactions that involve "intent to use" marks.

Generally, one should avoid an outright assignment of a trademark, but rather seek a security agreement that provides a security interest in the mark and reserves the right to file an assignment upon the enforcement of the security agreement. This often involves a pre-signed undated form of assignment, to remain with the lender unless default occurs. Additionally, creditors must take proper steps to ensure that the required renewals are made to keep the mark alive.


Perfection of a security interest in a registered copyright is provided by recording a lien, or "copyright mortgage," in the Copyright Office. Numerous cases have held that the federal Copyright Act is one of the few federal laws relating to intellectual property that preempts state law governing secured transactions. The copyright mortgage should generally cover a security interest in the copyright AND all receivables and intangibles related to the copyright. As such, creditors should also file a UCC financing statement for the receivables and intangibles. There are several additional considerations when the copyright involves software, however, such considerations are beyond the scope of this article.

The method of perfection of a security interest in unregistered copyrights has not been as clear as that for registered copyrights. However, the U.S. Ninth Circuit Court of Appeals recently found that security interests in unregistered copyrights are to be perfected by the filing of traditional financing statements in accordance with state law, in In re World Auxiliary Power Co., 303 F. 3d 1120 (9th Cir.). Perhaps more importantly, the court suggested that it is the creditors responsibility to monitor whether the unregistered work becomes registered and to then take appropriate action to perfect. Therefore, prudent creditors should require borrowers to disclose copyright registrations via loan covenants and monitoring procedures, or require that all copyrightable work be registered.


Perfecting security interests in accordance with state law AND recording such interests with the USPTO, or Library of Congress, is the conservative starting point in providing creditors with the maximum amount of protection from debtors-in-possession and bankruptcy trustees. Further, creditors must take proper steps to ensure that a debtor's intellectual property is preserved, including monitoring ongoing payments and changes in the status of the intellectual property.

© 2006 Gallagher & Dawsey Co., L.P.A. - Cincinnati, Columbus, Dayton, Ohio

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