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
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