The rules for using intellectual property as collateral can be counter-intuitive.
Intellectual property--patents, trade secrets, copyrights, trademarks, and perhaps even domain names--can be your company’s most valuable assets.
A lender often insists on an agreement granting it a security interest in the company's existing intellectual property, and in any after-acquired intellectual property, as collateral to secure repayment.
If there is a default or bankruptcy, a properly secured party will likely get paid before the unsecured creditors. But the security interest must have been properly “perfected.” How to perfect a security interest in the different types of intellectual property is tricky because the requirements are not intuitive and are not uniform.
You might think that the proper procedure would be filing in the United States Patent and Trademark Office (“USPTO”), or in the Copyright Office. But that may or may not be true.
Security interests in most personal property are governed by the Uniform Commercial Code (“UCC”), which has been adopted with minor differences in all states and the District of Columbia. Under the UCC, a “financing statement” (sometimes referred to as a UCC-1) must be filed against the debtor’s name in a state or county office in order to perfect a security interest. It also must adequately describe the collateral, although “all general intangibles now owned or hereafter acquired” is considered a sufficient description.
The question remains: how is a security interest in each type of intellectual property perfected?
Trade secrets are not registered in any federal or state office, so a security interest in a trade secret is perfected only under the UCC.
A patent can be obtained only by a grant from the USPTO. But the Patent Act does not preempt state law when it comes to perfection of a security interest, so a security interest in a patent is perfected only under the UCC.
The federal trademark system exists concurrently with state trademark systems. So a security interest in a trademark (whether or not registered) is perfected only under the UCC.
- A lender’s request for an outright assignment of trademarks with a license back to the debtor is very risky and generally this should NOT be done. Such an arrangement could destroy the trademark because the lender normally is in no position to exercise the required quality control over its debtor/licensee or to prepare and file documents to maintain the trademark registrations. Moreover, intent-to-use applications cannot be assigned except “to a successor to the business” of the applicant.
- Also, a security interest agreement should include “goodwill” such as the means to manufacture the goods or offer the services (e.g., trade secrets, formulas, customer lists), because trademarks cannot be validly assigned “in gross” (without goodwill) if the security interest is levied upon.
A copyright in a work (whether or not registered) is recognized by the federal Copyright Act, which contains comprehensive provisions for recording security interests in registered copyrights and preempts state procedures. So a security interest in a registered copyright is perfected by filing in the Copyright Office.
It has been held that a security interest in unregistered copyrights may be perfected under the UCC. But a later registration of the copyright would inadvertently take this collateral “out of perfection” unless the security interest is recorded in the Copyright Office within one month after the registration.
- A filing in the Copyright Office cannot be made against the debtor’s name, as it can under the UCC, but rather is recorded only against particular works identified by titles or registration numbers. Further, the title as it appears in the Copyright Office records may not be the same as the title under which the work is generally known.
- A filing in the Copyright Office cannot include after-acquired works. Once acquired, they may have to be registered in the Copyright Office so that the security interest can be filed against them there.
- It is not always clear what is, or is not, a “right under copyright.” An assignment of royalty income has been held not to be an assignment of an interest in the copyright, so it should have been recorded under the UCC instead of in the Copyright Office.
There have been conflicting decisions about whether domain names constitute property. But in California and perhaps elsewhere the UCC filing against “general intangibles” would apply to them.
Thus, a UCC filing is effective to perfect a security interest in all forms of intellectual property except for registered copyrights, which require a Copyright Office filing.
A Belt and Suspenders Recommendation
A cautious attorney should always make both the USPTO filing and the UCC filing with regard to registered trademarks and issued patents. If filed in the USPTO within three months of the grant of the security interest, this will cut off any rights claimed by a bona fide purchaser for value.
Similarly, filing the security interest in the Copyright Office as to registered copyrights should be in addition to a UCC filing as to existing unregistered and after-acquired works.
When searching for security interests, always search the relevant federal and state registries.
Beyond the United States
Whether it is possible to perfect a security interest in other countries, and where to perfect it, will vary depending on the country and the intellectual property asset at issue, as well as on whether the debtor has a business presence in the country or just owns intellectual property rights there.
Intellectual property due diligence and perfecting security interests around the world is both complicated and costly, so first determine whether the value of the assets justifies the expense. If it does, then retain local counsel with intellectual property and commercial finance experience.