Perfection of security interests in intellectual property can be a trap for the unwary. In general, secured parties are often confused about where to file in order to perfect a security interest. This is not surprising as the perfection regime differs depending on the type of intellectual property. As a starting point, one should determine the general rule for the main classes of intellectual property: trademarks, patents and copyrights.
However, making this determination is not always as simple as one would hope. All three types of intellectual property are governed at least in part by federal law. However, as federal law does not completely govern each, one must determine the extent federal law pre-empts the Uniform Commercial Code system for perfecting security interests for each class of property.
Perfection of a security interest in a trademark, whether it is a common law mark, state-registered mark or federally registered mark, is accomplished pursuant to the UCC because the Lanham Act, which governs federally registered trademarks, does not specifically address perfection of security interests. See In re Chattanooga Choo-Choo Co., 98 B. R. 792 (E.D. Tenn. 1989); In re Trimarchi v. Together Dev. Corp., 255 B.R. 606 (D. Mass. 2000). While registration with the United States Patent and Trademark Office will not perfect an interest even in a federally registered trademark, it is advisable to record with the USPTO in addition to the appropriate UCC filing. This is because while the Lanham Act does not address perfection, it does address assignments. 15 U.S.C. § 1060. Because the Lanham Act addresses assignments, it is prudent to also file with the USPTO to protect against subsequent purchasers.
Much like the Lanham Act, Section 261 of the Patent Act (35 U.S.C. § 261) establishes a federal regime for protecting patent rights. Just like the Lanham Act, however, the Patent Act addresses only “assignment, grant, or conveyances” of Patents, not perfection of security interests. As a result, a UCC filing is necessary to perfect a security interest in a Patent. See In re Cybernetic Services, Inc., 252 F.3d 1039 (9th Cir. 2001); In re Tower Tech, Inc., 67 Fed. Appx. 521 (10th Cir. 2003). However, like trademarks, the Patent Act does cover assignments and transfers. Therefore, a bare UCC filing will not protect against future bona fide purchasers if the secured party did not also file in the USPTO. See Rhone-Poulence Agro, S.A. v. Dekalb Genetics Corp., 284 F.3d 1323 (Fed. Cir. 2002).
- Federally Registered Copyrights
Unlike the Lanham Act and the Patent Act, the Copyright Act specifically provides a federal perfection scheme for federally registered copyrights. See Copyright Act, 17 U.S.C. § 205. Section 101 of the Copyright Act defines a transfer as an assignment, mortgage, exclusive license or any other conveyance or alienation of a copyright. As a result, the Copyright Act preempts the UCC where the Lanham Act and Patent Act do not. See In re World Auxiliary Power Co., 303 F. 3d 1120 (9th Cir. 2002). Thus, a UCC filing does not perfect a security interest in a federally registered copyright. See In re Peregrine Entertainment, Ltd., 116 B. R. 194 (C.D. Cal. 1990); In re AEG Acquisition Corp., 127 B. R. 34 (C.D. Cal. 1991), aff’d 161 B.R. 50 (9th Cir. 1993). A filing with the Copyright Office is the proper way to perfect a secured interest in a copyright.
However, counsel for a secured creditor taking an interest in a Registered Copyright would do well to also make a UCC filing. This is because what is a right under a copyright that is perfected by filing with the Copyright Office is not always clear. For example, an assignment of royalty income from a copyright has been held not to be one that requires recordation in the Copyright Office. See MCEG Sterling, Inc. v Phillips Nizer Benjamin Krim & Ballon, 646 N.Y. Supp. 2d 778 (Sup. Ct. 1996). In addition, if one has an interest in the copyright of a film, how much would that be worth without a corresponding security interest in the actual negative and positive prints of the film? Thus, it seems that any security interest in a Registered Copyright, while perfected by filing with the Copyright Office, should also be accompanied by UCC filings to ensure that all rights associated with the copyrighted work are subject to the security interest.
- Unregistered Copyrights
Copyrights exist automatically upon the creation of the work, whether the work is registered with the Copyright Office or not. What if the lender’s collateral consists of unregistered copyrights? How is that interest perfected? The Copyright Act would not seem to apply since it is not a registered Copyright. In fact, how would one file a notice of a security interest at the Copyright Office for a copyright that the office has no record of?
At least some courts have held that a security interest in an unregistered copyright is perfected by a UCC filing. World Auxiliary Power, 303 F.3d at 1128. However, other courts have held that perfection of an unregistered copyright is only accomplished by filing with the Copyright Office. AEG Acquisition Corp., 127 B.R. 34; In re Avalon Software, Inc., 209 B.R. 517 (D. Ariz. 1997). Under AEG and Avelon, it seems the only way a security interest in an unregistered copyright can be perfected is to first register the copyright with the Copyright Office and then file a notice of the interest.
This outcome is unsatisfying on many levels. First, it seems the World Auxiliary court has a better handle on federal preemption. Where the Copyright Act is silent with respect to unregistered copyrights, the UCC regime should not be pre-empted, and a UCC filing should be sufficient to perfect a security interest in an unregistered copyright. Moreover, there are many practical problems that are raised by the approach of requiring registration to perfect an interest in a copyright. For example, copyrights attach to many works in progress, such as films and computer code. Following the AEG and Avalon approach would seem to require a secured party to re-file a notice with the Copyright Office with every change to the work in progress. Such a result is simply impracticable.
While there is competing case law on the issue, the more sound view seems to be that a UCC filing alone should be sufficient to perfect an interest in an unregistered mark. Of course, if the secured party can require it, and it is otherwise feasible, the secured party should require the unregistered mark to be registered and filed with the Copyright Office. However, in many cases this simply is not possible and the UCC filing, with its uncertainties, is the only route available.
As noted above, the soundest way to ensure that a security interest in an unregistered copyright is perfected is for the secured party to require that the copyright be registered with the Copyright Office and then file the appropriate notice with the office. However, this is not always practicable with many types of collateral, especially works in progress. In this situation, where there is an unregistered copyright that is not going to be registered, the secured party is left to make the appropriate UCC filing. In this circumstance the secured party would be well served to require the borrower to covenant that it will not register the copyright without immediately notifying the secured party.
In short, in an area where the case law does not always provide clear guidance, the secured party does well to belt and suspender its perfection whenever possible.
Source: Tennessee Bankruptcy Newsletter