In this challenging economy, intellectual property rights are increasingly valuable assets. As sales and profits struggle, companies are taking more steps to promote their brands and preserve their intellectual property rights in hopes of improving their position in the marketplace upon recovery. Likewise, many companies find themselves leveraging the value of their intellectual property and the strength of their exclusive rights as collateral on much-needed loans.
When taking intellectual property assets as collateral, lenders should be aware of issues specific to perfecting security interests in patents, trademarks, copyrights, and domain names. The Official Comments to Uniform Commercial Code § 9-102 include intellectual property within the definition of “general intangibles.” Generally, a lender’s security in general intangibles is perfected by the filing of a UCC-1 financing statement in the state where the borrower’s principal place of business is located. It should be noted, however, that UCC § 9-311 provides an exception when the intellectual property rights are governed by federal statutes, regulations, or treaties. In such a case, the proscribed federal procedures take precedence.
Courts have noted that the language of the federal patent statute explicitly provides for protection against subsequent purchasers or mortgagees, but appears to leave open the issue of protection against lien creditors, as lien creditors hold a security interest, not title to the property. Accordingly, a bona fide purchaser defense is most likely available to a subsequent purchaser or mortgagee against any claim that is not recorded at the United States Patent and Trademark Office (“USPTO”).
The best method for perfecting a security interest in patents is generally to:
- record the security interest with the USPTO to perfect against subsequent purchasers for value; and
- file a UCC-1 financing statement with the state to protect that security interest against future lien creditors.
Trademarks and Service Marks
There are particular limitations on trademark or service mark transfers which are of concern when taking a security interest in a mark. Section 1060 of the Lanham Act (15 USC § 1060) provides:
A registered mark or a mark for which an application to register has been filed shall be assignable with the good will of the business in which the mark is used, or with that part of the good will of the business connected with the use of and symbolized by the mark.
Trademarks and service marks cannot exist separate and apart from the ongoing business with which they have become associated. Therefore, any assignment which has the effect of transferring a mark apart from the associated good will is invalid. This stems from trademark law’s consumer protection origins, with the situation to be avoided being customer deception resulting from abrupt changes in the nature and quality of the goods or services after assignment of the mark. Lenders should keep in mind that a security interest recorded in a trademark with the USPTO should also grant a security interest in the good will.
Trademarks are governed by both state and federal regulations. In addition to a UCC filing, a lender should register its security interest in a federally registered mark (or in an application for federal registration of a mark) with the USPTO. The federal trademark statute does not contain any statutory provision for the registration, recordation, or filing of any instrument or document asserting a security interest in a mark or application for registration of a mark.
The best method for perfecting a security interest in a trademark is generally to:
- file a UCC-1 financing statement with the state for unregistered or state registered marks;
- record the security interest in a state registered mark with the state registration authority if it accepts such filings;
- file a UCC-1 financing statement with the state for federally registered marks; and
- record the security interest in a federally registered mark in the USPTO.
Copyrights, in general, protect original works of authorship fixed in any tangible medium of expression and are governed by federal law. To perfect a security interest in a registered copyright, it must be recorded at the Copyright Office. The Copyright Act establishes a uniform method for recording security interests in copyrights and avoids the practical difficulties of determining and enforcing an author’s rights under differing state law. Therefore, the UCC step-back provision applies and federal law preempts state law in this area. A security interest in unregistered copyrights is properly perfected by filing UCC financing statements, but courts have suggested that it is the creditor’s responsibility to monitor whether the unregistered work becomes registered and to then take appropriate action to perfect.
The method for perfecting a security interest in a copyright is generally to:
- record in the US Copyright Office the security interest in a registered copyright; and
- file a UCC-1 financing statement with the state for unregistered copyright interests (being sure to register with the US Copyright Office should the copyright later be registered).
The best method for perfecting a security interest in a domain name is to file a UCC-1 financing statement setting forth the domain names to be used as collateral. There is a split in both legal authority and among legal scholars and practitioners, however, as to whether domain names are in fact a type of “property.” Many argue that a domain name is not property and that the registrant of a domain name receives only the conditional contractual right to the exclusive association of the registered domain name for the term of the registrations. The registrant does not, through its contract with the registry, obtain any rights against any other person other than the consequent exclusivity resulting from the fact that an identical domain name cannot be used during the term of registration. The legal status of domain names has been characterized by analogy to that of telephone numbers.
On the other hand, The Anticybersquatting Consumer Protection Act (ACPA) authorizes in rem civil action against a domain name, suggesting that a domain name is a form of intangible property, especially since in rem actions are brought specifically against property. Cases decided under the ACPA have held that Congress intended for domain names to be treated as property, at least with respect to the ACPA. Further, domain names have been treated as property in the “buying”, “selling” and transfer of domain names and by courts addressing disputes regarding the same. Not surprisingly, domain names have routinely been made subject to security interests created and perfected under the UCC. To date, there have been no statutes, regulations, or case law to suggest that the creation and perfection of security interests in domain names cannot be achieved under the UCC rules set forth for general intangibles.
It is important to note that registrars have exhibited a reluctance to accept the authority of a security interest recording without a court order or without the borrower registrant’s written agreement to transfer the domain. When possible, it is best for lenders to secure the borrower’s written agreement to transfer the domain in advance, with the condition that the agreement will not be presented to the registrar except upon default.