- Taking Security Interests in Intellectual Property
- May 5, 2003
- Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
You've been asked to loan $1,000,000 dollars to a company, whose sole collateral is its patents, trademarks, and copyrights, which are said to be valued at tens of millions or more. Should you do it? How do you do it? How can you best protect yourself and those patents, trademarks, and copyrights?
Intellectual property (IP) can basically be broken down into three main areas: copyrights, patents, and trademarks. In the eyes of the law, IP is essentially the same type of property as your sofa or your car (i.e., any personal property except real estate). As IP continues to grow in importance, owners are increasingly using its power as an "intangible asset" to obtain credit.
In turn, lenders are increasingly taking an interest in IP assets to secure repayment of credit extended to the IP owner. A "security interest" of this type allows a lender to foreclose on IP assets if the owner defaults on the loan, making the IP assets the property of the lender. In order to "perfect" this interest, however, the law requires the lender to file ("record") its security interest with the proper office to have priority in repayment or risk losing the security interest. Seems easy enough, doesn't it? Unfortunately, the law surrounding perfection of security interests in IP is not well settled and can be confusing.
Where should a lender file to perfect the IP security interest? The answer to this question is difficult, because federal and state law control different aspects of IP security interests. Moreover, the two bodies of law can overlap, or at times leave gaps, regarding the filing of IP security interests. This article will address copyrights, patents, and trademarks below in an attempt to address the question.
Since copyrights are a creature of federal law, it is federal law that controls the perfection of their security interests and establishes the transfer of ownership rules. The law provides a filing process that requires filing at the Copyright Office to provide notice of a security interest or transfer of ownership. Sounds pretty cut and dried but be careful - there is an argument that unregistered copyrights are not covered by federal law. Further, there are unique issues such as whether a security interest in the royalties derived from a copyright are controlled by federal law. Therefore, listed below are some important notes and preferred actions.
Remember that perfecting a security interest in a copyright is not the same as perfecting a security interest in a patent or trademark.
Federal law allows for the transfer of any copyright ownership or other document pertaining to a copyright, such as a license or a security interest, to be recorded in the Copyright Office. The filing of a document describing such a transfer is intended to provide the world with notice of the facts stated in the document.
Therefore, as a general rule, if you were going to grant a security interest with copyrights as collateral, you may want to consider first filing in the Copyright Office to perfect the security interest and to protect yourself against someone claiming ownership subsequent to the security interest. Then file in a state office (typically the state where the debtor resides) to ensure protection against any unique issues concerning security interests not addressed by federal law.
While the laws of each state can affect the ownership of "inventions," it is typically federal law that controls the ownership of patents, patent applications, and legal interests (as well as the transfers of such ownership). Federal law does not, however, provide for the filing of non-ownership interests such as liens and security interests. [A lien is defined as a claim, encumbrance, or charge on property for payment of a debt.]
According to U.S. Patent and Trademark Office (PTO) policy, the filing of non-ownership interests in patents in the PTO is permitted but not required. Therefore, security interests in patents are subject to state law. Here are some preferred approaches for security interests in patents.
Federal law states that if Moe tries to transfer ownership in a patent to Larry, after he has already transferred ownership to Curly, then the transfer of ownership to Larry is good if Larry had no notice of Curly's ownership. In order to provide Larry with effective notice, the transfer to Curly must be filed in the PTO within three months from the date of transfer to Curly or before the date of the transfer to Larry.
Since the federal law does not include the terms "security interest" or "lien," courts have held that state law regulates their perfection. Even though the Patent Office permits parties to record such things as "security agreements," the filing of such non-ownership interests are merely permitted, and not required. Nor would the Patent Office ever be called upon to resolve a dispute regarding such interests. Instead, courts have concluded that state law ultimately controls such interests.
Therefore, if you plan to take a security interest in a patent, a general guideline would be to first file in the PTO, to prevent the patent owner from transferring ownership in the patent free of the security interest, and then file in your state office to protect your security interests.
Please take note that this article only concerns federally registered marks (not state registered marks or unregistered or common law marks). Federal law controls the transfer of ownership of federally registered trademarks similar to the filing provisions for patents. Thus, state law also controls security interests in trademarks.
Therefore, as a general rule, if a lender wants to protect a security interest in a trademark of a debtor, he should first file in the PTO to ensure protection against a transfer of ownership to a later purchaser, and second in a state office to perfect the security interest.
Bottom line: if you are the owner of any IP, check with your attorney to be sure you have the proper assignments in place and recorded. If you hope to create a security interest in someone else's IP, your attorney should ensure that you have properly recorded that interest in the proper location and manner.