As collateral for a loan, lenders are accustomed to obtaining a security interest in the property of the borrower. Such property usually includes tangible assets of the borrower such as real estate, machinery and other physical assets, and may often include intangible assets namely, patents, trademarks and copyrights which collectively are the borrower’s intellectual property.
Under the Uniform Commercial Code (UCC) Article 9, security interests are recorded in the Office of the Secretary of State in the state where the borrower resides; however, this UCC recording may not be sufficient for all intellectual property. To perfect a security interest in copyrights, the security interest should be recorded at the Copyright Office to provide appropriate notice and to perfect the security interest. For patents and trademarks, the UCC filing is usually sufficient to protect the lender, but may not be sufficient with respect to a future transfer of rights by the debtor to an innocent purchaser. The better practice is to record in a timely manner, in addition to a UCC filing, a security interest in patents and trademarks at the U.S. Patent and Trademark Office (PTO). Such recording at the PTO will provide proper notice which will prevent transfer of good title by the debtor to an innocent third party.
After repayment of a loan, it is important to timely record a release of the security interest with the appropriate Secretary of State’s Office, Copyright Office and Patent and Trademark Office, as applicable, to reflect the release in the public record.
Difficulties can arise by failure to timely record a release at the PTO or other applicable agency. Often the lack of a recorded release is discovered much later than the original transaction and at a time when parties may not be available to execute appropriate documents. All documents affecting title should be timely filed in the appropriate agencies to provide a publicly accessible chain of title. If not done in a timely manner, the passage of time can lead to difficulties.
Consider the following scenario: Your company is seeking to acquire another company and you discover that patents of the target company are subject to a security interest held by Town Bank and recorded at the PTO. You learn from officers of the target company that the loan underlying the security interest was paid years ago but nobody paid attention to releasing the security interest at the PTO. So far as the public record at the PTO reveals, a security interest is still in place. Town Bank has gone through several mergers and is now part of Megabank. The security interest still reflected in the PTO public record presents an obstacle to the acquisition being completed and your company counsel requests that the target company clear this up.
What can now be done to remove this obstacle? The following options could be pursued:
- Find an officer of Town Bank willing to now sign an acknowledgment that the security interest was released as shown on attached copies of the loan release.
- If Megabank is willing, file a release signed by Megabank which traces the history back to Town Bank with appropriate documentation showing payment of the loan years ago and release of the security interest by Town Bank.
- File a document from the target company with affidavits and exhibits showing that the loan was previously paid and that the security interest was in fact released by Town Bank years earlier.
The PTO response to such filings can be quite variable and may require subsequent filings of documents and/or affidavits to meet PTO requests. This hassle could have been avoided if a release of security interest had been recorded at the time the release from the bank occurred.
The lesson to be learned is the advisability for timely filing of releases of security interests to avoid problems of correcting record title to patents (and other intellectual property) which can be complicated by the passage of time such as parties disappearing, mergers, people going missing, which can impede or prevent necessary signatures of pertinent parties being obtained.