As our practice bridges the areas of intellectual property, banking law and bankruptcy law, we are often faced with the problem of protecting a buyer, seller, lender, or borrower where intellectual property serves as security for a debt. The problem might arise in the sale of a business where the seller needs to obtain security for a portion of a purchase price which is to be paid over time. The buyer although willing to grant such an interest, needs to be sure that its underlying ownership of the specific property or similar property is not affected where there is no default. Secured lenders and their borrowers face similar problems. Often these problems are first faced in the bankruptcy courts.
All of such parties should have a common interest, namely, a predictable result from a given course of conduct. There are actually two methods for establishing the priority of the secured party, whether this party is a lender or a seller. The first method is to comply with the Uniform Commercial Code’s filing provisions in the particular jurisdiction. The second method is to comply with the filing provisions, if any, afforded by the federal government in the Patent Act, Copyright Law, or the Lanham Act (governing trademarks).
There are three versions of the Uniform Commercial Code’s Article 9 (secured transaction provisions): the original version adopted in the 1960’s, the revised Code adopted in the 1970’s, and the new revision which is now being adopted throughout the country – pending in the New Jersey Legislature. Under any of these versions, patents, copyrights, trademarks, and trade secrets all would be considered “general intangibles”. See the new Section 9-102(42) and Official Comment 5(d). Protection of the secured party’s interest under State law requires, first, that there be a contract granting the security interest (the Security Agreement) and that a Financing Statement in proper form be filed in the State’s filing office, usually that of the Secretary of State. But there are provisions in the Uniform Commercial Code which give effect to alternate perfection of a security interest if it is permitted by Federal law. See, e.g., Section 9-311(a) which in its comments notes as an example, liens on aircraft under 49 U.S.C. §§ 44-107 to 111.
Unfortunately, there is no mention in the official comments whether the Patent Act, Copyright Law or Lanham Act provides such an alternative or even exclusive method of perfection. For answers to that question, we must turn to case law. Unfortunately, the cases are not completely consistent.
With regard to patents, most cases have determined that the filing of a conditional assignment with the Patent Office under 37 C.F.R., § 3456 and Section 261 of the Patent Act is ineffective to perfect a security interest. The sections govern the assignment of a patent in terms of a full or even a conditional transfer of ownership and are not intended to cover the granting of a security interest. See In re Cybernetic Services Inc., 239 B.R. 917, 919-921 (B.A.P. 9th Cir. 1999). Similar rules apply to trademarks. Trimarchi v. Together Development Corp., 255 B.R.606, 610-12 (D. Mass. 2000) (holding that the Lanham Act’s registration provisions do not preempt the state filing of a security interest under the Uniform Commercial Code).
The law governing copyrights yields mixed results. In re Peregrine Entertainment, Ltd., 116 B.R. 194, 198-204 (C.D. Cal. 1990) stands for the proposition that a Uniform Commercial Code filing covering copyrights is ineffective. The security interest must be registered in the Copyright Office. Where, however, the copyright itself is unregistered, the filing to perfect the secured party’s interest would be with the State under the U.C.C. In re World Auxiliary Power Co., 224 B.R. 149, 151-56 (Bankr. N.D. Cal. 1999). The same is true of security interests in service marks. In re Chattanooga Choo-Choo Co., 98 B.R. 792,796 (Bankr. E.D. Tenn. 1989).
All of these issues are compounded when there are claims that the scope of the security taken by a seller or lender includes too much or too little, or whether the proceeds from the sale of particular interests fall within the security. Cross-collateralization sometimes is intended; other times it is asserted unfairly.