"Perfecting" Security Interests in United States Patents, Trademarks and Copyrights

by White & Case LLP
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Many financing transactions, such as loans or securitizations, involve businesses that are focused on or have some material amount of intellectual property ("IP"). We often receive questions about the IP security interest process which has become confusing due to competing bodies of federal and state law and various judicial decisions. This post provides a general summary of the law and some best practices.

In making a secured loan, a lender will customarily take a security interest over some or all of the borrower’s United States IP assets as collateral against repayment of the loan and the borrower’s compliance with its obligations under the loan agreement and related security documentation. Security interests over United States IP assets are created and attached in the same way as those over other personal property, but there are some important considerations in how United States IP security interests are procured, or "perfected", by lenders. The law on this process at times can be confusing. As a result, the best practice in order to perfect a security interest in US IP is for a secured creditor to (i) file a UCC-1 financing statement with the state in which the debtor has its place of business or its executive office if it has more than one place of business, and (ii) record a related short-form IP security agreement or confirmatory document with the United States Patent and Trademark office ("USPTO") and/or the United States Copyright Office ("USCO"), as applicable.

Governing Law
Article 9 of the Uniform Commercial Code ("UCC") governs any transaction that creates a security interest in personal property.1 All states in the U.S., and the District of Columbia, have adopted Article 9 of the UCC.2 Article 9 of the UCC governs security interests in "general intangibles," which are considered personal property.3 Although trademarks, patents, and copyrights are not explicitly in the definition of "general intangible," the Official Comment uses the catch-all term "intellectual property" as an example of a "general intangible."4 Under the UCC, perfection generally requires the filing of the UCC-1 statement with the Secretary of State of the state where the debtor/borrower is located.5 The UCC-1 statement filed need not be the transaction document creating the security interest, but must contain basic information about the parties and a description of the type of collateral.6

Article 9, however, does not apply "to the extent that a statute, regulation, or treaty of the United States preempts this article."7 A short-form IP security agreement or other confirmatory document should be filed in cases where Article 9 is preempted or if the lender seeks to record a security interest with a federal agency such as the USPTO or USCO. Such agreement should (i) specifically identify each IP asset that the security interest applies to, and (ii) be complete on its own terms. In addition, because recordation with the USPTO or USCO is a public disclosure of the recorded document, it is best practice to file either a short-form IP security agreement or some form of confirmatory security interest grant to avoid complete public disclosure of the transaction’s principal documents.

In addition to the law discussed in this post, applicable foreign law should be consulted in determining how to perfect security interests in cases where an American company holds foreign IP or a foreign company holds U.S. IP.

Patents
The federal Patent Act does not address perfecting security interests.8 Therefore, Article 9 of the UCC should govern perfection of security interests over patents and patent applications.9 To perfect a security interest in a patent, the party should file the UCC-1 financing statement.10 The lender, however, should also file a short-form IP security agreement with the USPTO to provide protection against and serve as notice to subsequent bona fide purchasers or mortgagees of the patent who search the USPTO records and take such patent subject to the existing security interest. To be considered timely, the filing of the IP security agreement with the USPTO must be within three months from its date or before the date of a subsequent purchase or mortgage.11 If the lender does not timely file a short-form IP security agreement providing notice of its security interest, a subsequent purchaser or mortgagee of the affected patent will not have notice of the security interest, and this may impact the effectiveness of the security interest. The security agreement should have an expansive definition of patents that includes provisional and non-provisional applications, issued patents including those based on continuation, continuation-in-part, divisional and substitute applications, patents resulting from a reissue or reexamination proceeding, and any foreign equivalents and improvements thereof. It is further recommended that such drafting includes claims for past and future infringements of the secured patents.

Trademarks
Federally registered trademarks and trademark applications are governed by the Lanham Act.12 Courts have consistently reached the conclusion that a state filing alone is sufficient to perfect a security interest in trademarks because the Lanham Act only governs the recordation of assignments and is silent regarding security interests.13 Since Article 9 of the UCC is not preempted, it governs the perfection of security interests in all trademarks, whether registered or unregistered.14

Like with patents, a party should file the UCC-1 financing statement, and it is best practice to also file short-form IP security agreements with the USPTO to ensure notice to subsequent bona fide purchasers and mortgagees who would take the property subject to such lien. To be considered timely, the filing of the short-form IP security agreement with the USPTO must be within three months of its date or before the date of a subsequent purchase.15 A security agreement should have an expansive definition of trademarks that includes any registration or application for registration of trademarks and service marks, unregistered trademarks and service marks, trade dress, logos, designs, fictitious business names, any business identifiers and any other indicia of origin. As with patents, the drafting should capture claims for past and future infringements of the secured trademarks. The security agreement should also define the trademarks to include the goodwill of the business with which the trademarks are associated because a trademark cannot be sold or assigned apart from the goodwill it symbolizes.16

Copyrights
The Copyright Act preempts Article 9 of the UCC regarding perfection of a security interest in registered copyrights and pending copyright applications.17 To perfect a security interest in registered copyrights and pending copyright applications, the short-form IP security agreement must be filed with the USCO.18 The Copyright Act generally awards priority to the first executed transfer over the first recorded transfer.19 Under the Copyright Act, a "transfer" of copyright ownership is defined to include a "hypothecation of a copyright," and "hypothecation" includes "a pledge of property as security or collateral for a debt."20 The transfer, however, must be recorded within one month after execution of the transfer agreement (two months if the agreement is executed outside of the U.S.), or before the recordation of a later transfer in order to ensure priority over such later transfers.21

Regarding unregistered copyrights, however, it is not as clear what law governs security interests. The leading appellate decision holds that there is no federal preemption of state law with respect to security interests in unregistered copyrights.22

A security agreement should have an expansive definition of copyrights that includes copyright rights to any works of authorship or other copyrightable subject matter, copyright registrations, applications for copyright registrations, rights of renewal and unregistered copyrights as well as claims for past and future infringements.

Admittedly, the steps advocated herein go beyond what is legally required to perfect a security interest in certain U.S. IP. They do, however, address potential broader judicial treatment of security interests in a way similar to transfers of IP. While some uncertainty remains in the IP security interest process, these best practices are customary for U.S. IP and represent the best approach available under current U.S. federal and state law.


1 - See UCC § 9-109(a)(1).
2 - See UCC Article 9 Amendments Enacted in 26 States, UNIFORM LAW COMMISSION (May 22, 2012), http://www.uniformlaws.org/NewsDetail.aspx?title=UCC%20Article%209%20Amendments%20Enacted%20in%2026%20States; D.C. Code Ann. § 28:9.
3 - See UCC § 9-102(42).
4 - See UCC § 9-102 cmt. 5(d).
5 - See UCC §§ 9-307; 9-301(1); see also UCC § 9-301 cmt 4. Also, to the extent the borrower/debtor is located outside of the U.S. the filing of the UCC-1 statement should be made in the District of Columbia. See UCC §§ 9-307 cmt. 3.
6 - See UCC § 9-502(a).
7 - See UCC § 9-109(c)(1).
8 - 35 U.S.C. § 1 et seq.
9 -
See In re Cybernetic Servs., Inc., 252 F.3d 1039 (9th Cir. 2001) (holding that the Patent Act does not preempt Article 9).
10 - Id.
11 - 35 U.S.C. § 261.
12 - 15 U.S.C. § 1051 et seq.
13 -
See, e.g., In re TR-3 Industries, 41 B.R. 128 (Bankr. C.D. Cal. 1984); In re 199Z, Inc., 137 B.R. 778 (Bankr. C.D. Cal 1992) (holding that filing with the USPTO was insufficient to perfect a security interest in trademarks).
14 - See Trimarchi v. Together Dev. Corp., 255 B.R. 606 (D. Mass. 2000).
15 - 15 U.S.C. § 1060 (a)(4).
16 - 15 U.S.C. § 1060 (a)(1); see also Money Store v. Harriscorp Fin., Inc., 689 F.2d 666, 676 (7th Cir. 1982).
17 - See In re Peregrine Entm’t, Ltd., 116 B.R. 194 (C.D. Cal. 1990).
18 - Id.
19 - 17 U.S.C. § 205(d).
20 - 17 U.S.C. § 101; see In re Peregrine Entm’t, Ltd., 116 B.R. at 199.
21 - 17 U.S.C. § 205(d).
22 - See In re World Auxiliary Power Co., 303 F.3d 1120, 1128 (9th Cir. 2002).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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