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WinTech Legal Insight for Start-Up and Established Technology Businesses

Financing with IP Collateral

Posted in Biotechnology, Development & Commercialization of Technology, Nanotechnology, Patent Counseling & Strategies, Technology News & Events, Technology Transactions, Venture Capital, Private Equity and Other Financings

In a recent guest post on the Patently-O blog by Dennis Crouch, http://patentlyo.com/, William Mann, an assistant professor of finance at the Anderson School of Management, UCLA, notes the explosion in USPTO filings that record a creditor’s security interest in a patent.  Secured debt can be a significant source of financing for many technology companies, with the value of their patent portfolio contributing heavily to financing capacity.  Professor Mann’s work (recent paper) reflects the importance of intellectual property as an asset class and increasing efforts by businesses to monetize that asset class.

Given the significance of IP portfolios as collateral it is somewhat surprising to find that frequently lenders fail to secure or properly document interests in the IP.  These failures can lead to damage to or loss of a lender’s priority, and in some circumstances to loss of IP rights held by the borrowers.

A security interest is perfected by filing the right document in the right place.  Perfection of security interests in general is controlled by the Uniform Commercial Code (U.C.C.) as adopted by the states, but ownership of patents, trademarks, and copyrights is controlled by federal law.  The interplay between state and federal law, and the differences between patent, trademark and copyright ownership and recording requirements under federal law, make it important not to miss key elements required.

PATENTS

The Patent Act does not specifically preempt state law regarding security interests.  Case law indicates that U.C.C. filings perfect security interests in patents as to subsequent lien creditors and PTO filings perfect security interests with respect to subsequent purchasers and mortgagees.  Searches for prior interests should be done both in state records and in the USPTO.  Best practice is to file both with the U.C.C. and with the USPTO.  Note also that under the patent statute there is a three month grace period for filing assignments which could lead to a previously perfected state U.C.C. security interest being superseded.  Records searches cannot locate these types of transactions so warranties should be obtained from creditors that no conflicting interests in the patent have been granted.

TRADEMARKS

The federal law controlling trademarks is the Lanham Act.  Searches for prior interests should be done both in state records and in the USPTO.  Like the Patent Act, the Lanham Act does not specifically preempt state law regarding security interests.  Case law indicates that U.C.C. filings perfect security interests in trademarks.  The trademark statute also has a three month grace period for filing assignments which could lead to a previously perfected state U.C.C. security interest being superseded by assignments filed within the grace period.  Best practice is to file the security interest both as a state U.C.C. filing and with the PTO.

Documentation for security interests in trademarks must also account for the requirement under trademark law that “goodwill” associated with a trademark must be included with any assignment or transfer of the trademark.  Transferring, or attempting to transfer a trademark without the associated goodwill is invalid, and may affect or even destroy the value of the trademark.

COPYRIGHTS

The Copyright Act covers more types of transactions, transfers of ownership, than the Patent Act or the Lanham Act.  The recording system under federal law for copyrights provides for recordation of security interests in the Copyright Office and sets up a scheme for priority, and generally is understood to be sufficient to perfect a security interest in a copyright.  Priority under the Copyright Act generally is awarded to the first executed transfer rather than the first recorded transfer as under the U.C.C.  However transfers must be recorded within one month after execution or before a later transfer is recorded, in order to obtain priority.

Note however, that only registered copyrights may be recorded in the Copyright Office.  The Copyright Act does not preempt the U.C.C. for unregistered copyrights which must be perfected under the U.C.C.  If and when such unregistered works become registered, the Copyright Act automatically applies and the security interest must be re-recorded with the U.S. Copyright Office.  A typical handling of unregistered copyrights might be to require the work to be registered, to first file the security interest under the U.C.C while the application is pending, and then to record the security interest with the Copyright Office once the copyright application is finalized.

SUMMARY

Just creating an exhaustive list of intellectual property assets and filing it with the U.C.C. will ordinarily not provide the most complete and effective protection for a security interest and in some circumstances could lead to damaging the collateral itself.  Monetizing IP portfolios is increasingly a focus for technology companies.  In every case, careful analysis of the collateral is important to make sure that the right language is used for documentation, and that the right documents are timely filed in the right place.