Brought to you by LACBA’S Remedies Section
November, 2006 • Volume 2, Number 1




How To Secure An Interest In Intellectual Property
By Karin Peterka, Esq. and Richard P. Ormond, Esq.
      Buchalter Nemer, P. C.

It is common practice for lenders to extend credit to their customers that require their customers to use their Intellectual Property (such as copyrighted material, trademarks or patents) as collateral.
In order to properly foreclose on that collateral and enforce its priority position, a lender needs to ensure that it has properly perfected its security interest in the borrowers intellectual property.  If the security interest in the collateral is not properly perfected, the lender is relegated to the status of an unsecured creditor and may be left without recourse to cover its losses.

Uniform Commercial Code §9102 includes intellectual property within the definition of “general intangibles.”   Generally a lender’s security in general intangibles is perfected by the filing of a UCC-1 financing statement in the state where the borrower’s principal place of business is located.  It should be noted, however, that UCC §9311 provides an exception when the intellectual property rights are governed by federal statutes, regulations, or treaties,  federal procedures take precedence.  Thus, patents, federally protected trademarks and copyrights are ultimately governed by these federal laws and regulations.

Perfecting security interests in patents, trademarks, copyrights, and domain names all have different requirements and to complicate matters, there are inconsistencies in court rulings and regular changes in the applicable law.

Perfecting Security Interest in Trademarks and Service Marks
Trademarks and service marks protect names, symbols, words, designs, slogans, or combinations thereof, used by an entity to identify and distinguish its goods or services from those provided or manufactured by others.  Trademarks are governed by both state and federal regulations but, a lender should register its security in a trademark with the United States Patent and Trademark Office (“USPTO”).

There are many benefits of recording security interests in trademarks with the USPTO.  A USPTO recording may (1) be necessary to cut off rights of subsequent purchasers for value without notice; and (2) put potential purchasers of the borrower on notice of the lender’s security interest.  Finally, lenders should keep in mind that a security interest recorded in a trademark with the USPTO should also grant a security interest in the goodwill.

Perfecting Security Interest in Copyrights
Copyrights, in general, protect original works of authorship fixed in any tangible medium of expression and are governed by federal law.   The Ninth Circuit Court of Appeals held that the only proper method to perfect a security interest in registered copyrights was to record a lien or “copyright mortgage” with the U.S. Copyright Office.  This ruling confirmed the prior ruling of In re Peregrine Entertainment Ltd.116 B.R. 194 (C.D. Cal. 1990) which holds that registered copyrights can only be perfected by recording with the U.S. Copyright Office.  The Peregrine case also held that a security interest in unregistered copyrights was properly perfected by filing UCC financing statements.  But, the Court suggested that it is the creditor’s responsibility to monitor whether the unregistered work becomes registered and to then take appropriate action to perfect. 

As such, we recommend to our lender clients that, in taking a copyright as security, the borrower be required to register the copyrighted material with the U.S. Copyright Office.  Prudent lenders should require borrower to disclose copyright registrations via loan covenants and monitoring procedures, and require that all copyrightable works be registered.  Finally, we also recommend that, in order for a lender to perfect a security interest in a copyright whose application is pending before the U.S. Copyright Office, that lender also file an appropriate UCC financing statement.

Perfecting Security Interest in Patents
Patents cover inventions of new and useful processes, products or improvements and are governed by federal law.  However, no federal statute governs the registration of a lender’s security interests in a patent.

As a practice, we recommend that our clients record their security interest in a Patent with the USPTO.  Recording a lien in the USPTO is necessary to cut off a subsequent purchaser or mortgagee for valuable consideration without notice.  In other words, a bona fide purchaser, or mortgagee, that duly records an interest in a patent with the USPTO may defeat a secured creditor that has not recorded their interest in the USPTO.  We also recommend that a lender file an appropriate UCC financing statement. 

Tips for Intellectual Property Security Interest Agreements
• Make sure the collateral includes all “now existing and hereafter acquired or created” Intellectual Property, as well as everything associated with the Intellectual Property, i.e., film reels, contract rights, license rights, distribution rights, proceeds and income, right to sue for infringement, goodwill, foreign rights, etc.
• Borrower should have an affirmative duty and obligation to promptly register any newly acquired or created Intellectual Property, and Borrower should be obligated to notify the secured creditor of any such newly acquired or created Intellectual Property, to permit the secured creditor to properly perfect as to the collateral.
• Require Borrower to provide frequent updates to the lender with respect to Intellectual Property.
• Security agreement should allow the secured creditor to effectively exercise its remedies upon default, i.e., the Borrower’s agreement to cooperate, and a power of attorney to permit the secured creditor to assign and register the rights upon foreclosure.
• Borrower should agree to timely file and pay all maintenance fees for patents and renewal fees for trademarks, and should also agree that it will notify the secured creditor of any infringement litigation and will cooperate with the secured creditor in protecting the rights and defending that litigation (at Borrower’s expense).
• Security agreement should include warranties as to the Borrower having good and marketable title, no previous assignments, no prior security interests, and the validity and enforceability of the Intellectual Property.