Creating, Perfecting, and Enforcing Security Interests in Intellectual Property

• Author: Scott J. Lebson
• Profession: Ladas & Parry LLP
• Pages: 103-120

C06 09/02/2011 12:43:17 Page 103

CHAPTER 6

Creating, Perfecting, and

Enforcing Security Interests

in Intellectual Property

Scott J. Lebson

Ladas & Parry LLP

In November 2006, Ford Motor Company was featured prominently in the busi-

ness sections of many major newspapers and financial media outlets for offer-

ing nearly all its domestic assets as collateral in exchange for US$18 billion in

secured loans.

1

Among the key assets included in this refinancing were all of

Ford’s patent and trademark rights. Foreseeing difficult times ahead, Ford strate-

gically leveraged the full value of its intellectual property (IP) rights as part of the

overall collateral. The resultant liquidity ultimately allowed Ford to weather the

height of the global economic recession and become the only major U.S. car com-

pany to avoid declaring bankruptcy in 2009.

2

Ford CEO Alan Mullaly stated, ‘‘Dur-

ing the worst economic recession in 30 or 40 years, because of the strength of the

plan we put in place a few years ago, we were not only able to survive but also to

create a foundation that is delivering now profitable growth.’’

3

Undoubtedly, the

Ford name and technology were critical components of this successful refinanc-

ing strategy.

TheFordexampleisindicativeofhowfarIPhasevolvedinnotjustthepro-

tection of inventions, brands, and other intangible assets, but as a dynamic and

dominating factor in commercial transactions. In fact, it could be argued that the

driving force behind a majority of mergers and acquisitions completed during the

last two decades has been the acquirer’s desire to obtain the target’s IP assets.

Lenders

4

and other professionals in the investment community have come to rec-

ognize that a company’s IP may be its most valuable asset. Secured transactions

5

are an ideal method in which to capture the true value of IP rights. This chapter

will discuss the creation, perfection, and enforcement of security interests in the

United States and worldwide.

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U.S. Securitization of Intellectual Property

Both in the United States and in most other countries, ther e are three separate and

distinct legal components that must be taken into account during the securitization

process. These three components are:

1. Creation

2. Perfection

3. Enforcement/release

Source of Law: Application of Uniform Commercial Code Article 9

6

Most IP rights created in the United States, in particular, patents, trademarks, and copy-

rights, are creatures of federal law, deriving from powers granted by the U.S. Constitu-

tion or federallegislation.

7

However, thecreation of a security interest inIP is governed

by the law of the individual states, which is typically set forth in that state’s principal

commercial statutory framework known as the Uniform Commercial Code (UCC). Arti-

cle 9 of the UCC, which governs secured transactions, explicitly provides that it applies

to any transaction, regardless of its form,that creates a security interestin personal prop-

erty.

8

More specifically, Article 9 of the UCC governs security interests in ‘‘general intan-

gibles,’’

9

and general intangibles are considered personal property for purposes of UCC

interpretation.

10

It is important to note that there is no specific mention of patents,

trademarks, and copyrights in Section 9-102. However, upon a more in-depth review

of this section, the Official Comment utilizes the catch-all term ‘‘intellectual property’’

as an example of a general intangible,

11

and it is well settled that patents, trademarks,

and copyrights fall within the definition of intellectual property.

12

Federal versus State Law: When Does Federal Law IP Law Trump State Law

As previously mentioned, the law with respect to the creation of security interests in

IP is governed exclusively by state law and is fairly uniform across the fifty states

under their respective versions of the UCC.

13

However, in terms of perfecting (i.e.,

filing and recording) a security interest in IP, state law does not exclusively control.

14

Depending on the type of IP being securitized, preemption by federal law could be

encountered when secured parties are seeking to perfect their liens so as to obtain

priority and make certain their rights are protected and enforceable if foreclosure is

subsequently necessary. It is critical for borrowers, lenders/secured parties, and their

respective counsel to be aware of some potential pitfalls that currently exist when

securitizing IP in the United States.

Section 9-109(c)(1) of the UCC states:

This article does not apply to the extent that: a statute, regulation or treaty of the

United States preempts this article.

15

For IP rights that are governed exclusivelybystatelaw,suchascommon-law

trademarks used in intrastate comm erce and trade secrets, Article 9 is c lear that no

federal rules need to be followed or federa l filings made. The creation, perfection ,

104 Intellectual Property Operations and Implementation