Lars S. Smith, General Intangible or Commercial Tort: Moral Rights and State-based Intellectual Property as Collateral Under U.c.c. Revised Article 9

• Citation: Vol. 22 No. 1
• Publication year: 2011

GENERAL INTANGIBLE OR COMMERCIAL TORT: MORAL RIGHTS AND STATE-BASED INTELLECTUAL PROPERTY AS COLLATERAL UNDER U.C.C. REVISED ARTICLE 9

Lars S. Smith^*

INTRODUCTION

When the American Law Institute and the National Conference of Commissioners on Uniform State Laws adopted Revised Article 9 of the Uniform Commercial Code in 1998,¹they added a new type of collateral that could be used as security-commercial torts.²Prior to the 1998 revision, all tort claims were excluded as a form of security.³However, when drafting Revised Article 9, the drafters included commercial torts as a potential asset in early drafts.⁴

Characterizing certain rights as commercial torts can have important consequences in how a lender will perfect its security interest and whether it can obtain a secured position in intangible rights acquired after the original security interest was granted. In addition, the debtor or trustee in bankruptcy may be able to avoid the effect of a security interest in those assets if the specific rules governing commercial torts were not followed. For example, if a particular trade secret is more properly treated as a commercial tort rather than a general intangible, it is unlikely that the creditor would have a perfected security interest if the trade secret was created after the security interest originally attached.⁵Even if it were a trade secret that arose before attachment of the original security interest, if not specifically listed in the security agreement, the creditor would not have a security interest in the trade secret. This possibility will create a strong incentive for a debtor or trustee in bankruptcy to attempt to recharacterize the collateral as a commercial tort claim to avoid the creditor's security interests in general intangibles.

Under Old Article 9 there was little question that the primary forms of federally protected intellectual property-patents,⁶copyrights,⁷and trademarks⁸-were treated as general intangibles and capable of being used as security.⁹While there was some debate as to the proper process of perfecting such an interest,¹⁰the category of collateral was never in dispute.¹¹

While the law was clear on the categories for such types of intellectual property, several types of intellectual property are either only protected or defined under state law, or are subject to minimal federal protection. These intellectual property rights include trade secrets, the right of publicity, rights against unfair competition, and moral rights.¹²Many of these forms of intangible rights derive from tort law. For example, misappropriation of trade secrets was included in the first Restatement of Torts, and the definition of trade secrets from that Restatement is still relied upon by courts to this day.¹³

To the extent that such intangible rights were defined solely as a right arising under tort law, they could not be used as security under Old Article 9.¹⁴

If a court was willing to protect such intangible rights under Old Article 9, the only category these rights could fit in to was "general intangible," which was the catchall category under Old Article 9.¹⁵For example, trade secrets have been held to be general intangibles and thus covered by Old Article 9.¹⁶

Since Revised Article 9 now includes "commercial torts" as a new category of collateral, more intangible rights defined as torts can be used as collateral in a commercial transaction. It is therefore appropriate to reevaluate whether certain intellectual property rights, which may have been treated as general intangibles or excluded entirely under Old Article 9, should now be categorized as commercial torts under Revised Article 9. For example, a trade secret may be seen as merely a tort protecting certain special relationships, such as between an employer and employee. If so, the right is more akin to a tort and not a general intangible.

This Article does two things. First, it explores the extent to which forms of intellectual property that were not able to be used as security under Old Article

9 are now covered as commercial torts. Second, the Article considers whether forms of intellectual property, which might have been characterized as general intangibles under Old Article 9, are more properly characterized as commercial torts under Revised Article 9.

I. GENERAL INTANGIBLES V. COMMERCIAL TORTS

UNDER REVISED ARTICLE 9

A. General Scope of Article 9¹⁷

The purpose of Article 9 of the Uniform Commercial Code is to "provide[] a comprehensive scheme for the regulation of security interests in personal property and fixtures."¹⁸Article 9 does not govern all liens created in personal property, but rather, is generally limited to consensual¹⁹security interests²⁰in personal property created by debtors for the benefit of creditors to secure repayment of loans.²¹Thus, the creation of a nonconsensual judgment lien in personal property is governed by law other than Article 9.²²Nevertheless, to the extent that liens created outside of Article 9 affect the rights of secured parties in such personal property, such as judgment liens, the relative rights of the parties will generally be governed by Article 9.²³

Personal property subject to a security interest is "collateral" under Article

9.²⁴When a creditor has been granted a security interest in such collateral, the creditor becomes a secured party under Article 9.²⁵The most common method for a creditor to become a secured party is for the debtor to grant a security interest in the debtor's personal property by way of a written security agreement that describes the collateral.²⁶Once this is done, the security interest becomes enforceable against the debtor and attaches to the collateral.²⁷

At this point, the secured party has ensured that, as between the secured party and the debtor,²⁸the secured party will be able to seek repayment of the debt by proceeding against the collateral.²⁹

However, to help ensure that the secured party's security interest has priority over third parties, such as other secured parties, judgment lien creditors, and purchasers, the secured party needs to "perfect" its interest.³⁰

The essence of perfection under Article 9 is providing public notice to other creditors of the existence of the secured party's security interest in the collateral.³¹To perfect a security interest, the security interest must have attached, and the secured party must have taken the steps necessary to perfect.³²In most instances, a secured party will perfect its interest by filing a financing statement describing the collateral.³³The financing statement is a form³⁴that provides basic information about the possible existence of a security interest by including information such as the debtor's name, a description of the collateral, and the name of the secured party.³⁵Thus, in the typical secured transaction, the debtor will have executed a security agreement that describes the collateral and grants a security interest in that collateral to a secured party, the creditor. Additionally, the secured party will have filed a financing statement with the central filing office for the state where the debtor is located.³⁶The creditor then becomes a perfected secured party.

Once a creditor has taken these steps to become a perfected secured party, its right to proceeds resulting from a disposition of the collateral after a default³⁷will be determined by the creditor's relative priority with respect to the collateral. In general, priority is determined by the first to file rule-that is, a secured party will have greater rights to enforce its security interest in the collateral if it filed its financing statement before other creditors either filed their own financing statements³⁸or otherwise obtained their liens on the same collateral.³⁹

B. Characterizing the Collateral

The preceding section describes the basic structure of obtaining and perfecting a security interest in collateral under Article 9. One stated purpose of the adoption of Article 9 was to unify the varied methods of creating security interests in different forms of personal property into a single system.⁴⁰

Even so, Article 9 retains distinctions among types of personal property for many purposes. In particular, the requirements for perfection depend upon the particular type of collateral in question. For example, certain types of collateral can only be perfected by filing,⁴¹whereas possession is the only permitted method for others.⁴²Even as to those forms of collateral that may be perfected by filing, different requirements may apply.⁴³

Revised Article 9 has an extensive definitional section that defines the types of collateral it covers.⁴⁴To apply the correct rules to a form of intellectual property, one must determine the type of collateral, which includes intellectual property. To do so, one must distinguish those types of intellectual property that are properly categorized as general intangibles from those that should be categorized as commercial torts under Revised Article 9. This section discusses the definitions relevant to determining the proper characterization of intellectual property rights as collateral.

1. Definition of Intellectual Property

Intellectual property is not specifically defined under Article 9. The comments explaining the definition of "general intangibles" mention that "various categories of intellectual property" are examples of general intangibles,⁴⁵but then fail to describe which categories are included. By using the phrase "various categories," one may reasonably conclude that not all forms of intellectual property are to be characterized as general intangibles. Thus, Article 9 must look to other law for the definition of intellectual property.

"Intellectual Property" is a broad concept, often defined to include the following types of rights: patents, trademarks, copyrights, trade secrets, moral rights, rights of publicity, and rights against unfair competition.⁴⁶Thus, it is commonly accepted that the term "intellectual...