The Ninth Circuit Falls Short While Establishing the Proper Perfection Method for Security Interests in Patents in in Re Cybernetic Services

• Publication year: 2001

36 Creighton L. Rev. 669. THE NINTH CIRCUIT FALLS SHORT WHILE ESTABLISHING THE PROPER PERFECTION METHOD FOR SECURITY INTERESTS IN PATENTS IN IN RE CYBERNETIC SERVICES

Creighton Law Review

Vol. 36

INTRODUCTION

When taking a security interest in intellectual property, a secured creditor must determine whether the particular federal statute (such as the Patent Act, the Copyright Act, and the Lanham Act) or, alternatively, Article 9 of the Uniform Commercial Code ("Article 9" or "UCC") controls perfection of that security interest.(fn1) Federal courts have been inconsistent, at best, in interpreting the relationship between intellectual property statutes and the UCC.(fn2) Despite this confusion, lower courts, but until recently not federal circuit courts, have been relatively uniform in deciding that Article 9 controls perfection.(fn3) Those courts have determined that for protection against other secured creditors and lien holders, security interests in patents are properly perfected by filing with the appropriate state office pursuant to the UCC, and not by filing to perfect with the United States Patent and Trademark Office ("PTO") pursuant to the Patent Act.(fn4) Presently, however, because this issue is just now reaching federal courts and because there is presently no absolute rule governing how to perfect a security interest in a patent, the only manner in which a secured creditor can be absolutely certain of protection involves making a dual filing with the PTO and the relevant state filing office, thereby limiting the patent's use as collateral in other secured transactions.(fn5)

Recently, in In re Cybernetic Services,(fn6) the United States Court of Appeals for the Ninth Circuit determined the Patent Act did not expressly require the filing of a security interest in a patent with the PTO; thus, the Ninth Circuit determined that filing pursuant to the UCC was proper to perfect a security interest in a patent.(fn7) In Cybernetic Services, Matsco, Inc. and Matsco Financial Corporation (collectively "Matsco") were given a security interest in all Cybernetic Services' ("Cybernetic") assets, including Cybernetic's patent in a data recorder.(fn8) Matsco perfected the security interest by filing with the California Secretary of State, as required by Article 9.(fn9) Thereafter, Cybernetic Services filed for Chapter 7 bankruptcy, and Matsco sought to foreclose Matsco's interest in the patent pursuant to its security interest.(fn10) The Ninth Circuit concluded that the Patent Act preempted state filing only with respect to ownership interests in patents, but not with respect to security interests in patents.(fn11) The Ninth Circuit further determined that Article 9 required federal filing only when the federal statute in question provided for national filing of security interests and concluded that the Patent Act did not preempt Article 9 because the Patent Act involved only ownership interest transfers.(fn12)

This Note will first examine the facts and holding of Cybernetic Services.(fn13) This Note will then detail the relevant provisions of both the former and revised versions of Article 9 of the Uniform Commercial Code.(fn14) This Note will also examine other federal acts that provide for proper perfection of security interests and will illustrate that security interests in patents are properly perfected pursuant to the rules set forth in Article 9.(fn15) Next, this Note will examine prior case law examining federal statutes that are sufficiently comprehensive to preempt the provisions of the UCC.(fn16) This Note will then analyze the holding in Cybernetic Services.(fn17) Specifically, this Note will commend the Ninth Circuit for properly analyzing the relationship between the UCC and the Patent Act.(fn18) This Note will conclude by commending the Ninth Circuit because the court provided a limited framework for perfecting security interest in patents.(fn19) This Note will then implore the Supreme Court, the Ninth Circuit, and other courts to provide a comprehensive opinion discussing the interplay between the UCC and the Patent Act that would give debtors and creditors an enhanced template for perfecting a security interest in a patent.(fn20)

FACTS AND HOLDING

Cybernetic Services ("Cybernetic") provided scrolling reader boards, such as those located in Times Square, and their data to various businesses.(fn21) Cybernetic provided the data to businesses by piggybacking the data to a satellite via television station uplinks.(fn22) The data was received through a television signal downlink and was decoded for display on the scrolling reader board.(fn23) Cybernetic owned a patent in a data recorder involved in the encoding and decoding of data sent via satellite.(fn24) The patent in the data recorder included the ability to capture video signal data regardless of from which horizontal line the data came.(fn25)

Matsco, Inc. and Matsco Financial Corporation (collectively, "Matsco") executed a Security Agreement and UCC-1 Financing Statement pursuant to Article 9 of the Uniform Commercial Code ("Article 9" or "UCC"), thereby receiving a blanket security interest in Cybernetic's assets.(fn26) In turn, Cybernetic received equipment from Matsco for use in its studios.(fn27) The security interest included Cybernetic's "general intangibles" and created an interest in the data recorder patent, Cybernetic's principal asset.(fn28) Matsco filed the financing statement and a UCC-2 Continuation Statement in a timely manner with the California Secretary of State.(fn29) Matsco did not record the interest with the United States Patent and Trademark Office ("PTO").(fn30) Soon thereafter, various Cybernetic creditors petitioned for involuntary Chapter 7 bankruptcy in the United States Bankruptcy Court for the Central District of California.(fn31)

Matsco sought relief from the automatic stay in the bankruptcy court based upon the security interest it filed with the California Secretary of State.(fn32) In opposing the motion for relief, the bankruptcy trustee ("trustee") argued that a security interest in a patent is not properly perfected unless it is first filed with the PTO.(fn33) The parties agreed Matsco's actions complied with Article 9's filing requirements as adopted in California.(fn34) The bankruptcy court concluded that Article 9, rather than the Patent Act, governed the perfection of a security interest in a patent.(fn35) The court stated that the Patent Act did not require recordation of security interests in patents with the PTO for protection against lien creditors.(fn36) Therefore, the court determined that the Patent Act did not require recordation in the PTO for protection against a trustee because a trustee generally becomes a hypothetical lien creditor during bankruptcy.(fn37) Because Matsco had properly perfected its security interest in accordance with Article 9, the court granted Matsco's motion for relief from the automatic stay and allowed Matsco to foreclose on the patent.(fn38) Thereafter, the bankruptcy court allowed Matsco to take possession of the patent, sell it, and apply any proceeds from the sale toward Cybernetic's indebtedness to Matsco.(fn39)

Following the bankruptcy court's decision to grant relief from the automatic stay, the trustee appealed to the United States Bankruptcy Appellate Panel of the Ninth Circuit.(fn40) The trustee argued that the Patent Act's registration system preempted state law or excluded the UCC from granting security interests in patents.(fn41) The bankruptcy appellate panel ("BAP") disagreed and concluded that the Patent Act did not preempt Article 9 and that Article 9 therefore controlled the perfection of security interests in patents.(fn42) The BAP determined that the Patent Act did not preempt Article 9 because the Patent Act was of limited focus and did not discuss either the creation or perfection of security interests.(fn43)

The BAP stated that in patent law, an assignment only concerned title transfer.(fn44) The BAP also found the administrative rules governing the Patent Act consistent with the conclusion that the Patent Act was concerned only with title transfer recordation and not security interest recordation.(fn45) The BAP noted that since the UCC's adoption, title transfer had not been involved in the majority of security interests.(fn46) The BAP found this limitation important because other federal statutes containing a system for recording security interests expressly included the security interest transfer within their scope.(fn47) The BAP stated that a security interest was merely a vehicle for garnering payment and did not necessarily involve title transfer.(fn48) The BAP found that the Patent Act's exclusion of security interests from its scope led to the conclusion that the Patent Act did not preempt state law that requires security interest regulation.(fn49) The BAP also found the Patent Act's system of recording security interests on a discretionary basis was insufficient to preempt Article 9's application.(fn50) Thus, the BAP affirmed the bankruptcy court's decision to grant Matsco relief from the automatic stay.(fn51)

The trustee appealed the decision of the BAP to the United States Court of Appeals for the Ninth Circuit.(fn52) The trustee argued that the Patent Act preempted Article 9's filing requirements and that a security interest in a patent could only be perfected by filing with the PTO pursuant to...