Using intellectual property to secure financing after the worst financial crisis since the Great Depression.

AuthorJacobs, Brian W.

INTRODUCTION I. BACKGROUND AND HISTORY OF USING INTELLECTUAL PROPERTY TO SECURE FINANCING A. Background On Patents B. Background on Trade Secrets C. Background on Trademarks D. Background on Copyrights E. Statutory Analysis on the Use of Intellectual Property as Collateral II. ADVANTAGES AND DISADVANTAGES OF USING INTELLECTUAL PROPERTY AS COLLATERAL A. Advantages of Using Intellectual Property as Collateral B. Disadvantages of Using Intellectual Property as Collateral III. INTELLECTUAL PROPERTY USED AS COLLATERAL DURING THE FINANCIAL CRISIS AND THE FUTURE OF USING INTELLECTUAL PROPERTY AS COLLATERAL A. Intellectual Property use as Collateral During the Financial Crisis B. The Future of Intellectual Property as Collateral to Secure Financing IV. Conclusion INTRODUCTION

Ever since Thomas Edison first used his patent on the incandescent electric light bulb as collateral to secure financing to start his company, the General Electric Company, intellectual property has been able to be used as collateral. (1) Although not immediately thought of when securing financing, using intellectual property as collateral has occurred ever since the late 1800's with Thomas Edison. (2) In recent years, using intellectual property as collateral to secure financing has become quite popular. (3) However, as with most financing in general, the use of intellectual property as collateral has slowed due to the first recession in the twenty-first century. Even though there have been signs of the recession coming to an end and recovery starting in the beginning of 2010, (4) will the use of intellectual property to secure loans ever bounce back?

There are two types of intellectual property that can be used to secure financing: legal intellectual property and competitive intellectual property. (5) Legal intellectual property refers to patents, trademarks, copyrights, and trade secrets, while competitive intellectual property usually refers to proprietary know-how, collaboration activities, leverage activities, and structural activities. (6) This Comment will focus on using only legal intellectual property to secure financing so competitive intellectual property need not be discussed any further.

This Comment will explain the use of intellectual property to secure financing and then the possible future use of intellectual property as collateral. Part I will explain the history of using intellectual property as collateral in securing financing. Part II will explain the advantages and disadvantages of using intellectual property as collateral. Lastly, Part Ill will explain the use of intellectual property as collateral during the recession and then the possible future use of intellectual property after the recession. As the united states grows farther away from a manufacturing-based economy and closer to a technology-based economy, the use of intellectual property as collateral will continue to be more prevalent. Even though the use of intellectual property as collateral declined during the recession, it will increase again and continue to rise in use in the future.

  1. BACKGROUND AND HISTORY OF USING INTELLECTUAL PROPERTY TO SECURE FINANCING

    Collateral is used to secure financing in lending agreements. Collateral is a borrower's promise of specific property if a loan is not repaid. (7) When using intellectual property as collateral, the borrower is promising the rights of his intellectual property (be it patent, trade secret, trademark, or copyright rights) if he does not repay his loan. (8)

    Intellectual property was first used as collateral to secure financing by Thomas Edison in the late 1880s. (9) Edison used his patent for the incandescent electric light bulb as collateral to secure financing for his own business. (10) That business would eventually become the General Electric Company. (11)

    Using intellectual property as collateral did not really gain popularity until the end of the twentieth century. (12) The act of using intellectual property as collateral became more popular once the united state's economy started shifting from manufacturing-based to more intellectual-based. (13) This shift accelerated and became common once the increased cash flow from the licensing of intellectual property caught the eyes of those on Wall street. (14) This economic shift occurred because of the merger and acquisition activity of the 1980's. (15) Soon the use of intellectual property as collateral became well known once intellectual-based transactions became the hot topic of the news. such transactions included the sale of the song rights for both Jimi Hendrix (16) and the widely-known purchase of the Beatles catalog by pop musician Michael Jackson for $47.5 million in the 1980s (17), along with the widely popular speculation of the future of the catalog after the death of Michael Jackson.

    Edison's use of his patent for the incandescent electric light bulb is a great example of the use of intellectual property to secure financing. (18) But patents are not the only form of intellectual property that can be used. As discussed above, other forms include trade secrets, trademarks, and copyrights. (19) This section will explain the types of intellectual property mainly used as collateral as well as the steps to take when using different kinds of intellectual property to secure financing.

    1. Background On Patents

      What is a patent? 35 U.S.C. [section] 271(a) states that "[e]xcept as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefore, infringes the patent." (20) Essentially, a patent gives an owner the right to prevent others from making, using, offering to sell or selling their patented invention for the length of the patent (right now 20 years for most patents). (21) For example, if an inventor patents an invention, that inventor is the only one who has the right to make, use, and offer to sell or sell that particular patented invention.

      There are different categories of inventions that an inventor may patent. These categories include process, machine, composition of matter, manufacture, and an improvement on any of the previous categories, (22) which all fall under "utility patents." These "utility patents" cover the useful aspects of inventions, (23) including two special categories of patents called design patents, which cover the aesthetic appearance of useful objects, (24) and plant patents, which cover certain types of asexually reproduced plants. (25) For an invention to be patentable, the patent must be useful, (26) novel, (27) and non-obvious. (28)

      One main thing to think about when using patents as collateral is the fact that they are only enforceable within the United States. (29) Therefore, the protection given by 35 U.S.C. [section] 271(a) is only afforded to a patent owner within the United States.

    2. Background on Trade Secrets

      "Trade secrets make up the majority of intellectual property." (30) One of the most well-known trade secrets, and a great example of one, is KFC's "secret blend of herbs and spices" in their Original Recipe Chicken. (31) According to the Uniform Trade Secrets Act, "trade secret" means:

      [I]nformation, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from no[t] being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its...

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