Value and Risk Considerations for Intellectual Property Collateral

• Date: 01 June 2022
• Author: Richard M. Assmus, Barbara M. Goodstein, Sen 'Alex' Wang

Published in Landslide, Volume 14, Number 4, 2022. © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion

thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the

American Bar Association.

6

By Richard M. Assmus, Barbara M. Goodstein,

and Sen “Alex” Wang

Images: Getty Images

Published in Landslide, Volume 14, Number 4, 2022. © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion

thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the

American Bar Association.

6

Published in Landslide, Volume 14, Number 4, 2022. © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion

thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the

American Bar Association.

7

I

ncreased technology innovation, content creation, and brand

marketing have propelled the value of intellectual property (IP)

in the global economy to a historical height. IP is a broad concept

that encompasses a variety of intangible assets, including patents,

copyrights, trademarks, trade names, domain names, know-how,

and trade secrets. With IP’s rising importance and value, companies

are not only utilizing their IP for revenue generation in the ordinary

course of business but also seeking to leverage their IP as collateral

to secure funding to support business growth or, in difcult times,

maintain liquidity. For example, in the summer of 2020 during the

COVID-induced travel slump, United Airlines pledged its Mileage-

Plus frequent yer program, including important IP assets such as

brands and member data, to secure a $5 billion loan.1

This article presents a brief overview of issues that arise in

using IP as collateral, including overlapping federal and state law,

the requirements for perfecting security interests in IP collateral,

due diligence steps in assessing IP collateral, and considerations

in drafting the applicable agreements, including a notable case

illustrating how a lender’s interests in IP, though perfected, may

nevertheless be defeated.

Importance of IP as Collateral

There are several contributing factors to the rise of IP as collateral.

First, according to a 2020 study, intangible assets, a majority of

which are IP assets, are estimated to account for 90% of the total

assets held by companies in the S&P 500.

2

This compares to 32%

in 1985 and 68% in 1995.3 A similar study estimates that, as of

2018, S&P 500 companies held over $21 trillion of intangible

assets, compared to only about $4 trillion of tangible assets (e.g.,

inventory, real estate, and equipment).4 Thus, it is only natural

that both borrowers and lenders are increasingly looking at IP

portfolios as a potential source of valuable collateral.

Moreover, for companies that have long-term secured credit

facilities or have gone through multiple rounds of secured nanc-

ings, most tangible assets have already been pledged as collateral,

often leaving IP as the only remaining unpledged assets. Further,

many companies are continuing to innovate and create new IP,

thus increasing the size and value of their IP portfolio, which in

turn raises the attractiveness to their lenders of that portfolio

as collateral.

Indeed, the increasing popularity of IP as collateral is supported

by public data. A review of the U.S. Patent and Trademark Ofce

(USPTO) trademark assignment database reveals an accelerated

increase in the number of security agreements recorded against

unique trademarks in recent years. The data for patents is similar.

In short, IP should always be considered when assessing collat-

eral packages.

Pledged IP Assets and Governing Law

Categories of IP Assets and Relevant Statutes

IP is the subject of a number of statutes that require or provide for

registration of rights or usage in respect of a variety of intangible

Value and Risk

Considerations

for Intellectual

Property Collateral

Richard M. Assmus is a partner in Mayer Brown’s Chicago

oce, where he maintains a balanced IP transactional and

litigation practice, including strategic IP agreements, IP

due diligence, technology and IP licensing and counseling,

and oensive and defensive litigation involving patents,

trademarks, copyrights, domain names, and trade secrets.

He can be reached at rassmus@mayerbrown.com. Barbara

M. Goodstein is a partner in Mayer Brown’s New York oce,

where she focuses her practice on commercial and structured

f‌inancing transactions, debt workouts, and restructurings

involving a wide variety of collateral assets, including IP. She

can be reached at bgoodstein@mayerbrown.com. Sen “Alex”

Wang is an associate in Mayer Brown’s Chicago oce, where

he focuses his practice on IP and technology transactional

matters involving technology and IP licensing and counseling,

IP due diligence, and data privacy issues. He can be reached

at awang@mayerbrown.com.

Published in Landslide, Volume 14, Number 4, 2022. © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion

thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the

American Bar Association.

8

assets. Among these are patents and patent applications, trade-

marks and trademark applications, copyrights and copyright

applications, and trade secrets. Their respective governing federal

statutes include:

• The Patent Act of 1952 (35 U.S.C. §§ 1et seq.), protecting

inventions in many technology areas, including pharmaceu-

ticals, electronics, mechanical inventions, etc.

•

The Lanham Act of 1946 (15 U.S.C. §§ 1051et seq.),

protecting trademarks and other source identiers

•

The Copyright Act of 1976 (17 U.S.C. §§ 101et seq.),

protecting all forms of creative expressions, including soft-

ware, movies, books, and other media properties

• The Defend Trade Secrets Act of 2016 (18 U.S.C. §§ 1832

et seq.), which created a federal cause of action for trade

secret misappropriation

Note that state law also applies in certain instances to, for

example, the registration of trademarks and trade names and

the protection of trade secrets (e.g., state statutes adopting the

Uniform Trade Secrets Act). In addition, domain names, rights of

publicity, and proprietary know-how that does not qualify as trade

secrets are also regularly included in IP collateral packages, even

though they are not governed directly by any federal law.

U.C.C. Article 9 and Federal Preemption

In general, secured transactions are governed by Uniform Commer-

cial Code (U.C.C.) Article 9. However, it should be noted that the

U.C.C. is a model statute that has been adopted in all 50 states (and

D.C.), with each state introducing its own variations to the model

version. Thus, it is important to check the specic version adopted by

the state whose law will govern a specic transaction. Furthermore,

U.C.C. Article 9 does not apply to the extent that it is preempted by

federal statute, regulation, or treaty but defers to federal law “only

when and to the extent it must.”5This limited deference is critical to

understanding the different requirements for perfecting security inter-

ests on different IP assets, as further explained below.

Creation, Perfection, and Priority

of Security Interests in IP

Creation/Attachment of a Security

Interest in IP

Under the U.C.C., a security interest in IP

is enforceable against the debtor only if it

has attached. To establish proper attach-

ment, the following conditions must be met.

First, value must be given to the debtor in

exchange for the security interest. Second,

the debtor must have rights in the IP pledged

as collateral,

6

although its rights in the IP

need not be ownership rights—licensed

rights can also be pledged (subject to

contractual limitations). Finally, the debtor

must sign or otherwise authenticate a secu-

rity agreement that reasonably identies

the collateral. This identication of collat-

eral can be drafted broadly.

7

For example,

language such as “all patents,” “all copyrights,” or even “all intel-

lectual property” of the debtor could be sufcient.8 In addition,

the identication of collateral can also include after-acquired IP.9

Perfection of a Security Interest in IP

To obtain priority over others, including a trustee in bankruptcy,

the security interest must be perfected. Perfection is the process

that allows a secured creditor to potentially acquire priority in

respect of pledged collateral over other parties who also have an

interest in the collateral pledged by the debtor.

U.C.C. Article 9 classies properties pledged as collateral into

different categories, with IP falling within the “general intangibles”

bucket.10 As a general rule, the secured party perfects its security

interest in most kinds of collateral, including general intangibles,

by ling a U.C.C. nancing statement (i.e., UCC-1 statement)

“indicating” the collateral in the appropriate ling ofce in the

applicable state or other jurisdiction as per Article 9.

11

This “indi-

cation” of collateral need not be specic, although if it does not

cover all assets, it must, like a security agreement, “reasonably

identify” the collateral.12 Further, the ling is to be made where

the debtor is “located,” which for most U.S. entity debtors is the

jurisdiction of formation or organization of the debtor.

However, as noted above, when IP assets are pledged as collat-

eral, several federal statutes are potentially implicated. The critical

issue becomes how the federal preemption rules affect the general

method of perfection (i.e., perfecting by ling a UCC-1 nancing

statement) when the security interest covers IP. Although U.C.C.

Article 9 contains a general rule that ling a UCC-1 nancing state-

ment is not necessary or effective to perfect a security interest in

property subject to certain U.S. statutes, regulations, or treaties,

13

that preemption, at least in regard to IP, applies only to federal

requirements relating to the priority of a security interest over

the rights of a lien creditor, and so courts have not always found

federal preemption of the U.C.C. ling requirements governing IP.

In particular, neither the Patent Act nor the Lanham Act

addresses security interests. Thus, the state-specic U.C.C. Arti-

cle 9 requirements apply to perfection in patents and trademarks,

and security interests in those assets must be perfected by ling a

UCC-1 nancing statement.14 Nevertheless, many secured parties

with liens on patents and/or trademarks also record their security

interests with the USPTO15 to help put third parties on notice that

a security interest exists against such assets.

Registered copyrights are situated differently. The Copyright

Act, unlike the Lanham Act and the Patent Act, discusses recor-

dation of “transfer of copyright ownership,”16 which is a term

explicitly dened to include “mortgage.”

17

In the context of the

Copyright Act, “mortgage” has been interpreted to be equivalent

to “security interest.”

18

As a result, federal copyright law preempts

U.C.C. Article 9, and the secured party should perfect its security

interest in registered copyrights by ling a document detailing

the security interest with the U.S. Copyright Ofce.19 Notably, a

UCC-1 nancing statement is still necessary to perfect a security

interest in unregistered copyrights.20 Nevertheless, most secured

parties will also le a UCC-1 nancing statement to perfect a lien

in a registered copyright, the reason being, again, to better put

others on notice of their security interest.

The chart summarizes the perfecting methods for different types