Value and Risk Considerations for Intellectual Property Collateral

AuthorRichard M. Assmus, Barbara M. Goodstein, Sen 'Alex' Wang
Pages6-58
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. §§ 1 et seq.), protecting
inventions in many technology areas, including pharmaceu-
ticals, electronics, mechanical inventions, etc.
The Lanham Act of 1946 (15 U.S.C. §§ 1051 et seq.),
protecting trademarks and other source identiers
The Copyright Act of 1976 (17 U.S.C. §§ 101 et 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.”5 This 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

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