This report was originally published in The Business Lawyer, Volume 71, Issue 3, Summer 2016. For the model agreement that accompanies this report, see “Model Intellectual Property Security Agreement.”
1. Introduction
Once a kind of collateral handled only by specialists, intellectual property (IP) now occupies a significant position in commercial finance arrangements. Almost every business has IP[1] rights, whether as an owner or as a licensee, ranging from off-the-shelf software products to patents on the next big advance in biotech. The business name or website address can function as a trademark, and copyrights can exist in just about any written text or artwork, including marketing materials, employment manuals, and computer code.
A business will often use its intellectual property as collateral for loans and other financing arrangements. In venture capital financing, intellectual property such as a software program or a patent application may be the debtor’s only valuable asset. Film financing may be based on the value of the copyrighted script or film treatment. In other contexts, a loan may finance the debtor’s acquisition, development, or commercialization of particular IP assets. In almost all syndicated credit facilities, a debtor’s intellectual property is included as a matter of course in an all-assets collateral package, often without particular reliance on the value of the intellectual property or its usefulness in the debtor’s business.
Although these financing arrangements are not unusual, they may still present hurdles for the parties’ counsel. Many lawyers who regularly represent lenders and secured parties are familiar with Article 9 of the Uniform Commercial Code (U.C.C.)[2] but have only a vague understanding of the laws applicable to intellectual property. On the other hand, many IP lawyers are knowledgeable about the laws covering their clients’ IP assets but have avoided dealing with the U.C.C. since law school. U.C.C. lawyers and IP lawyers speak different languages; negotiation of IP collateral arrangements can be treacherous without a translation manual.
1.1 Purpose
The accompanying Model Intellectual Property Security Agreement (the Model Agreement) attempts to bridge the gap between U.C.C. and IP lawyers by offering—and explaining—provisions the lawyers should consider in documenting a secured loan when the collateral includes intellectual property. The Model Agreement was produced by a task force (the Task Force) organized by the Commercial Finance and Uniform Commercial Code Committees of the American Bar Association Business Law Section.
Some model agreements can be used as forms, with only minimal changes to adapt them for particular transactions. The types of intellectual property and their importance for any transaction are so varied, however, that a one-size-fits-all approach will not work. The Model Agreement is therefore largely a teaching tool, supplying basic provisions for an idealized hypothetical transaction that involves solely IP collateral. The footnotes address issues that often arise in practice and suggest modifications that may be negotiated to fit the needs of the parties in various real-world situations.
To assist users of the Model Agreement, this report summarizes some basic U.C.C. and IP concepts and terminology, and briefly discusses some issues that often arise when the two bodies of law interact. We have tried to explain, or at least identify, some of the most relevant legal issues, but neither the Model Agreement nor this report is intended as an exhaustive treatise on IP law or U.C.C. Article 9, “Secured Transactions.” The summaries in section 2 (IP basics) and section 3 (U.C.C. basics) merely point out the most salient and topical issues. The Model Agreement should be used with care; particular transactions may raise legal or practical issues making some provisions inappropriate or incomplete.
1.2 Limited Scope
For simplicity and clarity, the Task Force decided to limit the scope of the Model Agreement and to make certain assumptions about the …
