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 hypothetical secured transaction. The most important of these limitations and assumptions are:

1.2.1 Loan Agreement

The Model Agreement assumes that the IP assets are being pledged as collateral for loans made under a separate loan agreement that will provide most of the substantive terms of the parties’ agreement. The Model Agreement focuses on the IP collateral, and defers to the loan agreement for more general terms to be negotiated by the parties, such as the matters that will be treated as “material” and the events and circumstances that will constitute events of default.

1.2.2 Single Parties

The Model Agreement contemplates a single U.S. borrower that owns the collateral and a single lender (which could be a single collateral agent acting on behalf of a group of lenders).

1.2.3 Stand-Alone Agreement

The Model Agreement deals solely with IP collateral and the directly associated rights and property. We do not, however, intend to perpetuate the historical practice of using both a “regular” security agreement and a separate IP security agreement for a single transaction. We believe that the historical bifurcated practice grew in part from the U.C.C. lawyer’s limited knowledge of IP law and the IP lawyer’s limited understanding of U.C.C. Article 9. To promote efficiency, eliminate inconsistent language, and conform terminology, we recommend including non-IP and IP assets in a single security agreement.

If the transaction documents include a single security agreement for all types of collateral, then the IP-specific provisions of the Model Agreement can be folded into it, replacing or supplementing the general terms.

1.2.4 U.S. Intellectual Property Only

Intellectual property is recognized under local law on a country-by-country basis. In light of the global nature of many businesses, lenders usually want to include foreign IP assets owned by the debtor, such as counterparts of U.S. patents issued in other nations or trademarks registered in other countries, in the collateral package. However, the legal regimes for establishing, protecting, and enforcing liens on intellectual property vary widely by country. While the Model Agreement includes foreign IP assets in the collateral package (through broad granting language covering all the debtor’s IP assets), the Task Force decided to leave for another day contractual provisions to establish, protect, and enforce the lender’s rights in foreign intellectual property. Lenders should consult with local counsel as to the requirements for liens on foreign intellectual property.

1.2.5 Broad Grant

The Model Agreement covers virtually every kind of intellectual property that a debtor might have, regardless of the intellectual property’s value or its importance to the debtor’s business or the secured party’s credit decision. To the extent that certain types of intellectual property are not important for the transaction, parts of the Model Agreement can be deleted. For example, if patents form an insignificant part of the collateral, then provisions applicable to patents can be deleted or patents can be expressly excluded from the definition of “Intellectual Property.” The Model Agreement also permits the parties to list property (either by class or item-by-item) that is to be excluded from the collateral package.^[3]

1.2.6 Strict Representations and Covenants

The Model Agreement’s representations and warranties, scheduling obligations, and covenants are relatively strict, with few limitations. The result is a document that appears to read more favorably to the lender than the borrower, in the sense that the borrower will be more likely to breach a representation or covenant due to the absence of “wiggle room.” The Task Force took this approach for instructional purposes because it allows the Model Agreement to present straightforward provisions that highlight the issue being addressed, un-cluttered by qualifications. The first draft in a loan transaction is likely to favor the lender in any event, because counsel for the lender generally drafts the loan agreement. The Model Agreement includes footnotes explaining how and when a borrower may want to delete particular provisions, or modify them to include materiality, knowledge, or other limitations.

2. Intellectual Property—Basic Concepts and Terminology

2.1 Overview

2.1.1 IP Assets

“Intellectual property” is a catchall term for various types of intangible rights recognized under federal, state, or foreign law. Different types of intellectual property are created and obtained in different ways, have different characteristics, and are subject to different laws.

The most common types of U.S. statutory intellectual property are copyrights, patents, and trademarks. Copyrights^[4] protect works of creative expression such as novels, motion pictures, music, or artworks; patents^[5] protect inventions; and trademarks^[6] and service marks protect the exclusive rights to use names, images, or slogans to identify products and services. Although trade secrets are not separately protected by statute, they also constitute intellectual property and can take many forms (such as customer lists, recipes, or production know-how). Some types of intellectual property are specialized, in that they pertain only to particular industries or particular assets, and may be subject to different or additional requirements.^[7] Such specialized types of intellectual property are not excluded from the granting language and are thus included in the collateral package, but for simplicity the Model Agreement does not contain any special representations or covenants for those assets or the industries in which they are used. Sections 2.2 to 2.6 below briefly summarize some of the basic characteristics of different types of intellectual property.

2.1.2 United States vs. Foreign Intellectual Property

Intellectual property rights are territorial and protected on a country-by-country basis. U.S. patents, for example, are issued by the United States Patent and Trademark Office (PTO) and provide the right to exclude others from practicing the invention claimed in the patent in the United States only. Companies with worldwide businesses often have large IP portfolios consisting of registrations in multiple countries. U.S. companies can file for IP registrations in foreign IP filing offices and foreign corporations can register intellectual property in the United States. Local counsel is generally engaged to prosecute IP filings outside an applicant’s home jurisdiction.^[8]

2.1.3 Registered vs. Unregistered Intellectual Property

Copyrights and trademarks can be registered or unregistered. (U.S. patents can only arise upon issuance by the PTO.) Copyright protection arises automatically when the copyrightable work is fixed in a tangible medium of expression, but copyrights can be registered in the United States Copyright Office. Trademarks may also arise under common law through use of the mark in commerce. In the United States, trademarks can be registered nationally in the PTO or locally in most states, usually through the secretary of state’s office.^[9]

While IP rights can exist in unregistered copyrights and trademarks, registration provides certain legal advantages, and registered intellectual property is often perceived as more valuable. (The benefits of registering copyrights and trademarks are discussed in sections 2.2.3 and 2.4.3 below.)

2.1.4 Value of Intellectual Property

IP rights tend to be integral to the particular business in which they are used. Accordingly, their value apart from the business as a whole can be difficult to calculate. For these reasons, intellectual property may not be assigned much value in determining how much debt a company’s assets can support. Nevertheless, it is risky for a lender to leave intellectual property outside the collateral package if it hopes to sell the debtor’s business as a going concern in the event of a foreclosure.

2.2 Copyrights

2.2.1 What Law Governs?

The genesis of copyright law in the United States is Article 1, Section 8 of the U.S. Constitution, which provides that “Congress shall have the power … [t]o promote the Progress of Science and Useful Arts, by securing for limited times to Authors and Inventors, the Exclusive Right to their respective Writing and Discoveries.” Copyright protection is provided under the U.S. Copyright Act.^[10]

2.2.2 What Is a Copyright?

Copyrights apply to original works of authorship fixed in a tangible medium of expression, including works of poetry and prose, motion pictures, musical compositions, sound recordings, paintings, drawings, sculptures, photographs, computer software, and other works.^[11] Copyright protects only the expression of an idea, and not the idea itself.^[12] For that reason, there can be many ways of expressing the story of star-crossed lovers from feuding factions, i.e., the overall plot line of Romeo and Juliet, without infringing the copyright in Shakespeare’s play (even if his copyright were still in force).

A copyright holder has the exclusive right to:

• reproduce the copyrighted work;
• prepare derivative works based upon the copyrighted work;
• distribute copies of the copyrighted work; and
• display or perform the copyrighted work publicly.^[13]

A copyright arises in favor of a human author unless it is a “work for hire.” Works for hire include works prepared by an employee in the course of his or her employment and certain works prepared on commission or special order.^[14] The hiring or commissioning party is considered the author of a work for hire. Most standard form employment agreements state that copyrightable works created by the employee in the scope of employment are works for hire and, as a back-up, also contractually obligate the employee to assign to the employer the copyright in all such works.

2.2.3 Registration

Because a copyright automatically attaches to a work of authorship when the work is reduced to tangible form, it is not necessary for the work to be either published or registered with the Copyright Office. Generally, however, registration of the copyright is a prerequisite to the right to sue for infringement.^[15]

Remedies for infringement of copyright include actual damages, statutory damages, attorney’s fees, injunction against infringement, recovery of the infringer’s profits, and seizure of copies.^[16] In general, statutory damages and attorney’s fees are available only for infringements occurring after the copyright is registered.^[17]

2.2.4 Assignment and Transfer

The ownership of a copyright may be transferred, in whole or in part, by any means of conveyance or by operation of law, and may be bequeathed by will or pass under the applicable laws of intestate succession.^[18] A written instrument or memorandum of the transfer must be duly signed by the transferor, unless ownership is transferred by operation of law.^[19] A signed transfer instrument may be recorded in the Copyright Office. If the copyright has been registered and the transfer instrument identifies the work by title or registration number so that, after the document is indexed, it would be revealed by a reasonable search under the title or registration number, the recorded document will give all persons constructive notice of the facts stated therein.^[20] Any “assignment, mortgage, exclusive license” or other “conveyance, alienation, or hypothecation” of a copyright (or any of the exclusive rights comprised in a copyright) is a “transfer of copyright ownership” as defined in the Copyright Act and will be subject to these transfer and recording provisions.^[21]

The Copyright Act provides that a “transfer of copyright ownership” will “prevail” over a later conflicting transfer if the first transfer is properly recorded^[22] in the Copyright Office (i) within one month after the effective date of the transfer (or within two months if the transfer is executed outside the United States) and (ii) at any time before the later transfer is recorded. Otherwise, the later transfer will prevail, if it is properly recorded and if the later transferee takes its copyright interest in good faith, for valuable consideration (or for a binding promise to pay royalties), and without notice of the first transfer.^[23]

2.2.5 Duration

Copyrights have a limited, albeit lengthy, duration. The copyright term depends on several factors, including when the work was first published or renewed.^[24] No renewal or maintenance payments are necessary to keep a copyright (or registration) in force for its full term.

The author of a copyrighted work (other than a work for hire) who has transferred or licensed the copyright on or after January 1, 1978, has the non-waivable right to terminate the transfer (i.e., to rescind the transaction) during the five-year period beginning thirty-five years after the transfer or license.^[25] This means that authors and their heirs retain a residual interest in their copyrights, even if they have sold them or granted long-term licenses. This right to recapture copyright ownership could override assignments, licenses, and liens previously granted by the author or the author’s heirs.^[26]

2.3 Patents

2.3.1 What Law Governs?

Patent protection, like copyright, traces its roots to Article 1, Section 8 of the U.S. Constitution.^[27] Today, the right to obtain and enforce patents is governed by the U.S. Patent Act.^[28] There is no state patent law or any common law patent rights.

2.3.2 What Is a Patent?

A patent is a right granted by the United States government permitting the inventor “to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States”^[29] for a limited time in exchange for public disclosure of the invention when the patent is granted. Patents provide a competitive advantage during their term; after the expiration of a patent, anyone is free to use the invention. Only a patentee (the original owner or a successor-in-title) can bring an action for infringement.^[30]

2.3.3 Obtaining a Patent

To obtain a patent, the inventor, or a person to whom the inventor has assigned (or is under an obligation to assign) the invention, files an application in the PTO.^[31] An inventor’s employer typically obtains and records a written assignment from the inventor in order to be recognized as the patent owner in the PTO.

A patent application must contain the information necessary for the PTO examiner to determine if the invention is eligible for a patent.^[32] Patent examinations are notoriously rigorous and patents can take years to issue. The attorney for the applicant “prosecutes” the patent application by responding to the PTO examiner’s concerns and modifying the scope of the patent application until the PTO examiner is satisfied. During this “patent prosecution” process, the breadth of the invention initially described in a patent application is often narrowed in order to accommodate the examiner’s concerns. If and when the examiner determines that the invention as then described meets all the requirements, the application is approved and the patent issued.^[33]

An application for a patent is generally kept in confidence by the PTO for eighteen months after its filing date.^[34] Once a patent is issued, the invention is publicly available and will no longer be protectable as a trade secret.

2.3.4 Assignment and Transfer

A patent, patent application, or other interest in a patent can be assigned by a written instrument, and a patentee, applicant, or assignee may grant or convey all or part of its rights under the patent or application.^[35] Any such “assignment, grant, or conveyance” of patent rights will be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the PTO within three months from its date or before the subsequent purchase or mortgage.^[36]

2.3.5 Duration

A patent is generally valid for 20 years from its application date.^[37] Maintenance payments are due periodically (at 3.5, 7.5, and 11.5 years after the issuance date) in order to continue the patent in force.^[38] The validity of the patent can be challenged by third parties at any time by bringing an inter partes review in the PTO.^[39]

2.4 Trademarks

2.4.1 What Law Governs?

Trademarks are protected under U.S. federal law, common law in most states, statutes in some states, and international law. The federal law is the Lanham Act (also referred to as the Trademark Act).^[40]

2.4.2 What Is a Trademark?

Trademarks are words, phrases, symbols, designs, or a combination thereof that identify and distinguish the source of one party’s goods from those of others.^[41] A trademark used in connection with services, rather than goods, is sometimes referred to as a “service mark,” and each may be referred to as a “mark.”^[42] Trademark law protects consumers by making it easier to recognize a particular business, product, or service.^[43] Trademark law also protects the trademark owner’s valuable property rights in the mark and the goodwill associated with the consumer’s recognition of the mark.^[44]

In the United States, trademarks can be registered if they are used in commerce. However, a company can reserve a trademark before actually offering products under that mark by filing an application to register it in the PTO on the basis of a bona fide “intent to use” the mark.^[45] The mark must then be put into commercial use in interstate commerce within three years from the examiner’s approval of the application.^[46]

2.4.3 Registration

Registration is not required for trademark rights to attach to a mark that is used in connection with a business, product, or service. Registration of a trademark^[47] in the PTO does, however, provide important advantages:

• constructive notice of a claim of ownership of the mark;
• a legal presumption of ownership of the mark and therefore the exclusive right to use the mark nationwide on or in connection with the goods/services listed in the registration;
• the ability to bring an action concerning the mark in federal court;
• the use of the U.S. registration as a basis to obtain registration in foreign countries;
• the ability to record the U.S. registration with the U.S. Customs and Border Protection Service to prevent importation of infringing foreign goods;
• the right to use the federal registration symbol ®; and
• listing in the PTO’s online databases.^[48]

2.4.4 Assignment and Transfer

A registered trademark can be assigned, but only along with the goodwill of the business in which the trademark is used (or with the goodwill of the part of the business connected with the use of and symbolized by the trademark).^[49] A trademark for which an application to register has been filed can be assigned in the same way, except that an “intent to use” (ITU) application can only be assigned to a successor to the applicant’s ongoing and existing business (or relevant part of that business) to which the trademark pertains.^[50] The assignment must be in a signed writing and contain the information required by the PTO.^[51] An assignment will be void against a subsequent purchaser for valuable consideration, without notice, unless the assignment (including the required information) is recorded in the PTO within three months after the date of the assignment or before the subsequent purchase.^[52]

Patent and trademark assignees may be subject to laws in addition to the recording provisions of the Patent Act or Lanham (Trademark) Act; for example, a new trademark owner may be subject to a license granted by the previous trademark owner, even if the license is not recorded and the new owner has no knowledge of the preexisting license.^[53]

2.4.5 Duration

Trademark registration can theoretically remain effective as long as use of the mark continues in connection with the products and services claimed in the registration, periodic affidavits and declarations are filed when required, and the trademark is not “abandoned.”^[54] A trademark can become abandoned if it is not used, and a federally registered trademark may be presumed to be abandoned after three consecutive years of non-use.^[55] Trademark protection can also be lost if the trademark owner engages in “naked licensing” (i.e., not adequately monitoring the use of the mark by its licensees) or fails to take adequate steps to prevent unauthorized use by others.^[56] For example, because the owners of the marks “aspirin” and “escalator” did not take steps to protect against infringements, the names ultimately became generic terms available for anyone to use.^[57]

2.5 Trade Secrets

2.5.1 What Law Governs?

Trade secrets have traditionally been protected and enforced under state law. Virtually all states have adopted the Uniform Trade Secrets Act (U.T.S.A.) and many courts still refer to guidance under section 757 of the original Restatement of Torts or section 39 of the Restatement of Unfair Competition. As of May 11, 2016, federal law recognizes a cause of action for misappropriation of trade secrets under the Defend Trade Secrets Act of 2016 (D.T.S.A.).^[58] While virtually all states have adopted a variation of the Uniform Trade Secrets Act (U.T.S.A.),^[59] many courts still refer to guidance under section 757 of the original Restatement of Torts or section 39 of the Restatement of Unfair Competition.

2.5.2 What Is a Trade Secret?

Trade secrets are defined in the U.T.S.A. as information that derives independent value from not being generally known or readily ascertainable by proper means by others (the novelty test) and that is the subject of reasonable efforts to maintain its secrecy (the secrecy test).^[60] If both tests are met, information such as formulas, patterns, programs, methods, devices, techniques, and processes are cited by the U.T.S.A. as potential trade secrets. Often information that would not qualify as a true trade secret because it fails to satisfy the novelty or secrecy test can be protected by contractual non-disclosure agreements or covenants not to compete from employees (if permitted under applicable state law).

Unlike a patent, which permits the owner to exclude others from using the patented information, ownership of a trade secret does not prevent the independent development of the same information by others. Accordingly, a trade secret is only protected against “misappropriation”^[61]—the acquisition of a trade secret by “improper means,”^[62] such as industrial espionage, breach of a confidentiality agreement, or theft by an employee. The U.T.S.A. does not, however, expressly prohibit a company’s competitor from analyzing or reverse-engineering the company’s product or process in order to use it in the competitor’s own business; reverse engineering by itself is not considered improper means.^[63] If a trade secret is incorporated into a product that will be publicly used or distributed, the owner may consider protecting it under patent law (if possible) rather than attempting to claim it as a trade secret.

2.5.3 Maintaining a Trade Secret

Trade secrets cannot be protected by filing or registering them in any state or federal jurisdiction. Rather, the owner of a trade secret must take reasonable steps to maintain the secrecy of the information. In certain cases, those steps may include limiting access to the information to only those employees who have a need to know the information in the course and scope of their work, providing locks and other physical security to the location at which the information is held, or obtaining confidentiality agreements from vendors or contractors who must use the trade secret in performing services for the owner. Additionally, the owner of a trade secret may sue to enjoin another from revealing or utilizing its trade secrets. Under the U.T.S.A. as adopted in most states, in an appropriate case the owner would be entitled to enjoin the use or distribution of the trade secret and would also be able to recover damages for misappropriation.

2.5.4 Duration

A trade secret will last as long as the owner is able to maintain the secrecy of the information so that it does not become lawfully available to the public.

2.6 Domain Names

2.6.1 What Law Governs?

Ownership of domain names is governed by state common law. The use of domain names and websites may be subject to regulation under federal law, however, as well as rules established by international organizations, such as the Internet Corporation for Assigned Names and Numbers (ICANN).

2.6.2 What Is a Domain Name?

A domain name is a part of the address of a website on the internet that helps a user to access the site. The complete address, including the domain name, is known as a URL, for Uniform Resource Locator. The domain name is the part of the address consisting of a single word, followed by a period and a short alphabetical indicator known as a top-level domain. For example, americanbar.org is a domain name and org is the top-level domain. Every computer or device on the internet has a unique internet address, consisting of a string of numbers, that allows it to connect with others. The domain name system allows more comprehensible letters and words to be associated with the numeric internet addresses. The creation, registration, and use of a domain name, along with the operation and maintenance of the website, generally involves an interlocking set of contracts among the owner, the domain name registrar, internet service providers, network operators, and the like.

2.6.3 Registration

Domain names are registered with one of several registrars recognized by ICANN, and the registration can be transferred from one registrar to another. Most courts have considered a registered domain name to constitute intangible personal property,^[64] although a few have held that domain names are contractual rights.^[65] The owner of a domain name may also have trademark rights in the name if it is used in marketing the owner’s business.

2.6.4 Duration

Registration is effective for the period provided in the registrar’s contract for services. Ten years is a common period, and renewal is generally permitted.

3. U.C.C. Article 9—Basic Concepts and Terminology

3.1 Overview

The U.C.C. as a whole is generally intended to simplify, clarify, and modernize the law governing various kinds of commercial transactions and to make that law uniform among the various jurisdictions.^[66] One of the ways that U.C.C. Article 9 simplified commercial finance transactions was by collecting and consolidating various traditional but somewhat uncertain methods of using personal property as security.^[67] The term “security interest” was created as a generic replacement for all those common law arrangements, including chattel mortgages, installment sales, title retention, conditional assignments, collateral assignments, and the like.^[68] Since its creation in the mid-twentieth century, Article 9 has been revised several times to maintain its modern outlook, and was comprehensively revised in 2001.^[69]

In reality, Article 9 is quite complex, not necessarily uniform, and definitely not simple. The following is a brief overview of the Article 9 concepts that are most relevant in discussing issues affecting the use of IP assets (especially federally registered intellectual property) as collateral.

Like the federal IP legal systems, U.C.C. Article 9 has its own terminology; both the differences and the unintended similarities can cause confusion when IP interests are used as collateral.

3.2 Security Interests

Under Article 9, a debtor enters into a security agreement that grants a security interest in personal property collateral to a secured party, generally to secure the payment or performance of an obligation of the debtor to the secured party.^[70] Article 9 honors substance over form; any transaction creating a security interest (regardless of how the interest may be described) is subject to Article 9 unless excepted.^[71]

3.3 Attachment and Title

A security interest attaches to, and becomes enforceable against, whatever rights the debtor has in the collateral described in a signed security agreement once value has been given; the title to the collateral is not necessarily determinative.^[72] The security agreement must reasonably identify the collateral, but in most cases does not need to be specific, and can even use the collateral types defined in Article 9 (accounts, goods, general intangibles, inventory, etc.)^[73] The security agreement can cover collateral acquired later by the debtor.^[74] For example, the description of the collateral in the security agreement can be as general as “all present and future copyrights” of the debtor.

3.4 Perfection

The secured party perfects its security interest in most kinds of collateral under Article 9 by filing an appropriate financing statement in the appropriate filing office in the applicable state or other jurisdiction determined under Article 9’s governing law rules.^[75] Perfection helps protect the secured party’s rights in the collateral against claims by other creditors. A financing statement must contain the names of the debtor and the secured party and must “indicate” the collateral.^[76] In almost all cases, the financing statement need not describe the collateral specifically, and can even indicate only that the collateral consists of all the debtor’s personal property (an “all-assets” filing).^[77] If authorized by the debtor, the financing statement can be filed before the security interest is created.^[78] Financing statements are indexed by the name of the debtor, not the nature or type of collateral; potential creditors need only search under the debtor’s name to find any financing statements filed with respect to the debtor’s personal property.^[79]

3.5 After-Acquired Collateral

A filed financing statement is effective against the indicated collateral at the time the security interest attaches to the collateral, even if attachment comes after the financing statement is filed.^[80] This means that a secured party can file a single financing statement covering present and future items of collateral, without having to refile or specifically describe after-acquired property. For example, if a security agreement covers the debtor’s interests in all present and future patents, and the financing statement indicates “all patents” as the collateral, then the security interest will be enforceable against (i.e., will attach to) the debtor’s rights in both those patents existing when the security agreement is signed and any patents issued after that date, even if the invention is created and the patent granted after the financing statement is filed.

3.6 Priority

Article 9 has extensive rules to determine which creditors have priority—that is, the right to satisfy their obligations out of the collateral before other creditors. The priority rules depend on many factors, including the type of collateral, method of perfection, and the nature of the transaction.^[81] Generally, however, and subject to several exceptions and conditions:

• A security interest has priority over a general unsecured claim.
• A perfected security interest has priority over an unperfected security interest.
• A perfected security interest has priority over the claims of a person (including a bankruptcy trustee) who becomes a lien creditor^[82] after the security interest is perfected.^[83]
• A perfected security interest has priority over a later-perfected security interest.^[84]

The most prominent exceptions to these rules are:

• A secured party who finances the debtor’s acquisition of some kinds of tangible property or software may, by following certain procedures, have priority as to that property over an earlier-perfected security interest.^[85]
• Third parties acquiring collateral subject to an existing security interest, including a buyer of goods in the ordinary course of business^[86] and a “licensee in the ordinary course of business,” may take the collateral free of the security interest in certain circumstances.^[87]

3.7 Override of Anti-Assignment Clauses

Article 9 overrides certain contractual restrictions on a debtor’s ability to use certain intangible property as collateral. Many contracts contain “anti-assignment” provisions that prohibit a party from “assigning” its contract rights to a third party without the other party’s consent, and provisions of state or federal law may prohibit “assignment” of governmental permits or licenses without the consent of the governmental authority. Such provisions often do not clearly distinguish between a party’s absolutely assigning away its rights under contracts or permits and merely granting a security interest in those rights.

Article 9 facilitates a debtor’s ability to pledge these intangible assets by making certain anti-assignment provisions included in contracts or created by law ineffective to prevent the creation, attachment, perfection, or, in some cases, enforcement of a security interest in these assets.^[88]

The extent to which Article 9 overrides an anti-assignment clause depends in part on the nature of the collateral.^[89] If the collateral is a right to payment from a third party (an “account” or “payment intangible”^[90]), an anti-assignment provision is ineffective to prevent a secured party taking a security interest in those rights and, in some circumstances, collecting payments in place of the debtor after default.^[91]

For collateral consisting of “general intangibles”^[92] (a catch-all category of intangible assets that would include copyrights, patents, trademarks, software, IP licenses, and some other forms of intellectual property), the secured party can take a security interest in the debtor’s rights in the general intangibles, despite an anti-assignment clause, but the secured party’s enforcement rights will be significantly limited. Generally, without consent from the other party to the contract:

• The secured party cannot enforce the security interest against the other party;
• The other party does not assume any duty to the secured party;
• The other party does not have to recognize the security interest, render performance to the secured party, or accept performance by the secured party; and
• The secured party may not use or assign the debtor’s rights under the contract.^[93]

3.8 Enforcement

Under Article 9, after default, a secured party may sell, lease, license, or otherwise dispose of collateral, subject to certain conditions.^[94] The disposition can be private or public, but every aspect of the disposition must be commercially reasonable.^[95] While the requirement of commercial reasonableness cannot be waived,^[96] the security agreement may set the standards by which commercial reasonableness will be measured, provided that the standards are not themselves manifestly unreasonable.^[97]

The secured party generally cannot purchase the collateral at a private sale,^[98] and it cannot simply take or keep the collateral to satisfy the secured debt without satisfying certain conditions, including the debtor’s written consent after the default.^[99]

The secured party may also collect amounts payable on the collateral and enforce the debtor’s rights under contracts included in the collateral.^[100] The secured party’s rights to enforce a contract against the other party will generally be subject to the other party’s defenses and rights of setoff against the debtor, and it may be further restricted if the contract prohibits assignment by the debtor.^[101]

4. Intersection of Federal IP Law and U.C.C. Article 9

4.1 Perfecting a Security Interest

4.1.1 Which Law Applies?

The federal IP registration systems are generally intended to create a “chain of title” to each IP asset, allowing the current position to be traced back to the original registration. Assignments, mergers, and name changes generally must be recorded with the applicable IP filing office in order for subsequent owners of the intellectual property to be put on notice. The Copyright Office and the PTO will also accept lien filings (and lien releases) for recording as long as they refer to the registration or application information for each item.^[102] There is uncertainty, however, regarding the extent to which the federal systems for registering transfers of title are intended to cover transfers of partial interests, such as security interests.

One source of confusion is the lack of a common terminology. The federal rules and recording systems were established well before the original version of U.C.C. Article 9, and the few modifications have not dealt with the use of IP assets as collateral.^[103] Key U.C.C. concepts, such as perfection, do not seem to have any analogue in the federal system, while some common terms have different meanings in the federal IP laws and U.C.C. Article 9.

The federal IP statutes generally speak of “assignments” or “transfers” of IP assets, but do not use the U.C.C. terms “security interest,” “secured party,” or “purchaser”; the statues thus address the rights of “assignees,” “transferees,” and even “mortgagees” in some cases, but not the rights of “secured parties.”^[104]

Under the federal IP statutes, it is not clear whether “assignment” and “transfer” apply to a transfer of a partial interest, such as a security interest; some courts have interpreted the terms to refer solely to ownership transfers,^[105] but the question remains unsettled. The U.C.C., on the other hand, explains that, depending on the context, “assignment” or “transfer” may refer to the outright assignment/transfer of an ownership interest or to the assignment/transfer of a security interest or other limited interest.^[106]

4.1.2 Preemption

Under Article VI of the U.S. Constitution, the federal laws of the United States “shall be the supreme law of the land.” If the federal IP laws govern transfers of partial or limited interests^[107] like security interests in registered IP assets, they would preempt the U.C.C. rules; the federal recording system would then provide the only means to give public notice of an interest akin to a U.C.C. security interest.

The U.C.C. recognizes, as it must, the preemptive power of federal law: Article 9 “does not apply … to the extent that a statute, regulation, or treaty of the United States preempts” it. However, the U.C.C. defers to federal law “only when and to the extent that it must.”^[108]

Article 9 excepts from its perfection rules certain transactions that are subject to other legal systems. In particular, the filing of a U.C.C. financing statement “is not necessary or effective to perfect a security interest in property subject to … a statute, regulation, or treaty of the United States whose requirements for a security interest’s obtaining priority over the rights of a lien creditor with respect to the property preempt” Article 9’s requirement for a filed financing statement.^[109]

Courts addressing this preemption issue have generally found that:

• the Copyright Act includes requirements for a security interest to obtain priority over the rights of a lien creditor, and those requirements preempt Article 9’s perfection-by-filing requirements for federally registered copyrights,^[110] but
• neither the Patent Act nor the Lanham (Trademark) Act includes requirements for a security interest to have priority over the rights of a lien creditor and therefore neither act preempts Article 9’s perfection rules.^[111]

Although only a few courts have addressed these perfection issues, the rulings cited above have been prominent and persuasive enough that the general understanding among finance and IP lawyers is that a security interest in registered copyrights can only be perfected by a filing in the Copyright Office, while a security interest in patents or trademarks can only be perfected by a U.C.C. filing.^[112]

Perfection will protect a security interest against claims of lien creditors (including a bankruptcy trustee) and unperfected and later-perfected security interests.^[113] Perfection is a term of art under U.C.C. Article 9, however, and the extent to which perfection will also protect the secured party against the claims of licensees and good-faith purchasers of federally registered intellectual property remains unsettled. Accordingly, the current practice for a cautious secured party with federally registered IP collateral is to file both a U.C.C. financing statement in the appropriate state office and a security document in the appropriate federal filing office.^[114] The following sections discuss the reasons for this caution.

Secured parties often take precautionary approaches, seeking maximum protection by trying to comply with all competing and potentially contradictory legal systems, protocols, and practices affecting perfection.^[115] This approach, along with due diligence and careful drafting, can address some of the risks, but compliance with multiple filing systems can be duplicative, expensive, and time-consuming. Parties often seek to balance the risks and benefits by negotiating carve-outs, limitations, exceptions, and other terms. Some examples of such provisions are included in the Model Agreement.^[116]

4.2 Reasons for Dual Filing

4.2.1 Copyrights

For Article 9 perfection purposes, compliance with the Copyright Act’s requirements for obtaining priority over the rights of a lien creditor is “equivalent” to filing an Article 9 financing statement.^[117] Nonetheless, secured parties will also want to file an actual financing statement covering all copyright collateral in the appropriate U.C.C. filing office. An “equivalent” federal recording may not cover non-copyright collateral, such as proceeds and other rights. More important, it probably will not cover unregistered copyrights.

Some courts have recognized that it is a practical impossibility to register all copyrightable material; a copyright can attach immediately to any tangible expression of an idea, regardless of whether the expression will remain in that initial form. These courts have held that the Copyright Act does not preempt Article 9 as to perfection of a security interest in an unregistered copyright.^[118] The prevailing view now is that an unregistered copyright is a general intangible in which a security interest is perfected by filing a financing statement in accordance with Article 9, not by recording in the Copyright Office.^[119]

The risk remains, of course, that a security interest in an unregistered copyright perfected by a U.C.C. filing will become unperfected if the copyright is later registered. The Model Agreement includes provisions intended to reduce that risk, including procedures facilitating the secured party’s ability to record its security interest in the Copyright Office immediately upon the debtor’s registration of a copyright or filing of a copyright application.^[120]

4.2.2 Patents and Trademarks

Filing a financing statement covering patents or trademarks in the appropriate U.C.C. filing office should give a secured party priority over an unperfected or later-perfected security interest and a later lien creditor, including a bankruptcy trustee. But the extent to which Article 9’s other priority rules might be preempted by federal patent or trademark law remains an unsettled question, especially where a later purchaser or licensee of the intellectual property claims that it takes free of the security interest under federal law.

To some extent, the federal patent and trademark laws protect a purchaser who records the transfer of the IP asset in the federal filing office against claims of later transferees; a purchaser whose transfer is not recorded may be subject to the rights of a later transferee that acquires the IP asset in good faith, for value, and without knowledge of the first purchase.^[121]

These are not the results one would expect under Article 9. For example, suppose a secured party files a financing statement covering a patent in the appropriate U.C.C. filing office, but does not record a security document in the PTO. Six months later, a third party purchases the patent without actual notice of the security interest, and it records its interest in the PTO. If all patent priority issues are determined under Article 9, as state law,^[122] then the purchaser’s interest in the patent will be subject to the earlier perfected security interest regardless of the lack of a PTO recording.^[123] But if the U.C.C. determines priority only as among secured parties and lien creditors, with federal IP law determining the respective rights of secured parties and purchasers, then the purchaser would take free of the unrecorded security interest.^[124]

Because of this uncertainty, many secured parties record security interests in patents and trademarks in both the U.C.C. filing office and the PTO. If a court were to hold that federal law preempts Article 9 as to claims of parties acquiring ownership of a patent or trademark, the secured party’s timely federal recording could provide notice of its security interest to potential purchasers searching the federal records.

4.3 Assignment Language vs. Granting Language

Historically, lenders’ counsel unsure about the federal statutory provisions dealing with the “assignment” of IP interests would use assignment and conveyance language to create a security interest. Another traditional approach was to structure a secured transaction like an assignment of real property rents: The borrower would “assign” the intellectual property to the lender, who would license the intellectual property back to the borrower, who could exercise all the rights of an owner until a default, which would terminate the license.^[125]

In light of the prevailing case law, it is not necessary to use assignment language to create a security interest in registered IP assets.^[126] In addition, assignment language has possible drawbacks:

• A secured party that is an assignee of a patent may be considered an owner and successor-in-title and thus be a necessary party to any infringement suit.^[127]
• A secured party that is an assignee of a trademark may be considered the trademark owner and licensor. As such, the secured party would be required to exercise quality control over the products and services bearing the trademark, whether provided by the debtor or its licensees, at the risk of invalidating the mark.^[128]
• An assignment of a trademark without the accompanying goodwill of the business (sometimes called an “assignment in gross”) can invalidate the mark or weaken its enforceability and value.^[129] If a secured party is an assignee of a trademark, the security interest could constitute an assignment in gross, with negative consequences for both the secured party and the debtor.^[130]
• Since a secured party is not operating the debtor’s business, an assignment of trademark collateral that inadvertently includes an ITU application may invalidate both the application and the mark itself.^[131] In the absence of law positively stating that creating a security interest is not the kind of assignment that would threaten the trademark application and any resulting registration, the practice has developed of conditionally excluding ITU applications from the collateral package, but only to the extent that, and as long as, the security interest would be treated as a prohibited assignment.^[132]

4.4 Federal Recording vs. U.C.C. Filing Systems

The federal IP recording systems are based on the specific registered item, not the name of the person with an interest in the item. Consequently, a secured party’s document recorded in the Copyright Office or PTO would not be effective if it merely described the debtor’s collateral by category (e.g., “all registered copyrights” or “all patents” or “all registered trademarks”); rather, the recorded security document must specifically identify each item of collateral, generally by registration or application number. Similarly, potential creditors cannot easily determine the lien status of all of a debtor’s IP assets by simply searching in the debtor’s name, but must usually search item-by-item and then work through the sometimes chaotic results. Moreover, transfer and assignment documents must include the item’s registration number; therefore, a transfer or assignment of (or security interest in) future rights in IP assets cannot be effectively recorded, since no registration number would exist. (These requirements prevent the kind of floating lien often used in inventory financing.) All this is in marked contrast to the U.C.C. filing system, which indexes security interests by the debtor’s name, does not require item-by-item identification of collateral, and permits perfection by filing against future collateral.

As with real property collateral, a secured party will want to search the IP filing office records, not only to discover other liens, but to make sure that the debtor has good title to its IP assets. Searches are somewhat easier in the PTO, which maintains an online database of recordings against each registration, so that the chain of title can be followed. The Copyright Office records are not so well-organized; a search and the necessarily detailed review of search results can take much longer and cost much more than a U.C.C. search.^[133]

Specific identification of each IP registration or application included in the collateral is thus necessary for recording a lien in the Copyright Office or PTO. The common practice is to identify each item of registered intellectual property in schedules to the security agreement and then attach the schedules to the documents to be recorded. The schedules also give the secured party information for monitoring the status of collateral registrations and applications and exercising its rights to collect on or dispose of collateral after default.

4.5 Security Interests in “Non-Assignable” IP Licenses

IP licenses are often described as “non-assignable” in a kind of shorthand to indicate that the license contains provisions prohibiting the licensee’s assignment of the license without the licensor’s consent. Even if a license is silent as to the licensee’s ability to assign its rights, IP lawyers consider the license to be non-assignable.^[134] Under federal case law, generally, unless the license agreement provides otherwise, a nonexclusive patent, trademark, or copyright license gives the licensee only personal rights to, not property rights in, the licensed intellectual property; the license would thus not be assignable without the licensor’s consent. These are not statutory rules, but judicially developed contract interpretation default rules; the parties can (but generally do not) contract around them.^[135]

Despite the presumption of non-assignability in IP practice, an anti-assignment provision in an IP license may not prevent the licensee’s grant of a security interest in the license. U.C.C. Article 9 views a party’s creation of a security interest in its rights under a contract as different from the type of “assignment” that may be prohibited by the contract terms. Thus, Article 9 generally permits a debtor to grant a security interest in its rights under a contract even if the contract or a statute prohibits “assignment.” However, Article 9 severely limits the rights of the secured party against the other party to the contract, thus averting many of the negative consequences faced by an IP licensor if its licensee assigns the license to an unapproved third party.^[136]

Although courts have not directly determined whether federal law preempts the U.C.C. so as to make an anti-assignment clause in an IP license effective to prevent the grant of a security interest,^[137] courts frequently rule that not all issues related to IP contracts are necessarily governed by federal law.^[138] Even if federal law preempts Article 9 on this point, a court may still interpret the policy underlying Article 9’s rules of free assignability with limitations as compatible with federal policy, and find that a security interest in a licensee’s or licensor’s rights under an IP license need not be treated as a prohibited assignment in all circumstances.^[139]

The Model Agreement leaves these arguments open by excluding from the collateral package an IP license if (and only as long as) it is subject to a provision of law or of the IP license that is effective and enforceable to prevent the grant of a security interest, whether or not the provision would prevent an absolute assignment of all the debtor’s rights.^[140]

Disputes about retention and assignability of IP licenses often arise in bankruptcy cases, when a debtor wants to assume and/or assign its rights under an IP license. In bankruptcy, a secured party with collateral consisting of a debtor’s rights as licensee under an IP license faces an inherent risk that this collateral may evaporate if the licensor objects to the debtor’s assumption or assignment of the license.^[141] The treatment of IP licenses in bankruptcy involves unresolved issues, and it is beyond the scope of this report.^[142]

4.6 IP License Considerations

The collateral may include intellectual property licensed by the debtor to licensees or licensed by third parties to the debtor. The rights of a secured party holding a security interest in a debtor’s rights under an IP license will depend on whether the debtor is a licensor or a licensee, the type of IP asset licensed, and whether the license is exclusive or nonexclusive. Federal law addresses some of these factors, by statute or otherwise, with results that can differ from the results expected under Article 9.

If the debtor is a licensor, the secured party will be concerned that the debtor’s licensees might take the licensed intellectual property free of the security interest, or that licenses granted by the debtor would remain effective after foreclosure of the security interest. If the debtor is a licensee, the secured party will be concerned about limitations on the debtor’s rights under the license, in addition to possible restrictions on the debtor’s ability to assign or grant a security interest in its licensee rights.^[143]

4.6.1 Article 9 “Licensee in Ordinary Course”

Under Article 9, an IP licensee generally takes the licensed IP rights subject to any previous security interest.^[144] There is, however, an exception to this rule: If the license is nonexclusive, a “licensee in ordinary course of business”—that is, a person that in good faith, without knowledge that the license violates the rights of another person, acquires the license in the ordinary course from a person in the business of licensing such property—will take the licensed intellectual property free of a previously perfected security interest, even if the licensee knows of the security interest.^[145] The federal IP laws take a different approach.

4.6.2 Exclusive Copyright Licenses^[146]

Debtor as licensor. Under Article 9, an exclusive licensee is not a licensee in ordinary course of business; accordingly, the exclusive license would be subject to any security interest that attaches to the licensed property.^[147] However, under federal law, an exclusive licensee of a copyright may in some circumstances take free of a security interest.

Under the Copyright Act, the grant of an exclusive license of a copyright is a type of “transfer of copyright ownership.” Most recent courts decisions have also, explicitly or implicitly, viewed a security interest in a copyright as being a “transfer of copyright ownership.”^[148] A secured party and an exclusive licensee from the debtor would thus be competing transferees of the license, subject to the rules on “conflicting transfers.”^[149]

If the secured party properly records its security interest in a registered copyright in the Copyright Office within the applicable one or two-month grace period, the recorded security interest should prevail over a later conflicting exclusive license.^[150] But if the secured party does not properly record within the grace period, a later exclusive license could prevail over the earlier security interest if the licensee takes its license in good faith, for valuable consideration, and without notice of the security interest, and properly records its license before the secured party records its security interest.

A secured party that immediately and properly records its security interest may be surprised to find itself behind an earlier exclusive licensee if the licensee records its license within the applicable grace period. For example, if a security interest is granted on January 20 and properly recorded that same day, the secured party may still find itself behind an undisclosed exclusive licensee that took its license on January 10 but did not record until January 30. An earlier exclusive license still in its grace period is like a secret lien, in that a search of Copyright Office filings would not reveal it.^[151]

Debtor as licensee. If the debtor is an exclusive licensee of a registered copyright, the secured party should consider having the debtor record its license in the Copyright Office against the copyright registration, and then record its security interest in the recorded license. This two-step process minimizes the risk that a transferee of the debtor’s license rights (or a transferee of the licensed copyright itself) would take those rights free of the security interest. Courts have not yet addressed these issues. As a practical matter, however, outside some industries, such as motion pictures^[152] or music, or with respect to exclusive copyrights that are essential to the transaction or the debtor’s business, secured parties do not generally record liens in the Copyright Office against copyrights licensed to the debtor.^[153]

4.6.3 Nonexclusive Copyright Licenses

While the grant of a nonexclusive copyright license is not a “transfer of copyright ownership” under the Copyright Act, the Act protects a nonexclusive licensee, even if the license is not recorded and the licensee does not provide value to the licensor.^[154]

If a debtor grants a security interest in a copyright and later grants a third party a written nonexclusive license to use the copyright, and the license and the security interest conflict with each other,^[155] the licensee will prevail if the license is taken in good faith without notice of the security interest and before the security interest is recorded.^[156] If the debtor’s written grant of a nonexclusive copyright license precedes its grant of the security interest, the licensee will prevail, regardless of whether the security interest or the license are recorded.^[157]

These results under the Copyright Act differ from the results under Article 9. Under Article 9, a nonexclusive licensee will take free of an existing security interest only if its licensor created the security interest, is in the business of licensing such property, and grants the license in the ordinary course of its business.^[158] The Copyright Act’s protections, in contrast, do not depend on who created the security interest or the nature of the licensor’s business or the license transaction. On the other hand, the licensee’s knowledge of the security interest would leave it unprotected under the Copyright Act, whereas Article 9 protects a licensee with knowledge of the security interest as long as the licensee does not have knowledge that the license violates another person’s rights in the copyright license.^[159]

4.6.4 Patent and Trademark Licenses

Neither the Patent Act nor the Lanham (Trademark) Act directly addresses the rights of licensees. However, under well-established U.S. patent and trademark law principles, a license grant, whether exclusive or nonexclusive, continues in force when title to the patent or mark is transferred to a new owner, even if the new owner had no knowledge of the license and even if the license is not recorded.^[160]

A security interest, of course, can only attach to the rights that the debtor has in the collateral. A secured party thus could find that its security interest in patent or trademark collateral loses to patent and trademark licenses previously granted by the debtor, and also loses to nonexclusive licensees qualifying as licensees in the ordinary course of business under Article 9.

4.7 Enforcement of IP Security Interests

For copyright, patent, or trademark collateral, a secured party will typically be able to use Article 9’s normal enforcement rules after default. Federal law generally does not preempt state law as to foreclosures and contract enforcement.^[161]

If the debtor is a licensor, its rights to payment from licensees would be “accounts” or “payment intangibles” under the U.C.C., and the secured party should be able to collect payments generated by the licensee’s use of the intellectual property, even if the license prohibits assignment by the licensor.^[162]

If the debtor is a licensee, however, its rights under the license would likely be “general intangibles.” Most IP licenses—especially trademark licenses—expressly or implicitly prohibit assignment by the licensee; even if U.C.C. section 9-408 allows the licensee to grant a security interest,^[163] the secured party’s ability to use the licensed intellectual property or enforce the license would be severely limited.^[164] A secured party that contemplates using or enforcing the debtor’s IP licenses upon default should get the licensor’s consent to assignments before the transaction closes, not after default.

Sometimes an agreement involving rights in intellectual property, but not titled “security agreement,” may contain language purporting to forfeit or transfer the intellectual property to the secured party automatically upon the debtor’s default. Finance lawyers tend to see this kind of provision as an attempt (possibly unwitting) to evade Article 9’s required foreclosure procedures.^[165] If the substance of the agreement creates a security interest, then regardless of what the arrangement is called, the party seeking to take the IP asset must comply with Article 9’s enforcement rules, unless federal law preempts the Article 9 enforcement system. Not all courts, however, recognize Article 9’s substance-over-form approach in the IP context.^[166]

5. Drafting Process

The Task Force was co-chaired by Katherine Simpson Allen and Matthew Kavanaugh, with David Fournier, John E. Murdock, and Elaine D. Ziff serving as vice chairs and Howard Darmstadter as editor.

The Task Force met jointly with the Commercial Finance Committee’s Intellectual Property Financing Subcommittee at the ABA annual meetings from 2009 through 2013, the Business Law Section’s spring meetings in 2011, 2013, 2014, and 2015, and the Business Law Section’s annual meetings in 2014 and 2015. Beginning in 2012, the Task Force also held monthly meetings by conference call.

Guided by John Murdock, the first few meetings in 2010 and 2011 focused on using a document assembly software program to construct a model agreement by collecting provisions in similar agreements available in the EDGAR database and analyzing their relative frequency of use. The initial 2012–2013 working drafts were based in large part on this system, but for various reasons the Task Force ultimately reverted to a more traditional drafting approach.

Co-chair Kathi Allen, vice chair Elaine Ziff, and editor Howard Darmstadter acted as a de facto drafting committee. Kathi prepared initial drafts, Elaine provided expert commentary on IP law and practice, and Howard edited each draft to streamline and simplify the language.

Revised drafts of the agreement and/or the accompanying report were distributed to the Task Force, and posted on the Task Force website, a few days before each Task Force meeting (whether held in person or by telephone), and the new drafts were discussed at the meeting. Based on the issues raised and discussed at the meeting, the process of revision, distribution, and discussion was repeated for the following meeting.

In addition to its co-chairs, co-vice chairs, and drafting committee, the Task Force was supported in its work by members of the Task Force and members of the Commercial Finance Committee’s IP Financing Subcommittee. (Lists of members are available on the respective website home pages for the Task Force and Subcommittee.) The following members of both groups provided especially critical support by attending meetings frequently, reviewing drafts, sending comments, correcting errors, drafting sections, explaining legal technicalities, updating practice tips, offering solutions to drafting problems, and resolving occasional differences of opinion:

• Warren E. Agin
• Leianne S. Crittenden
• Patrick A. Guida
• Kiriakoula Hatzikiriakos
• Marilyn C. Maloney
• Pamela J. Martinson
• Peter S. Munoz
• Stephen L. Sepinuck
• Pauline M. Stevens
• Stephen T. Whelan

The Task Force also enjoyed the support of successive chairs of its sponsoring Committees: Lynn A. Soukup, James Schulwolf, and Neal J. Kling of the Commercial Finance Committee, and Penelope L Christophorou, Norman M. Powell, and Kristen David Adams of the U.C.C. Committee.

1. In this report and the footnotes to the Model Agreement, we generally use “IP” as an abbreviation for “intellectual property” when used as an adjective. ↑

2. Unless otherwise indicated, all references to the “U.C.C.,” the Uniform Commercial Code, or any Article of the U.C.C. are to the Official Text approved by the American Law Institute and the Uniform Law Commission most recently before the date of this report. References to earlier versions of the Uniform Commercial Code mean the Official Text most recently approved and in effect in the year stated. References to “Former Article 9” refer to the Official Text as approved and in effect immediately prior to July 1, 2001. ↑

3. See section 1.2.1 (“Scheduled Excluded Property”) of the Model Agreement. ↑

4. See infra section 2.2. ↑

5. See infra section 2.3. ↑

6. See infra section 2.4. ↑

7. Examples are plant variety patents (patents for distinct and new varieties of asexually reproduced plants that are not tuber-propagated or found in an uncultivated state); “mask works” (semiconductor chip product designs, which are protected under copyright laws); and vessel hull configurations (original designs of vessel hulls, which are protected under copyright laws). ↑

8. As noted in supra section 1.2.4, the Model Agreement includes foreign intellectual property in the collateral, but does not attempt to provide for protecting or enforcing that lien under non-U.S. law. Different countries’ approaches to IP collateral vary greatly. See generally United Nations Comm’n on Int’l Trade Law, UNCITRAL Legislative Guide on Secured Transactions: Supplement on Security Rights in Intellectual Property (2010), http://www.uncitral.org/uncitral/uncitral_texts/security/ip-supplement.html. ↑

9. Although some trademarks and other IP assets may be recognized, registered, and/or regulated under the laws of some states, this report generally focuses on the legal issues raised by the pledge of IP property that is created, registered, and/or regulated under federal law. ↑

10. 17 U.S.C. §§ 101–1332 (2012). Some pre-1976 sound recordings, however, are excluded from the Copyright Act requirements, and thus possibly governed by state law, until 2067. Id. § 301(a). ↑

11. Id. § 102(a) (listing examples of types of works of authorship). ↑

12. Id. ↑

13. Id. § 106. ↑

14. Id. § 101. ↑

15. Id. § 411. ↑

16. Id. §§ 502–504. ↑

17. Id. § 412. ↑

18. Id. § 201(d)(1). ↑

19. Id. § 204. ↑

20. Id. § 205(a), (c). A transfer of copyright ownership (or other document pertaining to a copyright) can be recorded in the Copyright Office even if the copyright has not been registered, but the recording will only give constructive notice if it relates to a registered copyright. Note that identifying the copyright only by title may not satisfy the requirements for constructive notice if there are numerous registered works with the same title and many recorded documents referring to the title. ↑

21. Id. § 101. ↑

22. For convenience, this report sometimes uses the term “properly record” to mean that the relevant document is recorded in the Copyright Office in the form and manner required to give constructive notice of the facts stated therein. ↑

23. Id. § 205(d). For a recorded transfer to “prevail over” another transfer, the recording must give constructive notice, which can only happen if the copyright is registered. See supra note 20. Thus, only documents pertaining to registered copyrights can “prevail” under these rules. ↑

24. 17 U.S.C. §§ 302–305. ↑

25. Id. § 203(a). ↑

26. Id. ↑

27. See supra section 2.2.1. ↑

28. 35 U.S.C. §§ 1–390 (2012). ↑

29. Id. § 154(a)(1); see also id. § 271(a) (“whoever without authority makes, uses, offers to sell, or sells any patented invention … infringes the patent”). ↑

30. See id. §§ 100(d), 281.35. ↑

31. Id. §§ 111, 118. ↑

32. Id. §§ 111–115. ↑

33. Id. § 131. ↑

34. Id. § 122. ↑

35. Id. § 261. ↑

36. Id. ↑

37. Id. § 154(a)(2). ↑

38. Id. § 41(b). ↑

39. Id. § 311. ↑

40. 15 U.S.C. §§ 1051–1141 (2012). ↑

41. Id. § 1115(a). ↑

42. Id.; see also id. § 1053. ↑

43. J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition §§ 5.1, 2.7 (4th ed. 2007) (as originally conceived the purpose of trademark law was to prevent fraud and deceit by unfair competition). ↑

44. See, e.g., Inwood Labs. v. Ives Labs., 456 U.S. 844, 854 n.9 (1982) (an infringer deprives trademark owner of goodwill earned by owner’s efforts and deprives consumers of ability to distinguish among competitors’ products). ↑

45. 15 U.S.C. § 1051(b). ↑

46. Id. § 1051(d)(1)–(2) (explaining the timing of usage and the extensions of time available). ↑

47. The PTO maintains both a “principal register” and a “supplemental register” for trademarks. Some trademark applications may not meet the requirements for the principal register, but may be recorded in the supplemental register, which provides a lower level of protection. This report and the Model Agreement do not distinguish between the two, but use the term “registered” to refer to the principal register, unless otherwise specified. ↑

48. See id. §§ 1072, 1111, 1114(a), 1115(a), 1124. ↑

49. Id. § 1060(a)(1). ↑

50. Id. § 1060(a); 37 C.F.R. § 3.16 (2015). ↑

51. 15 U.S.C. § 1060(a)(3). ↑

52. Id. § 1060(a)(4). ↑

53. See infra section 4.6.4. ↑

54. 15 U.S.C. §§ 1059(a), 1058(a)–(b). ↑

55. Id. § 1127. If the registration is not challenged, however, the trademark will remain on the registry indefinitely, as long as the owner files an affidavit or declaration of use between five and six years after registration, and by the end of every ten-year period after registration. Id. §§ 1058, 1059. ↑

56. E.g., Eva’s Bridal, Ltd. v. Halanick Enters., 639 F.3d 788 (7th Cir. 2011) (trademark owner must have quality control over licensee’s use to maintain consistent quality, not necessarily high quality, of goods and services using the trademark); Barcamerica Int’l USA Trust v. Tyfield Imps., Inc., 289 F.3d 589 (9th Cir. 2002) (trademark owner engaged in naked licensing and thus forfeited its rights in the mark, resulting in the cancellation of registration). ↑

57. 15 U.S.C. § 1064(3); Bayer Co. v. United Drug Co., 272 F. 505 (S.D.N.Y. 1821); Haughton Elevator Co. v. Seeberger (Otis Elevator Co.), 85 U.S.P.Q. 80 (Comm’r Pat. 1850). ↑

58. 114 P.L. 153, 130 Stat. 376. The D.T.S.A. amends the Economic Espionage Act, 18 U.S.C. §§ 1831–1839 (2012), which was formerly solely a criminal statute. Among other things, the D.T.S.A. creates a federal civil cause of action for trade secret misappropriation, in parallel with state law. See D.T.S.A. § 2(f) (“Nothing in the amendments made by this section shall … preempt any other provision of law.”). ↑

59. U.T.S.A. refers to the Uniform Trade Secrets Act with 1985 amendments. ↑

60. U.T.S.A. § 1(4). ↑

61. Id. § 3. ↑

62. Id. § 1(2). ↑

63. Id. § 1(1). ↑

64. See, e.g., Kremer v. Cohen, 337 F.3d 1024 (9th Cir. 2003) (under California law, a domain name is intangible personal property and can be subject to claim for conversion); Harrods, Ltd. v. Sixty Internet Domain Names, 302 F.3d 214 (4th Cir. 2002); Caesars World, Inc. v. Caesars-Palace.com, 112 F. Supp. 2d 502 (E.D. Va. 2000) (registered domain name is property subject to in rem action under Anti-Cybersquatting Consumer Protection Act); Schott v. McLear (In re Larry Koenig & Assoc., LLC), No. 01-12829, 2004 Bankr. LEXIS 2311, at *1 (Bankr. M.D. La. Mar. 31, 2004) (domain name and contractual right to use name are property rights under Louisiana law); Sprinkler Warehouse v. Systematic Rain Inc., 859 N.W. 2d 527 (Minn. Ct. App. 2015) (domain names and copyright-protected material on websites are subject to garnishment). ↑

65. See, e.g., Dorer v. Arel, 60 F. Supp. 2d 558 (E.D. Va. 1999) (registered domain name is not personal property that can be the object of a judgment lien); Network Solutions, Inc. v. Umbro Int’l, Inc., 529 S.E.2d 80, 87 (2000) (registered domain name is not personal property subject to garnishment, but “the product of a contract for services” between the registrant and the registrar). ↑

66. U.C.C. § 1-103(a). ↑

67. U.C.C. § 9-101 cmt. (1972). ↑

68. See id. § 9-102 & note. ↑

69. Revised Article 9 was approved in 1995 and effective in most states on July 1, 2001. The most recent amendments to Article 9 were approved in 2010 and became effective in most states on July 1, 2013. ↑

70. U.C.C. §§ 9-102(a), 1-201(b)(35). ↑

71. Id. § 9-109. ↑

72. Id. §§ 9-203, 9-202. ↑

73. Id. § 9-108. ↑

74. Id. § 9-204. ↑

75. See id. §§ 9-301, 9-501. ↑

76. Id. § 9-502(a). ↑

77. Id. §§ 9-504, 9-108(c). Such a general “all assets” description will not, however, be effective in a security agreement to identify the collateral. ↑

78. Id. § 9-509(a). ↑

79. Id. § 9-519(c). ↑

80. Id. §§ 9-308(a), 9-502 cmt. 2. ↑

81. See id. §§ 9-317–9-339. ↑

82. Id. § 9-102(a)(52). ↑

83. Id. § 9-317(a). ↑

84. Id. § 9-322(a)(1). ↑

85. Id. §§ 9-103 (defining purchase-money security interest), 9-324 (priority of purchase-money security interest). ↑

86. Id. §§ 9-320, 1-201(a)(9). ↑

87. Id. § 9-321; see infra section 4.6.1. ↑

88. Id. §§ 9-406(d)–(e), 9-408. ↑

89. The nature of the transaction—as a true sale or a secured payment obligation—is also relevant in some cases. Id. §§ 9-406(e), 9-408(b). ↑

90. Id. § 9-102(a)(2), (61). ↑

91. Id. § 9-406(a), (d). ↑

92. Id. § 9-102(a)(42). ↑

93. Id. § 9-408(d)(1)–(4), (6); see also id. § 9-408 cmt. 2, ex. 1. ↑

94. Id. §§ 9-601–9-624. ↑

95. Id. § 9-610(b). ↑

96. Id. § 9-602(7). ↑

97. Id. § 9-603(a). ↑

98. Id. § 9-610(c)(2) (secured party can purchase collateral at private sale only if the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations). ↑

99. Id. § 9-620. Generally, the debtor cannot waive its rights in connection with the secured party’s acceptance of collateral in satisfaction of the debt, and can only waive certain other rights in an authenticated record after default. Id. §§ 9-602(10), 9-624. ↑

100. Id. § 9-607(a). ↑

101. See id. § 9-408(d); supra section 3.6. ↑

102. The PTO accepts only specific types of documents for recording, and it then cross-references each recorded document to the original registration; the PTO can therefore generate a report showing all documents recorded against a particular patent or trademark. The Copyright Office will record any document “pertaining to a copyright” (17 U.S.C. § 205(a)), as long as it contains the original registration number. The Copyright Office does not cross-reference or link the recorded documents and registrations, but can generate a report showing every document that refers to a particular registration or party. ↑

103. See, e.g., Moldo v. Matsco, Inc. (In re Cybernetic Servs.), 252 F.3d 1039, 1044 (9th Cir. 2001) (“As is often true in the field of intellectual property, we must apply an antiquated statute in a modern context.”). ↑

104. For instance, although U.C.C. Article 9 had been in effect for several decades when the Copyright Act was comprehensively amended in 1976 (effective January 1, 1978), the amendments did not specifically address “security interests.” Instead, the amendments defined mortgages, hypothecations, and exclusive licenses as “transfers of copyright ownership,” and addressed the priority of claims of transferees. The Copyright Act does recognize “security interests” as such, but only in a limited context related to collective bargaining agreements. 28 U.S.C. § 4001(c) (2012). ↑

105. See, e.g., Cybernetic Servs., 252 F.3d at 1049–50 (discussing historical meanings of assignment, grant, and conveyance as transfers of title, and equating “hypothecation” to a security interest). ↑

106. See U.C.C. § 9-102 cmt. 26 (regarding the terms “assignment” and “transfer,” “no significance should be placed on the use [in Article 9] of one term or the other. Depending on the context, each term may refer to the assignment or transfer of an outright ownership interest or to the assignment or transfer of a limited interest, such as a security interest.”). ↑

107. The federal IP laws generally permit the owner of a registered IP asset to transfer “partial” interests in the nature of different kinds of rights (e.g., performance rights and distribution rights in a copyrighted work) or rights that can be exercised only in certain geographic areas (e.g., exclusive right to use a trademark in Texas and Oklahoma). The federal laws do not necessarily govern all of the contractual rights among transferors and transferees. See infra note 133. The question here is whether a security interest is the kind of “partial interest” that would be governed by the federal IP laws. ↑

108. U.C.C. § 9-109(c)(1) cmt. 8. ↑

109. Id. § 9-311 (addressing federal preemption as to methods of perfection). ↑

110. Aerocon Eng’g, Inc. v. Silicon Valley Bank (In re World Auxiliary Power Co.), 303 F.3d 1120, 1126 (9th Cir. 2002) (Copyright Act’s use of “mortgage” as a type of “transfer” is properly read to include security interests under U.C.C. Article 9); In re Nacio Sys., Inc., 410 B.R. 38 (Bankr. N.D. Cal. 2009); see also In re AEG Acquisition Corp., 127 B.R. 34 (Bankr. C.D. Cal. 1991) (as to registered copyrights), aff’d, 161 B.R. 50 (9th Cir. BAP 1993); In re Peregrine Entm’t, Ltd., 116 B.R. 194 (C.D. Cal. 1990) (same). ↑

111. See, e.g., In re Tower Tech, Inc., 67 F. App’x 521 (10th Cir. 2003) (filing with PTO is ineffective to perfect security interest in patents); Moldo v. Matsco, Inc. (In re Cybernetic Servs.), 252 F.3d 1039 (9th Cir. 2001) (U.C.C. filing is effective to perfect security interest in patents); Trimarchi v. Together Dev. Corp., 255 B.R. 606 (D. Mass. 2000) (U.C.C. filing is necessary to perfect security interest in trademark and PTO recording is ineffective); In re Coldwave Sys. LLC, 368 B.R. 91 (Bankr. D. Mass. 2007) (U.C.C. filing is necessary to perfect security interest in patents); In re 199Z, Inc., 137 B.R. 778 (Bankr. C.D. Cal. 1992) (U.C.C. filing is necessary to perfect security interest in a trademark and PTO recording was ineffective); In re Chattanooga Choo-Choo Co., 98 B.R. 792 (Bankr. E.D. Tenn. 1989) (U.C.C. filing, not federal registration, is required to perfect security interest in trademarks); In re Roman Cleanser Co., 43 B.R. 940 (Bankr. E.D. Mich. 1984) (U.C.C. filing is sufficient to perfect security interest in trademark and PTO recording is not necessary), aff’d, 802 F.2d 207 (6th Cir. 1986). ↑

112. The federal IP laws do not use the term “perfection”; references here to “perfecting a security interest” in a copyright through a filing in the Copyright Office mean that the filing will be sufficient to give the secured party’s interest priority over lien creditors (including a bankruptcy trustee) and unperfected and later-perfected security interests. ↑

113. See supra section 3.6. ↑

114. The exhibits to the Model Agreement include short-form security agreements for recording liens in the relevant federal IP filing offices. ↑

115. I.e., the secured party’s well-known “belt and suspenders.” ↑

116. See, e.g., section 1.4 (“After-acquired Collateral”), note 30 (possible knowledge and materiality qualifications), and note 65 (possible limitation on perfection requirements) in the Model Agreement. ↑

117. U.C.C. § 9-311(b). ↑

118. See, e.g., Aerocon Eng’g, Inc. v. Silicon Valley Bank (In re World Auxiliary Power Co.), 303 F.3d 1120, 1131 (9th Cir. 2002). ↑

119. A few older cases had held that recording in the Copyright Office would be necessary to per fect a security interest in materials for which a copyright application could be, but had not been, filed with the Copyright Office. In re AEG Acquisition Corp., 127 B.R. 34 (Bankr. C.D. Cal. 1991), aff’d, 161 B.R. 50 (9th Cir. BAP 1993); In re Avalon Software, Inc., 209 B.R. 517 (Bankr. D. Ariz. 1997). These decisions temporarily led some secured parties to impose the impracticable requirement that debtors register all their copyrights. These decisions were heavily criticized and have been generally discredited. The Aerocon court expressly rejected the holdings in AEG Acquisition and In re Avalon that recording in the Copyright Office would be necessary to perfect a security interest in an unregistered copyright. See also MCEG Sterling, Inc. v. Phillips Nizer Benjamin Krim & Ballon, 646 N.Y.S.2d 778, 780 (Sup. Ct. 1996) (Peregrine ruling is “questionable” as to the need to register security interests in accounts receivable arising from copyrights). ↑

120. See section 1.4.4 (“Notice of Copyright Applications”) and notes 16 & 17 of the Model Agreement. ↑

121. See supra sections 4.2.1 (Copyright Act) & 4.2.2 (Patent and Lanham Acts). Although the language used in the different statutes is not identical, this kind of “bona fide purchaser” is essentially the opposite of a lien creditor, such as a bankruptcy trustee, who does not acquire an asset in good faith and does not provide value. ↑

122. See U.C.C. § 9-311 cmt. 5 (perfection of a security interest under a preemptive federal statute has all the consequences of perfection under Article 9); Moldo v. Matsco, Inc. (In re Cybernetic Servs.), 252 F.3d 1039, 1058 n.9 (9th Cir. 2001) (former U.C.C. section 9-302(3) governs only the “where to file” question, while issues left unresolved by the federal statute, such as priority, are resolved by looking to Article 9). ↑

123. U.C.C. § 9-317(d). ↑

124. See In re Transp. Design & Tech., Inc., 48 B.R. 635, 639 (Bankr. S.D. Cal. 1985) (U.C.C. governs perfection of a security interest in a patent, but federal law governs rights of bona fide purchasers, and they would prevail over security interest not recorded in the PTO). ↑

125. For instance, in Clorox Co. v. Chemical Bank, 40 U.S.P.Q.2d 1098 (T.T.A.B. 1996), the transaction at issue was structured as this kind of “assignment-with-license-back.” See infra note 131. ↑

126. See, e.g., In re Roman Cleanser Co., 43 B.R. 940 (Bankr. E.D. Mich. 1984) (security interest in a trademark is not equivalent to an assignment under the Lanham (Trademark) Act), aff’d, 802 F.2d 207 (6th Cir. 1986). ↑

127. See 35 U.S.C. §§ 281.35 100(d) (2012); In re Neurografix (360) Patent Litig., 5 F. Supp. 3d 146 (D. Mass. 2014) (an assignee that only has exclusionary right cannot bring infringement suit without joining the assignor patentee). For recording purposes, the PTO treats a “conditional assignment” as an “absolute assignment” regardless of whether the condition, such as payment of money, has been fulfilled, and the “assignment” can only be cancelled by both parties or a court order. 37 C.F.R. § 3.56 (2015). If a security interest in a patent is structured as a conditional assignment and recorded, the secured party could be treated as an assignee. ↑

128. See supra text accompanying note 56. ↑

129. See 15 U.S.C. § 1060(a) (2012); Brown Bark II, L.P. v. Dixie Mills, LLC, 732 F. Supp. 2d 1353 (N.D. Ga. 2010) (secured party that bid on debtor’s trademarks at its own Article 9 foreclosure sale but did not actually use the marks in business had received an “assignment in gross” and had no enforceable rights in the marks). ↑

130. Roman Cleanser Co., 43 B.R. at 947 (security interest in a trademark along with formulas and customer lists satisfied the goodwill requirements of the Lanham (Trademark) Act). ↑

131. See supra section 2.4.4; 15 U.S.C. § 1060(a). In Clorox, the trademark collateral included an intent-to-use (ITU) application, which had been filed in the PTO, but for which the required evidence of use of the trademark had not been accepted by the PTO. Clorox Co. v. Chemical Bank, 40 U.S.P.Q.2d 1098, 1100 (T.T.A.B. 1996). In response to a later challenge, the court found that the trademark registration itself (not merely the lien) had been invalidated by the premature “assignment” of the ITU application without the corresponding goodwill and operating business. Id. at 1105. Because Clorox dealt with an actual “assignment” of the trademarks and ITU application, the same analysis would not necessarily apply to the grant of a security interest that is not structured as an “assignment.” ↑

132. See section 1.2.2 of the Model Agreement. ↑

133. In the Copyright Office, there is a significant lag time between the submission of a non-electronic document for recording and its actual recording. Consequently, the “chain of title” reflected in the records of the federal IP recording offices may not be complete or correct. For copyright assignments (which cannot be submitted electronically), the lag can be as much as one year. ↑

134. See, e.g., Elaine D. Ziff, The Effect of Corporate Acquisitions on the Target Company’s License Rights, 57 Bus. Law. 767 (2002). ↑

135. In re XMH Corp., 647 F.3d 690 (7th Cir. 2011) (rule that trademark licenses are not assignable without authorization is a sensible default rule); In re Trump Entm’t Resorts, Inc., 526 B.R. 116, 124 (Bankr. D. Del. 2014) (parties to a trademark license agreement are free to contract around the default rule of non-assignability); In re Golden Books Family Entm’t, 269 B.R. 311 (Bankr. D. Del. 2001) (nonexclusive copyright licenses do not create ownership rights and are not assignable over the licensor’s objection). ↑

136. See supra section 3.7. ↑

137. But see U.C.C. § 9-408 cmt. 9 (“This section does not override federal law to the contrary. However, it does reflect an important policy judgment that should provide a template for future federal law reforms.”). ↑

138. See, e.g., as to copyrights, Ryan v. Editions Ltd. W., Inc., 786 F.3d 754, 761 (9th Cir. 2015) (Copyright Act does not generally preempt contract-based claims under state law); Gaiman v. Mc-Farlane, 360 F.3d 644, 652 (7th Cir. 2004) (citing Saturday Evening Post Co. v. Rumbleseat Press, Inc., 816 F.2d 1191, 1194–95 (7th Cir. 1987)) (like a suit to enforce a copyright license, a suit for an accounting of profits between copyright co-owners arises under state law, not federal law, and there is no issue of copyright law); Broadcast Music Inc. v. Hirsch, 104 F.3d 1163, 1167–68 (9th Cir. 1997) (state law, not federal law, determined the effect of copyright owner’s assignment of royalties). ↑

139. See Valley Bank & Trust Co. v. Spectrum Scan, LLC (In re Tracy Broad. Corp.), 696 F.3d 1051 (10th Cir. 2012). In confirming the validity of a debtor’s grant of a security interest in proceeds of its FCC license notwithstanding federal statutory prohibition of an assignment of such a license without FCC consent, the court found support in U.C.C. section 9-408, stating that section 9-408 “does for state licenses what FCC policy does for FCC licenses,” and noting that section 9-408 and its comments recognize that a lien on the right to sale proceeds of a government license can attach when a lender extends credit to a licensee, so long as the governmental interest in regulation of the license is not infringed. Id. at 1064; see also U.C.C. § 9-408 cmt. 9. ↑

140. See section 1.2.3 (“Restricted IP Licenses”) of the Model Agreement. ↑

141. See, e.g., In re Trump Entm’t Resorts, Inc., 526 B.R. 116, 124 (Bankr. D. Del. 2015) (debtor trademark-licensee cannot assume or assign trademark license because trademark law prohibits assignment without consent of licensor). Although courts differ widely as to the correct statutory analysis, Bankruptcy Code section 365 generally permits a bankruptcy trustee or debtor in possession to “assume” and/or “assign” some kinds of existing contracts even if “applicable law” would otherwise “prohibit, restrict, or condition the assignment” of the contract, with an exception for circumstances where the “applicable law” would still bar assumption or assignment of the particular contract at issue. 11 U.S.C. § 365(f) (2012); see, e.g., Perlman v. Catapult Entm’t (In re Catapult Entm’t), 165 F.3d 747 (9th Cir. 1999) (debtor licensee could not assume patent license over licensor’s objection). Although the language in Bankruptcy Code section 365 and in U.C.C. section 9-408 as to laws or contract terms that prohibit, restrict, or condition the assignment of a contract may be similar, Article 9 does not include the same exceptions as the Bankruptcy Code. ↑

142. Other Bankruptcy Code provisions deal with intellectual property. See, e.g., In re Crumbs Bake Shop, Inc., 522 B.R. 766 (Bankr. D.N.J. 2014) (despite debtor’s sale of all its assets, non-debtor trademark licensees could still elect to maintain licenses in place, under Bankruptcy Code section 365(n), even though it technically does not cover trademarks). ↑

143. See supra section 4.5. ↑

144. U.C.C. §§ 9-201(a), 9-315(a)(1). ↑

145. Id. § 9-321(a), (b). ↑

146. Relevant Copyright Act provisions on recording, registration, priority, and related matters addressed in this section 4.6 are summarized in supra section 2.2.4. ↑

147. U.C.C. § 9-315(a)(1). ↑

148. See supra note 109. ↑

149. The circumstances in which the respective interests of a secured party and an exclusive licensee would “conflict” in a way that would allow one of them to “prevail over” the other are not clear. Possibly there is no “conflict” until the secured party forecloses its lien. Possibly no conflict arises unless both transfers are of the same type or unless the grants are identical. Notwithstanding these theoretical concerns, a secured party will likely be content with a perfected security interest covering the debtor’s rights to collect royalties or license fees generated under the license. See supra note 118. ↑

150. See supra section 2.2.4. ↑

151. Documents submitted to the Copyright Office may not be recorded for several months. The date of recording, however, is the date when the proper document, in proper form, and fees are all received in the Copyright Office. 37 C.F.R. § 201.4(e) (2015). ↑

152. In film financing, for instance, the owner of the film copyright may grant an exclusive license in (or assign) the rights to distribute the film (and collect royalties) to a separate distribution company. A lender to the distribution company is likely to require the recordation of both the exclusive license (or assignment) and the security interest in the Copyright Office. ↑

153. Parties may also resist recording licenses when they would prefer to avoid the public disclosure of their relationships and other business terms. ↑

154. 17 U.S.C. § 101 (2012). ↑

155. See supra note 149. ↑

156. 17 U.S.C. § 205(e) (2012). ↑

157. See, e.g., CERx Pharm. Partners, LP v. RPD Holdings, LLC (In re Provider Meds, LP), No. 13-30678-BJH, 2014 Bankr. LEXIS 3519, at *10–13 (Bankr. N.D. Tex. Aug. 20, 2014) (in lender’s suit against debtor for fraudulent inducement and tortious interference, alleging that debtor had reduced software collateral value by granting perpetual, royalty-free licenses to third parties, court held that the licenses did not create “encumbrances,” and that debtor therefore had not breached its representations or covenants as to priority and absence of encumbrances). ↑

158. U.C.C. § 9-321(a). ↑

159. Id. § 9-321(a), (b). ↑

160. See, e.g., Moldo v. Matsco, Inc. (In re Cybernetic Servs.), 252 F.3d 1039, 1052 (9th Cir. 2001) (citing Keystone Foundry v. Fastpress Co., 272 F. 242, 245 (2d Cir. 1921) (patents)); ICEE Distributors, Inc. v. J&J Snack Foods Corp., 325 F.3d 586, 593 (5th Cir. 2003) (trademarks). This rule also has been applied to covenants not to sue and settlement agreements. See, e.g., Jardin v. Datallegro, Inc., No. 08cv1462-IEG-RBB, 2009 U.S. Dist. LEXIS 3339, at *6–7 (S.D. Cal. Jan. 20, 2009) (new patent owner was bound by prior settlement agreement and could not bring infringement action); V-Formation, Inc. v. Benetton Grp. SpA, Civ. A. No. 02-cv-02259-PSF-CBS, 2006 U.S. Dist. LEXIS 13352, at *18–21 (D. Colo. Mar. 10, 2006) (new patent owner could not bring infringement suit even though new owner was not aware of covenant not to sue granted by prior owner). ↑

161. See, e.g., Republic Pictures Corp. v. Security-First Nat’l Bank of L.A., 197 F.2d 767 (9th Cir. 1952) (federal court does not have jurisdiction to foreclose copyright mortgage); Moore v. Willis, No. 14cv1602 BTM (RBB), 2014 U.S. Dist. LEXIS 127543, at *4–5 (S.D. Cal. Sept. 8, 2014) (state law applies to determine if copyrights are subject to execution to satisfy a judgment); Mayfair Wireless LLC v. Celico P’ship, No. 11-772-SLR-SRF, 2013 U.S. Dist. LEXIS 124206, at *17–18 (D. Del. Aug. 30, 2013) (federal law determines validity and terms of an assignment of a patent, but state law applies to a transfer of patent ownership by operation of law if it is not deemed an assignment). ↑

162. See U.C.C. § 9-406(a), (d); supra section 3.6. ↑

163. See supra section 4.2. ↑

164. See U.C.C. § 9-408(a); supra section 3.6; see also supra section 4.5 (Bankruptcy Risks). ↑

165. See, e.g., Sky Techs. LLC v. SAP AG, 67 U.C.C. Rep. Serv. 2d 802 (E.D. Tex. 2008) (where patent security agreement was recorded in the PTO, purchaser from secured party’s assignee at fore-closure sale acquired patents by operation of law—U.C.C. Article 9—notwithstanding absence of written assignment or recorded transfer from original debtor to purchaser); In re Coldwave Sys. LLC, 368 B.R. 91 (Bankr. D. Mass. 2007) (U.C.C. Article 9, not patent law, governs secured party’s exercise of remedies, and secured party was not allowed to transfer the IP collateral to itself without debtor’s consent, or waiver, as required for a strict foreclosure under U.C.C. section 9-620). ↑

166. See Corsair Special Situations Fund, L.P. v. Engineered Framing Sys., Inc., 694 F. Supp. 2d 449, 459 (D. Md. 2010) (court construed security agreement provision that patent collateral would “become an absolute assignment” after default to effectuate an automatic transfer of title upon default); but see Steven O. Weise & Stephen L. Sepinuck, Personal Property Secured Transactions, 70 Bus. Law. 1243, 1265 n.218 (Corsair decision allowing collateral to be automatically assigned to secured party on default, as provided in security agreement, is “simply wrong”). ↑