)

SECURITY INTERESTS ININTELLECTUAL PROPERTY

Ron Cuming, Q.C.College of Law,

University of SaskatchewanSaskatoon, Sask. S7N OWO

Ph: 966-5869 Fax:. 966-5900

BIOGRAPHICAL INFORMATION

Ron Cuming, Q.C.

Professor Cuming teaches commercial law at the University of Saskatchewan. His public service includes:Chairperson, Law Reform Commission of Saskatchewan (1978-82); Principal advisor to governments ofAlberta, British Columbia, and Saskatchewan in the design and implementation of Personal PropertySecurity Legislation in those provinces (1986-92). Professor Cuming was also Chief spokesperson for theCanadian Delegation to the Diplomatic Conference on the Unidroit Conventions on International FinancialLeasing and International Factoring, 1988, and Consultant to International Institute for the Unification ofPrivate Law (UNIDROIT) on a Convention on Security Interests in Mobile Equipment (1990-). He isDirector of the Secured Financing Project, National Law Center for Inter-American Free Trade, Tucson,Ariz. (1993- ) and Consultant to the Private Sector. Development Department, World Bank (1994- ).Professor Cuming is the co-author of three books on Canadian personal property security law and is author

--" of numerous chapters and articles on commercial law. Professor Cuming is a Queen's Counsel for"'-__) Saskatchewan. -

)TABLE OF CONTENTS

Security Interests in Intellectual Property

I. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. Security Interests in Intellectual Property UnderThe PPSA: The Good News 2

III. Uncertainty as to the Sources of Applicable Law:The Bad News 7

(l) The Patent Act as the Exclusive Source ofApplicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

(2) The PPSA as the Source of Applicable Law . . . . . . . . . . . . 12

(3) The PPSA and the Patent Act as Concurrent orAlternative Sources of Applicable Law . . . . . . . . . . . . . . 17

IV. Summary (But Few Conclusions) 19

1

SECURITY INTERESTS IN INTELLECTUAL PROPERTY

(A paper prepared by Ronald C.C.Cuming, College of Law, University of Saskatchewan, forthe SCLESI Seminar on Intellectual Property, April 7-8, 1995.)

I. INTRODUCTION

Intellectual property in the form of a patent, trade secret, copyright, trade-mark, trade name,

industrial design, plant breeders rights and integrated circuit topographies can have significant

economic value. This is so even though some of the statutory intellectual property rights are of

limited duration and common law intellectual property rights can easily be lost. The owners of

this property expect to be able to offer it, as they can with any other property they own, as

collateral to secured credit advances they obtain. 1

While there remains a peripheral intellectual debate as to whether or not certain types of

intellectual property are "property" in the traditional sense, it is now generally accepted that

intellectual property is a form of intangible property (chose in action) subject to assignment as

provided for in the relevant statute or the common law (equity). It follows from this that it is

possible to take security interests in intellectual property. Unfortunately, at this point certainty

starts to disappear and speculation enters the picture. Security interests can be taken, but how

or, more accurately, under what system or systems?2

In the following paragraphs of this short paper, the central issues that arise in the context of

attempts to answer this question are canvassed. Amazingly enough, there is very little Canadian

case law that provides assistance in answering the question. Given the fact that the question

1 A secured party who takes a security interest must be concerned that the debtor has takenthe measures necessary to acquire and maintain the intellectual property right that is taken ascollateral. These measures are not the focus of this paper.

2 For a brief overview of some procedural matters that should be considered when takinga security interest in intellectual property, see Zimmerman, Bertrand and Dunlop, "IntellectualProperty in Secured Transactions" (1992), 8 C.I.P.R. 74 at pp.87-91.

2

involves significant constitutional considerations and the interpretation of specific statutory

provisions, approaches taken in the United States or in Commonwealth countries are not

particularly instructive. The following analysis focusses on statutory intellectual property since

it is in this context the principal problems arise.

II. SECURITY INTERESTS IN INTELLECTUAL PROPERTY UNDER THE PPSA:THE GOOD NEWS

The good news is that The Personal Property Security Act, 1993 (hereinafter, the PPSA) is well

suited to regulate security interests in intellectual property. There is nothing in the Act that

precludes its application to security interest in all forms of property created under federal statute

law or the common law. The regime is flexible enough to accommodate the peculiarities of

intellectual property. The following description of the treatment of security interests in

intellectual property under the PPSA is based on the assumption that the Act applies to such

interests. Whether or not this assumption is valid is a matter addressed later in this paper.

Intellectual property is an "intangible" under section 2(1)(w) of the PPSA. The debtor would

acquire "rights" in it so as to permit attachment of a security interest, as required by section 12,

when, under federal law, the right comes into existence. This is not necessarily when some form

of registration occurs under the relevant federal statute.

It is necessary to draw a distinction between the principal right (e.g., the copyright or patent),

a licence issued by the copyright or patent holder and an interest in accounts payable under a

licence. These can be separate rights. For example, a debtor may be a holder of a licence

without being the owner of the copyright. The licence may be a much narrower right than the

copyright itself but the value of the copyright may be limited by the fact that one or more

licences have been granted by the copyright holder. A holder of a patent can grant a security

interest in the amounts payable by a licensee under a licence and the holder of the licence may

be able to grant a security interest in the licence itself.

3

) A licence under the Patent Act,3 Copyright Act4 or the Industrial Design Acf falls within the

definition of "licence" in section 2(l)(z) of the PPSA only if the licence is transferrable by the

grantee. Presumably, therefore, an exclusive, non-transferable licence relating to an intellectual

property right would not fall within this definition. Whether it would be a general intangible

remains unclear. However, if it is not transferrable, the licence is very likely worth nothing as

collateral since it would be impossible for the secured party to realize on it through disposition

as provided in Part V. Of course, royalty payments to be made under a non-transferrable licence

would be accounts with the definition of section 2(1)(b) of the Act.

Since an intellectual property right, whether the principal right or a licence is an intangible, the

only method of perfection of a security interest in it available under the Act is registration. A

security interest in royality payments under licence is also an intangiible subject to the same

perfection requirements. This registration may not be in the Saskatchewan Personal Property

Registry. Under section 7(2) of the Act, the validity of the security interest, the priority position

that it occupies and the applicable registration requirements are all governed by the law of the

jurisdiction in which the debtor is located at the date the security interest attaches. If the debtor

is a business enterprise which has two or more business premises located in different

jurisdictions, the applicable law is that of the place where the chief executive office of the debtor

is located.6

3 R.S.C. 1985, c. P-4.

4 R.S.C. 1985, c. C-42.

5 Industrial Design Act, R.S.C. 1985, c. 1-9

6 Note, however, that section 7(4) does not apply to intangibles other than accounts.Accordingly, if the jurisdiction where the chief executive office is located does not provide fora registry for security interests in intellectual property (and several non-PPSA provinces andterritories do not) the security interest need not be perfected in the Saskatchewan PersonalProperty in order to be recognized as being perfected under Saskatchewan law.

4

A security interest in both existing and future-acquired intellectual property can be taken and

perfected under a security agreement providing for a security interest in "all present and after­

acquired personal property" of the debtor. There is no need (under the PPSA) to provide for a

specific assignment of the intellectual property right. A purchaser of an intellectual property

right can grant a purchase money security interest to a financer which has provided financing

to acquire the right from another holder of the right. However, it may not be possible for an

author to give a purchase money security interest in copyright. An author who acquires financing

in order to get a copyright registered does not use the financing to "acquire rights in the

collateral" as required by section 2(jj) of the PPSA. Under copyright law, an author

automatically acquires copyright as soon as the work is created, the right does not arise upon

registration under the Copyright Act.7 The same problem would not likely arise in the context

of a patent since the inventor acquires under the letter patent a limited monopoly in a context

in which did not exist prior to the issue of the patent.

Part V of the PPSA provides a legal structure within which security interests in intellectual

property can be enforced. It is very doubtful that section 57(2) applies to enforcement of a

security interest in intellectual property as such. The section provides in part that "[i]n the event

of default, the secured party is entitled to notify the debtor on an intangible....to make payment

to the secured party whether or not the assignor was making collections on the collateral before

the notification.. " The holder of a patent or copyright is not as a "debtor on an intangible."

While the term is not defmed (clearly, it has no connection with the defmition of "debtor" in

section 2(l)(m)), it would appear to refer to a person who owes money (an account) to the

debtor under the security agreement. Where the collateral is a patent or copyright, there is no

tripartite relationship of the kind contemplated by the section. However, where the debtor

(intellectual property owner) has granted a licence to someone else and payments are being made

under the licence, the section may be applicable since payments under the licence would be

proceeds of the intellectual property. The licensee would then be a "debtor on an intangible."

In this situation the intangible wo~ld be the obligation to make the payments under the licence.

7 Copyright Act, supra, s. 5.

)

5

Of course, if the security interest is taken in the royalties as original collateral, section 57(2)

would apply.

Section 58(2) provides that on default under a security agreement, the secured party has the right

to "enforce the security agreement by any method permitted by law." There is some uncertainty

as to whether section 59(2) applies to an intangible. The section applies where the secured party

has "seized or repossession the collateral". To the extent that these terms contemplate physical

seizure, they are inapplicable since an intangible is by definition incapable of physical seizure;

it is an incorporeal right. However, there can be little doubt that the basic principle of secured

transactions law that section 59(2) embodies applies as well to the enforcement of security

interests in intangibles. This principle is that the security interest is in an accessory right with

the result that, unless otherwise provided by the Act, the collateral in the form of intellectual

property must be sold by the secured party and the proceeds applied to the obligation secured.

Any surplus must be dealt with as provided in section 60. There is nothing to suggest that

intellectual property rights cannot be sold by a receiver as part of the sale of a complete business

unit.

Generally, there is nothing in the nature of an intellectual property right that would make

sections 59-62 in applicable. The only "fly in the ointment" is that these sections proceed on a

fundamental assumption: provincial law can provide for compulsory transfer of ownership rights

in intellectual property from the debtor to the purchaser under the disposition contemplated by

section 59. To the extent that this is a problem, its source is not any defect in the design of Part

V of the PPSA, it stems from the fact that most intellectual property rights arise under federal

statute law and not provincial law. The right to and mechanism for transfer of these rights are,

for the most part, set out in federal law.

6

Further exploration of this issue in the context of a patent right is instructive. Section 50(1) of

the Patent Act provides that a patent "is assignable in law... by an instrument in writing. "8

Section 50(2)-(3) provides for the registration of an assignment in the Patent Office. 9 Clearly

section 50 contemplates a voluntary act of assigning by the owner of the patent. Since a patent

right is a creature of federal law, presumably, the method of transferring the right is also a

matter within federal law. This being the case, the mere ipse dixit of section 59(14) of the

PPSA, (which provides that the buyer of the collateral from the secured party acquires it free

from the interest of the debtor) cannot be the basis on which the Patent Office can be forced to

recognize the buyer as the new owner of the patent. The Patent Office is not subject to

provincial law in this respect.

There are three possible solutions to this problem. One is to take an assignment of the patent as

part of the loan arrangement. 10 The second is to take a power of attorney from the debtor which

gives an unconditional power to the secured party to execute an assignment of the patent in the

event of default under the security agreement. If neither of these measures has been taken it may

8 The full text of the section is as follows:

50(1) Every patent issued for an invention is assignable in law, either as to thewhole interest or as to any part thereof, by an instrument in writing.

(2) Every assignment of a patent, and every grant and conveyance of anyexclusive right to make and use and to grant other the right to make and use theinvention patented, within and throughout Canada or any part thereof, shall beregistered in the Patent Office in the manner determined by the Commissioner.

(3) No assignment, grant or conveyance shall be registered in the Patent Officeunless it is accompanied by the affidavit of a subscribing witness or establishedby other proof of the satisfaction of the Commissioner that the assignment, grantor conveyance has been signed and executed by the assignor and by every otherparty thereto.

9 Ibid.

10 Endemic to this measure is the risk that as assignee of the patent, the secured party willbe seen as having the obligations associated with ownership of the patent. See also PPSA s. 17.

)7

still be possible to ensure that the policy of section 59(14) of the PPSA is effected in the context

of patents without having a conflict between federal and provincial law. Under section 63(2)(a)

of the PPSA, the Court of Queen's Bench is given power, invocable on application by, inter

alia, a secured party, to make "an order, including... an order for injunctive relief, that is

necessary to ensure compliance with" Part V of the Act. This section would appear to empower

a court to issue a mandatory injunction requiring the debtor to execute an assignment as required

by section 50(1) of the Patent Act transferring the patent to the purchaser from the secured

party. Precedent for this approach can be found in judgment enforcement law under which a

receiver of money owing by the federal Crown is appointed to act as the alter ego of a judgment

debtor with the power to receive money payable by the Crown to the debtor. Implicit in the

order is an injunction against the debtor collecting the money. The remedy involves no order

against the federal Crown (which, in any event would be ineffectual); it operates in personam

against the debtor.u

III. UNCERTAINTY AS TO THE SOURCE(S) OF APPLICABLE LAW: THE BADNEWS

The observations made under heading II of this paper proceeded on the assumption that the law

applicable to security interests in intellectual property is the PPSA. However, it cannot be stated

with complete certainty that this assumption is correct. There are other possibilities. What is

surprising is that such an important question remains to be resolved by the courts or by

legislative fiat. In the absence of any definitive confIrmation of the assumption, a person taking

a security interest in intellectual property must be aware of all of the realistic possibilities and

take whatever combination of measures that appears to be appropriate under the circumstances.

The possibilities are examined below in the context of patent law. Where appropriate footnoted

comments set what peculiarities are encountered in the context of other types of statutory

intellectual property.

11 See, e.g., Boucher v. Viala, [1947], 2 W.W.R. 277 (Sask.D.C.); Lavigne v. Robern(1978), 30 D.L.R. (4th) 757 (ant. H.C.).

8

It is the author's view that, realistically, three different possibilities must be considered when

determining the law applicable to security interests in a patent: (1) The Patent Act

(supplemented by equitable concepts); (2) the PPSA; and (3) both the Patent Act and the PPSA.

Each of these possibilities is examined in turn.

(1) The Patent Act as the Exclusive Source of Applicable Law

There is nothing in the Patent Act that expressly refers to the creation of a security interest in

patent rights. This is in stark contrast to the United Kingdom Patent Act, 1977 which provides

in section 30(2) that "any patent or any such application, or any right in it, may be assigned or

mortgaged." (emphasis added). Section 50 of the Canadian Act makes no reference to the

mortgage of a patent right. 12 However, the section does provide that a patent "is assignable. "13

At common law, a mortgage of property was created by a transfer of title to the property the

mortgage to the mortgagee. Accordingly, it is quite conceivable that the Canadian Parliament

thought it was not necessary to be as explicit as the Parliament at Westminster with respect to

the creation of security interests in the form of mortgages on patent rights. Under this view, the

absence of a specific reference to a power to mortgage or otherwise charge a patent is not

determinative, and it is possible to create a mortgage on a patent by transfer of the patent

holder's interest to the secured party mortgagee by assignment as provided in section 50 of the

Patent Act. 14

It would also appear possible to create a mortgage on a licence granted by a patent holder. While

section 50(1) of the Patent Act refers to the assignment of a "patent", section 50(2) provides for

12 Supra, note 8.

13 Ibid.

14 Apparently, the Patent Office does accept for registration assignments of patents made tocreditors. Registrations of security interests in trade marks, industrial design and copyright arealso accepted by the relevant federal government offices.

9

the registration of an assignment of a patent "and every grant and conveyance of any exclusive

right to make and use the invention patented... " 15

The conclusion that it is possible to create a mortgage of a patent or a licence by assignment

under the Patent Act does not end the uncertainty. Additional important questions must be

answered. One of these is whether or not Parliament can be seen as making this the exclusive

method of creating a security interest in patent rights. 16 If it is the exclusive method, a security

interest taken under the PPSA would give no rights recognized by federal law to the secured

party.

There is some case law authority for the view that a security interest in a patent can be created

by assignment under the Patent Act. In Colpitts v. Sherwood17 the Alberta Court of Appeal

accepted without question the efficacy of an assignment of a patent right to a trustee as security

for a debtor owing by the assignor to a creditor for whose benefit the trustee held the

assignment. However, it would be a mistake to read too much into this brief decision. The issue

of the validity of the assignment creating the security interest was not questioned and, therefore,

was not before the court. Nor was the court dealing with any issue associated with the nature

of the security interest or its enforcement. The only issue before the court was priority between

the assignee creditor and assignee who took and registered his interest with knowledge of the

15 Section 57(3) of the Copyright Act, supra, provides for registration of an assignment ofnot only a copyright, but as well to "an interest in a copyright, by licence." Section 13(1) ofthe Industrial Design Act, supra, provides that every design, registered or unregistered, isassignable in law by an instrument in which must be recorded in the office of the Commissionerfor Patents. Section 13(2) provides for the "recording" of licences. The Plant Breeders' RightsAct, R.S.C. 1985, c. P-14.6, s.31 provides for the assignment of plant breeders' rights andregistration of the assignment.

16 There appears to be little doubt that a security interest, whether in the form of anassignment or charge of money (royalties) payable to the owner of a patent by a licensee isgoverned by provincial law. An absolute assignment would be governed by The Choses inActions Act and the PPSA. See, Trubenizing Process Corp. v. Forsyth [1943] S.C.R. 422.

17 [1927] 3 D.L.R. 7.

10

prior unregistered interest of the creditor. However, the case does support the conclusion that

a security interest can be created by assignment under section 50 of the Patent Act.

Some support for federal law exclusivity in this context can be found in the fact that the Patent

Act contains a priority rule that can be applied to priority competitions among mortgagees of the

same patent or between a mortgage and an assignee of a patent. 18 Section 51 provides that an

"assignment affecting a patent for invention19... is "void against a subsequent assignee" unless

it is registered before the competing subsequent assignment is registered. 20 A priority rule is a

central element of any system for regulating security interests in property and its presence in the

Patent Act blunts any argument that the core of a possible priority structure is missing from the

Act.21 However, this provision has relevance outside priority competitions involving mortgagees

and, as such, is not conclusive evidence that Parliament intended that the Patent Act provide a

regulatory regime, let alone the only regulatory regime for creation of security interests in

patents. 22

18 The conclusion that federal law is the exclusive source of law dealing with securityinterests in patents and copyright has the advantage of removing from the secured party the fearof loss of the collateral to a trustee in bankruptcy since there is nothing in the federal legislationthat requires registration to "perfect" the interest against the debtor's trustee.

19 The section appears to refer only to a patent and not a licence.

20 The full text of the provision is as follows:51. Every assignment affecting a patent for invention, whether it is one referredto in section 49 or 50, is void against any subsequent assignee, unless theassignment is registered as prescribed by those sections, before the registrationof the instrument under which the subsequent assignee claims.

Section 32(3) of the Plant Breeders' Rights Act is almost identical. For the equivalent provisionin the Copyright Act, see, infra, note 24.

21 Indeed, the wording of section 51 is similar to priority provisions contain in TheConditional Sales Act, R.S.S. 1978, c. C-25, s. 3(l)and The Bills ofSale Act, R.S.S. 1978, B-1s. 3 (both repealed).

22 The Trade-Marks Act has no equivalent priority rule. However, it is possible to registeran assignment of a trademark. See Trade-Marks Act, supra, s. 48. See also Industrial Design

\

)

11

An argument for federal exclusivity has other weaknesses. A critical look at it reveals aspects

that must be a source of concern for its proponents (if any). It is obvious that any "federal

system" found to exist in the Patent Act would be, at best, very primitive. It provides for only

one way of creating a security interest in a patent: assignment in writing. It does not recognize

the possibility of creating a charge on the patent interest and denies the possibility of taking an

equitable mortgage on future acquired patent rights that would attach when those rights are

acquiredY Only by implication does it address the position of competing execution creditors or

the debtor's trustee in bankruptcy.

The achilles heal of the federal exclusivity argument is that any "federal system" must inevitably

draw on provincial law for much of its infrastructure. Of necessity a security interest created and

registered under the Patent Act must be in the form or an assignment, that is, a transfer of the

patent owner's or licensee's (mortgagor's) property rights in the patent to the secured party

(mortgagee). There is nothing in the Patent Act to indicate that, after the assignment, the

mortgagee is anything other than an owner of the patent right. However, it would be a denial

of one of the most basic tenets of equity to accept this at face value. The mortgagee might be

the "legal owner" just as a mortgagee of land or chattels is at common law the legal owner of

.the land or chattels; but in equity the mortgagor is the beneficial owner and the rights of the

mortgagee are subject to that beneficial ownership. The purpose of this paper is not to explore

all of the incidents of beneficial ownership; suffice it to say that it would be peculiar, indeed,

if Parliament were to be seen as denying to assignees of patent rights under section 50 the

concept of beneficial ownership that is so engrained in the common law system of property law.

If it is accepted that the rules of equity apply to security interests taken under section 50 of the

Act, supra, s. 13.

23 See, Holroyd v. Marshall (1862), 10 H.L.Cas. 191.

12

Patent Act, it follows that those rules must come from outside the Act and, perhaps, from

principles found only in provincial law. 24

(2) The PPSA as the Source of Applicable Law

--

The proposition that the PPSA is the exclusive source of law applicable to security interests in

patent interests has greater attractiveness. As noted above, the PPSA is a modem system that

is well-suited to the regulation of financing transactions in which intellectual property rights are

taken as collateral. Of particular relevance in this context is the facility with which a secured

party can take and perfect under the PPSA a security interest in all of the present and after­

acquired personal property of a business enterprise (including the principal intellectual property

right, a licence issued under it and royalty payments associated with it) and, in the event of

default, enforce that security agreement through receivership. There is no requirement that a

specific assignment of each intellectual property right be executed after the right has been

obtained by the debtor.

The proponents of PPSA exclusiveness in this context must accept one important qualification.

While it is quite possible to envision a structure in which the PPSA (or any equivalent provincial

system) is the source of rules governing security interests in patents, it must be accepted that

these rules will function in the context of a very different set of background property rules where

the collateral is a patent. Where other forms of personal property are involved, the PPSA

functions in the context of provincial personal property law.25 A central aspect of this law is that

transfers of ownership occur without the need for any significant statutory formalities.

Successive ownership interests are ranked under the principle of nemo dat quod non habet and

24 These principles can be found only in the common law (equity) and not the civil law ofQuebec where the concept of mortgage was never adopted. Can it be assumed that Parliamentintended to impose on patent holders resident in Quebec a regime foreign to their system?

25 This includes security interest taken under Section 427 of the Bank Act, S.C. 1991, c. 46.

13

) not on the basis of any registration or recording system. Intellectual property rights are not

addressed in the same way. The Patent Act provides that a transfer of a patent occurs when

section 50 (which requires a written assignment) has been complied with. While this may not

be the only way in which rights in patents can be transferred, it is one method given express

statutory recognition and the one that invokes the priority structure of section 51.

One of the implications associated with this difference in treatment has been explored in an

earlier portion of this paper. As noted there, it is necessary to take special measures or to invoke

direct judicial intervention to ensure that the purchaser of a patent sold by a secured party

pursuant to the enforcement of a security interest in the patent can acquire ownership of the

patent. However, other problems are not so easily addressed.

A security interest under the PPSA is a charge on the collateral and, as such, its existence

invokes the nemo dat principle of common law. In other words, it is an in rem interest with the

result that anyone who purchases or otherwise takes an interest in the collateral after the security

interest has been taken acquires his or her interest subject to the security interest. The PPSA

provides a qualifier: in order to be able to invoke the nemo dat principle, the secured party must

have perfected its security interest before the competing interest was acquired.

When this reasoning is applied in the context of a security interest in a patent, the outcome may

not be the same. Assume that a security interest is taken and perfected (by registration in the

Personal Property Registry) in a patent right of a debtor. Thereafter the debtor sells and assigns

the patent to a buyer who applies and becomes owner of the patent pursuant to section 50(2) of

the Patent Act. Assume that the buyer is unaware of the security interest. A conflict would exist

between the PPSA which, by necessary implication, gives priority to the secured party and

sections 50-51 of the Patent Act which imply that the assignee becomes owner of the patent

right free from any prior interest in it. Section 50 provides the mechanism through which

ownership interests in patents can be transferred and section 51 provides a priority regime that

does not subject a registered owner (assignee) to prior charges on a patent right acquired by him

14

or her. The logical outcome is that a perfected PPSA security interest in a patent may not have

the priority status that a security interest in other forms of personal property subject to provincial

law would have. A perfected security interest in a patent can be defeated by an assignee from

the debtor at least in situations where the assignment of the patent was acquired without actual

notice of the prior security interest in it. 26

This conclusion must be qualified. There is some basis for the position that sections 50-51 are

to be very narrowly interpreted so as not to be applicable unless the competition is between a

prior assignee who has not registered his assignment before a subsequent assignee has acquired

and registered her interest. In Poolman v. Eiffel Productions S.A. ,27 Pinard J. of the Federal

Court, Trial Division, gave a very narrow scope to section 57(3) of the Copyright Acf8 which,

for the purposes of this part of the paper, can be treated as essentially the same as section 51

of the Patent Act. The owner of copyright in a book assigned it to party 1 in 1958 and to party

2 (the appellant) in 1964. Through successive assignments, the interest of party 1 came to the

respondent. In 1991, the appellant registered his assignment. Apparently the successive

26 While the priority rule of section 51 of the Patent Act makes no mention of lack ofknowledge of a prior interest or the need for good faith, in Colpitts v. Sherwood, [1927] 3D.L.R. 7, the Alberta Court of Appeal held that knowledge of the existence of such priorinterest may disentitle the assignee to the priority under section 51. Mere knowledge of a priorassignment may not be sufficient by itself. The Court concluded that the assignee having theknowledge was acting fraudulently when he took and registered his assignment.

Registration in the Personal Property Registry is not constructive notice of the existenceof a security interest. PPSA s. 47. Even. if it were, it is most unlikely that it would have anylegal effect in the context of federal law.

27 (1991), 35 C.P.R. (3d) 384.

28 The full text of the provision is as follows:57(3) Any grant ofan interest in a copyright, either by assignmentor licence, shall be adjudged void against any subsequent assigneeor licensee for valuable consideration without actual notice, unlessthe prior assignment or licence is registered in the mannerprescribed by this Act before the registering of the instrumentunder which the subsequent assignee or licensee clai~s.

15

assignments through which the respondent acquired its interest were not registered. The appellant

sought an injunction preventing the respondent from making a film based on the book. The

position of the appellant was that it was the first to register its assignment as contemplated by

section 57(3) of the Copyright Act and that this was a complete answer to the claim of the

respondent. The court concluded that the outcome should not be determined on this basis. It

pointed out that section 57(3) states only that a prior assignment is void against a subsequent

assignment unless the prior assignment is registered before the subsequent assignment. Pinard

J. concluded:29

This does not mean that the interest of such first assignee in a copyright, eventhough registered before the registering of the instrument under which thesubsequent assignee claim, is immune from challenge under the general lawsapplicable to property and civil rights in the provinces of Canada. In principle,the registering of the instrument under which an interest in a copyright is grantedis not compulsory and, except as provided for the benefit of a subsequent assigneein s. 57(3) above, creates nothing more than a presumption of ownership of suchinterest, which is rebuttable.

In the case, the competition was not between a prior unregistered assignment and a subsequent

registered assignment, it was between a prior assignment and a subsequent assignment where the

prior assignment was registered after the subsequent assignment occurred but before it was

registered. Rather than extrapolating additional priority rules from section 57(3), the court

applied provincial personal property law to address a priority that did not strictly fall within the

wording of the section. The court concluded that under Quebec law the second disposition by

the original owner of the copyright passed through the second assignee the copyright to the

respondent. The relevant provision of Quebec law gave to the original owner the power to pass

ownership to the second assignee even though at the time of the second transfer the property was

vested in the first assignee.

One possible interpretation of the Poolman case is that provincial law governs all priority

situations except those that fall strictly within the federal legislation. Under this approach, the

29 Ibid., at 392.

16

secured party (in the scenario set out above) would have priority since the competition is not

between two assignees, but between an assignee and a provincially created PPSA interest.

Provincial law (the PPSA) gives priority over the buyer and the Patent Act has no application.

The implications of sections 50 and 51 of the Patent Act for the functioning of the PPSA are

further displayed in the following scenario. Assume that Debtor 1 gives a security interest in all

of his present and after-acquired property to SPI who registers a financing statement in the

Personal Property Registry. Assume as well that Debtor 2 gives a security interest in all of her

present and after-acquired property to SP2 who registers a financing statement in the Personal

Property Registry. Seller, who is the registered owner of a patent, assigns the patent to Debtor

1 and thereafter to Debtor 2. However, Debtor 2 is first to register her assignment in the Patent

Office. If the collateral had been a car, the combination of provincial personal property law and

the PPSA would give priority to SPI who was first to register a financing statement and who

was first to get a perfected security interest in the car. In fact, Debtor 2 would acquire no

property interest in the car and, consequently, SP2 could not have a security interest in it.

However, where a patent is involved, the picture may be quite different. Debtor 1 gets

ownership of the patent and SPI has a security interest in that ownership. However, because

Debtor 2 registered her assignment in the Patent Office, her ownership rights are better than

those of the Debtor 1. Indeed, under section 51 of the Patent Act, Debtor's assignment is "void"

against Debtor 2. Consequently, SP2 has priority over SPI.

The reasoning in the Poolman case does not affect this analysis and conclusion. In the scenario

described above, the buyer of the patent right would fall directly within the express wording of

section 51 of the Patent Act and the fact that under provincial law the buyer would take subject

to the security interest is of no significance.

\

) (3)

17

The PPSA and the Patent Act as Concurrent or Alternative Sources of ApplicableLaw

The third possibility is that the courts will conclude that a security interest in a patent right may

be created under the either the PPSA, in which case the secured party has a charge (security

interest) on the patent, or under section 50 of the Patent Act through assignment of the patent,

in which case the secured party becomes "owner" (mortgagee) of the patent who can be

registered as such under section 51. Under this possibility, a secured party would have a choice

of systems or might choose to use both of them. 30

The two systems would not be true alternatives in the sense that each would give to the secured

party roughly equivalent rights or protection against subordination or loss of the security interest

to competing holders of interests in the same patent rights. Clearly, of the two, the PPSA would

be the most complete and commercially efficient. However, there could be no doubt that a

security interest taken in the form of an assignment of a specific patent under section 50 of the

Patent Act would, in some situations at least, be less vulnerable if it is registered under section

51,31

The following scenario displays the interface between sections 50-51 of the Patent Act and PPSA

in the context of competing security interests where each is created under a different system.

Assume that a security interest is taken and perfected (by registration in the Personal Property

Registry) by SP1 in a patent right of Debtor. SP1 also takes an assignment of the patent, but

30 The possibility of a secured party having rights under both the PPSA and under federallaw (the Bank Act) was recognized by both the Saskatchewan and Ontario Courts of Appeal. SeeBirch Hills Credit Union v. C. I. B. C. (1988), 52 D.L.R. (4th) 113 (Sask.C.A.); Bank of NovaScotia v. International Harvester Credit Corp. (1990), 73 D.L.R. (4th) 385 (Ont.C.A.).

31 Apparently, the Patent Office will "register" a PPSA security agreement, including asecurity agreement which purports to transfer by way of security all patents owned by a namedpatent owner. In addition, the security agreement can be registered against patent applicationsif the potential invention has be clearly identified. However, since there is no statutoryrecognition of the practice or effect given to it, it is not clear that it has any legal significance.

18

does not register it in the Patent Office. 32 Thereafter Debtor gives a security interest in the same

patent to SP2 but through an assignment under section 50 of the Patent Act. 33 The assignment

to SP2 is registered pursuant to section 51 of the Patent Act. A conflict would exist between

the PPSA which, by necessary implication, gives priority to SPI and sections 50-51 of the

Patent Act which provide that SP2, as registered assignee of the patent, takes right free from any

prior interest in it. This conflict would necessarily be resolved in favour of the federal system

since the subject-matter of both security interests is expressly within the legislative jurisdiction

of Parliament. 34 The necessary conclusion is that the perfected PPSA security interest in the

patent can be defeated by an assignee-secured party who complies with sections 50-51 of the

Patent Act at least in situations where the assignment of the patent was acquired without actual

notice of the prior security interest.

However, the approach taken in Poolman v. Eiffel Productions S.A. 35 could result in the

application of the priority rules of the PPSA in the following context. Assume that Debtor gives

a security interest in all of his present and after-acquired property to SPI who fails to register

a financing statement in the Personal Property Registry. SPI also takes an assignment in

compliance with section 50. Assume as well that Debtor gives a security interest in the patent

to SP2 who registers the security interest in the Personal Property Registry. 36 SPI then registers

its assignment in the Patent Office. The PPSA would give priority to SP2 because of the lack

of registration of SPl's security interest in the Personal Property Registry. The fact that SP1 was

32 Somewhat anomalously, the result may be different if SPI does not take an assignmentunder section 50 of the Patent Act. See discussion of the implication of the Poolman case, infra.

33 Assume that SP2 is unaware of the existence of the security interest given to SPI. See,supra, note 26 and the accompanying text.

34 Constitution Act, 1867, s. 91(22)-(23).

35 Supra, note 27

36 The outcome would be the same in a situation where the Debtor assigns the patent to abuyer who does not register the assignment or who registers the assignment after SPl registersits assignment.

)19

first (or the only creditor) to register its assignment in the patent office would not change this

result. Section 51 of the Patent Act would not apply since this would not be a priority

competition between the holder of a prior assignment who failed to register the assignment or

who registered the assignment after a second assignment was registered. The reasoning in the

Poolman case can be extended further. Assume that SP1 took an assignment (mortgage) in

compliance with section 50 of the Patent Act and registered the assignment at the Patent Office

but did not register the security interest in the Personal Property Registry. If section 51 of the

Patent Act applies only where there are competing "assignments", SP2 would have priority since

it did not take an assignment (it acquired only a security interest in the form of a charge) and

the PPSA would give it priority because of SP1 's failure to perfect its security interest in the

Personal Property Registry.

IV. SUMMARY (BUT FEW CONCLUSIONS)

It is the author's view that the current state of the law dealing with security interests in personal

property is too undefined and uncertain to permit identification of the source or sources of the

applicable rules, let alone how those rules might operate in particular situations. Of the three

possibilities set out above, the second one makes the most commercially and legal sense. It is

the author's view that security interests in intellectual property should be governed solely by

provincial personal property security law. In other words, absence of any reference in section

50 to the creation of a mortgage on patents should be interpreted by the courts as indication that

Parliament intended to leave security interest in patents to provincial law (or federal law dealing

specifically with security interest in personal property). This conclusion is buttressed by the fact

that provincial personal property security law is very modem, sophisticated and attuned to the

needs of modem business financing.

This approach is not entirely satisfactory since it must accommodate sections 50-51 of the Patent

Act which provide the operational rules for the transfer of property in patents. While the effect

of section 51 was read down in Poolman, it retains a role.

20

It is most unlikely that the courts will conclude that the only method available for taking security

interests in patents is through an assignment (mortgage) under section 50 of the Patent Act.

However, it is less unlikely that they will conclude that a security interest can be taken in a

patent either as provided by provincial law or by assignment under section 50. As noted above,

a mixing of two systems in this context produces some peculiar result. The author of this paper

has set out hereunder in summary form some of these results.

The following short form designations have been used: SP = secured party; D = debtor; B =buyer; si = security interest in a patent taken under the PPSA; mtg. = mortgage by assignment

under section 50 of the Patent Act; assmt = non-mortgage assignment under section 50 of Patent

Act; PPSA reg. = registration in the Personal Property Registry; and PA Reg. = registration in

Patent Office.

Situation 1:

-D gives si to SPI with PPSA reg..

-D sells to B (who is without actual notice of si)

-B effects PA Reg. of assmt

Result:

(i) B gets priority if logical inference of ss. 50-51 of Patent Act applies; or

(ii) SPI get priority if, as a result of Poolman, section 51 of Patent Act inapplicable and

provincial property rules apply.

Situation 2:

-D gives si to SPI with PPSA reg.

-D give mtg to SP2

-SP2 effects PA Reg. of mtg

Result:

(i) SP2 gets priority if logical inference of ss. 50-51 of Patent Act applies; or

)(ii)

21

SPI get priority if as a result of Pootman, section 51 of Patent Act inapplicable and

provincial property rules apply.

Situation 3:

-D gives mtg to SPI

-D give mtg to SP2

-SP2 effects PA Reg. of mtg

Result:

SP2 gets priority under section 51 of Patent Act

Situation 4:

-D gives si with PPSA reg. and mtg to SPI

-D give mtg to SP2

-SP2 effects PA Reg. of mtg

Result:

SP2 gets priority under section 51 of Patent Act

Situation 5:

-D gives si to SPI (no PPSA reg.)

-D give mtg to SP2

-SP2 effects PA Reg. of mtg

Result:

Under both federal and provincial law SP2 gets priority.

Situation 6:

-D gives si with PPSA reg. and mtg. no PA Reg. to SPI

-D give mtg to SP2

-SP2 effects PA Reg. of mtg

Result:

SP2 gets priority under section 51 of Patent Act.

22

It would appear that in order to get "belt and suspenders" protection for a security interest in

a patent right (but not a security interest in accounts payable under a licence) it will be necessary

for a secured party to take and perfect a PPSA security interest in the patent right and also take

an assignment of the patent in compliance with section 50 of the Patent Act. It would also appear

that the worst course of action would be to take a PPSA security interest and an assignment of

the patent but fail to register the assignment (Situation 6). Section 51 would given priority over

a subsequent assignee of the patent who acquired his or her interest without knowledge of the

prior assignment or the PPSA interest. The PPSA perfection would not be of much help since

the priority dispute is one falling directly within section 51. Where the circumstances are such

that it is not commercially realistic or possible to get and register an assignment of the patent

(e.g., the debtor does not have the patent right at the date the security agreement is executed)

it will be necessary to rely on PPSA priority. If Poolman represents the existing law, this would

give full protection even against a subsequent assignee.