Security Interests Over Intellectual Property Rights: The UCC 9 Approach in the United States

Steve WeiseProskauer Rose LLPLos Angeles

sweise@proskauer.com

March 2015

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Issues

•Federal v. state law•Creation of security interestAssignment of IP rights

•Perfection methods•Enforcement•Full citations for court decisions listed at end

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Federal v. state law

• Tensions between Federal regulation of IP and state law through Uniform Commercial CodeUCC adopted in every state

• Preemption by Federal lawExpress preemptionField preemptionConflict preemption

• Generally, when there is preemption in this area, conflict preemption appliesUCC preempted only to the extent of conflict

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Kinds of intellectual property• Intellectual property

Copyrights Patents Trademarks Domain names Trade secrets and know-how

• Rights to use intellectual property Licenses ‘in’ vs. licenses ‘out’­Licensor rights­Licensee rights

Exclusive licenses vs. non-exclusive licenses

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Intellectual property classified under UCC•General Intangibles:Registered and unregistered IP

•Goods:‘Embedded software’

•Accounts:License fees/royalties

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Creation of security interest

• UCC § 9-203(b)(2) requires that the debtor have: ‘rights’ in the collateral or the power to transfer rights in the collateral to a secured party

• Effect of IP law on ability of debtor to create a security interest in the various IP-related rightsEffect of Federal lawEffect of anti-assignment provisions in licenses (license royalties and licensee rights)

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Anti-assignment issues

• Scope of UCC §§ 9-406, 9-408 provisionsPayment rightsOther contract rightsRecall that Article 9 applies to sales of accounts

• Effect of contract terms + other laws• Does not override conflicting Federal law

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Scope – payment rights – UCC § 9-406• ‘Security interest’ permitted despite anti-assignment provision in:Accounts, including royalties (except health-care-insurance receivable)­IP royalties not ‘IP’ for purposes of federal law

Chattel paperPayment intangibles (except sales)Promissory notes (except sales)

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Payment rights: effect of contract terms – UCC § 9-406• Ineffective to limit in any way:Creation + attachmentPerfectionEnforcement

•May not declare default

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Scope – other contract rights – UCC § 9-408•Assignment of rights under:

General intangibles, including licensee’s rights

Promissory notes (sales only)Health-care-insurance receivables

•Applies to payment intangible or promissory note only if a sale of the rights

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Other contract rights: effect of contract terms and other laws• Ineffective to limit in any way:Creation + attachmentPerfection

•May not declare default•Does not allow the secured party to enforce its security interest

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Creation of security interest – the IP itself

•No dispute on ability of owner of IP to create a security interests in the IP

•Perfection issues discussed below

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Creation of security interest – copyright licensee• Harris (9th Cir. 1984) (Bankruptcy trustee could not

assign copyright licenses as ‘mere licensee’ per Copyright Act of 1909; a license is not an ‘interest’ in a copyright)

• Nike (9th Cir. 2002) (Exclusive licensee could not assign copyright licenses per Copyright Act of 1976; entitled to the ‘protection and remedies’ of the copyright owner, but not the right to assign)

• Cincom Systems (6th Cir. 2009) (corporate merger effected an impermissible assignment of a non-exclusive copyright license, applying Federal common law)

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Creation of a security interest – patent licensees• Federal common law says patent licenses are

not assignable without the consent of the licensor

• Licensees hold ‘personal,’ not ‘property,’ interests in the patent Catapult (9th Cir. 1999) (licensee cannot

assign rights without consent of licensor under Bankruptcy Code § 365(c))

CFLC (9th Cir. 1996) (licensee cannot assign rights without consent of licensor under Bankruptcy Code § 365(c))

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Creation of security interest – trademarks• Assignment must include transfer of associated goodwill

(no ‘assignments in gross’)• Trump (Bankr.D.Del. 2015) (rights of trademark licensee

not assignable without affirmative consent of licensor)• RCR Marketing (M.D.N.C. 2010) (secured party with

security interest in trademarks was not entitled to preliminary injunction against an alleged infringer, allowing transferee continued, monitored use if it pays a fee; policy at work?)

• Dixie Mills (N.D. Ga. 2010) (secured party with a security interest in trademarks and associated goodwill did not have ‘goodwill’ after original trademark owner’s business operations ceased)

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Creation of security interest – other IP type rights•Domain Names

Kremen (9th Cir. 2003) (domain name is ‘property’)

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Perfection - general

•For intangible assets, general rule under UCC is filing of a financing statementFile in state of ‘location’ of debtor­Typically state of organization

Can cover future assets

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Perfection - patents

• Does the U.S. Patent Act preempt Article 9? UCC § 9-109(c)(1) and § 9-311 35 USC § 261 (‘assignment, grant or other

conveyance’ means transfers of ownership only; ‘subsequent purchaser or mortgagee’ means purchaser, not a trustee or lien creditor)

• Cybernetics (9th Cir. 2001) No preemption as to perfection for patents File with Patent and Trademark Ofice anyway to

defeat buyer?• Coldwave (Bankr. D. Mass. 2007) (follows Cybernetics

and clarifies that PTO filing alone does not perfect)

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Perfection - copyrights

• Does the U.S. Copyright Act preempt Article 9? 17 USC § § 101 and 205(c) (‘transfer’ is broadly defined to include any mortgage or hypothecation, as well as exclusive licenses)

• Aerocon (9th Cir. 2002) Unregistered (until registered) - UCC Registered - Copyright Office File under UCC anyway? See also Peregrine

• Need new filing to cover after-acquired registered copyrights

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Perfection - trademarks

•Does the Lanham Act preempt Article 9?15 USC § 1060 (‘assignment’ means transfers of ownership only)

•Trimarchi (D. Mass. 2000) Always UCC

•File with PTO anyway?•Royalty stream and licensee rights

UCC filing

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Perfection – domain names

•General intangible•Always UCC

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Perfection – copyrights

• Nuts and bolts of a Copyright Office recordation17 USC § 205 + Copyright Office CircularsConstructive notice:­Must reasonably identify the work (would be revealed by a reasonable search of the title or registration number)

Search by work

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Perfection - royalties

•Royalty stream and licensee rightsNot treated as ‘IP’Generally governed by UCCBroadcast Music (9th Cir. 1997) (copyright royalties were validly assigned without filing with the Copyright Office)

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Priority

• General rule of UCC priority: First secured party to file or perfect

• Customary Article 9 lien priority rules apply when Article 9 applies to collateral, but also note: Patent Act 35 USC § 261 Lanham Act 15 USC § 1060 Assignments are void against subsequent

purchasers for valuable consideration without notice

• Copyright Act 17 USC § 205 rules apply when the Copyright Act applies to collateral

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Purchase money security interest• ‘Super-priority’ under UCC•Sometimes available when collateral is goods – UCC § 9-103(c)

•When is related software included?‘Integrated’ transaction

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Chattel paper

•Record evidencing a monetary obligation and a security interest in specific goods

•When is software included?Used in goodsUCC § 9-324(f)

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Disappearing collateral

• Effect of licensor’s rejection of license in licensor’s bankruptcy Bankruptcy Code § 365(n) (addresses patents,

copyrights and trade secrets as ‘intellectual property’ under § 101(35A))

Sunbeam Products (7th Cir. 2012) (allows trademark licensees to continue to use the IP after rejection)

Collectively address Lubrizol (4th Cir. 1985)• Patents – if not enforced• Trademarks – if not associated with goodwill

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Enforcement - which law

• Generally state law• Copyrights:

Hendrick & Lewis (9th Cir 2014)• Patents

Ager (Supreme Court 1881) Olive Branch Holdings (Ohio 2009)

• Trademarks and trade secrets• Domain names

Office Depot (9th Cir. 2010)

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Enforcement

• Standing of secured partyDoes secured party have sufficient IP rights to enforce IP itself?

• Drafting suggestionsSecured party requires notice of all disputes

Notice of debtor’s default if intellectual property pledged

Consider tri-party agreement with domain name registrar

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Case citations (in alphabetical order)• Aerocon Engineering, Inc., v. Silicon Valley Bank (In re

World Aux. Power Co.), 303 F.3d 1120 (9th Cir. 2002)• Ager v. Murray, 105 U.S. 126 (Supreme Court 1881)• Bank of North Carolina v. RCR Marketing, LLC, 2010 WL

5020502 (M.D.N.C. 2010)• Braunstein v. Gateway Management Services Limited

(In re Coldwave Systems, LLC), 368 B.R. 91 (Bankr. D. Mass. 2007)

• Broadcast Music, Inc. v. Hirsch, 104 F.3d 1163 (9th Cir. 1997)

• Brown Bark II, L.P. v. Dixie Mills, LLC, 732 F.Supp.2d 1353 (N.D. Ga. 2010)

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Case citations (in alphabetical order)• Cincom Systems Inc. v. Novelis Corp., 581 F.3d

431 (6th Cir. 2009)• Everex Systems, Inc. v. Cadtrak Corp. (In re

CFLC, Inc.), 89 F.3d 673 (9th Cir. 1996)• Gardner v. Nike, Inc., 279 F.3d 774 (9th Cir.

2002)• Harris v. Emus Records Corp., 734 F.2d 1329

(9th Cir. 1984)• Hendrick & Lewis, 766 F.3d 991 (9th Cir 2014)• Kremen v. Cohen, 337 F.3d 1024 (9th Cir. 2003)

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Case citations (in alphabetical order)• Lubrizol Enterprises, Inc. v. Richmond Metal Finishers,

Inc., 756 F.2d 1043 (4th Cir. 1985)• Moldo v. Matsco, Inc. (In re Cybernetic Services, Inc.),

252 F.3d 1039 (9th Cir. 2001)• National Peregrine, Inc. v. Capitol Federal Savings &

Loan Association of Denver (In re Peregrine Entertainment, Ltd.), 116 B.R. 194 (C.D. Cal. 1990)

• Office Depot, Inc. v. Zuccarini, 596 F.2d 6965 (9th Cir. 2010)

• Olive Branch Holdings, LLC v. Smith Technology Development, LLC, 181 Ohio App.3d 479 (Ohio 2009)

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Case citations (in alphabetical order)• Perlman v. Catapult Entertainment, Inc. (In re

Catapult Entertainment, Inc.), 165 F.3d 747 (9th Cir. 1999)

• Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012)

• Trimarchi v. Together Development Corp., 255 B.R. 606 (D. Mass. 2000)

• In re Trump Entertainment Resorts, Inc., 2015 WL 756873 (Bankr.D.Del. 2015)

• Valley Bank and Trust Company v. Spectrum Scan, LLC (In re Tracy Broadcasting Corp.), 696 F.3d 1051 (10th Cir. 2012)