Update on perfecting security interests in intellectual property

ELT, Apr 2003 by Veatch, William S

The Ninth Circuit holds that a UCC-1 filing perfects a security interest in unregistered copyrights.

A recent decision of the U.S. Circuit Court of Appeals for the Ninth Circuit, Aerocon Engineering, Inc. v. Silicon Valley Bank, et. al., 2002 WL 31017352, held that a lender can perfect a security interest in unregistered copyrights by filing a UCC-1 financing statement under state law. Prior to the Aerocon decision, a lender was effectively precluded from perfecting a security interest in unregistered copyrights. The only solution was to require the borrower to register its copyrights, so that the lender could perfect its security interest by filing in the U.S. Copyright Office.

Although the Aerocon case is helpful to secured lenders, as we will see, it does not solve all the difficult issues associated with perfecting a security interest in intellectual property.

Background

Certain types of personal property, such as patents, trademarks and copyrights are subject to federal law as well as the state law provisions of Article 9 of the UCC. To the extent that there is a conflict between the state law and federal law, the federal law will preempt the UCC. While the federal Patent Act, the Lanham Act, and the Copyright Act provide a federal scheme for the registration of patents, trademarks, and copyrights, respectively, only the Copyright Act contemplates recordation of documents involving a security interest. In order to perfect a security interest in a registered copyright, a lender must file in the Copyright Office. In the case of patents and trademarks, a UCC-1 financing statement filed under state law is sufficient to perfect a security in a patent or trademark.

Prior to the Aerocon case, confusion arose out of the fact that copyright registrations are permissive, not mandatory. In the case of software, for example, a copyright in the source code attaches the moment the source code is written, making it unnecessary that the copyright in the source code be registered. If the copyright is not registered, however, there is no place for a secured lender to file its lien in the Copyright Office, because filings in the Copyright Office are filed against the registration number or title of the copyright, not against the debtor's name. This created a real dilemma for secured lenders prior to the Aerocon case. The only options were to either (i) require the borrower to register its copyrights or (ii) not lend against the collateral value of any unregistered copyrights.

Filing a UCC-1 financing statement was not previously an option, at least in the Ninth Circuit, because of the case In Re Avalon Software, Inc., 209 B.R. 517 (Bankr. D. Ariz. 1997), which held that any copyrightable intellectual property that is entitled to be, but that has not yet been, registered in the Copyright Office must first be registered before a security interest in such property can be perfected, and the burden is on the creditor to assure that this is done. Most commentators believed that the Avalon decision was incorrectly decided, but felt that the case needed to be followed until expressly overruled. The Aerocon decision clarifies the law by stating that a secured lender can perfect its security interest in unregistered copyrights by filing a UCC-1 financing statement under state law with the appropriate filing office in the jurisdiction where the borrower is located.

In summary, a UCC-1 financing statement filed under state law is effective to perfect a security interest in patents, trademarks, and unregistered copyrights. A lender must file in the Copyright Office to perfect its security interest in registered copyrights.

Limitations of the Aerocon Decision

Although the Aerocon decision was welcomed by the lending community, it does not solve all of the difficulties involved in financing intellectual property rights. In particular, what happens if a lender perfects its security interest in unregistered copyrights of a borrower by filing a UCC-1 financing statement, and the borrower later registers the copyrights? The answer is that the lender becomes unperfected if it does not register its security interest in the Copyright Office. As a result, some lenders may still require their borrowers to register their copyrights up-front. Other lenders may be satisfied with a covenant that requires the borrower to notify the lender of any copyright registrations, so that the lender can make a timely filing in the Copyright Office.

Another difficulty with copyrights is that it is not possible to register a security interest in the Copyright Office against after-acquired collateral. Therefore, each time the borrower registers a new copyright or a material revision to an old copyright, the lender must file again in the Copyright Office.

It is also worth noting that a prudent lender will file a notice of its security interest in the U.S. Patent and Trademark Office (PTO) as well as a UCC-1 financing statement at the state level if it is lending against patents or trademarks. Although the UCC-1 filing will perfect a security interest in patents and trademarks, the PTO filing is necessary to prevent a buyer in good faith for value without notice from purchasing the patent or trademark free and clear of the security interest.