Banks, venture capitalists and other lending institutions often require borrowers to pledge their intellectual property (patents, trademarks, copyrighted matters) as collateral for a loan.  Before the lender is in a position to foreclose on such collateral and assert a priority position in a bankruptcy proceeding, it is essential that the lender has properly “perfected” its security interest in the borrower’s IP.  Failure to properly perfect the security interest leaves the lender no better off than an unsecured creditor.

To “perfect” a security interest, the secured party (the lender) must provide public notice of the existence of such interest by filing a lien notice with the applicable local, state or federal agency.  The applicable jurisdiction and law depends upon the type of intellectual property involved.

As a general rule, a lender’s security in “general intangibles” (which includes IP) is perfected not only by filing the notice but also by the filing of a so-called U.C.C.-1 Financing Statement.  Under the Uniform Commercial Code, a set of uniform laws enacted in all 50 states governing the conduct of business, the filing of a U.C.C.-1 Financing Statement creates a lien against the property so the borrower may not dispose of the property without paying the debt.  The lender typically files the document with the Secretary of State’s Office where the borrower’s principal place of business is located or in the applicable County Clerk’s Office.  It is wise for a lender to file in both as a matter of safe practice.

A question often arises as to whether it is necessary to record a lien in the U.S. Patent and Trademark Office in order to perfect the security interest against patents.  The patent assignment provisions of the patent laws do not specifically address the issue of perfection of security interests in patents.  Prior to the adoption of the U.C.C., perfection of a security interest in patents did require recordation of such liens in the U.S. Patent and Trademark Office (USPTO).  Subsequently, however, several jurisdictions have specifically held that filing of a U.C.C.-1 Statement under state law is sufficient, but the law remains somewhat unsettled.  Accordingly, dual filings by lenders under the applicable U.C.C. provisions and with the USPTO are recommended. 

Concerning trademarks, which are governed by both federal and state regulations, a lender should record its security interest with the USPTO.  Such a recording may be necessary to prevent a subsequent bona fide purchaser from acquiring rights to the trademark.  Some federal courts have held that nothing in the Lanham Act covering trademarks preempts state law as far as perfecting security interests in trademarks is concerned and, therefore, again it is recommended that both a U.C.C. filing and a recording of a security interest in a trademark with the USPTO be undertaken by the lender.  Because a trademark cannot subsist separate from the goodwill of the business with which the mark is associated, special care must be exercised in drafting the U.C.C.-1 Statement where trademarks and/or service marks are to serve as loan collateral.

With respect to copyrights, the law is quite clear that security interests in federally registered copyrights can only be achieved by recordation of that security interest with the U.S. Copyright Office.  Specifically, a U.C.C. filing is insufficient to perfect the lien.  In the case of unregistered copyrights, the lender should insist that registration of the copyright take place and that the security interest in that registered copyright be recorded with the U.S. Copyright Office.

Attorneys at Nikolai & Mersereau, P.A. are knowledgeable in this area and are in a position to handle the perfecting of security interests in IP.

Tom Nikolai                 (612) 392-7307           Tom.Nikolai@nm-iplaw.com