Security Interests in Intellectual Property

Lenders and investors are increasingly underwriting loans and investments on the basis of "intellectual property." This trend highlights the need for lenders to carefully consider the type of intellectual property involved in any loan transaction involving a security interest in intellectual property. Making a loan without the right type of collateral documentation in place can leave a lender without the collateral it expected.

"Intellectual property" is a word that is often used casually but can have many meanings. There are primarily four types of intellectual property in the U.S.:

  1. patents,
  2. trademarks,
  3. copyrights and
  4. trade secrets.

Each of these is a distinct type of property right in which a security interest can be perfected.

These four types of intellectual property can be further grouped into two broad categories: those that can be perfected under article 9 of the Uniform Commercial Code ("UCC") and those in which a security interest can only be perfected by a filing with the U.S. Patent and Trademark Office (the "U.S. PTO").

With respect to patents, an inventor has an enforceable right once the inventor has filed a patent application with the U.S. PTO, although the right may not fully ripen until the U.S. PTO has issued the patent (a process that usually takes months but may take years).

A trademark includes any word, series of words or graphic design intended to designate a source of goods or services. Trademarks exist both at common law and under state and federal statutes. Thus, although trademarks are often registered under state trademark statutes and under the federal Lanham Act, through the U.S. PTO, there are also common law trademarks where no public filing is made. (Because common law and state law trademarks are relatively less likely to be the subject of a lender's underwriting, this article will only address the perfection of a security interest in a registered, federal law trademark).

A copyright exists automatically once the creator of a "work" fixes the work in a tangible medium. A work is "fixed in a tangible medium" when it is written, photographed, recorded or otherwise documented. Copyrights can include everything from books and works of literature, as well as non-literary written documents, including compilations of data, references, price lists and computer software. Although a copyright will generally exist under the common law automatically, the inventor's rights are best protected and most clearly set forth when the inventor files for copyright protection under the Copyright Act (17 U.S.C. 201) through the U.S. PTO.

Security interests in patents and registered copyrights are perfected by the filing of a collateral assignment in the U.S. PTO. Because of the existence of a federal filing system for trademarks, it might be intuitive to assume that security interests in trademarks are perfected by filing in the U.S. PTO. Although the authorities are divided, most courts that have considered the question, and most treatises conclude, that security interests in trademarks can be perfected only through a filing under article 9 of the UCC. In light of the uncertainty, however, most lenders will also file a collateral assignment with the U.S. PTO in an exercise of caution.

Security interests in trade secrets can only be perfected under article 9 of the UCC by filing an appropriate financing statement.

Trade secrets, unlike patents and copyrights, exist primarily by virtue of state law and are never subject to protection through filing with the U.S. PTO (except to the extent that some trade secrets can be "converted" into patents or copyrighted works). Under the Uniform Trade Secrets Act (adopted in most states), a trade secret can be defined as any information, not known to the public, which confers pecuniary value upon the holder of it and which is the subject of reasonable efforts by the holder to maintain its secrecy. Computer software, compilations of data, customer lists, price lists, secret formulae and some business plans can be treated as trade secrets.

Most court decisions have held that trade secrets are a type of "general intangible" under article 9 of the UCC. As a result, a secured party can perfect its security interest by filing a financing statement covering the specific trade secret, or all of the debtor's general intangibles.

To avoid the possibility of an unperfected security interest, a lender in a secured transaction should be certain that the security agreement or other loan documents describe the type of intellectual property involved. The lender may require the debtor to make specific representations that the debtor either has or has not filed for patent protection, copyright or trademark registration through the U.S. PTO or otherwise, as the case may be.

In addition, the lender or the lender's counsel should spend time discussing the borrower's intellectual property protection strategy. This will be especially true in loan transactions where the borrower's intellectual property is an important part of the underwriting decision or collateral package. The more information the lender has, the better prepared the lender will be to structure the loan documents accordingly.