Financing Intellectual Property Under Revised Article 9: National and International Conflicts

141 Pages Posted: 11 Jan 2002

Abstract

This is the second of two companion articles on intellectual property secured financing. This one discusses the conflicts with national and international intellectual property law in Revised Article 9. The companion article, Financing Intellectual Property Under Federal Law: A National Imperative, discusses federal law.

The essential purpose of intellectual property law is to provide the public with new creations by allowing creators to collect royalties as an incentive to create. Lenders who fund creators look to the intellectual property rights and the resulting royalty stream from licensees to repay the loan. The purpose of Revised 9, however, is to allow licensees to direct royalties to their own secured creditors ahead of creators and their lenders, despite any agreement with a licensor to the contrary. The result conflicts with federal civil and criminal intellectual property law.

Revised 9's treatment of assignments and exclusive licenses as "really" security interests that cannot be cancelled for material breach but only "foreclosed" by sale at public auction is incompatible with basic federal law. Its "licensee in the ordinary course" construct has been repeatedly repudiated by the federal courts and held to constitute both civil infringement and criminal piracy. Its "embedded software" and "software license as chattel paper" rules are preempted by the Copyright Act and endorse infringing conduct. The provisions of Revised 9 that render void all restrictions on assignment of IP licenses are, as even the Official Comments admit, contrary to federal law. Revised 9's "licensee in the ordinary course" and its prohibitions on anti-assignment clauses can prevent a trademark owner from stopping naked licensing, risking invalidation of the entire mark.

Revised Article 9 also confuses the filing and priority rules. By ignoring the difference between a lien creditor and a bona fide purchaser, it now directs most U.S. IP security interests to be perfected by filing in the local UCC office in the District of Columbia. Absent federal preemption, existing U.S. IP security interests not refilled in D.C. by Revised 9's effective date (July 1, 2001) can become unperfected without a grace period. For international interests, Revised 9 requires a U.S. lender loaning against a patent of a Japanese company to be used in the U.S. to perfect by filing, not in the PTO, but in Tokyo, contrary to treaty obligations. Similarly, a U.S. lender loaning against copyright royalties payable to a U.S. debtor from a French company perfects against a U.S. bankruptcy trustee by filing in Paris. The article digests more than 40 countries with national IP registers in which Revised 9 will now require filing, often at considerable expense, to perfect against IP royalties remitted to U.S. debtors. And if a lender does not file against any licensee wherever located worldwide within one year, the security interest can become unperfected retroactive to day one. Revised 9 decimates export financing for the nation's leading export industries.

Revised Article 9, in its basic philosophy and statutory mechanics, conflicts with significant aspects of national and international intellectual property law. It raises manifold risks for anyone using it to finance intellectual property.

Keywords: Intellectual Property, Copyright, Patent, Trademark, Secured Financing, Article 9, Revised Article 9, Bankruptcy, Enforcement of Judgment, International Law

Suggested Citation

Brennan, Lorin, Financing Intellectual Property Under Revised Article 9: National and International Conflicts. Available at SSRN: https://ssrn.com/abstract=296529 or http://dx.doi.org/10.2139/ssrn.296529

Lorin Brennan (Contact Author)

Gray Matter, LLC ( email )

180 Newport Center Drive, Suite 180
Newport Beach, CA 92660
United States
(949) 720-8490 (Phone)
(949) 719-0551 (Fax)

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