by Lorin Brennan
A growing share of commerce in today’s global information economy revolves around IP assets rather than the physical commodities that dominated the industrial age. IP represents an important source of commerce in its own right, for example online content licensing, and is also an increasing component of traditional merchandise, from trademarked fashion apparel to patented drugs. While these developments offer exciting opportunities for increased trade, they also present profound challenges to many established legal practices.
IP law has traditionally focused on protecting the property right. Commercial law, by contrast, deals with making and enforcing contracts in the course of trade. Much of traditional commercial law, however, developed for transactions in tangible goods, and IP is, of course, different. As IP becomes more prevalent in modern commerce, it is becoming imperative to harmonize these different bodies of law.
One area where this process is occurring is secured financing. In December 2007, the U.N. Commission on International Trade Law (UNCITRAL) promulgated a long awaited Legislative Guide on Secured Transactions to help states modernize their laws and increase the availability of low-cost credit. However, the Guide was primarily focused on financing practices for tangible goods and related trade receivables, and it was recognized that the Guide could require asset-specific adjustments for IP. Thus, the Guide does not apply “to the extent [that it is] inconsistent with intellectual property law.” Instead, UNCITRAL is preparing an Annex on how to adjust the Guide for IP.
The discussions at UNCITRAL have been remarkably fruitful in identifying the varying expectations of commercial lenders and IP right holders but much work needs to be done for effective harmonization. Professionals from all sectors have expressed a strong desire to develop modern rules for IP financing, and the UNCITRAL Secretariat has been a tireless supporter of the process. While many issues are still open, the following are some major areas under discussion:
Effectiveness: Many commercial laws require public notice of a security right before it can be effective against third parties. The UNCITRAL Guide thus proposes a personal property registry for filing notices of security rights, which could include IP. In many states, typically those whose financing law derives from pledge concepts, the lack of a registration system for some types of IP, e.g. copyrights or trade secrets, makes them in practice unfinanceable. The UNCITRAL Guide would open up these assets to secured financing, a welcome improvement. However, in some states, primarily those whose financing law developed from mortgage notions, the lack of registration is not seen as an impediment, and a security right in IP takes effect when the contract is concluded like just like any other transfer. In these states, adopting a security right filing requirement would require additional formalities for third party effectiveness, potentially including against infringers.
Co-ordination of registries: Many countries maintain IP registries, especially for patents and trademarks, which often allow recording of security rights. How should existing IP registries harmonize with the personal property registry proposed in the UNCITRAL Guide? This raises questions of priority and efficiency.
As to priority, the Guide defers to existing IP registries by proposing that a security right recorded in an IP registry takes priority over any security right: (i) registered in the Guide’s general personal property registry at any time; or (ii) later registered in the IP registry. However, priority is based on “pure race” or first to file rule that applies regardless of knowledge of the prior transfer. Many IP registries use different priority rules. For example, many countries use a “pure notice” rule in which a later transfer to a bona fide purchaser for value and without knowledge (“BFP”) prevails. Under this rule, filing is encouraged since it gives constructive notice sufficient to defeat a later BFP, but it is not strictly necessary. Other states use a “race notice” rule under which, between competing BFPs, the first to file prevail. Still other states provide that registration creates an evidentiary presumption of priority which is rebuttable by an earlier filer. For reconciling these priority rules the “first to file” rule in the Guide requires further study.
The related issue of efficiency and the problems raised by the Guide’s registry requiring only a simple notice with a general description of the collateral (e.g., “all intellectual property now or later owned”) indexed against the debtor have already been discussed in the previous article.
Ordinary Course Transfers: Another issue is whether the “ordinary course” concept should apply to IP. The concept reduces transaction costs where parties reasonably expect a security right to be released upon a sale of the goods. A purchaser buying goods from inventory would not expect the seller’s inventory lender to retain a lien that allowed repossession of the goods if the seller defaulted. If that were the case, the purchaser would certainly demand a lien release, to which the lender would readily agree since it was looking to generate proceeds to retire the loan. The Guide accommodates this commercial expectation by providing that a security right does not continue in goods after “ordinary course” sales. There is a discussion on whether this concept should also apply to non-exclusive IP licenses on the theory that commercial expectations are similar. However, that is not always so. In many cases parties expect and require a prior security right to continue against licensees, e.g., motion picture or franchise lending. The licensees know they must exercise due diligence, find prior lenders, and negotiate “non-disturbance” agreements if they want their licenses to continue after a foreclosure. Thus, IP professionals maintain that the situation is more analogous to leases in an office building subject to the master property mortgage than to sales of goods from inventory, so that an ordinary course rule would be an “exception and limitation” to rights in conflict with normal exploitation.
Intellectual Property and Goods: Consider a digital camera that has copyrighted software to operate the mechanism and is sold under a trademark. How should a secured creditor describe collateral consisting of 100 such cameras: “all digital cameras” or “all digital cameras plus IP rights”? There is some thought that the second description is unnatural or cumbersome. Thus, a collateral description of tangible goods should include what is sometimes called “embedded” or “related” IP, allowing the lender to dispose of the goods in case of default without need to reference to IP rights. A concern, however, is that what starts as a convenient collateral description may become a kind of compulsory license. If the cameras were acquired in a legitimate transaction by authority of the IP owner, relevant IP rights were satisfied (e.g. “exhausted”) so the lender is not exercising them in case of a foreclosure. If the goods are pirated, a lender should not have a right to dispose of them free of the IP right. If the goods were made under a limited license, it would seem appropriate for the collateral description to so state. This is an area where traditional IP law seems to address the issue already, but a better explanation of how it works could be helpful.
Applicable law: What law should apply to the creation, effectiveness, priority and enforcement of a security right in IP, especially one covering multiple countries? From a commercial law perspective, one would like a single law to resolve all of these issues, such as the law of the country where the grantor is located. On the other hand, rules for effectiveness against third parties and priority directly impact who can assert and own the IP, matters which affect the means of redress and therefore implicate the traditional territorial principle and the “law of the protecting state.” It would be anomalous if the law of Country A determined whether IP was owned and effective against third party infringers in Country B.
These are a few of the issues that have arisen in UNCITRAL’s effort to prepare its IP Annex. The process has helped raise awareness about the variety of commercial needs and expectations of parties who deal with IP. Lenders who provide working capital financing would like an “enterprise lien” that can easily encumber existing and future assets of a debtor, including IP, with a simple notice filing. The Guide’s approach is well-suited to these practices. IP lenders, such as movie financiers or franchise lenders, want an asset specific device that provides priority over licenses and royalty income streams with an easy filing in a system they know. Both perspectives are important, and both can be accommodated. But it will take diligent efforts to do so. Participation in the process by IP experts in governments and professional organizations would be both welcome and conducive to a successful conclusion.
Source: WIPO Magazine