Canada: Domain Name Security Interests: "Control" Isn’t "Perfection"

Introduction

As a great deal of value can stem from a debtor's domain name, secured creditors ought to consider how best to protect their interest in such property. One option, which has gained traction in the United States, is to take constructive possession or "control" of the domain name. This means doing whatever is necessary technologically at the time credit is advanced to ensure that no further consent of the debtor would be required, should default occur, to dispose of the collateral. An example would be obtaining and modifying all requisite passwords in the domain name as a condition of providing credit.

While this "control" method has a certain practical appeal, it is woefully inadequate in offering legal protection to secured creditors in the event of a priority dispute. All security interests in personal property – including those in domain names – must be properly perfected to form legal priority over competing secured creditors, trustees in bankruptcy and other bona fide stakeholders. A secured creditor obtains a security interest over domain names through a general security agreement or a more specific intellectual property security agreement. The security interest granted in favour of the secured creditor in the intellectual property is then perfected by registering it in Ontario's Personal Property Security Registration System (the "PPSRS"). Similar requirements are in place in the other Canadian and U.S. common law jurisdictions.¹

Domain Names Are Intangible Personal Property

The 2011 Ontario Court of Appeal decision in Tucows.com Co. v. Lojas Renner S.A., for which leave to appeal to the Supreme Court of Canada was refused, confirms that domain names are not only personal property, but are intangible personal property.² While this case did not involve security interests in domain names – indeed, there appears to be limited Canadian jurisprudence on this particular topic – the implications of domain names being classified as intangible personal property are two-fold:

i. they are subject to the rules of the Personal Property Security Act (Ontario) (the "PPSA");³ and

ii. they are subject to the PPSA's specific rules pertaining to intangible personal property.

Neither Possession Nor Control Perfects Security Interests in Intangible Personal Property

While security interests in personal property under the PPSA may generally be perfected by possession, control or PPSRS registration, intangible personal property may only be perfected via registration.

Perfection by possession requires actual physical possession of the underlying asset, and is statutorily limited to the five categories of tangible property – chattel paper, goods, instruments, negotiable documents of title, and money.⁴ The PPSA explicitly excludes each of these categories from the scope of intangible property.⁵

Perfection by control is akin to constructive possession of the underlying asset, but this method is statutorily limited to "investment property" such as shares or futures contracts, and typically involves the execution of an agreement by which the issuer or broker agrees to comply with instructions given by the secured creditor.⁶ Once again, the PPSA explicitly excludes "investment property" from the scope of intangible personal property.⁷

Given the factual impossibility of physically possessing intangible assets, it makes perfect sense that perfection by physical possession not be available to security interests in such assets. However, the rationale for restricting the control method is not as clear. In essence, a secured creditor that attains control has done whatever is necessary, given the circumstances, to be in a position to dispose of the property without further consent of its original owner. If this can be achieved with "investment property" by instructing the issuer or broker of shares to comply with instructions given by the secured creditor instead of the original owner, it is not clear why this method ought not to be applied in the domain name context to establish valid perfection. The short answer for the time being is that the control method does not apply to domain names because the PPSA does not allow for it.

PPSRS Registration is the Only Way to Perfect Security Interests in Intangible Personal Property

This leaves the PPSRS registration method as the only avenue through which security interests in domain names may be perfected. The PPSA explicitly provides that "[r]egistration perfects a security interest in any type of collateral."⁸ This refers to the registration of a financing statement with the PPSRS, and not some other registry. Consequently, while a secured creditor may "record" its security interest elsewhere – such as with the Canadian Intellectual Property Office ("CIPO") for trademarks, patents, industrial designs and copyrights (no domain name registry is maintained by CIPO) – the secured creditor still needs to register its security interest under the PPSA to properly perfect its security interest. Should a priority dispute arise with respect to properly-perfected and competing security interests in the same domain name, only the temporal order of registration under the PPSRS will determine the winner.⁹

Conclusion

Although the PPSA's perfection rules for intangibles have yet to be brought before the courts in the domain name context, the statutory regime appears to be quite clear that security interests in domain names can only be perfected by registration under the PPSRS. Thus, while it is entirely possible for a secured creditor to maintain practical control of a domain name, this should not be confused with legal protection and the requirements of the PPSA. A secured creditor that does not register its security interest in a domain name under the PPSRS will be vulnerable should a priority dispute arise. Where a domain name forms an integral part of the security package, a prudent secured creditor may want to register its interest under the PPSRS and obtain control of the domain name.

Footnotes

1 In the United States, for example, see UCC § 9-312 to § 9-314.

2 2011 ONCA 548, 106 O.R. (3d) 561, 336 D.L.R. (4th) 443, leave to SCC refused, 34481 (May 24, 2012) at paras. 65-66.

3 R.S.O. 1990, c. P.10, as amended [PPSA].

4 Ibid, s. 22.

5 Ibid, s. 1(1) ("intangible").

6 Ibid, s. 22.1; see also Securities Transfer Act, 2006, S.O. 2006, c. 8, ss. 23- 25.

7 Supra para. 3, s. 1(1) ("intangible").

8 Ibid, s. 23.

9 PPSA, supra para. 4, s. 30(1).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.