Many intellectual property lawyers believe that the entire subject of secured transactions1 does not concern them. Whether that was ever true, such a belief could be disastrous today. There has been a growing acknowledgement over the last few years among lenders and investment bankers that a company's intellectual property is often its most valuable asset. This is so not just for high tech companies with their portfolios of patents or computer software developers with software copyrights and patents, but equally for entertainment and publishing companies, whose copyrights are at the heart of their businesses. For consumer product companies -- high tech or low -- their trademarks are often their single most valuable asset.

Because of their value, intellectual property often serves as collateral in the various types of financing which are essential to the functioning of today's corporations. In order to provide comprehensive counseling, whether one’s specialty is intellectual property, corporate or commercial finance, a lawyer must have at least a basic understanding of how each of the forms of intellectual property can be made the subject of a security interest, how such security interest can be perfected and how to search for existing security interests.

Unfortunately, ambiguous statutes, inconsistent court rulings and administrative difficulties bedevil security interests in intellectual property. The law applicable to security interests in intellectual property is far from settled -- whether in the United States or elsewhere. This paper sets out what a practitioner should look for to avoid the myriad of pitfalls which can create a trap for the unwary.

I. How the Issue Arises

Few businesses today could survive without borrowing money for some business purpose, whether it is a factoring arrangement,2 a revolving credit line or the financing of a major expansion. Whatever the reason for the loan, however, the lender often insists that the company's existing intellectual property (i.e., its trademarks, copyrights, patents and trade secrets), including any after acquired intellectual property, serve as collateral for the financing. When a lender is providing the financing for the acquisition of a business (whether a stock or asset purchase), the intellectual property of the acquired company or division is invariably part of the collateral for the loan.

Now that intellectual property is valued as an important form of collateral, intellectual property lawyers are being asked to opine on the validity and enforceability of rights in intellectual property, both in the United States and internationally. For the skilled intellectual property lawyer, that is not where the pitfalls lie. The most problematic issue -- which affects all others -- is the "perfection" of the security interest; how to accomplish such perfection, and how to determine if a particular intellectual property asset is the subject of a perfected security interest.

Perfection is of paramount importance because a secured party which has perfected its security interest has greater rights than those of an unperfected secured party in case of the bankruptcy of the debtor -- that is, the secured party stands first (or second, etc., depending on priority) in line with respect to the assets in which it has a perfected security interest, rather than at the back, with all the unsecured creditors.

To "perfect" a security interest, generally, the secured party provides public notice of the existence of its interest, by filing notice of its lien in a public file, as provided by applicable law. The applicable law, however, varies both by jurisdiction and by the kind of intellectual property involved.

II. Perfection: Where to Search, Where to File

In the United States, security interests in most personal property are governed by Article 9 of the Uniform Commercial Code ("UCC"), which has been adopted with minor differences in all states and the District of Columbia.3

Section 9-109 of the Code provides that Article 9 (Secured Transactions) applies to "a transaction, regardless of its form, that creates a security interest in personal property . . . ." Among the various types of personal property subject to Article 9 are general intangibles. The Code defines "General intangibles" as

any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The Term includes payment intangibles and software.

UCC § 9-102 (a)(42). The Official Uniform Comment to UCC 9, states that the term "General Intangible" is

the residual category of personal property, including things in action, that is not included in other defined types of collateral. Examples are various categories of intellectual property and the right to payment of a loan of funds that is not evidenced by chattel paper or an instrument. As used in the definition of "general intangible," "things in action" includes rights that arise under a license of intellectual property, including the right to exploit the intellectual property without liability for infringement.

Under Article 9, a "financing statement" (sometimes referred to as a UCC-1) must be filed against the debtor in order to perfect a security interest. A financing statement must adequately describe the collateral which is the subject of the lien. If only certain intellectual property is serving as collateral, then that collateral must be separately identified. However, language such as "all general intangibles now owned or hereafter acquired by [the debtor company]" is considered a sufficient statement to cover, for example, all trademarks (whether or not federally registered) and all trademarks subsequently acquired by the debtor. There is no requirement under the UCC to separately list or describe the "general intangibles" when the intention is to include all of them.

A. Where the Problem Arises: The Conflict between State and Federal Law

Article 9 also provides, in Section 9-311, exceptions to this State filing requirement. The subsection of particular interest provides:

(a) Security interest subject to other law. Except as otherwise provided in subsection (d), the filing of a financing statement is not necessary or effective to perfect a security in property subject to:

(i) a statute, regulation, or treaty of the United States whose requirements for a security interest's obtaining priority over the rights of a lien creditor with respect to the property preempt Section 9-310(a)

A similar exception appeared in former Article 9 at UCC § 9-302(3)(a). Section 9-311 of the current Article 9 follows UCC § 9-909, which replaces former UCC § 9-104(a)) and which governs the scope of Article 9. It specifically states that Article 9 does not apply to the extent that it is preempted by a "statute, regulation, or treaty of the United States." UCC § 9-109(c)(1). The Official Comment to UCC § 9-109 attempts to clarify past misconceptions regarding the relationship between Article 9 and federal law:

Some (erroneously) read the former section to suggest that Article 9 sometimes deferred to federal law even when federal law did not preempt Article 9. Subsection (c)(1) recognizes explicitly that this Article defers to federal law only when and to the extent that it must--i.e., when federal law preempts it.

Certain intellectual property rights are governed by State law -- such as trade secrets and common law trademarks. Other intellectual property rights only exist as a federal right -- patents, copyrights and rights in mask works. Still others are subject to federal statute, and concurrent state jurisdiction -- federally registered trademarks. Because of the exception provided in UCC § 9-311(a)(1) and UCC § 9-909(c)(1), there is no certainty about how the various forms of intellectual property are to be perfected, whether under the basic UCC framework or federal law. To make matters more difficult, the issue has infrequently been addressed by the courts, and the few court decisions which do address the issue have created their own sets of problems. The newly revised Article 9 now in effect does not (and could not) resolve this problem. Only federal legislation will solve the pre-emption/perfection issues regarding intellectual property discussed in this paper.

B. Perfection of Security Interest in Trademarks

Section 10(a) of the United States Trademark Act, the Lanham Act, provides that

An assignment shall be void as against any subsequent purchaser for a valuable consideration without notice, unless the prescribed information reporting the assignment is recorded in the Patent and Trademark Office within 3 months after the date of the subsequent purchase or prior to the assignment.

15 U.S.C. § 1060(a). The Assignments branch of the United States Patent and Trademark Office ("USPTO") will accept security interests for recordal, provided that the document identifies the marks, including the registration number or serial number in the case of applications. Such recorded security interests are treated by the USPTO as conditional assignments.

Assignments which are made conditional on the performance of certain acts or events, such as the payment of money or other condition subsequent, if recorded in the Office, as regarded as absolute assignments for Office purposes until cancelled with the written consent of all parties or by the decree of a court of competent jurisdiction. The Office does not determine whether such conditions have been fulfilled.

Trademark Rules of Practice, 37 C.F.R. § 3.56.

1. Perfecting Security Interests in Trademarks is Accomplished under the UCC

Because of the Lanham Act provisions which allow for recording of security interests in the USPTO, many practitioners mistakenly believe that recording a security interest in the USPTO is how one perfects a lien against such trademark registration. Although the USPTO will accept security agreements for recordal -- and such recordal will be effective against subsequent purchaser/assignees -- all reported cases hold that perfection of a lien on trademarks is accomplished by proper filing under Article 9.

It is not surprising that security interests in common law trademark rights and trade secrets would be perfected under the UCC system, as these are rights under state rather than federal law. However, perfection of a security interest in federally registered marks is equally accomplished under the UCC system.

The court in Joseph v. Valencia, Inc. (In re 199Z, Inc.), 137 B.R. 778 (Bankr. C.D. Cal. 1992) held that the Lanham Act only provides for recording of assignments of registered trademarks, but not for recording security interests. In reaching this conclusion, the court noted:

This result is not altered by the fact that, as in this case, the Patent Office accepts the filing of documents memorializing the granting of a security interest in a trademark. The Lanham Act gives the Patent Office the discretion to accept various documents not expressly described in the Act; it does not, however, expressly provide for the filing of documents memorializing pledges of trademarks, as the Copyright Act does for hypothecation of copyrights.

Id. at 137 Bankr. 782, n.7. See also In re Together Dev. Corp., 227 B.R. 439 (Bankr. D. Mass. 1998); In re Chattanooga Choo-Choo Co., 98 B.R. 792 (Bankr. E.D. Tenn. 1989); In re TR-3 Industries, 41 B.R. 128 (Bankr. C.D. Cal. 1984); In re Roman Cleanser Co., 43 B.R. 940 (Bankr. E.D. Mich. 1984), aff'd 802 F.2d 207 (6th Cir. 1986).

Accordingly, whether you are seeking to perfect a security interest in a trademark registration or performing a search to locate existing liens, your efforts cannot end with a search of the records of the USPTO. You must also review all UCC financing statements filed against the owner of the marks. Remember, a lien has been perfected against a trademark registration whether the specific mark is listed or only the phrase "general intangibles" or "all trademarks" is used. Even if you are only checking chain of title when your client is purchasing a single mark and registration, you should do a UCC lien search to make sure that the registration is not subject to a lien. If it is, a waiver or release should then be obtained from the lender.

2. One Cannot Reply only on UCC Filings

On the other hand, it is not enough just to do a UCC lien search, or record your lien by filing a Financing Statement. The records of the USPTO must also be checked, both to confirm that title is in the name of the borrower, and that there are no liens recorded against those registrations. An unreleased lien recorded against a trademark registration in the USPTO will be a cloud on the title to that registration. In addition, unless a lien against a federally registered trademark is recorded in the USPTO, it will not cut off bona fide purchasers for value. Lanham Act §  10 (a)(4).

3. Additional Issues Regarding Security Interests in Trademarks

Whether you are representing the lender or the borrower, do not allow the lender to take an outright assignment of trademarks, rather than a security interest, as this may destroy the trademark. Most commercial finance attorneys can be made to understand that the lender does not want to nor is it in a position to be the owner of the mark during the life of the loan. A lender does not want to be a licensor, exercising quality control over its debtor/licensee nor be responsible for filing necessary documents such as § 8 declarations. Of course, intent-to-use applications cannot be assigned except "to a successor to the business of the applicant," Lanham Act § 10(a), 15 U.S.C. § 1060(a)(1). To do so would invalidate any subsequently obtained registration. The Clorox Co. v. Chemical Bank, 40 U.S.P.Q.2d 1098 (T.T.A.B. 1996) (outright assignment of intent-to-use application voided resultant registration under 15 U.S.C. § 1060).

When drafting a trademark security agreement, remember that trademarks cannot be assigned "in gross." Be sure that the security interest includes "goodwill" and means to manufacture goods or offer services (e.g., trade secrets, formulas, customer lists). Green River Bottling Co. v. Green River Corp., 997 F.2d 359 (7th Cir. 1993) (trademarks cannot be assigned "in gross", trademark followed ownership of secret formula); In re Roman Cleanser, 802 F.2d 207 (6th Cir. 1986). Lastly, cessation of use of trademark during bankruptcy may result in abandonment, 15 U.S.C.§ 1064(3); Crestar Bank v. Comband Technologies, 1995 U.S. App. LEXIS 31064 (4th Cir. 1995) (surcharged expenses of debtor-in-possession were required for preservation and sale of collateral).

C. Perfecting Security Interests in Copyrights: Is It Necessary to File in the Copyright Office?

1. In re Peregrine

Copyrights are included within the definition of general intangibles. Two decisions from the federal courts in California, In re Peregrine Entertainment, Ltd., 161 B.R. 194 (C.D. Cal. 1990) and In re AEG Acquisition Corp., 127 B.R. 34 (Bankr. C.D. Cal. 1991), aff'd, 161 B.R. 50 (Bankr. 9th Cir. 1993), have held that a security interest in copyrights or rights under copyright must be recorded in the Copyright Office in order to perfect the lien. Parallel UCC filings were held to be ineffective.

The reasoning underlying these decisions is based both on principles of preemption of state law by federal statute as acknowledged by UCC § 9-311(a) and former UCC § 9-302(3)(a). These courts noted that the Copyright Act, 17 U.S.C. § 205, contains comprehensive provisions for recording security interests, and held that these provisions preempted state UCC methods of perfecting security interests. Their reasoning is bolstered by the UCC itself, which provides that the UCC "does not apply to the extent that: (1) a statute, regulation, or treaty of the United States preempts this article." UCC § 9-109(c)(1).

From the point of view of a secured lender, these cases, which hold that perfection of a security interest in copyrights (or rights under copyright) is made by filing in the Copyright Office, has created tremendous problems. The Copyright Office is ill-equipped to handle lien filings for a number of reasons. First, filings cannot be made against the debtor, as they are under the UCC. UCC financing statements are filed and indexed against the debtor, and not against the property which is the collateral. Searching is, therefore, done by checking under the debtor's name. Instead, in the Copyright Office, the filing is recorded only against particular works identified by title or registration number -- and title as it appears in the Copyright Office records may not be the same as the title under which the work is generally known.

Second, if security interests can only be filed against registered works, a filing in the Copyright Office cannot include after-acquired collateral of the same type -- a common provision in most loan agreements. Consequently, under the reasoning of Peregrine new works would have to be first registered and then a new security interest must be filed against the registration.

This requirement of registration in order to perfect has been particularly problematic for software development companies, which constantly create new software or update existing software (derivative works), but seldom register their claim to copyright in such software, especially interim versions. Following Peregrine, the court in In re Avalon Software Inc., 209 Bankr. 517 (Bankr. D. Ariz. 1997), held that a security interest in unregistered copyrights, including after-acquired copyrights, was governed by the Copyright Law. Finding the lender unperfected, this Court held that it was impossible to perfect against unregistered copyrights.

2. Aerocon Engineering v. Silicon Valley Bank

Given this problem, is it possible to perfect security interests in unregistered copyrights under the UCC? In a recent decision, the Ninth Circuit, Aerocon Engineering v. Silicon Valley Bank, 303 F. 3d 1120 (9th Cir. 2002) broke new ground and held that it is possible to perfect a security interest in unregistered copyrighted works by filing a UCC financing statement. This decision has important ramifications for lenders and borrowers alike, and will require lenders to reevaluate the steps they take to perfect, protect and maintain their security interests in copyright collateral.

In Aerocon the Ninth Circuit distinguished and narrowed the Peregrine decision. While confirming that registered copyrights can only be perfected by recording in the Copyright Office, the Ninth Circuit held that unregistered copyrights are perfected under the UCC

The case resulted from a complex bankruptcy contest among a bank and various entities over ownership of unregistered copyrights in drawings, technical manuals, blueprints and computer software used in connection with modifying airplanes. Briefly, the bank held a security interest in the copyrights that it obtained in exchange for financing an entity that later went bankrupt. Prior to the bankruptcy, the bank had perfected its security interest pursuant to California’s version of Article 9 of the UCC. In the course of the bankruptcy, the appellant had purchased the copyrighted works along with other assets from the bankruptcy trustee and had attempted to avoid the bank’s security interest through a purchase by a related entity of the trustee’s right to avoid the security interest. When the bank foreclosed on the copyrights and sold them to a third party, the appellant sued to avoid the bank’s security interest, arguing that the bank did not have a perfected security interest in these unregistered copyrights. The bankruptcy court determined that the bank had a perfected security interest, and its decision was affirmed on appeal to the district court.

On further appeal, the Ninth Circuit upheld the district court’s decision, holding that a secured creditor can perfect a security interest in an unregistered copyright (but not a registered copyright) by filing a UCC financing statement. The court reasoned that since the Copyright Act does not provide a means by which a security interest in an unregistered copyright may be perfected, it does not conflict with or preempt the UCC filing system with respect to perfection of security interests in unregistered copyrights. In the Court’s words, "there aren’t two competing filing systems for unregistered copyrights. The Copyright Act doesn’t create one. Only the UCC creates a filing system applicable to unregistered copyrights."

Relying in large part on the text and purposes of the Copyright Act, the Court rejected the decisions of two lower courts which, following Peregrine, had held that security interests in unregistered copyrights may not be perfected under the UCC. The Ninth Circuit concluded that there is no justification for requiring registration as a condition of perfection because it would imply that "Congress intended to make unregistered copyrights practically useless as collateral" and would wrongly "amount to a presumption in favor of federal preemption." The Court also concluded that its decision to allow secured lenders to perfect their security interests by filing UCC financing statements does not frustrate federal copyright policy; rather, it preserves the collateral value of unregistered copyrights.

3. Problems Still Remain for the Lender

The Court accepted that there may be situations where a devious debtor that had obtained financing based on unregistered copyrights may then register the copyrights and obtain additional financing from another secured lender who, by recording its interests with the Copyright Office, would obtain priority over an original lender who had only perfected its security interests under the UCC However, the Court never addressed the more probable situation in which even a good-faith borrower may need to register valuable copyright collateral (for example, to sue for infringement or register the copyright with Customs), thus inadvertently taking this valuable collateral "out of perfection." The Court assumed that prudent lenders would take the necessary steps to protect themselves.

Aerocon provides some new comfort to lenders who wish to extend credit to borrowers whose assets include valuable unregistered copyrights. Indeed, if Aerocon is followed, lenders now have the ability to perfect security interests in unregistered copyrights, making it easier to finance, for example, a software developer. At the same time, Aerocon also introduces additional uncertainty to such secured transactions. Of course, it is impossible to forecast whether courts in other circuits will follow Aerocon, although its reasoning appears sound. Hopefully, the commercial finance and intellectual property bars will again seek a solution based on a more workable, unified filing system in Congress.4 If Aerocon remains good law, lenders must continue to include appropriate covenants and warranties in their loan documents, such as requiring the borrower to promptly notify the lender when the borrower registers previously unregistered copyrights and being more vigilant in enforcing such provisions. In addition, an internal program at the lender must be in place, so that the lien is immediately recorded in the Copyright Office against each copyright that is registered, with one month of its registration. 17 U.S.C. §  205(d).

4. What Rights Need to Be Recorded?

Whether it is necessary for perfection purposes, to register security interests in the Copyright Office, this issue is further complicated because of the nature of copyright rights under United States law. The Peregrine court held that security interests in rights under copyrights also must be recorded in the Copyright Office. Based on The Copyright Act, a right under copyright would include, for example, the exclusive right to distribute and sell video tapes of a film and to receive the income from such sales. If the debtor is a film distributor, as was the case in Peregrine, the reasoning in that case would require the following, as almost invariably, copyrights in films are ultimately registered. To perfect a security interest against the exclusive copyright rights of the debtor, including the rights in the accounts receivable from the distribution of the films, the lien would have to be recorded separately against the copyright registration for each individual film. As the debtor receives additional licenses to distribute new films, new filing would have to be made at the Copyright Office.

What is, or is not a "right under copyright" is not always clear, either. For example, in BMI v. Hirsch, 104 F.3d 1163 (9th Cir. 1997), the Ninth Circuit held that an assignment of royalty income from copyrights to repay debt was not assignment of interest in copyright which needs to be recorded in Copyright Office. In MCEG Sterling, Inc. v. Phillips Nizer Benjamin Krim & Ballon, 646 N.Y. Supp. 2d 778 (Sup. Ct. 1996), the court held that failure to record a security interest, consisting of rights to accounts and royalties from three films, certain contracts, and completion bonds of two films under production, in the Copyright Office, was not malpractice. While the Phillips Nizer court reached its decision largely on the fact that holding in Peregrine could not be applied retroactively, it still questioned Peregrine's application to security interests which are not, in and of themselves, copyrights. Id. at 628-629.

D. Perfection of Security Interests in Patents: There's Light at the End of the Tunnel

Perfecting security interests in patents and patent applications present yet another complicated set of considerations. Peregrine stated in dicta that a security interest in a patent or patent application must also be recorded in the USPTO to be perfected. Earlier cases had held otherwise, however, finding that a federal filing was not required to perfect such a security interest. City Bank & Trust Co. v. Otto Fabric Inc., 83 Bankr. 780, 7 U.S.P.Q.2d 1719 (D. Kan. 1988) (perfect security interest in patents under UCC, reversing Bankruptcy Court ruling that recording in USPTO required); In re Transportation Design & Technology, Inc., 48 Bankr. 635 (Bankr. S.D. Cal. 1985) (same; however, noted that recording in USPTO under 35 U.S.C. § 261 is necessary to cut off rights of subsequent purchasers or mortgagees of the patents without notice).

In Moldo v. Matsco, Inc. (In re Cybernetic Services, Inc.), 239 B.R. 917 (9th Cir.1999), the Ninth Circuit laid to rest questions arising from the dicta in Peregrine. The court held that a security interest in a patent is perfected under the UCC, and that the Patent Act does not preempt state law when it comes to perfection of a security interest in a patent. The court noted that prior to the adoption of the UCC, other security devises were used, such as chattel mortgage and patent mortgages, which placed title to property in a mortgage.

The Cybernetic Services court, however, drew a distinction between such security devices, including the patent mortgage at issue in Waterman v. MacKenzie, 138 U.S. 252 (1891), which was created by transferring ownership of a patent subject to defeasance upon payment of a loan, and security interests under the UCC, which are "not dependent on who [has] title to the property." Id. at 920.

The court quoted from In re Transportation Design & Technology, which found that Waterman:

stands for the proposition that a bona fide purchaser holding a duly recorded conveyance of the ownership rights in a patent or a mortgagee who has recorded its interest as a transfer of title with the Patent Office will defeat the interest of a secured creditor of the grantor or mortgagor who has not filed notice of its security interest in the Patent Office.

Id. at 920 n.8.

E. Domain Names: The New Land Mine

Is it possible to perfect a security interest in a borrower's domain name? The answer to this question largely depends on whether a domain name constitutes a property interest. In Network Solutions, Inc. v. Umbro Int’l Inc., 54 U.S.P.Q.2d 1738 (Va. Sup. Ct. 2000), the court held that a domain name registration is not a property interest and, therefore, was not garnishable under Virginia state law. The Virginia Supreme Court reasoned that, although a domain name may constitute intangible property of the judgment debtor, it is first and foremost a contractual right, "inextricably bound to the domain name services that NSI provides."

In a strong dissent, two justices of the Virginia Supreme Court criticized the court for failing to see the unique property interest at stake:

Because NSI has received everything required to give the judgment debtor the exclusive right to use the domain name it registered, the contractual right, a valuable asset, is the intangible personal property in which the judgment debtor has a possessory interest.

The Ninth Circuit came to the opposite conclusion in Kremen v. Cohen, 337 F.3d 1024 (9th Cir. 2003), finding a domain name intangible personal property, thus entitling Kremen to seek damages against Network Solutions based on the tort of conversion (NSI assigned the domain name to a third party based on an assignment letter fraudulent on its face).

One would hope that the Ninth Circuit’s reasoning in Kremer will be followed in the secured transactions context. However, if Umbro is followed by subsequent courts, this could spell trouble for creditors seeking to recover money judgments, when the domain name is a key piece of collateral.

III. What's a Cautious Lawyer to Do -- Use a Belt and Suspenders Approach

Caution must be the practitioner's guide when dealing with secured transactions. While the courts have supplied some guidance regarding perfection of security interests in intellectual property, the case law is limited and often inconsistent. Which statute applies may be unclear -- or changed by the next court deciding the issue.

Accordingly, since the USPTO will accept security interests for recording against trademark registrations and pending applications and patents and patent applications -- and even though no case holds that a security interest must be recorded in the USPTO to perfect a lien -- a cautious attorney should always add the USPTO filing "belt" to his or her UCC-1 "suspenders" with regard to trademarks and patents, whether the attorney is charged with the due diligence search or with the filing for perfection of the lien.

Similarly, copyrights should be referenced in a UCC-1 financing statement, whether specifically or by reference to general intangibles, and filed under State law; in addition to filing the security interest in the Copyright Office. Conversely, searches for outstanding liens should not only be limited to either federal or state filings, but should include both in order to ensure a complete search.

Using this dual approach to recording liens against trademarks, copyrights and patents avoids a claim of malpractice. A court cannot subsequently hold that the lender should have filed where it did not. See MCEG Sterling, Inc. v. Phillips Nizer Benjamin Krim & Ballon, 646 N.Y. Supp. 2d 778 (Sup. Ct. 1996) (failure to record security interest in copyright in film in Copyright Office year before Peregrine not malpractice -- but would it be now?). More importantly, any subsequent lender or purchaser for value of the collateral will have been given actual notice of the lien, whether through its commercial finance lawyers (who would generally first look to filings under the UCC) or through its intellectual property lawyers (who would naturally look to the federal records). Lastly, even when the UCC controls perfection, appropriate federal filing serves as constructive notice to assignee/subsequent purchasers for value.

Turning to Cyberspace, the dearth of established case law on security interests in domain names and fundamental questions about whether domain names constitute property, make it imperative to cover all bases when protecting security interests in domain names. UCC-1 financing statements should be properly filed including the state where the Registrar is located, and the state where the host server is located.

Another solution is to have the domain names assigned to the creditor. However, if the borrower refuses to assign them, then an assignment can be held in escrow, along with a Power of Attorney in the name of the lender. Because Versign, formerly NSI had been the most difficult Registrar to deal with, at a minimum, the domain name should be registered with any one of a number of other Registrars who will accept powers of attorney, allowing easy transfer of the domain name after foreclosure.

IV. Possible Legislative Solution

Because of the uncertainties discussed above regarding how one perfects a security interest in intellectual property, as well as the difficulties in perfection under federal recordation schemes, particularly with regard to copyrights rights and any after-acquired intellectual property, two sections of the American Bar Association, (the Section of Business Law and the Section of Intellectual Property Law), working with the International Trademark Association and the American Intellectual Property Law Association, had, after many years of work, developed a proposal to solve the problem by changing federal intellectual property law. The cornerstone of the ABA proposal is the creation of a dual filing system (the "mixed approach").

Under the ABA's proposed plan, perfection of a security interest as against all other secured parties would be accomplished by the filing of a UCC financing statement. Changes in the copyright and patent laws would, in effect, overturn the results in In re Peregrine. The ABA plan would also establish a separate federal filing system, which a secured creditor could use to establish the secured party's priority with respect to subsequent bona fide purchasers for value and all other subsequent transferees of ownership interests, excepting only security interests.

While The Subcommittee on Courts and Intellectual Property, Committee on the Judiciary, U.S. House of Representatives had a hearing on this issue in 1999, the ABA proposed plan has not gone anywhere. Whether federal legislation will eventually be enacted, and the exact form of such legislation cannot be known at this time. Some objections to the proposed legislation, and particularly the "mixed approach," has been raised by the film industry. The concerns raised by this constituency will have to be resolved before any legislation can be passed. In the meantime, lawyers need to know about and be able to deal with the current state of the law.

V. Beyond the United States

The issue is no less unsettled outside the United States. For example, Canada, like the United States, had divided legislative authority. In the case of Canada, the division is between its federal government and the governments of the various provinces, causes similar uncertainty regarding which statutory scheme applies and whether perfection should be undertaken on the federal or provincial level. The answer also may be different depending on what intellectual property asset is at issue, as well as whether the debtor has a business presence in Canada, or just owns Canadian patents or trademark registrations.

In the U.K., charges (liens) against intellectual property rights need to be registered within 21 days at Companies House. It is not clear, however, whether such filing would be effective against a non-U.K. company with no physical presence in the U.K. Additionally, the charges must also be separately registered for any registered rights (patents, registered designs and registered trademarks) at the proper U.K. Registry within six months. Liens against Community trademarks and registered designs would have to be recorded at OHIM.

A number of jurisdictions, such as China and Hong Kong, which permit security interests for patents, do not allow them for trademarks. The theory behind this distinction is the quality control required of a trademark owner. It is for the same reason that it is unwise for a lender to take an assignment of a trademark and license the mark back to the to the borrower. The lender does not want to (nor is it usually in a position to) fulfill the obligations of a trademark owner, particularly in common law countries.

VI. Conclusion

Intellectual property due diligence and perfecting security interests around the world is both complicated and costly. If charged with perfection globally, it is essential to first determine whether the value of the assets in a particular jurisdiction justifies the expense. If it does, then one should retain counsel at a local intellectual property firm which also has the necessary commercial finance expertise, for knowledge of both disciplines is called for. Given the fact that current law governing secured transactions involving intellectual property -- both in the United States and elsewhere -- is unsettled and less than satisfactory, practitioners must attempt to avoid the many pitfalls and proceed with caution.


1. A secured transaction is generally defined as:

a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract

New York Uniform Commercial Code § 9-109(a)(1).

2. Factoring is the lending of money to producers and dealers, generally with accounts receivable serving as the collateral. However, factors often also require a lien on inventory and on intangible property such as a company's trademarks.

3. The differences in the various State versions of the UCC are not material to this discussion. All citations to the UCC in this article are to New York's Uniform Commercial Code, which is the revised Article 9 enacted in New York State on June 29, 2001.

4. An effort in 1999 failed. See Point IV below.

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.