Christopher R. Vaccaro

Business lenders are accustomed to making loans secured by garden-variety assets such as accounts receivable, inventory and equipment, but sometimes they are called upon to make loans where the most valuable collateral is intellectual property, namely patents, copyrights and trademarks. 

Perfecting security interests in intellectual property can be tricky, because both federal and state laws regulate transactions involving those intangible assets. Lenders need assurances that their security interests in intellectual property have priority over competing claims of good faith purchasers, other secured lenders, lien creditors and especially bankruptcy trustees. 

Bankruptcy trustees can present difficult challenges to secured lenders when borrowers go bankrupt. The federal bankruptcy code requires bankruptcy trustees to gather bankrupt debtors’ assets, liquidate them and distribute the proceeds among unsecured creditors. 

To maximize assets available for distribution, bankruptcy trustees are given special statutory powers, commonly referred to as “strong arm” powers, to avoid security interests that are not properly perfected under applicable law. 

When bankruptcy trustees avoid lenders’ security interests, the underlying collateral is added to the bankrupt estate available for liquidation and distribution. Lenders that lose their security interests are demoted to the ranks of unsecured creditors, who usually receive only pennies on the dollar from the estate. 

Federal bankruptcy courts are occasionally asked to decide the fate of security interests in patents, copyrights and trademarks. Their reported decisions show how the interplay between federal law and the Uniform Commercial Code (UCC) affect lenders having security interests in intellectual property. 

Patents are governed by the federal Patent Act. This statute requires that when ownership of a patent is transferred, the transfer must be filed with the Patent and Trademark Office (PTO) within three months. Otherwise, the transfer is void as against subsequent purchasers and mortgagees. The Patent Act does not specifically require that security interests in patents be filed with the PTO. Therefore, bankruptcy courts have consistently held that lenders seeking to perfect security interests in patents must file UCC financing statements listing the patents as collateral.  

A filing with the PTO alone is insufficient, but lenders obtaining security interests in patents should also file their security agreements with the PTO anyway. The PTO filing discloses the security interest to prospective purchasers of the patent, who are expected to examine PTO records before purchasing. 

Securing Interests in Registered Copyrights 

The federal Copyright Act addresses transfers of copyrights differently from the Patent Act. In contrast to the Patent Act, the Copyright Act provides for filing with the federal Copyright Office for any “assignment, mortgage, exclusive license or any other conveyance, alienation or hypothecation” of a registered copyright.  

“Hypothecation” is an antiquated term that means a pledge or a grant of a security interest. Applicable bankruptcy court decisions have held that lenders must file their security agreements with the federal Copyright Office, in order to perfect security interests in registered copyrights.  

However, the Copyright Act’s filing requirement does not apply to unregistered copyrights. Security interests in unregistered copyrights can be perfected only by filing UCC financing statements.  

As a belt and suspenders, lenders should file security interests in copyrights under both the federal Copyright Act and the UCC. 

The federal Lanham Act charges the PTO with responsibility for administering trademarks. Similar to the Patent Act, the Lanham Act requires that “assignments” of trademarks are void as against subsequent purchasers, unless the assignment is filed with the PTO within three months. The Lanham Act does not define the term “assignment,” but bankruptcy courts have ruled that the statute was not intended to cover security interests in trademarks. Thus, lenders obtaining security interests in trademarks should file UCC financing statements with the appropriate secretary of state, and also file with the PTO, just as they would for security interests in patents.  

There is another issue peculiar to trademarks. 

A trademark without its associated good will is meaningless. For example, consider what the value of the Nike swoosh would be if it were divorced from the prestige of the underlying athletic apparel. It might have no value at all. Therefore, when obtaining security interests in trademarks, lenders should include not only the trademark itself in the collateral description, but also all good will associated with it. 

Caution is the better part of valor in the world of secured lending. Lenders with intellectual property collateral are best protected if they file their security agreements with the appropriate federal offices, and UCC financing statements with the appropriate secretaries of state. 

Christopher R. Vaccaro is a partner at Dalton & Finegold in Andover. His email address is cvaccaro@dfllp.com.