Enforceability of Limits on Security Interests in Intellectual Property Licenses
As a general rule, provided the collateral in question is a general intangible,3 the impact of the application of §9-408 to licenses is mostly mitigated by UCC §9-408(d). As a result, the secured party cannot, among other things, (a) enforce the security agreement against or impose a duty or obligation on the account debtor,4 (b) require the account debtor to recognize the security interest, pay or render performance to the secured party or accept payment or performance from the secured party, or (c) use, assign, possess or have access to any trade secrets or confidential information.5 The major caveat is that the protections of UCC §9-408(d) only apply when §9-408 is used to limit or restrict the enforceability of a term in the underlying agreement. So if a party generally consents to a security interest being granted, the protections of §9-408(d) will presumably not apply. To the extent to which a limited consent is granted, any limitations on the consent may not be enforceable under §9-408, but the protections of §9-408(d) should still apply if the limitations are held to be unenforceable.
More troubling, from a licensee's standpoint, is the possibility that the licensee's obligation will be characterized as a "payment intangible"6 of the licensor. The basic problem is that terms restricting assignment of or creation of a security interest in a payment intangible can be voided pursuant to UCC §9-406(d),7 which does not have an equivalent section protecting the licensee comparable to §9-408(d). This result, while probably unobjectionable when the payment intangible is something like a loan participation, is much more dangerous in the context of a license agreement. The only time the protections of §9-408(d) are potentially available in connection with a payment intangible is in connection with the sale of such a payment intangible.8 To the extent to which the absence of these protections is a concern, the licensee should ensure that a provision is inserted in the license agreement emphasizing the non-monetary obligations of the licensee and specifically categorizing the license as a general intangible, in case the courts look to the intent of the parties in distinguishing between a general intangible and a payment intangible. This is not an issue for the licensor as the license of intellectual property, in the hands of the licensee, is clearly going to be characterized as a general intangible, avoiding this issue entirely.
The final issue, given the non-uniformity of §9-408 as enacted, is which version of §9-408 should be applied. The starting point for the choice-of-law analysis is in Article 1, specifically UCC §1-105 or UCC §1-301.9 The basic premise is that the choice of governing law made by the parties is honored provided (a) the state in question bears a "reasonable relation" to the contract in question10 and (b) the area of law implicated does not conflict with a laundry list of contrary provisions contained within the UCC. For our purposes, the key exception is that the choice of law "governing perfection, the effect of perfection or nonperfection, and the priority of security interests and agricultural liens" is governed by UCC §§9-301 to 9-307 and "a contrary agreement is effective only to the extent permitted by the law (including the conflict-of-laws rules) so specified."11 However, attachment is not included in this exception and so may be governed by the choice of law in the security agreement. Under UCC §9-301(1), while a debtor is located in a jurisdiction, the local law of that jurisdiction governs "perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral." For registered organizations12 then, the choice between conflicting versions of §9-408 is fairly clear-cut, as such a choice applies to perfection and priority. To the extent a licensee is concerned with forum-shopping on these issues, at least with respect to the law governing perfection, as long as the licensor remains registered in the same jurisdiction, there is no real opportunity for forum-shopping.
Which version of §9-408 applies to attachment is trickier. Although §9-408 applies to the creation, attachment and perfection of a security interest in certain types of collateral, attachment is not necessarily governed by the same choice of law as perfection. This matters to the licensee, as all that is needed to create the risk of disclosure is for the secured creditor to have rights against the debtor, potentially without even requiring perfection of those rights, enabling the secured creditor to require an inappropriate disclosure. There are two possible choices of law for §9-408 as it applies to attachment, but one of them may not be available depending on the states involved. The first choice utilizes the choice of law in the security agreement to determine which version of §9-408 should be applied to attachment, provided the choice of law is valid as discussed above. The difficulty with this approach is that the parties drafting the license agreement have no way to know what state's law with respect to §9-408 will be selected by the secured creditor. Given the differences between the various state statutes, both now and from future legislation, this may become an issue as the secured creditor can forum shop with respect to the law governing attachment. For example, when Delaware's version of §9-408 does apply,13 it may have significantly greater reach than §9-408 in other states. Delaware included a very broad provision in §9-408(f) effectively repealing any inconsistent state law.
The second choice of law for attachment actually relies on the repeal of any inconsistent state law like Delaware's §9-408(f). Thus, to the extent that §9-408 repeals any inconsistent state law, an argument exists that §9-408 itself overrides the inconsistent choice-of-law provisions in Article 1. Interestingly, the first reported decision under §9-408, Straffi v. New Jersey (In re Chris-Don Inc.), 308 B.R. 214 (Bankr. D. N.J. 2004), finding adoption of §9-408 implicitly repealed portion of liquor control ordinances preventing a lien on the debtor's liquor license, explicitly relied on N.J. Stat. Ann. §12A:9-408(e), a provision repealing any inconsistent state law like Delaware's §9-408(f). The problem with this interpretation is that, as discussed above, not all states have included such a provision.14
Overall, Revised Article 9 and its impact on license agreements remains an issue to watch as it is actually litigated. Indeed, to the extent to which no license agreement is ever found by a court to create a payment intangible, then some of the risks to licensees will be eliminated. Until the impact of the statutory differences is clarified by the courts, it is difficult to guess how some of these issues will play out and which jurisdictions will end up as favorites among licensors, licensees and the secured creditor community.
1 For the purpose of this article, I am providing statutory cites in these footnotes for only California, Delaware, Illinois, Texas and New York. Unfortunately, there is sufficient diversity between these major commercial jurisdictions to illustrate my point. Return to article
3 See California Commercial Code §9102(42), Delaware Title 6 §9-102(42), 810 ILCS 5/9_102(42), Texas Business and Commerce Code §9.102(42) and New York UCC §9-102(42) (uniform definition). Return to article
4 In connection with a license, the account debtor should be read as whichever party is not pledging a security interest against the general intangible in question. In other words, if the licensee is pledging a security interest in a license, the account debtor under the UCC is the licensor. Return to article
6 As defined in revised Article 9, a payment intangible is "a general intangible under which the account debtor's principal obligation is a monetary obligation." See California Commercial Code §9102(61), Delaware Title 6 §9-102(61), 810 ILCS 5/9_102(61), Texas Business and Commerce Code §9.102(62) and New York UCC §9-102(61) (uniform definition but located in different subsection in Texas statute). Return to article
8 UCC §9-406(e) limits the application of §9-406(d) to the sale of a promissory note or payment intangible. See California Commercial Code §9406(e), Delaware Title 6 §9-406(e), 810 ILCS 5/9_406(e), Texas Business and Commerce Code §9.406(e) and New York UCC §9-406(e). UCC §9-408(b) limits the application of§9-408(a) to payment intangibles "only if the security interest arises out of the sale of the payment intangible or promissory note." See California Commercial Code §9408(b), Delaware Title 6 §9-408(b), 810 ILCS 5/9_408(b), Texas Business and Commerce Code §9.408(b) and New York UCC §9-408(b). Return to article
9 Further complicating matters, these jurisdictions are no longer uniform with respect to UCC Article 1, as Delaware and Texas have both adopted Revised Article 1, although both Delaware and Texas chose not to adopt the proposed changes to the choice-of-law provision. Compare California Commercial Code §1105, 810 ILCS 5/1_105, New York UCC §1-105, Delaware Title 6 §1-301, Texas Business and Commerce Code §1.301 with Revised UCC §1-301 (validating choice of law provisions for commercial transactions without a reasonable relation to the contract in question). Return to article
10 Although this standard is adopted in the cited UCC provisions (prior to the adoption of Revised UCC §1-301, which no state has adopted as drafted to date), there are two exceptions worth noting. Texas has adopted a non-uniform rule in §1.301(c) for a "qualified transaction" (transaction exceeding $1 million), whereupon the choice-of-law provision may be enforced even without a reasonable relation to the state chosen. See Texas Business and Commerce Code §35.51(c). Similarly, New York General Obligations Law §5-1401 provides that the choice of New York law is enforceable for many contracts over $250,000, even without a reasonable relation between the contract and New York. Return to article
13 Although not generally relevant to this discussion in connection with licenses, Delaware's version of §9-408 does not apply to interests in partnerships, limited liability companies or trusts. See Delaware Title 6 §9-408(e)(3) and (e)(4). Return to article