Proper Perfection Procedures for Intellectual Property

Proper Perfection Procedures for Intellectual Property

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Over the past few years, issues regarding the perfection of security interests in intellectual property have become a popular topic of conversation. This has been especially true due to the current state of the technology sector of the economy, but also because the methods by which a creditor perfects its security interest in intellectual property is confusing.

The first issue to be addressed in determining how security interests in intellectual property are perfected is to know what type of intellectual property is at issue. Perfection requirements for trademarks and patents are the same, while perfection of interests in copyrights differs. The reason for the difference is that patents and trademarks are arguably governed by the UCC, while copyrights are not, due to preemption issues.


A principal case addressing this issue is In re Peregrine Entertainment Ltd., 116 B.R. 194 (C.D. Cal. 1990). In this case, the court addressed whether a security interest in a copyright is perfected by an appropriate filing with the U.S. Copyright Office or by a UCC-1 financing statement filed with the relevant secretary of state.

The debtor's principal assets in Peregrine were a library of copyrights, distribution rights and licenses to films and accounts receivable arising from the licensing of the films to various programmers. The secured creditor in the case had a security agreement and UCC-1 financing statement describing the collateral as "all inventory consisting of films and all accounts, contract rights, chattel paper, general intangibles, instruments, equipment and documents related to such inventory, now owned or hereafter acquired by the debtor." Id. at 198.

Section 9-106 of the Uniform Commercial Code defines "general intangibles," and the Official Comments to §9-106 specifically identify "copyrights trademarks and patents" as included in the definition of general intangibles. UCC §9-106; Id.

In Peregrine, the debtor challenged the creditor's security interest in the copyrights to the films and in the accounts receivable generated by their distribution as being unperfected because the secured creditor failed to record its security interest with the U.S. Copyright Office and only filed its UCC-1 Financing Statement with the relevant secretaries of state.

According to relevant provisions, the Copyright Act provides that "any transfer of copyright ownership or other document pertaining to a copyright" may be recorded in the U.S. Copyright Office. 17 U.S.C. §205(a). A "transfer" under the act includes any "mortgage" or "hypothecation of a copyright," whether "in whole or in part" and "by any means of conveyance or by operation of law." 17 U.S.C. §§101, 201; Peregrine, 116 B.R. at 198-199. Thus, it is clear that the security interest in a copyright could be recorded in the U.S. Copyright Office; however, what must be determined is whether the UCC provides a parallel method for perfecting such an interest. This is a matter of preemption of state law by federal statute. The comprehensive scope of the federal Copyright Act's recording provisions, along with the unique federal interests they implicate, support the view that federal law preempts state methods of perfecting security interests in copyrights and related accounts receivable. Id. at 199.

The federal Copyright Act ensures predictability by virtue of its recording system. Id. "No useful purposes would be served—indeed, much confusion would result—if creditors were permitted to perfect security interests by filing with either the Copyright Office or state offices." Id. If state methods of perfection were valid, a third party would have to check the indices of the U.S. Copyright Office and any relevant secretary of state.

Due to these issues and the fact that the Copyright Act provides its own scheme for determining perfection and priority, recording in the U.S. Copyright Office rather than filing a financing statement under Article 9 is the proper method for perfecting a security interest in a copyright. Id. at 203.

Additional authority adopts this conclusion, although the law has been somewhat unclear with regard to perfection of patents, trademarks and copyrights. Under the new provisions of Article 9, there may be a limitation on Peregrine; federal copyright law may not preempt Article 9 with regard to unregistered copyrights. Revised UCC §9-106(c)(1); see "Attachment and Perfection of Security Interests Under Revised Article 9," 9 Am. Bankr. Inst. L. Rev. 179 (Spring 2001).

Patents and Trademarks

Perfection of security interests in patents and trademarks are different, and the Peregrine decision is often distinguished to show that preemption of state law does not occur in all situations where federal law exists. With regard to patents and trademarks, courts have generally held that federal law preempts Article 9's filing system only where federal law includes a provision of mandating filing in a federal office; an example would be transfers of a patent. See In re Cybernetic Systems, 239 B.R. 917, 920 (B.A.P. 9th Cir. 1999). Recordation of assignments of less than full ownership, including security interests in a patent, was discretionary under the Patent Act, and thus not preempted. Id. A similar result has been reached in trademark cases. See In re Together Develop. Corp., 227 B.R. 439 (Bankr. D. Mass. 1988).

The federal statutes governing patents and trademarks do not set forth the procedure for perfection and priority schemes in the same detail as the Copyright Act. Accordingly, courts have reached the conclusions mentioned above and determined that state law and the UCC are not preempted.

In the past, the relationship between Article 9 and federal patent and copyright laws has been confusing and often uncertain. Under Revised Article 9, copyrights, trademarks and patents will continue to be considered general intangibles. Section 9-109(a) of Revised Article 9 defers to federal law only if it "preempts this article." UCC §9-109(c). Official Comment 8 to UCC-§109 does appear to refer to the Peregrine decision stating that Article 9 sometimes deferred to federal law even when federal law did not necessarily preempt Article 9. Section 9-109(c)(01) of Revised Article 9 recognizes a deference to federal law only when and to the extent that it must—"i.e., when federal law preempts it." UCC §9-109, Comment 8; see "Attachment and Perfection of Security Interests Under Revised Article 9," 9 Am. Bankr. Inst. L. Rev. 179 (Spring 2001). It is not clear yet what effect this change will have.

Journal Date: 
Wednesday, May 1, 2002