Securing Copyrightable Collateral A Lenders Perspective
As a follow-up to the March 2000 Practice and Procedure article "Intellectual Property in Today's Financing Market," one narrow, poignant issue needs further attention from a lender's perspective. That issue is whether a secured creditor must record its security interest in unregistered copyrightable materials in the U.S. Copyright Office, or whether the traditional recording under applicable state UCC law is sufficient.
Federal pre-emption doctrines would appear to dictate that the Copyright Act pre-empts state law. On the other hand, one must consider the practical issues created by attempting to record where no registration exists. A close examination of the scant case law reveals, however, that no affirmative answer exists.
The Copyright Act
The Copyright Act establishes a priority scheme for interests in registered copyrights. 17 U.S.C. §205. Creators and owners of copyrightable materials, however, are not required to register those materials with the Copyright Office to receive the benefits of copyright protection. 17 U.S.C. §408(a). Specifically, §408(a) states that the owner of copyrightable materials, or of any exclusive right in such materials, may obtain registration thereof by delivering to the Copyright Office the specified deposit. Section 408 further states that such registration is not a condition of copyright protection.
Due to the discretionary nature of §408, owners of copyrightable materials such as computer codes and programs often choose not to register their works in order to protect trade secrets, as well as the need for frequent refiling or new registrations due to constant enhancements and modifications. In fact, the Copyright Act requires a copyright owner to register copyrightable materials only if it wants to pursue an infringement action and statutory damages thereunder. 17 U.S.C. §§411, 412.
The discretionary use of the Copyright Act, and the conditional nature of its recording provisions, is further demonstrated in 17 U.S.C. §205, which provides the recording procedure and schematic for copyrightable material. Specifically, the relevant portion of §205 states:
(a) Conditions for Recordation—Any transfer of copyright ownership or other document pertaining to a copyright may be recorded in the Copyright Office...
(c) Recordation as Constructive Notice—Recordation of a document in the Copyright Office gives all persons constructive notice of the facts stated in the recorded document, but only if—
Due to the discretionary nature of §408, owners of copyrightable materials...often choose not to register their works in order to protect trade secrets...
(1) the document, or material attached to it, specifically identifies the work to which it pertains so that, after the document is indexed by the Register of Copyrights, it would be revealed by a reasonable search under the title or registration number of the work; and(d) Priority Between Conflicting Transfers—As between two conflicting transfers, the one executed first prevails if it is recorded in the manner required to give constructive notice under subsection (c)...(emphasis added)
(2) registration has been made for the work.
Due to this discretionary language, it seems only logical that when copyrightable materials are not registered, §205 does not apply and no procedure for recording a security interest in unregistered copyrightable materials exists. Thus, the only method for a secured creditor to perfect its security interest is pursuant to applicable state UCC law, as it is impossible to perfect a security interest in unregistered copyrightable materials by recording a financing statement with the Copyright Office. Such a filing, where there is no file, is the equivalent of a fixture filing in a county where the subject real property is not located.
Consequently, although 17 U.S.C. §301 expressly pre-empts other laws that might otherwise interfere with a copyright owner's rights under 17 U.S.C. §106, such as the right to reproduce, copy or distribute copyrighted materials, no section of the Copyright Act expressly pre-empts state law application to the recording of a security interest in unregistered copyrightable materials. Certain courts, however, have held that perfection of a security interest in unregistered copyrightable materials occurs only by recording in the Copyright Office. In re Peregrine Entertainment Ltd., 116 B.R. 194, 198-99 (C.D. Cal. 1990).
Peregrine and Its Progeny
In Peregrine, the court stated that the Copyright Act established a uniform method of recording security interests in copyrights and, therefore, state law methods of perfection are supplanted. Peregrine, 116 B.R. at 203. Accordingly, the court held that due to the failure to record a security interest in the Copyright Office, such interests are avoidable and may be preserved for the bankruptcy estate. Id. at 207.
Peregrine, however, did not state whether the copyrightable materials in issue were registered or unregistered and also failed to analyze the applicability of recording a security interest in unregistered copyrightable materials. Similarly, in In re AEG Acquisition Corp., 161 B.R. 50 (9th Cir. BAP 1993), a secured creditor failed to record its interest in foreign films, which the Berne Convention for the Protection of Literary and Artistic Works exempts from registration. Despite the registration exemption, however, the BAP summarily stated that no other exemption exists, and therefore, an unrecorded interest in foreign films is avoidable. AEG Acquisition, 161 B.R. at 57.
AEG Acquisition, however, did not analyze the affect of state law recording where a secured creditor failed to record in the Copyright Office. Thus, both Peregrine and AEG Acquisition are an incomplete analysis of whether a security interest in unregistered copyrightable materials must be recorded under the Copyright Act or applicable state law.
However, the Bankruptcy Court for the District of Arizona has held that the Copyright Act pre-empts state law, thereby requiring recordation with the Copyright Office to perfect a security interest in copyrightable materials, whether registered or unregistered. In re Avalon Software Inc., 209 B.R. 517 (Bankr. D. Ariz. 1997). In Avalon, as opposed to Peregrine and AEG Acquisition, the facts clearly set forth that the secured creditor took a security interest in unregistered copyrightable materials (software) and recorded its security interest under state law, but not under the Copyright Act.
Thus, the Avalon court held that when a creditor obtains a security interest in copyrightable materials, it must comply with both applicable state law and the Copyright Act. Avalon, 209 B.R. at 520. Avalon, however, failed to recognize the discretionary language of 17 U.S.C. §408. This discretionary language was recognized by another court, thereby creating a split of authority as to unregistered copyrightable materials. In re World Auxiliary Power Co., 244 B.R. 149 (Bankr. N.D. Cal. 1999).
The Sound Reasoning of World Auxiliary Power
In World Auxiliary Power, the court held that Peregrine's analysis only works if the copyrightable materials are registered. World Auxiliary Power, 244 B.R. at 152. Further, the court held that Congress did not clearly indicate an intention to occupy the field of a secured creditor's rights with respect to a copyright, and therefore, the Copyright Act does not expressly pre-empt state law. Id. at 155. Thus, the court held that the failure to record a security interest under the Copyright Act does not create an avoidable security interest. Id.
Additionally, World Auxiliary Power set forth an analysis that goes to the heart of a trustee's avoidance powers. Id. at 152-53. Specifically, the court pointed out that a hypothetical judicial lien creditor's recording of its lien in the Copyright Office does not give priority over an unperfected security interest under 17 U.S.C. §205(d). Id. at 152. Section 205(d), in fact, sets forth priorities of interests recorded in the manner sufficient to give constructive notice to third parties, and constructive notice is given only if the copyright is registered. Id., citing 17 U.S.C. §205(c).
Further, since unregistered copyrightable materials are by nature unregistered, no such filing could ever give any third party constructive notice. 17 U.S.C. §205(c). Since no constructive notice could be made, a trustee, who does not have the rights of a bona fide purchaser, could never attach a lien with priority over a creditor's security interest.1 World Auxiliary Power, 244 B.R. at 152-53; see, also, Peregrine, 116 B.R. at 206-07, but, see Avalon, 209 B.R. at 521-22 (which again failed to fully address all pertinent issues). Thus, a secured creditor's priority in unregistered copyrightable materials must derive from state law, as the Copyright Act provides no such priority of interests. World Auxiliary Power Co., 244 B.R. at 154.
World Auxiliary Power is currently on appeal. The result of the World Auxiliary Power appeal could end or further compound the current split of authority. While the outcome of the appeal is uncertain, the result may very well change the practice of securing financial obligations using copyrightable materials.
Further, all of the cases cited herein derive from Ninth Circuit courts, resulting in a lack of mandatory authority for other circuits, who may apply their own analysis. Accordingly, practitioners should carefully examine such issues and consider the implications thereof, as the split of authority may very well surprise many a lender who thought its security interest was perfected and unavoidable.