Best Practices: Finding The Perfect Approach: How to Secure a Lien on Intellectual Property Collateral

In today’s technological world many small businesses seek to protect their intangible creations, often referred to as intellectual property, by obtaining registered copyrights, trademarks and patents on these items. As with other types of personal property, to perfect a security interest in intellectual property, a lender must not only document the interest in sufficient detail but also must record the appropriate documents with the proper governmental authority. Different types of intellectual property may be governed by federal and state law. As such, there is often uncertainty as to the appropriate filing office with which to record a security interest.

As a general rule, security interests in personal property, including intellectual property are governed by Article 9 of the Uniform Commercial Code (“UCC”). Under Article 9, a lender must file a UCC financing statement with the respective Secretary of State where the borrower resides. However, Article 9 also states that a UCC financing statement is not sufficient where a federal statute, regulation, or treaty of the United States preempts Article 9.

For example, registered copyrights are subject to the requirements of the Copyright Act. Because the Copyright Act outlines liens on copyrights, the Copyright Act preempts Article 9 of the UCC regarding perfection of a security interest in registered copyrights and pending copyright applications. Therefore, to perfect a security interest in registered copyrights and pending copyright applications, lenders must file a security agreement with the United States Copyright Office. The Copyright Act generally awards priority to the first executed transfer over the first recorded transfer.

Conversely, it is well established that the federal law governing trademarks (the Lanham Act) applies only to assignments and not to security interest. Therefore, courts have consistently held that the filing of a UCC-1 financing statement on trademarks at the state level is sufficient for a lender to perfect a lien on a borrower’s trademarks regardless of whether they are registered.

Similarly, the federal Patent Act does not address perfecting security interests. However, the courts are split as to how a security interest in a patent should be perfected. The majority of courts have held that Article 9 of the UCC governs perfection of security interests over patents and patent applications, which means that a lender who files a UCC-1 financing statement on patents at the state level has properly perfected its security interest. However, other courts have expressly stated that a lender must file a lien with the U.S. Patent and Trademark Office (“PTO”) in order to perfect its security interest.

Due to this uncertainty, it is best practice for lenders taking a lien on patents to file both a UCC-1 financing statement at the state level as well as file a security agreement with the PTO. Lenders may also wish to take this belt and suspenders approach with regard to trademarks by filing a security agreement with the PTO so as to provide notice of the lender’s lien to future assignees.

While lenders making loans to small businesses require a lien on any commercial real estate and personal property owned by the small business, many lenders often fail to consider intellectual property as collateral for the loan. In some cases, a company’s intellectual property may be its most valuable asset. Therefore, lenders should take steps to ensure any copyrights, registered trademarks and/or patents are included in the collateral analysis. In addition, lenders must understand how to perfect its lien based on the intellectual property being taken as collateral.  For commercial lending questions, contact the attorneys at Starfield & Smith at 215.542.7070.