United States: Perfection Of Security Interests In Intellectual Property

I. Copyrights—The Courts Of The 9th Circuit Speaks—Everyone Else Is Silent

A. Perfection.

• Leading case on this issue: In re Peregrine Entertainment, Ltd., 116 Bankr. 194, 16 U.S.P.Q.2d 1017 (C.D. Cal. 1990). Security interest in copyrights and rights under copyright must be perfected by filing in the Copyright Office.
• See also: In re AEG Acquisition Corp., 161 Bankr. 50 (Bankr. 9th Cir. 1993). Confirms In re Peregrine.

• In re World Auxilliary Power Co. Aerocon Engineering Inc. v. Silicon Valley Bank, 244 B.R. 149 (Bankr. N.D. Cal 1999). Perfect a lien in unregistered copyrights by filing UCC-1 financing statements. Claims In re Avalon Software Inc. below and In re AEG Acquisition Corp. did not consider whether it was appropriate to apply In re Peregrine to unregistered copyrights.
• In re Avalon Software Inc., 209 Bankr. 517 (Bankr. D. Ariz. 1997). Security interest in unregistered copyrights, including after acquired copyrights must be recorded in Copyright Office, after underlying copyrights are registered; calling unregistered copyrights trade secrets does not change nature of collateral.

B. Miscellaneous Copyright Cases

• BMI v. Hirsch, 104 F.3d 1163 (9th Cir. 1997). Assignment of royalty income from copyrights to repay debt not assignment of interest in copyright which needs to be recorded in Copyright Office.
• MCEG Sterling, Inc. v. Phillips Nizer Benjamin Krim & Ballon, 646 N.Y. Supp. 2d 778 (Sup. Ct. 1996). Failure to record security interest in copyright in film in Copyright Office year before In re Peregrine not malpractice—but is it now? Implied criticism of In re Peregrine. Remains unclear how other Circuits would rule if faced with issue of perfection of liens on copyrights.

II. Trademarks—The Most Settlement Area

A. Perfection.

1. Perfect security interest by filing under UCC.
2. However, if trademarks are federally registered, should also record lien in United States Patent and Trademark Office ("USPTO") to cut off rights of "subsequent purchasers for value without notice" of trademark rights subject to the security interest. 15 U.S.C. §1060.

• In re 199Z, Inc., 137 Bankr. 778 (Bankr. C.D. Cal. 1992). Lanham Act only provides for recording of assignments of registered trademarks, not security interests.
• In re TR-3 Industries, 41 Bankr. 128 (Bankr. C.D. Cal 1984). Same.
• In re Roman Cleanser, 43 Bankr. 940, 225 U.S.P.Q. 140 (Bankr. E.D. Mich. 1984); aff'd 802 F.2d 207 (6th Cir. 1986). Same.

B. Lender Should Not Take Outright Assignment Of Marks.

1. As attorney for either the lender or borrower, do not allow the lender to take an outright assignment of trademarks, rather than a security interest, as this may destroy the trademark.
2. Trademarks cannot be assigned "in gross." Be sure security interest includes "goodwill" and means to manufacture goods or offer services (e.g., trade secrets, formulas, customer lists).
3. Intent-to-use applications cannot be assigned except in connection with assignments of business of assignor or portions of business to which mark pertains, and that business must be ongoing and existing. 15 U.S.C. § 1060 (a).

• Green River Bottling Co. v. Green River Corp., 997 F.2d 359 (7th Cir. 1993). Trademarks cannot be assigned "in gross", trademark followed ownership of secret formula.
• In re Roman Cleanser, 802 F.2d 207 (6th Cir. 1986). Same.
• The Clorox Co. v. Chemical Bank, 40 U.S.P.Q.2d 1098 (T.T.A.B. 1996). Outright assignment of intent-to-use application voided resultant registration under 15 U.S.C. §1060.

C. Miscellaneous Cases.

Cessation of use of trademark may result in abandonment, 15 U.S.C. §1064(3).

In re Comband Technologies, Inc., 1995 U.S. App. LEXIS 31064 (4th Cir. 1995). Surcharged expenses of debtor-in-possession were required for preservation and sale of collateral.

III. Patents—The Picture Gets Clearer

A. Perfection.

1. Perfect security interest by filing under UCC.
2. Recording lien in USPTO necessary to cut off "subsequent purchaser or mortgagee for valuable consideration, without notice...." 35 U.S.C. §261.

• In re Cybernetic Services, Inc. Moldo v. Matsco, Inc., 239 B.R. 917 (9th Cir. 1999). Laying to rest dicta in In re Peregrine, Court held that security interest in patents is perfected under UCC. No federal preemption in patent statute with regard to liens, as lien holder is not a "mortgagee" . However,

• City Bank & Trust Co. v. Otto Fabric Inc., 83 Bankr. 780, 7 U.S.P.Q.2d 1719 (D. Kan. 1988). Perfect security interest in patents under UCC, reversing Bankruptcy Court ruling that recording in USPTO required.
• In re Transportation Design & Technology, Inc., 48 Bankr. 635 (Bankr. S.D. Cal. 1985). Same; also noted that recording in USPTO under 35 U.S.C. §261 necessary to cut off rights of subsequent purchasers or mortgagees of the patents without notice.

B. Effect Of Actual Notice Of Lien Or Failure To Record Assignment In USPTO.

• V.T. Thomas v. Tomco Acquisitions, Inc., 776 F. Supp. 431 (E.D. Wisc. 1991). Actual knowledge of lien defeats subsequent purchaser of patents.
• Tollinger v. Ithaca Gun Co., 555 N.Y.S.2d 908 (App. Div. 1990). Unrecorded patent reassignment ineffective against purchaser for value without notice.
• Nonexclusive patent licenses—Get Consent of Licensor.

• In re CFLC, Inc., 89 F.3d 673 (9th Cir. 1996). Nonexclusive patent license is personal and nonassignable without authorization of patent owner or if license itself permits assignment.

IV. Domain Names—The New Land Mine

A. Perfection.

Is it possible to perfect a security interest in a borrower's domain name? Network Solutions Inc. ("NSI", the largest Registrar of domain names) maintains domain names are not property, but a service agreement. Virginia Supreme Court agrees.

• Network Solutions Inc. v. Umbro Int'l Inc., 54 U.S.P.Q.2d 1738, 1743 (Va. Sup. Ct. 2000).

• Practical Solutions.

File UCC-1 anyway (in state of incorporation of borrower, state where principal office is located, the state where the registrar is located, and the state where the host server is located).

1. Have the domain names assigned to the creditor.
2. If lender won't assign, hold assignment is escrow and have a Power of Attorney.
3. I'd require the borrower to change registrar to one other than NSI, since they are so difficult to deal with, and register all new domain names with that registrar.