Sometimes we get rather technical questions, and this post responds to one of those: if the collateral for your loan includes patents, trademarks or copyrights ("IP"), read on.
Searches. In addition to regular lien searches, you may want to run specific IP searches on your borrower and guarantors, especially if valuable IP is part of your collateral. A search will confirm who the owner of the IP is, and will reveal the existence of other liens. If IP is central to your deal, beware of the timing gap issues discussed below and consider running some additional post-filing searches after the applicable time period lapses.
Disclosure Schedules. Accurate schedules listing the IP are important — and sometimes difficult to obtain. The underlying representations in the credit and security agreements will determine what should be disclosed on the schedules. Sometimes the list is limited to registered U.S. IP; other times, it is limited to material IP. The schedules and your search results should be reconciled.
How to Perfect. The steps required to perfect your security interest in IP vary for different types of IP. We will spare you the extensive legal explanation here and just say that the preferred practice is to file a UCC-1 financing statement (as you typically would for most other collateral) and also to file a short-form security agreement with the U.S. Patent and Trademark Office for patents and trademarks, and with the U.S. Copyright Office for registered copyrights. The short-form agreement is prepared solely for the purpose of making these filings and does not include the covenants and other detailed terms that would appear in the more comprehensive security agreement for the deal. Even though a PTO filing may not be absolutely required for perfection of patents or trademarks, it is advisable in order to help protect your interests against a good faith purchaser of a patent or trademark. However, please note that unlike patents and trademarks, a Copyright Office filing is required for perfection of your interest in registered copyrights. As always, it is critical to get the collateral description, the IP identifying marks and other necessary information right on these filings.
Timing Gap Issues. One potential timing gap issue arises when there is a discrepancy between the closing date and the date through which the searches have been run. This is purely an issue of the PTO and Copyright Office records being up to date. A longer gap in time here increases the likelihood of things being missing from the search results. A second timing gap issue is the grace period provided by both the PTO and Copyright Office that permits an assignment that was signed before your security agreement filing but unrecorded at the timing of your filing to trump priority of your recorded filing, as long as the competing assignment is recorded within the grace period (even if recorded after your filing). This grace period is three months for patents and trademarks and one month for copyrights. To help with this issue, the lender would usually receive representations from the borrower that no competing assignments have been granted. Post-closing searches should reveal the existence of any of these filings.
Other IP; Special Cases. “Intent-to-use” trademarks deserve a special mention. Although a security interest can be taken in this type of IP, you should be aware that foreclosure may be problematic until the mark has been put to use in commerce and there is goodwill associated with it. If the collateral includes mask works, you’ll want to make both Copyright Office and UCC filings. For trade secrets, UCC filings are advisable. And, generally, if you have other unusual (and valuable) IP collateral — for a company that develops software, or where software is embedded into machinery with accompanying accounts receivable, for example — consult with counsel to be sure you are properly perfected.
After-Acquired IP. The credit or security agreement will usually require the borrower to deliver periodic updates listing any newly acquired or registered IP (including a requirement to inform the lender as soon as an unregistered copyright became registered). UCC-1 filings can be structured to effectively cover after-acquired assets in the initial filing, but new filings with the PTO or the Copyright Office will be needed to cover each additional IP item.