CCLS Seminars: New Voices in Commercial Law ‘Security over IP rights’ – Paper presented by Dr Sean Thomas[1]

by Olumayowa O. Adesanya

As part of its ‘New Voices in Commercial Law’ seminar series, [2] which is in its second year, Dr Sean Thomas of the University of Leicester was invited to present a paper titled ‘Security over Intellectual Property Rights’ on the 6th day of February, 2014. The aim of the series is to provide a forum for debate and an opportunity for early career academics with outstanding potential to talk about their research in an intellectually stimulating, supportive and non-judgemental environment.

Using IP as an asset for secured financing is not a new phenomenon, however, the law remains largely underdeveloped with apparent conflicts that may require judicial intervention soon enough. Dr Thomas began with a disclaimer stating he was no expert in IP matters and was open to input and corrections in that regard.

His paper was predicated on the submission by Allen & Overy LLP to the Hargreaves Review on Intellectual Property concerning IPRs and security interests. Invariably, the paper focused on the United Kingdom’s regime with little reference made to the United States’ regime on the subject matter. The rights concerned with were copyright, designs, patents and trademarks. The possibility of trade secrets being used where secured financing is concerned remains a matter for another debate.

For the purpose of creating security interests, it is uncertain if IPRs[3] are chose in action. The Patents Act, however, clearly defines patents not to be a chose in action. With the multiple types of security interests available in England, selecting the most appropriate for IPRs proves a challenge. There is the problem of proving possession under mortgage as well as the fact that mortgages do not extend to future property. Pledges and liens are also besotted with the problem of possession. The most suitable instrument would be a floating charge as it is much more flexible and extends to future interests. However, it is less secure and there is the problem of identifying the particular assets covered. Although the relevant IP Acts make mention of mortgages and assignments, it is clear that the legislations did not envisage securitization of IPRs.

Using IP rights to secure financing is particularly convenient for Small and Medium Enterprises (SMEs) who have not grown to the point of owning significant tangible assets. For larger and well-established businesses, at some point, the tangible and intangible assets become so interspersed that the existence of one is dependent on the other.

The current regime for the creation of security over IPRs poses a number of difficulties for the parties involved such as registration. There is the problem of dual registration for registered IP rights where the debtor is an artificial person and the case of non-registration where the debtor is a natural person attempting to secure financing based on non-registered rights such as copyrights and unregistered trademarks.

Secured transactions carried out by legal entities are to be registered at the Companies House within a period dependent on the asset in question. The essence of such registration is to put third parties on notice. An individual cannot avail of this provision under the Companies Act unlike the situation in the United States, which allows registration by both natural and artificial persons of secured transactions at the Secretary of State’s office under the Uniform Commercial Code. Registrations in the relevant IP offices in special registers are often not mandatory and only serve to indicate ownership. Where for instance, an individual uses his copyright in a work as collateral, there will be no registration from which third parties can be put on notice opening the possibility for fraud.

Flowing from the registration issue are two enforcement issues where bankruptcy or insolvency arises: establishing priority (in the case of dual registration) and the hyper-mobility of IPRs, which pose a problem in tying down the already intangible assets.

In resolving the current issues, Dr Thomas advocates for a new commercial law with a unified single register. Other approaches would include the use of Special Purpose Vehicles (SPV) or Purchase Money Security Interests (PMSIs), which have their drawbacks too. He noted that between the United States system and that of UNCITRAL[4], it would appear that the latter is the best legislation so far, although imperfect. He noted also that orphan works pose a challenge in securitization of IPRs.

A remark to round up the presentation was made about the attitude of IP lawyers to security interests and that of secured credit stakeholders to IP as the reason for the snail-paced approach in improving this area of law. Security of IPRs is covered neither in the Hargreaves’ Report nor in the IP Bill currently passing through Parliament. Notwithstanding, an increased use and recognition of IPRs as assets in secured financing will result in judicial intervention in the face of challenges arising from enforcement and ultimately in improved legislation.

 

 

Olumayowa O. Adesanya is an LLM (IP) Candidate at Queen Mary, University of London and an Assistant Editor of the Queen Mary Journal of Intellectual Property Law.


[1] Senior Lecturer in Commercial Law at the University of Leicester
LLB (Durham), PhD (Manchester), PG Cert (Anglia Ruskin), Fellow of the Higher Education Academy.  Sean is also a member of the Secured Transactions Law Reform Project.

[2] The Centre for Commercial Law Studies at Queen Mary, University of London

[3] Intellectual Property Rights

[4] United Nations Commission on International Trade Law