Financing Intellectual Property Under Federal Law: A National Imperative

Abstract

This is the first of two companion articles on intellectual property secured financing. This one discusses how the federal intellectual property statutes provide a comprehensive solution for perfecting security interests in copyrights, patents and federal trademarks. The companion article, Financing Intellectual Property Under Revised Article 9: National and International Conflicts, discusses state law. Although some argue that intellectual property security interests should be perfected using only the state UCC system, when pressed they have been unable to answer the most basic question of secured financing law: if the debtor later transfers to a bona fide purchaser, who owns the information when the secured creditor forecloses, the subsequently filing federal bona fide purchaser or the state foreclosure sale purchaser? As this question demonstrates, using state filing to perfect a security interest in a federal copyright, patent or trademark makes the security interest either commercially worthless or a public fraud. In every information financing there are four separate items of collateral in which a lender should perfect. UCC priority rules are incapable of dealing with all four in a commercially efficient manner. The federal information statutes can. This article explains why. It begins with the evolution of intellectual property financing under federal and state law, both pre- and post-Code. It covers royalty financing and how it differs from account financing. The article examines the basic differences between the horizontal financial model Article 9 adopted with the floating lien, and the vertical financing model needed for intellectual property. It discusses the crucial concept of chain of title, why statutorily it does not exist for tangible property but why it is essential for intellectual property. It also rebuts the claim that searching for prior liens using only the state UCC filing is efficient, giving an example of an inexpensive federal search that would cost millions using only the state registers. Some practitioners say a state UCC filing should at least trump a creditor, meaning a bankruptcy trustee. The article discusses why, for more than two centuries, preemptive federal law and state enforcement of judgment law has said lien creditors do not and cannot exist for intellectual property. It digests the enforcement of judgment laws in more than 20 states that say a writ of levy or attachment - the essential prerequisite for lien creditor status - does not extend to intangible information. Instead, a creditor must reach intellectual property by appointing a receiver and proceeding to judicial sale, i.e. becoming a bona fide purchaser under both state and federal law. The article discusses why the strong arm power requires treating a bankruptcy trustee as a bona fide purchaser under the federal intellectual property statutes, not a lien creditor. Finally, the article digests the judicial decisions that have, bewilderingly, come to different conclusions about the meaning of the nearly identical priority language in the Copyright Act, Patent Act, and Lanham Act. The article concludes with suggested clarifications to federal law to remedy the confusion.