e Intellectual Property Financing under the Supplement to the UNCITRAL Legislative Guide on Secured Transactions Spiros V. Bazinas* Contents 1 Introduction 2. General principles and terminology 3. Scope of work. 4. Creation 5. Third-party effectiveness 6. Registration 7. Priority 8. Enforcement 9. Acquisition financing 10. Applicable law i. Insolvency 12. Conclusions 1, Introduction Economic development depends to a large extent on technological innovation. Innovation is generally protected through intellectual property rights. Thus, in a modern economy, intellectual property rights represent one of the most valuable types of asset. Yet, all over the world, the law relating to intellectual property financing is either under- developed or not sufficiently well coordinated with the law governing general asset-based lending. “Senior Legal Officer, International Trade Law Division, Office of Legal Affairs (which serves as the Seerctariat of UNCITRAL). The views expressed in this article are the personal views of the author and do not represent the views of the United Nations or UNCITRAL ©2011 Thomson Reuters @ UCC Law Journal @ Vol. 43Aprl 2011 601UNIFORM Commerctat Cone Law JOURNAL [VoL. 43 #2] The UNCITRAL Legislative Guide on Secured Transac- tions (‘the Guide")," which was adopted by the United Na- tions Commission on International Trade Law (UNCITRAL) in December 2007,’ attempts to address that problem by facilitating the extension of credit at a lower cost while defer- ing to intellectual property law to the extent an issue is ad- dressed in that law in a different way than in the Guide. The Supplement on Security Rights in Intellectual Prop- erty (“the Supplement”), which UNCITRAL adopted in July 2010," is a second step towards addressing the problem of insufficient coordination of secured transactions and intel- lectual property law. The general commentary and recom- mendations of the Guide apply to security interests in intel- lectual property rights as supplemented or revised by the specific commentary and recommendations of the Supplement. The overall objective of the Supplement is to make credit more available and at a lower cost to intellectual property right holders, thus enhancing the value of intellectual prop- erty rights as security for credit. At the same time, the Supplement seeks to achieve this objective without interfer- ing with fundamental policies of intellectual property law. This balance is the foundation of the Supplement. ‘The purpose of this article is to discuss the treatment of security interests in intellectual property rights under the Supplement. Part 2 considers the general principles and the terminology of the Supplement. Parts 3, 4, 5, 6 and 7 deal with the scope, creation, third-party effectiveness, registra- The Guide includes commentary and legislative recommendations on security interests in tangible and intangible movable assets, including intellectual property rights. The recommendations provide the certainty needed for a law on seeured transactions. The commentary provides the analysis and flexibility that is inherent in a Guide as compared to a model, law or a convention, “See Report of UNCITRAL on the work of its resumed fortieth ses- sion, A/62/17 (Part Il), paras, 99-100. All the documents referred to i this article are available on the UNCITRAL website (httpd//aww.uncitral. org). For a list of all the preparatory documents of the Supplement, the footnotes of the Proface of the Supplement, °Soe recommendation 4 (b). ‘See Report of UNCITRAL on the work of its forty-third session, ‘65/17, para. 227. *See Supplement, para. 1 602 @2011 Thomson Reuters # UCC Law Journal # Vol. 43April 2011 | | 1 || INTELLECTUAL ProPERTY FINANCING UNDER UNCITRAL tion and priority of a security interest in intellectual prop- erty rights respectively. Part 8 discusses the enforcement of a security right and part 9 considers the treatment of acquisition financing devices in an intellectual property context. Part 10 deals with applicable law issues, part 11 with the impact of insolvency of a licensor or licensee on a security interest in that party's rights and part 12 draws some preliminary conclusions as to the importance and the prospects of the Supplement: as a basis for harmonization of secured transactions law. 2. General principles and terminology of the Supple- ment a. |The principle of deference to intellectual prop- erty law As already mentioned, the foundation of the Supplement is a principle that became famous as the principle of recom- mendation 4, subparagraph (b) (also referred to as the principle “to be or not to bel”). According to this principle, the Guide and the Supplement give way to intellectual prop” erty law (defined in a broad way to include national law and international treaties) if an issue is addressed in that law in an asset-specific and different way from the way it is ad- dressed in the Guide. ‘This principle became the key to the consensus reached in the Supplement between the secured financing and the intel- lectual property world because it made it easier for intel. lectual property law experts to accept some of the fundamen. tal principles of modern secured transactions laws and the Guide. At the same time, this principle was accepted by secured transactions law experts as the primacy of intel- lectual property law was generally recognized and as long as the intellectual property law rule to which secured transac- tions law would defer would be asset-specific and thus apply specifically to intellectual property law rights (otherwise, old secured transactions law displaced with respect to other types of asset after law reform would remain applicable with respect to intellectual property rights). Deference to intellectual property-specific rules dealing “I am sure the reader will agree that the Supplement provides a series of solutions to a number of Gordian knots of intellectual property naneing and thus deserves to be described as a tribute to Alexander tho Great! (©2011 Thomson Reuters @ UCC Law Journal « Vol. 43Aprl 2011 603 semUnirorn Commerctat Cope Law Journat [VoL. 43 #2] with security interests in intellectual property rights is certainly a limitation to the Supplement and its harmoniza- tion effect, but was a necessary limitation in view of the need to facilitate the extension of credit to intellectual prop- erty owners and other right holders, without interfering with the fundamental policies of intellectual property law. ‘The realization of the exact scope of the potential overlap and conflict between secured transactions and intellectual property law was one of the benefits drawn from the discus- sion of this principle, The Supplement deals with the cre- ation, third-party effectiveness, priority and enforcement of a security interest in an intellectual property right. It does not deal with the creation, effectiveness, priority and protec- tion of an intellectual property right. These are exclusively matters of intellectual property law. To the extent better coordination between secured transac- tions and intellectual property law would be served by a revision of intellectual property law (for example, with re- spect to registration of a security interest in the relevant intellectual property right registry), the Supplement deals with that matter by way of mild suggestions in the commen- tary as to how States enacting the Guide and the Supple- ment might better coordinate their intellectual property law with that enactment. b. Key objectives and fundamental policies ‘As already mentioned, the overall objective of the Guide is to promote secured credit. To achieve this objective, the Guide formulates a number of objectives, such as predict- ability, transparency, equal treatment of the various sources of credit and balancing the interests of all affected persons.” The Guide also reflects certain fundamental policies, includ- ing the comprehensive, integrated and functional approach to secured transactions. All these key objectives and fundamental policies apply equally to an intellectual property context. ‘This means that the overall objective of the Supplement is to facilitate the extension of credit to intellectual property owners and other right holders, enhancing the value of intellectual property rights as security for credit. ‘The Supplement, however, seeks to achieve this objective "See recommendation 1 604 © 2011 Thomson Reuters @ UCC Law Journal « Vol. 43April 2011 INTELL inaw and of contr: exam imped also 0 value to the that n tions « e The corner agree were from used alll ‘The secur owne! of ent credit owne infrir An secur is jus value not 8 erty the F fort More be er the § Si (the ant”, exper erty weINTELLECTUAL PRopeRTY FINANCING UNDER UNCITRAL in a way that does not interfere with the rights of owners and other right holders under intellectual property law, contract law or general property law. This means, for example that the Supplement does not aifect the content or impede the protection of an intellectual property right. It also means that nothing in the Supplement diminishes the value of an intellectual property right or causes confusion as to the source of products or services. Furthermore, it means that nothing in the Supplement affects the terms and condi- tions of licence agreements. ¢. Terminology The terminology of the Supplement is one of its cornerstones, Initially, one of the main problems in reaching agreement on any issue was the fact that some key terms were understood differently in a secured transactions context from an intellectual property context, while other key terms used in one or the other context were not. fully understood by all. The term “secured creditor” is a good example. Under secured transactions law, the secured creditor is not an owner unless it acquires the encumbered asset in the context of enforcement. Under intellectual property law, the secured creditor may become the owner or exercise the rights of an owner, for example, to renew registrations and pursue infringers. Another such term was the term “encumbered asset”. In a secured transactions context, an intellectual property right is just another intangible asset (if it has economic value, but valuation while mentioned as an important practical issue is not addressed in the Supplement). In an intellectual prop- erty context, an intellectual property right is next only to the Holy Grail! Tt is the heroic expression of intellectual ef- fort and as such has to be handled with care and caution,” More seriously, the determination of what right exactly may be encumbered was an extremely important achievement of the Supplement. Similar remarks can be made about the terms “grantor” (the person granting a security interest”), “competing claim- ant”, “licence”, “receivable” and “assignment”, "At one of the initial informal meetings, an intellectual property law expert remarked: “You cannot give a secured lender an intellectual prop- certy right. What else could a gorilla do with a Stradivarius except destroy in (©2011 Thomson Reuters # UCC Law Journal # Vol 43Apri 2011 605Untrorm ComMERCIAL Cop Law JOURNAL [VoL. 43 #2] What is an intellectual property right (for example, pa tent, trademark or copyright) and whether it may be transferred is a matter of intellectual property law. There is no overlap and no potential conflict in that regard with secured transactions law. The Guide and the Supplement are based on the assump- |. Scope of work a, Assets and transactions covered Th tion that, to the extent that an intellectual property right a may be transferred, a security interest may be created in In that intellectual property right. Thus, in principle the Supp exclusive rights of an owner and the rights of a licensor or a fect licensee under a licence agreement may be encumbered, if fectis they are transferable under intellectual property law. aaa ‘The Guide follows a functional approach (“substance over Pater form”). Thus, all transactions that serve security purposes, prote no matter how they are denominated (for example, pledges, byste: mortgages, trusts or security transfers) are covered.® ity be Outright transfers of intellectual property rights are not | A covered, except to the extent that an encumbered intellectual i . property is transferred and as a result there is a priority i ia competition between the right of the transferee and the se- not ¢ curity interest. In this case, the commentary and the recom- (whic mendations of the Guide and the Supplement dealing with This priority conflicts apply.” i Th b. Limitations | ee As already mentioned, in principle, the Guide applies to i secu! security interests in all types of movable asset, tangible or 1 gran intangible, including intellectual property rights." However, { the if secured transactions and intellectual property law apply | its | ‘See recommendation 2 | catio °A registration relating to a security interest in a future intellectual i spec property right remains effective despite the transfer of the intellectual | and property right (see recommendation 244), And a transferee of an | i encumbered intellectual property right, with few exceptions, takes the | 7 i 8 right subject to the pre-existing security interest (see recommendations 79-82), mus "the Guide does not apply to security interests in securities and not payment rights arising under financial contracts and foreign exchange contracts, in aireraft and similar equipment to the extent security interest issues are dealt with in other law or immovable property with the excep- | tion of attachments or accessions (see recommendations 4-7), 606 ©2011 Thomson Reuters UCC Law Journal » Vol. 43April 2011a be is th INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL to the same matter and lead to a different result, the Guide does not apply." There is one significant condition to this rule. The intel- lectual property law rule must be specific to intellectual prop- erty rights. As a result, there is no deferral to a general rule of secured transactions law that happens to apply to intel- lectual property rights as well. 4. Creation . a. Creation and third-party effectiveness In line with the approach followed in the Guide, the Supplement draws a distinction between the creation (ef- fectiveness between the parties) and the third-party ef- fectiveness of a security interest. The reason for this ap- proach lies in the need to facilitate the creation of a security interest, while at the same time reasonably ensuring the protection of third-party rights and establishing an objective system (based on registration) for the determination of prior- ity between a secured creditor and a competing claimant. b. Requirements for creation As already mentioned, the Guide and the Supplement do not deal with the creation of an intellectual property right (which may include its effectiveness against third parties). ‘This is exelusively a matter of intellectual property law. They do deal though with the creation of a security inter- est in an intellectual property right and require a security agreement that reflects the intent of the parties to create a security interest, identifies the secured creditor and the grantor, describes the secured obligation and describes also the encumbered asset in a manner that reasonably allows its identification." ‘The last requirement typically refers to a general identifi- cation of the encumbered asset. It does cover though a more specific identification if it is required under a particular law and practice, such as intellectual property law and practice. As is the case with any other type of asset, the grantor of a security interest in a future intellectual property right must have rights in the intellectual property right and can- not encumber more rights than the grantor actually has ‘See recommendation 4, subparagraph (b) See recommendation LU. ©2011 Thomson Reuters # UCC Law Journal # Vol. 43April 2011. 607UNIFORM ComMERCIAL Cope Law Journat [Vot. 43 #2] (nemo dat quod non habet or nemo plus juris transferre potest quam ipse habet).” Finally, the grantor may create a security interest in a future intellectual property right." In such a case, the secu- rity interest is created when the intellectual property right arises. If, however, intellectual property law does not permit the creation of a security interest in an intellectual property right, the Guide and the Supple t do not override that limitation.” ¢. Distinction between a secured creditor and an owner in an intellectual property context One of the difficult issues that the Supplement had to ad- dress was the different approaches taken in secured transac- tions and intellectual property law to the question whether the secured creditor could have the rights of an owner. Under secured transactions law, the secured creditor does not become an owner except in the case of enforcement and that only under strict conditions. Under intellectual property law though, if the secured creditor cannot exercise at least some of the rights of the owner (for example, the right to renew registrations or the right pursue infringers), the secured creditor would have no real security. ‘The Supplement resolves this matter in a way that may appear to be very simple and logical but that was not so easy to be agreed upon (even the realization of the problem took time). Accordingly, the secured creditor is not the owner of the encumbered intellectual property right. However, who is the owner of an encumbered asset (not just intellectual prop- erty) is not a matter of secured transactions law but of the relevant property law (including intellectual property law). d. Types of intellectual property right that may be encumbered ‘To the extent that they are transferable under intellectual property law, all rights of an owner, licensor or licensee of intellectual property may be encumbered, ‘The exact scope and content of these rights is a matter exclusively for intellectual property law. Subject to that "Soe recommendation 13. “See recommendation 17 "See recommendation 18. 608 2011 Thomson Reuters # UGG Law Journal # Vol. 43April 2011na ght nit rty rat ad- xe. ver ves ad ty st ae ay i | INPELLECTUAL PROPERTY FINANCING UNDER UNCITRAL limitation, the Supplement recognizes that the rights of an owner to enjoy its intellectual property right, to prevent its unauthorized use pursuing infringers, to rey and the right to authorize its use by others and to collect royalties may be encumbered. Of particular importance are the rights to the payment of licence fees or royalties. Following the approach of the United Nations Convention on the Assignment of Receivables in International Trade," the Guide and the Supplement treat rights to the payment of royalties as receivables. As a result, the commentary and recommendations of the Guide ap- plicable to receivables apply to rights to the payment of royalties (see section 4.g. on contractual and statutory limi- tations below). e. Tangible assets with respect to which intel- lectual property is used Another of the difficult issues that found a “simple and easy” solution in the Supplement is the effect of a security right in a tangible asset on the intellectual property rights used with respect to that asset (for example, inventory of personal computers with copyrighted software). The Supplement simply confirms that in such cases the secured creditor has a security interest only in the tangible asset, unless otherwise agreed.” As a result, the secured creditor may upon default repossess and sell the encumbered inventory, but may not otherwise use the copyrighted software (see section 8.d. below on the enforcement of secu- rity interests in mixed assets). f, Future intellectual property rights As already mentioned, the Guide and the Supplement provide that a security interest may be created in an asset that does not belong to the grantor at the time of the secu- rity agreement or is created thereafter."® This approach is justified by the need to cover future assets in one security agreement. This rule also applies to intellectual property ‘Article 2, http://www uneiteal org/uncitraVen/unci 1001 Cor bles. "'See recommendations 10 and 243, “See recommendation 17, ©2011 Thomson Reuters UCC Law Journal # Vol. 43April 2011609Uniroeat Commerciat Cope Law Journat [Vot. 43 #2] rights but only if it is not inconsistent with intellectual prop- erty law." In many cases, intellectual property law allows a security interest to be created in a future intellectual property right (for example, in a future copyrighted motion picture) to facil- itate the creation of the future intellectual property right. In other cases though, intellectual property law may prohibit the creation of a security interest in a future intellectual property right (for example, in new media or technological uses) to prevent a creator from making undue commitments. ‘The Guide and the Supplement respect such limitations. g. Contractual and statutory limitations The Guide and the Supplement take an intellectual prop- erty right as it exists under the relevant intellectual prop- erty or other relevant law and do not override any statutory limitations to the transferability of an intellectual property right.” However, the Guide does set aside statutory limita- tions relating to the assignability of receivables based on the sole ground that they are future receivables or are assigned in bulk." This rule does not apply if the statutory limitation is based on the nature of the receivable, for example, as an employment benefit rather than as a future receivable only. In addition, the Guide and the Supplement override an anti-assignment agreement with respect to receivables and only if the debtor (licensee) prohibits the creditor (licensor) from assigning its receivables to a third party. However, the Guide and the Supplement do not affect contractual lim- itations with respect to the transferability of intellectual property rights. Nor do they affect contractual limitations to the assignability of rights to the payment of royalties where the licensor prohibits the licensee from assigning to a third party sub-royalties owed to the licensee as a sub-licensor. Third-party effectiveness a, The concept of third-party effectiveness The concept of “third-party effectiveness” (or perfection) of a security interest under the Guide and the Supplement See recommendation 4, subparagraph (b) ® See recommendation 18, * See recommendation 23 *Sce recommendation 24. 610 ©2011 Thomson Reuters © UCC Law Journal « Vol, 2/pril 2011‘it INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL refers to whether a security interest in an asset is effective against parties (other than the grantor and the secured cred- itor) that have at that time or acquire later a property right in that asset. By contrast, under intellectual property law, the concept of “effectiveness of a security right against third parties” refers to the effectiveness of exclusive rights associated with ownership or rights of a licensor or licensee. The Supplement recognizes that these two distinct concepts should not be confused. In line with that approach, the Supplement addresses the issue of the third-party ef- fectiveness of a security interest in an intellectual property right as a matter of secured transactions law. It does not ad- dress, however, the effectiveness of an intellectual property right as against third parties, which is exclusively a matter of intellectual property law. b. Third-party effectiveness rules The main rule under the Guide and the Supplement is that a security interest in an intellectual property right may be made effective against third parties by registration of a notice in a general security rights registry (for the character- istic aspects of the registry, see section 6.a. below on registration). At the same time, to avoid undermining existing special- ized registries, the Guide provides that a security interest may be made effective against third parties by registration in a specialized registry. This rule applies also to intel- lectual property registries. What is registered exactly (that is, a document, a sum- mary or a notice) is a matter of intellectual property law. The Guide and the Supplement assign third-party effective- ness to this registration, irrespective of what are the legal consequences of registration under intellectual property law, unless this is not permitted under intellectual property law (for a discussion of the coordination between registries, see section 6.c. below). If a security interest in an intellectual property right may not be registered in an intellectual property registry or the intellectual property right is of a type that is not subject to See recommendation 32. *Sco recommendation 38 ©2011 Thomson Reuters UCC Law Journal ¢ Vol, 43Apri 2011.6 LLUntrorm Commerctat Cone Law Journat [Vou 43 #2] registration in an intellectual property registry (for example, a copyright), the security interest can be made effective against third parties only by registration in the general se- curity interest registry. This is one of the advantages of a general security interest registry 6. Registration a. The general security interest registry ‘The Guide recommends that States establish a general se- curity interest registry so as to: (a) provide for an efficient method of making security interests effective against third parties; (b) establish an effective point of reference for the priority rules based on registration; and (c) provide an objec- tive source of information for third parties. ‘The characteristic aspects of the following: ‘try include the (a) Registration involves a notice with minimal informa- tion, not the transaction documents; (b) The legal consequence of registration is third-party ef- fectiveness of a security interest, not its creation; (c) Registration is, to the extent possible, electronic, the registry operates continuously and the registry record is centralized; (a) Registration is initiated by the registrant and the reg- istrar may require the identity but not on line verifica- tion or authorization for registration; (e) Registration must be authorized by the grantor, in the security agreement or elsewhere; () Registration is effective when the registered inforn tion becomes available to searchers of the registry rec ord; (g) The registrant has to forward a copy of the registered information to the grantor; (h) The registry is open to the public and a searcher need not justify the reasons for the search; (i) Registered information is indexed and becomes search- able according to the identifier of the grantor; (i) Fees for registration and searching, if any, have to be set at a level no higher than necessary for cost recovery; and 612 @ 2011 Thomson Reuters # UCC Law Journal « Vol. 49April 2011 | | | | Inte tk onls grat rep: dur the enfi ber: the mer tiet fute pro var reg pat cor bot rig rep wh dox ati qu In by th ek be be t °INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL (k) Multiple copies of the registered information are maintained and information deleted from the public record is archived. ‘As already mentioned, the registered notice need contain only minimal information, such as the identifier of the grantor and the secured creditor (or the secured creditor's representative), a description of the encumbered asset, the duration of registration and, if required in a certain State, the maximum amount for which a security interest may be enforced.” The standard for the description of the encum- bered asset in the notice is the same as mentioned above for the description of the encumbered asset in the security agree- ment and may vary depending on the requirements of a par- ticular law or practice.” Similarly, the notice may refer to fature assets, unless this is not permitted under intellectual property law.” b. Asset-specific intellectual property registries The treatment of intellectual property right registration varies from country to country. Some registry systems permit registration of some intellectual property rights (for example, patents and trademarks) but not others (for example, copyrights). Some registry systems permit registration of both title and security interests in intellectual property rights, while others permit registration of only title. Some registry systems require registration of a notice or summary, while others require registration of the transaction documents, In some systems registration results in the cre- ation of a security interest, while in others the legal conse- quence of registration is third-party effectiveness or evidence. In some systems, the registration and searching is possible by electronic means and fees are minimal, while in others the registries are paper based and fees are substantial. It would be reasonable to argue that a notice-based, electronic registry, with third-party effects with the att butes of the security interest registry mentioned above would be more efficient than a different registry. But, as these at- tributes exist in both security interest and intellectual prop- See recommendations 54 and 55, * See recommendation 57. *'See recommendation 63. See recommendations 17 and 67 ©2011 Thomson Reuters # UCC Law Journal e Vol. 43April 2011 613Untrorst Commerciat Cove Law Jourwat [Vot. 43 #2] erty registries, it would be an oversimplification to say that one registry is better than the other. They simply perform different functions and a party in some cases may need to register in one, while in other cases the same party may need to register in the other. For example, if a party needs to ensure priority as against all competing claimants (that priority may be ensured only by registration in the relevant intellectual property registry; see section 7.d. below on priority), a party would have to reg- ister in the relevant intellectual property registry. If, however, a party needs to ry only as against other secured creditors, registration in the general security interest registry may be sufficient.” In addition, if a security interest in a certain type of intellectual property right may not be registered in an intellectual property registry, registration in the general security interest registry may be ficient. ¢. Coordination of registries To the extent that a State has a general security interest registry and various types of intellectual property registry, a need for some coordination among the relevant registries. ‘The Guide and the Supplement address this issue in three ways. First, if intellectual property law provides that a secu- in an intellectual property right has to be an intellectual property registry or has other provisions that are inconsistent with the provision in the Guide permitting registration of such a security interest in the general security interest registry,” intellectual property law will prevail according to the Supplement’s principle of deference to intellectual property law.” ‘The second way in which the Guide and the Supplement address the issue of coordination of registries is by way of a priority rule. Under a specific rule in the Guide, priority is given to a security interest in an intellectual property right In addition, if a security interest in a certain type of intellectual property right may not be registered in an intellectual property registry registration in the general security interest registry may be sufficient See recommendation 38. *'See recommendation 4, subparagraph (b). 614 ©2011 Thomson Reuters # UCC Law Journal # Vol. 43April 2011INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL, with respect to which a registration has taken place in an intellectual property registry. The third way in which the Guide and the Supplement a. dress the issue of registries coordination is by discussing in the commentary how the various types of registry may be made compatible or linked with each other. For example, the registries could allow the registration of notices relating to possible security interests in present or future intellectual property rights with third-party effects and establish and maintain both asset-based and name based-indices, and allow searches by both asset description and grantor identifier. Such an alignment would certainly require that States review and revise not only their secured transactions laws but also their intellectual property laws. The international registry for security and other interests aircraft established by the Aircraft Protocol of the Conven- tion on International Interests in Mobile Equipment (Cape Town, 2001) may provide a good model for such a registry system. Another way of coordination of registries discussed in the Guide and the Supplement is to link the electronic registries, in such a way that information entered in one registry will be appear in the others so that wherever a party searches will be able to discover all security interests relating to certain assets or assets of a certain debtor (both asset- and debtor-based indices would be necessary). It should be noted that coordination of registries will be one of the issues to be discussed by UNCITRAL in the context of its new project on general security interest registries. This project is mainly aimed at addressing all the legal and practical matters associated with the establish- ment and operation of a security interest registry and will include also registry regulations." d. Future intellectual property rights As already mentioned, the Guide permits registration with See recommendation 77, subparagraph (a). “http://www. unidroit.org/english/conventions/mobile-equipment/ main.htm, See report of UNCITRAL at the work of its 43" session (A/65/17, para, 268), See also, http//www-uncitral.org under Working Group Docu- ments and then Working Group VI ©2011 Thomson Reuters ¢ UCC Law Journal « Vol. 43Apri 2011.15UNIFORM CommerctaL Cope Law JOURNAL [VoL. 43 #2] respect to security interests in future assets, including future intellectual property rights.”* In many cases, intellectual property law permits the cre- ation and registration of a security interest in an intellectual property right. To the extent this is not the case, intellectual property law will prevail and registration will not be pos- sible with respect to such future rights.”* As a text on secured transactions law, the Supplement does not include a recommendation on purely intellectual property law matters. However, it suggests that States might consider reviewing their intellectual property laws with a view to allowing registration with respect to future intel- lectual property rights. e. Time of effectiveness of registration Under the Guide, registration becomes effective as of the time the information entered in the registry record becomes available to searchers. In the case of an electronic registry, information becomes searchable immediately upon its entry into the registry record by a registrant. Thus, in such a case, there is no time difference between the time information is entered into the record by a registrant and the time it becomes available to a searcher. In the case of a paper-based registry, this is not the case As a result, if the time of effectiveness is the time informa- tion becomes available to the public, registrants bear the burden of registrar error in entering the relevant informa- tion into the record; or, if the time of effectiveness is the time information is entered, that is, before it becomes avail- able to the public), searchers bear the burden of discovering all information relating to security interests in the assets of the grantor. ‘The situation is different with respect to intellectual prop- erty registries in that there are different times of effective- ness of a registration. In the case of some patent and trademark registration systems, a registration is effective upon the submission of the information to the registry. In the case of other systems, a registration is effective when the information is entered into the record and a certificate is issued. * See recommendation 67. See recommendation 4, subparagraph (b) ©2011 Thomson Reuters « UCC Law Journal # Vol. 43April 2011 INTELL As al rity int even 0% securit of effe problet 1 lect! ‘The transf registr ‘The issue 1 the tri sary; withir of the sary a ning « knowl ‘The the that prope regist witho The disco finan: to re- is tre licens ae a. Ur Ty”] ure ao ual ual 108+ ont ual sht la el- he es. yy. we, is it INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL As already mentioned, the Guide gives priority to a secu- rity interest registered in an intellectual property registry even over a security interest registered earlier in the general security interest registry.” Thus, the difference in the time of effectiveness of registration should not create any problems. f. Impact of a transfer of an encumbered intel- lectual property right ‘The Guide does not resolve the issue of the impact of a transfer of an encumbered asset on the effectiveness of registration in that it has no recommendation on the subject. ‘The commentary discusses the issue and suggests that the issue may be resolved in one of the following three. ways: (a) the transfer has no impact and no new registration is neces- sary; (b) the transfer makes necessary a new registrati within a specified period of time to preserve the effectiveness of the original registration; and (c) the transfer makes nec sary a new registration within a certain period of time begin- ning only when the secured creditor on record acquires knowledge of the transfer. ‘The Supplement takes a different approach. It addresses the matter expressly with an asset-specific recommendation that provides that a transfer of encumbered intellectual property right has no impact on the effectiveness of a registration and thus the registration remains effective without a new registration.» The reason for this approach lies in the need to avoid discouraging or making more expensive intellectual property financing by ensuring that a secured creditor would not have to re-register each time the grantor transfers or, if a licence is treated under intellectual property law as a transfer, licences its intellectual property rights. 7. Priority a. The concept of priority Under the Guide, the concept of “priority” of a security interest refers to the question whether the secured creditor may obtain payment in preference to competing claimants. Typically, under intellectual property law, the concept of *"Seo recommendation 77. See recommendation 244. ©2011 Thomson Reuters UCC Law Journal # Vol. 43Apri 2011617.Untrorst Commenctat. Cone Law JouRNAL [VoL 43 #2] “priority” may relate to exclusive rights. If an intellectual property right is transferred, a second transfer by the origi- nal owner will transfer no rights (nemo dat), except if the first transfer had not been completed by the required registration. If both transferees create security interests, the secured creditor of the second transferee may obtain no right (nemo dat), b. Competing claimants Under the Guide, the term “competing claimant” refers to another secured creditor with a security right in the same asset as the first secured creditor, an outright transferee, lessee or licensee of an encumbered asset, a judgement cred- itor and the grantor’s insolvency administrator. In an intel- lectual property context, the term “conflicting transferees” is used instead and refers to transferees and licensees compet- ing with each other. The Guide applies only if there is a conflict of priority be- tween a security interest (including the right of a transferee by way of security) and the right of a competing claimant. If no security interest is involved (as in the case, for example, of two outright transferees), the Guide does not apply. c. Knowledge Under the Guide, knowledge of the existence of a security interest on the part of a competing claimant is irrelevant for determining priority.” As a result, a later created but earlier registered security interest has priority over an earlier cre- ated but later registered security interest, even if the holder of the later created security interest had knowledge of the earlier created security interest. The reason for this ap- proach is to avoid referring priority to subjective notions that are difficult to prove. To the contrary, intellectual property law may provide that a later conflicting transfer or security interest may gain priority if it is registered first and taken without knowledge of a prior conflicting transfer. The justification for this ap- proach is the need to uphold good faith standards, Under the principle of deference of intellectual property law, this rule would prevail. However, the Supplement suggests that ce recommendation 98. However, the knowledge that a transfer or security right violates the rights of an existing secured creditor may be relevant (ace recommendations 81, 105 and 106) 618 ©2011 Thomson Reuters # UCC Law Journal @ Vol. 43Apri 20113421 tual rrigi- “the ired , the ‘ight «sto ame sree, sred- atel- svis pet- eree t TE iple, wity for clier cre- Ider the ap- ions vide rain sdge ap: the rule hat ybe ort INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL States might review their knowledge-based priority rules and the impact of these rules on certainty with respect to the rights of third parties. d. Priority rules ‘The main priority rule under the Guide and the Supple- ment is based on the time of registration of a notice of a se- curity interest in a general security interest registry." The first secured ereditor to register a notice of its security inter est in the general security interest registry prevails over secured creditors that registered later or did not register at all. ‘There is one exception to this rule. If a secured creditor registers its security interest in an intellectual property reg- istry, that secured creditor has priority over secured credi- tors that registered earlier in the general security interest registry (and those that registered later in the same registry)."" This rule is designed to avoid undermining the reliability of intellectual property registries, but does not recommend the establishment of such registries if they do not exist. Under another important priority rule, a transferee of an encumbered intellectual property right takes the intellectual property right subject to the security interest (provided that it is effective against third parties). This means that, upon default of the grantor, the secured creditor may enforce its security interest by transferring or licensing the encumbered intellectual property right or by simply collecting royalties from the existing licensee (royal- ties are treated as proceeds, if the original collateral is the intellectual property right, or as the original collateral, if so agreed with the grantor). Tt does not mean, however, that the secured creditor has more rights than the grantor or that the enforcement may affect in any other way the rights of the licensee under the licence agreement and the law applicable to it. Tt should also be noted that, if the transferee created a second security interest, that security interest is subordi- hated to the security interest created by the transferor as “gee recommendation 76. “See recommendation 77, subparagraph (a). ‘See recommendation 79. ©2011 Thomson Reuters UCC Law Journal @ Vol. 43April 2011619UNtFoRM Commerciat Cope Law JouRNAL [VoL. 43 #2] the secured creditor of the transferee cannot be in a better position than the transferee.” There are two exceptions to this priority rule. A transferee, ee or licensee of an intellectual property right takes it free of a pre-existing security interest if (a) the secured creditor authorized the transfer or licence free of the secu- rity interest;“ or (b) the transfer, lease or licence is in the ordinary course of business of the transferor, lessor or the licensor and the transferee, lessee or licensee had no know!- edge that the transfer or licence violated the rights of the secured creditor under the security agreement. This means that, upon default by the grantor, the secured creditor may enforce its security interest by collecting royal- ties owed to the grantor, but may not transfer or licence the intellectual property right. The security interest is not af- fected in any other way, that is, its general effectiveness and enforceability remain unaffected. In any case, it should be noted that all these rules apply to security interests in intellectual property rights only to the extent that intellectual property law does not address the relevant priority conflicts in a different way. e. Rights of certain licensees As already mentioned, the Guide provides that an ordinary-course-if-business (“OCOB") licensee who does not have knowledge that the licence violates the rights of a secured creditor takes the licence free of the security interest. As the concept of an OCOB licensee in an intellectual prop- erty context was found to be foreign to intellectual property law and in order to clarify the limited application of recom- mendation 81, UNCITRAL decided to adopt an asset-specific recommendation in this regard. Once again, the recommen- dation appears to be overly simplistic and stating the obvious. It was, however, the result of long and hard negoti- ations (the fate of hard problems in the Supplement is to find simple solutions)! oe recommendation 82, This would be the result even under law ‘outside the Guide (nemo dat) “Seo recommendation 80. “See recommendation 81 jee recommendation 4, subparagraph (b) 620 ©2011 Thomson Reuters # UCC Law Journal @ Vol. 43April 201143 #2) better sferee, ukes it scured "secu- in the or the snowl- of the secured, royal- ce the ot af sand ply to ‘0 the is the t an 5 not of a urity prop- verty com- cific men- the goti- is to law Port INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL, ‘The key to this “simplistic” solution was an agreement in principle about the limited impact of OCOB licences, An- other key element of the solution was the hard-to-reach agreement that each branch of law deals with the rights of a person under that law and does not affect the rights that person may have under other law. This means that, secured transactions law deals with the rights of the secured creditor as a secured creditor and not as an owner under intellectual property law (or a shareholder under company law)! Based on the above-mentioned agreement, the Supple- ment provided that recommendation 81, subparagraph (c), applies to the rights of a secured creditor under secured transactions law but not to the rights a secured creditor may have as an owner under intellectual property law. In other words, an OCOB licensee may be protected against enforce- ment of the security interest by the secured creditor, but not against any other right or remedy the secured creditor may have as an owner to pursue the OCOB licensee as an infringer, f, Relative priority of security interests granted by licensors and licensees The relative priority of security interests granted by licen- sors and licensees is another Gordian knot that UNCITRAL had to resolve in an Alexander-like way! Again, it may be easy to describe the problem now, but it was not during the negotiations that led to the Supplement; and without a common understanding of the problem a solu: tion was for some time beyond reach! Here is the problem, Where a licensee creates a security interest in its right to payment of sub-royalties, in principle there is no priority conflict with a security interest created by the licensor in its right to payment in royalties. The rea- son is that, in the two cases, the collateral is different. However, the collateral may be the same, if what the licen- sor has agreed to receive is a percentage of the sub-royalties to be collected by the licensee as a sub-licensor. Whoever be- tween the licensor and licensee (and there may be many tiers of licensors-licensees in a licence chain) can ensure priority for its secured creditor is likely to have easier access to credit. Here is the solution under the Supplement. If the assign- ment (including security interest) of the right to the pay- ment of a percentage of the sub-royalties by the licensor ©2011 Thomson Reuters @ UCC Law Journal « Vol 43Ap¢l 2011 621Unirorm Commerctat Cone Law JOURNAL [VoL. 43 #2] takes place before a security interest is created by the li censee, the licensee does not have a right in these sub- royalties at the time it creates a security interest and thus the secured creditor of the licensee takes its rights subject to the rights of the licensor’s assignee (including a secured creditor). Otherwise, the licensee’s secured creditor takes its rights from the licensee free of the rights of the licensor’s as- signee (including a secured creditor). Apart from assigning its percentage of the sub-royalties ahead of the licensee granting a security interest, there are other ways in which the licensor may protect its interests, including by: (a) ensuring that its secured creditor registers first in the general security interest registry, or, even better, in the relevant intellectual property registry; (b) prohibiting the licensee from granting a security interest and terminat- ing the licence agreement if the licensee violates the prohibi- tion; and (c) requiring any secured creditor of a prospective licensee to enter into a subordination agreement with the cured ereditor of the licensor before the licence is granted. g. Priority of judgement creditors and subordina- tion ‘The recommendations of the Guide with respect to the priority of judgement creditors and subordination apply in an intellectual property context as well. This means that an unsecured creditor has priority over a secured creditor with an interest in an intellectual property right if it obtained a judgment against the grantor and took steps to acquire righis in the encumbered intellectual prop- erty (under the applicable enforcement regime) before the security interest became effective against third parties.” It also means that a competing claimant may at any time subordinate its priority unilaterally or by agreement in favor of any other existing or future competing claimant as long as this does not affect the rights of third parties."* 8. Enforcement a, The interaction of secured transactions, procedural and intellectual property law As already mentioned, the Guide and the Supplement do ve recommendation 84 oe recommendation 94, 622 ©2011 Thomson Reuters # UCC Law Journal « Vol. 43Apri! 2011 INTEL not d right and b again the er erty 1 the ec Wh proce inter: proce: cases rity i that prope able « deper the ¢ from b. In lectu secur contr sell i satisf ties t Th grant total such owne encui objec inteli Th subje and 20143 #2 the li- » sub- i thus ject to cured ses its r’s as- alties re are rrests, isters retter, biting ainat- obibi- ective h the nted. ina- © the aly in ver a perty took prop- 2 the time favor ag as at do 2011 |ANCING UNDER UNCITRAL INTELLECTUAL PROPERTY Fi not deal with the enforcement of an intellectual property right in the sense of the right holder’s right to enjoy the use and benefits of its intellectual property or to enforce its right against infringers. The Guide and the Supplement deal with the enforcement of a security interest in an intellectual prop- erty right addressing the remedies of a secured creditor in the case of the grantor’s default. When enacted, the Guide and the Supplement will replace procedural rates relating to the enforcement of security interests. Typically, such rules are included in a code of civil procedure or other procedural law statute. However, in some cases, procedural rules relating to the enforcement of secu- rity interests in intellectual property rights or simply rules that affect that enforcement may be found in intellectual property law. For example, what is a commercially reason- able enforcement act in an intellectual property context may depend on intellectual property law and practice. If that is the case, and the intellectual property rules are different from other enforcement rules, the former prevail.” b. Remedies where the grantor is the owner In a nutshell, where the security interest is in the intel- lectual property owner’s rights, the main remedies of a secured creditor when the owner/grantor defaults is to obtain control of the encumbered intellectual property right and to sell it or license it on behalf of the owner/grantor so as to satisfy from the proceeds of the sale or from the licence royal- ties the secured obligation.” ‘The secured creditor may also propose to the owner/ grantor to acquire the encumbered intellectual property in total or partial satisfaction of the secured obligation, but, in such a case, the secured creditor has to notify in writing the owner/grantor and any other person with a right in the encumbered intellectual property. If any of these persons object, the secured creditor may not acquire the encumbered intellectual property.” ‘The remedies may be exercised in court or out of court subject to adequate protection of the rights of the grantor and any other person with interests in the encumbered See recommendation 4, subparagraph (b). “Seo recommendation 141. *'Seo recommendations 156-159, ©2011 Thomson Reuters # UCC Law Journal » Vol. 43Apri 2011623Untrorm Cosmerctat Cop Law JourNAL [Vou 43 #2] assets."* The requirements for out-of-court repossession of the encumbered asset are particularly strict. The grantor must have consented to extra-judicial repossession in the se- curity agreement; the secured creditor must give the grantor and any person in possession of the encumbered asset notice of default and extra-judicial repossession; and, at the time the secured creditor seeks to repossess the encumbered as- set, the grantor and any person in possession of the asset must not object.” If there is a surplus left after the satisfaction of the secured obligation, the secured creditor has to turn it over to the grantor.* The’ person acquiring an intellectual property right in the context of out-of-court enforcement of a security interest acquires it free of the security interest of the enforc- ing secured creditor and any other junior secured creditor but subject to any security interests that are senior to the security interest of the enforcing secured creditor. It is important to note that, in enforcing its security inter- est, the secured creditor has to act in good faith and in ac- cordance with reasonable commercial standards.” It should also be noted that, under the Guide and the Supplement, the secured creditor does not become the owner of the encumbered intellectual property right, unless the secured creditor acquires the encumbered intellectual prop- erty right in the context of enforcement.” This approach does not interfere with the possible treatment of a secured creditor under intellectual property law as an owner in the sense that the secured creditor may have the right to deal with government authorities, for example, to renew registra- tions, or to sue infringers. c. Remedies where the grantor is a licensee Where the security interest is in a licensee's rights under a licence agreement, upon default of the licensee/grantor, the secured creditor may enforce its security interest by disposing of the licence or by granting a sub-licence and col- "See recommendation 137, 138 and 142 "See recommendation 147. fee recommendation 152. jee recommendation 161. "See recommendation 131 "See recommendations 148 and 156. 624 ©2011 Thomson Reuters UCC Law Journal # Vol. 43Apdi! 2011 INTELL lecting licenct licens: The licenct tion, 1 parric agree! ‘The owed rity it was & agree licen icenc The ofali credit rights a. ass As set W not agree secur for er not u TVs in th In able secu calles Th ter o Stat: unde an i inver 20143 #2] sion of rantor the se- rantor notice 2 time ed as- asset of the wer to operty curity nfore- editor 0 the inter- in ac- i the wwner 5 the prop- ‘oach ‘ured a the deal stra- nder ator, t by col- 2011 INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL lecting sub-royalties, provided that the licensor consents, the licence is transferable or, under the licence agreement, the licensee has a right to grant a sub-licence. The secured creditor may also propose to acquire the licence in total or partial satisfaction of the secured obliga- tion, provided that the licensee/grantor and other interested parties are notified and do not object and also the licence agreement does not prohibit the transfer of the licence. ‘The secured creditor may also collect any sub-royalties owed to the licensee as a sub-licensor. If, however, the secu- rity interest in the right to the payment of any sub-royalties was granted in violation of an initial or intervening licence agreement, the licensor would retain all its rights under the licence agreement, including its right to terminate the licence agreement. The key point here is that the rights of a secured creditor of a licensee or anyone who acquires rights from the secured creditor upon enforcement of a security right in a licensee's rights are limited by the terms of the licence agreement. d. Enforcement of a security interest in mixed assets As already mentioned, a security interest in a tangible as- set with respect to which intellectual property is used does not extend to the intellectual property, unless otherwise agreed. This means that, upon the grantor’s default, the secured creditor may enforce its security interest by selling, for example, the encumbered inventory of TV sets, but may not use the copyrighted software or patents to produce new TV sets or otherwise use the copyright or patent embodied in the TV sets. In other words, the intellectual property owner should be able to control the manner and the place of enforcement of a security interest in such mixed assets, except where the so called “exhaustion doctrine” applies. The exact meaning of the “exhaustion doctrine” is a mat- ter of intellectual property law, which varies from State to State and the Supplement refers to this doctrine as understood in each State. In any case, the basic idea is that an intellectual property right in a product (for example, inventory of clothes bearing a trademark) is exhausted under ‘See recommendations 10 and 243, ©2011 Thomson Reuters © UCC Law Journal e Vol. 43Apil 2011 625UNiFoRat Commerctat Cope Law JouRNAL [VoL. 43 #2] certain circumstances, such as the first sale or marketing of the product. As a result, a person who resells the product is protected from infringement liability. 9. Acquisition financing a. The need for a special treatment of intellectual property acquisition financing While the idea of a special regime of acquisition financing for intellectual property is not unknown, its application has been rather limited. By establishing such a regime, the Supplement breaks new ground to facilitate acquisition financing in an intellectual property context, "The basic idea is that, as a retention-of-title seller of goods or a lender financing the acquisition of goods by the grantor deserves a special priority status as without that acquisition money the grantor could not acquire the goods, a financier financing the acquisition of an intellectual property right or a licence by a grantor deserves to be treated in the same way In essence, the Supplement implements the super-priority given to a retention-of-title seller or an acquisition money (purchase money) secured creditor in an intellectual prop- erty context, This, purchase money among other things, means that the super priority does not extend to cash proceeds of inventory. b. Third-party effectiveness and priority of an acquisition security interest in an intellectual prop- erty right The Supplement provides that an acquisition security interest in intellectual property held by the grantor for sale or licence in the ordinary course of business should be treated in the same way as an acquisition security interest in inventory; an acquisition security interest in intellectual property held by the grantor for use in its own busine: should be treated in the same way as an acquisition security interest in equipment; and such a security interest in intel- lectual property used or intended to be used by the grantor for personal, family or household purposes should be treated in the same way as an acquisition 626 ©2014 Thomson Reuters UCC Law Journal # Vol. 43April 2011 proper priorit notice intere than ¢ acquit Sim rope ordin. acquis (a) (b) e int: As inter intel no ac rity it as thi Ag regis! the g time both istry, Ho owne tion tion die proacl @20143 #2) ing of luet is tual ineing n has >, the sition goods antor sition ncier ht or same iority oney prop- ings, cash arity sale d be rest stual ness arity atel- ntor ated 2011 INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL security interest in consumer goods. As a result, an acquisition security interest in intellectual property held by the grantor for use in its own business has priority over a non-acquisition security right, provided that hotice is registered with respect to the acquisition security interest in the general security interest registry not later than a short period of time (20 or 30 days) after the grantor acquired the intellectual property or licence." Similarly, an acquisition security interest in intellectual property held by the grantor for sale or licence in the ordinary course of business has priority over a non- acquisition security right, provided that: (a) before the grantor acquires the intellectual property right or the licence, a notice is registered with respect to the acquisition security interest in the general secu- rity interest registry; and (b) a notice is sent to secured creditors with an earlier- registered non acquisition security interest. c. Priority of a security interest registered in an intellectual property registry As noted above, the Guide and the Supplement do not interfere with specialized registration regimes, including intellectual property right regimes. This means that there is no acquisition security interest priority for acquisition secu- rity interests registered in an intellectual property registry, as this is matter of intellectual property law. A security interest registered in an intellectual property registry has priority over a security interest registered in the general security interest registry, irrespective of the time of registration. However, between two security interests both of which are registered in an intellectual property reg- istry, there is no acquisition money super priority. However, in many situations, the secured creditor of an owner of intellectual property subject to specialized registra tion will in essence have the priority position of an acquisi- tion secured creditor. Where, for example, the intellectual See recommendation 247, subparagraph (a). "see recommendation 180, alternative A, subparagraph (a). For a discussion of the various alternatives or the unitary and non-unitary ap- proach to aequisition financing, see the Supplement, chapter IX. "See recommendation 180, subparagraph (b) ©2011 Thomson Reuters # UCC Law Journal e Vol. 43Apri 2011. 627Uniform Commercial Cope Law JouRNaL [VoL. 43 #2] property regime does not permit the registration of a secu- rity interest in future intellectual property, the secured cred- itor of a transferee or licensee of intellectual property can only register after the transfer or the licence. As a result, the owner's secured creditor will always have priority over the transferee’s or licensee's secured creditor. d. Priority of an acquisition security interest in proceeds of intellectual property In line with the relevant rules that apply to an acquisition security interest in the proceeds of tangible assets, the Supplement provides that an acquisition security interest in the proceeds of intellectual property or licence held by the grantor for use in its own business has the same super- priority as the acquisition security interest in the encum- bered intellectual property or licence. However, an acquisition security interest in the proceeds of intellectual property or licence held by the grantor for sale or licence in the ordinary course of business has the same super-priority as the acquisition security interest in the encumbered intellectual property or licence only if the proceeds are not cash proceeds." ‘The rationale for this ap- proach is to protect financiers that extended credit to the grantor against cash proceeds as original collateral. 10. Applicable law a. Property matters ‘The Guide and the Supplement do not deal with the law applicable to ownership rights with respect to intellectual property rights. They do deal, however, with the law ap- plicable to the creation, third-party effectiveness, priority and enforcement of a security interest in an intellectual prop- erty right. As there is no generally acceptable applicable law rule with respect to security interests in intellectual property rights, UNCITRAL took the time to discuss this issue at length’ and in depth." Various alternatives were considered and their comparative advantages and disadvantages were ‘See recommendations 185, subparagraph (a), and 247. Seo recommendations 185, subparagraph (b), and 247 “the discussions included a representative of the Bureau of the Hague Conference on Private International Law. Informal discussions also took place with the European Max-Planck-Group for Conflict of Laws 628 © 2011 Thomson Reuters @ UCC Law Journal # Vol 43April 2011 brief! Th tions One right inter thes ‘The it we intel in th right An to se the g tratic in fa plica with and intel and A optic sues prop for t! optic Me ther gran ness It the in Int tenleltion the ‘tin the ger- um- eds sale ime the the ap- the aw ral 1p ity le ty at ad re INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL, discussed." The outcome, which was considered to be a sig- nificant success, in particular, as it was agreed upon after a long and well informed discussion by consensus, may be briefly described as follows. The Supplement discusses in the commentary various op- tions with their comparative advantages and disadvantages. One option is based on the law applicable to ownership rights. Under this approach, the law applicable to a security interest in an intellectual property right should be the law of the State in which the intellectual property right is protected. ‘The main arguments in favour of this approach are that: (a) it would be consistent with the approach followed in many intellectual property law conventions; and (b) it would result in the application of one and the same law to ownership rights and security interests in intellectual property rights. Another option is based on the law applicable in the Guide to security interests in intangible assets, that is, the law of the grantor’s location (the grantor’s place of central adminis- tration or principal place of business)." The main argument in favour of this approach is that it would result in the ap- plication of a single law, one that would usually coincide with the law governing matters in the grantor’s insolvency and which, in the case of a security interest in a portfolio of intellectual property rights, would result in significant time and cost savings to create and enforce a security interest. A third option is based on a combination of the first two options referring to the law of the grantor’s location some sues and to the law of the State in which the intellectual property right is protected other issues. The main argument. for this approach is that it maximizes the advantages of both options and minimizes their disadvantages More concretely, this approach allows parties to choose ei- ther the law of the protecting State or the law of the grantor’s location as the law applicable to creation (effective- ness between the parties, not affecting third parties). It refers third-party effectiveness and priority to the law of the protecting State, giving appropriate recognition to the in Intellectual Property (CLIP) (http//www.ip mpg de/ww/de/pub/mikrosei ten/el_ip_ewhome.ctin) “See AICN.9/700 and Addenda 1-7. See also the report of the Com: mission at its 43" session (A/65/17, paras. "¢ recommendation 208 and 219, ©2011 Thomson Reuters UCC Law Journal ¢ Vol. 43Apri 2011-629Ustrorm Commenciat Cone Law Jourwat [Vou. 43 #2] principle of territoriality and the need to refer security interests in registrable intellectual property rights to the law of the State of registration. It also permits third-party effectiveness as against judgment creditors and insolvency administrators to be achieved under a single law (the law of the State of the grantor’s location). Furthermore, this option refers enforcement to a single law (the law of the grantor’s location), subject to the principle of the application of the ex fori to procedural matters and the lex fori concursus to certain insolvency-related matters (avoidance, ranking of claims and distribution of proceeds).”" This is the recommended approach." b. Contractual matters ‘The Guide provides that the law applicable to the mutual rights and obligations of the parties arising from their secu- rity agreement is the law chosen by the parties. In the absence of a choice of law by the parties, the applicable law is the law governing the security agreement as determined by the conflict-of-law provisions generally applicable to contractual obligations.” 11. The impact of the insolvency of a licensor or a li- censee on a security interest a. General The UNCITRAL Legislative Guide on Insolvency Law (the “Insolvency Guide”) deals with all issues that are typically dealt with in insolvency law, including the treatment of se- curity interests in insolvency proceedings, The Guide in chapter XII contains a comprehensive, self-contained sum- mary of the discussion in the Insolvency Guide of the treat- ment of security interests in insolvency proceedings Both Guides generally deal also with security interests in intellectual property rights, without placing much emphasis on all relevant issues at the intersection of secured transac- tions and insolvency law, on the one hand, and intellectual property law, on the other hand. The emphasis on those is- sues is given in the Supplement. Thus, chapter XII of the Supplement complements chapter XII of the Guide and deals ‘ee recommendation 223, “Seo recommendation 248, See recommendation 216. 630 © 2011 Thomson Reuters # UCC Law Journal # Vol. 43April 2011 InTeLte with th securit ment i Insolve More discus: of inso fully p fall in contin which credite Insolve The autom event ( unenfé the in: conta) autom proper situati traden b. Typi insolv contra insolv. falls i admin lose it: Ina (or an chain and n catast includ how s referri e20143 #2 seurity to the i-party dlvency law of single ‘inciple rs and aatters eeds).” nutual rsecu- In the dle law ‘mined ible to rali- w (the pieally of se- ide in Usum- treat- ests in phasis ansae- ectual ose is- of the Ideals 2011 INTELLECTUAL PROPERTY FINANCING UNDER UNCITRAL, with the impact of insolvency of a licensor or a licensee on a security interest in that party’s rights under a licence agree- ment in a way that is consistent with the UNCITRAL Insolvency Guide. More concretely, the Insolvency Guide contains extensive discussion and recommendations with regard to the impact of insolvency proceedings on contracts that have not been fully performed by both parties. A licence agreement could fall in that category and the insolvency administrator may continue or reject it.” The Supplement discusses ways in which the counterparty of the insolvent debtor and secured creditors may protect their interests (in line with the Insolvency Guide). The Insolvency Guide also discusses at length contractual automatic termination clauses upon the occurrence of an event (such as insolvency) and provides that they should be unenforceable as against the insolvency administrator and the insolvent debtor.” The Supplement includes references contained in the Insolvency Guide to systems that uphold automatic termination clauses for creators of intellectual property to be able to control their property, for example, in situations where insolvency may affect not only the value of trademarked goods but also of the trademark itself. b. Insolvency of the licensor ‘Typically under insolvency law, where a licensor becomes insolvent, the insolvency administrator may reject any contract that may not have been fully performed by both the insolvent debtor and its counterparty. If a licence agreement falls into that category and the licensor’s insolvency administrator rejects it, a licensee and any sub-license will lose its rights. In addition, a secured creditor of the licensor or licensee (or any sub-license) will lose its security. In the case of a chain of licensees that have invested in further developing and marketing the licensed products, this result can be catastrophic. To address this problem, the Supplement includes some discussion and makes mild suggestions as to how secured creditors and licensees may be protected by referring to approaches taken in various States. "Seo the Insolvency Guide, recommendations 72 and 73. See The Insolvency Guide, recommendation 71 ©2011 Thomson Reuters # UCC Law Journal # Vol 43Apri 2011 631UNIFORM CoMMERCIAL Cope Law JouRNAL [VoL. 43 #2] For example, the secured creditor of the licensor may take a security interest in the intellectual property right itself and, if the licensor's insolvency administrator rejects the licence agreement, the licensor’s secured creditor may seek to enforce its security right in the intellectual property itself. As the intellectual property right will be part of the estate, the security interest will be subject to the stay and the other limitations imposed in the case of insolvency proceedings (for example, avoidance, preferences).”” Similarly, to protect itself from the consequences of a rejec- tion of the licence agreement by the licensor’s insolvency administrator, the licensee’s secured creditor may refuse to extend credit to the licensee unless the licensee obtains a se- curity interest in the licensed intellectual property right. In such a case, if the licensor’s insolvency administrator rejects the licence agreement, the licensee can enforce its security interest in the licensed intellectual property (subject to the limitations on the enforcement of security interests imposed by insolvency law). ‘Some States have introduced legislation to protect invest- ments of licensees in the case of the licensor's insolvency. For example, in some States, a licensee may be given the right to continue to use the licensed intellectual property right even after the rejection of the licence agreement by the licensor’s insolvency administrator, provided that the li- censee continues paying royalties and otherwise performing the licence agreement. This approach balances the interest of the insolvent licensor to avoid burdens under the licence agreement and the interest of the licensee to protect its investment in the licensed intellectual property right. In addition, in other States, licence agreements may not be subject to rejection under insolvency law because: (a) they are explicitly excluded from the list of contracts that may be rejected; (b) exclusive licences are treated as property rights that are not subject to rejection; (c) licence agreements are not executory contracts subject to rejection as the licensee has performed its obligation by granting the licence; or (d) they are registered in the relevant intellectual property registry. Moreover, in other States, the licence does not depend on See chapter XII of the Guide and the treatment of secured creditors under the Insolvency Guide, Annex I 632. © 2011 Thomson Reuters # UCC Law Journal « Vol. 43April 2011 Invent the el cordir cense: prope withd enrict e Ifa istrat retair as ay and, right will ¢ Iti the Li rity i licenc use t! secur grant ties, ‘The prote tion Th the | term conti exer defa cense whic impo licen the | there prior