Task Force Introductory Report and Background Considerations Model Intellectual Property Security Agreement

Task Force Introductory Report and Background Considerations Model Intellectual Property Security Agreement Contents 1 Introduction... 850 1.1 Purpose... 851 1.2 Limited Scope... 852 1.2.1 Loan Agreement... 852 1.2.2 Single Parties... 852 1.2.3 Stand-Alone Agreement... 852 1.2.4 U.S. Intellectual Property Only... 853 1.2.5 Broad Grant... 853 1.2.6 Strict Representations and Covenants... 853 2 Intellectual Property Basic Concepts and Terminology... 854 2.1 Overview... 854 2.1.1 IP Assets... 854 2.1.2 United States vs. Foreign Intellectual Property... 854 2.1.3 Registered vs. Unregistered Intellectual Property... 855 2.1.4 Value of Intellectual Property... 855 2.2 Copyrights... 855 2.2.1 What Law Governs?... 855 2.2.2 What Is a Copyright?... 855 2.2.3 Registration... 856 2.2.4 Assignment and Transfer... 856 2.2.5 Duration... 857 2.3 Patents... 858 2.3.1 What Law Governs?... 858 2.3.2 What Is a Patent?... 858 2.3.3 Obtaining a Patent... 858 2.3.4 Assignment and Transfer... 859 2.3.5 Duration... 859 2.4 Trademarks... 859 2.4.1 What Law Governs?... 859 2.4.2 What Is a Trademark?... 859 2.4.3 Registration... 860 849

850 The Business Lawyer; Vol. 71, Summer 2016 2.4.4 Assignment and Transfer... 860 2.4.5 Duration... 861 2.5 Trade Secrets... 861 2.5.1 What Law Governs?... 861 2.5.2 What Is a Trade Secret?... 862 2.5.3 Maintaining a Trade Secret... 862 2.5.4 Duration... 863 2.6 Domain Names... 863 2.6.1 What Law Governs?... 863 2.6.2 What Is a Domain Name?... 863 2.6.3 Registration... 863 2.6.4 Duration... 864 3 U.C.C. Article 9 Basic Concepts and Terminology... 864 3.1 Overview... 864 3.2 Security Interests... 864 3.3 Attachment and Title... 865 3.4 Perfection... 865 3.5 After-Acquired Collateral... 866 3.6 Priority... 866 3.7 Override of Anti-assignment Clauses... 867 3.8 Enforcement... 868 4 Intersection of Federal IP Law and U.C.C. Article 9... 868 4.1 Perfecting a Security Interest... 868 4.1.1 Which Law Applies?... 868 4.1.2 Preemption... 869 4.2 Reasons for Dual Filing... 871 4.2.1 Copyrights... 871 4.2.2 Patents and Trademarks... 872 4.3 Assignment Language vs. Granting Language... 873 4.4 Federal Recording vs. U.C.C. Filing Systems... 875 4.5 Security Interests in Non-assignable IP Licenses... 875 4.6 IP License Considerations... 877 4.6.1 Article 9 Licensee in Ordinary Course... 878 4.6.2 Exclusive Copyright Licenses... 878 4.6.3 Nonexclusive Copyright Licenses... 879 4.6.4 Patent and Trademark Licenses... 880 4.7 Enforcement of IP Security Interests... 880 5 Drafting Process... 881 I. INTRODUCTION Once a kind of collateral handled only by specialists, intellectual property (IP) now occupies a significant position in commercial finance arrangements. Almost

Model IP Security Agreement Introductory Report 851 every business has IP 1 rights, whether as an owner or as a licensee, ranging from off-the-shelf software products to patents on the next big advance in biotech. The business name or website address can function as a trademark, and copyrights can exist in just about any written text or artwork, including marketing materials, employment manuals, and computer code. A business will often use its intellectual property as collateral for loans and other financing arrangements. In venture capital financing, intellectual property such as a software program or a patent application may be the debtor s only valuable asset. Film financing may be based on the value of the copyrighted script or film treatment. In other contexts, a loan may finance the debtor s acquisition, development, or commercialization of particular IP assets. In almost all syndicated credit facilities, a debtor s intellectual property is included as a matter of course in an all-assets collateral package, often without particular reliance on the value of the intellectual property or its usefulness in the debtor s business. Although these financing arrangements are not unusual, they may still present hurdles for the parties counsel. Many lawyers who regularly represent lenders and secured parties are familiar with Article 9 of the Uniform Commercial Code (U.C.C.) 2 but have only a vague understanding of the laws applicable to intellectual property. On the other hand, many IP lawyers are knowledgeable about the laws covering their clients IP assets but have avoided dealing with the U.C.C. since law school. U.C.C. lawyers and IP lawyers speak different languages; negotiation of IP collateral arrangements can be treacherous without a translation manual. 1.1 PURPOSE The accompanying Model Intellectual Property Security Agreement (the Model Agreement) attempts to bridge the gap between U.C.C. and IP lawyers by offering and explaining provisions the lawyers should consider in documenting a secured loan when the collateral includes intellectual property. The Model Agreement was produced by a task force (the Task Force) organized by the Commercial Finance and Uniform Commercial Code Committees of the American Bar Association Business Law Section. Some model agreements can be used as forms, with only minimal changes to adapt them for particular transactions. The types of intellectual property and their importance for any transaction are so varied, however, that a one-size-fits-all approach will not work. The Model Agreement is therefore largely a teaching tool, supplying basic provisions for an idealized hypothetical transaction that involves solely 1. In this report and the footnotes to the Model Agreement, we generally use IP as an abbreviation for intellectual property when used as an adjective. 2. Unless otherwise indicated, all references to the U.C.C., the Uniform Commercial Code, or any Article of the U.C.C. are to the Official Text approved by the American Law Institute and the Uniform Law Commission most recently before the date of this report. References to earlier versions of the Uniform Commercial Code mean the Official Text most recently approved and in effect in the year stated. References to Former Article 9 refer to the Official Text as approved and in effect immediately prior to July 1, 2001.

852 The Business Lawyer; Vol. 71, Summer 2016 IP collateral. The footnotes address issues that often arise in practice and suggest modifications that may be negotiated to fit the needs of the parties in various real-world situations. To assist users of the Model Agreement, this report summarizes some basic U.C.C. and IP concepts and terminology, and briefly discusses some issues that often arise when the two bodies of law interact. We have tried to explain, or at least identify, some of the most relevant legal issues, but neither the Model Agreement nor this report is intended as an exhaustive treatise on IP law or U.C.C. Article 9, Secured Transactions. The summaries in section 2 (IP basics) and section 3 (U.C.C. basics) merely point out the most salient and topical issues. The Model Agreement should be used with care; particular transactions may raise legal or practical issues making some provisions inappropriate or incomplete. 1.2 LIMITED SCOPE For simplicity and clarity, the Task Force decided to limit the scope of the Model Agreement and to make certain assumptions about the hypothetical secured transaction. The most important of these limitations and assumptions are: 1.2.1 Loan Agreement The Model Agreement assumes that the IP assets are being pledged as collateral for loans made under a separate loan agreement that will provide most of the substantive terms of the parties agreement. The Model Agreement focuses on the IP collateral, and defers to the loan agreement for more general terms to be negotiated by the parties, such as the matters that will be treated as material and the events and circumstances that will constitute events of default. 1.2.2 Single Parties The Model Agreement contemplates a single U.S. borrower that owns the collateral and a single lender (which could be a single collateral agent acting on behalf of a group of lenders). 1.2.3 Stand-Alone Agreement The Model Agreement deals solely with IP collateral and the directly associated rights and property. We do not, however, intend to perpetuate the historical practice of using both a regular security agreement and a separate IP security agreement for a single transaction. We believe that the historical bifurcated practice grew in part from the U.C.C. lawyer s limited knowledge of IP law and the IP lawyer s limited understanding of U.C.C. Article 9. To promote efficiency, eliminate inconsistent language, and conform terminology, we recommend including non-ip and IP assets in a single security agreement.

Model IP Security Agreement Introductory Report 853 If the transaction documents include a single security agreement for all types of collateral, then the IP-specific provisions of the Model Agreement can be folded into it, replacing or supplementing the general terms. 1.2.4 U.S. Intellectual Property Only Intellectual property is recognized under local law on a country-by-country basis. In light of the global nature of many businesses, lenders usually want to include foreign IP assets owned by the debtor, such as counterparts of U.S. patents issued in other nations or trademarks registered in other countries, in the collateral package. However, the legal regimes for establishing, protecting, and enforcing liens on intellectual property vary widely by country. While the Model Agreement includes foreign IP assets in the collateral package (through broad granting language covering all the debtor s IP assets), the Task Force decided to leave for another day contractual provisions to establish, protect, and enforce the lender s rights in foreign intellectual property. Lenders should consult with local counsel as to the requirements for liens on foreign intellectual property. 1.2.5 Broad Grant The Model Agreement covers virtually every kind of intellectual property that a debtor might have, regardless of the intellectual property s value or its importance to the debtor s business or the secured party s credit decision. To the extent that certain types of intellectual property are not important for the transaction, parts of the Model Agreement can be deleted. For example, if patents form an insignificant part of the collateral, then provisions applicable to patents can be deleted or patents can be expressly excluded from the definition of Intellectual Property. The Model Agreement also permits the parties to list property (either by class or item-by-item) that is to be excluded from the collateral package. 3 1.2.6 Strict Representations and Covenants The Model Agreement s representations and warranties, scheduling obligations, and covenants are relatively strict, with few limitations. The result is a document that appears to read more favorably to the lender than the borrower, in the sense that the borrower will be more likely to breach a representation or covenant due to the absence of wiggle room. The Task Force took this approach for instructional purposes because it allows the Model Agreement to present straightforward provisions that highlight the issue being addressed, uncluttered by qualifications. The first draft in a loan transaction is likely to favor the lender in any event, because counsel for the lender generally drafts the loan agreement. The Model Agreement includes footnotes explaining how and when a 3. See section 1.2.1 ( Scheduled Excluded Property ) of the Model Agreement.

854 The Business Lawyer; Vol. 71, Summer 2016 borrower may want to delete particular provisions, or modify them to include materiality, knowledge, or other limitations. 2INTELLECTUAL PROPERTY BASIC CONCEPTS AND TERMINOLOGY 2.1 OVERVIEW 2.1.1 IP Assets Intellectual property is a catchall term for various types of intangible rights recognized under federal, state, or foreign law. Different types of intellectual property are created and obtained in different ways, have different characteristics, and are subject to different laws. The most common types of U.S. statutory intellectual property are copyrights, patents, and trademarks. Copyrights 4 protect works of creative expression such as novels, motion pictures, music, or artworks; patents 5 protect inventions; and trademarks 6 and service marks protect the exclusive rights to use names, images, or slogans to identify products and services. Although trade secrets are not separately protected by statute, they also constitute intellectual property and can take many forms (such as customer lists, recipes, or production know-how). Some types of intellectual property are specialized, in that they pertain only to particular industries or particular assets, and may be subject to different or additional requirements. 7 Such specialized types of intellectual property are not excluded from the granting language and are thus included in the collateral package, but for simplicity the Model Agreement does not contain any special representations or covenants for those assets or the industries in which they are used. Sections 2.2 to 2.6 below briefly summarize some of the basic characteristics of different types of intellectual property. 2.1.2 United States vs. Foreign Intellectual Property Intellectual property rights are territorial and protected on a country-by-country basis. U.S. patents, for example, are issued by the United States Patent and Trademark Office (PTO) and provide the right to exclude others from practicing the invention claimed in the patent in the United States only. Companies with worldwide businesses often have large IP portfolios consisting of registrations in multiple countries. U.S. companies can file for IP registrations in foreign IP filing offices and foreign corporations can register intellectual property in the United States. Local counsel is generally engaged to prosecute IP filings outside an applicant s home jurisdiction. 8 4. See infra section 2.2. 5. See infra section 2.3. 6. See infra section 2.4. 7. Examples are plant variety patents (patents for distinct and new varieties of asexually reproduced plants that are not tuber-propagated or found in an uncultivated state); mask works (semiconductor chip product designs, which are protected under copyright laws); and vessel hull configurations (original designs of vessel hulls, which are protected under copyright laws). 8. As noted in supra section 1.2.4, the Model Agreement includes foreign intellectual property in the collateral, but does not attempt to provide for protecting or enforcing that lien under non-u.s.

Model IP Security Agreement Introductory Report 855 2.1.3 Registered vs. Unregistered Intellectual Property Copyrights and trademarks can be registered or unregistered. (U.S. patents can only arise upon issuance by the PTO.) Copyright protection arises automatically when the copyrightable work is fixed in a tangible medium of expression, but copyrights can be registered in the United States Copyright Office. Trademarks may also arise under common law through use of the mark in commerce. In the United States, trademarks can be registered nationally in the PTO or locally in most states, usually through the secretary of state s office. 9 While IP rights can exist in unregistered copyrights and trademarks, registration provides certain legal advantages, and registered intellectual property is often perceived as more valuable. (The benefits of registering copyrights and trademarks are discussed in sections 2.2.3 and 2.4.3 below.) 2.1.4 Value of Intellectual Property IP rights tend to be integral to the particular business in which they are used. Accordingly, their value apart from the business as a whole can be difficult to calculate. For these reasons, intellectual property may not be assigned much value in determining how much debt a company s assets can support. Nevertheless, it is risky for a lender to leave intellectual property outside the collateral package if it hopes to sell the debtor s business as a going concern in the event of a foreclosure. 2.2 COPYRIGHTS 2.2.1 What Law Governs? The genesis of copyright law in the United States is Article 1, Section 8 of the U.S. Constitution, which provides that Congress shall have the power... [t]o promote the Progress of Science and Useful Arts, by securing for limited times to Authors and Inventors, the Exclusive Right to their respective Writing and Discoveries. Copyright protection is provided under the U.S. Copyright Act. 10 2.2.2 What Is a Copyright? Copyrights apply to original works of authorship fixed in a tangible medium of expression, including works of poetry and prose, motion pictures, musical compositions, sound recordings, paintings, drawings, sculptures, photographs, law. Different countries approaches to IP collateral vary greatly. See generally UNITED NATIONS COMM N ON INT L TRADE LAW, UNCITRAL LEGISLATIVE GUIDE ON SECURED TRANSACTIONS: SUPPLEMENT ON SECURITY RIGHTS IN INTELLECTUAL PROPERTY (2010), http://www.uncitral.org/uncitral/uncitral_texts/security/ipsupplement.html. 9. Although some trademarks and other IP assets may be recognized, registered, and/or regulated under the laws of some states, this report generally focuses on the legal issues raised by the pledge of IP property that is created, registered, and/or regulated under federal law. 10. 17 U.S.C. 101 1332 (2012). Some pre-1976 sound recordings, however, are excluded from the Copyright Act requirements, and thus possibly governed by state law, until 2067. Id. 301(a).

856 The Business Lawyer; Vol. 71, Summer 2016 computer software, and other works. 11 Copyright protects only the expression of an idea, and not the idea itself. 12 For that reason, there can be many ways of expressing the story of star-crossed lovers from feuding factions, i.e., the overall plot line of Romeo and Juliet, without infringing the copyright in Shakespeare s play (even if his copyright were still in force). A copyright holder has the exclusive right to: reproduce the copyrighted work; prepare derivative works based upon the copyrighted work; distribute copies of the copyrighted work; and display or perform the copyrighted work publicly. 13 A copyright arises in favor of a human author unless it is a work for hire. Works for hire include works prepared by an employee in the course of his or her employment and certain works prepared on commission or special order. 14 The hiring or commissioning party is considered the author of a work for hire. Most standard form employment agreements state that copyrightable works created by the employee in the scope of employment are works for hire and, as a back-up, also contractually obligate the employee to assign to the employer the copyright in all such works. 2.2.3 Registration Because a copyright automatically attaches to a work of authorship when the work is reduced to tangible form, it is not necessary for the work to be either published or registered with the Copyright Office. Generally, however, registration of the copyright is a prerequisite to the right to sue for infringement. 15 Remedies for infringement of copyright include actual damages, statutory damages, attorney s fees, injunction against infringement, recovery of the infringer s profits, and seizure of copies. 16 In general, statutory damages and attorney s fees are available only for infringements occurring after the copyright is registered. 17 2.2.4 Assignment and Transfer The ownership of a copyright may be transferred, in whole or in part, by any means of conveyance or by operation of law, and may be bequeathed by will or pass under the applicable laws of intestate succession. 18 A written instrument or memorandum of the transfer must be duly signed by the transferor, unless own- 11. Id. 102(a) (listing examples of types of works of authorship). 12. Id. 13. Id. 106. 14. Id. 101. 15. Id. 411. 16. Id. 502 504. 17. Id. 412. 18. Id. 201(d)(1).

Model IP Security Agreement Introductory Report 857 ership is transferred by operation of law. 19 A signed transfer instrument may be recorded in the Copyright Office. If the copyright has been registered and the transfer instrument identifies the work by title or registration number so that, after the document is indexed, it would be revealed by a reasonable search under the title or registration number, the recorded document will give all persons constructive notice of the facts stated therein. 20 Any assignment, mortgage, exclusive license or other conveyance, alienation, or hypothecation of a copyright (or any of the exclusive rights comprised in a copyright) is a transfer of copyright ownership as defined in the Copyright Act and will be subject to these transfer and recording provisions. 21 The Copyright Act provides that a transfer of copyright ownership will prevail over a later conflicting transfer if the first transfer is properly recorded 22 in the Copyright Office (i) within one month after the effective date of the transfer (or within two months if the transfer is executed outside the United States) and (ii) at any time before the later transfer is recorded. Otherwise, the later transfer will prevail, if it is properly recorded and if the later transferee takes its copyright interest in good faith, for valuable consideration (or for a binding promise to pay royalties), and without notice of the first transfer. 23 2.2.5 Duration Copyrights have a limited, albeit lengthy, duration. The copyright term depends on several factors, including when the work was first published or renewed. 24 No renewal or maintenance payments are necessary to keep a copyright (or registration) in force for its full term. The author of a copyrighted work (other than a work for hire) who has transferred or licensed the copyright on or after January 1, 1978, has the non-waivable right to terminate the transfer (i.e., to rescind the transaction) during the five-year period beginning thirty-five years after the transfer or license. 25 This means that authors and their heirs retain a residual interest in their copyrights, even if they have sold them or granted long-term licenses. This right to recapture copyright ownership could override assignments, licenses, and liens previously granted by the author or the author s heirs. 26 19. Id. 204. 20. Id. 205(a), (c). A transfer of copyright ownership (or other document pertaining to a copyright) can be recorded in the Copyright Office even if the copyright has not been registered, but the recording will only give constructive notice if it relates to a registered copyright. Note that identifying the copyright only by title may not satisfy the requirements for constructive notice if there are numerous registered works with the same title and many recorded documents referring to the title. 21. Id. 101. 22. For convenience, this report sometimes uses the term properly record to mean that the relevant document is recorded in the Copyright Office in the form and manner required to give constructive notice of the facts stated therein. 23. Id. 205(d). For a recorded transfer to prevail over another transfer, the recording must give constructive notice, which can only happen if the copyright is registered. See supra note 20. Thus, only documents pertaining to registered copyrights can prevail under these rules. 24. 17 U.S.C. 302 305. 25. Id. 203(a). 26. Id.

858 The Business Lawyer; Vol. 71, Summer 2016 2.3 PATENTS 2.3.1 What Law Governs? Patent protection, like copyright, traces its roots to Article 1, Section 8 of the U.S. Constitution. 27 Today, the right to obtain and enforce patents is governed by the U.S. Patent Act. 28 There is no state patent law or any common law patent rights. 2.3.2 What Is a Patent? A patent is a right granted by the United States government permitting the inventor to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States 29 for a limited time in exchange for public disclosure of the invention when the patent is granted. Patents provide a competitive advantage during their term; after the expiration of a patent, anyone is free to use the invention. Only a patentee (the original owner or a successor-in-title) can bring an action for infringement. 30 2.3.3 Obtaining a Patent To obtain a patent, the inventor, or a person to whom the inventor has assigned (or is under an obligation to assign) the invention, files an application in the PTO. 31 An inventor s employer typically obtains and records a written assignment from the inventor in order to be recognized as the patent owner in the PTO. A patent application must contain the information necessary for the PTO examiner to determine if the invention is eligible for a patent. 32 Patent examinations are notoriously rigorous and patents can take years to issue. The attorney for the applicant prosecutes the patent application by responding to the PTO examiner s concerns and modifying the scope of the patent application until the PTO examiner is satisfied. During this patent prosecution process, the breadth of the invention initially described in a patent application is often narrowed in order to accommodate the examiner s concerns. If and when the examiner determines that the invention as then described meets all the requirements, the application is approved and the patent issued. 33 An application for a patent is generally kept in confidence by the PTO for eighteen months after its filing date. 34 Once a patent is issued, the invention is publicly available and will no longer be protectable as a trade secret. 27. See supra section 2.2.1. 28. 35 U.S.C. 1 390 (2012). 29. Id. 154(a)(1); see also id. 271(a) ( whoever without authority makes, uses, offers to sell, or sells any patented invention... infringes the patent ). 30. See id. 100(d), 281.35. 31. Id. 111, 118. 32. Id. 111 115. 33. Id. 131. 34. Id. 122.

2.3.4 Assignment and Transfer Model IP Security Agreement Introductory Report 859 A patent, patent application, or other interest in a patent can be assigned by a written instrument, and a patentee, applicant, or assignee may grant or convey all or part of its rights under the patent or application. 35 Any such assignment, grant, or conveyance of patent rights will be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the PTO within three months from its date or before the subsequent purchase or mortgage. 36 2.3.5 Duration A patent is generally valid for 20 years from its application date. 37 Maintenance payments are due periodically (at 3.5, 7.5, and 11.5 years after the issuance date) in order to continue the patent in force. 38 The validity of the patent can be challenged by third parties at any time by bringing an inter partes review in the PTO. 39 2.4 TRADEMARKS 2.4.1 What Law Governs? Trademarks are protected under U.S. federal law, common law in most states, statutes in some states, and international law. The federal law is the Lanham Act (also referred to as the Trademark Act). 40 2.4.2 What Is a Trademark? Trademarks are words, phrases, symbols, designs, or a combination thereof that identify and distinguish the source of one party s goods from those of others. 41 A trademark used in connection with services, rather than goods, is sometimes referred to as a service mark, and each may be referred to as a mark. 42 Trademark law protects consumers by making it easier to recognize a particular business, product, or service. 43 Trademark law also protects the trademark owner s valuable property rights in the mark and the goodwill associated with the consumer s recognition of the mark. 44 35. Id. 261. 36. Id. 37. Id. 154(a)(2). 38. Id. 41(b). 39. Id. 311. 40. 15 U.S.C. 1051 1141 (2012). 41. Id. 1115(a). 42. Id.; see also id. 1053. 43. J. THOMAS MCCARTHY, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION 5.1, 2.7 (4th ed. 2007) (as originally conceived the purpose of trademark law was to prevent fraud and deceit by unfair competition). 44. See, e.g., Inwood Labs. v. Ives Labs., 456 U.S. 844, 854 n.9 (1982) (an infringer deprives trademark owner of goodwill earned by owner s efforts and deprives consumers of ability to distinguish among competitors products).

860 The Business Lawyer; Vol. 71, Summer 2016 In the United States, trademarks can be registered if they are used in commerce. However, a company can reserve a trademark before actually offering products under that mark by filing an application to register it in the PTO on the basis of a bona fide intent to use the mark. 45 The mark must then be put into commercial use in interstate commerce within three years from the examiner s approval of the application. 46 2.4.3 Registration Registration is not required for trademark rights to attach to a mark that is used in connection with a business, product, or service. Registration of a trademark 47 in the PTO does, however, provide important advantages: constructive notice of a claim of ownership of the mark; a legal presumption of ownership of the mark and therefore the exclusive righttousethemarknationwideonorinconnectionwiththegoods/services listedintheregistration; the ability to bring an action concerning the mark in federal court; the use of the U.S. registration as a basis to obtain registration in foreign countries; the ability to record the U.S. registration with the U.S. Customs and Border Protection Service to prevent importation of infringing foreign goods; the right to use the federal registration symbol ; and listing in the PTO s online databases. 48 2.4.4 Assignment and Transfer A registered trademark can be assigned, but only along with the goodwill of the business in which the trademark is used (or with the goodwill of the part of the business connected with the use of and symbolized by the trademark). 49 A trademark for which an application to register has been filed can be assigned in the same way, except that an intent to use (ITU) application can only be assigned to a successor to the applicant s ongoing and existing business (or relevant part of that business) to which the trademark pertains. 50 The assignment 45. 15 U.S.C. 1051(b). 46. Id. 1051(d)(1) (2) (explaining the timing of usage and the extensions of time available). 47. The PTO maintains both a principal register and a supplemental register for trademarks. Some trademark applications may not meet the requirements for the principal register, but may be recorded in the supplemental register, which provides a lower level of protection. This report and the Model Agreement do not distinguish between the two, but use the term registered to refer to the principal register, unless otherwise specified. 48. See id. 1072, 1111, 1114(a), 1115(a), 1124. 49. Id. 1060(a)(1). 50. Id. 1060(a); 37 C.F.R. 3.16 (2015).

Model IP Security Agreement Introductory Report 861 must be in a signed writing and contain the information required by the PTO. 51 An assignment will be void against a subsequent purchaser for valuable consideration, without notice, unless the assignment (including the required information) is recorded in the PTO within three months after the date of the assignment or before the subsequent purchase. 52 Patent and trademark assignees may be subject to laws in addition to the recording provisions of the Patent Act or Lanham (Trademark) Act; for example, a new trademark owner may be subject to a license granted by the previous trademark owner, even if the license is not recorded and the new owner has no knowledge of the preexisting license. 53 2.4.5 Duration Trademark registration can theoretically remain effective as long as use of the mark continues in connection with the products and services claimed in the registration, periodic affidavits and declarations are filed when required, and the trademark is not abandoned. 54 A trademark can become abandoned if it is not used, and a federally registered trademark may be presumed to be abandoned after three consecutive years of non-use. 55 Trademark protection can also be lost if the trademark owner engages in naked licensing (i.e., not adequately monitoring the use of the mark by its licensees) or fails to take adequate steps to prevent unauthorized use by others. 56 For example, because the owners of the marks aspirin and escalator did not take steps to protect against infringements, the names ultimately became generic terms available for anyone to use. 57 2.5 TRADE SECRETS 2.5.1 What Law Governs? Trade secrets have traditionally been protected and enforced under state law. Virtually all states have adopted the Uniform Trade Secrets Act (U.T.S.A.) and many courts still refer to guidance under section 757 of the original Restatement of Torts or section 39 of the Restatement of Unfair Competition. As of May 11, 2016, federal law recognizes a cause of action for misappropriation of trade 51. 15 U.S.C. 1060(a)(3). 52. Id. 1060(a)(4). 53. See infra section 4.6.4. 54. 15 U.S.C. 1059(a), 1058(a) (b). 55. Id. 1127. If the registration is not challenged, however, the trademark will remain on the registry indefinitely, as long as the owner files an affidavit or declaration of use between five and six years after registration, and by the end of every ten-year period after registration. Id. 1058, 1059. 56. E.g., Eva s Bridal, Ltd. v. Halanick Enters., 639 F.3d 788 (7th Cir. 2011) (trademark owner must have quality control over licensee s use to maintain consistent quality, not necessarily high quality, of goods and services using the trademark); Barcamerica Int l USA Trust v. Tyfield Imps., Inc., 289 F.3d 589 (9th Cir. 2002) (trademark owner engaged in naked licensing and thus forfeited its rights in the mark, resulting in the cancellation of registration). 57. 15 U.S.C. 1064(3); Bayer Co. v. United Drug Co., 272 F. 505 (S.D.N.Y. 1821); Haughton Elevator Co. v. Seeberger (Otis Elevator Co.), 85 U.S.P.Q. 80 (Comm r Pat. 1850).

862 The Business Lawyer; Vol. 71, Summer 2016 secrets under the Defend Trade Secrets Act of 2016 (D.T.S.A.). 58 While virtually all states have adopted a variation of the Uniform Trade Secrets Act (U.T.S.A.), 59 many courts still refer to guidance under section 757 of the original Restatement of Torts or section 39 of the Restatement of Unfair Competition. 2.5.2 What Is a Trade Secret? Trade secrets are defined in the U.T.S.A. as information that derives independent value from not being generally known or readily ascertainable by proper means by others (the novelty test) and that is the subject of reasonable efforts to maintain its secrecy (the secrecy test). 60 If both tests are met, information such as formulas, patterns, programs, methods, devices, techniques, and processes are cited by the U.T.S.A. as potential trade secrets. Often information that would not qualify as a true trade secret because it fails to satisfy the novelty or secrecy test can be protected by contractual non-disclosure agreements or covenants not to compete from employees (if permitted under applicable state law). Unlike a patent, which permits the owner to exclude others from using the patented information, ownership of a trade secret does not prevent the independent development of the same information by others. Accordingly, a trade secret is only protected against misappropriation 61 the acquisition of a trade secret by improper means, 62 such as industrial espionage, breach of a confidentiality agreement, or theft by an employee. The U.T.S.A. does not, however, expressly prohibit a company s competitor from analyzing or reverse-engineering the company s product or process in order to use it in the competitor s own business; reverse engineering by itself is not considered improper means. 63 If a trade secret is incorporated into a product that will be publicly used or distributed, the owner may consider protecting it under patent law (if possible) rather than attempting to claim it as a trade secret. 2.5.3 Maintaining a Trade Secret Trade secrets cannot be protected by filing or registering them in any state or federal jurisdiction. Rather, the owner of a trade secret must take reasonable steps to maintain the secrecy of the information. In certain cases, those steps may include limiting access to the information to only those employees who have a need to know the information in the course and scope of their work, providing locks and other physical security to the location at which the information is held, or obtaining confidentiality agreements from vendors or contractors who must 58. 114 P.L. 153, 130 Stat. 376. The D.T.S.A. amends the Economic Espionage Act, 18 U.S.C. 1831 1839 (2012), which was formerly solely a criminal statute. Among other things, the D.T.S.A. creates a federal civil cause of action for trade secret misappropriation, in parallel with state law. See D.T.S.A. 2(f) ( Nothing in the amendments made by this section shall... preempt any other provision of law. ). 59. U.T.S.A. refers to the Uniform Trade Secrets Act with 1985 amendments. 60. U.T.S.A. 1(4). 61. Id. 3. 62. Id. 1(2). 63. Id. 1(1).

Model IP Security Agreement Introductory Report 863 use the trade secret in performing services for the owner. Additionally, the owner of a trade secret may sue to enjoin another from revealing or utilizing its trade secrets. Under the U.T.S.A. as adopted in most states, in an appropriate case the owner would be entitled to enjoin the use or distribution of the trade secret and would also be able to recover damages for misappropriation. 2.5.4 Duration A trade secret will last as long as the owner is able to maintain the secrecy of the information so that it does not become lawfully available to the public. 2.6 DOMAIN NAMES 2.6.1 What Law Governs? Ownership of domain names is governed by state common law. The use of domain names and websites may be subject to regulation under federal law, however, as well as rules established by international organizations, such as the Internet Corporation for Assigned Names and Numbers (ICANN). 2.6.2 What Is a Domain Name? A domain name is a part of the address of a website on the internet that helps a user to access the site. The complete address, including the domain name, is known as a URL, for Uniform Resource Locator. The domain name is the part of the address consisting of a single word, followed by a period and a short alphabetical indicator known as a top-level domain. For example, americanbar.org is a domain name and org is the top-level domain. Every computer or device on the internet has a unique internet address, consisting of a string of numbers, that allows it to connect with others. The domain name system allows more comprehensible letters and words to be associated with the numeric internet addresses. The creation, registration, and use of a domain name, along with the operation and maintenance of the website, generally involves an interlocking set of contracts among the owner, the domain name registrar, internet service providers, network operators, and the like. 2.6.3 Registration Domain names are registered with one of several registrars recognized by ICANN, and the registration can be transferred from one registrar to another. Most courts have considered a registered domain name to constitute intangible personal property, 64 although a few have held that domain names are contractual 64. See, e.g., Kremer v. Cohen, 337 F.3d 1024 (9th Cir. 2003) (under California law, a domain name is intangible personal property and can be subject to claim for conversion); Harrods, Ltd. v. Sixty Internet Domain Names, 302 F.3d 214 (4th Cir. 2002); Caesars World, Inc. v. Caesars-Palace.com, 112 F. Supp. 2d 502 (E.D. Va. 2000) (registered domain name is property subject to in rem action under Anti-Cybersquatting Consumer Protection Act); Schott v. McLear (In re Larry Koenig &

864 The Business Lawyer; Vol. 71, Summer 2016 rights. 65 The owner of a domain name may also have trademark rights in the name if it is used in marketing the owner s business. 2.6.4 Duration Registration is effective for the period provided in the registrar s contract for services. Ten years is a common period, and renewal is generally permitted. 3 U.C.C. ARTICLE 9 BASIC CONCEPTS AND TERMINOLOGY 3.1 OVERVIEW The U.C.C. as a whole is generally intended to simplify, clarify, and modernize the law governing various kinds of commercial transactions and to make that law uniform among the various jurisdictions. 66 One of the ways that U.C.C. Article 9 simplified commercial finance transactions was by collecting and consolidating various traditional but somewhat uncertain methods of using personal property as security. 67 The term security interest was created as a generic replacement for all those common law arrangements, including chattel mortgages, installment sales, title retention, conditional assignments, collateral assignments, and the like. 68 Since its creation in the mid-twentieth century, Article 9 has been revised several times to maintain its modern outlook, and was comprehensively revised in 2001. 69 In reality, Article 9 is quite complex, not necessarily uniform, and definitely not simple. The following is a brief overview of the Article 9 concepts that are most relevant in discussing issues affecting the use of IP assets (especially federally registered intellectual property) as collateral. Like the federal IP legal systems, U.C.C. Article 9 has its own terminology; both the differences and the unintended similarities can cause confusion when IP interests are used as collateral. 3.2 SECURITY INTERESTS Under Article 9, a debtor enters into a security agreement that grants a security interest in personal property collateral to a secured party, generally to secure the Assoc., LLC), No. 01-12829, 2004 Bankr. LEXIS 2311, at *1 (Bankr. M.D. La. Mar. 31, 2004) (domain name and contractual right to use name are property rights under Louisiana law); Sprinkler Warehouse v. Systematic Rain Inc., 859 N.W. 2d 527 (Minn. Ct. App. 2015) (domain names and copyright-protected material on websites are subject to garnishment). 65. See, e.g., Dorer v. Arel, 60 F. Supp. 2d 558 (E.D. Va. 1999) (registered domain name is not personal property that can be the object of a judgment lien); Network Solutions, Inc. v. Umbro Int l, Inc., 529 S.E.2d 80, 87 (2000) (registered domain name is not personal property subject to garnishment, but the product of a contract for services between the registrant and the registrar). 66. U.C.C. 1-103(a). 67. U.C.C. 9-101 cmt. (1972). 68. See id. 9-102 & note. 69. Revised Article 9 was approved in 1995 and effective in most states on July 1, 2001. The most recent amendments to Article 9 were approved in 2010 and became effective in most states on July 1, 2013.

Model IP Security Agreement Introductory Report 865 payment or performance of an obligation of the debtor to the secured party. 70 Article 9 honors substance over form; any transaction creating a security interest (regardless of how the interest may be described) is subject to Article 9 unless excepted. 71 3.3 ATTACHMENT AND TITLE A security interest attaches to, and becomes enforceable against, whatever rights the debtor has in the collateral described in a signed security agreement once value has been given; the title to the collateral is not necessarily determinative. 72 The security agreement must reasonably identify the collateral, but in most cases does not need to be specific, and can even use the collateral types defined in Article 9 (accounts, goods, general intangibles, inventory, etc.) 73 The security agreement can cover collateral acquired later by the debtor. 74 For example, the description of the collateral in the security agreement can be as general as all present and future copyrights of the debtor. 3.4 PERFECTION The secured party perfects its security interest in most kinds of collateral under Article 9 by filing an appropriate financing statement in the appropriate filing office in the applicable state or other jurisdiction determined under Article 9 s governing law rules. 75 Perfection helps protect the secured party s rights in the collateral against claims by other creditors. A financing statement must contain the names of the debtor and the secured party and must indicate the collateral. 76 In almost all cases, the financing statement need not describe the collateral specifically, and can even indicate only that the collateral consists of all the debtor s personal property (an all-assets filing). 77 If authorized by the debtor, the financing statement can be filed before the security interest is created. 78 Financing statements are indexed by the name of the debtor, not the nature or type of collateral; potential creditors need only search under the debtor s name to find any financing statements filed with respect to the debtor s personal property. 79 70. U.C.C. 9-102(a), 1-201(b)(35). 71. Id. 9-109. 72. Id. 9-203, 9-202. 73. Id. 9-108. 74. Id. 9-204. 75. See id. 9-301, 9-501. 76. Id. 9-502(a). 77. Id. 9-504, 9-108(c). Such a general all assets description will not, however, be effective in a security agreement to identify the collateral. 78. Id. 9-509(a). 79. Id. 9-519(c).

866 The Business Lawyer; Vol. 71, Summer 2016 3.5 AFTER-ACQUIRED COLLATERAL A filed financing statement is effective against the indicated collateral at the time the security interest attaches to the collateral, even if attachment comes after the financing statement is filed. 80 This means that a secured party can file a single financing statement covering present and future items of collateral, without having to refile or specifically describe after-acquired property. For example, if a security agreement covers the debtor s interests in all present and future patents, and the financing statement indicates all patents as the collateral, then the security interest will be enforceable against (i.e., will attach to) the debtor s rights in both those patents existing when the security agreement is signed and any patents issued after that date, even if the invention is created and the patent granted after the financing statement is filed. 3.6 PRIORITY Article 9 has extensive rules to determine which creditors have priority that is, the right to satisfy their obligations out of the collateral before other creditors. The priority rules depend on many factors, including the type of collateral, method of perfection, and the nature of the transaction. 81 Generally, however, and subject to several exceptions and conditions: A security interest has priority over a general unsecured claim. A perfected security interest has priority over an unperfected security interest. A perfected security interest has priority over the claims of a person (including a bankruptcy trustee) who becomes a lien creditor 82 after the security interest is perfected. 83 A perfected security interest has priority over a later-perfected security interest. 84 The most prominent exceptions to these rules are: A secured party who finances the debtor s acquisition of some kinds of tangible property or software may, by following certain procedures, have priority as to that property over an earlier-perfected security interest. 85 Third parties acquiring collateral subject to an existing security interest, including a buyer of goods in the ordinary course of business 86 and a li- 80. Id. 9-308(a), 9-502 cmt. 2. 81. See id. 9-317 9-339. 82. Id. 9-102(a)(52). 83. Id. 9-317(a). 84. Id. 9-322(a)(1). 85. Id. 9-103 (defining purchase-money security interest), 9-324 (priority of purchase-money security interest). 86. Id. 9-320, 1-201(a)(9).

Model IP Security Agreement Introductory Report 867 censee in the ordinary course of business, may take the collateral free of the security interest in certain circumstances. 87 3.7 OVERRIDE OF ANTI-ASSIGNMENT CLAUSES Article 9 overrides certain contractual restrictions on a debtor s ability to use certain intangible property as collateral. Many contracts contain anti-assignment provisions that prohibit a party from assigning its contract rights to a third party without the other party s consent, and provisions of state or federal law may prohibit assignment of governmental permits or licenses without the consent of the governmental authority. Such provisions often do not clearly distinguish between a party s absolutely assigning away its rights under contracts or permits and merely granting a security interest in those rights. Article 9 facilitates a debtor s ability to pledge these intangible assets by making certain anti-assignment provisions included in contracts or created by law ineffective to prevent the creation, attachment, perfection, or, in some cases, enforcement of a security interest in these assets. 88 The extent to which Article 9 overrides an anti-assignment clause depends in part on the nature of the collateral. 89 If the collateral is a right to payment from a third party (an account or payment intangible 90 ), an anti-assignment provision is ineffective to prevent a secured party taking a security interest in those rights and, in some circumstances, collecting payments in place of the debtor after default. 91 For collateral consisting of general intangibles 92 (a catch-all category of intangible assets that would include copyrights, patents, trademarks, software, IP licenses, and some other forms of intellectual property), the secured party can take a security interest in the debtor s rights in the general intangibles, despite an anti-assignment clause, but the secured party s enforcement rights will be significantly limited. Generally, without consent from the other party to the contract: The secured party cannot enforce the security interest against the other party; The other party does not assume any duty to the secured party; The other party does not have to recognize the security interest, render performance to the secured party, or accept performance by the secured party; and 87. Id. 9-321; see infra section 4.6.1. 88. Id. 9-406(d) (e), 9-408. 89. The nature of the transaction as a true sale or a secured payment obligation is also relevant in some cases. Id. 9-406(e), 9-408(b). 90. Id. 9-102(a)(2), (61). 91. Id. 9-406(a), (d). 92. Id. 9-102(a)(42).