Intellectual property rights are often used as security for loans from banks and others lending to or investing in a business. It is important to ensure that any security interests are comprehensively recorded and that the whole ‘package’ of rights is considered as the value of one asset in isolation may be limited.
Security over a trade mark, for example, may extend to domain names incorporating the trade mark and copyright in the trade mark, if it is a logo.
Practical Considerations
What should the security agreement say? When tangible assets are used as security, the loan agreement typically includes a right for the lender to enter premises and take possession of the assets if the borrower defaults. That approach will be of less use in the case of intellectual property (IP) rights, where the asset might be software operating on a computer hosted by a third party in another jurisdiction. It may be necessary to take other measures - such as placing a copy of the software with a trusted third party in ‘escrow’ - so that the lender can gain access to it.
Enforceable Rights
Procedural requirements differ from country to country. For example, in the UK security interests need to be recorded on company, patent and trade mark registers within strict time limits, or the security interests may not be enforceable. There is no official copyright register in the UK - although such registers do exist in other countries.
INTA Recommendations
In order to facilitate the use of IP as security, the International Trademark Association (INTA), which is the leading international trade mark organisation, has recently adopted a resolution containing recommendations to harmonise trade mark laws regarding the recording of security interests. These recommendations include a number of ‘common sense’ proposals, for example that agreements recording security interests should enable lenders to pay renewal fees in order to preserve trade mark registrations if the borrower becomes insolvent and ceases to do this.
INTA also recommends that regulatory formalities concerning the recording of trade marks should be kept to a minimum. For example, documents filed with trade mark registries should simply identify the security interest, the parties involved, the rights involved, a brief description of the nature of the security interest and its effective date. The INTA recommendations are an important and useful contribution towards harmonising procedures concerning use of IP as security.
Legal Mortgages
One way lenders typically seek to protect their interests is to simply take ownership of the IP assets involved by way of a ‘legal mortgage’. Under this type of arrangement, ownership of the IP assets is transferred to the lender and then licensed back to the borrower. Once the loan is repaid, the IP rights are transferred back to the borrower.
From the lender’s perspective, the advantage is that the security can be enforced without the need to obtain a court order or otherwise acquire ownership of the IP asset. However, a borrower should consider carefully the practical implications of this. It will need to continue to use IP rights to operate its business and so must ensure that it has sufficiently wide and exclusive rights to exploit - and possibly sublicense - the relevant IP rights during the term of the loan.
In summary, parties wishing to use IP as security should clarify which IP rights are involved, what the extent of the security interest is, how this will be perfected and what the commercial implications are. The INTA recommendations help clarify the key considerations in this area.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.