The purpose of this article is to bring awareness to important Uniform Commercial Code (UCC) issues involved in performing due diligence for intellectual property assets in the context of mergers, acquisitions, licensing, and financing transactions. A company engaged in a business transaction, whether as a purchaser, seller, underwriter, licensor, investor, bank, or venture capitalist, will require an assessment of the assets and liabilities associated with the transaction. This assessment may be needed to satisfy applicable statutory and regulatory requirements, including disclosure obligations under the federal securities laws. The process of gathering information to assess the benefits and risks
associated with a transaction is called “due diligence.” Intellectual property has become an important aspect of transactional due diligence.
Different companies often raise different types of intellectual property concerns and require different levels of due diligence. While there is no set procedure for conducting due diligence, the acquiring company typically requests and obtains from the target company a list of all patents, patent applications, registered trademarks and services marks, trademark and service mark applications, registered and unregistered copyrights, U.S. and foreign, together with copies of all current and expired licenses, liens and security interests concerning this intellectual property. For material intellectual property assets, the acquiring company should conduct its own independent investigation to verify that the target company has ownership and clear title to these intellectual property assets.
It is critical that both state UCC records as well as the applicable federal records be searched in conducting the due diligence. With respect to federal records, the U.S. Patent and Trademark Office (PTO) administers the rules and regulations of patents under the Patent Act, as well as trademarks under the Lanham Act. The Copyright Office administers the rules and regulations of copyrights under the Copyright Act. The interrelationship of both state UCC and federal laws in intellectual property due diligence can pose difficult and somewhat complex legal issues.
Article 9 of the UCC governs security interests in “general intangibles,” namely patents, trademarks, copyrights, and other intellectual properties. Article 9 of the UCC was extensively revised in recent years. Former Section 9-104(a) provided that Article 9 is inapplicable to “security interests subject to any statute of the United States to the extent that such statute governs the rights of parties to and third parties affected by transactions in particular types of property.” The corresponding provision of Revised Article 9, Section 9-109(c)(1) more clearly states “this Article does not apply to the extent that…a statute, regulation, or treaty of the Untied States preempts this Article.” The former Article 9 also contained another relevant provision, Section 9-302(3), which stated that where a federal statute provided for filing security interests, the UCC filing is rendered inoperative. The corresponding provision of Revised Article 9 is Section 9-311(a)(1), which provides that “…the filing of a financing statement is not necessary or effective to perfect a security interest in property subject to…a statute, regulation, or treaty of the United States whose requirements for a security interest’s obtaining priority over the rights of a lien creditor with respect to the property preempt subdivision (a) of Section 9- 310.” Accordingly, the relevant federal patent, trademark or copyright statute must be analyzed to determine whether the UCC or federal law controls the perfection of security interests, liens and licenses.
The statutory authority for recording assignments at the PTO is 35 U.S.C. Section 261 for patents, and 15 U.S.C. Section 1060 for trademarks, both of which substantively provide in part: “An assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgage for a valuable consideration, without notice, unless it is recorded in the PTO within three months from its date or prior to the date of such subsequent purchase or mortgage.” Both the Patent Act and the Lanham Act fail to mention anything about the priority of security interests, judgment liens, or licenses.
Courts have uniformly held that the UCC recording provisions are not preempted by the patent statute. The reason is that the patent statute adheres to strict concepts of title in order to protect the ownership of new inventions, and accordingly the PTO does not consider a security interest, lien, or license to be an “assignment, grant or conveyance” subject to the mandatory patent recording provision.1 In fact, it has been held that filing with the state, not the PTO, perfects a security interest in patents as against a subsequent lien creditor but not against a subsequent bona fide purchaser.2 And further, that filing a financing statement at the PTO does not perfect a security interest in the trademark under UCC Article 9.3
On the contrary, copyright ownership and title issues in the U.S. can usually be resolved by searching solely in the U.S. Copyright Office rather than the UCC. The Copyright Act sets forth the method of executing transfers of copyright ownership, and clearly sets forth a priority scheme for conflicting transfers and provides that recordation of a document in the Copyright Office “gives all persons constructive notice of the facts stated in the recorded document.”4 The extent to which the Federal Copyright Act regulates transfers, including security interests, leads to the conclusion that it preempts state methods of perfecting security interests in copyrights. Section 205 of the Copyright Act states that a “transfer of copyright ownership” is an assignment, mortgage, exclusive license, or any other conveyance, alienation, or hypothecation of a copyright or of any of the exclusive rights comprised in a copyright, whether or not it is limited in time or place of effect, but not including a nonexclusive license. In National Peregrine, Inc., the Court held that the proper place for perfecting a security interest in copyrights is the U.S. Copyright Office.5 However, the U.S. Bankruptcy Court for the Northern District of California found that, with respect to an unregistered copyright, a security interest was perfected by a UCC financing statement.6
Accordingly, it is critical that the acquiring company determine the controlling authority, UCC or federal statute, and search in the applicable records to verify ownership and clear title to patent, trademark and copyright related assets.
Unfortunately, a recent case has made the UCC search process, for all types of property, far more complex.
Last summer, a U.S. Court of Appeals’ decision held that a federal tax lien filed using an abbreviation of the debtor’s legal name trumped a lien filed by a bank using the debtor’s exact legal name.7 The Court reasoned that a federal tax lien is valid if a “reasonable and diligent” search would find the lien.
As a result of this decision, when searching UCC records for financing statement filings concerning a corporation, LLC, or any entity, the search must include “similar names.” For example, if you are searching for “ABC Plumbing and Heating”, you will need to also search “ABC Plumbing & Heating.” This is difficult, because some states searching systems may disregard characters such as the “&” and occasionally even “and.” The safest search, although far more time consuming, would be to search “ABC.” A compromise might be “ABC Plumbing.”
The bottom line is that searching for UCC filings is now so complex that it should only be done by professional search services or a major title company. The secured party may also want to consider a UCC Insurance Policy, which insures the security interest filing. These policies are available from major title insurance companies.