IP assets can serve as loan collateral
By Jaime Rich Vining
Many businesses are realizing the tangible value of their intangible intellectual property in the face of a downswing economy and economic hardships caused by the pandemic.
The trademarks, copyrights and patents registered by a business may indeed be among some of its most valuable corporate assets. The World Intellectual Property Office (WIPO) has estimated that intangible assets now represent 80 percent of corporate value. Famous trademarks—such as Google, Apple, Samsung and Apple—are valued in the billions of dollars. Even current accounting practices require intellectual property to be listed on balance sheet at valuation. As one court put it, “theoretically and perhaps practically as well, this hard-earned [trademark] right is as important as money in the bank.”
But, when forced between paying rent or maintenance fees to the U.S. Patent & Trademark Office (USPTO), the question remains why businesses should renew their trademark registrations now.
One primary consideration, particularly for those companies seeking financing to cover cash flow shortfalls for operating expenses, is that these intellectual property assets can serve as security for debt to access capital and to enhance credit. Lending institutions around the world are largely extending their business to offer loans on the basis of intellectual property. In cases where a borrower pledges its patents, trademarks or copyrights, both the collateral pool and the likelihood of a successful loan increase.
For example, in 2006, Ford Motor Company pledged its famous Ford blue logo design, along with various other assets (which it reclaimed in 2012), as part of a financial bailout. Ford Chairman William C. Ford Jr. was quoted in the New York Times as saying, “Getting the blue oval back was both a relief and a validation of the comeback. …We were pledging our heritage.”
The main challenge in using intellectual property as collateral is risk. After applying for a loan, a borrower may be required to produce a detailed schedule of its intellectual property assets as part of the due diligence process. A prudent lender will likely also carry out an independent audit to verify the assets owned and/or licensed by the borrower and to mitigate risks. All relevant registrations will be evaluated to ensure that they are current and the borrower may remain responsible for maintaining the leveraged IP registrations. Trademarks and patent registrations will lapse permanently if not timely renewed. Similarly, a failure to defend valuable IP assets by taking legal action against infringers may lead to the same outcome.
Obtaining a security interest in any collateral is governed by the Uniform Commercial Code (UCC), which has been adopted with minor differences in all states and the District of Columbia. The security interest “attaches” to the pledged assets upon execution of a lending agreement between a creditor and a debtor, and the security interest must be “perfected” to grant the creditor priority over competing creditors concerning the same asset.
The USPTO will also accept the recording of any instrument affecting title to a registered trademark. Such documents may be recorded “in the public interest in order to give third parties notification of equitable interest or other matters relevant to the ownership of the mark.”
Filing with the USPTO, however, does not preempt UCC filing requirements for the perfection of a security interest in a trademark, but it is a best practice for a lender to record a security interest with the USPTO in any registered trademark or pending trademark application. With respect to copyrights, Section 205 of the Copyright Act governs the recordation of transfers of copyright ownership and provides that any transfer of copyright ownership may be recorded in the Copyright Office. The Copyright Act defines a transfer of copyright ownership broadly as an “assignment, mortgage, exclusive license, or any other conveyance, alienation, or hypothecation of a copyright.”
Thus, even in times of economic uncertainty, maintenance of these corporate assets remains critical. When considering leveraging intellectual property assets as a source of financing and working capital, businesses should consult with a qualified and experienced IP attorney for guidance on issues related to registration and maintenance.
Jaime Rich Vining of Miami’s Friedland and Vining is a Florida Bar-certified Intellectual Property attorney. She practices law at the intersection of IP, the internet and entertainment. Contact her at firstname.lastname@example.org