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
\nassociated with a transaction is called \u201cdue diligence.\u201d Intellectual property has become an important aspect of transactional due diligence.<\/p>\n
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.<\/p>\n
It is critical that both state UCC records as well as the applicable federal records be\u00a0 searched in conducting the due diligence. With respect to federal records, the U.S. Patent\u00a0 and Trademark Office (PTO) administers the rules and regulations of patents under the\u00a0 Patent Act, as well as trademarks under the Lanham Act. The Copyright Office\u00a0 administers the rules and regulations of copyrights under the Copyright Act. The\u00a0 interrelationship of both state UCC and federal laws in intellectual property due diligence\u00a0 can pose difficult and somewhat complex legal issues.\u00a0\u00a0<\/span><\/p>\n Article 9 of the UCC governs security interests in \u201cgeneral intangibles,\u201d namely patents,\u00a0 trademarks, copyrights, and other intellectual properties. Article 9 of the UCC was\u00a0 extensively revised in recent years. Former Section 9-104(a) provided that Article 9 is\u00a0 inapplicable to \u201csecurity interests subject to any statute of the United States to the extent\u00a0 that such statute governs the rights of parties to and third parties affected by transactions\u00a0 in particular types of property.\u201d The corresponding provision of Revised Article 9,\u00a0 Section 9-109(c)(1) more clearly states \u201cthis Article does not apply to the extent that\u2026a\u00a0 statute, regulation, or treaty of the Untied States preempts this Article.\u201d The former\u00a0 Article 9 also contained another relevant provision, Section 9-302(3), which stated that\u00a0 where a federal statute provided for filing security interests, the UCC filing is rendered\u00a0 inoperative. The corresponding provision of Revised Article 9 is Section 9-311(a)(1),\u00a0 which provides that \u201c\u2026the filing of a financing statement is not necessary or effective to\u00a0<\/span>perfect a security interest in property subject to\u2026a statute, regulation, or treaty of the\u00a0 United States whose requirements for a security interest\u2019s obtaining priority over the\u00a0 rights of a lien creditor with respect to the property preempt subdivision (a) of Section 9- 310.\u201d Accordingly, the relevant federal patent, trademark or copyright statute must be\u00a0 analyzed to determine whether the UCC or federal law controls the perfection of security\u00a0 interests, liens and licenses.\u00a0\u00a0<\/span><\/p>\n The statutory authority for recording assignments at the PTO is 35 U.S.C. Section 261 for\u00a0 patents, and 15 U.S.C. Section 1060 for trademarks, both of which substantively provide\u00a0 in part: \u201cAn assignment, grant or conveyance shall be void as against any subsequent\u00a0 purchaser or mortgage for a valuable consideration, without notice, unless it is recorded\u00a0 in the PTO within three months from its date or prior to the date of such subsequent\u00a0 purchase or mortgage.\u201d Both the Patent Act and the Lanham Act fail to mention anything\u00a0 about the priority of security interests, judgment liens, or licenses.\u00a0\u00a0<\/span><\/p>\n Courts have uniformly held that the UCC recording provisions are not preempted by the\u00a0 patent statute. The reason is that the patent statute adheres to strict concepts of title in\u00a0 order to protect the ownership of new inventions, and accordingly the PTO does not\u00a0 consider a security interest, lien, or license to be an \u201cassignment, grant or conveyance\u201d\u00a0 subject to the mandatory patent recording provision.<\/span>1<\/span> In fact, it has been held that filing\u00a0 with the state, not the PTO, perfects a security interest in patents as against a subsequent\u00a0 lien creditor but not against a subsequent bona fide purchaser.<\/span>2<\/span> And further, that filing a\u00a0 financing statement at the PTO does not perfect a security interest in the trademark under UCC Article 9.<\/span>3<\/span>\u00a0<\/span><\/p>\n On the contrary, copyright ownership and title issues in the U.S. can usually be resolved\u00a0 by searching solely in the U.S. Copyright Office rather than the UCC. The Copyright Act\u00a0 sets forth the method of executing transfers of copyright ownership, and clearly sets forth\u00a0 a priority scheme for conflicting transfers and provides that recordation of a document in\u00a0 the Copyright Office \u201cgives all persons constructive notice of the facts stated in the\u00a0 recorded document.\u201d<\/span>4<\/span> The extent to which the Federal Copyright Act regulates transfers,\u00a0 including security interests, leads to the conclusion that it preempts state methods of\u00a0 perfecting security interests in copyrights. Section 205 of the Copyright Act states that a \u201ctransfer of copyright ownership\u201d is an assignment, mortgage, exclusive license, or any other conveyance, alienation, or hypothecation of a copyright or of any of the exclusive\u00a0 rights comprised in a copyright, whether or not it is limited in time or place of effect, but\u00a0 not including a nonexclusive license. In National Peregrine, Inc., the Court held that the\u00a0 proper place for perfecting a security interest in copyrights is the U.S. Copyright Office.<\/span>5<\/span>\u00a0 <\/span>However, the U.S. Bankruptcy Court for the Northern District of California found that,\u00a0 with respect to an unregistered copyright, a security interest was perfected by a UCC\u00a0 financing statement.<\/span>6<\/span>\u00a0<\/span><\/p>\n Accordingly, it is critical that the acquiring company determine the controlling authority,\u00a0 UCC or federal statute, and search in the applicable records to verify ownership and clear\u00a0 title to patent, trademark and copyright related assets.\u00a0<\/span><\/p>\n Unfortunately, a recent case has made the UCC search process, for all types of property,\u00a0 far more complex.\u00a0\u00a0<\/span><\/p>\n Last summer, a U.S. Court of Appeals\u2019 decision held that a federal tax lien filed using an\u00a0 abbreviation of the debtor\u2019s legal name trumped a lien filed by a bank using the debtor\u2019s\u00a0 exact legal name.<\/span>7<\/span> The Court reasoned that a federal tax lien is valid if a \u201creasonable and\u00a0 diligent\u201d search would find the lien.\u00a0\u00a0<\/span><\/p>\n As a result of this decision, when searching UCC records for financing statement filings\u00a0 concerning a corporation, LLC, or any entity, the search must include \u201csimilar names.\u201d\u00a0 For example, if you are searching for \u201cABC Plumbing and Heating\u201d, you will need to\u00a0 also search \u201cABC Plumbing & Heating.\u201d This is difficult, because some states searching\u00a0 systems may disregard characters such as the \u201c&\u201d and occasionally even \u201cand.\u201d The\u00a0 safest search, although far more time consuming, would be to search \u201cABC.\u201d A\u00a0 compromise might be \u201cABC Plumbing.\u201d\u00a0\u00a0<\/span><\/p>\n The bottom line is that searching for UCC filings is now so complex that it should only\u00a0 be done by professional search services or a major title company. The secured party\u00a0 may also want to consider a UCC Insurance Policy, which insures the security interest\u00a0 filing. These policies are available from major title insurance companies. <\/span><\/p>\n","protected":false},"excerpt":{"rendered":" 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,…<\/p>\n","protected":false},"author":27,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[9],"tags":[112],"coauthors":[],"class_list":["post-907","post","type-post","status-publish","format-standard","hentry","category-attorney-articles","tag-intellectual-property-law","attorney-charles-f-reidelbach-jr","practice-intellectual-property-law"],"acf":[],"yoast_head":"\n