A United Nations group that has been hard at work laying out recommendations for how to effectively integrate intellectual property into secured financing law is heading into the final phase.

The UN Commission on International Trade Law (UNCITRAL), Working Group VI (security interests), met in Vienna on 2-6 November to further discuss ways countries can use intellectual property as collateral in commerce. The group includes governmental representatives, as well as interest groups, IP stakeholders, and non-governmental organisations serving as observers providing input.

Progress was made on issues including “automatic termination or acceleration clauses” regarding IP licences, acquisition financing, and which country’s laws apply in an international transaction involving security rights in intellectual property, according to sources.

Working Group VI is developing an intellectual property supplement to the UNCITRAL Legislative Guide on Secured Transactions. The guide aims to modernise countries’ financing laws to spur investment, while the supplement’s goal is to recommend how to use intellectual property in secured finance transaction so that it does not interfere with intellectual property laws.

This month, text was added to the supplement to address so-called “automatic termination or acceleration clauses” in intellectual property licence agreements where a licensor or licensee becomes insolvent. Such clauses typically say the licence agreement can be terminated by the licensor in case of insolvency of the licensee.

“The working group decided to include in the supplement some discussion [from the UNCITRAL Legislative Guide on Insolvency Law] explaining that in some states, such clauses are upheld because if the licensee becomes insolvent, not only the licensed product … may be hurt but also the IP right itself,” Spyros Bazinas, senior legal officer at the International Trade Law Division and UNCITRAL secretariat, explained to Intellectual Property Watch. For example, where the licensor is the owner of a trademark clause and the licensee becomes insolvent, the damages may affect the trademarked item, or the value of the trademark itself.

But there are cases, such as that of a clothing company, when that company becomes insolvent and is going through a reorganisation, if the licence for clothes – its primary product – is taken away, the firm may not survive. The working group will recommend that some clauses should be overridden to avoid these situations, and to allow for certain exceptions relating to financial contracts and other transactions subject to other rules. This issue was also referred to the UNCITRAL Working Group V on insolvency, which met in Vienna 9-13 November.

The working group also agreed to give special status to a financier who finances an acquisition of intellectual property or a licence. This is a historical step since few states currently have laws on this issue regarding intangible assets like intellectual property.

“This is a gap in the law,” Bazinas explained. “There is a business out there, a substantial business, of financial institutions financing the acquisition of intellectual property or the licence of intellectual property.”

The working group essentially bent an existing rule to favour the original financier by allowing a grace period of 20 to 30 days after the creation of a security interest, during which time if someone else registers a security interest, the original financier has priority.

Without the financing credit, the asset may not even be created. For example, during the purchase of a car, the buyer acquires a car based on the retention of credit provided by financier. If the buyer establishes a security interest in the car, he would come in second in terms of priority because if it was not for the original financing by financier, the buyer wouldn’t have been able to buy the car in the first place.

The group also discussed an issue of great concern to the intellectual property industry – the priority of “ordinary-course” of business non-exclusive licensees of intellectual property.

For example, if you go to a store and buy a DVD or software programme, you should not have to check whether the producer, say, Microsoft, created a security interest in the software or license. You are considered a licensee in the ordinary course of the licensor with the purchase of that product.

The IP industry argues that “ordinary course” does not exist in intellectual property, and it wants to ensure that language does not allow licensees to grant non-authorised sublicenses to others. There was discussion in the meeting on how to formulate a rule for the IP supplement that is compatible with current intellectual property law.

The working group decided not to refer at all to “ordinary course,” but instead said a licensee may take the licence free of the security interest created by the licensor if the licence is non-exclusive, non-customised (off-the-shelf), and relates to copyrighted software. This means that the secured creditor can enforce the security right and collect the royalties but not take away the licence from an authorised licensee who meets the requirements of this provision and respects the terms of the licence agreement.

More discussion is needed on specifically what products this rule will refer to – such as software or patents – but an agreement was reached on principle.

The working group is also wrestling with which country’s law applies to the creation, third-party effectiveness, priority and enforcement of a security interest in intellectual property if an international transaction takes place between, say, a bank in England and an owner of a patent registered in France. Some believe the law of the state where the IP right is protected and registered should apply, while others believe that the law of the state in which the borrower is located should apply. There is no consensus on this topic.

“If at the end there is no agreement, we will have a discussion in the commentary for legislators for states to choose from,” Bazinas said. “It’s not a do-or-die issue.”

The working group will meet again 8-12 February in New York, when it will adopt the draft supplement, then submit it to the full UNCITRAL committee for adoption at its 21 June – 9 July meeting.

The UNCITRAL secretariat is also organising an international colloquium on intellectual property interests from 1-3 March in Vienna. It will invite interests from the private sector, industry and governments to discuss future work of the group. Agenda topics include: security interest in directly-held securities; preparation of regulations for registration of general security rights registries; preparation of a model law based on recommendations in the guide; and a possible contractual guide on intellectual property licensing.

WIPO’s Role

It will be up to the World Intellectual Property Organization to decide how much action to take on the latter topic, since it currently has a number of ongoing work projects in the works on IP licensing. Working Group VI will work in consultation with WIPO if asked; WIPO says it welcomes any future work on licensing.

WIPO wants to ensure as wide participation of member states as possible in UNCITRAL’s discussions, including developing countries, particularly given the importance placed by WIPO on the Development Agenda, and the UN Millennium Development Goals. The use of intellectual property as collateral is viewed as particularly important for developing countries, where many startups may not have many hard assets, such as equipment, or real estate, but their main value is in their ideas, or intellectual property.

WIPO will soon publish an information paper providing material to its member states on the issue and the work Working Group VI is doing. It will include the results of a WIPO survey of member states about the current treatment of intellectual property assets in national laws.