UN Agency To Address Link Between IP Assets And Financial Securities

By Liza Porteus Viana for Intellectual Property Watch
NEW YORK – The banking industry and the intellectual property community will be keeping close tabs on the activities of a United Nations group next month when it meets to begin forming the foundation of IP rights treatment by the world’s various secured financing systems.

The UN Commission on International Trade Law (UNCITRAL) Working Group VI, which is focused on security interests, will meet on 19-23 May to work on an annex to the UNCITRAL Secured Transactions Guide, a publication aimed modernising and harmonising secured financing law. The annex will provide guidance to governments on changes that must be made to their laws to avoid inconsistencies between secured financing and intellectual property law, and will address specific IP issues not addressed in the guide, which is more broadly focussed.

The increased use of intellectual property rights as collateral for credit has made it more difficult to coordinate between current laws in both areas. As more commercial lenders become willing to accept IP assets as collateral, the granting of security interests in trademarks has become more common.

To add to the harmonisation confusion, many developing countries do not have strong laws of either type, nor do they have solid IP financing practices in place.

Between the guide – adopted by UNCITRAL in December – and the annex, UNCITRAL hopes to set a standard for national legislation that will facilitate secured financing.

“The goal [of next month’s meeting] is common to all: facilitate IP financing without interfering with basic principles of IP law, reflected both in national law and IP treaties such as TRIPS and the WIPO Treaty,” Spiros Bazinas, senior legal officer for the UNCITRAL secretariat and secretary of Working Group VI, told Intellectual Property Watch. “There seems to be a general agreement on the principle of deference to IP law.”

Bazinas outlined several challenges that the working group will try to resolve along with intergovernmental organisations such as the World Intellectual Property Organization and private-sector groups such as the International Association for the Protection of Intellectual Property and the International Trademark Association (INTA).

One is to coordinate securities transaction and intellectual property registries so they do not interfere with intellectual property law, both at the national and international levels. Another is to address issues arising from securities interests in mixed goods – tangibles, including intellectual property assets.

“We need to find a balance between the need to facilitate, for example, inventory and equipment financing, without interfering with IP protection standards,” Bazinas said.

Other issues to be dealt with include insolvency and applicable law. Trademark owners also want to be sure the value of trademarks is preserved, as is their right to own their marks, even if they default on loans, and to avoid purchaser confusion as to the source of goods or services.

The trademark concern centres on preservation of the right to the trademark itself, “in that nothing in any commercial financing legislative scheme has the effect of lessening the value of the trademark,” explained Thilo Agthe, chairman of the INTA Emerging Issues Committee Security Interests Subcommittee. “And depending on national law, that’s a fairly easy thing to do – losing the value.”

Intellectual property owners are worried about a scenario such as this: Nike licences a shoemaker in Georgia, who says it can make Nike sunglasses as well. The shoemaker has an inventory of 100,000 sunglasses and takes out a loan because it needs new machines to make more glasses. But it defaults on its loan and the bank, wanting to recoup at least part of its money, decides to dump the trademarked Nike sunglasses at a bargain store at deeply discounted prices. Nike is fuming, knowing that its high-end product is being sold so cheaply, possibly lessening the value of its brand.

“This is not something that banks like to think about – they want their security and they want their money,” Agthe said. “While I have a lot of sympathy for that position, it’s not one that can be upheld … you own a trademark, you have to police it.

“This is one of the issues we think should be very clearly stated in the annex,” Agthe said.

INTA wants the annex to address lingering or contradictory provisions in the guide they think would negatively impact intellectual property owners, purchasers, licensees, and financiers, with specific recommendations.

“It will not be sufficient, and the annex will fail of its purpose, if it serves solely as an ‘issue-spotting’ document but fails to provide real and effective guidance to the legislatures of enacting states,” stated INTA’s February paper to UNCITRAL [pdf].

The Commercial Finance Association (CFA), which has been heavily involved in the UNCITRAL proceedings, does not think lending institutions are necessarily on the opposite sides of that of IP owners, but that there is a lack of understanding between the two cultures. Securities transactions law and intellectual property law are very different, the CFA argues, and working group members need to understand those differences and how they intersect, then integrate the two in a way that encourages financing.

“The annex can recommend laws that make it significantly easier for such companies to obtain financing based on their IP, which would be a tremendous benefit for these companies,” said Richard Kohn, co-general counsel of the CFA and partner at Goldberg Kohn, a law firm in Chicago. “As a result, the annex could be of tremendous benefit, given that many countries currently have no clear legal regime covering these questions at all.”

A 7 May public meeting will be held with the US State Department, lending industry and other interested parties to discuss how the US will approach the working group meeting later in the month, according to a source.

Many in industry hope the annex holds as much weight as the broader guide, even though the annex probably will not be finished for at least two years, after the guide is issued. Bazinas tried to assuage concerns that it will not be taken into consideration when governments look for guidance on setting laws.

“An effective legislative regime on IP financing will release an enormous potential and substantially increase the credit available for IP rights holders but also licensees. This applies not only to practices in which the IP is the collateral but also to practices where the collateral is a tangible asset that includes IP,” Bazinas said. “If the ST [securities transactions] Guide is the crown, the IP annex will be the jewel in the crown.”

Liza Porteus Viana may be reached at info@ip-watch.ch.