UNCITRAL Lays Groundwork For Policy On IP Assets And Financing

By Liza Porteus Viana for Intellectual Property Watch
NEW YORK – The groundwork has been laid at the United Nations by governments, non-governmental organisations, and intellectual property and finance experts on how to use intellectual property assets to encourage credit around the globe while not interfering with intellectual property laws.

The UN Commission on International Trade Law (UNCITRAL) Working Group VI (Security Interests) met at the UN last week to work on an annex to the Legislative Guide on Secured Transactions. The guide aims to modernise and make more efficient countries’ financing laws to spur investment, promoting business development and trade. The annex will provide asset-specific recommendations for intellectual property financing – or when intellectual property is used for collateral to get a loan.

“Success is within our reach. There is substantial agreement on the overall objective,” Spiros Bazinas, the senior legal officer for the UNCITRAL Secretariat and secretary for Working Group VI, told Intellectual Property Watch.

“I think it was an educational process – and it’s an ongoing educational process for quite a few people there who have an orientation either in the IP field or the secured finance field,” added Richard Kohn, a founder of Goldberg Kohn law firm in Chicago and a Working Group representative of the Commercial Finance Association (CFA). “It’s like a point where ocean currents come together and they sort of mesh – they come together at this point. That’s sort of what’s happening.”

The idea of using intellectual property as collateral for credit may be a new concept for some countries. That use is 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.

Some have suggested the annex is aimed at developing countries, but Bazinas refuted that, noting that even many European countries, for example, do not have sufficient IP financing regimes in place.

“Many developed countries do not have a good legislative primer for IP financing and also, if we were to prepare something that is good only for developing countries … they want the best, they don’t want the second best,” Bazinas later said.

Intellectual property experts want, among other things, to ensure the value of the property up for collateral is preserved as much as possible, even if an individual or company defaults on a loan. The lending community wants transparency, clarity and consistency in nations’ laws so they know their rights when accepting IP rights as collateral.

“From the secured financing point of view, their point is ‘look, we have to have one system … to finance everything to make it easy,'” Lorin Brennan, the Working Group representative of the International Federation of Independent Film and television Alliance (IFTA), told Intellectual Property Watch. “From our point of view, intellectual property law cannot work the same way” for all goods.

Remaining Work

The UNCITRAL Secretariat provided the 45-page “Working Paper 33” [pdf] and a 20-page addendum [pdf] full of recommendations to serve as a launching pad for discussion.

At week’s end, subjects that still needed work included [link to report here]: intellectual property rights related to tangible assets (equipment, inventory of items such as watches); the nature of a security right (for example, should a secured creditor be the “owner” of the collateral); the description of the collateral (whether, in a secured financing agreement, all patented or otherwise embedded intellectual property in something like a television set needs to be listed to assess its value); how a security right can be effective against third parties, especially an insolvency representative should one go bankrupt; whether royalties are part of the intellectual property; priority rules (secured financing and IP laws have different rules for who gets priority treatment in a conflict over the asset); and how and where to register the security interest in the property.

“If not done the correctly, [it] could be done in a way that seriously changes IP law,” warned Brennan, who noted that some recommendations could conflict with the World Trade Organization Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS). “You don’t do this right, you could cause a mess.”

The issue of third-party effectiveness is another sticking point. The main method for making a security right effective against third parties is by registering it in a general security rights registry and/or a intellectual property registry (whether one or both is required is under debate). But some countries may not have two registries, and their registration requirements may differ. The annex commentary will suggest what it thinks are sufficient registration requirements.

“There are all of these property registration offices all over the world … that the possibility of recording an interest in general commercial registries with really no clear history and no clear consensus on how this issue of giving notice of one’s claims should really play out,” explained Oscar Alcantara, chair of the intellectual property group at Goldberg Kohn and a CFA Working Group representative.

Another issue is the so-called “exhaustion doctrine,” which refers to the point in time when the IP owner no longer has the right to control the products embodying the intellectual property used as collateral.

For example, if a designer makes trademarked jeans and a lender provides financing for the manufacturing of the jeans, the lender takes a security right in the inventory of jeans. If the designer defaults on his loan, the question is: At what point can the lender enforce his security right (by perhaps selling the inventory to recover some of the costs) in those jeans without going back to the owner (designer), to get approval?

The secured finance community wants the annex to suggest some best practices on how states can streamline their varying exhaustion rules; it cannot mandate anything on the issue.

“The reason we’re hopeful countries will strive for clarity with the exhaustion doctrine, is the whole purpose of the Guide is to help extend credit,” Kohn said. “The best way to do that is by having certainty.”

Several delegations, including those from Australia and Switzerland, agreed on that point. “I think it’s a very familiar term in the IP community however, I don’t think we can say this is a clear concept,” the Swiss delegate said last week.

An informal group will meet in Vienna toward the end of June to advise the secretariat on some outstanding issues in order to assist the larger working group. The informal group will include representatives from the intellectual property and finance communities, the American Bar Association, The World Intellectual Property Organization, and delegations such as India, Australia, Canada and the United States.

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