Governments, Financial Stakeholders Meet On Policy For IP As Collateral

By Liza Porteus Viana for Intellectual Property Watch
Intellectual property and financial stakeholders, representatives from developing and developed countries, and non-governmental organisations are in Vienna this week to work on a global guide on how to use intellectual property as collateral in commerce.

The United Nations Commission on International Trade Law (UNCITRAL) Working Group VI (Security Interests) is working on an intellectual property annex to the UNCITRAL Legislative Guide on Secured Transactions. The guide aims to modernise countries’ financing laws to spur investment, while the annex’s goal is to recommend how to use intellectual property in secured finance transaction so that it does not interfere with intellectual property laws.

“There is an increasing need for information on this issue, in particular among developing countries, as the practice of securitisation of IP is being taken up by small and medium-sized enterprises in various jurisdictions,” Lucinda Longcroft, senior legal officer in the World Intellectual Property Organization’s Copyright and Related Rights Sector, told Intellectual Property Watch. “Securitisation of IP assets can be an important tool for economic development, and numerous governments are considering the modernisation of their secured transactions laws to facilitate the practice.”

American inventor Rick Howell of Vermont said UNCITRAL’s discussions are vital, particularly since debt financing for early-stage intellectual property is often hard to come by.

“The timing for this long-awaited breakthrough in banking and bank lending … could not be better in terms of stimulating the global economy via the development of innovation and the full commercialisation of innovation,” Howell said.

Since the group met in New York in May (IPW, United Nations, 30 May 2008), progress has been made on issues such as how to enforce rights of rights holders in some transactions and enforcement of security interests in “mixed goods.” Mixed goods include both tangible and non-tangible assets like intellectual property – a tangible inventory of personal computers, for example, includes intellectual property such as software under copyright.

“There has been some useful discussion and I think we are very close to agreement,” on those issues, Spiros Bazinas, the senior legal officer for the UNCITRAL secretariat and secretary for Working Group VI, told Intellectual Property Watch.

The idea is that the secured creditor with a security right in the inventory can only sell the inventory as is, but cannot use the software in the computers, or act in other ways that would diminish the value of the intellectual property.

But other issues still need to be resolved, including: the scope of the rights of a licensor when it comes to intellectual property; how specific property descriptions should be in registries; what happens to the rights of both the licensee and licensor when one or the other cannot pay their debts; and which country’s laws should apply in transactions where intellectual property is involved.

“I think the participants in this project at every level are still getting used to dealing with what I’ll call ‘bilingualism’ – that there truly are two separate languages and cultures that have grown up around IP law on one hand and secured property law on the other,” said Oscar Alcantara, chair of the intellectual property group at Goldberg Kohn and a Commercial Finance Association (CFA) representative. “That, more than anything else, slows the process.”

“Right now we’re sort of discussing how to get there,” added Lorin Brennan, the representative of the International Federation of Independent Film and television Alliance (IFTA). “We’re making really good progress but we’re coming into focus that there’s almost two different kinds of financing that are done for IP financing.”

Those two types are: working capital financing “enterprise” financing, where a licensee has intellectual property but it is used as part of the business’ ongoing operations; and project financing for a specific project, such as a movie. In the latter, one can finance a movie but not the ongoing enterprise of the entire movie production company. The same concept can be applied to software.

Whose Law Wins?

The issue of which country’s law should prevail when it comes to the creation, registration and enforcement of a security right in intellectual property is a controversial one. Should it be where a contract was signed, or where the intellectual property is already protected – like where a patent is registered, or perhaps the country in which the borrower is located?

There’s a “fundamental misunderstanding in the commercial finance world regarding the choice of law,” charged Thilo Agthe, chair of the International Trademark Association’s (INTA) Security Interests Subcommittee.

Current intellectual property law says the jurisdiction in which the asset is protected must override all others. “There are some people that want to change that … I’m not sure what the issue is, why there is a problem,” Agthe said.

Alcantara said the CFA is not necessarily advocating one position or the other, but “we may find that the only way to build consensus here is to choose the easiest rule even if it doesn’t make a lot of commercial sense.”

The easy route would be the country where the IP is already protected. There are issues with that, however, including what happens when a patent or other assets are filed with multiple countries.

There is also some concern that the exact definition of “laws relating to intellectual property law” could be interpreted too broadly. Intellectual property parties would like it to include any laws dealing with intellectual property, while others want it to be more specific.

One guide recommendation addresses what happens in the case of a conflict between secured financing law and intellectual property law – dealing with patents, trademarks, or copyrights, for example. The general rule is that IP law presides. But the working group has to decide just how far the two types of laws bleed into each other and when, exactly, the guide will preside. It is up to member states whether to adopt the guide’s recommendations.

“As we get into the details, it is sometimes difficult to determine how that principle of deferment plays out in different ways,” explained Alcantara. “I think we’re going to find that lots of different people in the room have views on how [Recommendation 4B] is going to play out in those different circumstances.”

Added Bazinas: “We have to have discussion and resolution of this matter. …Otherwise, there will be in a way a gap in the modern regime that the guide will implement.”

Another issue is coordination of security and intellectual property registries. One option is an international registry that includes both intellectual property and security interests; some states have one or the other, or both, but there’s no uniform standard. The intellectual property sees little burden on having to register rights in more than one registry, or for creditors to have to search multiple registries.

The finance community, on the other hand, ideally thinks less is more in this case.

“CFA recognises that one of the underlying principles of this project is to facilitate finance in developing countries,” Alcantara said. “The way you do that is making the cost of credit lower and lower and if you reduce the transactions cost, then you reduce the cost of the credit.

Leasing Law in the Works

Meanwhile, the International Institute for the Unification of Private Law (UNIDROIT) will meet in Rome next month to put the finishing touches on a model leasing law for countries to adopt. The US delegation held a vital meeting earlier this month to discuss, among other things, how to approach one of the more controversial issues – whether or not software should be included as an “asset” in the law.

There is concern among some in the IP community that if software is included, or even implied, to be an asset in a leasing law geared toward tangible goods, it could pull other forms of intellectual property that are intangible into a world where they should not be.

For example, movies these days look a lot like software, with many DVDs offering extended viewing capabilities through the latest technology.

“You start trying to distinguish that from software, and it’s like drawing a line in water,” said IFTA’s Brennan.

You cannot lease intellectual property, they argue. You can license it and transfer rights to it, but you cannot lease the intellectual property itself.

INTA’s Agthe said: “Intellectual property has no place in the leasing law.”

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