Security Interests in Patents Ninth Circuit Holds that Article 9 (Not the Patent Act) Governs Perfection

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Apr 2002

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Patents, copyrights, trademarks and other forms of intellectual property constitute
"general intangibles" under Article 9 of the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Commercial Code. See Rev.
U.C.C. §9-102(42)</a> and comment d. See also Holt v. United States, 13
UCC Rep. Serv. (Callaghan) 336, 337 (D. D.C. 1973) (finding
a patent to be a general intangible). Nevertheless, the law on perfecting security
interests in such forms of property is not in all respects clear or coherent. The
primary source of the uncertainty emanates from the interplay between federal and state
law.

There are a number of federal statutes establishing federal filing systems for
perfecting transfers or assignments for various forms of intangible property—some of
which possibly include security interests. See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §261</a>
(patents); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §§101-603</a> (copyrights); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§§1051-1128</a> (trademarks). State laws that either interfere with or are contrary
to such federal laws are preempted by the U.S. Constitution's supremacy clause. See

<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… County v. Automated Med. Labs. Inc., 471 U.S. 707, 712
(1985)</a>. The UCC therefore contains a general "step-back" provision to make it
clear that Article 9 is displaced "to the extent that...a statute, regulation or
treaty of the United States preempts" its application. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. UCC
§9-109(c)(1)</a>. Accord, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. UCC §9-311(a)(1)</a> (providing that a
financing statement is "not necessary or effective" when federal law preempts its
application through an alternative scheme).

The essential question in intellectual property secured transactions is whether federal
law or the UCC controls perfecting security interests in the collateral. The
authorities interpreting the federal framework governing intellectual property rights and
applicable provisions of the UCC have not provided uniform guidance. Cases decided
under former Article 9 have varied and depended in large part upon the construction
given to the applicable federal statutes and the interpreted degree of federal preemption
of state law. See, generally, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Peregine Inc. v. Capital Fed. Sav. &

Loan Ass'n. (In re Peregrine Entertainment Ltd.), 116 B.R. 194
(C.D. Cal. 1990)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Bank & Trust Co. v. Otto Fabric Inc., 83
B.R. 780 (D. Kan. 1988)</a>.

The Court of Appeals for the Ninth Circuit in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Services Inc. v.
Matsco Inc. (In re Cybernetic Services Inc.), 252 F.3d 1039 (9th
Cir. 2001)</a>, appears to be the first circuit to weigh in on the issue. The
Ninth Circuit ruled that a creditor's security interest in a patent trumped the
interest of a bankruptcy trustee, even though the creditor did not record its interest
with the U.S. Patent and Trademark Office (PTO).

<h3>Factual Background</h3>

Cybernetic Services Inc. granted Matsco Inc. and Matsco Financial Corp.
(collectively called "Matsco") a blanket security interest in all of its assets,
including "general intangibles." Matsco recorded its security interest with the California
Secretary of State in accordance with the version of Article 9 of the California
Commercial Code that was then in effect. No financing statement or any other document
was filed with the PTO. The debtor was forced into an involuntary chapter 7
liquidation proceeding. The primary asset of the bankruptcy estate was a patent on
technology that the debtor developed.

Shortly after the case commenced, Matsco filed a motion for relief from the
automatic stay to foreclose its security interest in the patent. The bankruptcy trustee
resisted the motion, but did not dispute the fact that the description of "general
intangibles" was sufficient to create a security interest in the patent. The trustee
did, however, contend that Matsco's failure to record its interest with the PTO
rendered the estate's right to the patent superior by virtue of the trustee's status
as a hypothetical lien creditor. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §544(a)(1)</a>. The trustee,
contending that Matsco was unperfected, asserted that the Patent Act preempted Article
9's filing requirements and required a federal filing. The court of appeals rejected
the trustee's argument and ruled in favor of Matsco.

<h3>Analysis</h3>

The Patent Act requires that any "assignment," "grant" and "conveyance" be recorded
in the PTO to be effective against a subsequent "purchaser" or "mortgagee." See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §261</a>. The trustee contended that this recording provision requires a patent
security interest-holder to record that interest with the PTO to be perfected as to
a subsequent lien creditor. The court acknowledged that if the trustee's interpretation
of the Patent Act was correct, and if California's version of Article 9 permitted
a different method of perfection, then the Patent Act would preempt state law. If,
on the other hand, the Patent Act does not cover liens on patents, then the filing
requirements of Article 9 would not conflict with the federal recording scheme.

The court analyzed the text, context and structure of the Patent Act's recording
provisions in light of governing case law and concluded that the terms "assignment,"
"grant" and "conveyance" all contemplate the transfer of an ownership interest only. The
court observed that Supreme Court precedent differentiated between two different categories
of transfers—those that involved the patent's title (ownership interests that are required
to be recorded) and those that amounted to "mere licenses" (less than ownership
interests that are not required to be recorded). A security interest in a patent,
reasoned the court, was tantamount to a license and did not represent the kind of
conveyance of an interest that was required to be recorded with the PTO. Similarly,
the court found that the Patent Act renders unrecorded conveyances void as against only
a subsequent "purchaser" or "mortgagee," which, as a hypothetical lien creditor, the
trustee was not.

The court also opined that the applicable PTO regulations supported its interpretation
of the Patent Act. It observed that the regulations require all "assignments" to be
recorded in the PTO and that "[o]ther documents affecting title to applications, patents
or registrations" were permissive filings. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Services, 252 F.3d at
1056-67</a> (quoting 37 C.F.R. §3.11(a)).

The Ninth Circuit in Cybernetic Services found no conflict between Article 9 and
the Patent Act. Accordingly, the UCC was not preempted and, in the court's view,
controlled. Because Matsco filed its security interest in accordance with state law
prior to the bankruptcy filing, it was properly perfected and had priority over the
trustee's claim.

<h3>Observations</h3>

The fundamental basis for the court's opinion is its view that the Patent Act only
requires filings for transactions that effect a transfer of an ownership interest in a
patent. Contra, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §§101, 201(d)(1)</a> (Copyright Act)
(requiring a federal filing for any transfer of an interest in the work, including
any "hypothecation"); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §11301</a> (aircraft). Since the Patent Act
did not, according to the Cybernetic Services court, require the filing of
non-assignment interests such as liens, state law was not preempted. The fact that
the PTO, as a matter of course, accepts filings of virtually any agreement affecting
title to a patent (i.e., security agreements) does not mean that all such interests

must be recorded. See Manual of Patent Examining Procedure §313 (7th ed.
1998) (indicating that other documents that may be filed with the PTO include
"agreements which convey a security interest. Such documents are recorded in the public
interest in order to give third parties notification of equitable interests...").

Cybernetic Services was decided under the pre-amended version of Article 9.
Former Article 9's step-back (from federal law) provisions and related interpretative
comments contained significant ambiguities that have contributed to much of the debate
over the scope of federal preemption. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. UCC §9-104</a> and comments; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=….
UCC §9-302(3)</a> and comments. Revised Article 9 attempts to rectify what has
not been altogether apparent under the former version of the statute—Article 9 applies
to the full extent permitted by the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. See Rev. UCC §9-109</a> and
comment 8 ("Some (erroneously) read the former section to suggest that Article 9
sometimes deferred to federal law even when federal law did not preempt Article 9.
[This section] recognizes that [Article 9] defers to federal law only when and to
the extent that it must—i.e., when federal law preempts it."); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. UCC
§9-311</a> and comments. The issue of preemption is, however, determined by federal,
not state, law, and must refer to the federal scheme governing the particular property
that is intended to serve as collateral. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Peregine Inc. v. Capital
Fed. Sav. & Loan Ass'n. (In re Peregrine Entertainment Ltd.), 116 B.R.
194 (C.D. Cal. 1990)</a> (rejecting the argument that a state filing is
an acceptable method for perfecting a security interest in copyrights).

<h3>Practical Issues</h3>

While a secured party may, at least in the Ninth Circuit, perfect a security
interest in a patent (and perhaps certain other forms of general intangibles) by
only filing a financing statement in accordance with the UCC, an informed creditor
is nevertheless best served by making a dual filing whenever possible. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re
Transportation Design & Technology Inc., 48 B.R. 635 (Bankr. C.D.
Cal. 1985)</a> (opining that "real protection...requires dual filing—state and
federal"). A state filing, at most, provides a creditor claiming an interest in
a patent with superior rights against a subsequent lien creditor or bankruptcy trustee.
If, however, the secured creditor also wishes to have priority over later voluntary
assignees of title to the patent (e.g., purchasers and perhaps exclusive
licensees), the secured party must also record an assignment with the PTO. Also,
to the extent that a security interest in a patent takes the form of a "collateral
assignment," a federal filing would in fact appear to be required. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v.
MacKenzie, 138 U.S. 252, 258-60 (1891)</a>. See, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…,
Trademarks and Copyrights, 37 C.F.R. §3.56 (2001)</a> ("Assignments which
are made conditional on the performance of certain acts or events, such as the
payment of money or other condition subsequent, if recorded in the [PTO], are
regarded as absolute assignments for [PTO] purposes until cancelled with the written
consent of all parties or by decree of a court of competent jurisdiction (emphasis
added).").

Secured creditors and the counsel that represent them should remain cognizant of the
fact that the federal recording system plays an important role in the realm of secured
transactions, particularly where intangible property rights, such as patents, serve as
collateral.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> George H. Singer is a partner in the Minneapolis office of Lindquist & Vennum P.L.L.P. and concentrates his practice on
corporate and commercial law. He also currently serves as an adjunct professor of law at the Hamline University School of Law and teaches
courses on secured transactions and bankruptcy. Mr. Singer formerly served as an attorney on staff with the National Bankruptcy Review Commission
and as a judicial law clerk to the Hon. Nancy C. Dreher, U.S. Bankruptcy Court for the District of Minnesota, and to the Hon.
William A. Hill, U.S. Bankruptcy Court for the District of North Dakota. <a href="#1a">Return to article</a>

Journal Authors

George H. Singer

Journal Date

Monday, April 1, 2002 - 12:00

Bankruptcy Rule

2002