Pub. 1 2020 Issue 1

www.cbak.com 16 In Touch The Uniform Trade Secrets Act defines a trade secret as “information, including but not limited to, technical or nontechnical data, a formula, pattern, compilation, program, device, method, technique or process” which has independent economic value and which is subject to reasonable efforts to maintain its secrecy. Virtually all commercial borrowers maintain a private customer list. That is a trade secret. agreement with the U.S. Copyright Office. Conversely, if the copyright is not registered then no filing can be done with the Copyright Office, and consequently, a lender will be perfected through obtaining a normal security agreement and doing a UCC-1 filing. For registered copyrights, federal law gives the lender a one-month grace period to do the filing. This one- month period means that the lender must do sufficient due diligence to insure the borrower has not pledged that collateral to someone else before the execution of the loan with the lender. If a borrower has an exclusive copyright license, then lenders may want to consider getting a security agreement in that license. The federal Patent Act governs patent ownership but specifically fails to address security agreements. As such, a security interest in a patent is governed by normal state-law perfection rules under the UCC. That being said, however, a prudent lender will also record with the U.S. Patent & Trademark Office a short-form patent security agreement or general IP security agreement to protect against a subsequent sale of the patent to a bona fide purchaser. This is because a bona fide purchaser will take free and clear of the security interest if it doesn’t have notice of the security agreement’s existence. Remember, Patent & Trademark Office filings are only done on existing patents. Consequently, if the borrower subsequently obtains a new patent, the lender must file with respect to that new patent to protect its interests. Significantly, there is a three-month grace period for patent filings. As such, lenders must insure that they do careful due diligence to insure the patent was not pledged to someone else in the three-month period preceding the obtainment of the security interest. Similar to the Patent Act, the Lanham Act fails to address security interests in trademarks. As such, perfection is governed by normal state-law UCC requirements. When getting the security interest in the trademark, it is absolutely essential that the lender also obtain a security interest in goodwill as it is well-settled law that a trademark can only exist in connection with the goodwill of the business. Similar to patents, lenders should also file with the U.S. Patent & Trademark Office a short-form trademark security agreement or general IP security agreement covering the trademark. The three-month grace period applicable to patents also extends to trademarks. Again, the lender should carry out proper due diligence to insure the collateral was not pledged in the three-month period preceding the granting of the security interest. The Special Case of Trade Secrets While quite different from each other, patents, copyrights, and trademarks do share an important feature—they offer legal protection for assets that are publicly disclosed and precisely described. Indeed, such public disclosure is at the heart of modern IP law. Particularly in the realm of patents, innovators participate in a kind of trade-off: society at large benefits from the knowledge entailed in the new invention, while the innovator alone has a window of time to benefit commercially from the invention. Trade secrets are different in that the innovator entity has opted not to disclose the nature of the invention. Some of the world’s most valuable IP are trade secrets, but the legal framework that protects these assets is very different from that of patents, copyrights and trademarks. The Uniform Trade Secrets Act defines a trade secret as “information, including but not limited to, technical or nontechnical data, a formula, pattern, compilation, program, device, method, technique or process” which has independent economic value and which is subject to reasonable efforts to maintain its secrecy. Virtually all commercial borrowers maintain a private customer list. That is a trade secret. Those same borrowers likely also have devices, special manufacturing processes, software, unique formulas or recipes, or other proprietary “tricks of the trade” that enable them to maintain an advantage over their competitors. These too are all trade secrets. Unlike patents, copyrights and trademarks, there is no federal law impacting security interests in trade secrets. Consequently, normal state law rules of perfection apply. A lender’s security interest must reference general intangibles but ideally will expand on that term to note that it includes the borrower’s trade secrets. The lender perfects by simply filing a traditional UCC-1 financing statement with the secretary of state’s office. Liquidating Intellectual Property Since there is no federal framework for foreclosing a security interest in IP, lenders need to follow normal state-law rules. After a default, the UCC allows a secured creditor to sell, lease, license, or otherwise dispose of the collateral. Selling the IP is perhaps the easiest way to dispose of it. But it must be remembered that the UCC requires that the disposition must be done in a commercially reasonable manner. Consequently, a Continued from Page 14