We hope you have enjoyed our: "Everything you wanted to know about PPSA but were too afraid to ask," series. With the upcoming end of year festivities soon upon us, we will be taking a short break following today's alert, and recommencing the series in early 2012. We will of course keep you updated regarding details on Registration Commencement Time when it is released.
Securing the future - using intellectual property as collateral
Last week we considered some of the issues that might arise where numerous PMSI interests have competing claims to a fund created by the sale of co-mingled goods. This week, we discuss tricks and traps when taking security over intellectual property.
Question
William Fences, founder of Microhard Pty Ltd (Microhard), is a prolific inventor. William has developed an innovative new personal computing device integrated into a pair of sunglasses, which in a stroke of genius he dubbed the “eyePatch”. While Microhard has an impressive portfolio of patent and trade mark rights, it has very few other assets and, thanks to all the patent attorney bills, cash flow is usually pretty tight.
The Bank of Innovation and New Kitsch (BINK) has developed a niche market in providing finance to technology-based start up companies. BINK is excited that the PPSA reforms have now made intellectual property assets more attractive as collateral. It loans a considerable sum to Microhard to fund further product development, in return for security over Microhard’s IP portfolio and the handful of physical assets in William’s garage.
BINK promptly records its interest on the PPSA Register (correctly recording the individual serial numbers of each secured patent and trade mark right), and sits back to wait for the eyePatch to take the world by storm and its loan to be repaid.
Has BINK done everything necessary to secure its interest and protect the value of its collateral?
Answer
Unfortunately BINK fails to register its security interest in foreign countries, where local laws provide for public registration of security interests over IP rights, or govern the enforceability of the security interest against successors in title. BINK may find itself unable to enforce its security interest over IP rights in key foreign markets against third party purchasers.
If BINK had recorded its security interest on the Australian Patents Register, it would have had to approve an amendment to the specification of Microhard’s key patent rights, which were prompted by a dispute with its competitor Giggle Inc. This amendment has significantly reduced the scope and commercial value of those patent rights, and accordingly, their attractiveness to BINK as collateral.
BINK has also failed to require Microhard to provide notice of new patent and trade mark rights it or William acquires. In a moment of absent-mindedness, William instructs his patent attorney to obtain patent rights for the new and improved eyePatch2 in his own name, rather than Microhard’s. BINK finds that the value of its collateral is now significantly less than the outstanding balance of the loan.
Lesson: When taking security over valuable intellectual property assets, ensure your security agreement contains appropriate obligations and that these are complied with, and consider whether any interest should be recorded on registers in addition to the PPS Register.
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