Taking Security Over IP

Introduction

Increasingly, intellectual property represents a valuable part of the assets of a borrower group and therefore a valuable asset to be used as security for loans.

This briefing discusses the types of intellectual property rights that may be relevant to a business and the ways a lender can take – and subsequently enforce – its security over such rights. In doing so, the effects of including a negative pledge clause in a loan or security agreement where intellectual property is relevant will also be considered.

Types of Intellectual Property

The term Intellectual Property ("IP") covers a wide range of disparate rights and, at its most basic, is used to refer to intangible assets that are "creations of the mind". When considering taking security over IP, especially when (as in many cases) it could be the most valuable part of the security being obtained, it is necessary to consider the types of IP owned by the borrower group and how these fit within the proposed security structure.

It is likely that IP will be considered more valuable where such IP is long-lasting, easy to secure, registered, generates regular, if not constant, revenue and retains value independently of the business that owns and uses it.

Notwithstanding this, there are many different types of intellectual property, both registered and unregistered, over which security can be taken – the main categories of these are considered separately below.

Patents

Patents give protection for inventions (both products and processes). Patents must be registered in order to exist. Once granted, patents give a very clear proof of title and typically have a strong value independent of the business in which they are used. However, existing revenue streams are often uncertain as most patents are not licensed out (as the patent owner typically wants to maintain exclusivity in the marketplace).

It is necessary to apply for patent protection before the invention is "disclosed" to the public and if a disclosure is made then any subsequent patent application will be invalid. This means that if security is being taken over future patents it is necessary to ensure that the relevant processes are in place so that potential patents are not invalidated through inadvertent disclosure.

Patent rights last up to 20 years in the UK and so consideration should be given to how much of this period remains when taking security over a patent.

At the European Union level, recent legislation has been passed which will eventually enable a single unified patent registration and court system to operate in the European Union. This system is not expected to come into operation in stages during the course of 2015. Once this system is in effect, care should be taken by lenders to check registration of a patent on the new unified patent register.

Trade marks

Trade marks give protection for words, logos and lots of other things such as colours, sounds, shapes and smells (in fact there is no technical limit on what can be protected as a trade mark).

There can be both registered and unregistered trade mark rights and these rights can last forever (although they must be renewed every 10 years). If trade marks are licensed they can give a very secure and consistent income. The downside of using trade marks as security is that they are often (and unregistered trade marks are almost always) business-dependent, so that if a business fails the value of the trade marks that business uses will fall (for example, consider the value of the RATNERS trade mark following the near self-destruction of that business).

Also, it is often difficult to register the trade marks being used by a business (following an application in the UK, the trade mark must be advertised for at least 2 months without opposition before registration can be effected). However, registered trade marks are a lot more valuable than unregistered trade marks (in a dispute between two holders of like trade marks, a registered trade mark owner will be able to claim ownership of the trade mark over an earlier unregistered trade mark owner of which the registered trade mark owner was unaware).

Notwithstanding this, trade marks can give very valuable security if a business is successful. By way of an example in the late 1990s both DreamWorks and the Tussauds Group granted security over their IP to secure around $320 million - both grants of security covered both existing IP and future IP.

At the European Union level, trade marks can also be registered as "community trade marks" on the Community Trade Marks Register which, following registration, will take effect across the European Union.

Designs

Designs give protection for shapes, lines, patterns, texture and lots more. As with trade marks, there are both registered and unregistered design rights.

Registered designs can last for a period up to 25 years. It is relatively easy to secure design registration and, once registered, there is clear proof of title. Also, unlike trade marks designs typically have a value independent of a business.

Traditionally, design rights are very complicated and in the UK design rights can be afforded protection under a number of different mechanisms. For registered design rights, for example, these could be registered under the Registered Designs Act 1949 in the UK and also under the Regulation on Community Design 6/2002 across the European Union. A prudent design owner operating in Europe in addition to the UK would register its design both at the European Union level and also at the national level for the UK and for each relevant country in which the design was used. This would be to guard against a successful claim being made against a design registered centrally only as such successful claim may invalidate the design registration across the whole of the European Union.

However under the Intellectual Property Act 2014 (which came into force on 1 October 2014) the UK Secretary of State is empowered to enter into relevant agreements to enable design owners simultaneously to register their design at the European Union level and also to effect multiple national registrations in designated countries (as opposed to filing separate applications in each relevant jurisdiction). This new system is expected to take effect in stages during 2015.

Unregistered designs may be protected by the Copyright, Designs and Patents Act 1988 in the UK and the Regulation on Community Design 6/2002 across the European Union. The Intellectual Property Act 2014 also narrows the definition of an unregistered design right in order to give greater certainty as to the scope of protection afforded to an unregistered design right. Care should therefore be taken in attributing value to unregistered design rights.

Copyright

Copyright gives protection for recorded material of whatever nature, including written and artistic works, sound and video recordings and broadcasts. Protection arises automatically, the benefit of which is that protection is very easy to secure – and in theory coverage worldwide can be obtained without cost. The downside is that it is often very difficult to prove ownership and infringement, which affects the value of many forms of copyright. Copyright cannot be registered.

In most cases, copyright lasts for up to 70 years after death (although there are some exceptions), so that once ownership and the value of copyright is proven, this can give good security and generate consistent and valuable revenue streams until it expires. For example, one of the first known security interests taken over IP in respect of copyright was when David Bowie sold "Bowie bonds" covering royalty payments for his back catalogue, which at that time gave him a regular income of more than $1 million per year (the bonds raised David Bowie around $55 million).

Given that copyright cannot...