STATEMENT OF LORIN BRENNAN
on behalf of
AFMA
(The American Film Marketing Association)
and
The AFMA Affiliated Financial Institutions
in opposition to
Proposed
Federal Intellectual Property Security Act
Oversight Hearing on June 24, 1999
STATEMENT OF LORIN BRENNAN
INTRODUCTION
My name is Lorin Brennan. I am appearing as Special Counsel for AFMA (the American Film Marketing Association) and their Affiliated Financial Institutions (AFIs). AFMA is a trade association for 142 independent (non-studio) motion picture and television production and distribution companies. The AFIs, a division of AFMA, consist of 22 major banks and financial institutions. Neither I nor AFMA have received any federal grant, contract or subcontract in the current or preceding two fiscal years.
All of our member companies are familiar with secured copyright lending and the Peregrine decision (In re Peregrine Entertainment, Ltd., 116 B.R. 194 (C.D. Cal. 1990)). On their behalf, I am here to register our strongest opposition to the proposed Federal Intellectual Property Security Act (FIPSA). We oppose FISPA because:
FIPSA will decimate the ability of motion picture producers to finance their productions, threatening tens of thousands of jobs.
FIPSA will skyrocket the risks and legal uncertainties of secured copyright lending to ruinous levels.
FIPSA will not and cannot accomplish its stated objectives, subjecting copyright borrowers and lenders to unacceptable risks for no benefits.
In my brief remarks I will identify the reasons why we have come to these conclusions. They are not new. We have opposed the FIPSA "mixed filing" scheme for years, and communicated our opposition to Congress, the Copyright Office and to the American Bar Association (ABA).
At the same time, we acknowledge that the current system of secured copyright financing needs improvement, especially for "floating liens" and "after-acquired property." We have advocated the need for constructive change to the Administration, the Copyright Office, and now Congress . We support the goal of FIPSA, but cannot in any way support its methods.
In have attached to this statement copies of some of our extensive work in this regard. They describe the many reasons why we cannot support the "mixed filing" system in FISPA. They also contain our suggestion for a workable solution.
WHY FIPSA WILL NOT WORK
Copyrights exist solely by reason of federal law. They are intangible assets, simultaneously everywhere, and highly divisible. They often have complex chains of title. As national assets, they are supported by a single, unified federal recording system in the Copyright Office. This system indexes transfers of copyright ownership against registered works.
Article 9 of the Uniform Commercial Code is state law. It deals with assets that are either located in any easily identifiable place, e.g. hard goods, or, in the case of intangibles, presumed to exist only at the location of the debtor. They rarely have complex chains of title. Article 9 indexes security interests against the debtor in numerous filing systems. As one commentator puts it: "Variations from state to state are legion; some are authorized by alternative versions of the [Uniform Commercial] Code itself; others are local frolics." (Barkley Clark, The Law Of Secured Transactions Under The UCC, ¶ 2.12[1] (1994 Rev. Cum. Ed.).)
The collateral, focus and methodologies of the copyright system and the Article 9 system are marked opposites. Mixing them is a recipe for disaster.
1. FISPA Will Not Eliminate The Need To Make Dual Filings
The proponents of FIPSA complain that the decision in Peregrine requires a creditor loaning against a copyrighted work to search and file in the Copyright Office in addition to filing against the other assets under Article 9.
Whether or not this is a burden, FISPA will not eliminate it. To see why we need only ask: What happens when the secured lender forecloses? Consider the following (ignoring the 30-60 filing windows in the Copyright Act):
May 1: Copyright owner grants a security interest in a registered copyright to a Lender who records under UCC.
June 1: Copyright owner grants an exclusive license to a Licensee who records in Copyright Office.
July 1: Lender forecloses and becomes a transferee at foreclosure sale.
Who own the copyright, the Lender or the Licensee?
This example illustrates the conflict between the exclusive Licensee who records in the Copyright Office under federal law, and the Lender/Transferee at a foreclosure sale under state law. The conflict is not just in the priority schemes. It is in the basic system for transfer of ownership of the copyrighted work.
Under Article 9-105(d), a "debtor" includes a later owner of collateral, and Article 9-306(2) continues a security interest in collateral "notwithstanding sale, exchange or other disposition thereof" unless the lender releases. (Barkley Clark, The Law Of Secured Transactions Under The UCC, ¶¶ 1.02[2], 2.11[1][a] (1994 Rev. Cum. Ed.).) Article 9-504(4) provides that "[w]hen collateral is disposed of by a secured party after default, the disposition transfers to the purchaser for value all of the debtor's rights therein, discharges the security interest under which it was made, and any security interest or lien subordinate thereto." In other words, per Article 9 the Lender takes the copyright free of the Licensee's later recorded interest.
Under Section 205(d) of the Copyright Act, however, "[a]s between two conflicting transfers, … the later transfer prevails if recorded first" in the Copyright Office in the manner necessary to give constructive notice. Under this section, since the Licensee recorded federally and the Lender did not, the Licensee prevails over the Lender.
This is an irreconcilable conflict between the ownership transfer provisions of state and federal law. No amount of drafting can finesse it. Only one system can prevail.
Although not entirely clear, FIPSA apparently does not intend to eliminate federal preemption of the ownership transfer rules for copyrights. Thus, under FIPSA the Licensee would still prevail.
But this means the Lender's security interest has no value against subsequent assignees or exclusive licensees unless the Lender also records in the Copyright Office. Even under FISPA, any prudent lender must still search and record in the Copyright Office to ensure the continuing value of its security.
Thus, FIPSA does not and can not eliminate the "dual filing burden."
2. FISPA Will Significantly Increase the Costs Of Copyright Lending
FISPA provides that the relative priority between secured lenders and lien creditors is determined solely by state law. Copyrighted works often have complex chains of title, with many tiers of derivatives works, licenses, sublicenses and sub-sublicenses. Under Article 9, foreclosure by a senior secured creditor anywhere higher up in the "chain" wipes out a junior interest. This makes its critical for lender to find any senior interests before it makes a loan.
Under current law, the lender can conduct a single search of the records in the Copyright Office to find all prior copyright liens. Under FISPA, a lender will now need to search the UCC filing systems maintained in the fifty states. This burden will be enormous.
Let me illustrate the magnitude of the problem with a practical example. Assume an independent producer wants to finance a new movie, Terminator 3, based on the popular Terminator and Terminator 2 pictures. Since Terminator 3 will be a derived from several prior works (screenplays and movies), the production lender certainly wants to know all prior security interests against any of these prior works since they would be superior to its loan. Attached is a Copyright Report for the Terminator pictures showing the recorded chain of title, but with the copyright mortgages omitted. If FISPA passes, this is what secured lenders will see in the future. Let us try to find all prior copyright mortgages using only this report.
The report shows numerous prior transfers. Any transferor or transferee could have granted a security interest in its rights so we must search each one. Ignoring duplicate entries and transfers that may not affect our new production, it looks like there are still 94 separate entities to search. The Copyright Report does not show where they are located, so we must search under the rules in all fifty states and the District of Columbia.
There are several state variants regarding the place to file a security interest. For a general intangible like a copyright, 26 states only require filing in the Secretary of State, while 14 others can also require an additional filing in the county where the debtor is located. (Hawkland, Lord & Lewis UCC Series, §§ 9-401 et. seq. (1997 ed.).) According to one major searching service, there are 6,400 potential filing jurisdictions in the United States. How will our production lender find all prior lien filings, and how much will it cost?
Here is an analysis based on the going charges of a well known search company.
Locating the Corporations: It looks like 90 of the entries in the Chain of a Title are corporations. We can conduct a 50 state search to locate their place of incorporation at $365 per debtor, i.e. $365 x 90 = $32,850.
Searching the Corporations: Now that we know where they are located, we must search the local UCC filings there. Searching fees vary per state. In California, a search at the Secretary of State costs $34. No county search is required for intangibles. If all of these companies are headquartered in California, then we must conduct 90 UCC searches at a cost of $34 x 90 = $3,060.
Copies of Filing: The UCC searches only disclose the UCC-1s filed against the debtor, not against the copyright in Terminator. One transferor alone, Carolco Pictures, had more than 1,000 UCC-1 filed against it. (Each time it produced a picture, the lenders filed a UCC-1 to cover the physical materials). To find out which UCC-1s apply to Terminator, we must order a copy of each one. The cost in California is $1.25 per page. If we make the conservative assumptions that each UCC-1 is only 1 page, and that all 90 debtors only have only 2,400 UCC-1s in total filed against them, this means an additional cost of $1.25 x 2,400 = $3,000.
Reading The UCC-1s: Then somebody has to read all 2,400 UCC-1s to determine which ones apply to Terminator. If a legal professional could read one UCC-1 a minute, it would still take 40 hours to read them all. If were only charged $100 per hour, that is an additional $4,000.
Individuals: There are four individuals identified in the Copyright Report - the screenplay writers. There is no facility for nationwide searches for individual locations like there is for corporations, so to be sure we have identified all security interests we must search the Secretary of State in all 50 states, plus all the counties in the additional 14 states that require dual filings. Let us assume, conservatively, this means searching 100 jurisdictions, or 4 x 100 = 400 searches. The costs is $34 per state search, and $49 per county search, i.e. ($34 x 200) + ($49 x 200) = $16,600. We will assume no copy or reading problem.
Judgment Liens: We still have the judgment liens. Currently, a lien creditor who does not record in the Copyright Office remains junior to a federally recorded copyright mortgage (In Re Peregrine, supra 116 B.R. fn. 16; LeFlore v. Grass Harp Productions, Inc., 67 Cal.Rptr. 340, fn. 1 (Cal.App. 1997), although the case law is admittedly sparse. This means that currently a Copyright Report is sufficient to disclose any prior lien creditors. Under Article 9-301(1)(b), however, a party who becomes a lien creditor by levy or attachment before the security interest is perfected has priority. (Barkley Clark, The Law Of Secured Transactions Under The UCC, ¶ 3.03[2][c] (1994 Rev. Cum. Ed.).) Under FIPSA, our production lender would need to search at the state level to find prior lien creditors. Again, there are many state variations as to when lien creditor status arises (filing, levying) notice rules (some states include judgment liens with UCC filings) and procedures. (See Coogan, Hogan, Vagts & McDonnell, Secured Transactions, Chpt. 7E (Matthew Bender, 1998).) Since many copyright owners operate nationally, and copyrights exist everywhere, a judgment lien affecting the copyright might be recorded in any of the 6,400 filing locations nationwide. Searching them all would require examining all 94 parties in all 6,400 locations at $49 per search - for a staggering cost of $29,478,400. Let us assume we only need to search in the counties where the parties are located. Then we still need an additional 94 searches at $49 a search, or $4,606.
The following table compares the admittedly hypothetical costs of finding all liens that might apply to a Terminator 3 production loan under current law and under FIPSA.
Search Cost Comparison for Terminator 3 (Estimates)
;
Current Law;
FISPA
;
Documents;
Cost;
Documents;
Cost
Federal Search
1
$250
1
$250
State Searches for Corp. Locations
0
0
100
$32,850
State & County UCC Corp. Searches
0
0
100
$3,060
Copies of State UCC filings
0
0
2,400
$3,000
Review of UCC filings
0
0
$4,000
Individual Searches
0
0
400
$16,600
Judgment Lien Searches
0
0
94
$4,606
Total
1
$250
3,095
$64,366
Of course, we could get lucky. We could find the parties after searching only a few locations. But we cannot guarantee it.
Terminator is not unusual. There are many U.S. motion pictures with chains of title just as elaborate, if not more so. Copyrights have complex chains of title. A remote transferee often has no way of knowing where prior transferors are located other than by searching the public records. Since copyrights are national assets, a remote transferee must be prepared to search public records on a national scale.
The average independent motion picture costs $2 million. They cannot absorb the uncontrollable costs that will be required under FISPA to obtain a production loan. It will mean these pictures cannot be produced at all - or that they must be financed and produced outside the United States. Independent producers are responsible for close to 148,000 American jobs nationwide. FIPSA threatens them all.
A BETTER SOLUTION
As we mentioned, AFMA and AFIs do not believe that the current system is perfect. To the contrary, we have for several years advocated reform. Two problems need attention from the point of view of lenders:
Floating liens: The ability to file a "floating lien" that covers all of the debtor's assets in a single filing.
After-Acquired Property: The ability to have the lien attach to after-acquired property.
Article 9 does have legal rules to accommodate the creation, attachment and foreclosure of floating liens and after-acquired property. The problem is that Article 9 does not have the facilities for filing and perfection with regard to these types of interests where copyrights are concerned. As the previous discussion indicates, it is incapable of doing so.
That does not mean we cannot solve the problem. Copyrights are federal rights; they deserve a federal solution. AFMA has previously proposed a solution that preserves the essential nature of the copyright system and solves these problems. The details are discussed on the attachment. So let must just discuss the concept.
The Copyright Office filings are indexed against works. Article 9 filings are indexed against persons (debtors). To solve the problem, we need to create a facility in the Copyright Office for constructive notice filings against persons as well as works.
The idea is to allow the Copyright Office to establish a "person index." Persons (companies or individuals) with a copyright interest can file a "person registration statement" just like a copyright work registration statement. Recorded transfers can then be indexed against the parties in the "person register" or against the work in the current "work register." These filings will be linked in a computerized, relational database. Either one will have constructive notice and create priority under federal law, and the necessary perfection under state law.
This is essentially the same system the title insurance companies use for land titles. They maintain two indexes: a "lot book" for the properties, and a "general index" describing filings against the persons. They search both to issue a title policy.
This is also the system used in all the major database vendors to create "relational databases." It is a well understood problem with well documented solutions.
In practice, the system could be simple to use. A secured creditor loaning against a copyright need only insure that either the work or the debtor is registered. The lender can then, in principle, file an additional copy of its UCC-1 financing statement with the Copyright Office to perfect against the copyright assets. One extra filing. No multiple searching. No excessive costs.
Again, the exact details are explained in the attachments.
CONCLUSION
The 140 member companies of AFMA, and the 22 banks and financial institutions in the AFI, support needed federal legislation to update the current system for securing copyright mortgages. We endorse the goal of FISPA, but cannot under any circumstances support its "mixed filing" methodology.
Copyrights are national treasures. They deserve a national solution. We look forward to working on a system that will solve current problems while preserving the integrity of the federal copyright system.
LIST OF ATTACHMENTS
to
STATEMENT OF LORIN BRENNAN
Documents Discussed In Statement
Copy of Copyright Research Report For Terminator 2.
Documents Advocating Positive Solutions
Letter dated April 6, 1999 from Allen R. "Mike" Frischkorn, President of AFMA, to House Subcommittee on Courts and Intellectual Property enclosing proposed improvement legislation for copyright financing.
AFMA proposed amendments to Copyright Act to improve copyright financing.
Memo from Lorin Brennan and Prof. Ronald Mann describing benefits of AFMA proposal, with attached Concept Paper
Documents Regarding "Mixed Filing System
Memo dated November 30, 1998 to ABA describing objections to "mixed filing" system in FISPA.
Allen R. Frischkorn, Jr.
President
April 20, 1999
Ms. Debbie Laman
Subcommittee on Courts and Intellectual Property
House Judiciary Committee
B-351-A Rayburn House Office building
Washington, DC 20515
Re: Security Interest in Copyrights Financing Preservation Act
Dear Debbie:
Thank you for contacting AFMA concerning our views on the Security Interest in Copyrights Financing Preservation Act (SICFPA). As Lorin Brennan and I noted in our telephone conversation, the SICFPA approach will create more problems than it will resolve.
I am enclosing for your information a memorandum, concept paper and draft legislation prepared by Lorin Brennan and Ronald Mann, a law professor at the University of Michigan. This material sets forth a different approach, which we believe will address many concerns which gave rise to the SICFPA, but will do so in a manner that does not cause problems for copyright holders.
After you have reviewed this material, you may wish to contact Lorin directly with any questions. Lorin, who is a consultant for AFMA, can be reached at 1-949-720-8490.
Thanks again for contacting us concerning this important issue.
Sincerely,
/s/
ALLEN R. FRISCHKORN, JR.
ARF:CCH
encl
Lorin Brennan
Mary Beth Peters and David Carson - Copyright Office (fax: 1-202-707-8366)
Lewis Horwitz
Bill Shields
mwc\LAMAN4-20-99.DOC
PROPOSED COPYRIGHT FILING MODERNIZATION ACT
AMENDMENTS ARE TO TITLE 17, SECTIONS 101 et. seq.
§ 101. Definitions
…
A "transfer of copyright ownership" is an assignment, mortgage, exclusive license, grant of a security interest, or other conveyance, alienation or hypothecation of a copyright or any of the exclusive rights comprised in a copyright, currently existing or to be created, whether or not it is limited in time or place of effect, but not including a nonexclusive license.
§ 205. Recordation of Transfers and Other Documents
(a) Conditions for Recordation. - Any transfer of copyright ownership or other document pertaining to a copyright or the interest of a person in a copyright may be recorded in the Copyright Office if the document filed for recordation bears the actual signature of the person who executed it, or if it is accompanied by a sworn or official certification that it is a true copy of the original, signed document.
(b) Certificate of Recordation. - The Register of Copyrights shall, upon receipt of a document as provided in subsection (a) and of the fee provided by section 708, record the document and return it with a certificate of recordation.
(c) Recordation as Constructive Notice: Recordation of a document in the Copyright Office gives all persons constructive notice of the facts stated in the recorded document, but only if either -
(1) Work Identification:
(A) The document, or material attached to it, specifically identifies the work to which it pertains so that, after the document is indexed by the Register of Copyrights, it would be revealed by a reasonable search under the title or registration number of the work, and
(B) The work has been registered on or before the date when the document is recorded;
or
(2) Person Identification:
(A) The document, or material attached to it, specifically identifies the person to which it pertains so that, after the document is indexed by the Register of Copyrights, it would be revealed by a reasonable search under the name or identifying information of the person; and
(B) A person identification has been filed on or before the date when the document is recorded with respect to the person; and
(C) Any work to which such document relates is registered no later than five years after the date when the document is recorded.
(d) Priority Between Conflicting Transfers. - As between two conflicting transfers, the one executed first prevails if it is recorded, in the either manner required to give constructive notice under subsection (c), within one month after its execution in the United States or within two months after its execution outside the United States, or at any time before recordation in such manner of the later transfer. Otherwise, the later transfer prevails if recorded first in such manner, and if taken in good faith, for valuable consideration or on the basis of a binding promise to pay royalties, and without notice of the earlier transfer.
(e) Priority between Conflicting Transfer of Ownership and Nonexclusive License. - A nonexclusive license, whether recorded or not, is effective against and prevails over a conflicting transfer of copyright ownership if the license is evidenced by a written instrument signed by the owner of the rights licensed or such owner's duly authorized agent, and if
(1) the license was taken before execution of the transfer; or
(2) the license was taken in good faith before recordation of the transfer and without notice of it.
(f) Transfer of Royalties Only. - As between two conflicting transfers of a right to receive royalties (or other purely monetary interests including license fees) only with respect to a copyrighted work without any right or privilege to exercise any of the rights in such work granted under this title, priority of the transfers is determined by applicable law other than this title.
§ 301. Preemption With Respect to Other Laws.
[Add new (g)]
(g) The determination and effect of constructive notice and of the priority of transfers and licenses with respect to copyrighted works are governed exclusively by this title.
§ 409A. Application for Person Identification
(a) Enabling. - Any person who has or expects to have an interest in a copyrightable work may file an original or amended application for person identification with the Copyright Office in accordance with this section.
(b) Application: The application for person identification shall be made on a form prescribed by the Register of Copyrights and shall include -
(1) The current name of the person, and such other information as the Register of Copyrights may prescribe to identify the person;
(2) The current address of the person, and such other information as the Register of Copyrights may prescribe to locate the person;
(3) If the person has previously filed a person identification, the name or filing number for a prior registration, and such other information as the Register of Copyrights may prescribe to locate the prior filing by a reasonable search; and
(4) Any other information regarded by the Register of Copyrights as bearing on the identification of the person.
(c) Filing. - Upon receipt of an application for a person identification that meets the requirements of section (b), and upon payment of the fee specified in section 708, the Copyright Office shall file such application in the public records maintained for such purpose in the Copyright Office, and, if requested, issue a certificate of such filing.
(d) Index. - The Register of Copyrights shall maintain an index of the registrations, filings and recordings duly made under this title so that a reasonable search of the records of the Copyright Office would disclose:
(1) For a registered work, all registrations for the work, all documents recorded which reference such work and each person identified as a transferor or transferee in such a document; and
(2) For a person identified in a filed person identification, all registered works in which such person is identified as an author or copyright owner, and all recorded documents in which such person is identified as a transferor, transferee or other similar capacity maintained in the records of the Copyright Office.
(e) Reports. - The Copyright Office upon request made in conformity with the procedures established by the Register of Copyrights and payment of the fee specified in section 708 shall issue a report for a work or a person showing the results of a reasonable search of the records of the Copyright Office as indexed in conformity with section 409A(d). A report issued under this section shall be prima facie evidence of the accuracy of its contents.
§ 708. Copyright Office Fees.
(a) The following fees shall be paid to the Register of Copyrights:
[(1) - (10) Same. Add the following:]
(11) on filing each application under Section 409A for person identification, including the issuance of certificate of filing if filing is made, $20 [or the same as prescribed under section 708(a)(1)];
(12) on the filing of any amendment of a person identification, including the issuance of certificate of filing if filing is made, $20;
(13) on issuance of a report under Section 409A(e), $20 for the first name or title, and for additional names or titles, $10 for each group of not more than 10 names or titles [but not more than $500 in total].
§ 711. Copyright Office Authority.
(a) Sample Forms: The Register of Copyright may establish procedures for using and filing sample forms for recording documents regarding transfers of copyright, security interests in copyrights, changes in a person's name or location, and other matters consistent this title. The Register of Copyright may allow reduced fees or expedited procedures for use of such forms.
(b) Electronic Authentication: The Register of Copyright may establish procedures for using and filing any document required or allowed under this title in electronic form with appropriate means to authenticate the genuineness of any such electronic document including by a digital signature. Any document filed in accordance with such procedures will have the same effect under this title as if filed in non-electronic form. The Register of Copyright may allow reduced fees or expedited procedures for use of electronic documents.
MEMORANDUMJune 22, 1999
To: Interested Parties
Fr: Lorin Brennan, Gray Matter LLC
Ronald Mann, Prof. of Law, Michigan Univ. School of Law
Re: Copyright Office Filing System
_______________________________________________________________
Enclosed are two papers describing our proposed changes to the Copyright Office filing system to facilitate modern development and financing transactions. The first is a Concept Paper describing in principle the changes we believe are needed. The second is draft legislation to implement the proposed changes.
We are sympathetic to the concerns motivating the proposed Security Interests in Copyrights Financing Preservation Act (SICFPA) by its ABA sponsors. However, we believe the approach is simply unworkable. Crucially, the SICFPA fails to adopt to the relational database approach to information management that is the mainstay of all modern data management systems. As such, it can not take advantage of the efficiency gains available from an electronic, online environment. Also, by institutionalizing a two-filing system - at both the state and federal levels - it introduces needless complexity and doubt into the simplest transactions.
Our proposal instead authorizes the Copyright Office to create a relational database at the federal level for copyrighted works. It would require the Copyright Office to maintain two filing indexes: one for copyrighted works (the current system); and a new system for interested parties (a "person index"). These indexes will be linked by computer in a relational database. Think of this as an "electronic Rolodex" that can be searched either by work or by person. The current state law system for tracking security interests in personal property is indexed by the debtor ("person"), so our proposed system actually combines both methods in one , unified federal system.
We suggest that a relational system - and only a relational system - can resolve the concerns motivating the SICFPA. Indeed, our proposal solves problems the SICFPA can not even address:
Floating Liens: Lenders want to file "floating liens" that attach to all the copyrighted works of a debtor without the necessity of filing for each work. Under our proposal, a lender could file a financing document with regard to a "person," e.g. "all works now owned or acquired by Debtor Co." If Debtor Co. has duly filed a Person Identification Statement in the Copyright Office, this financing document would be recorded in the "person index" against Debtor Co. As Debtor Co. becomes the registered author/copyright owner or transferee of interests in a copyrighted work, these interests would be related to Debtor Co.'s person index filing by the computer's relational database, and in turn related to the financing document. The SICFPA proposes that all the security interest filings be maintained in 50 separate state indexes, so there could never be a relational link, and no way to insure consistency of the filings between the states and the Copyright Office (i.e. no "data integrity").
Identity Changes: In addition to lenders, many copyright owners would also like a single filing to relate to all their works. Typical examples are corporate acquisitions or name changes. The SICFPA does nothing for this situation, but our proposal does.
After-Acquired Property: Lenders also want their liens to attach to after-acquired property. Under our proposal, a person identification statement can be filed for interests in copyrighted works that a person has or expects to have. As in the previous example, new works would be related to a filing as they are registered. We have proposed a five year period in which registration should occur for such attachment, similar to the renewal period for liens under state law.
Output Deals: Transferees other than lenders would also like to file for works to be created in the future, e.g. "the next three productions of Producer Co." A particular example is filing by a distributor against a motion picture or software program while still in production. Note that the SICFPA also does not address this situation for anyone but lenders, but our proposal solves the problem for transferees and lenders alike.
Simplified Searching: Under the SICFPA proposal, a person desiring to loan against a copyright must conduct two searches: one for prior transfers of the work, and another for persons who may have prior security interests. Since many copyright transfers do not identify the location of prior parties in the chain of title, relating transferees with the secured parties can require searching dozens of entities in all fifty states - an extraordinary burden. The UCC-1 financing statements often do not identify what copyrights are encumbered, so a search may not even disclose all creditors. Our proposal allows a single, unified, effective search in the Copyright Office.
Simplified Filing: Even the proponents of the SICFPA admit that it will still require a lender to file in two places - the Copyright Office and the state. Our proposal requires only one filing for copyright interests - the Copyright Office. Where the loan secures collateral other than copyrights, of course two filings will be required, but in that case our proposal is no more burdensome than the SICFPA and far more beneficial.
No Circular Liens: The SICFPA has a serious problem: what happens if the secured creditor forecloses? Which law determines the priority of the purchaser at a foreclosure sale as against a prior transferee who recorded in the Copyright Office? The SICFPA does not - and cannot - reconcile this conflict. Our proposal does.
Consistency With Current Law & Practice: The SICFPA requires a radical change in current law and practice. It would impose serious adverse consequences on "up-stream" lenders who finance the creation of copyrighted works in preference to the interests of "down-stream" lenders who loan against the assets of remote licensees. We believe this policy choice is both unwarranted and unnecessary. Our proposal enables new filing methods while still continuing current ones. Since, like current copyright law, it only deals with filing and priority, existing state law rules for creating, attaching and foreclosing floating liens and after-acquired property will remain in place. We merely enable the federal system to accommodate them in parallel with the state system. We do not tear down and start over; we add on and enhance.
Further questions on this proposal can be addressed to: Lorin Brennan at (949) 720-8490 or Prof. Ronald Mann at (734) 764-5571.
Enc.
CONCEPT PAPER
Reforming the Copyright Filing System
_ Technological Upgrading - The system should be upgraded to use a relational database of the kind that commercial enterprises routinely use for their data.
The existing system, while appropriate for an earlier age, has now become cumbersome, slow, and expensive, hindering financing and development.
A relational database will save money by (a) lowering the costs of filing and searching; (b) eliminating the delay between filing with the office and recordation; and (c) increasing the information available to searchers, scholars, and the filing office.
The staff in the Copyright Office has the technological sophistication to implement such a system if only given the necessary statutory authority and fiscal support.
_ Legal Changes - The system should be updated to include the kinds of rules sthat facilitate the ability of developers to obtain financing for their projects.
Filing Rules
A single filing, with a single fee, should be permitted for all assets of a specified party. If a lender wants a lien in all of the works of Lydgate, one filing should be adequate to perfect against all of them.
Filings should be permitted against after-created assets. If a lender wants a lien on a work that Lydgate is developing, it should be able to file before the work has been created and remain protected throughout the process of development.
To accomplish this, the Copyright Act should allow filings with constructive notice effect against interested parties ("author/person index") as well as against a work. The person and work files can then be related through a relational database. This is a common approach in industry. For example, telephone contact databases ("electronic Rolodexs") are done this way.
The records should permit online, electronic filings, searches, and payment. The system also should provide filers and searches contemporaneous verification against existing records to limit typographical errors, as well as substantially immediate confirmation of filings and priority.
Priority Rules - The Copyright Act must clearly define the boundaries of federal preemption of the state filing systems.
A federal filing should be required and sufficient for any transaction in which a lender attempts to acquire a security interest in a right to exercise any of the exclusive rights protected by the Copyright Act. That should be true whether the right is granted by the owner of the copyright or by some party acting under an exclusive license from the copyright owner.
A federal filing should not be required for a transaction involving transfers or security interests in purely monetary interests, even if they derive from the copyrighted material. In other words, the priority of a transfer of a right to receive royalties ("accounts") only, independent of any of the exclusive rights in the copyrighted work itself, should be governed by non-federal law. A transfer of rights and royalties, however, should be covered by a federal filing.
The 30-day and 60-day grace periods in Copyright Act Section 205(d) should be eliminated. That is a vestige of a time when filing paper documents required significant administrative time and effort. An electronic filing system should provide for substantially contemporaneous filing.
The Copyright Act also should validate the right of the nonexclusive licensee to grant to the lender the right to terminate the right of the licensee to use its software. It is not clear that state law has the power to validate that transaction.
MEMORANDUM
June 20, 1999
To: Joint Task Force of Security Interests in Intellectual Property
Ad Hoc Committee on Security Interests (Business Law Section)
Committee 457 (IP Section)
Fr: Lorin Brennan
Re: Proposed Federal Intellectual Property Security Act
_______________________________________________________________
EXECUTIVE SUMMARY
This Memo comes in response to the fax of November 19, 1998 containing the Revised Draft of the Proposed Federal Intellectual Property Security Act. In essence, the Revised Draft continues to propose a mixed system in which federal law determines priority for the intellectual property rights, but state law determines priority with respect to royalties ("proceeds").
I led the coalition of banks, copyright owners and labor organizations that opposed this proposal when it was suggested to Congress several years ago. I also voted against the proposal in Committee 457 last year. My opinion has not changed.
My objection to a "mixed system" is not that it is difficult to make such a system work; it can not work. A "mixed system" is based on a flawed data design. It will invariably lead to data anomalies, including circular liens and searching conflicts. A correct approach requires implementing a relational data model in a unified federal system with constructive notice from both the author ("entity") index and work ("object") index.
The following Memo describes these issues in detail.
ANALYSIS
A. Why a Mixed System Will Fail
Section (b)(2) of the Proposed Federal Intellectual Property Security Act contains the basic "mixed system" approach regarding what it calls "Federal IP Rights," e.g., copyrights, trademarks and patents.
Under subsection (A), "… the priority of a security interest in Federal IP Rights or the proceeds thereof relative to all competing rights, claims and interests therein and licenses thereof" is determined by "non-federal law governing security interests in personal property," presumably Article 9 of the Uniform Commercial Code, as currently existing or as revised.
As an exception, under subsection (B), a security interest in a Federal IP is "ineffective against the buyer(1) of the Federal IP Right who properly recorded the document transferring ownership of the Federal IP Right to such buyer … before a federal financing statement … was filed." In other words, prior filing of a federal financing statement is effective against a subsequent transferee with regard to the rights but not the proceeds.
Let us see how this would work in practice.
1. First Problem: Circular Liens
Assume Copyright Owner grants a security interest to Lender A in a work and its proceeds. Lender A duly records a federal financing statement in the Copyright Office, but no where else. Seeing this, Copyright Owner grants a second security interest in the same work and its proceeds to Lender B, who only records in the state offices. Lender A forecloses and transfers its entire interest to BFP1, a bona fide purchaser without actual notice of Lender B's state recording. We can graphically illustrate this example as follows:
Copyright Owner
Records federally Records in State
Lender B
(Proceeds)
Lender A
(Rights)
BFP1
Now, what are the rights of BFP1 vis-à-vis Lender B? In particular, is BFP1 required to pay any royalties ("proceeds") to Lender B? Asked another way, if BFP1 refuses to pay royalties to Lender B, what remedies does Lender B have? There are two possible results.
Case 1: BFP1 takes free and clear of the obligation to pay royalties to Lender B. That means when BFP1 exploits the work and earns income, for example by selling copies or making further sublicenses, BFP1 does not owe any payments to Lender B. The argument in favor of this approach is that BFP1 now has legal ownership of the work, and one of the basic incidents of legal ownership is the right to turn it to account. If this is the result, then Lender B did not gain much by making a state recording for the proceeds only. If a transfer to a bona fide purchaser who does not have actual knowledge of the state recording cuts off the right to proceeds, then Lender B would be well advised to record federally as to the rights as well.
Case 2: BFP1 takes subject to the obligation to pay royalties to Lender B. In other words, BFP1 still gets the rights, but now must pay a portion of any income to Lender B to pay off the debt. The theory here is that BFP1 has constructive knowledge of the state recording by Lender B.(2) But if that is the case, then BFP1 will certainly discount its bid in the foreclosure sale based on the obligation to Lender B. That means that if Lender A wants to ensure it gets full value upon a foreclosure, it had better record in the state as well.
We have discussed the example in terms of a bona fide purchaser (technically, a bona fide transferee) at a foreclosure sale, but the same reasoning applies to a bona fide transferee from Copyright Owner as well.
Three observations come from this example. First, the cases are not reconcilable. You get one or the other, but not both. Second, the Proposed Federal Intellectual Property Security Act does not tell us which result is correct.(3) In other words, we will have more litigation over which system prevails in case of conflict. Third, the only secure approach for either Lender is to record in both places, federal and state. Whether such a dual filing system does anything more than create a trap for the unwary will be discussed below.
2. Second Problem: Incompatible Obligations
Assume the same example as in the previous case, only this time Lender B forecloses first and transfers its entire interest to BFP2, a bona fide purchaser without actual notice of Lender A's federal recording. We can graphically illustrate this example as follows:
Copyright Owner
Records federally Records in State
Lender B
(Proceeds)
Lender A
(Rights)
BFP2
Now, what are the rights of BFP2 vis-à-vis Lender A? In particular, is Lender A required to direct any payments it receives from Copyright Owner to BFP2? Asked another way, if Lender A refuses to do so, what remedies does BFP2 have? Again, there are two possible cases.
Case 1: Lender A is required to direct payments to BFP2. In this case, the payments would have been royalties and other income earned by Copyright Owner from exploiting the work, which could have been paid to Lender A either directly by Copyright Owner's licensees or through Copyright Owner. The theory is that BFP2 by the foreclosure now "owns" such royalties. If this is the result, then Lender A did not get what it thought it was getting by making a federal recording for the rights only. If Lender B's transfer to a bona fide purchaser who does not have actual knowledge of the federal recording cuts off the right to proceeds, then Lender A would be well advised to record in the state as to the proceeds as well.
Case 2: Lender A is not required to direct payments to BFP2. The theory here is that the royalties come from exploitation of the work by Copyright Owner. If Lender A is deprived of the royalties, then it can foreclose for non-payment and take the work, in effect putting us back in the first situation discussed above. Again we are faced with the question: if Lender A (rights branch) refuses to pay royalties, then what remedy does BFP2 (proceeds branch) really have? BFP2 cannot foreclose on the income-earning asset (the rights), because it does not own them. In such a case, BFP2 will also certainly discount its bid in the foreclosure sale based on the obligation to Lender A, meaning that if Lender B wants to ensure it gets full value upon a foreclosure, it had better record federally as well.
As in the first situation, the Proposed Federal Intellectual Property Security Act does not indicate which case prevails, so the cautious lender would be well advised to record in both the federal and state registers. Once again, the same reasoning applies if Lender A is a licensee.
As these examples illustrate, a dual filing system that splits works from royalties is unstable. Invariably one system must swallow the other.
3. Third Problem: Searching
As the previous examples illustrate, the only rational approach for a secured creditor under the Proposed Federal Intellectual Property Security Act is to file in both the state and federal registers. This actually makes matters worse.
The sine qua non for filing is to perfect the security interest and thus obtain priority over other creditors, especially a trustee in bankruptcy. Under current law, one filing in one forum, such as filing in the Copyright Office, is sufficient. Requiring two filing now creates a trap for unwary creditors, who may find themselves unperfected as to a critical aspect of their security. Rights and royalties go hand in hand; to separate them for filing purposes invites potential disaster.
Separation also creates a considerable problem when it comes to searching. A secured creditor wants to locate all prior security interests in the collateral. Under current law, that requires, at least for copyrights, one search in the Copyright Office with regard to the work. The Proposed Federal Intellectual Property Security Act would now require two searches, one at the federal level for the rights, and another at the state level for proceeds. Such a search becomes enormously difficult for many copyrighted works, often requiring searches of numerous potential debtors whose domiciles are unknown.
To understand why this is so, we need to look at two different concepts of how financing of intellectual property occurs. We may term them "inventory financing" and "asset financing."
Inventory Financing: In inventory financing, the creditor seeks a floating lien over all the assets of the debtor. Physical objects ("goods") come into and move from the debtor's business, and the lien attaches as the goods enter, and is released in favor of the buyer in the ordinary course as the goods leave. What the creditor looks to is the business of the debtor, not the individual objects that come and go, and so, naturally, the security interest is indexed against the debtor. This is the focus of state law recordings under Article 9. We might think of inventory financing as "horizontal financing," graphically illustrated as follows.
Debtor's Business
Inventory
Goods
Inventory
Goods
Post Sale
Goods
Pre-Purchase
Goods
In the modern economy, a valuable component of the debtor's assets may consist of software, trademarks and other intellectual property. One would therefore like a floating lien to attach directly to the intellectual property without the necessity of separate filing in a federal register each time the intellectual property becomes part of the debtor's asset base. Note that for copyrighted works, we are really only addressing assignments and exclusive licenses, since there is no federal recording system for non-exclusive copyright licenses.
This is the primary reason for the objections to Peregrine and AEG. They require additional effort for a secured creditor to perfect its interest under this model. But this is not the only financing model. There is another one in common use for which Peregrine and AEG are the right answer.
Asset Financing: In this model, the primary focus is not on the debtor's business but on the protected work. We might think of it as akin to real estate financing of an office building. The key asset is the land and the building, and one files a mortgage against the property. In a building, there can be many leases that pay rents (royalties) to the owner. The lender wants to know that filing against the underlying property also gives it priority as to subsequent lease interests. Lending against copyrighted works follows the same paradigm, especially for motion pictures. The underlying property (e.g. copyright in the motion picture) can be subject to many sublicenses. A secured lender wants to ensure that filing against the underlying property gives priority as to subsequent licensees. We might think of asset financing as "vertical financing" graphically illustrated as follows.
Copyrighted Work
License A: All U.S. Rights Some Term
Sublicense A1:
Some Rights
Limited Term
Sublicense A2:
Other Rights
Later Term
License C:
Other Rights,
Later Term
License B:
Some Rights, Later Term
In this model, each license generates royalties ("proceeds"). By filing against any box, the secured lender gains priority over all included ("junior") boxes. Therefore, a secured creditor loaning against Sublicense A2 to needs to look up the tree to determine whether there is a filing for a prior transferee, i.e. with respect to License A or the Copyrighted Work.
Notice that in the horizontal inventory model, there is only one look-up step to the immediate debtor. It is easy to search, since the creditor knows who the debtor is. But in the vertical model, the secured creditor needs to look at all prior interests. The secured creditor may know its immediate debtor, but what about prior transferees?
Here is an example based on real filings for the motion picture Latino. The Producer of the picture granted certain exclusive distribution rights to Management Company Entertainment Group, Inc. The Copyright Report discloses that a Pledge and Security Interest was filed in the Copyright Office on July 13, 1989 in favor of Kidder, Peabody Group, Inc., as secured creditor, listing the following companies as debtors:
Management Company Entertainment Group, Inc., Manson International, MCEG Productions, Inc., Independent Production Resources, Inc., Independent Screenplay Development Corp., MCEG Development Corp., DAHL, Inc., Go Ahead…Bore Me, Inc, Plantation House, Inc., Stroke of Luck, Inc., World Food Resources, Inc., Small Minds, Inc., I'm Nothing, Inc., Hometown Boy, Inc., Follow Your Dream, Inc., Redblood, Inc., Beyond Control, Inc., MCEG/Virgin Holdings, Inc., Virgin Vision America, and Virgin Vision, Inc.
This type of filing is not unusual. Motion picture companies typically create many subsidiaries for specific purposes. For example, each picture is often produced by a newly formed company without antecedent debt so that all the capital of the company can be used to produce the picture and will not be attached by prior creditors. Thus, secured lenders often file against all companies in the corporate group.
Assume Lender A now wants to make a loan to the Producer of Latino secured by the copyright in the picture including royalties payable. How can Lender A determine what interest has been granted to Management Company Entertainment Group, Inc. and its related companies through a search of the records?(4) Currently, the Copyright Report is sufficient, as it identifies the rights granted to these parties in a single listing, but since it will not be available to us under the Proposed Federal Intellectual Property Security Act, using it would be cheating. Interested parties are invited to determine for themselves what interest, if any, the listed companies have by conducting UCC searches for themselves. No, I do not know where these companies are domiciled. I will also note that there are probably hundreds of UCC-1s filed against Management Company Entertainment Group, Inc. in California alone; which one relates to Latino will require reading each one. Of course, even identifying these companies required a Copyright Search. If the Producer had granted rights to Management Company Entertainment Group, Inc., but had granted proceeds to, say, Virgin Vision, Inc., how would Lender A even know about this grant if Producer was not forthcoming?
That is the easy case. At least one can ask the Producer and hope for a complete answer. The Copyright Report for Latino also shows that Management Company Entertainment Group, Inc. granted rights to Orion Pictures Corporation. Now, assume Lender A wants to extend credit to Orion based on the value of its assets. Lender A wants to know what prior interests exist with regard to these assets. Orion may know that it obtained rights from Management Company Entertainment Group, Inc., but it may know nothing about, say, a separate assignment of proceeds to Virgin Vision, Inc. Even if Lender A asked and Orion answered honestly, Lender A might not find out. If Producer is unforthcoming or simply unavailable, Lender could not search by debtor with regard to prior grants of proceeds because it does even know who the prior debtor are.
By splitting filings of rights from royalties, the Proposed Federal Intellectual Property Security Act seriously undercuts the ability IP owners to engage in asset based financing of IP rights. Licenses of intellectual property rights can be either exclusive or non-exclusive. For exclusive licenses, the licensee typically undertakes further exploitation of the work through sublicenses or disposition of copies. It is crucial for a senior lender to know that is security interest against the licensor's rights is prior to and entitles it to royalties from sublicensees, and equally important for financiers of sublicensees to know about prior security interests. This is similar to the position of the lenders against office buildings. The permanent lender wants to ensure that its mortgage against the property has priority against the leases of space in the building, and a junior lender against the property or a leasehold estate needs to know about prior mortgages. Non-exclusive licenses, on the other hand, are typically granted to end users, such as a merchant who uses software in its business. In that case, it would be helpful if a floating against the debtor attached to the non-exclusive license. Yet under federal law non-exclusive licenses are not assignable, so even if the lien did attach, it could not be assigned to the lender on foreclosure in any case. The Proposed Federal Intellectual Property Security Act does not even address this issue. What it does is undercut the ability of exclusive licensees to continue the traditional financing method that they need in an attempt to enable a financing method for non-exclusive licensees that they can not use.
The federal filing system, at least for copyrights, looks to the work as the main determinant of value. From this perspective, it quite correctly indexes filings against the work, and it supports well "vertical" asset financing. The decisions in Peregrine and AEG are correct from this perspective. The Proposed Federal Intellectual Property Security Act only looks at financing from the inventory model. It criticizes Peregrine and AEG for not supporting this methodology. This criticism is misplaced. The proper course is to develop a filing system that supports both methods.
B. The Proper Approach: The Relational Data Model
The previous section gives examples of where a mixed system will fail. But proper analysis requires more than a list of problematic cases. We must also ask why the system fails. The answer is a faulty data model. Essentially, the mixed system proposes a hierarchical data model with two roots (technically, a network model). Such a data model cannot ensure consistency or integrity in the data model itself. Let's see why.
1. The Hierarchical Data Model
Consider a simple example, which we might call the "Rolodex Problem." A Rolodex creates a hierarchical database arranged alphabetically and indexed either by individual ("entity") or by company ("object"). A hierarchical database is often represented in a tree-view as follows:
In this case, the database is indexed by individual. One searches the database by "walking the tree" from the root down each branch until the desired data node is reached
As anyone who uses a Rolodex knows, there are problems with this approach. You receive a business card from a client. How do you file the card, by individual name or company name? If you file by individual name, what happens when you want to visit a particular company and all your contacts there? The only way to find all the contacts is to search through all the cards. What happens if an individual leaves a company? If you throw away the card, you lose information about the company. What happens if you file everything by company? How can you find an individual if you forget the company name? Maintaining two databases, one for individuals and one for companies, doubles the filing work, and risks having inconsistent databases (lack of data integrity). The fact is there is no satisfactory solution to these problems using a hierarchical database. The model itself is inadequate to the task.
2. The Relational Data Model
The proper solution to the Rolodex Problem is to implement an entirely different data design, the relational data model. Unlike hierarchical models, which are based on an ad hoc data model, the relational model is based on a consistent underlying mathematical theory derived from predicate logic. In simple terms, all data is expressed in tables consisting of rows and columns. These tables are related through a key column that uniquely identifies each row. The Rolodex Problem is solved by maintaining three tables like this:
Person Table Company Table
Person ID;
Person Name
Company ID;
Company Name
P1
John Jones
C1
Acme Co.
P2
Ann Tones
C2
Widget Co.
P3
Pete Clones
C3
Blackacre Co.
Person/Company Table
Person ID;
Company ID
P1
C1
P2
C1
P3
C2
One table holds the data for persons, another for companies. A third table relates persons to companies. The Person/Company Table identifies that John Jones (P1) and Ann Tones (P2) both work for Acme Co. (C1). Pete Clones (P3) works for Widget Co. (C2). Now, if we want to visit Acme Co. and find all the employees who work there, we just search the Person/Company table for all entries for Acme Co. (C1), and for each entry look to the corresponding Person key and use that to find the entry in the Person table. If Pete Clones moves to Blackacre Co., we simply update the entry in the Person/Company table to indicate the change. We do not need to delete the entry for Widget Co. when Peter changes jobs.
It should be clear that the Rolodex Problem is identical to filing security interests in intellectual property. There are really two different indexes in use. One can record against the owner of the rights, i.e., the person. This is the approach taken in under Article 9, which indexes security interests against the debtor. Alternatively, one can index against the work (company), i.e. the IP rights. This is the approach taken under federal law, for example in the Copyright Office, where one records in reference to a registered work. Both state and federal law use single index, hierarchical databases. Both of them lead to the problems commonly found in hierarchical systems. Neither one does or can provide a complete solution by itself.
The Proposed Federal Intellectual Property Security Act adopts the worst solution of all. It requires maintaining two hierarchical databases, with all the problems in that data model, without any method of determining which one prevails in case of conflict. This is like maintaining two Rolodexes with separate data in each one, such as phone numbers in one indexed by name and addresses in the other indexed by company, without any methodology to ensure consistency between them.
It is pointless to argue the merits of inventory financing (Article 9 approach) over asset financing (federal IP approach). Each works fine for its own financing model. Neither one works well for the other. But the universe of IP financing requires we use both. We cannot address this universe by tinkering with either hierarchical model (e.g. choosing either state or federal system) or by simply decoupling them (Proposed Federal Intellectual Property Security Act). The underlying data design is wrong. We must move to an entirely new data model.
C. Implementing The Relational Models
In a relational design, we need to maintain two separate tables (registers), one for persons (owners, transferees, secured parties, etc.) and another for IP interests (copyrights, etc.) The Copyright Office already maintains two such registers now: a work register, and an author register. In concept, we need to amend the Copyright Act to allow constructive notice from filings in the author register, and then give the Copyright Office authority to create a relational database that relates filings between the two. We should start with the Copyright Office as the first step in order to make sure the system functions correctly and then as necessary roll out the system to the P.T.O.
As a design matter, we would not be working on new ground. The World Intellectual Property Organization maintains an International Register for Audiovisual Works.(5) This International Register has been set up on a proper relational model, with two registers, a "person register" and a "work register" with systems to relate filings. W.I.P.O. has already established forms and procedures for its use. The current Registrar of Copyrights spent close to a year at W.I.P.O. working on the International Register and is quite familiar with how these systems should be established.(6) There is of course no need to adopt any of the W.I.P.O. rules or forms, and I am not advocating that we do so. The point is that there is a wealth of knowledgeable talent available at the federal level to implement a proper system.
We should identify in principle what we want the system to do (data design phase) before constructing the legal rules (coding). I suggest the system should do the following:
Single, National System: Article 9 envisions separate state registers. But intellectual property rights under federal law are national in scope. Thus, we need a national database to deal in national rights. It must also be a single database. We cannot maintain two separate databases and ensure data integrity. This argues that the filing structure must be a single, unified federal system.
Relational Data Model: The federal system must implement the relational data model. In other words, the system must allow filings against the work (IP Rights) as well as filings against persons. This will require maintaining a separate "person" index. The system must maintain the relationship between them. The work of the System Manager (e.g. Register of Copyrights) is to maintain the database.
Constructive Notice As to Persons: As a legal matter, filings in the person index must also impart constructive notice to establish priority against subsequent transferees. There may need to be a "birth certificate," like a registration certificate, identifying the first filing for a person. This system would greatly simplify such matters as filing corporate name changes, mergers, etc.
Floating Liens: The system should allow for filing floating liens. This could be done by filing against an individual in the person index. The system would then attach the filing to all registered works of the debtor.
After-Acquired Property: The system should allow for filings that apply to after-acquired property. The Copyright Act now allows for transfers of works to be created, although there is no constructive notice effect until the work is registered. This becomes a problem when advancing funds to create a work, such as for software development or motion picture production. Again, filings in the person index can accommodate this approach. We may want a time limit, such as the filing only applies to works registered within X years of the filing date.
Others may have additional suggestions as to how the system should operate, but I suggest that this is the direction discussions should take. Please note that the Copyright Act only has a federal filing system for assignments and exclusive licenses. Thus, this discussion only relates to them. Different considerations may apply to non-exclusive licenses.
CONCLUSION
Intellectual property rights have become the center of the American economy. The IP industries are the faster growing segment of the economy and the engine of new job growth and wealth creation. Continued development in this area requires a modern system for facilitating secured financing.
The relational data model is the modern data model. It is the basis for the vast majority of business databases. It is implemented in all the office suites (Access, Approach, Paradox) as well a products from major business suppliers (Oracle, Sybase, Microsoft SQL Server). It is the only data model grounded on a solid mathematical foundation.
A modern financing model for IP Rights should be grounded on a modern data model.
LB:hs
1. 0 There is no concept of a "buyer" as such in current federal law. The Proposed Federal Intellectual Property
Security Act essentially defines a "buyer" as any transferee of IP rights. Under current law, assignments and
exclusive licenses are assignable, while non-exclusive licenses are not. Moreover, there is no federal recording
system for non-exclusive copyright licenses. As a result, it may be appropriate to treat non-exclusive licenses
differently.
2. 0 We discuss why this assumption of constructive knowledge is not always reasonable in the next section.
3. 0 The same arguments as were made in Peregrine and AEG would argue for the first approach, meaning that the
proposed legislation accomplishes little, if anything.
4. 0 Obviously, this information can also be obtained from the debtor, but the point of searching the public records is to
verify the debtor's representations rather than accepting them on blind faith.
5. 0 For political reasons we need not discuss here, the U.S. has not adhered to the Treaty establishing this Register,
although many countries have.
6. 0 I was a member of the U.S. Delegation to the Diplomatic Conference that established the International Register,
and also spent considerable time working on the project.