Statement of

John T. Cross

Professor of Law

University of Louisville School of Law (Louisville, KY)

for the

Oversight Hearing on Report of the United States Copyright Office

on Copyright and Digital Distance Education

and

Intellectual Property Security Registration

Subcommittee on Courts and Intellectual Property,

Committee on the Judiciary

United States House of Representatives

June 24, 1999

EXECUTIVE SUMMARY

Both of the items on today's agenda deal with important issues that have arisen in the realm of intellectual property. Although the proposals contained in each document are essentially sound, both could benefit from a few minor changes.

Report on Copyright and Digital Distance Education

This comprehensive report does an admirable job setting out the many copyright problems that have arisen in the use of new digital technologies for distance education. I fully agree with the overwhelming majority of the Report, especially the background materials. My few comments relate solely to the suggestions for legislative change contained in the report. In short, I:

• Generally agree with most specific proposals set out in the Report. The antiquated language of the §110 exceptions should be updated to enable the effective use of modern digital technology in distance education.

• Disagree with the proposal that teachers involved in distance education should not have the same freedom to use copyrighted works as teachers in the classroom.

• Suggest that rather than amending §110(2), Congress should merge that exception into the "face-to-face" education exception in § 110(1). This more sweeping change would put distance education on an equal footing with classroom education insofar as the unlicensed use of copyrighted works is concerned. The greater risks posed by distance education could be dealt with by technological controls.

Federal Intellectual Property Security Act

This proposal for legislation seeks to remedy flaws in the filing systems maintained by various federal offices for security interests in intellectual property. Although the proposal is well thought-out and carefully crafted, it could be improved in several ways, including:

• Excluding marks from the provision requiring the filing of a federal financing statement. Because of several crucial differences between federal marks and other forms of federal intellectual property, the proposal would result in a de facto "dual-filing" system for marks. In addition to being redundant, this dual-filing system poses some risk to lenders and consumers.

• Revising the key provision to make it clear that filing a federal financing statement gives the lender priority not only over subsequent transferees, but also over junior secured lenders.

Index

Discussion of Report on Copyright and Digital Distance Education . . . . . . . . . . . . . . 2

Discussion of Federal Intellectual Property Security Act . . . . . . . . . . . . . . . . . . . . . . 6

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Mr. Chairman and the Members of the Subcommittee:

My name is John Cross. I am a Professor of Law at the University of Louisville School of Law in Louisville, Kentucky. Before I begin, I would like to thank the Subcommittee for the opportunity to address the two items on today's agenda.

Because of my professional background, I can offer some unique insights into the matters before the Subcommittee. Prior to accepting a faculty position at the University of Louisville, I was an attorney in private practice in Minneapolis, Minnesota. A major portion of my practice involved representing the interests of small firms in obtaining and protecting intellectual property, especially trademarks. In that practice, I had the opportunity to deal with some of the problems that can arise when firms attempt to use their intellectual property as collateral for loans.

I have continued to specialize in intellectual property during my academic career. I regularly teach courses in Law and Computers and Trademark Law. I have published several articles dealing with various facets of intellectual property law. I have also had occasion to deal with these issues from a more practical perspective. I have served on my law school's technology committee for several years, acting as chair for the last two. In addition, I regularly provide consulting services for the University's Office of Technology Transfer, focusing primarily on patents. In this same capacity, I recently helped rewrite the University policy concerning ownership of intellectual property in inventions and works produced by University faculty. Finally, for the past several months I have served on a university committee dealing with, among other matters, the use of computer technology in distance education.

My work at the University of Louisville has kept me in tune with the myriad problems that arise in connection with distance education. The University of Louisville is a regional leader in providing distance education. Although we, like many other universities, originally used only television technology, the past few years have seen various faculty experiment with the use of other technologies, including interactive synchronous video and asynchronous web-based classrooms. More recently, the Commonwealth of Kentucky launched a major new distance education initiative, called the "Commonwealth Virtual University," in which most of the Commonwealth's universities will participate. Because of these activities, I consider myself qualified to comment on each of the proposals before the Subcommittee.

Before dealing with the specifics of each proposal, I would like to offer a few general comments concerning both the Report on Copyright and Distance Digital Education and the proposal for a Federal Intellectual Property Security Act. Both documents deal with important issues facing modern intellectual property owners. Both deal with these issues in a comprehensive and well-considered way. The concrete proposals for legislative change in each document have been carefully crafted to deal with the problems identified. Therefore, I wish to make it clear that although my statement identifies and discusses certain problems with each document, the positive aspects of each document far outweigh the problems. The proposals for legislative change set out in the Report on Copyright and Digital Distance Education would, if enacted into law, go a long way toward ameliorating some of the problems posed by the use of digital technology in distance education. Likewise, the Federal Intellectual Property Security Act could easily be turned into a bill dealing with providing notice of security interests in federal intellectual property. Each of these proposals needs only a little "fine-tuning" to become effective legislation.

The remainder of my Statement will deal with each of the documents in turn.

Report on Copyright and Digital Distance Education

Throughout the history of the United States, there has been a tension between education and copyright. The ultimate purpose of copyright is to advance the general level of knowledge. This goal is reflected in Article I, § 8 of the Constitution, which allows Congress "To promote the Progress of Science and the useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." Yet, the system the framers designed sometimes works at cross-purposes with the ultimate goal of increased knowledge. That system seeks to advance the general level of knowledge by giving authors exclusive control over the fruits of their creative activity. However, neither the Constitution nor the enabling legislation contains a general requirement that authors and inventors disseminate their works. There is no general compulsory licensing requirement in the Copyright Act. Accordingly, a stubborn author may prevent release of her work, thereby denying society the benefits of her creative activity and potentially thwarting the pursuit of greater knowledge.

Recognizing this problem, Congress has exempted certain educational activities from the federal copyright laws. As discussed at length in the Report, § 110 of the Copyright Act creates several broad exceptions relating to education. Section 110(1) allows nonprofit educational institutions to perform or display any copyrighted work in the context of face-to-face education. Section 110(2) creates a prerogative to perform or display copyrighted works as part of an educational "transmission." That second exception, of course, directly pertains to distance education. However, the §110(2) prerogative to transmit works is much narrower than the §110(1) prerogative to use works in the classroom. For example, while a teacher may perform any work in class, he may transmit a performance of only nondramatic literary or musical works. That limitation would significantly impair an educational institution's ability to offer a distance course in, e.g., "Modern American Film." Other provisions in §110(2) further restrict the freedom to transmit copyrighted works in ways that do not apply in the classroom.

In addition to §110, the fair use provision of §107 may also apply to education. An obvious example of an educational fair use not covered by §110 would be the use of an overhead projector to display a picture from a book or a passage from a novel or poem. Because the teacher has "copied" the work onto the overhead rather than performed or displayed the original, the §110 exceptions do not apply. However, because the teacher has used only a portion of the work for educational purposes, and done so in a way that has little if any impact on the market for the work, that use would be a non-infringing fair use.

The Report on Copyright and Digital Distance Education focuses primarily on the educational exceptions of §110, rather than the more general concept of fair use. Moreover, although it does discuss 110(1) at length, the Report concentrates on the transmission exception of §110(2). Rather than burden the Subcommittee with a rehash of the Copyright Office's excellent analysis, I will provide only a cursory review of the major points, together with my own observations on the Report's recommendations.

In essence, the Report identifies two basic types of problems with the current legislation. The first are various technical problems posed by changes in the types of technology used in distance education. The second are various policy considerations designed to facilitate the use of distance education.

Technical Proposals. The Committee's proposals concerning the technical matters are contained primarily in Part VI(B)(3)(a) - (e) and (i). I fully agree with all of these proposals. For example, as both §110(1) and (2) currently allow only "performance" and "display" of copyrighted works, a teacher may not rely on those provisions to copy a work. And yet, most distance education requires the creation of one or more copies, typically on a server. As long as these copies are merely incidental to the educational use, they should not constitute an infringement. Admittedly, such copying could constitute a non-infringing fair use under §107. However, as the Report accurately points out, the fair use exception is too vague to provide much guidance to teachers and educational administrators who are conscientiously trying to avoid infringing a copyright. If distance education is to succeed, there is a clear need to amend §112 to create the new "ephemeral recording exception" proposed in subsection (i) of the Report. For the same reasons, the subsection (b) proposal to add limited rights of reproduction and distribution is likewise very important.

On the other hand, the Report is also correct in noting that the exceptions should not be amended to the extent that they would effectively undermine the market for copyrighted academic works. In their current form, the §110(1) and §110(2) exceptions fit a specific paradigm -- a single, time-limited performance or display of a work. Although promoting distance education may necessitate relaxing the current requirement that such performance or display occur in a traditional classroom environment, the basic notion that the student's exposure to the work be limited in time should be preserved. In essence, the student should be allowed only a single access to the work. A student who wants to archive the display or performance in order to review it at a later date should ordinarily be required to compensate the copyright owner. In this regard, the distance education student would be treated no differently than a student in a traditional classroom environment. For example, although a college professor is free to read a copyrighted text to his students, any student who wants a permanent copy of the text must either purchase it from an authorized source or obtain permission to copy from the copyright owner.

With respect to these technical issues, I am somewhat more confident than the authors of the Report that technology will develop in a way that will enable an institution providing distance education to meet this "single access" requirement. Although not infallible, the use of passwords has already developed to a stage where access to distance education materials can be limited to students enrolled in a course. Effective technological controls on printing and archiving works should also not be difficult to develop, if in fact they do not already exist. Therefore, in order to ensure that copyright satisfies its ultimate goal of promoting the progress of knowledge, an educational institution that uses such controls should be given relatively free rein to perform or display works, together with any copying and distribution incidental to that performance or display, in connection with distance education.

Policy Issues. Parts VI(B)(3)(f), (g), and (h) of the Report deal with broader questions of policy. Although I agree with much the Report has to say about these matters, I also disagree with certain crucial points in (f) and (g).

Section (f) deals with the ongoing dispute concerning whether the §110(2) exception should continue to be available only to "nonprofit" educational institutions. I too have concern about a for-profit institution reaping profit from the free use of copyrighted works. On the other hand, given that the ultimate goal of copyright is to further knowledge, I would be hesitant to endorse a system that either denied for-profit educational institutions access to the same background materials available to non-profits, or made such access cost-prohibitive. I would suggest, however, that the issue is not as black or white as the Report makes it seem. Although it would be difficult to administer, Congress might want to consider the use of some sort of compulsory licensing regime for for-profit educational institutions. If works were available to those institutions at a reasonable cost, perhaps based on marginal profit, it would go a long way toward ensuring that for-profit and nonprofit educational institutions could utilize the same materials.

Section (g) suggests that the categories of works that qualify for the §110(2) exception be expanded, but in only a very limited way. I strongly disagree with this particular recommendation. As noted above, distance education may open up a number of new vistas in the education process. Most significantly, it may give those of limited means, or those with limiting personal or family circumstances, the chance to obtain a college education. In order for distance education to realize its promise, however, the educational process must mirror as closely as possible the traditional classroom environment. In fact, most of the technological development in distance education is geared toward making the virtual classroom as much like traditional face-to-face education as possible. If the technology is there, it would be terribly unfortunate if the law placed greater restrictions on a teacher providing distance education than it did on the teacher in the classroom setting. Section 110(1) allows a teacher in the classroom to perform or display any work. The teacher providing that same class to a distant audience should have the same freedom.

Of course, distance education that is based on digital technology poses greater risks to the copyright owner. As long as effective technological controls can be developed, and educational institutions are required to utilize those controls, we can achieve a balance between the economic interests of the copyright owner and society's need for furthering knowledge.

A More Comprehensive Proposal. The observations of the last two paragraphs lead directly into my last recommendation. The mandate given to the Copyright Office specifically called for it to consider ways in which §110(2) might be amended. Therefore, although the Report did deal with §110(1) to some extent, the vast majority of the discussion focused on §110(2). That focus, however, is unnecessarily confining. Were the whole question of how copyrighted works could be used in education to be considered anew, the result might be something more comprehensive than an amendment to §110(2). In fact, a more sweeping change would actually do a better job in striking a proper balance between the needs of education and the legitimate interests of copyright owners.

I propose that §110(2) be merged into an amended §110(1). The new provision would apply equally to all education, regardless of whether it takes place in the traditional classroom or over a network. Like the current §110(1), the new provision should allow the performance of any copyrighted work, not merely nondramatic or musical works. The other requirements of current §110(1), such as the requirement that only lawful originals be used, should of course be retained. The new provision could also incorporate the §110(2)(A) requirement that the performance or display be part of the education activities of the institution.

In addition, the new provision could incorporate many of the specific proposals that the Report makes concerning §110(2). Because distance education poses greater risks to the copyright owner, an educational institution should be required to limit access to authorized students. Likewise, the institution should be required to use available technological controls to prevent unauthorized archiving or printing of works, or the dissemination of copies to third parties.

The goal of my proposal is for the law to treat traditional and distance education alike. That is, in fact, the direction that the technology is heading. Although I personally wonder whether distance education can ever fully recreate the dynamic that exists in the traditional face-to-face classroom, the technology may prove me wrong. If so, it would be unfortunate for the law to stand in the way of a process that could make quality education available to all. Therefore, the distance educator should have exactly the same prerogatives as the in-class educator.

In closing, I commend the Copyright Office for its comprehensive report and specific proposals for change. That Report will be a valuable tool for Congress when it decides whether the problems posed by distance education warrant a legislative solution.

Federal Intellectual Property Security Act

The proposal for a Federal Intellectual Property Security Act deals with a technical, but important, problem facing a wide variety of businesses. Federal patent, trademark, copyright, and similar laws turn inventions, works, and business symbols into valuable assets. By providing a limited monopoly for these assets, Congress has in essence created a new form of business capital. In fact, for many start-up companies, especially those in the biomedical industry, the capital represented by a patent or copyright is the company's main asset.

Marketing a new invention or copyrighted work often requires significant start-up costs. Because many authors and inventors simply do not have the money, they simply license their innovation to another. In many cases, these deals prove unsatisfactory to the author or inventor, as the royalty that they receive may be only a small share of the ultimate proceeds attributable to the invention or work. Realizing this, a growing number of inventors and authors forego the standard channels of distribution and attempt to market their intellectual property themselves. To obtain the start-up costs, these inventors and authors typically borrow money from a commercial lender. As the federal intellectual property right is the heart of the fledgling business enterprise, the institutional lender quite naturally takes a security interest in that intellectual property right as collateral for the loan.

There is already a well-established practice of granting security interests in intellectual property. The Proposal before the Subcommittee today deals not with the validity of the practice, but in the seemingly more mundane question of how the secured lender provides notice of its interest to others. Most security interests, regardless of whether they involve tangible or intangible collateral, are accompanied by the filing of a financing statement with a state registry. That filing "perfects" the interest, giving the lender priority over subsequent transferees and other security interests.

In theory, that same system would work for federal intellectual property rights. However, each of the federal laws dealing with intellectual property contains a provision governing how the right may be transferred. All of these provisions require that notice of the transfer be filed with the federal office responsible for overseeing that form of intellectual property. A transferee who fails to file the required notice runs the risk that the transfer will not be effective against a subsequent transferee of the same intellectual property right.

Although there is a difference between the grant of a security interest and an outright conveyance, most lenders already file notice of security interests in federal intellectual property with the appropriate federal office, usually in addition to a state filing. Because a default on the underlying loan may lead to foreclosure, this federal filing helps to ensure that the lender will take good title to the intellectual property interest in the event of foreclosure. All of the federal offices routinely accept these notices.

However, the current filing system has certain problems. First, as the Proposal acknowledges, there is some disagreement among the courts as to whether a federal filing is necessary to safeguard the lender's interest, especially in the field of copyright. Second, many commercial lenders take a security interest in all business assets, including property acquired by the debtor afer the date of the loan. While state filing systems based on the Uniform Commercial Code allow the lender to file a financing statement containing a general description of the collateral, the federal offices do not.

The Proposal has two basic goals. The first goal is substantive: to make filing in the federal office alone sufficient to protect the lender's rights. Although a lender would still be free to file in a state office, only the federal filing would ensure the lender priority over subsequent transferees. The second goal is to make the federal filing system more like current state UCC-based systems, by allowing for general descriptions of collateral.

The proposal is very well thought-out and carefully drafted. However, there are a few areas in which the Proposal might be improved. To this end, I have one general suggestion, and a handful of more specific recommendations.

General Comment. The Proposal makes a great deal of sense for security interests in copyrights, patents, boat hull designs, mask works, and plant variety protection. However, it is more problematic with respect to marks. Because there are significant differences between marks and other forms of intellectual property, making a federal filing an absolute prerequisite to priority is at best unnecessary, and quite possibly detrimental to the interests of lenders, owners of marks, and even consumers. I therefore recommend that if the proposal is introduced as a bill, it should be amended to exclude coverage of marks. Although filing notice of a security interest with the Patent and Trademark Office should by all means be allowed, it should not be a prerequisite for obtaining priority over junior interests in the mark.

Most federal intellectual property rights involve discrete, ascertainable interests. A patent is the exclusive right to make and sell a particular invention, as defined by the claims. A copyright grants a set of exclusive rights in a certain identifiable work. The laws governing mask works, plant variety protection, and boat hull designs also fit this basic paradigm. There is a one-to-one relationship between the federal right and the creation. In addition, the right granted by federal law is separable from the underlying object. An author or inventor may sell the physical embodiment of his creation without losing his copyright or patent. Therefore, the federal right and the physical creation each have a separate value.

A mark also relates to an identifiable business asset. Trademarks, service marks, collective marks, and certification marks are all symbols that represent the value of the goodwill that the owner of that mark has garnered over the years. But the similarity between marks and other forms of federal intellectual property ends there. First, unlike other federal intellectual property rights, a mark cannot be separated from the goodwill that it represents. A "naked" assignment of a mark (that is, a transfer of a mark without the goodwill of the transferor) is considered an abandonment of the mark, resulting in the loss of all rights in the mark. Section 10 of the Lanham Act (15 U.S.C. § 1060) incorporates this concept, and allows a mark to be assigned only along with the associated goodwill.

A second difference between marks and other federal intellectual property rights is that the protection of marks is not exclusively federal. Both federal and state laws afford protection to marks. Although registration of a mark under the Lanham Act does afford the owner of that mark certain additional rights, federal registration is not required for legal protection. A significant number of marks, especially service marks, are protected only by state law.

A third unique feature of marks is that there is not necessarily a one-to-one relationship between the right and the underlying asset. A person has only one patent in a given invention. A business may, by contrast, have a series of marks relating to the same good or service. It may, for example, claim rights not only in the stylized trademark it uses on its product, but also on the unadorned words alone. It may similarly use a symbol on the same product. In some cases, the distinct packaging or even a unique product design may function as a mark. It is not uncommon for a firm to register only some of its marks, relying on state law to protect the others.

The Proposal fails adequately to address the consequences that flow from these differences between marks and other forms of federal intellectual property. As written, the proposal applies only to marks that have been registered under the Lanham Act (although the Proposal fails to specify, I assume that this means registration under either the Principal or the seldom-used Supplemental Register of the Lanham Act). As a result, it applies neither to unregistered marks nor to the underlying goodwill of the firm. Security interests in these unregistered marks and goodwill must be perfected by state filings. Because a lender who takes a mark as collateral will invariably also take an interest in both the underlying goodwill and all other marks that pertain to that goodwill, the Proposal in effect creates a "dual-filing" system for marks, in which the lender will file in both the state office and the Patent and Trademark Office.

At best, this dual-filing system is an unnecessary redundancy. Admittedly, the burden of establishing and maintaining the system will not be that great. The Patent and Trademark Office already allows notices of security interests to be filed. The cost of converting that system to accommodate the new federal financing statement should not be that significant. Assuming that the filing fees remain reasonable, the additional cost to the lender of the second filing will be minimal.

On the other hand, what does the requirement of a second filing accomplish? As noted above, a mark cannot be separated from the goodwill with which it is associated. Therefore, any potential purchaser of an ongoing business will search for security interests in both the underlying goodwill and all marks associated with that goodwill. Because a state filing is necessary to perfect a security interest in the goodwill and any unregistered marks, the prudent buyer will automatically conduct a search of the state registry. If that search discloses that the goodwill is encumbered, that buyer has no need to conduct a second search in the appropriate federal office, for a mark is worthless without the underlying goodwill. Therefore, in the case of a mark, the requirement of a federal filing seems redundant.

Moreover, in certain situations the dual-filing system may actually have a detrimental effect. Although a careful lender would file with both the Patent and Trademark Office and the state registry, it is possible that a lender might comply with the requirements of one system but not the other. Suppose, for example, that a lender files a proper federal financing statement, but fails to make a proper state filing (it might, for example, have filed with the wrong state). That lender would have a perfected interest in the federal mark, but not any state marks or the underlying goodwill. Suppose further that the debtor later sells its business, including the goodwill, to a third party, pursuant to a sales agreement that makes no mention of any federally-registered marks. As the Proposal is drafted, if that third party had no actual notice of the lender's interest, it would take free and clear of the security interest. Although the federal filing might otherwise serve as constructive notice, the third party would have no reason to search the Patent and Trademark Office filing system, as it was not purchasing any federal marks.

Of course, it might seem as if the lender in this situation has merely suffered the consequences of its carelessness. However, one other consequence may result from this sequence of events. After the conveyance to the third party, the federal mark and the goodwill are owned by different parties. This separation of the mark and the goodwill results in abandonment of the mark, destroying its entire value. This possibility of abandonment certainly affects the lender, and will invariably be reflected in lending rates. Moreover, abandonment of the mark may also affect innocent consumers. After abandonment, anyone is free to adopt the mark for use on its own goods or services. Because consumers rely extensively on marks to make purchasing decisions, the unintended dissociation of the mark and the goodwill of the original seller is likely to cause customer confusion -- precisely the sort of confusion that the Lanham Act is designed to prevent.

Admittedly, the scenario set out just above is somewhat unlikely. But given that the requirement of a federal filing is redundant anyway, the risk of customer confusion is a further reason to question the desirability of a dual-filing system. Although allowing a federal filing for marks is commendable, actually requiring that filing as a prerequisite to protecting the lender's interest may well prove to be unwise. I therefore suggest that any future federal intellectual property security act omit marks from the compulsory filing provision.

Specific Comments. I also have a few specific comments concerning the Proposal, which I have referenced by the section numbers used in the Proposal.

Section 2(6)(b). If the act is to include federally-registered marks, this clause must be amended to include a reference to the Commerce Clause. The Patent and Copyright Clause of Article I, §8, cl. 3 cannot serve as the basis for federal laws dealing with marks. That clause allows Congress to provide protection "for limited Times." Protection of a mark is not limited in term, but continues for as long as the owner uses the mark. Moreover, Article I, §8 allows Congress to give rights only to "Authors and Inventors." Authors and inventors innovate. Legal protection of a mark, by contrast, does not require innovation. Rights in a mark vest in the person who has used that mark in connection with a given good or service for the longest time. That senior user has rights even if she copied the mark from someone else who used it for a different good or service.

Section 3(b)(2)(B). This provision is the heart of the entire Proposal, and therefore warrants close scrutiny. As written, filing a federal financing statement protects the secured party against subsequent transfers of the federal intellectual property. "Transfer" is defined in section 3(a) to exclude security interests. Therefore, as written, the Proposal nowhere provides that filing a federal financing statement gives the lender priority over junior security interests. Lenders could, of course, obtain that priority under state law by making a second filing with the state office. To eliminate that need, however, this provision should be amended to provide that a federal filing gives the lender priority not only over subsequent transferees, but also over junior security interests.

Section 3(b)(3)(B). I would recommend that the parenthetical phrase ("and, in the case of Federal marks, the goodwill of the business connected with the use of and symbolized by such Federal marks") be deleted. Goodwill is not a federal intellectual property right. Therefore, even if the Proposal becomes law, lenders will continue to perfect security interests in goodwill by filing with state offices. A potential purchaser of that goodwill will continue to search the state filing systems to determine if the goodwill is encumbered. The wording of this section, however, could be construed as allowing a lender to perfect a security interest in goodwill by filing either a state or federal financing statement. This in turn would force all purchasers of an ongoing business concern to conduct a separate search in the Patent and Trademark Office, in the off chance that the seller also has a federally-registered mark connected with that goodwill. Due diligence would require a federal search even if the purchase agreement did not mention federal marks.

Second, I am somewhat uncomfortable with the last clause of this section, which provides that a reference to "intellectual property" or "general intangibles" in a federal financing statement is sufficient to cover not only intellectual property that already exists, but also any federal intellectual property produced at a later date. I realize that whether that after-acquired property is actually subject to the security interest is governed by the security agreement, not the financing statement. However, if an author or inventor should later produce another work or invention, a subsequent lender may be hesitant to lend money out of fear that the new invention is already subject to a senior security interest. Without this clause, subsequently produced intellectual property would be covered by a financing statement only if that statement contained a specific after-acquired property clause. Requiring a specific reference would give the author or inventor who foresees acquiring additional copyrights or patents the chance to negotiate the language employed in the financing statement.

Admittedly, section 3(b)(3)(6) could address this problem. That section makes the lender responsible for any damages that the debtor suffers due to an improper financing statement. However, as the Proposal is written, a lender is perfectly free to file a federal financing statement containing broad language like "general intangibles," even if the security agreement does not actually reach after-acquired property. Therefore, if the damages action provided by section 3(b)(3)(6) is deemed an adequate deterrent, it should be amended to cover the problem of after-acquired property.

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I thank the Subcommittee for the opportunity to present my views on these matters, and hope that my comments will help you in any further action you may take on these proposals.

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John T. Cross