Joint Statement of

G. Larry Engel

Representing the Section of Business Law

and

Susan Barbieri Montgomery

Representing the Section of Intellectual Property Law

American Bar Association

Prepared for

Subcommittee on Courts and Intellectual Property

Committee on the Judiciary

U.S. House of Representatives

June 24, 1999

Oversight Hearing on Intellectual Property Security Registration

Chairman Coble, Members of the Subcommittee:

Thank you for the invitation to testify at today's oversight hearing on intellectual property security registration. The views we are expressing today represent those of the Section of Intellectual Property Law and the Section of Business Law of the American Bar Association. These views have not been approved by the House of Delegates or Board of Governors of the ABA, and, accordingly, should not be construed as representing the position of the Association as a whole.

We understand that one of the matters the Subcommittee will be examining this afternoon is a legislative proposal prepared and presented to you for your consideration by our two Sections of the ABA, a copy of which is attached. As co-chairs of a Joint Task Force that worked on behalf of the two Sections to develop this proposal, we appreciate the opportunity to appear before the Subcommittee to explain and speak on behalf of our proposal. We believe that this is an important law reform effort to facilitate secured financing, to clarify legal issues adversely impacting commerce, and to ensure uniform treatment of intellectual property security consistent with reasonable business practices.

Our names are G. Larry Engel and Susan Barbieri Montgomery. In addition to co-chairing the Joint Task Force, Larry Engel is also the Chair of the ABA Business Law Section's Ad Hoc Committee on Security Interests in Intellectual Property, and speaks for the Business Law Section from the perspective of commercial lawyers and clients. Business Law Section participants on the Task Force represent a wide range of Committees, such as the Uniform Commercial Code Committee, the Business Bankruptcy Committee, the Commercial Financial Services Committee, the Banking Committee, the Corporate Counsel Committee, the Corporate Practice Committee, the Cyberspace Law Committee and others. Susan Barbieri Montgomery is the chair of the ABA Intellectual Property Law Section's Committee 457, and she speaks for the Intellectual Property Section from the perspective of intellectual property lawyers and their clients, including those whose practices focus on patents, trademarks, copyrights, computer chip mask works, and trade secrets. The diverse perspectives and experiences of the two areas of specialty have been synthesized in the ABA proposal.

In order to facilitate the financing on desirable terms that is needed to fund the operations and growth of U.S. businesses, it is necessary for many businesses to borrow on a secured basis, often using all of their assets as collateral. In the technology development environment, intellectual property collateral may also be needed to secure other types of performance obligations. For technology companies, a bundle of intellectual property may be the only available significant asset. Increasingly, for all types of American businesses, intellectual property assets are a valuable part of any collateral package.

In order to satisfy the needs of commercial lenders and other parties, a security interest in collateral must be capable of certain and cost-effective "perfection," so that the lender can establish its priority over subsequent lenders and the lender's security interest is not avoidable in the event of the bankruptcy of the borrower. See Bankruptcy Code §§ 544, 547. It is also necessary for a financier to be able to quickly and inexpensively verify the borrower's ownership and the priority of the security interest in comparison to any competing interests and transfers. Unfortunately, in the case of intellectual property collateral, the certainty and predictability required for such financing have been impaired by varying treatment in the different Federal statutes and by several controversial court decisions (discussed below). These problems are addressed and, we believe, resolved by the proposed legislation we have submitted. In addition, related reforms in the ABA proposal facilitate financing by implementing better practices involving notice filings, availability of records and other process changes (e.g. elimination of the uncertainty created by current "lookback" periods for recording of intellectual property transfers) to expedite transactions.

While parallel law reform efforts have been undertaken at the State level with respect to security interests and notice filings pursuant to the Uniform Commercial Code, the Federal intellectual property laws and filing processes have not evolved in a consistent manner. This difference exists in part because the Federal intellectual property laws were designed to focus on absolute transfers of ownership, rather than upon security interests. These issues have been studied for years by the Joint Task Force, but the need for reform has accelerated because of financing realities of increasing importance for all types of businesses, whether or not considered technology companies. Every company has trademarks and trade secrets, and most now also have copyrights, although the latter are most commonly not registered. Many companies also have interests in patents and other types of intellectual property.

While intellectual property is normally addressed as a part of a collateral package that includes the borrower's other assets, a problem arising with respect to the intellectual property collateral can prejudice the quality and value of the other types of conventional collateral. For example, even a lender who is primarily lending against the borrower's accounts receivables and inventory can be severely prejudiced if the lender's security interest in intellectual property is problematic. Consider, for example, the fate of a lender whose inventory collateral is copyrighted or trademarked, if the lender cannot maintain an effective security interest in such intellectual property. This is the principal focus of the Commercial Finance Association's "quick fix" for copyrights. While the CFA proposal appropriately addresses the copyright part of the problem, that narrow copyright solution may not eliminate some broader problems created by cases like Avalon Software, discussed below, which affect patents and trademarks as well.

Similarly, the lender can be disappointed if the revenue from the licensing or sale of the borrower's products is deemed to be avoidable "proceeds" of an unperfected security interest in the underlying intellectual property. As noted below, some controversial court decisions would make it legally impossible to preserve in the borrower's bankruptcy a security interest in the borrower's unregistered copyrights and their "proceeds". Such courts have defined "proceeds" to include certain ordinary revenue from disposition of the products in the borrower's inventory (e.g., revenue from the sale of hardware products is treated in part as proceeds of the unregistered copyrights in software or licenses included with the products).

These problems frustrate financing and create unnecessary risks, which decrease the availability of cost-effective financing for companies on desirable terms. Lenders (and other secured parties to technology transactions) are often either hesitant to extend credit secured by intellectual property assets or they devalue the asset to reflect the uncertainty and risk associated with this type of collateral. This problem is especially serious for software companies, whose unregistered copyrights and license revenue raise the most difficult issues under the controversial court decisions. However, since the Supreme Court has confirmed that copyrights apply to marketing materials including product packaging (e.g. shampoo labels), almost every business has unregistered copyrights at issue. Under the controversial bankruptcy court decisions described below, the lenders risk the loss of the value allocated by the bankruptcy court to at least their copyright collateral and its proceeds. Because such collateral is typically interdependent and integrated with other collateral, such bankruptcy allocations between perfected collateral and avoidable collateral impose unnecessary litigation risks and uncertainties.

As one court recently observed in invalidating a trademark security interest that was not perfected under the applicable State version of the Uniform Commercial Code,

It is, of course, unfortunate that the trademark statute is sufficiently vague to require judicial interpretation. This produced the understandable mistake made here. Security interests in patents present the same difficulty…. Not even the copyright statute is totally consistent with the Uniform Commercial Code. All three statutes should be amended to place them in better harmony with the Code…. (emphasis added).

In re Together Development Corp., 227 B.R. 439, 442 (Bankr. D. Mass. 1998).

Controversial Court Decisions Impacting Security Interests

The Federal copyright, patent and trademark statutes provide systems for recording ownership and transfers of interests in the different types of Federal intellectual property. Over many years of continuous law reform efforts, the Uniform Commercial Code ("UCC") has created a cost-effective and uniform system of "perfecting" (and establishing priority among) security interests in most types of assets by means of a simple notice filing. Under any reasonable interpretation of the existing law, this system governs at least security interests in trade secrets and state trademarks and their associated "goodwill." Most experts contend that the UCC also governs the perfection of security interests in Federal trademarks and patents, consistent with all but one of the relevant court precedents, because those Federal laws deal with transfers of ownership, as opposed to security interests. See, e.g., (trademarks) In re Roman Cleanser Co., 802 F.2d 207 (6th Cir. 1986); In re 1992 Z Inc., 137 B.R. 778 (Bankr. C.D. Cal. 1992); In re Topsy's Shoppes, Inc. of Kansas, 131 B.R. 886 (D. Kan. 1991); In re Chattanooga Choo-Choo Co., 98 B.R. 792 (Bankr. E.D. Tenn. 1989); In re TR-3 Industries, 41 B.R. 128 (Bankr. C.D. Cal. 1984); (patents) City Bank and Trust Co. v. Otto Fabric, Inc., 83 B.R. 780 (D. Kan. 1988); Chesapeake Fiber Packaging Corp. v. Sebro Packaging Corp., 143 B.R. 360 (D. Md. 1992); In re Transportation Design and Technology, Inc., 48 B.R. 635 (Bankr. S.D. Cal. 1985); Holt v. United States, 73-2 U.S.T.C. ¶ 9680 (5th Cir. 1973). The core of the problem addressed by the proposed legislation arises from several related, controversial court decisions, commencing with In re Peregine Entertainment, Ltd., 116 B.R. 194 (C.D. Cal. 1990). See In re AEG Acquisition Corp., 161 B.R. 50 (9th Cir. BAP 1993); In re Avalon Software, Inc., 209 B.R. 517 (Bankr.D. Ariz. 1997); The Clorox Co. v. Chemical Bank, 40 U.S.P.Q. 2d 1098 (1996).

Clearly, in the modern world the borrower's products will often involve an interaction among all types of intellectual property, such as, for example, a patented hardware product with a valuable trademark that operates using software involving registered or unregistered copyrights and that is produced with the use of valuable trade secrets. If one part of that lender's security interest in that integrated bundle of rights (e.g. the copyrights) is unperfected and therefore becomes avoidable in bankruptcy, then a wholly artificial allocation of value must occur among the functionally inseparable components of a unitary product and its proceeds.

Indeed, even a pure software product may create complex value allocation problems, since the software product typically involves far more than copyrights on the source and object codes, but can also involve trade secrets and patents, as well as trademarks. There is no clear, consistent system for establishing the priority of the secured party's interest in a technology product or process that combines different types of intellectual property. Because many financiers margin the amount of credit that they extend to their borrowers against the reliable value of their perfected and nonavoidable collateral, uncertainty about intellectual property collateral unnecessarily reduces the credit available to borrowers. This problem is particularly acute in the technology development environment, where the developer faces great difficulty in obtaining credit until its technology is sufficiently developed to permit registration under the Federal systems.

The least controversial of several debated holdings of these controversial cases is that a trustee in bankruptcy can avoid a security interest in registered copyrights, if the secured party fails to record the security interest in the Copyright Office. See Bankruptcy Code §§ 544, 547. At least one court and many (but not all) experts would also agree that existing law creates that same result for unregistered copyrights, although this interpretation means that it is legally impossible to perfect a security interest in unregistered copyrights. Thus, in many cases (especially involving software) friction arises between lenders and borrowers over whether to depart from the borrower's rational industry practice of not registering many types of copyrightable material that the borrower owns.

However, even when the copyright owner elects to register its copyrights in the Copyright Office so that it is possible for the lender to perfect its security interest, the result is imperfect. In many cases the borrower regularly creates derivative works that upgrade the copyrighted work, which derivative works would, therefore, require frequent and burdensome supplemental registrations and security filings for the protection of the lender under current copyright law. Even where such supplemental registrations and security filings occur, the lender may still be at risk as a result of the 90-day preference exposure under Bankruptcy Code § 547.

An even more controversial decision in those disputed court cases is that certain revenue from the borrower's products constitutes "proceeds" of intellectual property. For example, license royalty payments on software operating a product sold by the buyer could be deemed "proceeds" of a copyright. If the security interest in the copyright is avoidable in bankruptcy, then so is the security interest in such proceeds. This is disputed by most legal experts, who would focus instead on the UCC status of such revenue as, for example, an "account" or "general intangible" (see UCC § 9106) or as proceeds of the "inventory" being sold by the borrower (see UCC §§ 9306, 9109). There are some supporting court decisions for that UCC interpretation. See, e.g., Broadcast Music, Inc. v. Hirsch, 104 F.3d 1163 (9th Cir. 1997).

In any event, unless the lender's only collateral is a bare copyright license by itself (an increasingly smaller percentage of the total transactions in many industries), this "proceeds" issue creates uncertainty and allocation disputes. In many transactions, the revenue at issue arises from a single price paid by the customer for a combination of a trademarked or patented hardware product and licenses of various kinds of intellectual property, including software copyrights. Indeed, as a result of the Supreme Court's confirmation of copyright protection for shampoo labels as recognized in Quality King Distributors, Inc. v. L'anza Research International, Inc., 523 U.S. 135, 118 S.Ct. 1125, 140 L.Ed. 2d 254 (1998), a portion of the accounts receivable from the sale of even "low tech" inventory could be argued under the disputed Peregrine theory to be proceeds of a copyright.

However, the ultimate intellectual property "heresy" is evidenced by the bankruptcy court's decision in In re Avalon Software, Inc., where the court appeared (without citing authority or offering an explanation) to "deperfect" and avoid what experts would have considered to be nonavoidable perfected security interests in trademarks, trade secrets, and software related licenses, contracts, and inventory (.e.g, user manuals, documentation, etc.). In effect, because the lender was unable to perfect the security interest in the bankrupt software company's copyrights, the lender lost the core of its tangible and intangible software-related collateral, even though the lender's interest in everything but the copyright was properly perfected under the UCC. In effect, the Court dodged the difficult allocation issue for splitting the value of the debtor's assets between (1) the software-related copyrights, and (2) everything else, by treating all of the software related assets as if they were somehow merged into the unperfected copyrights and, therefore, as also avoidable by reason of their association with the avoidable copyright security interest. The fact that the unprecedented Avalon theory is widely deemed to be incorrect by legal experts does not prevent that theory from now being regularly argued by trustees in bankruptcy across the country. While the Avalon aberration may be extreme, it illustrates why reform is essential.

We perceive no compelling policy or legal reason for making it legally impossible to perfect security interests in unregistered copyrights, or even in making it impractical to perfect security interests in registered copyrights. While some parties still attempt to address these problems by using documentation which is in form an absolute assignment of rights to the borrower's intellectual property (but is intended to be a security interest), the results can be very disappointing. See, e.g., The Clorox Co. v. Chemical Bank, 40 U.S.P.Q. 2d 1098 (1996) (transfer of rights in trademarks prior to actual registration and use is void where the secured creditor describes the transfer as an assignment rather than a security interest); Haymaker Sports Inc. v. Twain, 581 F.2d 257, 261 (CCPA 1978) (voiding an assignment under the "assignment in gross" doctrine). Proper treatment of security interests should eliminate the need to accept the risk of such results.

Other Desirable Reforms

The desire for certainty and uniformity with respect to the filing requirements for security interests in intellectual property goes far beyond borrowers and lenders. Clearly, many parties to commercial transactions besides traditional lenders have an interest in obtaining security interests to secure obligations of their counter-parties, including because they wish to receive the increased protections available to secured creditors in the event of the counterparty's bankruptcy. Moreover, licensees, licensors, purchasers, venture partners and other parties to strategic transactions also have an interest in being able to determine the nature and extent of competing security interests, encumbrances and other interests in intellectual property. While some transactions may only involve one type of intellectual property, increasingly multiple intellectual property rights are involved in transactions, so that lenders and others have become accustomed to searching in both state UCC filing offices and Federal registries. The burden of UCC filing and searching is not as significant as one might expect, since intellectual property is classified as "general intangibles" under UCC § 9106, which need only be filed in one state under UCC § 9103, not in every state where the borrower does business.

The current search process is, however, complicated by the existing "lookback" provisions under Federal intellectual property laws. These provisions require parties desiring timely closing of their transactions to assume the risk of the existence of a preceding transfer of intellectual property rights that is not yet submitted for recordation. Other complications for the due diligence process of evaluating title to intellectual property collateral under current law include varying requirements and documentation among the copyright, patent and trademark laws, as well as gaps in the records.

Given the present uncertainties, the current practice of many lenders and secured parties is to undertake dual filings: one UCC filing in the applicable state system (UCC §§ 9103, 9401), together with filings in the Patent & Trademark Office for patents and trademarks and in the Copyright Office for registered copyrights and mask works. (As noted above, there is no present ability to file a security interest in the Copyright Office for unregistered copyrights, and software developers and various other copyright owners are reluctant for costs or competitive business reasons to register all their copyrights.) The ABA proposal is consistent with that practice, with the state UCC filing perfecting the lender's security interests (and making it nonavoidable by the trustee in bankruptcy), while the Federal filing establishes priority as compared to subsequent transfers of ownership interests in the applicable Federal intellectual property.

State UCC notice filings to perfect security interests are preferred not just by lenders but by many secured parties for various reasons, including:

The UCC permits "floating" liens on all intellectual property of the owner, whether now existing or hereafter arising. This floating lien does not exist under Federal intellectual property law, thus, for example, creating the copyright burden described above with respect to the requirement of separate filings for each new derivative work.

Instead of the separate filing requirements under Federal law for each new copyright, trademark or patent, UCC notice filings can be done by general descriptions of the covered collateral, even in advance of the closing of the transaction (e.g., a security interest in all general intangibles, including all patents and applications of the debtor, now existing or hereafter arising.)

Instead of indexes by registration number in the Copyright Office, UCC searches can be conducted in the applicable state by reference to the debtor-owner's name.

After decades of encouragement from commercial users, the UCC filing and search reporting systems are comparatively quick and cost effective to use, without a transaction-delaying "look back period" as exists under the Federal intellectual property laws.

The law reform contemplated by the ABA proposal introduces many of these desirable features in the proposed Federal filing system for security interests in intellectual property..

The Proposed Legislation Implements ABA Joint Task Force Recommended Reforms

After years of study and consultation with many client constituents of the ABA Business Law Section and Intellectual Property Law Sections, the ABA Joint Task Force has made the following recommendations:

The establishment of a "Mixed Approach" of Federal and state law to govern recordation of security interests in intellectual property. Under this mixed approach, recordation in the relevant Federal agency of security interests in intellectual property governed by federal law would establish the secured party's priority with respect to subsequent bona fide purchasers for value and all other subsequent transferees of ownership interests, excepting only security interests. Recordation of security interests in all intellectual property in the relevant state agency under Article 9 of the Uniform Commercial Code would perfect the security interest and establish priority as against other secured parties and lien creditors.

Provision for utilization of the same type of notice filing in the federal agencies with respect to security interests as in state agencies under the Uniform Commercial Code. This would be accomplished by amendment of the patent, trademark, copyright and mask work laws and rules to permit recordation in the respective federal agencies of notices of security interests with respect to debtors, without requiring specific identification of the properties securing the debt and without requiring recordation of the security agreement itself. Substantially the same form of notice filing as is currently employed under the Uniform Commercial Code could be utilized in the federal filing,

Permitting the notice filing of security interests to apply to "after-acquired" intellectual property of debtors.

Making the Federal agency records concerning title to and security interests in intellectual property more useful by eliminating or substantially reducing the period for recordation of documents. This would be accomplished by amendment of the patent, trademark, copyright and mask work laws to substantially reduce the "lookback" periods for recordation of documents concerning title to and security interests in intellectual property, and requiring prompt recording and indexing by the federal agencies.

Encouraging the establishment of an electronic filing system. This would reduce the agencies' burden of handling and recording security interests and facilitate the prompt and cost-effective availability of records for interested parties.

The ABA proposal embodies the approach recommended by the ABA's Section of Intellectual Property Law and Section of Business Law to implement these reforms in a manner that we hope and believe is consistent with the needs of all relevant constituencies. We would welcome the opportunity to work with you and the Subcommittee staff in further developing and advancing these proposals. Thank you for your interest and consideration.

FEDERAL INTELLECTUAL PROPERTY SECURITY ACT

A BILL

To amend titles 17 and 35, United States Code, and the Trademark Act of 1946 to provide for the perfection of security interests in copyrights, patents, trademarks, and other intellectual property, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled:

Section 1. Short Title.

This Act may be cited as the "Federal Intellectual Property Security Act."

Section 2. Recordation of Security Interests in Intellectual Property

(a) Title 17, United States Code, is amended--

(1) By amending the definition of "transfer of copyright ownership" in section 101 to read as follows:

"A 'transfer of copyright ownership' is an assignment, exclusive license or any other conveyance or alienation of a copyright or of any of the exclusive rights comprised in a copyright, whether or not it is limited in time or place of effect, but not including a nonexclusive license or the grant of a security interest."

(2) By amending section 205(d) to read as follows:

"(d) Priority between conflicting transfers - As between two conflicting transfers of

copyright ownership, the one executed first prevails if it is recorded, in the manner required to give constructive notice under subsection (c), 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 value, and without notice of the earlier transfer."

(3) By adding the following at the end of section 205:

(f) Notwithstanding subsections 205(a)-(e), the provisions of section 205 shall not apply to the creation, attachment, perfection, priority or enforcement of a security interest in a copyright or the proceeds thereof; no document creating, evidencing or otherwise relating to the creation or perfection of a security interest shall be required to be recorded under section 205; and the recordation of a document under section 205 shall not give constructive notice of any fact relating to the existence or priority of any security interest; provided, however, that transfer statements submitted in accordance with section 3(b)(4)(G) of the Federal Intellectual Property Security Act shall be recorded and once recorded shall give constructive notice under subsection (a) of the contents thereof."

(4) By amending section 903(c) to read as follows:

"(c) (1) Any document pertaining to a mask work 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. The Copyright Office shall, upon receipt of the document and the fee specified pursuant to subsection 908(d), record the document and return it with a certificate of recordation. The recordation of any transfer or license under this paragraph gives all persons constructive notice of the facts stated in the recorded document concerning the transfer or license.

(2) Notwithstanding subsections 903(a)-(d), the provisions of section 903 shall not apply to the creation, attachment, perfection, priority or enforcement of a security interest in a mask work or the proceeds thereof; no document creating, evidencing or otherwise relating to the creation or perfection of a security interest shall be required to be recorded under section 903; and the recordation of a document under section 903 shall not give constructive notice of any fact relating to the existence or priority of any security interest; provided, however, that transfer statements submitted in accordance with subsection 3(b)(4)(G) of the Federal Intellectual Property Security Act shall be recorded and shall give constructive notice under subsection (a) of the contents thereof."

(b) Section 10 of the Trademark Act of 1946 is amended to read as follows:

"1060. Assignment of mark; execution; recording; purchaser without notice

A registered mark or a mark for which an application to register has been filed shall be assignable with the goodwill of the business connected with the use of and symbolized by the mark. However, no application to register a mark under section 1051(b) of this title shall be assignable prior to the filing of the amendment under section 1051(a) or the verified statement of use under section 1051(d) of this title, except to a successor to the business of the applicant, or portion thereof, to which the mark pertains, if that business is ongoing and existing. In any assignment authorized by this section or by section 3(b) of the Federal Intellectual Property Security Act, it shall not be necessary to include the goodwill of the business connected with the use of and symbolized by any other mark used in the business or by the name or style under which the business is conducted.

Assignments shall be by instruments in writing duly executed. Acknowledgment shall be prima facie evidence of the execution of an assignment and when recorded in the Patent and Trademark Office the record shall be prima facie evidence of execution. An assignment shall be void as against any subsequent purchaser for a valuable consideration without notice, unless it is recorded in the Patent and Trademark Office prior to such subsequent purchase, and shall be subject to the rights of any secured party who has filed a federal financing statement prior to the date of filing of such assignment. A separate record of assignments submitted for recording hereunder shall be maintained in the Patent and Trademark Office. An assignee not domiciled in the United States shall be subject to and comply with the provisions of section 1051(e) of this title."

(c) The final paragraph of section 261 of title 35, United States Code, is amended to read as follows:

"An assignment, grant or conveyance of a patent application or a patent (but not of a security interest in a patent application or a patent) shall be void as against any subsequent purchaser for value, without notice, unless it is recorded in the Patent and Trademark Office prior to the date of such subsequent purchase. Except as provided in section 3(b)(4)(G) of the Federal Intellectual Property Security Act, the rights and obligations of all persons with respect to a security interest in a patent, a patent application, or the proceeds of either, including matters of creation, attachment, perfection, priority, and enforcement, shall be governed by non-federal law relating to security interests in personal property."

(d)-(f) RESERVED FOR CONFORMING AMENDMENTS TO THE PLANT VARIETY PROTECTION ACT, 7 U.S.C. §2321 et seq, THE VESSEL HULL DESIGN PROTECTION ACT, 17 U.S.C. §501 et seq. AND CHAPTER 180 OF TITLE 28, U.S. CODE (ASSUMPTION OF CONTRACTUAL OBLIGATIONS RELATED TO TRANSFERS OF RIGHTS IN MOTION PICTURES)

(g) Accommodation of New Filing Technologies

All references in the Lanham Act, the Patent Act and the Copyright Act to filings relating to security interests shall not be limited to paper documents but shall include electronic, voice, optical, and such other information transmission, storage, processing, maintenance, and retrieval technologies as shall be approved for such purposes by the Register of Copyrights, the Commissioner of Patents and Trademarks and the Plant Variety Protection Office from time to time.

Section 3: Security Interests in Intellectual Property Subject to Federal Law

(a) Definitions

The following definitions shall apply for purposes of this Act:

A "transferee" means a person other than a secured party or lien creditor who acquires any right or interest (other than a security interest) in, or ownership of, a Federal Intellectual Property Right.

A "federal financing statement" means a notice of a security interest which complies with the requirements of § 3(b)(3) of this Act. Unless the context otherwise requires, the term "federal financing statement" includes the original federal financing statement and any filed amendments, continuations and assignments.

The terms "authenticate", "collateral", "debtor", "good faith", "lien creditor", "representative" "secured party", "security agreement', "security interest", "signed" or "signature" and "value" shall have the meanings given to such terms under applicable non-federal law relating to security interests in personal property.

The term "appropriate Federal office" means the Copyright Office for matters relating to copyrights, mask works and vessel hull design protection rights, the Patent and Trademark Office for matters relating to patents and Federal marks (provided that records filed in the Patent and Trademark Office must be filed with the applicable Assignment Division of such Office), and the Plant Variety Protection Office of the Department of Agriculture for matters relating to plant variety protection rights.

The term "copyright" means any of the exclusive rights comprised in a copyright under chapter 1 of title 17, United States Code, whether or not registered under chapter 4 of such title.

The term "Federal mark" means a mark that is registered pursuant to the Lanham Act (15 U.S.C. §1051 et seq.), or for which an application for such registration is pending with the U.S. Patent and Trademark Office.

The term "mark" has the meaning given in section 45 of the Lanham Act (15 U.S.C. §1127).

The term "mask work" has the meaning given in section 901 of title 17, United States Code.

The term "patent" means a patent or a pending application for a patent under title 35, United States Code.

The term "person" means an individual, corporation, partnership, limited liability company, business trust, estate, trust, association, joint venture, government or governmental subdivision or agency, or any other legal or commercial entity.

The term "plant variety protection rights" means a certificate of plant variety protection or a pending application for such a certificate under chapter 57 of title 7, United States Code.

The term "proceeds" means whatever is received or to be received by the owner or any other party from the transfer, disposition, license (whether or not exclusive), use or other exploitation of Federal Intellectual Property Rights, and includes (but is not limited to) the meaning given to "proceeds" under applicable non-federal law relating to security interests in personal property.

The term "vessel hull design protection rights" means a certificate of registration or a pending application for such a certificate under chapter 13 of title 17, United States Code.

The term "Federal Intellectual Property Rights" means copyrights, patents, Federal marks, mask works, plant variety protection rights and vessel hull design protection rights.

(b) Security Interests

(1) This section applies to all security interests in Federal Intellectual Property Rights and in the proceeds thereof which interests are created by contract, regardless of form and nomenclature.

(2) (A) The creation, attachment, perfection, priority and enforcement of a security interest in a Federal Intellectual Property Right or in the proceeds thereof relative to all competing rights, claims, and interests therein and licenses thereof shall be determined by applicable non-federal law governing security interests in personal property, except as provided in subsection (b)(2)(B). The creation, attachment, perfection, priority and enforcement of any right or interest (other than a security interest) in, or ownership of, a Federal Intellectual Property Right shall be determined by the applicable federal law governing such Federal Intellectual Property Right.

(B) A security interest in a Federal Intellectual Property Right is ineffective against a transferee of the Federal Intellectual Property Right, whether or not such interest is perfected under non-federal law, if (i) the document transferring ownership of the Federal Intellectual Property Right to such transferee is recorded with the appropriate Federal office before a federal financing statement covering the Federal Intellectual Property Right and relating to such security interest was filed with such office, and (ii) such transferee's recordation is made in the manner required under applicable federal law (as amended by Section 4 of this Act) to give priority to such transferee's interest in the Federal Intellectual Property Right.

(3) (A) A federal financing statement may be filed by a secured party or by the debtor to give notice of the secured party's interest in the Federal Intellectual Property Rights described in the statement. The federal financing statement shall contain the names of the debtor and the secured party (or its collateral agent or trustee); the mailing addresses of the debtor and the secured party; and a description, which may be general, specific or both, indicating the types, or describing the items, of collateral.

(B) In describing the collateral, a general reference to "intellectual property" or ``general intangibles" shall be sufficient to describe all of the debtor's interests in all Federal Intellectual Property Rights (and, in the case of Federal marks, the goodwill of the business connected with the use of and symbolized by such Federal marks), including those Federal Intellectual Property Rights subsequently created or acquired. A general reference to "marks", "patents," "copyrights" or "mask works" shall be sufficient to describe all of the debtor's interests in the respective sub-category of Federal Intellectual Property Rights (and, in the case of Federal marks, the goodwill of the business connected with the use of and symbolized by such Federal marks), including such of those Federal Intellectual Property Rights subsequently created or acquired.

(C) A federal financing statement may be filed at any time, whether before or after a security agreement is entered into or a security interest otherwise attaches, before or after a financing statement is filed in a non-federal jurisdiction, or before or after a Federal Intellectual Property Right is created or a Federal Intellectual Property Right is acquired by the debtor.

(D) A secured party of record may add or delete Federal Intellectual Property Rights as collateral or otherwise amend the information provided in a federal financing statement by filing an amendment that describes the changed information and identifies, by file number, the original federal financing statement to which the amendment relates. An amendment does not extend the period of effectiveness of a federal financing statement. If any amendment adds collateral, it is effective as to the added collateral only from the filing date of the amendment.

(E) A federal financing statement sufficiently provides the name of the debtor only if it provides the individual, partnership, corporate, or other entity name of the debtor, whether or not it adds trade names or names of partners. Where the debtor so changes the debtor's name, identity, or corporate structure that a filed federal financing statement becomes seriously misleading, that federal financing statement is not effective with respect to collateral acquired by the debtor more than four months after the change [plus the period of the filing backlog at the applicable Federal agency at the time of such change], unless a new federal financing statement or an amendment which renders the federal financing statement not seriously misleading is filed before the expiration of that time. A filed federal financing statement remains effective with respect to Federal Intellectual Property Rights described therein that are sold, exchanged, licensed or otherwise transferred and as to which the secured party's security interest continues, even if the secured party knows of or consents to the disposition.

(F) A federal financing statement substantially complying with the requirements of this subsection is effective even if it contains minor errors or omissions as long as such errors or omissions are not seriously misleading.

(4) (A) (i) Presentation for filing of a federal financing statement and tender of the filing fee or acceptance of the federal financing statement by the appropriate Federal office constitutes filing of the federal financing statement under this subsection 3(b).

(ii) The appropriate Federal office shall assign to each federal financing statement a file number and keep a record of the date and hour of filing, and shall hold the statement or other reliable record thereof for public inspection. In addition, by no later than ________ days after filing, the appropriate Federal office shall index the federal financing statement according to the name of the debtor and shall note in the index the file number and the name and address of the debtor and the secured party given in the statement.

(B) A filed federal financing statement is effective for ten years from the date of filing. The effectiveness of a filed federal financing statement lapses on the expiration of the ten-year period unless a continuation statement is filed prior to the lapse.

(C) (i) An assignment statement may be filed by the secured party of record or its assignee to disclose an assignment of a security interest in some or all of the collateral described in a filed federal financing statement. The assignment statement must be authenticated by the secured party of record, must indicate the name and address of the assignee and the file number of the original federal financing statement, and must describe the types or items of collateral covered by the assignment. On presentation of the assignment statement to the appropriate Federal office, such office shall note the hour and date of filing of the assignment statement upon the record of the original federal financing statement.

(ii)After the filing of an assignment statement under this Section, the assignee is the secured party of record with respect to the Federal Intellectual Property Rights collateral covered by the assignment statement.

(D) A continuation statement may be filed within six months prior to the expiration of the ten-year period specified in subsection (b)(4)(B). Any such continuation statement must be filed by the secured party of record or its assignee, and identify by file number the original federal financing statement. A continuation statement filed by a person other than the secured party of record must be accompanied by a separate assignment statement authenticated by the secured party of record and complying with subsection (b)(4)(C), including payment of any required fee. Upon timely filing of the continuation statement, the effectiveness of the original federal financing statement is continued for ten years after the last date to which the filing was theretofore effective, whereupon it lapses in the same manner as provided in subsection (b)(4)(B) unless another continuation statement is filed prior to such lapse. Succeeding continuation statements may be filed in the same manner to continue the effectiveness of the original federal financing statement.

(E) Whenever there is no outstanding secured obligation and the secured party of record is not subject to any commitment to make advances to the debtor, incur obligations or otherwise give value, the secured party must, within 10 days after written demand by the debtor, send to the debtor or file with the appropriate Federal office a termination statement to the effect that the secured party no longer claims a security interest under the federal financing statement. A termination statement authenticated by a person other than the secured party of record must be accompanied by a separate written assignment statement authenticated by the secured party of record and complying with subsection (b)(4)(C), including payment of the required fee. Upon the filing of a termination statement with the appropriate Federal office in accordance with this paragraph, the federal financing statement to which the termination statement relates ceases to be effective.

(F) A secured party of record may by a release statement release all or part of any collateral described in a filed federal financing statement. A release statement is sufficient if it contains a description of the types or items of the collateral being released, the name and address of the debtor, the name and address of the secured party, and the file number of the federal financing statement. A release statement authenticated by a person other than the secured party of record must be accompanied by a separate assignment statement authenticated by the secured party of record and complying with subsection (b)(4)(C), including payment of the required fee. Upon presentation of such a release statement to the appropriate Federal office, such office shall note the hour and date of filing of the release statement upon the record of the original federal financing statement.

(G) With respect to any Federal Intellectual Property Rights that are subject to a security interest (whether or not perfected) as to which the secured party has exercised its post-default rights or remedies, the person that is the transferee of such Federal Intellectual Property Rights as a result of such exercise of rights or remedies may file in the appropriate Federal office a transfer statement that:

(i) states the name of the debtor and the name and mailing address of the secured party;

(ii) identifies the Federal Intellectual Property Rights transferred;

(iii) identifies, by file number, the federal financing statement, if any, previously filed by the secured party covering the Federal Intellectual Property Rights;

(iv) states the name and mailing address of the transferee of the Federal Intellectual Property Rights (which may but need not be the secured party); and

(v) states that: (a) the secured party had a security interest in the Federal Intellectual Property Rights (and, in the case of Federal marks, in the goodwill of the business connected with the use of and symbolized by such Federal marks); (b) the debtor defaulted in connection with an obligation secured by the Federal Intellectual Property Rights and such default has not been cured; (c) the debtor has been given at least 5 days prior written notice of the transfer (which notice shall be deemed given if the secured party shall have complied with the notice requirements of applicable non-federal law in connection with the foreclosure upon, or other disposition of, collateral other than such Federal Intellectual Property Rights); and (d) the identified transferee of the Federal Intellectual Property Rights has complied with all requirements imposed by federal law as a condition to the effectiveness of a transfer of such Federal Intellectual Property Right and is entitled to the transfer of record of the interest of the debtor in the Federal Intellectual Property Rights transferred (and, in the case of Federal marks, in the goodwill of the business connected with the use of and symbolized by such Federal marks) by reason of the secured party's exercise of its post-default rights or remedies in accordance with applicable non-federal law.

Recordation by a transferee of such a transfer statement in the manner required under applicable federal law (as amended by Section 4 of this Act) to give priority to such transferee's interest in the Federal Intellectual Property Right, if the transferee has complied with all other requirements imposed by federal law as a condition to the effectiveness of a transfer of such Federal Intellectual Property Right, shall transfer to the identified transferee, for purposes of the public record, all of the interest of the debtor and the secured party in the Federal Intellectual Property Rights transferred (together with, in the case of Federal marks, the goodwill of the business connected with the use of and symbolized by such Federal marks).

(5) Federal marks shall be transferable to the secured party in accordance with applicable non-federal law and subsection (b)(4)(G) above even though such party does not engage in or intend to enter the business to which the Federal mark relates, provided that the secured party holds the Federal mark only for the purpose of subsequently transferring it along with the goodwill relating to the Federal mark, and that such subsequent transfer occurs [prior to the dissipation of the goodwill][within a period no longer than __ months from the initial transfer].

(6) Any person that files a federal financing statement, amendment, assignment statement, continuation statement, termination statement, release statement or transfer statement that the person is not entitled to file shall be liable for damages to the debtor or secured party in the amount of any loss proximately caused by such filing, which may include loss resulting from the debtor's inability to obtain, or increased costs of, alternative financing. In addition to any damages recoverable by a debtor under the preceding sentence, the debtor may recover from such person $1,000. A prevailing party in any action under this paragraph may recover reasonable attorneys' fees from the non-prevailing parties.

(7) Whenever there is no outstanding secured obligation of a debtor to the secured party of record and the secured party is not subject to any commitment to make advances to the debtor, incur obligations or otherwise give value, if within ten days after written demand therefor by the debtor the secured party fails to either file a termination statement or send to the debtor such a termination statement, the secured party shall be liable to the debtor for $1,000. A prevailing party in any action under this paragraph may recover reasonable attorneys' fees from the non-prevailing parties.

(8) Notwithstanding the provisions of 28 U.S.C. §1338, the federal district courts and the courts of the states shall have concurrent jurisdiction with respect to any civil action arising under paragraphs (6) or (7) above.

(c) Regulatory Authority

The Register of Copyrights, subject to the approval of the Librarian of Congress, the Commissioner of Patents and Trademarks, under the direction of the Secretary of Commerce, and the Plant Variety Protection Office shall promulgate final regulations to implement the federal filing system established by subsection 3(b) of this Act not later than ___ days after the date of enactment of this Act, and those regulations shall become effective not later than ___ days after the date of enactment of this Act. The Register of Copyrights, the Commissioner of Patents and Trademarks and the Plant Variety Protection Office are authorized to maintain, in addition to or in lieu of a paper-based filing system, a filing system utilizing electronic, voice, optical, and other information transmission, storage, processing, maintenance and retrieval technologies. The Register of Copyrights, the Commissioner of Patents and Trademarks and the Plant Variety Protection Office shall also issue such other regulations as they determine to be appropriate to carry out the purposes of this Act, including regulations, if any, necessary and sufficient to permit submission and retrieval of information from the database(s) established pursuant to subsection (e)(1) below.

(d) Coordination

The Register of Copyrights, the Commissioner of Patents and Trademarks and the Plant Variety Protection Office shall coordinate their respective procedures for filings of federal financing statements as to security interests in Federal Intellectual Property Rights pursuant to subsection (b) above. Such coordination could include, for example, the creation of a single database or index of databases, a uniform form of federal financing statement, and/or a single place of filing of federal financing statements covering copyrights, patents, Federal marks or mask works. The Register of Copyrights, the Commissioner of Patents and Trademarks and the Plant Variety Protection Office shall also coordinate the form of federal financing statement with the forms for recordation of transfers of ownership in Federal Intellectual Property Rights.

(e) Information Databases

(1) The appropriate Federal office shall maintain an information database relating to the filing, amendment, assignment, continuation, release or termination of federal financing statements relating to any security interest affecting ownership of or any interest in a Federal Intellectual Property Right. Subject to the provisions of subsection (d), this requirement may be met by means of separate database(s) maintained by the Copyright Office, the Patent and Trademark Office and the Plant Variety Protection Office, as well as by a single unified database. The database(s) maintained by the Copyright Office, the Patent and Trademark Office and the Plant Variety Protection Office shall be adequate to search and identify security interests by debtor.

(2) Upon request and tender of the required fee, the Copyright Office, the Patent and Trademark Office and the Plant Variety Protection Office shall issue a certificate showing whether there is on file in the database referred to in section (e)(1) on the date and hour stated therein, any effective federal financing statement naming a particular debtor and any assignment statement thereof and, if there is, giving the date and hour of filing of each such statement, the collateral covered, and the name and address of each secured party therein.

(f) Availability of Copies of Records

(1) If the person filing any federal financing statement, amendment, assignment statement, continuation statement, termination statement, release statement or transfer statement furnishes the Copyright Office, the Patent and Trademark Office or the Plant Variety Protection Office a copy thereof, the Copyright Office, Patent and Trademark Office or Plant Variety Protection Office, as applicable, shall upon request note upon the copy the file number and date and hour of the filing of the original and deliver or send the copy to such person.

(2) Copies or reproductions of filed federal financing statements and other filings related thereto shall be furnished by the end of the fifth business day after request and payment of the fees specified by subsection (g).

(g) Fees

The fees for filings in each appropriate Federal office under this Act shall be established in the same manner as the other fees charged by that office.

Section 4. Report to Congress.

The Copyright Office and the Patent and Trademark Office shall report to the _______________Committee of the _____________ not later than ________days after the enactment of this Act regarding their plans to comply with the requirements of this Act.

Section 5. Effective Dates

(a) This Act shall become effective on the date of enactment of this Act, except that the provisions of paragraphs 3(b)(3) - 3(b)(8) shall not become effective until the effective date of the regulations described in subsection 3(c).

(b) Section 3(b)(2)(A) shall apply to all security interests in effect under applicable non-federal law on the date of enactment.