Challenges Related to Security Interests over IP Rights under the Canadian PPSA System Norman Siebrasse Professor of Law University of New Brunswick, Canada

PPSA PRINCIPLES

Basic PPSA Principles Modelled on UCC Art 9 Modelled on UCC Art 9 “Proximates” Art 9 “Proximates” Art 9 Reform complete in early 90s Reform complete in early 90s Scope Scope Very broad, subject to specific exclusion (eg land) Very broad, subject to specific exclusion (eg land) IP licences problematic due to SCC decision IP licences problematic due to SCC decision Test is whether right is analogous to something that was similar to property at common law Test is whether right is analogous to something that was similar to property at common law Legislative reform in Sask includes IP licences Legislative reform in Sask includes IP licences

Basic PPSA Principles Substance over form Substance over form Locus of title is irrelevant for secured transactions law and insolvency law Locus of title is irrelevant for secured transactions law and insolvency law All traditional forms are effective and equivalent All traditional forms are effective and equivalent chattel mortgage, conditional sale, fixed charge, floating charge, pledge, trust indenture, trust receipt chattel mortgage, conditional sale, fixed charge, floating charge, pledge, trust indenture, trust receipt Grant of “security interest” also effective and equivalent Grant of “security interest” also effective and equivalent

Basic PPSA Principles Substance over form Substance over form Locus of title remains relevant for other purposes Locus of title remains relevant for other purposes Financing lease treated as lease for tax purposes Financing lease treated as lease for tax purposes Locus of title may be relevant for IP law Locus of title may be relevant for IP law As described by Dr Tosato As described by Dr Tosato Solution: use “security interest” Solution: use “security interest” That form is irrelevant to PPSA allows flexibility for other purposes That form is irrelevant to PPSA allows flexibility for other purposes

Basic PPSA Principles Publicity (“perfection”) by registration in PPR Publicity (“perfection”) by registration in PPR Notice filing Notice filing Agreement itself is not registered Agreement itself is not registered Single registration may perfect multiple agreements Single registration may perfect multiple agreements Registration of Registration of Debtor name Debtor name Secured party name Secured party name Asset description Asset description

Asset Description General asset description General asset description by item or kind or by reference to one or more of the following: “goods”, “document of title”, “chattel paper”, “investment property”, “instrument”, “money” or “intangible”, by item or kind or by reference to one or more of the following: “goods”, “document of title”, “chattel paper”, “investment property”, “instrument”, “money” or “intangible”, After-acquired property clauses are effective & common After-acquired property clauses are effective & common “All present and after-acquired property” = GSA “All present and after-acquired property” = GSA

Asset Description Serial number for “serial numbered goods” Serial number for “serial numbered goods” Motor vehicles Motor vehicles Some IP could be treated as “serial numbered goods” Some IP could be treated as “serial numbered goods” Patents Patents Registered trademarks Registered trademarks General collateral description and serial number are separate fields General collateral description and serial number are separate fields

Search Search by Search by Debtor name Debtor name Serial number Serial number Cannot search by Cannot search by General collateral description General collateral description Secured party name Secured party name (General collateral description and serial number are separate fields) (General collateral description and serial number are separate fields) Registration and search are entirely online Registration and search are entirely online

Basic PPSA Principles First-to-file priority First-to-file priority Knowledge generally irrelevant Knowledge generally irrelevant Super-priority for purchase-money security interest (PMSI) Super-priority for purchase-money security interest (PMSI) Eg Conditional sales agreement Eg Conditional sales agreement Grant of IP licence during term of agreement with assignment on satisfaction of obligations creates PMSI Grant of IP licence during term of agreement with assignment on satisfaction of obligations creates PMSI

CURRENT CANADIAN SITUATION

Current Canadian Situation Commercial law generally is provincial responsibility Commercial law generally is provincial responsibility PPSA in effect in all common law provinces PPSA in effect in all common law provinces Very successful Very successful Bankruptcy and insolvency is federal (BIA) Bankruptcy and insolvency is federal (BIA) BIA well-integrated with PPSA BIA well-integrated with PPSA No priority reversals No priority reversals

Current Canadian Situation IP is generally federal IP is generally federal Except unregistered trademarks, trade secrets Except unregistered trademarks, trade secrets IP Acts have registration system IP Acts have registration system Ownership interests are registrable Ownership interests are registrable CIPO permits registration of security interests CIPO permits registration of security interests Priority effect of registration is unclear Priority effect of registration is unclear Both wrt security interest and assignments, licences etc Both wrt security interest and assignments, licences etc

Current Canadian Situation Interaction between PPSA / IP Acts not clear Interaction between PPSA / IP Acts not clear Registration in provincial PPR effective to perfect security interest in IP Registration in provincial PPR effective to perfect security interest in IP

Law Reform History Law Commission initiative 2002 Law Commission initiative 2002 Post PPSA reforms Post PPSA reforms Roform stalled Roform stalled Institutional disinterest from CIPO Institutional disinterest from CIPO Dual registration solution Dual registration solution Now: Patent troll problem of rights of IP licensees in insolvency Now: Patent troll problem of rights of IP licensees in insolvency Nortel Nortel

Challenges Legal challenges Legal challenges Priority & registration Priority & registration Substantive law Substantive law Institutional challenges Institutional challenges

LEGAL CHALLENGES

Priority & Registration How to integrate PPSA security interests registry with IP title registry? How to integrate PPSA security interests registry with IP title registry? Patent, copyright, registered trademarks Patent, copyright, registered trademarks Issue is not primarily federalism Issue is not primarily federalism IPRs not subject to title registry treated as general intangibles under PPSA IPRs not subject to title registry treated as general intangibles under PPSA Eg unregistered trademarks Eg unregistered trademarks

IP Title Registry Reform Problem (1) Problem (1) Current Canadian IP title registries not adequate for commercial purposes Current Canadian IP title registries not adequate for commercial purposes Substantive effect of registration Substantive effect of registration Searchability Searchability Need definitive asset searchable registry Need definitive asset searchable registry

Search & Registration Problem (2) Problem (2) Dual search / registration Dual search / registration PPR for security interests, IP registry for title PPR for security interests, IP registry for title Goal Goal Minimize combined search & registration burden Minimize combined search & registration burden

Search & Registration Perfection with single registration minimizes registration burden while increasing search burden and vice versa Perfection with single registration minimizes registration burden while increasing search burden and vice versa Entirely eliminating dual search /registration is not possible Entirely eliminating dual search /registration is not possible

All Assets v Single Asset Tension between party dealing with Tension between party dealing with Single IP asset and Single IP asset and All assets of the debtor All assets of the debtor All-asset financing facilitated by debtor name registration All-asset financing facilitated by debtor name registration IP-specific financing facilitated by asset registration IP-specific financing facilitated by asset registration

Two Approaches PPR focus PPR focus IP registry focus IP registry focus

PPR FOCUS

PPR Focus Perfection Rule Perfection Rule Security interests must be registered in PPR Security interests must be registered in PPR Priority Rule Priority Rule Assignments & security interests have priority according to order of registration in respective registries Assignments & security interests have priority according to order of registration in respective registries

Advantages Uses existing sophisticated PPSA (in Canada) Uses existing sophisticated PPSA (in Canada) General financier can perfect security interest with single registration General financier can perfect security interest with single registration

Disadvantages Chain of title problem Chain of title problem Consider party dealing with specific IP (eg prospective assignee) Consider party dealing with specific IP (eg prospective assignee) Must search Must search IP registry for prior owners and IP registry for prior owners and PPR by prior owner name for security interests granted by predecessors in title PPR by prior owner name for security interests granted by predecessors in title Requires uniform debtor name rules Requires uniform debtor name rules

Disadvantages Difficult IP registry reform required Difficult IP registry reform required Debtor name rules consistent with PPR rules required Debtor name rules consistent with PPR rules required How to enforce name rules? How to enforce name rules? Invalidity of assignment is draconian Invalidity of assignment is draconian

Disadvantages Foreign debtor problem Foreign debtor problem Twist on chain of title problem Twist on chain of title problem Which PPR? Which PPR? Location of Debtor for general intangibles Location of Debtor for general intangibles Foreign debtor granting security interests in UK IPRs registers in foreign PPR Foreign debtor granting security interests in UK IPRs registers in foreign PPR

Disadvantages Characterization problem Characterization problem Exclusive licence to IP with option to purchase at end of term Exclusive licence to IP with option to purchase at end of term True licence or financing licence? True licence or financing licence? Mischaracterization results in invalid registration Mischaracterization results in invalid registration “Solved” by dual registration “Solved” by dual registration

IP REGISTRY FOCUS

IP Registry Focus Allow registration of security interests in respective IP Registry Allow registration of security interests in respective IP Registry

Advantages Solves most of the problems with PPR focused approach Solves most of the problems with PPR focused approach Chain of title search not required Chain of title search not required Asset-based registration, so strict debtor name rules not required Asset-based registration, so strict debtor name rules not required No foreign debtor problem No foreign debtor problem Characterization problem does not arise Characterization problem does not arise

Disadvantages Burdensome for general financier Burdensome for general financier Requires multiple registration Requires multiple registration Can’t perfect after-acquired IP Can’t perfect after-acquired IP Solution Solution PPR registration should be effective against insolvency administrator PPR registration should be effective against insolvency administrator And against any party not registered in IP Registry And against any party not registered in IP Registry

Issues Unregistered trademarks Unregistered trademarks General intangibles under PPR General intangibles under PPR Unregistered copyright Unregistered copyright Mixed system Mixed system Royalties Royalties Should security interest in royalties be registered in PPR (general intangible) or in corresponding IP Registry? Should security interest in royalties be registered in PPR (general intangible) or in corresponding IP Registry? Depends on financing practice Depends on financing practice

Substantive Law Ordinary course rule Ordinary course rule Exhaustion Exhaustion UNCITRAL UNCITRAL OCR for secured financing law OCR for secured financing law Subject to restrictions in title documents Subject to restrictions in title documents

INSTITUTIONAL CHALLENGES