others in the intellectual property community toward workable security interest legislation. Thank you. Mr. COBLE. Thank you, Ms. Chasser. [The prepared statement of Ms. Chasser follows:] PREPARED STATEMENT OF ANNE CHASSER, DIRECTOR, OFFICE OF TRADEMARK & LICENSING SERVICES, OHIO STATE UNIVERSITY, ON BEHALF OF THE INTERNATIONAL TRADEMARK ASSOCIATION (INTA) SUMMARY Today, in an economy driven by technology, information and ideas, trademarks and other forms of intellectual property may very well be the most valuable asset a company owns. As a result, trademarks can become collateral to finance a new venture or launch a new product line. In these circumstances, the lender holds a "security interest" in the trademark. The current legal framework for security interests is Article 9 of the Uniform Commercial Code or "U.C.C." as codified in the laws of the individual States. Unfortunately, however, the U.C.C. is not totally effective when dealing with a security interest in a federally registered trademark. The problem lies in the interplay between the state-codified U.C.C. and the Lanham Act, the federal statute governing trademarks. No one can really say for certain whether or to what extent the Lanham Act preempts the state U.C.C. The U.C.C. says that Article 9 does not apply to a security interest if the party's rights to the property are governed by a federal statute. Yet, it also says that if the federal statute does not contain relevant provisions, then Article 9 of the U.C.C. may indeed be looked to for an answer. Turning then to the Lanham Act, it does not directly address security interests per se. However, it does contain provisions allowing for "assignments" of trademarks to other parties to be recorded. When all is said and done, the Lanham Act has generally been interpreted NOT to be a federal statute that preempts Article 9, although the case law is far from being uniform on the issue. The result is widespread legal uncertainty for intellectual property owners and also for purchasers of businesses in which intellectual property is an increasingly valuable part of the transaction. One promising answer is the proposal to establish a national, uniform recordation system for tracking security interests in trademarks. Under this approach, security interests are filed under Article 9 of the U.C.C. in the applicable state, but then are also supplemented by a new notice filing at the federal level. This allows potential purchasers to check only the federal database rather than resorting to guesswork or conducting searches of all 50 states for a U.C.C. filing. This is a straightforward method that utilizes the U.C.C. apparatus already in place and familiar to lenders, borrowers, and purchasers in the commercial world. Yet, it also integrates the existing federal registration system. By reconciling these two established systems, this approach will provide an effective mechanism for recording interests in trademarks. The benefits for all parties of a central database will not be realized, however, unless the three-month grace period for filing an "assignment" under Section 10 of the Lanham Act is eliminated. This will encourage prompt recording of security interests so that prospective purchasers of trademarks will have timely notice of security interests in the property. İNTA is looking to remove the uncertainty that has prevented trademark owners from being able to realize the full value of their trademark rights in secured lending transactions. INTA remains committed to working with the Subcommittee, as well as others in the intellectual property community towards workable security interest legislation that safeguards the rights of trademark owners. STATEMENT Introduction Good afternoon, Mr. Chairman. The International Trademark Association ("INTA") appreciates the opportunity to appear before the Subcommittee to offer its comments on the need to provide greater certainty and uniformity in the treatment of security interests in trademarks. My goal here today is to inform you about the problems trademark owners face under the current security interest system and then present you with possible solutions. We anticipate that this hearing will likely be the first step in a series of discussions on this subject and look forward to con tinuing to work with the Congress and other interested parties. My name is Anne Chasser. I am the President and Chairperson of the Board of Directors of INTA. Today, in an economy driven by technology, information and ideas, intellectual property may very well be the most valuable asset a company owns. Like other forms of business property, it can provide valuable collateral to finance a new venture or launch a new product line. Yet, the law governing security interests in intellectual property has not kept pace with the changing economy. To begin with, it is unclear which laws-the state-codified Uniform Commercial Code (U.C.C.) or the federal intellectual property statutes-provide the greatest protection and certainty for intellectual property owners and their business partners. In practical terms, the confusion results in significantly increased transaction costs, creates uncertainty with respect to priorities in secured transactions, reduces the value of intellectual property and in some cases forecloses the access of intellectual property owners to much needed capital. Trademarks and Security Interests Trademarks are among the most significant assets of a company-an efficient way to convey a message of quality, consistency, safety, and predictability to the consumer in an easy-to-understand form. Equally important, trademarks are the impetus for an economic transaction that begins with an idea, is translated into productivity, and ends with a satisfied customer. There are times when a business, regardless of its size, may want to use its valuable trademark(s) as collateral to secure a loan or other obligation. If the trademark owner does not satisfy the terms of that obligation in the future, the lender can foreclose and sell the trademarks to satisfy the debt. In such a case, the trademark is no different from accounts receivable or other intangible assets that are offered as collateral for a loan. The lender is said to hold a security interest, and the primary legal framework for security interests is Article 9 of the U.C.C. In security interest agreements, it is important to remember that there is no transfer of ownership of the mark(s). Transfer of ownership to the lender is supposed to take place only if the borrower (trademark owner) defaults on the loan. In other words, the security agreement is a conditional assignment. The U.C.C. and Federal Intellectual Property Statutes In order to protect its position, the lender will want to let others know that it is "first in line" to take ownership of the mark(s) if there is a default on the loan secured by the mark(s). It also becomes important when the owner of the trademark seeks to sell the business. A prospective buyer will want to know of any security interests in the assets of the business, including its trademarks. Generally, for a lender to secure its "first-in-line" status, the U.C.C. requires the lender to "perfect" its interest by filing written notice in the appropriate state office (typically the secretary of state), where it then becomes publicly available. While this seems straightforward enough, the U.C.C. system has proven to be inefficient in providing adequate notice of perfecting security interests in trademarks. This is due to the interplay between the state-codified U.C.C. and the federal statute governing trademarks-the "Lanham Act." For example, the U.C.C. states that the provisions of Article 9 do not apply to security interests to the extent that a party's rights regarding such property are governed by federal statutes.1 It further provides that a financing statement under Article 9 is not "necessary or effective to perfect a security interest in property subject to (a) a statute . . . of the United States which provides for national registration. . or which specifies a place of filing different than that specified in this article."2 Official Comment 1 to 89-104 of the U.C.C. states, however, that "if the federal statute contains no relevant provision, this Article could be looked to for an answer." While the Lanham Act does contain a provision allowing for "assignments," and while the USPTO Assignment Division generally accepts for recordation other documents affecting title, it does not contain any express provision addressing security interests. Thus, the Lanham Act has generally been interpreted not to be a federal statute that supersedes Article 9, although the case law is not uniform. The interpretation of the interplay between the Copyright Act or the Patent Act and Article 9 is also inconsistent, leading to even greater uncertainty. Moreover, as one of the leading authorities on trademark law, Professor Thomas J. McCarthy notes, 1 U.C.C. §9-104(a). 2U.C.C. 89-302(3)(a). 315 U.S.C. 1065. "Lanham Act § 10 can be read to mean that recordation notice is triggered only by recordation of a presently effective assignment." 4 The Problem for Trademark Owners Lack of a Centralized System "4 The problem for trademark owners is that there is no clear federal system for recording security interests in federally registered trademarks or pending applications, particularly as to subsequent bona fide purchasers. At the same time, there is not sufficient case law to conclusively assure trademark owners that a state U.C.C. filing alone will be adequate to put all parties on notice as to a security interest in federally registered marks or pending applications. The result is widespread legal uncertainty for intellectual property owners and also for purchasers of businesses in which intellectual property is an increasingly valuable asset. The practice which has thus evolved on an ad hoc basis among trademark practitioners is to record a financing statement under Article 9 of the U.C.C. and also to record a copy of the security agreement at the USPTO. Nonetheless, many lenders require that trademark owners give up ownership of their mark(s) without ever having defaulted on the loan, because of the ambiguity with respect to recording of conditional assignments such as security interests under Section 10 of the Lanham Act. The lender, now the assignee, then licenses the mark back to the original owner. In this way, the lender believes that it is assured of its "first-in-line" position upon default or when there is a subsequent purchaser. Unfortunately, however, this practice has had disastrous results. In Haymaker Sports, Inc. v. Turian 5 and Clorox Co. v. Chemical Bank,6 such an assignment and license back was held to have invalidated the trademark registrations assigned to the lender, resulting in a loss of the trademark rights and their value as collateral. If the lenders in these cases had taken a conventional grant of a security interest, the trademark registrations would have been maintained. What this all amounts to, Mr. Chairman, is a troubling lack of certainty as to where to file and how to perfect a security interest in trademarks, which affects both trademark owners, lenders, and potential purchasers. The Three-Month Period In addition to the problems that relate to the lack of a central or single intellectual property security interest system, there is the matter of Section 10 of the Lanham Act, which gives an assignee three months in which to record his interest in the mark with the USPTO. Consider this scenario: During the three month period before the lender is required to file the security interest with the USPTO, the trademark is sold to a bona fide purchaser. The purchaser might immediately have conducted due diligence into whether the mark and registration were, in fact, owned by the seller and not have turned up anything to the contrary. The lender could, in the meantime, file the required documents 85 days after the assignment-within the three-month period-and still walk away with the rights to the mark. The purchaser gets nothing other than what can be obtained in an action for fraud brought against the seller, even though the purchaser had no practical way to confirm ownership of the mark other than the USPTO assignment records. The Solution A National Recordation System One way to create certainty and alleviate problems in commercial transactions involving trademarks is a national recordation system. This will establish a uniform, dependable method for tracking security interests in intellectual property that will benefit trademark owners, lenders, and potential purchasers. It will provide comfort to lenders who want to perfect and give notice of their security interests and in turn permit borrowers who own trademarks to maintain ownership of their property unless they default. Under this approach, security interests would be filed under Article 9 of the U.C.C. in the applicable state and supplemented by a new notice filing at the federal level (on a debtor's name basis) designed to establish priority over subsequent transferees/assignees. State law would continue to govern all priority issues, except that for any lender (or other party) to obtain priority over a later purchaser, the lender must have filed at the federal level. This allows potential purchasers to check only the federal database rather than resort to guesswork or conduct a time-consuming search of up to fifty states for a U.C.C. filing. 4J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition, Fourth Edition, Volume 2 (St. Paul: West Group, 1998) 18-14. 5581 F2d 257, 198 USPQ 610 (CCPA 1978). 640 U.S.P.Q.2d 1098 (T.T.A.B. 1996). This is a straightforward method that utilizes the U.C.C. apparatus already in place and familiar to lenders and borrowers in the commercial world. Yet, it also integrates the existing federal registration systems. By reconciling these established systems, the proposed legislation will provide an effective mechanism for recording interests in intellectual property and eliminate the present uncertainty. Eliminate the Three-Month Period Elimination of the three month period reduces the chances of a subsequent purchaser of an interest in a registered mark winding up second in line to an assignee that was wholly unknown to the purchaser at the time of the purchase. Furthermore, it encourages prompt recording of the interests and makes it function just like the current state-level U.C.C. and real property recordation systems familiar to both lenders and borrowers. Conclusion Trademark owners are seeking reforms which would encourage lenders to record a security interest with the USPTO as notice to potential purchasers of their preexisting rights. The increased certainty should eliminate the requirement imposed by lenders that the trademark owner give up ownership of the mark as a condition of receiving the loan. Such amendments will also facilitate the creation of a nationwide database for security interests not only in trademarks, but patents and copyrights as well. Thank you again, Mr. Chairman. We applaud your efforts and remain committed to working with you, the members of this subcommittee, staff, and others in the intellectual property community towards workable security interest legislation that safeguards the rights of trademark owners. THE INTERNATIONAL TRADEMARK ASSOCIATION INTA is a not-for-profit membership organization, which just recently celebrated its 121st anniversary at its annual meeting in Seattle, Washington. Since the Association's founding in 1878, membership has grown from 17 New York-based manufacturers to approximately 3,600 members from the United States and 119 additional countries. Membership in INTA is open to trademark owners and those who serve trademark owners. Its members are corporations, advertising agencies, professional and trade associations, and law firms practicing trademark law. INTA's membership is diverse, crossing all industry lines and spanning a broad range of manufacturing, retail and service operations. All of INTA's members, regardless of their size or international scope, share a common interest in trademarks and a recognition of the importance of trademarks to their owners, to the general public, and to the economy of both the United States and the global marketplace. Mr. COBLE. Mr. Kirk. STATEMENT OF MICHAEL K. KIRK, EXECUTIVE DIRECTOR, AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION (AIPLA) Mr. KIRK. Thank you, Mr. Chairman. As we have heard today, intellectual property, or IP assets, are often the major assets of companies, and they are frequently used to secure loans critical to the company's existence and growth. To have a system where there is certainty for both the lender and the borrower greatly increases the value of IP in its role as collateral for loans. As Ms. Montgomery has outlined for us earlier, the law regarding perfecting of security interest is in some disarray, which creates uncertainty. It is this uncertainty, as well as the inability to include after-acquired rights, that prompted AIPLA to work with others toward achieving a uniform treatment of security interest in all types of IP. The ABA-drafted bill, FIPSA, in which we have cooperated, while still a work in progress, is a step toward bringing greater certainty into the recording of security interest in Federal IP. Although there are certain aspects of FIPSA that warrant further study, the AIPLA supports a number of its underlying concepts. We support the concept of permitting a filing at Federal agencies with respect to security interest in Federal IP. We believe these filings should be notice filings made in the name of a debtor and creditor, similar to filings under the UCC. Unlike the Federal filings regarding ownership of Federal IP, there should not be a requirement to identify the specific IP used as collateral, although it could be permitted if desired by either party. Moreover, we do not believe it necessary that Federal security interest filings include a copy of the actual agreement or contract giving rise to the security interest. The AIPLA believes that it should also be possible to have security interests cover after-acquired IP of the debtor if that is what the parties agree to. Under the present system, for example, a computer software developer may have difficulty in securing financing based on the projected value of software under development, as Mr. Johnson pointed out in his written statement. AIPLA also supports uniformity in the various Federal systems for filing security interest or ownership changes involving Federal IP rights. From the standpoint of IP owners, the optimal approach would be to eliminate all look-back provisions in the various systems. Today, for example, the assignee of a patent taking advantage of a 3-month look-back provision in existing Title 35, section 261, to record an assignment can wind up taking the patent subject to a security interest filed in a State earlier during that 3-month look-back period. Of course, the full benefits of the elimination of the look-back period in existing Federal IP law can only be practically achieved if electronic filing of Federal security interest and ownership documents is implemented. Establishing electronic filing systems will also facilitate electronically searching such filings. A number of States already permit the filing of security interests by electronic means, and several of them also provide for electronic searching of those filings. The software to do this, therefore, has already been developed and is in use in States. It would be desirable for the various Federal systems to adopt uniform, compatible systems so as to enable simultaneous filing and simultaneous searching across the various systems. The creation of such uniform, interconnected systems should be required as part of any change made by Congress. As I noted earlier, this is a work in progress. There are many questions yet to be answered, indeed probably many questions that haven't even been asked. Nonetheless we believe that a rationalization of the recording of security interest holds considerable promise, and we plan to work with this committee and with others to achieve a workable solution acceptable to all. Thank you, sir. Mr. COBLE. Thank you, Mr. Kirk. [The prepared statement of Mr. Kirk follows:] PREPARED STATEMENT OF MICHAEL K. KIRK, EXECUTIVE DIRECTOR, AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION (AIPLA) Mr. Chairman: |