UNCITRAL's Working Group VI Commences Deliberations on Intellectual Property Annex to Legislative Guide on Secured Transactions
By: Joseph J. Wielebinski
Insolvency and Restructuring International
September 2008
Working Group VI of the United Nations Commission on International Trade Law (UNCITRAL)1 commenced deliberations on the development of an Annex to the Legislative Guide on Secured Transactions ('Guide') at its 13th session on 19-23 May 2008 in New York. This session was continuing step in the process of developing a comprehensive Annex to the Guide which is intended to provide sufficient guidance to States (i.e., countries) as to the adjustments that might be required to avoid inconsistency between secured financing and intellectual property law.2 The impetus for such an Annex was a directive of the Commission as its resumed 40th session in December 2007, when the Guide was adopted for approval.
The Commission's directive to develop an Annex to the Guide had its genesis at the Commission's 39th session in 2006, where it was noted that intellectual property rights (e.g., copyrights, patents, trademarks and confidential information) were becoming an extremely important source of credit and should not be excluded from a modern secured transaction law. During the initial meetings of the 40th session held in Vienna in July 2007, the Commission considered a note by the Secretariat entitled 'Possible future work on security rights in intellectual property'.3 This note took into account the results of a colloquium on security rights in intellectual property organised by the Secretariat and held in Vienna in January 2007 in cooperation with the World Intellectual Property Organization. The note discussed several proposed adjustments to the Guide to address issues relating to intellectual property assets, although the intent of the Guide was not to interfere with or supersede traditional intellectual property financing and the underlying law.
At the resumed 40th session in December 2007, the Commission, in addition to approving the adoption of the Guide, specifically requested the Secretariat to consider the development of an Annex to the Guide. The Annex was envisioned as a means to address a perceived need to provide guidance to States on the appropriate coordination between secured transactions and intellectual property law.4 The Working Group's mandate in developing the Annex was to provide specific comments and recommendations on security rights in intellectual property rights.5 A corollary objective in the development of the Annex was to facilitate secured credit for businesses that own or have rights to intellectual property while protecting the legitimate interests of the owners.
The Working Group's discussion at the 13th session centred around a note prepared prior to the session by the Secretariat for consideration by the participants entitled 'Security rights in intellectual property rights',6 which provided a comprehensive outline of, and commentary on, the numerous issues to be considered in the development of an Annex designed to achieve the Commission's objective. The note initially presented several examples in which intellectual property rights may become subject to secured transactions. This was followed by a discussion of the treatment of security rights in intellectual property rights under current law in various systems. The note then summarised the treatment of security rights in intellectual property rights as outlined in the Guide and suggested several adjustments to be considered by the Working Group. Finally, the note suggested areas of future work on specific issues relating to security rights in intellectual property rights.7
The Working Group initially focused its deliberations on important substantive issues including the creation of a security right in intellectual property rights, third-party effectiveness, the registry system, priority, enforcement, rights and obligations of the parties and the impact of insolvency, among others. The discussion then moved to more mundane, but equally important, and sometimes challenging topics, like terminology, key objectives and the scope of the Annex, with the substantive issues guiding the discussion.
Broad range of topics discussed
The breadth of the topics covered and issues addressed by the Working Group makes it impossible to discuss each in any detail in this article. Some of the topics discussed, while potentially controversial, resulted in the development of a consensus view. Similarly, other issues, while not considered to be controversial, were clarified and refined through open discussion. However, no consensus view was reached in several areas and many of these issues will be the subject of future deliberations. Importantly, the deliberations allowed the Working Group to identify numerous challenges presented by 'real-world' experiences in intellectual property financing. Some of the highlights of the session are addressed below.
Creation of a security right
This issue encompassed discussion on a number of sub-topics including: (1) the concept of creation; (2) creation and registration; (3) legal or contractual limitations to transferability; (4) the creation of security rights in future intellectual property rights; (5) ownership in encumbered intellectual property rights; (6) the nature of the encumbered asset; (7) acquisition financing and licence agreements; and (8) intellectual property rights relative to tangible assets. As a result of deliberations on these sub-topics, a number of important issues were considered and several of these are to be clarified or explained in the commentary to the Annex. One topic that was the subject of much discussion was the breadth of enforcement rights given a secured creditor with security rights in tangible assets accompanied by intellectual property rights.
The Working Group also considered whether a distinction should be drawn in the Annex between the creation and the third-party effectiveness of a security right in an intellectual property right, an approach taken by the Guide. After discussion, it was agreed that, in line with the principle of deference to intellectual property law (see recommendation 4, subparagraph (b)), if intellectual property law addressed the issue, intellectual property law would apply; otherwise, the Guide would apply.8 The Working Group adopted the working assumption that outright assignments of intellectual property rights should not be covered in the Annex, unless there was a priority dispute with a security right in an intellectual property right.9 The Working Group agreed that commentary in the Annex should also explain that, while effectiveness against competing claimants was a matter of secured financing law, effectiveness against other third parties such as infringers was a matter of intellectual property law.
The registry system
The Guide endorses a general security rights registry to provide a method for making security rights effective in existing and future assets, to establish a point of reference for priority rules and to allow third parties a means to determine if a grantor's assets are encumbered. However, many States maintain separate registries for recording transfers of intellectual property rights. Those differing or alternative registration systems create a number of unique issues when trying to make global recommendations to Member States. Several suggestions were made to ensure effective coordination of specialised intellectual property rights registries and general security rights registries.
The Working Group considered questions of dual registration or search with regard to security rights in intellectual property rights. In order to avoid the inefficiencies and costs of dual registration and search, one suggestion was made that, if there was an intellectual property rights registry, registration of a security right in that registry should be mandatory. Another suggestion was made that the current approach of the Guide should be maintained, allowing for dual filing. It was felt that the commentary of the Annex should be further developed to discuss the issue without referring to 'dual' registration. The Secretariat was also requested to prepare a study of the cost of different approaches. Other issues discussed included the time of effectiveness of registration, and the registration of notices of security rights in future intellectual property rights.10 The issues of a 'licensee in the ordinary course of business' remains unresolved, with some intellectual property experts continuing to object to the concept.
Disposition of encumbered intellectual property
With respect to the issues associated with the disposition of encumbered intellectual property rights, differing views were expressed as to the requirements for the secured creditor to dispose of an encumbered intellectual property right either by transferring it or by granting a licence in it. The Working Group believed that commentary to the Annex should be expanded to include a discussion of various remedies, including a proposal by the secured creditor to accept an encumbered asset in full or partial satisfaction of the secured obligation. It was also widely felt that a discussion of the practices to be covered in the Guide was useful and should be expanded to cover practices in which different rights were used as collateral for credit, including the licensor's rights under a licence agreement and the payment of royalties.
The Working Group appeared to wrestle with the concept and parameters of the principle of 'exhaustion'. Although some participants felt the concept was widely used and well understood, other participants felt the use of the term was unclear and not uniformly applied. Accordingly, the Annex will not attempt to define 'exhaustion', but instead encourage States to clarify their law on this important principle.11
Insolvency
The impact of insolvency was the subject of much discussion. The deliberations included a thorough discussion of the treatment of a security right granted by a licensee in the insolvency of the licensor and the treatment of a security right granted by the licensor in the insolvency of a licensee. Although many of the insolvency issues are addressed generally in the UNCITRAL Legislative Guide on Insolvency Law,12 the Working Group considered a number of real-world situations which presented troublesome issues for the various parties holding rights in intellectual property rights.
Substantial discussion was centred around perceived uncertainty encountered in dealing with an insolvency involving rights under a licence agreement. The United States delegation offered its interpretation of one recurrent scenario involving the insolvency of a licensee of intellectual property rights where the licensor (or licensee) granted prior security rights to a secured creditor in rights attributable to the licensee. That delegation concluded that if royalties were due under a licence, they must be paid to the licensor ahead of a secured creditor's rights in those same royalties despite what appears to be a different result under the Guide on Insolvency Law. After much discussion and some concerns expressed, the United States' position was included in the record as that delegation's position, but not necessarily the view of the Working Group. Since it was uncertain whether these matters were sufficiently limited to secured transactions law to justify their inclusion in the Annex, they would be revisited in the future, possibly with the assistance of UNCITRAL's Working Group V (Insolvency Law).
Conclusion
While the Annex is far from complete and a number of topics were identified as requiring further discussion and analysis, this session of Working Group VI was an important and positive step in the ongoing process of developing a workable Annex to accompany the Guide. Future meetings of the Working Group will attempt to refine and focus the discussion on several important areas left unresolved or requiring further evaluation. Although there were no earth-shattering breakthroughs, the Working Group's five days of deliberations increased recognition among the participants that the issues encountered in achieving the Working Group's mandate are both challenging and complex. The Working Group's 13th session should be considered successful for several reasons; it identified a number of issues where consensus existed or evolved; it highlighted several problem areas or discrete issues that will be the focus of future deliberations and continuing analysis; and it increased the participants' awareness that while there exist serious challenges in trying to coordinate secured transaction law and intellectual property law in a real-world context, finding workable solutions was enhanced through an open dialogue.
Joseph J. Wielebinski attended UNCITRAL Working Group VI’s 13th session as a delegate for the International Bar Association on 19-23 May 2008. His partner, Jeff Dunn, attended UNCITRAL’s resumed 40th session in Vienna in December 2007, and his partner, Paul Seiler, attended UNCITRAL’s Intellectual Property Financing Colloquium in Vienna in January 2007. Paul Seiler also attended the initial meetings of UNCITRAL’s 40th Session in Vienna in July 2007 as an IBA delegate. Another partner, Ben Floyd, was active in Working Group V on Insolvency Rights and previously served as Co-Chair of the IBA’s Committee on Insolvency and Creditors’ Rights. Portions of this article relied upon the Report of Working Group VI (Security Interests) on the work of its 13th session (New York, 19-23 May 2008), A/CN.9/649 (28 May 2008).
1UNCITRAL was established in 1966 by the United Nations General Assembly with the objective of reducing obstacles to international trade by harmonising and unifying the laws of international trade. UNCITRAL currently is composed of 60 Member States elected by the United Nations General Assembly. Drafting of recommendations is proposed initially by six working groups examining the following topics: Working Group I (Procurement), Working Group II (International Arbitration and Conciliation), Working Group III (Transport Law), Working Group IV (Security Rights). Insolvency and Insolvency and Restructuring International, Vol 2, No 1 April 2008.
2Security rights in intellectual property rights. A/CN.9/WG.VI/WP.33.
3A/CN.9/632.
4Official Records of the General Assembly, Sixty-Second Session, Supplement No 17 (A/62/17) (Part I), para 162.
5A/CN.9/WG.VI/XIII/CRP.1/Add.1, p 1.
6A/CN.9/WG.V1/WP.33
7Ibid.
8A/CN.9/649/p 7.
9Ibid.
10The Working Group noted with appreciation certain 'best practices' recommended by the International Trademark Association (INTA) involving the registration of security rights in trademarks. While these 'best practices' might not be included as actual recommendations, they could be used as illustration which was generally thought to be useful,
11A/CN.9/649, p 72.
12Adopted by UNCITRAL on 25 June 2004.
