How to Validly Perfect a Security Interest in a Registered United States Patent

By Gary L. Marsh

 The United States Patent and Trademark Office ("PTO") has caused confusion recently regarding the question of how a party taking a security interest in a patent may validly perfect that interest.

 A review of the PTO's website (www.uspto.gov) could leave one with the impression that a security interest in a patent can only be perfected by the filing of an assignment of the patent directly with the PTO:

 "A patent is personal property and may be sold to others or mortgaged; it may be bequeathed by a will, and it may pass to the heirs of a deceased patentee.  The patent law provides for the transfer or sale of a patent, or of an application for patent, by an instrument in writing.  Such an instrument is referred to as an assignment and may transfer the entire interest in the patent.  The assignee, when the patent is assigned to him or her, becomes the owner of the patent and has the same rights that the original patentee had.

 A mortgage of patent property passes ownership thereof to the mortgagee or lender until the mortgage has been satisfied and a retransfer from the mortgagee back to the mortgagor, the borrower, is made.  A conditional assignment also passes ownership of the patent and is regarded as absolute until canceled by the parties or by the decree of a competent court.

An assignment, grant, or conveyance of any patent or application for patent should be acknowledged before a notary public or officer authorized to administer oaths or perform notarial acts.  The certificate of such acknowledgment constitutes prima facie evidence of the execution of the assignment, grant, or conveyance.

 The [PTO] records assignments, grants, and similar instruments sent to it for recording, and the recording serves as notice.  If an assignment, grant, or conveyance of a patent or an interest in a patent (or an application for patent) is not recorded in the Office within three months from its date, it is void against a subsequent purchaser for a valuable consideration without notice, unless it is recorded prior to the subsequent purchase."

 Such an impression is not necessarily correct.

 Article 9 of the Uniform Commercial Code ("UCC") governs the creation and perfection of security interests in personal property(1).   In the case of In re Cybernetic Services, Inc., officially known as Moldo v. Matsco, Inc., 252 F.3d 1039 (9th Cir. 2001), the U.S. Ninth Circuit held that a creditor who filed a UCC-1 Financing Statement properly perfected a security interest in a patent even if it did not also make a filing with the PTO.  The court based its decision on a finding that the federal Patent Act does not expressly cover liens on patents and does not preempt the UCC concerning the perfection of security interests.  Thus, at least in the Ninth Circuit, the filing of a UCC Financing Statement alone is sufficient to perfect a security interest in a patent.

 But the In re Cybernetic Services, Inc. holding did not specifically address the companion question of whether, as the PTO's website would seem to indicate, a filing of an assignment with the PTO without the filing of a Financing Statement would by itself be sufficient to perfect a security interest.  A more recent decision by the U.S. Bankruptcy Court for the District of Massachusetts has addressed this question.

On May 15, 2007, Judge William C. Hillman of that court issued his decision in the In re Coldwave Systems, LLC case(2).  

 There, the creditor attempted to rely on a PTO filing alone to perfect its security interest in a patent.   The Bankruptcy Court had avoided as a preference a late UCC filing made long after the security interest was granted, but within 90 days of the bankruptcy petition (i.e., within the "preference period" common to all bankruptcy proceedings).  The creditor had earlier - outside the 90- day window of the preference period, carried out a PTO filing of a Recordation Form Cover Sheet, thereby recording the conveyance of the security agreement between the debtor and the creditor.  Being outside the 90-day period, this filing was not subject to avoidance as a preference.  The creditor argued that the PTO filing was sufficient to perfect its security interest, even in the absence of a UCC filing.

 The Bankruptcy Court held that the PTO filing was insufficient to perfect the creditor's security interest.  The reasoning of the court was that the Patent Act (in particular, 35 U.S.C. § 261) did not create a system for the perfection of security interests in patents.  In the words of the court:

 "There is nothing in §261 that addresses in any way the conflict between one who is not a holder of an interest by way of assignment, grant, or conveyance and a bankruptcy trustee.  We must look to other law for the answer."

 The court then looked directly to the UCC for a suitable answer.  Noting that a patent is considered to be a "general intangible," the Court held that nothing in the UCC excepts general intangibles from the rule requiring perfection by a UCC filing.  Since no valid UCC filing perfected the creditor's security interest, it was unperfected, and subject to attack by other parties in interest (in this case, the Chapter 7 trustee).

 The Coldwave Systems holding is totally compatible with the earlier Cybernetic Services ruling.  When read together as companion cases, these two decisions indicate that the only way to perfect a security interest in a patent is by the filing of a UCC-1 Financing Statement.  A creditor who relies solely on a filing of an assignment with the PTO will end up being treated as unsecured, due to the lack of proper perfection of the security interest. 

 Note that other reasons may exist for creditors to file both an assignment with the PTO and a UCC-1 Financing Statement.  For example, if a debtor holding an interest in a patent attempts to sell that interest, the filing of an assignment with the PTO will act to protect the creditor against the ensuing confusion that such an event might cause.  Probably overall, the safest approach for secured creditors is to file both instruments.

 Footnotes:

 (1) The UCC has been adopted in all of the 50 states, and in the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands.  Louisiana, due to its heritage of being based on French and Spanish and, ultimately, Roman law, rather than English common law, was at first reluctant to adopt the UCC.  It has now adopted its version of the UCC as to all articles other than Article 2, relating to "Sales."

 (2) 368 B.R. 91 (Bankr. D. Mass. 2007).

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