In making a secured loan, a lender may take a security interest over some or all of a borrower's intellectual property (IP) assets, along with other tangible and intangible property, as collateral against repayment of the loan and the borrower's compliance with its other obligations under the loan agreement.

Security interests over IP assets are created and attached in the same way as those over other personal property, and have the same legal effect. However, there are other important practical considerations in how certain IP security interests are perfected by lenders and in how diligence is conducted to discover previous security interests in a borrower's or target company's IP.

Where the obligations of a borrower under a loan agreement are secured, the borrower grants security (also known as a security interest) over all or certain of its assets in favor of the lender to secure payment or performance of an obligation under the loan agreement. In this case:

For a secured lender to take advantage of the rights and remedies available to it under the UCC, the security interest detailed in the security agreement between the parties must be both:

Article 9 of the UCC as enacted in each state, applies to the creation and attachment of security interests over a borrower's personal property. For a further discussion on the issues relating to the creation and attachment of a UCC security interest in personal property, see Practice Note, UCC Creation, Perfection and Priority of Security Interests: Creation and Attachment of a Security Interest.

While certain IP is governed, at least in part, by federal law, these federal IP laws do not address the creation or attachment of security interests and therefore have not been held to supersede the UCC in that respect. Accordingly, a security interest over a borrower's IP assets is created and attached in the same manner as other UCC collateral, in particular by including in the security agreement:

For more information on IP terms and conditions in security agreements, see Practice Note, Intellectual Property Issues: Lending: Security Agreement.

In contrast with the creation and attachment of IP security interests, which is governed by the UCC, the lender's counsel must look to federal IP law or the UCC, or both, to determine the method for perfecting its IP security interests.

Under the UCC, security interests can be perfected by filing a properly completed UCC-1 Financing Statement in the appropriate state filing office. The filing of the one page UCC-1 form serves as public notice of the security interest.

However, courts have held that the provisions of the federal Copyright Act of 1976 and the recordation procedures it establishes in the US Copyright Office preempt the UCC for the perfection and priority of security interests over copyright registrations and applications, but not unregistered copyrights. While federal laws govern patents and trademarks, recordation under the UCC is sufficient for the perfection of security interests in issued patents and federally registered trademarks. However, the lender should still record its security interest in any patents, registered trademarks and related applications in the United States Patent and Trademark Office (USPTO) because it provides protection against later bona fide purchasers (that is, good faith purchases for value) and mortgagees.

Given these considerations, the common practice is for the lender's counsel to take the steps required or permitted under the applicable federal IP laws, in addition to filing UCC-1 financing statements in the appropriate state offices. In particular, the lender's counsel usually records a short-form IP security agreement or agreements in the USPTO and US Copyright Office, as applicable, for each category of IP included in the borrower's registered IP portfolio. When conducting due diligence of an IP portfolio in an M&A transaction or otherwise, parties should therefore consider both state UCC and relevant IP office filings.

For more information on evaluating security interests in IP, see Practice Note, Security Interests: Intellectual Property. This Practice Note includes a chart summarizing required or permitted steps for perfection with respect to the main categories of IP.

For a model short-form intellectual property security agreement for use when more than one type of IP is included in the collateral, see Standard Document, Intellectual Property Security Agreement (Short-form).

Alternatively, the parties can instead use separate short form agreements for each relevant type of IP, see Standard Documents: