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Leveraging Knowledge Assets

Secured lending based on IPRs faces challenges both because of valuation difficulties and because of the inadequate legal regime governing security interests in IPRs. We conclude that formal governmental action directed at improving the valuation expertise of financiers of IP collateral is not required. Valuation expertise has been and will continue to be developed by the private sector as the importance of IP assets increases.

In contrast action is needed to modernize the legal regime governing security interests in IPRs. The present system is radically uncertain in essentially every respect. Modernizing the IPRs security will improve access to and lower the cost of secured credit based on IPRs. It will also indirectly improve valuation; lowering this barrier to the use of IPRs will help set up a “virtuous circle” in which improved demand for IPR based security and will increase lenders familiarity with IPR based collateral and thus improve valuation techniques.

We have described two main approaches to security in IPRs. We will not review the details of these approaches here: our summaries and recommendations from the body of the text are repeated below for convenience. At this point we wish to emphasize the basic factors affecting the choice between the two systems.

The first approach which we reviewed was the misnamed provincial approach, in which the law relating to security interests in IPRs is that of the location of the debtor. The fundamental disadvantage of this approach is the problems which arise from the need to search title through a ownership registries and security registries in different jurisdictions. If the debtor names rules are not uniform among all the jurisdictions, including the ownership registries and the security registries, a full search chain could be very burdensome. In some cases it would not be possible to conduct a reliable search, as the ownership registry would not provide sufficient information about the correct name of a predecessor in title to allow a reliable search of the security registry. This problem would be significantly ameliorated by uniform debtor names rules among the provincial and federal registries. However, even this would not solve the problem of foreign debtors. If a foreign debtor appeared in the chain of title it would be necessary to search a foreign registry, if one existed, for encumbrances; and in some cases foreign law would not require registration of security interests in IPRs, in which case the prior interest would be undiscoverable. There is no solution to this problem in a provincial approach short of a world-wide IPR security registry, and this, needless to say, is not on the horizon. Note that a gateway approach to searching in which would direct a single query to multiple registries would not address these problems. Certainly a gateway search approach is desirable, but it is not a solution to the fundamental problems. It is really no more than a basic pre-requisite to a provincial approach.

The second approach is the federal approach. One of the most common objections to a federal system is that it would require dual registration to take a security interest in all of the debtor’s assets. We do not consider this to be a strong point. On the contrary, in view of the search problems raised in a provincial system, it is reasonably clear that the overall search and registration burden under a federal system is much less than under a provincial system. And problem of dual registration in particular can be largely overcome with a one-stop gateway registration system, similar to the gateway search system proposed for the provincial system.

Another common objection is that a federal approach would require a more radical overhaul of the federal registry system. While this point has some merit, we do not feel it to be a strong objection. The current federal system requires a major overhaul even to allow the proper operation of a provincial system. In comparing the provincial and federal approaches the question is what additional reforms which would be required to implement the federal approach. These should be technically minimal.

The most serious problem in the federal system is conceptual: the implementation of a system to allow security interests in after-acquired property in the context of an asset indexed system. The ability to take security interests in after-acquired property without subsequent specific appropriation is a major advantage of the current provincial systems. It would count as a significant objection to a federal system if we could not implement a similar feature in that context. We have proposed a system which would allow security interests in after-acquired property in a federal system. The question is whether this or an alternative system would be effective in this regard.

The following questions, then, need to be addressed in comparing the approaches. With regard to the provincial approach: In practice how serious a burden would chain of title searching for prior encumbrances be in the absence of uniform debtor name rules? In practice how serious a burden would chain of title searching for prior encumbrances be with uniform debtor name rules? What is the likelihood of implementing uniform debtor name rules? In practice how serious a burden is foreign debtor problem? And with regard to the federal approach: Can an effective system for implementing security interests in after-acquired property can be implemented.

On the whole we recommend the federal approach. We believe that the problems facing the federal approach can be overcome with good system design. The provincial approach faces an irreducible problem of due to the possibility of foreign debtors in the chain of title, and this problem is likely to get worse in an increasingly global economy. We should note, however, that our recommendation is based on a comparison of the best forms of the federal and provincial systems. In particular, if the basic reform of the federal ownership registry which we consider essential to the effective operation of either a provincial or federal system are not implemented, both the provincial and federal approaches would suffer, but they probably would not suffer equally. The comparison of the two systems would be different in such a “second-best” world. It is not possible in this Report to compare the various approaches under all possible scenarios, but we hope that this Report will provide a framework for so doing.