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Leveraging Knowledge Assets

5.1              Introduction

As already discussed, under the “provincial” approach security aspects of federal IPRs (and, of course, provincial IPRs) would be governed instead by the movables security regime in force in the jurisdiction where the debtor is located. In the case of Canadian debtors, any security interests registered provincially would have priority over assignments subsequently registered in the federal system. Similarly, the rights of a judgment creditor vis-a-vis a secured creditor or assignee would be determined by provincial law, so that where provincial law so provides, provincial registration by a judgment creditor in the provincial security system would be effective against subsequent assignees and secured parties. But at the same time the integrity of the federal ownership registry must be maintained. To do this, a interest registered provincially must be subordinated to a prior federally registered assignment.

The most obvious advantage of the provincial alternative is that its implementation would involve minimal federal law reform resources. It also has the advantage of preserving stability in the law. Existing provincial law refers issues relating to security in intangibles to the debtor’s home law. Consequently, this solution would respect existing provincial legal policy thereby ensuring that intangible assets in the form of intellectual property are governed by the same secured transactions law that applies to other intangible collateral. The most obvious disadvantage of the provincial solution is that it separates the substantive legal regime governing the grant of security in federal IPRs from that governing their ownership and assignment. This Part first addresses some details of the implementation of the provincial approach, and then turns to problems created by this severance between ownership and security interests.

5.2              Implementation of the Provincial Approach

5.2.1        Need for Federal Choice of Law Rule

It would be possible to implement the provincial approach with federal legislation making it clear that the federal registration requirements had no application to interests which were in substance security interests. The law of the debtor’s location would then govern by default. However, it would be preferable to implement provincial alternative be federal enactment of a choice of law rule deferring to the law of the jurisdiction where the debtor is located. If articulation of the choice of law rule were left to provincial or territorial law, there is a risk of non-uniformity at least at the level of detail (e.g. definition of debtor’s location), leading to the possibility that the applicable law will vary according to the forum in which litigation is pursued.⁶⁷ This risk is not acceptable for federal IPRs because, as we shall see, the provincial solution is intended to work in tandem with a limited degree of federal substantive law reform.

5.2.2        Resolving Priority between a Secured Creditor and an Assignee of the same IPR

As we have noted, a security interest registered provincially must be subordinated to a prior federally registered assignment. How is this rule to be implemented? Should the law of the debtor’s home jurisdiction supply the default priority rule or should there be a federal substantive rule for this particular issue?

The difficulty with the provincial solution is that the general priority rules of the debtor’s home jurisdiction typically are not designed to cover this kind of dispute. Suppose, for instance, that the debtor is located in New Brunswick so that the New Brunswick PPSA governs the perfected and priority status of the security interest. The NB PPSA priority regime, like that in effect in the other common law provinces, orders priority between a secured creditor and a transferee according to whether the transferee acquired its interest before or after the security interest was publicized by registration. If before, the transferee prevails unless he or she had actual knowledge that the debtor had already granted security. If after, the secured creditor prevails. The result under the CCQ is broadly similar except that the transferee would prevail against an unregistered security, even if the transferee was aware of the existence of the security interest at the time it acquired its own interest.

These provincial priority rules were designed on the assumption that the transferee’s interest, unlike that of a secured creditor, is not required to be publicized to acquire third party effect. The rules are not designed to accommodate a situation where both interests are subject to a publicity requirement, albeit under different registry regimes enacted at different levels of government. In the situation posited here, application of the law of the debtor’s location to supply the default rule would preclude a secured creditor from being able to rely on a search of the federal IP registry to assess its priority status as against a competing assignee. The secured creditor would be bound by prior unknown assignments of which it has no knowledge or means of acquiring knowledge, even if the policy recommendations outlined earlier to strengthen the federal registry regime for assignments were implemented.

The most logical solution to this problem would be to supplement the federal choice of law rule deferring to the debtor’s home law with a substantive priority rule ranking the assignee and the secured creditor according to the respective dates of registration of their interests in the federal IP registry and in the movables registry of the jurisdiction where the debtor is located. However, in the case of a foreign debtor located outside North America, the applicable law may not require or even enable registration of the security interest. As a matter of practical implementation, it would not therefore be possible to state the rule as a pure first to register rule. Rather, to accommodate foreign debtors, it would need to be crafted along the following lines (borrowing from the PPSAs): “An assignee of an IPR acquires the right subject to a security interest granted by the assignor if the assignment is registered in the federal IP registry after the secured creditor has complied with all requirements imposed by the law of the jurisdiction where the debtor is located to render the security effective against third parties.”

5.3              Search Burden Problems Posed by Chain of Title Considerations

5.3.1        General

If the rights of assignees of federal IPRs are to be made subject to prior security interests acquired under the law of the debtor’s location, it follows that prospective assignees carry the burden of determining whether or not the IPR in which they are interested is validly encumbered by a security interest under that law. If the debtor is an assignee or licensee, or if the relevant work is built on pre-existing creations, the prospective assignee faces the further risk that the IPR was encumbered by a security interest granted by a predecessor in title to the immediate apparent owner.⁶⁸ Consider the following hypothetical.

Debtor, located in Prince Edward Island, grants a security interest in its present and after acquired property. Secured Creditor registers notice of its security in the PEI Personal Property Registry. Without Secured Creditor’s authority, Debtor assigns its IPRs to B1, located in Ontario. B1 registers its assignment in the relevant federal IP registries, and then assigns the IPRs to B2 who also registers federally.

Unless the secured creditor is protected in this scenario, its security would be capable of being lost through the unilateral wrongdoing of the debtor in disposing of the collateral without the secured creditor’s authority. But if later assignees in the position of B2 are to take subject to a security granted by a predecessor in title, it will not be sufficient for them to search the registry in the jurisdiction in which the immediate assignor is located, here Ontario. To protect themselves, they will need to identify all assignees in the historical chain of title, ascertain the jurisdiction in which each was and is now located, and then determine whether an effective security interest was granted by any of them according to the law of their respective home jurisdictions.

The problem is not simply one of balancing the information burden imposed on assignees of IPRs against the goal of facilitating secured lending against IPR collateral. Prospective secured creditors lending to B2 in the above scenario would face exactly the same inquiry burden in order to ensure that the relevant IPR was not already encumbered by a security interest granted by a predecessor in title.

5.3.2        Foreign Debtors

The problem is exacerbated when an owner in the chain of title is located in a foreign jurisdiction. Consider for example the large number of Canadian patents issued to U.S. patentees. In the case of a foreign country debtor (or a foreign country predecessor in title), application of the debtor location rule would mean that the secured transactions law of a foreign country would apply to determine the validity of a security right granted in Canadian intellectual property rights, the manner and mode of publicizing it, and its priority ranking against third parties. This means that foreign registries may need to be searched in order to discover security interests affecting Canadian IPRs. Any financier seeking to take Canadian patents belonging to a U.S. debtor as security would be required to search the state Article 9 register of the state in which the debtor was located. The same is true if the lender was dealing with a Canadian debtor who had taken an assignment of the patent from an original U.S. owner.

Worse, many foreign countries do not operate general encumbrance registries of the kind established by the provincial and territorial secured transactions regimes in Canada. This means that any encumbrances granted by the foreign debtor may be entirely undiscoverable. A party dealing with the Canadian IPRs in such a case could do no better than to rely on warranties and representations. It might be difficult to obtain satisfactory warranties if the foreign owner was not the debtor but a predecessor in title to the current owner.

It is true that most countries have established intellectual property registries to accommodate the registration of security rights in addition to ownership transfers in intellectual property, with the priority of the security right then determined wholly or partially in accordance with the order of registration.⁶⁹ However, these registries are territorially confined, like the federal Canadian registries, to intellectual property rights to be exploited within the borders of the particular country.⁷⁰ They are not designed to accommodate the registration of security in Canadian intellectual property rights.

The remainder of this section considers possible structural responses to this problem.

5.3.3        “Gateway” Searching

In the United States context, a report by the Franklin Pierce Law Centre (“FPLC Report”), commissioned by the USPTO⁷¹ proposes a one-stop “gateway” approach in which a single query at a meta-search site would automatically query all the state Article 9 security interest registries and all the federal intellectual property ownership registries and return a single report. While the databases would be separate, in practice it would appear to the user as though only one registry is being searched.

Would construction of a common entry portal of this kind suggested resolve or at least alleviate the inquiry burden on assignees and secured creditors who contemplate taking security in a Canadian IPRs? Provided all the owners in the chain of title were located somewhere in Canada, this solution would avoid the need to determine the precise provincial or territorial location of each debtor in the chain of title, and to search each registry separately, since all registries would be automatically queried. (The fee implications of this approach would need to be worked out carefully, since querying all thirteen registries for every owner in a long chain of title could be very expensive if the normal province-by-province tariffs were to apply. Presumably a revenue neutral solution would be possible, since increased volume queries would compensate for reduced fees for gateway searching.)

Though the gateway approach would alleviate search problems in the provincial approach, the simplicity and efficiency of the common gateway solution should not be exaggerated. The authors of the FPLC Report acknowledge that it will be necessary to search the state security registries by debtor name for all predecessors in title to the immediate debtor whose names appear in the federal registry, ⁷² but they imply that this process will be easy because the gateway approach allows a one-stop search of all databases.⁷³

While we agree that a common portal would provide a one-stop searching venue, it is incorrect to suggest that it would do away with the need for multiple searches. An initial separate search of the federal IPR registries will be needed to establish the identity of the successive owners in the chain of title, followed by multiple separate searches of the provincial security registries according to the name of each owner in the chain of title. It would also be necessary to compare the timing of the various registrations, even in a purely Canadian context. For example a financing statement disclosing a general security interest might not have been registered until after the debtor or a predecessor in title had assigned the IPR to another.⁷⁴

A further complication is added by the fact that in Canada there is considerable variation in the rules and policies adopted by the different provinces and territories on how the correct name of the debtor is to be identified for registration and searching purposes. The lack of uniformity is greatest with respect to individual debtors; if we assume that most debtors who charge their IP collateral are enterprises rather than individuals, the existing differences may not prove too problematic in practice. On the other hand, differences also exist at the corporate name level and given the exactitude required in searching an electronic data base, the practical impact of this problem on the feasibility of the gateway solution should not be underestimated. Moreover, without uniform federal/provincial name rules (which is inevitable if provincial name rules are not themselves uniform), a security interest might be validly registered provincially against the name of a predecessor in title and yet be undiscoverable by a search using the style of owner name specified by the rules of the federal ownership registry. It is not clear how the searcher can avoid this problem. If a searcher wished to search multiple jurisdictions according to the name of its immediate debtor, it could search each jurisdiction by the name of that debtor defined according to the rules of the jurisdiction in question. But in the case of the predecessors in title, the searcher has no more information than is disclosed by the federal ownership registry. The searcher might guess as to variations that would correspond to the debtor name under the rules of the various provincial systems, but this would result in considerable additional cost, since the search criteria would require judgment, and there would in any event be irreducible uncertainty.

This problem would be reduced if uniformity in debtor names rules, between provincial security registries and the federal ownership registry, could be achieved. This might be a significant hurdle given that the current provincial regimes have not managed to achieve uniformity, even among the PPSA jurisdictions.

Finally, a purely Canadian gateway would not affect the search problem in the case of foreign debtors. A prospective secured creditor or assignee would still have to ascertain the location of any owner in the chain of title who is located outside of Canada and make inquiries as to possible outstanding security interests arising or registered under that law.

5.3.4        Debtor Name vs Asset Specific Registration-Search Criterion

The discussion of the common gateway approach to this point has assumed that registrations and searches for security granted in IP collateral in the provincial registries would be conducted according to name of the potential grantor of the security. But IPRs are already indexed by individual asset identifiers in the federal ownership registries, and asset indexing is not unknown to the provincial movable registries, which employ it for a restricted class of serial numbered goods.⁷⁵

The adoption by the provincial registries of asset indexing for IPRs, using the federal IPR registration number, would alleviate the problems identified above stemming from the lack of uniformity in the debtor name rules of different jurisdictions. Asset indexing would also eliminate the need to conduct multiple searches according to different debtor names (although it would still be necessary to conduct multiple searches according to each individual item of IP).

Unfortunately, there are a number of impediments to this proposal.

First, it is not a feasible solution for security in copyright. Copyrights do not have to be registered federally to come into existence. To require the federal identification number to be registered in order to effect a provincial security registration against a debtor’s copyrights would effectively force would-be debtors to go to the expense of registering their copyrights in all possible works before being able to grant an effective security in them. The burden would be particularly excessive for works of a kind that are continually evolving e.g. software. Moreover, even if this were considered worthwhile from a cost benefit analysis, copyrights cannot be reliably identified by reference to their individual federal registration number because the same work may be registered and described by different names in the federal registry. Consequently, a search would still have to be made against debtor name.

A second major difficulty is that asset indexing, even if restricted to patents and trade marks, would preclude the registration of an effective security interest in a debtor’s future IPRs (because they could not be identified uniquely) or in generic categories of IPRs (because the cost and expense of entering an individual descriptor for each item within a generic portfolio of IPRs would likely outweigh the benefit). It is because of these considerations that asset indexing is restricted to types of property which tend to be relatively durable and individually valuable: land and certain classes of personal property such as automobiles. In other words, asset indexing tends to be used only when the risk to subsequent transferees is highest and the burden relative to the value of the collateral is lowest. Intellectual property falls in an uncomfortable middle ground. Certainly, some intellectual property rights, such as a pharmaceutical patent on a major drug or the copyright on the flagship product of a software company, are individually very valuable. But other IPRs, such as the multitude of minor patents held by any firm with significant R&D; may not be particularly valuable relative to the size of the loan and would be more efficiently charged en masse as simply “all IPRs” or even included as part of a charge on all the debtor’s “present and after acquired property.

It is unclear to us whether it would be possible to draw even a rough dividing line between types of IP that might be efficiently indexed individually and those where a generic description would be commercially preferable. A middle ground solution would be to require registration by asset description for the security to be effective against subsequent secured parties or assignees. This would allow any person dealing with a specific IPR to be sure that they would not be subject to any prior undiscoverable interests, leaving it for the secured party to use its own judgment as the value of the collateral in choosing whether to register by asset description.⁷⁶

At the end of the day, we are not convinced that asset-indexing for security in IPRs is worth pursuing. The main advantage is to avoid the need to achieve interprovincial and federal/provincial uniformity in debtor name rules, and to alleviate the need for multiple debtor name searching back through the chain of title. While interprovincial uniformity as to the appropriate asset identifier should not be a problem for IPRs, uniform adoption by all provinces is likely to be since it would require a significant redesign of the existing hardware and software. Yet if the possibility of asset based indexing for IPRs was not uniformly adopted, the benefits would be significantly reduced. If there were even one non-compliant jurisdiction, it would be necessary to conduct a full chain of title search, determine if any predecessor in title in the chain was located in the non-compliant jurisdiction, and then conduct a name based search in that jurisdiction.

Even more importantly, even if uniform adoption were achieved among the Canadian secured transactions regimes, this would not assist in the case of a foreign country debtor or antecedent owner whose home jurisdiction may not even provide for registration, and even if it did, would not provide for indexing according to the registration numbers assigned by a foreign intellectual property registry.

5.4              Reformed Federal Registry

We noted in an earlier Part⁷⁷ that a provincial approach would require reforms to the federal registry system. Now that we have seen in more detail how a provincial system would operate, we repeat the point for emphasis.

The provincial security systems themselves are modern and efficient. Accordingly, one of the main advantages usually associated with a provincial system is that it would allow an effective system for taking security interests in IPRs without the need for extensive reform to the antiquated federal registries. But the above discussion shows that this assumption is not well-founded. The federal ownership registries are an integral part of the provincial system, since chain of title searching through the federal ownership registry is necessary to establishing good security in IPRs even under the provincial approach. That means that without reform to the federal ownership registries, these registries will remain a weak link in the system that will negate many of the advantages associated with taking security under the modern provincial systems.

Thus, significant reform of the federal registries to allow legally reliable, up to date, on-line searching of the federal ownership registries, including full chain of title for all IPRs (that is, grantor/grantee searching), is important. Otherwise it will not be possible to take a fully protected security interest in a debtor’s federal IPR without the cost and delay of a search at the CIPO offices in any case where the debtor is not the original owner of any of its IPRs.

Legal change is also desirable. As we have seen, at present the form of the security agreement is important with respect to registration in the federal system. A reformed system would adopt the substance over form approach which is used in the provincial systems. This should not be controversial. Also, as we have noted if uniformity at the provincial level in debtor name rules were achieved then the same rules should also be implemented in respect of ownership interests at the federal level.

5.5              Inconsistency of Choice of Law Rule with Other Jurisdictions

As a final point, we note that to apply the law of the debtor’s location is inconsistent with the general territorial principle⁷⁸ that pervades intellectual property law. Despite its intangible nature, intellectual property has historically been treated as being just as territorially fixed as real estate. There is no universal concept of an intellectual property right. Even though international conventions may impose international minimum standards, intellectual property rights still comprise a bundle of nationally-determined rights, the application of which is confined to the territory where the property is exploited. It follows that, as with land, intellectual property rights within each country are governed by the national law of that country.⁷⁹

The territoriality principle that pervades intellectual property law, and its analogy to land, suggests that the location of the collateral as opposed to the location of the debtor or the current owner is the more appropriate connecting factor for property dealings in intellectual property, whether by way of sale or security. The relevance of the territorial principle here is not purely conceptual. It accords with approach taken by most countries, under which the law governing the sale and grant of security in IPRs is integrated into a unified territorially-confined registration-based legal regime. Although the matter is being reconsidered currently, this is the current rule in the United States with respect to copyright as a result of a Federal Court ruling in the famous Peregrine case. It is true that reform efforts are underway in that country to return issues relating to security in copyright to the purview of state law, in particular Article 9. However, the debate is still controversial and even the Article 9 centred reform efforts contemplate close coordination with the federal law on IP ownership and its transfer. More importantly, Article 9 in the United States, while predicated on state enactment, is de facto national law since the identical version has been enacted by virtually every state. The same coast to coast to coast de facto uniformity does not exist in Canada, of course, with the result that the rights of secured creditors and third parties in respect of security taken in the same kind of federal IPR will fall to be determined under a federal deference approach by a different set of substantive secured transactions rules, depending on the jurisdiction in which the debtor is located.

This means that even if the provincial approach is adopted in Canada, the debtor location rule would be confined to Canadian IPRs. In view of the prevalence of the territorial principle internationally, a Canadian debtor granting security in its U.S. or European IPRs would not be able to rely in practice on its home secured transactions law. Any dispute involving foreign IPRs is apt to be adjudicated in the country where the IP rights are sought to be exploited and the courts of that country will apply their own territorial choice of law solution, a s opposed to the debtor location rule. The result is that other jurisdictions are unlikely to adopt a similar rule, with the result that foreign debtors could publicize an interest in Canadian IPRs with a foreign registration (or without registration, if that is what their law allowed) while a secured creditor lending to a Canadian debtors who held foreign IPRs would not have the similar benefit of a single registration, but would be required to register in the foreign jurisdiction.