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The 9th U.S. Circuit Court of Appeals has recently answered the question: Where does a party file a statement to perfect a security interest in a patent. This is an extremely important question for a lender who must take steps to protect itself when making a loan. The decision in Moldo v. Matsco, Inc. (In re Cybernetic Services, Inc., d/b/a Silent Radio, Inc.), ___ F.3d ___, 01 C.D.O.S. 4600 (9th Cir. 2001) means that the lender need only file with the Secretary of State to perfect a security interest in a patent. This simplification incidentally benefits other creditors because they will know where to look to determine whether other parties have security interests in a particular patent. The 9th Circuit has held that filing a UCC-1 financing statement with the California Secretary of State perfects a security interest in a patent and that there is no requirement to file a statement with the U.S. Patent and Trademark Office. Id. This decision affirms the September 29, 1999 holding of the 9th Circuit Bankruptcy Appellate Panel in Moldo v. Matsco, Inc. (In re Cybernetic Services, Inc., dba Silent Radio, Inc.), 239 B.R. 917 (9th Cir. BAP 1999). In Cybernetic Services, the most significant asset of the Chapter 7 estate was a patent for a data recorder which collects information via video signal. Prior to the bankruptcy case, Matsco, Inc. and Matsco Financial Corporation (“Matsco”) had filed a UCC-1 financing statement covering all assets including general intangibles, and a UCC-2 continuation statement both with the California Secretary of State of California. Matsco did not file a statement with the U.S. Patent and Trademark Office (“PTO”). In the bankruptcy case, Matsco moved for relief from the automatic stay to foreclose on the security interest in Cybernetic’s patent. The bankruptcy trustee opposed the motion for relief from stay arguing that Matsco did not have a perfected security interest in the patent because it failed to file a statement with the PTO. However, the bankruptcy court granted Matsco’s motion for relief from stay, holding that Article 9 governs perfection of a security interest in a patent. The Bankruptcy Appellate Panel affirmed the bankruptcy court ruling. The question of where to file a security interest has been an open issue because of the concern that it could implicate federal pre-emption issues. If the Patent Act were so comprehensive that there could be no room for state law to supplement it or if the state law seemed to conflict with it, then the state law would be pre-empted. However, the 9th Circuit determined that a grant of a security interest in a patent is not the type of assignment covered by the PTO regulations. The Patent Act registration requirements apply specifically to “assignments, grants, or conveyances” of a patent. 35 U.S.C. � 261. By means of a detailed review of case law from 1860 to the present, the court determined that a security interest in a patent is neither an assignment, grant, nor a conveyance of a patent, but more analogous to a license in that no ownership rights are transferred and thus � 261 does not apply to the transaction. 01 C.D.O.S. 4603. Additionally, the court noted in dicta that Copyright Act cases are not applicable because the Copyright Act, unlike the Patent Act, specifically covers hypothecation of an ownership interest in the relevant intellectual property. 01 C.D.O.S. 4605. The 9th Circuit agreed with the lower courts that have considered this issue in holding that the Patent Act does not create a system for recording security interests in patents. Therefore the Patent Act does not preempt state regulation of perfection of security interests in patents. This holding is important because it gives lenders and creditors certainty. In California, there is now binding authority at the circuit court level for the proposition that filing a UCC statement perfects a security interest in a patent. The upside for debtors is that by reducing the number of filings necessary to protect the security interest in a patent, the transaction costs associated with obtaining funding could be reduced. In practical terms, this case means that where a person is loaning money and receiving a security interest in a patent to secure that loan, the lender could decide that it will file a UCC-1 and not file with the PTO if the debtor is incorporated in California, headquartered in California and doing business in California. Once other circuit courts have considered this issue and commented on the MoldoCase, the lenders and creditors will know whether this course of action will work as a standard operating procedure in other states. However, until this question has been addressed by a number of circuits and lenders feel comfortable with the changes to Article 9 (which go into effect as of July 1, 2001), as a matter of prudence most lenders should probably continue to file a UCC statement in the appropriate location and file a statement with the PTO. On a related point, in Moldothe 9th Circuit cites Aerocon Engineering, Inc. v. Silicon Valley Bank (In re World Auxiliary Power Co.), 244 B.R. 149 (N.D. Cal. 1999) favorably. In that controversial case, the bankruptcy judge deftly reconciled the Copyright Act and the Uniform Commercial Code by holding that a secured creditor may perfect its interest in an unregistered copyright by filing a UCC-1 statement with the California Secretary of State. However, where a copyright has been registered with the U.S. Copyright Office, that would remain the proper place to file a statement in order to perfect a security interest. Although, this mention is dicta, it may provide some insight into the 9th Circuit’s leanings were the case appealed to the circuit court. Taken together, these two cases Moldo v. Matsco, Inc.and Aerocon Engineering, Inc. v. Silicon Valley Bankhave spelled out the process of perfecting a security interest in a patent and in a copyright. In summary, a security interest in a patent is perfected by filing a UCC statement with the California Secretary of State. A security interest in a registered copyright is perfected by filing a statement with the U.S. Copyright Office under the Copyright Act; while a security interest in an unregistered copyright is perfected by means of a UCC statement with the California Secretary of State. The clarity on this point is a potential boon for lenders in San Francisco and the Silicon Valley who routinely take a security interest in the intellectual property of the companies to which they loan money. Nicole D. Harris is an associate in the business group at Steinhart & Falconerin San Francisco. She clerked for the Hon. Leslie J. Tchaikovsky, United States Bankruptcy Court, Northern District of California and is currently the treasurer for the Board of Directors of the Barristers Club, Bar Association of San Francisco.

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