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Security interests in unregistered copyright material are governed by state, not federal, law, the 9th U.S. Circuit Court of Appeals ruled Wednesday. In a unanimous opinion written by Judge Andrew Kleinfeld, the 9th Circuit held that by filing a statement under California’s Uniform Commercial Code, a party can perfect, or protect, its security interest in material that lacks a federal copyright. “Regarding perfection and priority of security interests in unregistered copyrights, the California Uniform Commercial Code has not stepped back in deference to federal law, and federal law has not pre-empted the U.C.C.,” wrote Kleinfeld in Aerocon Engineering v. Silicon Valley Bank, 02 C.D.O.S. 9355. The case has important implications for high-tech businesses, whose most valuable assets are often their intellectual property. Wednesday’s decision makes it easier for businesses to use the intellectual property that’s not registered as a copyright as collateral for bank loans. “Unregistered copyrighted material just became more attractive to financial institutions,” said Shawn Christianson, an attorney at Buchalter, Nemer, Fields & Younger who handled the case. The case revolves around designs for airplane modifications owned by a trio of bankrupt companies. Silicon Valley Bank, a creditor in the bankruptcy case, had a security interest in the intellectual property. A company called Aerocon was sold the same designs from the bankruptcy estate. Under the federal bankruptcy code, a trustee can take control of assets in which the security interests are not perfected. Aerocon argued that since the material did not have a copyright registration, it was not properly perfected according to the federal Copyright Act, and hence, the trustee’s claim on it had priority over Silicon Valley Bank. The bankruptcy court judge took Silicon Valley Bank’s side, as did the U.S. District Court judge to which Aerocon appealed. “The only reasonable inference to draw is that Congress chose not to create a federal scheme for security interests in unregistered copyrights, but left the matter to states, which have traditionally governed security interests,” wrote Kleinfeld in Wednesday’s ruling. The decision came as a surprise, said Jerrold Guben, an attorney at Honolulu’s Reinwald, O’Conner & Playdon, who represented Aerocon. “I think virtually all prior cases went the other way,” Guben said. Guben also said he was still not sure whether the case would be appealed to the U.S. Supreme Court.

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