Federal Security Interests Research Study and Report 2000


A. Introduction

In the age of e-commerce and the revolution in information technology, the value of intellectual property ("IP") to companies is tremendous.; IP represents for many companies their primary asset.; The intangible nature of IP raises new problems for lenders, who have traditionally taken a "bricks and mortar" approach to advancing money to businesses.; Taking security in IP represents a new and increasingly important challenge for lenders.

Unfortunately, the current legislative system for taking a security interest in IP leaves much to be desired.; The lack of clarity in the legislation does not provide lenders with the kind of assurance they are looking for.; This in turn is likely to create an obstacle to the growth and prosperity of both IP-based businesses and the lending institutions themselves.; Comprehensive and clear legislative reform making it easier for lending institutions to advance funds against IP assets would provide a welcome boost to one of the fastest-growing sectors of the Canadian economy.; A summary of the relevant legislativa and regulatory provisions is provided in Appendix E.


1.The Federal IP Legislation

For the most part, the federal IP statutes do not concern themselves with the regulation of security interests in IP. There are, however, provisions in the various statutes which touch upon security interests by allowing the registration of "assignments" and "transfers".

(a) The Copyright Act

Section 57 of the Copyright Act provides for the registration of an assignment of copyright:

57. (1); The Registrar of Copyrights shall register an assignment of copyright, or a licence granting an interest in a copyright…

(3) Any assignment of copyright, or any licence granting an interest in a copyright, shall be adjudged void against any subsequent assignee or licensee for valuable consideration without actual notice, unless the prior assignment or licence is registered in the manner prescribed by this Act before the registering of the instrument under which the subsequent assignee or licensee claims.

The effect of s. 57 on security interests is unclear.; "Assignment" is not defined in the Act, and it is therefore unclear whether the language is broad enough to include a security agreement or other document granting a security interest in IP. ;Assuming that s. 57(3) does apply to security interests, it is not clear what effect the section might have on priorities issues.; Would a subsequent assignee without actual notice under the Copyright Act have priority over an earlier PPSA registration?; The wording of the Copyright Act would seem to dictate such a result, but this would undermine the basic "first to register" priority scheme adopted by the PPSA.

The possible impact of s. 57 of the Copyright Act on the issue of priorities was discussed by the Federal Court, Trial Division in Poolman v. Eiffel Productions S.A. ("Poolman").; The Court in Poolman dealt with the differing priority schemes established by s. 57(3) of the Copyright Act and Article 1488 of the Civil Code of Lower Canada.; The Court held that the issue of priority was to be determined in accordance with the provisions of existing provincial law.; The decision in Poolman indicates that in determining issues of priority among competing assignments the courts will defer to provincial PPSA legislation.; This approach is certainly the most logical, given that the Copyright Act was not designed to provide a complete system for determining priorities.

The inadequacy of the Copyright Act as an arbitrer among competing assignees is further illustrated by the difficulties involved in searching the register.; The presence of a security interest in a copyright does not show up on the card under the name of the work in the index of works.; A potential lender searching the registry would have to verify the microfiche registry for the registration certificate of the work to see if it is followed by the registration certificate of a security agreement.; In a situation where the author grants a security interest in a work whose title has changed, it is not possible to verify the ownership of rights in the work.; There is also no mechanism for notifying secured creditors of subsequent transfers of rights related to the item of IP encumbered.

(b) The Trade-Marks Act

Section 48(3) of the Trade-marks Act provides that the Register of Trade-marks "shall register the transfer of any registered trade-mark".; The term "transfer" is not defined, and it is not clear whether a transfer would include the registration of a security interest.; The Trade-Marks Registrar does administratively accept and record documents which grant a security interest in trade-marks, though it has no express statutory authority for doing so.;

Section 10 of the Trade-marks Act states that "Where any mark has by ordinary and bona fide commercial usage become recognized in Canada as designating the kind, quality, quantity, destination, value, place of origin or date of production of any wares or services, no person shall adopt it as a trade-mark in association with such wares or services or others of the same general class or use it in a way likely to mislead, nor shall any person so adopt or so use any mark so nearly resembling that mark as to be likely to be mistaken therefor".; Section 10 potentially creates a problem for those holding security in a trade-mark that has achieved a high level of distinctiveness.; Upon default of the debtor, the secured creditor must be careful to ensure that the quality and nature of the goods with which the trade-mark is associated is not altered.; If the quality and nature of the goods does change, a concerted effort must be made to notify the public of this change.; This problem was addressed in Heintzman v. 751056 Ontario Ltd. ("Heintzman").; In Heintzman, a company purchased a maker of pianos that had been producing high-quality pianos in Hanover, Ontario since 1926.; The purchaser closed the Hanover operation and began to sell lower quality pianos made in the United States and Korea in association with the Heintzman name.; The change in quality of the pianos was not advertised to the public, and the Court ordered that the Heintzman trade-mark be expunged.; Heintzman illustrates that lenders taking security in IP should be aware of some of the unique attributes of IP, where ownership does not always allow the owner to treat the asset as it pleases.

(c) The Patent Act

Section 50 of the Patent Act (a) states that patents are assignable and (b) states that assigments of patents shall be registered in the Patent Office.; Section 50 makes the Patent Act the only federal IP statute that requires registration of assignments or transfers.; Section 51 of the Patent Act provides that any assignment of a patent is void against any subsequent assignee unless the assignment is registered.;

Sections 50 and 51 of the Patent Act create uncertainty in regards to their application to security interests and their interplay with the PPSA in determining priorities.; These issues were addressed by the Alberta Court of Appeal in the case of Colpitts v. Sherwood ("Colpitts").; Colpitts ;dealt with a priority dispute between a subsequent assignee of a patent with actual notice of an earlier unregistered assignment.; The Court treated an assignment intended as security as an assignment registrable under the Patent Act.; The Court held that the subsequent assignee with notice did not take priority over the earlier unregistered assignee.; It is significant that in Colpitts all of the parties involved were aware of the respective agreements.; The Court was not faced with a situation where an assignee became aware of a subsequent assignment only after registering.; In other words, the Colpitts decision made sense given the facts of the case, but the finding should not be treated as a principle with general application.;

There is nothing in the wording of the Patent Act to suggest knowledge or lack thereof should play any role in determining priority among assignees.; The finding that the taking of a security interest in a patent constitutes an assignment registrable under the Patent Act is also suspect.; American courts, in interpreting language similar to that found in the Patent Act, have held that as taking security in a patent falls short of being a complete assignment, security interests in patents do not have to be registered as assignments under the Patent Act.; A UCC registration will be sufficient to perfect a lender's security interest in a patent.; The U.S. courts determined that where the federal legislation does not expressly provide for the taking of a security interest, the UCC will fill in the gaps.; The logic behind this determination is that if Congress intended to create an all-inclusive federal security regime for patents, it would have expressly provided for such in the legislation.; While it is far from certain that this logic would prevail in Canada, it does make some sense.; The Patent Act as currently drafted is not designed to provide a searchable registry and a method for determining priorities.; To bestow the Patent Act any role in these matters simply creates confusion among creditors and undermines the PPSA.; However, as there is no authoritative Canadian case law interpreting ss. 50-51 of the Patent Act, a prudent secured creditor will register a security interest in a patent under both the PPSA and the Patent Act.

The federal registries were never intended to establish a regime governing security interests.; The federal statutes fall far short of establishing a comprehensive scheme whereby the priorities of secured parties in IP may be resolved.; Indeed, the presence of the registration sections in the federal IP statutes serves largely to add to the uncertainty and confusion facing lenders who take security in IP.

2. The Provincial PPSA Legislation

Security agreements involving IP are almost invariably registered under the PPSA.; This is hardly surprising, seeing as the federal system offers no real alternative.; The PPSA offers a complete system governing issues involving registration, attachment and priorities.; There are, however, a number of problems with the PPSA as it relates to IP.;

There are several characteristics unique to IP that make it difficult for security interests in IP to fit easily into the PPSA structure.; For example, in order for a security interest to attach, the debtor must sign a security agreement containing a description of the collateral sufficient to enable it to be identified.; This requirement raises a problem where the collateral consists of unregistered trade marks and copyrights, trade secrets, unpatented inventions etc.

As discussed above in relation to the Heintzman case, lenders taking security in trade marks should be aware of the need to maintain the trade mark's distinctiveness.; This requirement distinguishes trade marks from more traditional collateral in which the full bundle of rights associated with ownership can be taken.

Copyrights present a similar dilemma, as a secured creditor enforcing its security in respect to a copyright will not obtain all the perquisites of ownership.; Section 14(1) of the Copyright Act provides that the author of the work has the right to the integrity of the work and the right to be associated with the work as its author.; These "moral rights" may not be assigned but may be waived in whole or in part.; In order to ensure that it will have the most complete set of rights possible, a lender taking security over a copyright will have to seek from the author of the work a waiver of moral rights.

Section 12 of the PPSA provides that a security interest in intangible property will automatically attach to after-acquired property as long as the security agreement between the parties evidences an intention to this effect.; Section 12 raises some unique issues where the collateral is IP. ;Important IP assets such as research and development and companion technology do not easily fit into traditional concepts of after-acquired property.; To ensure successful capture of such after-acquired intellectual property assets, they should be clearly described in the security agreement.

This list of characteristics unique to IP is far from complete, but it does give an indication of why a system for registering security interests designed specifically for IP might be recommended.

C. Interplay Between Federal and Provincial Legislation

The existence of possibilities to register security interests in IP at both the federal and provincial level creates a number of problems.; If the federal IP statutes are interpreted as governing priorities between competing security interests as well as assignments, it would create a potential for conflict between the federal and provincial statutes.; It would also put the impetus on lenders to search the federal registries for prior registered security interests, a task which, as discussed above, is markedly more difficult than performing a PPSA search.; For the most part, these problems have not been litigated.; It is thus unclear how the conflicts between the federal and provincial statutes might be resolved.; The Colpitts and Poolman cases do little more than provide fodder for speculation as to how a court might approach issues involving security interests and the interplay between the PPSA and the federal IP statutes.; There is no clear answer as to (a) whether security interests are included by the reference to "assignments" in s. 50 of the Patent Act and s. 57 of the Copyright Act and to "transfers" in s. 48 of the Trade-marks Act and (b) whether the PPSA or the federal IP statutes govern priority among competing assignees and transferees.; The presence of these unresolved issues and potential conflicts adds to the uncertainty involved in lending on IP, which in turn is likely to have a negative effect on a key sector of the economy.

D. A Single Federal Registry for Security Interests in IP

One possible solution to the problems outlined above is the creation of a single federal registry for security interests in IP.; This would involve amending the federal IP statutes to deal more comprehensively with priorities issues.; It would also involve the creation of an easily searchable registry.; The creation of a single federal registry would end the confusion as to the necessity and significance of registering security interests at both the provincial and federal levels.; It would end the current duplication where lenders register their security interests under both the PPSA and the relevant federal IP statute.; Finally, creating a single federal registry for security interests in IP run by CIPO makes it more likely that a sui generis security interest that takes into account some of the unique attributes of IP could be created.; Arguably, the experts at CIPO are in a better position to tailor a security interest to suit the needs of IP clients than are those who administer the PPSA.

E. Repealing the Federal Registration Provisions

As an alternative to the creation of a single federal registry, the registration provisions contained in the federal IP statutes could be repealed.; Another option would be to amend the provisions to make it explicitly clear that they have no application to security interests.; Either of these options would be less complex than creating a whole new registry at the federal level.; The impact on lenders would be minimal.; They would continue to register their security interests under the PPSA and would be spared the need to register at the federal level.; The federal registration provisions as currently drafted do little more than confuse lenders wishing to take security in IP.; Their purpose and effect is unclear, making their repeal worth consideration should the ideal of a single federal register be rejected on the grounds that it would be too complicated or that it would not pass muster constitutionally.

F. Constitutional Issues

Any proposal for a single federal registry for registering security interests in IP will have to be constitutionally acceptable.; The Constitution Act specifically gives the federal government jurisdiction over patents and copyrights.; The federal government has based its right to legislate in the area of trade-marks on its trade and commerce power.; The provinces, on the other hand, have legislated with respect to security interests pursuant to their jurisdiction over property and civil rights in the province.; Trade secrets and trade names are also matters coming within provincial jurisdiction.;

The federal government may enact legislation that impacts on an area of provincial jurisdiction as long as the "pith and substance" of the legislation is directed to a matter within its jurisdiction.; Arguably, a federal registry for recording and determining priority among security interests in patents, trade-marks and copyrights falls within federal jurisdiction to legislate in these areas.; Its impact on the provincial power to legislate in the area of property and civil rights would be merely incidental.; This argument does not hold true with respect to trade secrets and trade names.; It is also not clear where such IP assets as research and development and companion technology would fit in.; The federal government could try to include these "other" IP assets in a registry with reference to its trade and commerce power.; Arguably, these assets are not located "within a province" and federal legislation impacting them could be justified under the interprovincial trade and commerce power.

In our federal system there are myriad examples of federal and provincial laws that overlap and impact on each other.; The general approach to this situation has to be to interpret such laws in such a way as to allow them to coexist.; A federal registry for the recording of security interests in all types of IP would certainly impact on matters within the jurisdiction of the provinces.; However, this alone does not mean that the federal government would be unable to proceed.; Indeed, it is exceedingly difficult to predict how the constitutional arguments might play out if litigated.; Much would depend on the precise wording of the federal legislation and on the positions of the two levels of governments.; This said, constitutional considerations will certainly be an important factor in any reform to the registration provisions in the federal IP statutes.

G. Conclusion

The current process for taking security in IP is marked by a lack of certainty and clarity.; Reforming the law to deal with the issues outlined above would facilitate the growth of an increasingly vital sector of the Canadian economy.

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