IP licensors, contractor research organisations and SaaS developers – are you taking and properly registering security interests on the Personal Property Security Register? If not, you could lose your priority to critical intellectual property assets in the event of insolvency or non-payment.
What are security interests?
A security interest is an interest in the grantor’s property, which allows the recipient of the security interest (the ‘secured party’) to ‘take’ that personal property if the grantor doesn’t comply with some obligation it owes the secured party.
The Personal Property Securities Act (PPSA) regulates how security interests in intellectual property assets are managed.
Security interests are rarely considered in many arrangements involving intellectual property. Even if considered, perfecting the security interest according to the PPSA is often overlooked or simply not undertaken.
If managed properly, security interests can provide substantial protection in the event the other party becomes insolvent or refuses to pay what you’re owed.
What are some examples of security interests?
We recommend our clients take security interests in a variety of circumstances, including by:
- a retention of title arrangement; for example:
a. where software developed for a client remains owned by the software developer until it’s paid for;
b. where a supplier of goods (e.g. materials provided for the subject of research) retains title to those goods until the other party’s obligations (e.g. to pay some amount or satisfy some research milestone) are fulfilled;
- the express grant of an ‘all present and after acquired’ security interest; for example:
a. a licensor and licensee agree in the licensing agreement that the licensee grants a security interest over all of the licensee’s property, to secure the licensee’s obligations to pay royalties;
b. a SaaS provider and its customer agree in their SaaS agreement, that the customer grants a security interest over all of their property to secure the customer’s obligations to pay SaaS or other development fees;
c. a contract research organisation and its customer agree that the customer grants a security interest over all of the customer’s property, to secure the customer’s obligations to pay fees or milestones for the research deliverables;
d. it may be appropriate in some circumstances for a parent entity to grant a loan to, and then take a security interest in, a subsidiary entity that holds intellectual property assets as part of a corporate group structure, so that if the subsidiary becomes insolvent, the parent has higher priority to the assets (including IP) of the subsidiary.
What benefits will a security interest provide?
If the entity that has granted you the security interest (the grantor) fails to pay what is owed to you, or goes insolvent, a security interest can give you priority over the grantor’s assets (and prevent them from vesting in a liquidator) so that those assets are used to pay debts to you, before anyone else.
However, if you do not perfect the security interest as required by the PPSA, then you will not take these benefits.
How do I perfect the security interest?
For most assets other than intellectual property, an ‘all-present and after acquired property’ registration, or a ‘purchase money security interest’ (in respect of retention of title arrangements) on the Personal Property Securities Register (PPSR) is usually sufficient.
However, there are different rules to perfect a security interest in intellectual property.
Often, the grantor will have substantial intellectual property assets, and sometimes these may be the grantor’s only assets – for example, in the case of a start-up licensee with little revenue, but a patent portfolio. In order to ensure that you maintain your priority in respect of these assets, it’s critical that these different rules are followed.
To perfect serial numbered property (such as patents, plant breeders’ rights, trademarks, designs, or applications for or licenses over any of the aforementioned), they must be registered by their serial number (i.e. the number issued by IP Australia). To perfect unregistered rights such as copyright, the registration must clearly describe the copyright in which the security interest is taken.
Of course, when there are multiple security interests in the same property, earlier registration will take priority, so it’s important to undertake searches of the PPSR if these protections are to be relied on.
If you intend to obtain these protections, take care to ensure that the grant of the security interest in the relevant agreement is properly drafted, and that other requirements for registration on the PPSR (such as the description of collateral and timing requirements) are satisfied.
Mahoneys regularly assists clients with the protection of their intellectual property assets. If you would like any assistance with these issues, please contact Rhys Williamson firstname.lastname@example.org.