Thursday 18 March 2010

Update on the UNCITRAL secured transaction project

It has been a while since we last reported on where things stand with the proposed IP Supplement to the 2007 UNCITRAL Legislative Guide on Secured Transactions setting out recommendations for a uniform legal regime for secured financing. The following is an update on this project since our last update in October.

Working Group session in Vienna, November 2009

Following the London seminar of 14 October 2009 on IP rights and the UNCITRAL secured transaction project, the Working Group (“WG”) session in Vienna last November improved the language of the IP Supplement considerably, adding some helpful explanations regarding a number of points that were discussed at the seminar. The improved wording concerns in particular the issues of automatic termination clauses and acceleration clauses in licence agreements, as well as the integrity of licence agreement provisions and the secured creditor’s inability to acquire greater rights in an encumbered asset than the rights the grantor has. However, the WG did not reach agreement on two remaining issues of concern that were also discussed at the October seminar: 1) the issue of “ordinary course of business” exceptions, and 2) the choice of law question.

Working Group session in New York, February 2010

This session – the final WG session where the IP Supplement was scheduled for discussion on substance - was mainly about finding a solution on the two key remaining issues:

Issue # 1: Ordinary course of business: the “ordinary course of business” exception (an exception unknown under IP law) on the purchase of IP, intended for consumers to take copyrighted software free of any security interests that the vendor might have granted in the IP.

At this session, the WG was able to resolve this issue fairly quickly, agreeing on compromise wording to replace the previous, rather detailed recommendation focusing on software (included in doc. no. A/CN.9/WG.VI/WP.42/Add.4 dated 26 November 2009), as follows:

"The law should provide that the rule in Recommendation 81(c) applies to the rights and remedies of a secured credit under this law and does not affect the rights and remedies the secured creditor may have under the law relating to intellectual property."

The Guide in Recommendation 81, subparagraph (c) provides that an ordinary course licensee takes its rights unaffected by a security right previously granted by the licensor. The effect of this rule is that in the case of enforcement of the security right by the licensor’s secured creditor, the secured creditor cannot terminate the “ordinary course” licensee, as long as the licensee performs the terms of the licence agreement. All the secured creditor can do is to continue to collect royalties owed by the licensee to the licensor.
The new compromise wording essentially refers matters to the Guide’s Recommendation 4(b) - the overall rule clarifying that where the Guide is inconsistent with IP law, it does not apply. IP commentators have noted that this constitutes an acceptable compromise as it leaves the secured creditor with the possibility to sue the licensee in case of infringement of the IP right in question – with the important proviso that the underlying financing agreement must be drafted in a way that allows the secured creditor to do so.

Issue # 2: Choice of law: the question of which law is to apply, the law of the state(s) in which the IP is protected or the law of the state where the grantor of the security interest is located, which could create problems with chain of title searches and debtor allocation where there are multiple rightholders and/or creditors in different countries.

The WG could reach no consensus on this issue and a decision was made to defer the matter for further consideration to the UNCITRAL Commission which is to make a final decision at its next meeting in June/July when the IP Supplement is scheduled for finalisation and adoption. At the WG session a total of 6 different options to deal with the issue were discussed. All options would apply a different mix of lex protectionis and the grantor’s location law for the different proprietary matters the Guide deals with (the law applicable to the creation; effectiveness against third parties; priority as against the rights of competing claimants; and enforcement of a security right). Some of the options would also differentiate between registered and unregistered IP rights. Out of the 6 options discussed, the WG agreed that 4 options (with one option entailing two different versions) should be presented to the Commission.

Spring time at UNCITRAL ?

It will be interesting to see how the Commission will deal with this impasse. At the WG session it was noted that it is important to reach agreement on one option only, as otherwise a different rule would apply depending on the conflict-of-laws rule of the forum state, a situation which would perpetuate the currently prevailing uncertainty. If no agreement can be reached on an IP-specific recommendation, the general recommendations of the Guide as to the law applicable to security rights in intangible assets would apply - see recommendations 208 and 218, subparagraph (b) of the Guide.

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