Pre-release UNCITRAL IP Supplement now out

Last Friday this weblog published this short piece announcing the adoption of the UNCITRAL Legislative Guide on Secured Transactions, Supplement on Security Rights in Intellectual Property. We've now heard from Spiros V. Bazinas (Senior Legal Officer in UNCITRAL's International Trade Law Division) that the pre-release version of the IP Supplement is now available. You can access it on the UNCITRAL website here.

UNCITRAL: now there's a Supplement

According to a United Nations Commission on International Trade Law (UNCITRAL) press release, on 29 June the "UNCITRAL Legislative Guide on Secured Transactions, Supplement on Security Rights in Intellectual Property" was adopted. This Supplement is the third text prepared by the Commission in the field of secured transactions law, following (i) the UNCITRAL Legislative Guide on Secured Transactions and (ii) the United Nations Convention on the Assignment of Receivables in International Trade (2001).

The Commission's Working Group VI (Security Interests) has been working towards this draft since 2007, recognizing that States need guidance as to how the recommendations of the Guide apply to IP and as to the adjustments they must make in order to avoid inconsistencies between secured transactions law and law relating to intellectual property. The Working Group, after five one-week sessions, completed its work in February 2010 and the Commission, at its forty-third session, finalized and adopted the Supplement. According to the press release

"The overall objective of the Guide is to promote low-cost credit by promoting access to secured credit. In line with this objective, the Supplement is intended to make secured credit more available and at lower cost to intellectual property owners and other intellectual property right holders, thus enhancing the value of intellectual property rights as security for credit. The Supplement, however, seeks to achieve this objective without interfering with fundamental policies of law relating to intellectual property. States are recommended to utilize the Guide and the Supplement to assess the economic efficiency of their secured transactions regimes as well as their intellectual property regimes and to give favourable consideration to the Guide and the Supplement when revising or adopting legislation relevant to secured transactions and intellectual property ...".

I've not yet read this Supplement, but wonder if anyone who has read it might be able to shed any light on its content and on whether it has addressed the anxieties that IP owners have consistently expressed in the recent past over the apparent mismatch between lenders' and IP-ers' interests. A 17 March draft is available on the UNCITRAL website here, and it has various appendices which are listed here, together with comments by governments and international organisations (including WIPO), but I don't know if these represent the final form of the Supplement. Can any reader please advise?

That seminar ... and some expressions of thanks

A fuller report on today's seminar, "IP rights and the UNCITRAL secured transaction project: the draft recommendations and their potential consequences for British lenders and IP owners", will follow on this weblog in due course -- and before I post it I should add that I'd welcome comments from those present, since my organisational responsibilities caused me to miss some of the contributions.

At this point all I'll say is this:

* The main speaker, Spiros V. Bazinas (Senior Legal Officer at UNCITRAL secretariat), set out the project's aim and purpose, with a particular focus on IP financing and the UNCITRAL IP Supplement. This meant that he was on his feet and speaking/responding for the best part of three hours. The fact that he did so, dealing with some very tough questions from IP and banking interests alike, was hugely appreciated. Thanks, Spiros.

* The chairman (Professor Graham Penn) and the panellists -- Ben Goodger (Rouse Legal), Mark Bezant (LCI) and Nigel Page (Finance Editor, Intellectual Asset Management) -- took the time and trouble to turn up an hour before the event and discuss the main issues in some detail, to facilitate the smooth running of the seminar. Thanks, all of you.

* Further thanks are due to the volunteers who have served on an informal basis to promote interest in IP securitisation and to inject some urgency into its consideration by rights owners, licensees and their professional advisors. These include but are not limited to Eva Lehnert, Dawn Franklin and Lorin Brennan. The London office of Olswang gave us a room with a panoramic view, large enough to hold nearly 100 people, with coffee and biscuits too, for which we were all very grateful. Amazingly, the list of those attending incurred only four no-shows -- something of a record.

* The proceedings have been recorded and, assuming that the recording is audible, will be made available via this weblog to all who are interested.

Memo on some UNCITRAL issues now available

Ahead of tomorrow's seminar on the UNCITRAL proposals on secured interests in intellectual property rights (details here), a memorandum has been prepared which addresses some of the issues that are thought to cause concern or reflect practical problems and which are likely to raised in the course of the afternoon. While this document is being sent to all registrants for the seminar, it can also be downloaded by IP Finance readers here.

If everyone turns up, there will be over 90 people present -- an amazing number for what until recently was seen as an obscure, uninteresting and almost irrelevant issue for many businesses. There's still room for a few more participants: email Sandra Holloway here if you'd like to come. There is no charge for registration.

Securitization of IP: Urban Legend, or Playing Soon in a Theatre Near You?

Probably no word in the finance world has taken on a less flattering connotation in recent times that the word "securitization" (unless it is the word "leverage", but the two go hand in hand). With the collapse of the sub-prime securitization market, and the financial carnage that followed, the term has come to represent, rightly or wrongly, the nefarious excess of financial alchemy running amok in the name of pure greed.

I am too far-removed from the daily life of Wall Street and the like to have any reliable clue to what extent the securitization of assets will play as the financial world climbs out of its current economic malaise Against that backdrop, I read with interest a piece that appeared on July 31, 2009, in iddmagazine.com. Entitled "A Starring Role for IP", the article addresses the issue, as set forth in the caption preceeding the text of the article, of whether,

"[a]s the securitization market comes back to life, [and] private-equity firms are finding deal flow in intellectual property, [w]ill the structured finance market support IP deals"?

The heart of the article is expressed in the following paragraph from the article:

"The predictable income streams derived from song royalties, paid year after year, along with licensing fees collected from the use of trademarked brands, underpin private equity interest in IP. Beyond the scope of capitalizaing on regular streams of income, IP also offers another incentive for financial buyers. It has the potential to be securitized or packaged into bonds that are backed by royalty payments as collateral. The bonds can then be used to refinance existing debt of portfolio companies--an attractive option for overleveraged private-equity-owned-companies--or conversely as acquisition financing."

The article discusses in some detail what is described as the succcessful securitization of the Dunkin' Brands in 2006 (pre-the Great Recession, I note). By sucesssful I assume means that the financial arrangements secured by the IP (read: trade marks, not donuts) were more favourable to the borrower than the other financial alternatives that were considered. In truth, however, the article reaches back and forth in time to bring merely a few examples of successful securitization of IP rights, with no reference to even the legendary Bowie bonds. The impression one receives is that this is still a marginal activity.

Spot the Securitized Asset

And so to the question: will we see an uptick in IP securitization as a sanitized alternative to the media-discredited investments in sub-prime mortgages and the like? From where this simple-minded IP practitioner sits, I am skeptical. The article suggests at least two interrelated reasons. First, the likelihood of getting a triple-A rating "without a monoline wrap" (I think that means a default swap or some other form of insurance) is not high, which means that the borrower will have to pay a higher interest rate for its bonds, thereby defeating the purpose of the exercise. Second is the "esoteric" and sui generis nature of IP rights. Valuation, both for the present and over the life of the bond, poses difficult problems, and the ability to assign a market value for the IP assets must certainly be a daunting challenge.

IP Securitization Made Simple

That said, I wonder whether there is some further room for interaction between the finance and IP worlds in exploring the potential for securitization of IP assets. When I spoke last month in India on trade mark valuation, one of the co-speakers on the programme represented the accountancy-valuation side of the profession. I came away with the feeling that I had too little an appreciation for the accountancy-valuation side, and my colleague had too little an appreciation for the IP-legal perspective.

There are two possibilities here. Either it does not really matter for valuation that our perspectives are so unconnected, because the IP-legal side has so little to offer, or it does matter, with the result that valuation is not being carried out as well as it might be. If the latter is true, then what is needed is a hightened dialogue to take advantage of the potential cross-fertization between the financial and IP-legal worlds. Something similar might well apply in connection with IP securitization. Investment houses, private equity funds, and banks--are you listening and are you interested?

IP securitisation and UNCITRAL: it's not too late to comment!

For those who have been following the ongoing drama of IP securitisation over the past couple of years (see IP Finance posts here, here, here, here, here, here, here, here, here, here and here), there's further news. Work has been continuing on a Draft Supplement to the UNCITRAL Legislative Guide on Secured Transactions dealing with security rights in intellectual property, as revised further to the April-May 2009 session of the UNCITRAL Working Group VI (Security Interests) and the approval of the insolvency discussion by the UNCITRAL Working Group V (Insolvency Law) at its May 2009 session. This Draft Supplement forms the basis for discussions at the next session of Working Group VI (Vienna, 2-6 November 2009).

UNCITRAL documents are available on the UNCITRAL website. Informal drafts for discussion with experts are not publicly available. However, UNCITRAL encourages interested organizations with expertise and experts to contact them, if they wish to examine and comment on such informal drafts, which are then finalized in accordance with the instructions of the relevant UNCITRAL (inter-governmental) Working Group and submitted to that Working Group for consideration. Interested organizations with expertise and experts may email the UNCITRAL secretariat here, or Spiros Bazinas (Senior Legal Officer, UNCITRAL's International Trade Law Division) here, if they'd like further information.

UNCITRAL – IP security

As previously reported on this blog, the UK's Intellectual Property Office requested comments on the latest draft Annex on security rights in intellectual property. Here are some of the comments the UKIPO has received:

1. Registration: the proposed creation of a Security Rights Register, which will increase the searching required to check the title to IP rights, will cause significant problems in identifying the parties against whom a search is made. It will also cause problems in that it is unlikely to identify the rights actually covered by the security documentation.

2. Integrity of licence terms: the possibility that a lender to a licensee may be able to obtain greater rights over the licensed IP than the rights licensed to the licensee remains a problem. There is concern that the Guide will overrule the written terms of a licence agreement, particularly in the event of insolvency and regarding termination terms.

3. Ordinary course of business: the concept of granting/taking a licence in the “ordinary course of business” referred to in the Annex is not known under IP law. There is an expectation that a buyer purchasing tangible goods in “ordinary commerce” under an authorised transaction takes the goods’ title free of any prior claims. For IP assets however, there usually is a common understanding that the use of the IP may be subject to some other, pre-existing rights.

For those who want to spot more issues, the Annex is available on the UNCITRAL website.

IP security and an absurdly tight deadline for response

An email has been sent today by the UK's Intellectual Property Office to an circular list named as "Policy". It reads as follows [with my comments in red]:

"UNCITRAL - Security Interests Working Group

Dear Interest [am I alone in not liking to be called 'Interest'?], 

A working group of The United Nations Commission on Trade Law (UNCITRAL) was established in 2002 to develop "an efficient legal regime for security rights in goods involved in a commercial activity". The Commission subsequently noted that intellectual property rights were increasingly becoming an extremely important source of credit and should not be excluded from a modern secured transactions law. The Working Group on Security Interests has held a number of sessions to discuss the issue [one of which resulted in the establishment of this weblog] and is developing an Annex to the UNCITRAL Legislative Guide on Secured Transactions dealing with security rights in intellectual property [an internal search of this blog will reveal numerous items and documents related to this initiative]. The Annex will discuss how the principles of the Guide apply where the encumbered asset consists of an intellectual property right. The latest draft to be discussed at the next Session beginning on 27th April 2009 in New York can be found here. [No it can't. Readers have complained that this link doesn't work. All the papers relating to the IP Annex to the Guide seem to be available here]

If you would like to comment on the draft Annex before the 15th session or require further information, please e-mail policy@ipo.gov.uk no later than Friday 17th April [this means just 14 days, inclusive of two weekends one of which is a major holiday, to get one's head round the complex issues and then articulate some sort of response; not much time, is it?]."

I'm going to be effectively out of action between 8 April and 17 April, but I do hope that readers of this blog will be able to coordinate some sort of response.  Can I suggest that readers who want to be involved, but who have not yet identified themselves, should post their names and email addresses as contacts below this post, so that someone can contact them or they can at least contact one another.

IP securitisation in Italy

This note has been kindly provided for IP Finance by Chiara Ortolani, an Erasmus Scholar from the University of Bologna who is at present in residence at the London office of Olswang:

"When considering the intangible nature of intellectual property, perhaps it is not surprising that securitisations in this field have not become everyday, well-publicised transactions. Each type of intellectual property comes with its own peculiar set of complexities and unknown risks that are not common to commercial ventures involving tangible property" K. W. Medansky and A. D. Dalinka

As of March 2009, no public information has been made available about IP securitisation in the Italian market. However, given that the transparency of financial markets is only one species of capitalist utopia and that IP securitisations are less publicised than other kinds of transaction, we can assume that IP securitisation is a process which is extremely rare (if it has ever happened) in the Italian market.

Why hasn't a traditionally illiquid and bank-oriented market like that of Italy discovered IP securitisation? There are at least two answers: first, the Italian rules on securitisation date from 1999: even though some securitisations had been arranged since 1990 using foreign vehicles, uncertainty about the protection of the investors and the conflict between laws slowed the development of this financial process, which in the same period was already used in the US and UK markets.

Secondly, the Italian market has a very peculiar composition: a large proportion of economic operators are represented by small or medium family-owned businesses which are unable to bear the costs involved by securitisation. Furthermore, since the banks have never shown a real interest in IP securitisation, this can be considered a relevant factor, if not a proper reason, in our analysis.

Focusing on the Italian rules about securitisation, provided by Act 130/1999, they statute a wide definition of the assets which the originator can pool and sell to a special purpose vehicle (SPV), simply specifying that the assets have to be pecuniary credits, already existing or existing in the future (Art. 1). This means that every kind of asset, including IP assets, can be pooled and sold to the SPV to start off a securitisation. The Italian rules are at the same time careful to protect investors, stipulating that the rules for public offerings of financial instruments are to be applied to some phases of the process of securitization (Art. 2), that the SPV has to meet strict requirements to do this activity (Art. 3) and prescribing that some of the rules of banking and financial transactions are to be applied to securitisations (Articles 4 and 5).

There are still many live issues concerning this Act: in particular, the function of Italian SPVs is completely different from the role of US and UK SPVs, because the Italian ones are businesses which can manage assets from different originators (they have been defined "multi-seller" for that reason), with a high risk of conflict of interests. Furthermore, the Act doesn't provide any definition of the financial instruments which the SPV will use to obtain funds from the investors and doesn’t specify if they are shares, bonds, credit derivatives or hybrid securities. This omission leads to huge problems in applying the protection to investors. However, some authors say the Act on securitisation can only provide a legislative framework but does not cover all the issues which securitisation raises.

The Italian rules neither forbid nor limit IP securitisation, but the key issue is whether the characteristics of the Italian market can stop the development of this financial process, which is actually one the most affected by the financial crisis. Predictions as to the survival of IP securitisation in the financial markets are pessimistic because of the decreasing answer of securities, the pressure put on banks by the recession and the prohibitive costs of assets on the secondary market. No predictions can be offered where unpredictability is the rule, but one may focus on the "set of complexities and unknown risks" of IP securitization to understand if there are opportunities for the diffusion of this instrument in the Italian market.

In general the two main problems involved in the diffusion of IP securitisation are the lack of common and widely accepted valuation methodologies for IP assets and the volatility of the IP market. The effective degree of success of a film or of a song, as well as the degree of use of a trade mark or of a design, is unpredictable in the absence of a specific framework for evaluation and the value of these intangible assets; further, the rating of financial products used to obtain funds definitely relies on the prediction of successful diffusion of the IP assets (copyrights, trade marks, designs, patents). For that reason the valuation of IP assets made by banks and financial institutions needs a generally accepted methodology, able to ensure to businesses a global assessment of their securitisation plans, not solely based on the reputation of the originator or of his brand.

There are some trans-national challenges to overcome in the process of development and diffusion of IP securitisation. This process can't succeed without a generally accepted framework for valuation of IP assets, new international rules which allow IP owners to gain access to affordable credit through specific procedures and a strong awareness of the potentiality of this finance process between the economic and legal operators. Some domestic challenges face the Italian market and its players: IP securitisation is a not completely explored field and, for that reason, new solutions can be found to enable the Italian market to take advantage of IP securitisation. There is no evidence that this kind of securitisation can't work in a bank-oriented financial system -- the challenge is understanding how.

UNCITRAL draft: expert group meeting ahead

I have learned from Spiros V. Bazinas, Senior Legal Officer in the International Trade Law Division of the UNCITRAL secretariat, that an expert group meeting is to be held on 11 and 12 December 2008 to discuss a revised draft of the Annex on security interests in intellectual property rights (for earlier posts on this controversial and technically complex topic see here, here, here, here and here). Discussions at the expert group meeting will be based on a draft working paper which will be sent to you at least a week before the meeting. Spiros has furnished the first draft of the Annex and the report of the session during which this draft was discussed. There are three documents in all:

* Annex to the UNCITRAL Legislative Guide on Secured Transactions dealing with security rights in intellectual property (Part 1) (32 pages, covering the Introduction; Scope of application and party autonomy; Creation of a security right in intellectual property)

* Annex to the UNCITRAL Legislative Guide on Secured Transactions dealing with security rights in intellectual property (Part 2) (33 pages, covering Effectiveness of a security right in intellectual property against third parties; The registry system; Rights and obligations of the parties to a security agreement relating to intellectual property; Rights and obligations of third-party obligors in intellectual property financing transactions; Enforcement of a security right in intellectual property; Law applicable to a security right in intellectual property; The impact of insolvency on a security right in intellectual property);

* Report of Working Group VI (Security Interests) on the work of its fourteenth session (Vienna, 20-24 October 2008).

Any reader who wishes to attend the December session should email Spiros or phone him in Vienna on +43-1-26060 4072, so that his request can be considered. More importantly, if any reader would like to study the documents listed above in order to make any constructive and informed comments upon them, they can be obtained directly from Spiros or by emailing me here.

IP securities Down Under

Lorin Brennan has been working hard on a Commentary on the Australian Personal Property Securities Bill 2008. The IP community has until THIS FRIDAY, 15 August 2008, to submit comments and Lorin is anxious to receive comments on his commentary (he writes "identifying any errors would be most welcome").

For the record, Australia is one of the first countries to attempt to amend its secured financing law by reference to the UNCITRAL Guide on the securitisation of intangibles but without the benefit of the Annex relating to IP rights. The contents of the Commentary go like this:

"I. EXECUTIVE SUMMARY
II. Under Section 5 a Secured Creditor Should Be Treated as a Rights Holder of Intellectual Property
III. Section 21 Should Clarify Whether It Intends to Treat a Traditional Assignment of Intellectual Property as a Security Interest.
IV. Section 30 Should Not Allow a Security Interest in Tangible Property to Apply Automatically to “Related” Intellectual Property.
V. Sections 45 & 47 of the Bill Should Clarify the Law Applicable to a Security Interest in Intellectual Property.
VI. Section 69 Should Not Require a Secured Creditor To Make Continuous Filings Against Subsequent Transferees to Maintain Perfection of Its Security Interest.
VII. Sections 82 & 91 Should Not Allow A Person Who Acquires An Interest “In the Ordinary Course” To Take Free of an Intellectual Property Security Interest.
VIII. Sections 92 Should Clarify The Relationship Between The Priority Rules in the Guide with Those in the Intellectual Property Statutes.
IX. Section 116 Should Not Allow Transfers of Intellectual Property Licences Despite Contrary Licence Terms.
X. Section 113 Should Not Allow An Execution Creditor To Gain Automatic Priority Over An Unperfected Security Interest Without Registering In an Applicable Intellectual Property Registry".

If you've got some time to look at this document, peruse its contents and Lorin's comments on them, email me here and I'll send it to you a.s.a.p. Comments should be sent to Lorin here. Also, if you have any pertinent comments, I'll be happy to post them on this blog. Finally -- this blog has quite a few Australian readers: this is a great opportunity for you to take the initiative!