The locomotive of the IT era has slowed down, but its rampage in
the late nineties increased consciousness of the economic value
vesting in information and know-how. Many businesses have realized
the value of their intellectual property rights, not only as assets
in day-to-day business, but also as tools for funding.
Simultaneously, demand for security in trademarks, patents and
copyrights has increased. Issues have also been raised regarding
security interests in designs and domain names. The legal area is
thus becoming increasingly important, but questions surrounding it
are still unclear.
One question closely related to third-party rights in
intellectual property (IP) is an IP asset's value. The value of an
IP right is affected by several factors, which in general are of
less importance for material assets. IP rights may, for example, be
challenged by third parties claiming priority, lack of originality
or lack of other basic criteria for protection. The future value of
an IP asset is often uncertain and hard to estimate, partly because
a company going bankrupt may lose human resources closely connected
to the maintenance of the asset's value. The value is often higher
in the hands of an entrepreneur than in a creditor's.
Having touched upon the valuation problem, we move on to the
more heavily regulated third-party rights of industrial property,
primarily trademarks, with comments regarding particularities of
patents. Because there are registers for these rights, it is also
possible to register security in them. This increases third-party
control and has also made it easier for the legislator to set up a
formal structure for handling such securities. We continue with
third-party rights in copyrights, which is an area that, to a large
extent, lacks statutory regulation and formal structures.
Trademarks and patents
It is well known that patents and trademarks can represent
substantial values and sometimes even the greater part of the value
of a company. Statistics from the Swedish Patent and Registration
Office (PRV) indicate that the securing of investments through
pledges of trademarks has increased substantially in past years.
Five applications for pledges of registered trademarks and/or
trademark applications were filed in 1997, in 2000 the number was
50 and up until November this year about 160 applications have been
Trademark protection can be established either through use or
registration. Registered trademarks and trademark applications can
be pledged, but trademarks established through use cannot. However,
all trademarks can be used as security in a security transfer. The
prevailing opinion is that security transfers become valid against
third parties through the transfer agreement. Security transfers
will be further dealt with below in relation to copyright; here we
will focus on pledging registered rights.
A trademark can be registered through national, international or
European Community (EC) applications. Pledges of the first two are
registered by PRV. The EC authority in Alicante, Spain deals with
EC registrations. A national trademark becomes valid through
registration with priority from the date of application or, if
applicable, from the date of an earlier international application.
The protection runs for ten years from the date of registration,
and may be prolonged for an unlimited number of ten-year periods,
provided that the registered holder of the right files for renewal
and pays the renewal fees.
Registrations and applications for national and international
trademarks can be pledged by application and by filing the pledge
agreement with PRV. The pledge becomes valid through registration.
It is not possible to pledge part of a trademark. However, there
may be more than one pledgee of a trademark. If there is more than
one pledgee in a single transaction, PRV accepts that a security
agent is registered as a representative for all the pledgees.
Creditors obtaining pledge of a trademark should be aware of a
number of risks. The pledge may become worthless if the holder of
the trademark fails to renew the right. Further, a pledged
trademark can be challenged by another party. For example, if an
earlier right to a confusingly similar mark exists, or if the
pledged mark is not used continuously for five years, the pledged
mark may be cancelled by a court of law. A court may also find that
the mark lacks distinctiveness and therefore cannot serve the basic
purpose of distinguishing the user's goods from those of others.
Registration is therefore not a guarantee for protection, or for
the value of the mark or pledge. Some of these problems may be
dealt with in the pledge agreement, for example, the trademark
holder could undertake to renew the registration. Other criteria,
such as the value-preserving use of the mark, may be more difficult
to handle contractually.
Creditors should consider whether the trademark holder has
entered into any licence agreements. If so, the licensee may have
acquired a prior right to the trademark, which is likely to survive
irrespective of whether the pledge is realized or not. A licence
may therefore have substantial effect on the value of the pledge.
Further, trademarks may be included in the floating charge on a
company. However, the floating charge does not include pledged
The rules regarding pledge of patents are similar to the rules
regarding pledge of trademarks. As opposed to a trademark right,
which can be established through use, a patent can only become
valid when granted by a competent authority or organization. All
patents valid in Sweden are registered by PRV, irrespective of
whether they are filed as national, international or EC patents. A
patent is valid for 20 years from the date of filing of the patent
application, subject to registration, and provided that applicable
fees are paid.
A patent can be cancelled due to lack of novelty or lack of any
other basic criteria for grant of the patent. Further, a third
party may be entitled to the patent, and it can be transferred to
them. A good faith user of the patent may, however, be entitled to
continue its use after the transfer in exchange for fair
compensation. Particular rules apply for supplementary protection
of medicinal drugs and plant protection products.
According to the preparatory works of the Patent Act, two or
more persons jointly holding the right to a patent may each pledge
their part of it. But if the right to a patent rests in different
hands, the patent might not be very useful as security. PRV has in
some cases denied registration of a security agent as
representative for a collective of patent pledgees. This is
contrary to PRV's handling of trademark pledges, and causes
practical problems for pledgees. One such decision is subject to
Just as with trademarks and patents, large parts of certain
companies' assets can vest in copyrights. Software, motion pictures
and music recordings are good examples of copyrights that are
essential value drivers for the companies exploiting them. However,
a copyright is more uncertain as a security than a trademark.
A copyright is valid for 70 years after the death of the author
and consists of two parts, the economic right and the moral right.
The rights originally vest in the author of the work. The economic
right is transferable. The moral right, that is, the right of the
author to be acknowledged and not to have his work distorted, is
not. For software created by an employee, the copyright
automatically transfers to the employer if nothing else has been
The author has the exclusive right to choose whether, when and
how the work is made available to the public. No one can force the
author to make the work public. In accordance with this, an
author's copyright cannot be seized to benefit his creditors. The
same applies to manuscripts, and artworks that have not yet been
made public (reserved copy). However, if an author executes a
security transfer of a copyright or pledges a reserved copy, the
creditor can realize the copyright or the pledged work according to
the terms agreed.
The purchaser of a copyright cannot transfer the copyright, nor
can the purchaser make changes to the work, unless this has been
agreed. Before using a copyright as security the creditor must make
sure that the debtor can transfer it, otherwise the creditor cannot
seize it and a security transfer would not be valid. The scope of
the right is of course also intrinsic to the value. If the debtor's
transferable right does not include a right to amend the work, the
right's value is reduced.
Copies of works, as well as royalties and other earnings
referable to copyrights, can be seized in the same way as other
tangible property, and thus are not affected by the particularities
of the copyright itself.
A copyright can either be completely transferred or a
right/licence can be granted for certain use of the copyright.
There is consensus that a transfer becomes valid against a third
party through the agreement. For licenses and security transfers
the situation is less clear. Some argue that a transferee would
have priority over licensees and security transferees. The
prevailing opinion is, however, that a licensee or a security
transferee has priority against third parties through the
Another debated issue is whether or not a copyright can be
pledged. In principle, property that is neither tangible nor
registerable cannot be pledged. Court decisions regarding other
such property - buildings on leased ground - indicate that a pledge
might not be upheld. It is therefore preferable to demand a
security transfer in a copyright rather than a pledge.
Because a copyright is generally part of the debtor's business,
a security transfer agreement often contains a licence that gives
the debtor the right to sub-license the copyright. The right of the
creditor will be subject to these licences and to other rights
granted before the security transfer. Regarding software, the
source code should be put into escrow, in order for the creditor to
get full practical access to the security.
Copyrights, just as trademarks and patents, can be part of a
floating charge. A prerequisite therefore is, as indicated above,
that the copyright is transferable.
Even if IP rights have common denominators, they also have
inherent differences that must be considered by a creditor seeking
security. Only registered trademarks and patents can be pledged,
although all IP rights can be part of a floating charge or subject
to a security transfer. A creditor seeking security in an IP right
should, however, not only make an informed decision about the form
of security used, but also be aware of the possibility of the right
being challenged, as well as other uncertainties, such as prior
licences and time limitations.
There are many risks to consider and uncertainties to take into
account when evaluating an IP right as security. But it is possible
for a well-advised creditor to avoid most of the difficulties. And
correctly handled, IP rights can serve as an important and valuable
Per Victor specialises in intellectual property, media and
information technology law. He has a master of intellectual
property from New York University and has previously worked with a
New York law firm. His practice includes day-to-day work with
several major domestic and international media and software
companies as well as transactional IP counselling.
Advokat Gabriel Lidman is a commercial litigator specialising in
intellectual property and media disputes, and risk management. His
legal background includes a law degree from Uppsala University
(LLM), IP studies at the University of Minnesota Law School and
work as legal counsel of a major newspaper group in London. His
practice includes day-to-day work for major domestic and
international media and software companies.
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