The Personal Property Securities Act and Intellectual Property

What is the PPSA?

In October 2011, the laws in relation to security interests will change dramatically. The Personal Property Securities Act (“PPSA”) will impact most Australian businesses, irrespective of their size or sector. With limited exclusions (interests in land, fixtures and water rights), the PPSA will apply to all security interests including tangible and intangible personal property. This includes intellectual property.

What is a security interest?

The PPSA defines a security interest as “any interest or right in relation to personal property provided for by a transaction that in substance secures payment or performance of an obligation”. This includes a wide range of transactions including fixed and floating charges, chattel mortgages, retention of title agreements, hire purchase agreements, consignments, lease of goods and assignments and accounts receivables.

Why is the PPSA so important?

Where a secured party (the financier) perfects its security interest in the personal property provided to the grantor (the debtor) on the online PPS Register (“PPSR“), a security interest will generally be enforceable against a third party. If the secured party does not register its interest on the PPSR and the grantor becomes insolvent, then the secured party stands to lose its asset, as the liquidator may seize the asset as part of the grantor’s asset pool. In this scenario the secured party, at best, will stand as an unsecured creditor.

Intellectual property: what does it encompass

Under the PPSA, a person or business can grant a security interest over intellectual property. “Intellectual property” refers generally to rights deriving from intellectual or creative effort including rights relating to:

• literary, artistic and scientific works
• performances of performing artists, phonograms, and broadcasts
• inventions in all fields of human endeavour
• scientific discoveries
• industrial designs
• trade marks, service marks, and commercial names and designations
• protection against unfair competition
  and
• all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields.

It is important to note that excluded from the definition of intellectual property under the PPSA are other forms of intangible property such as trade secrets, Internet domain names and unregistered trade marks.

Intellectual property: application of the PPSA

Overall, the PPSA applies to intellectual property in the same way that it applies to other forms of personal property, although it must be said that the rules relating to intellectual property are very complex. However, there are some particular rules relating to intellectual property that must be taken into account including:

a)       Serial numbers and registration

Where the intellectual property has a serial number (e.g. a patent that is registered on the Australian Register of Patents or design registered on the Register of Designs), it must be described by that serial number in the PPSR documentation (known as a financing statement). If the serial number is not recorded, the security interest may in some cases be deemed defective and a third party may be able to take the intellectual property free of any security interest.

Both Australian patents and foreign patents are defined in the PPSA as “intellectual property”. However, it is very important to note that pending patent applications and unpatented inventions cannot be registered as a security interest on the PPSR. The security interest may only be registered, once the patent is granted, but there are alternative courses of action available to a secured party with pending intellectual property registrations.

b)      Intellectual property licenses

The definition of “personal property” in the PPSA expressly includes licences. Where the collateral is an intellectual property licence, the security interest will bind any successor in title to the original licensor if the licensed intellectual property is transferred and the licence remains binding.

c)       Intellectual property proceeds and payments

A secured party with a security interest in intellectual property or an intellectual property licence may have a right to receive payments due to the licensor under a related licence. Additionally, if a secured party is entitled to royalty payments, it may give rise to an “account” and a security interest taken in the future royalty payments, and be entitled to register its security interest.

d)      Licences over an Australian patent

If the secured property is a licence over an Australian patent, then the licence is regarded as having a serial number for the purposes of the PPSA. The licence must be described by the serial number of the patent.

e)       Trade marks

The Trade Marks Act defines trade marks as signs (e.g. names, brands and devices) used, or intended to be used, to distinguish the goods or services dealt with or provided by one person from the goods or services dealt with or provided by another. Registration of a trade mark enables the owner with the exclusive rights to use and authorise others to use the trade mark and to obtain relief in the case of infringement of that trade mark.

Both Australian registered trade marks and foreign registered trade marks are “intellectual property” under the PPSA. Australian trade mark numbers must be included in the financing statement. If the trade mark number is not recorded, the secured party runs the risk that a buyer or lessee of the registered trade mark will take it free of their interest. Additionally, owners of registered trade marks must consider carefully any assignment to a financier.

As unregistered trade marks are not recognised by the PPSA, obtaining trade mark registration has become more important than ever before (and this is also the case online now as well).

f)        Copyright

Both Australian and foreign copyrights are “intellectual property” under the PPSA. There is no register in Australia for the registration of copyright ownership and therefore a registration number is not required on the registration financing statement.

Preparing for the PPSA

Even though some aspects of intellectual property may not fall within the definition of intellectual property under the PPSA, they may be considered a type of personal property and be considered a security interest. Suffice to say, we recommend every business turn its mind to its intellectual property interests and evaluate whether the PPSA will apply.

Irrespective of your type of business, you should be taking steps to prepare for the PPSA as soon as possible. The new PPSA system is transformational and multifarious. It requires all businesses to consider existing financing, selling and other such arrangements in order that they are PPS compliant by October 2011.

MST is a member of the Attorney General’s PPSA Legal Special Interest Group.

For further assistance please contact David Boyall or Susan Reece Jones in our Corporate Advisory team.

Send an email to David and Susan