Licences of Intellectual Property and the PPSA

This article considers the impact of the Personal Property Securities Act 2009 (Cth) (‘the Act’) on intellectual property (‘IP’) licences. Both lenders and owners of IP should be aware of the advantages and disadvantages of the Act when dealing with IP licences.

IP Licences

Security interests over IP Licences

Section 12(1) of the Act provides that “…a security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).” Therefore, the Act allows a third party lender separate from the licensor (for example, a bank) to take a security interest over an IP licence granted to the licensor as security for a loan.

However, an IP licence in and of itself does not constitute a security interest which, on its own, can be registered under the Act. Rather, the Act simply defines an IP licence as an authority or licence to exercise rights comprising IP. Indeed, section 12(5)(a) of the Act excludes licences from the definition of “security interest.”

Therefore, for example, if a person grants another person a licence to use their patent, that licence would not constitute a stand-alone security interest. In contrast, if a third party lender takes a security interest over the IP licence which has been granted – for example, as security for a loan – the security interest over the licence will be a security interest for the purposes of the Act and may be registered on the Personal Property Securities Register (‘PPSR’).

This diverges from an assignment of IP, which is sometimes used as an alternative to an IP licence and which falls within the definition of “security interest” in the Act.

Proceeds of a licence

A security interest over an IP licence may also extend to the proceeds of the licence, being identifiable or traceable personal property that is derived from dealings with the collateral. The definition of “proceeds” in section 31(1)(d) includes the right of a licensee of the IP to receive payments under any licence agreement relating to that collateral.

Therefore, if a third party lender takes a security interest over an IP licence, they may also obtain the proceeds of the licence – for example, any royalties which flow from the licence.

Disposing of IP – granting licences

If the third party lender or other secured party has taken an IP licence as collateral and decides to exercise their security interest, the lender may seek to dispose of the collateral under section 128(2)(c), which allows the lender to licence the IP to a third party. However, because the power to dispose of the collateral is subject to the pre-existing terms and conditions of the licence, this power is limited. For example, if the pre-existing licence is an exclusive licence, the lender will be unable to dispose of the IP by granting a further licence without breaching the terms and conditions of the licence.

Binding successive licensors

Further, section 106 of the PPSA provides that if a security interest is granted in an IP licence and the IP is subsequently transferred to a new licensor but the original licensee continues to hold the licence after the transfer, the security agreement will bind any successor in title to the original licensor.

While personal property may be acquired free of security interests in certain circumstances, this will not apply if the successor in title has constructive knowledge of the security interest. Therefore, even if a successor in title has no actual knowledge of the pre-existing security interest when dealing with the IP licence, they may be bound by the security interest nonetheless.

IP and goods

Some IP licences may apply to goods, allowing the licensor to use a trade mark or other intellectual property on those goods. For example, a fashion brand may licence their trade mark to a cosmetics manufacturer to use on cosmetics.

The Act specifies that, in the absence of an agreement to the contrary, any security interest over the IP will also be exercisable over the goods. This can lead to competing security interests where the goods are already subject to a security agreement, leading to a clash between the security interest over the goods and the deemed security interest stemming from the IP licence.

When an IP licence permits IP to be used on goods (for example, the licence allows branded goods), it may be appropriate for a licensor to request that licensees exclude IP rights from any subsequent security interest placed over the goods by a third party.

What should clients do next?

Points to consider for licensors:
 

  • You should consider whether any existing or future licence agreements you have or will enter into should prevent the licensee from granting a security interest over the licence to a third party.
  • If you have granted an IP licence which allows your IP to be used on goods, you should ensure that licensees exclude IP rights from any further security interest over the goods granted to third parties. To do this, you must ensure that your contract with the licencee specifically provides that any security agreement between the licencee and a third party over the goods must exclude IP rights.
  • Points to consider for lenders:
  • If you wish to take a security interest in an IP licence, you should check the PPSR to ascertain whether there are any pre-existing security interests.
  •  A security interest over an IP licence may allow you to obtain proceeds from the licence.
  • If you take IP as collateral and wish to licence the IP to a third party upon default, you should ensure that you do not breach terms and conditions of a pre-existing licence.

 
Pointon Partners has extensive expertise and experience in drafting IP licences, security agreements and dealing with security interests on the PPSR more generally.

If you require further information about the Act and its impact on IP licences or you would like us to assist in reviewing your licencing or IP documents, please contact David Mazzeo of our office on 03 9614 7707.

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