Taking security over patents

March 2014

Without being able to offer suitable security, a business may find it difficult to borrow, or at least the terms of secured borrowing will be more favourable than those of unsecured borrowing. Intellectual property rights, including patents and patent applications, are assets that potentially can be used as security for loans or other credit. Indeed, for some research based businesses, the patent portfolio may be their most valuable asset. In this article, the person who creates the security is referred to as "the chargor" and the person who takes the benefit of the security – who could be a lender or even a supplier trading on credit terms - is referred to as "the chargee".

Security over patents

So how is security taken over patents and what are the potential consequences? There are two basic methods of creating security over patents under English law.

Whilst in principle it is possible to mortgage patents, a mortgage requires an assignment of the patents to the chargee, subject to the chargor's right to have the patents re-assigned on repayment of the loan and a licence back to the chargor. Although the safest for a chargee, a mortgage is often considered too cumbersome for lenders and an equitable charge is generally preferred by both parties. For an equitable charge, whilst there needs to be a valid and enforceable contract between the chargor and the chargee that sets out an intention to create a security interest, no transfer of title to the relevant patents is required. Whilst an equitable charge is often more convenient for both parties in practice, if patents subsisting in certain jurisdictions are offered as security, a lender may still insist on the first method simply because the law of the country in which the patent is registered permits mortgage assignments but does not recognise charges.

Effect on chargor

The chargor will need to consider carefully the consequences of entering into the deed of security and scrutinise its terms. Most fundamentally, the chargee will have the right to sell the patents in the event of a default by the chargor. In fact, if the chargee has taken security over not just the patents but the other business assets, the chargee may have other options too, such as the power to appoint an administrator with authority to run the business of the defaulting chargor. The chargee will have the power to appoint a receiver to the patents which are subject to the charge. Appointing a receiver is a procedure enabling the chargee to sell the patents or collect the revenues derived from the patents in order to repay the secured debt on a default by the chargor. The chargee will wish to ensure that the value of the charged patents are maintained and may seek to place obligations on the chargor in this respect in the security deed. For example, a general obligation to maintain patents and patent applications without any right to allow unimportant patents to lapse, or to abandon patent applications, could have the consequence of unnecessary patenting costs being incurred; the chargor would be well advised to seek to reserve the right to allow to lapse, or abandon, patents or patent applications it reasonably considers are no longer of value. Similarly, care should be taken over the wording of any general obligations not to do anything that may jeopardise the secured patent rights. Depending on how such an obligation is framed, it could cover the assertion of the patents against an infringer. Assertion often provokes a challenge to the validity of the rights.

Formalities

As is the case with other forms of security, it is necessary to 'perfect' the security interest over the patent in question. In the case of UK patents, the chargee will first be advised to register the charge at the UK Intellectual Property Office. This is because the granting of security over a UK patent or patent application is a registrable "transaction, instrument or event" under section 33 of the Patents Act 1977. A failure to register the charge at the UKIPO would mean that a subsequent assignee, licensee or chargee of the patent would take free of the charge, provided they were un aware of it.

There may be additional registration requirements too. For example, when the chargor is a UK company it is necessary for the charge to be registered at Companies House within 21 days of its creation. Section 860(7)(i) of the Companies Act 2006 makes clear that a charge over any intellectual property should be registered. The process of registering a charge at Companies House is relatively straightforward and involves submitting a prescribed form together with a certified copy of the charging document to Companies House, which can be done on-line through the Companies House portal. Companies House registration costs are de minimis, amounting to a registration fee of £13 for each registration. Failure to register at Companies House within the 21-day time limit results in the charge being void and unenforceable against a liquidator or administrator or any creditor of the chargor, as well as potentially causing the funds secured becoming immediately repayable. There is also the potential for an offence to be committed by the company and every officer who is in default. Thus, for security created by a UK company over UK patents, there are two separate registrations needed in order for such security to be perfected. As regards chargors outside the UK, or non-UK patents, local advice as to perfection requirements will generally need to be obtained.

Exploitation of patents

In most cases the chargor will want the freedom to continue to exploit the patent portfolio as part of its business. It must make sure any security document does not inhibit its freedom to do this in any material way. There is normally a community of interest between the chargor and chargee in this context because the chargee wants the business to generate revenue to repay the debt. More importantly perhaps, the chargor needs to bear in mind the fact that any future licensee will almost certainly become aware of the charge over the patents, either from inspecting the relevant registers (see above) or as a consequence of seeking standard warranties as to the chargor's title and right to license free from encumbrance. The chargor may be advised to seek to negotiate terms with the chargee at the outset so as to make clear that any future licensee's interest is not at risk of being defeated by the chargee exercising its right to sell the patents in the event of default on the loan. As a quid pro quo the chargor could offer to the chargee in such cases access to the revenue stream generated by the licence either by agreeing to pay it direct to the chargee or by giving the chargee security over the revenue stream itself.

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