Collecting Debt via Securing, Perfecting & Foreclosing on Patent Liens

Successful debt collection in California often hinges on whether the creditor obtains collateral for the debtor’s obligations.  Creditors can protect their interests by obtaining liens against debtors’ personal property and, if necessary, foreclosing the liens to take possession or force sales of the collateral.  One category of such personal property is patents held by the debtor company.  As with other intellectual property, the process for securing and foreclosing on patent liens is unique.

In order to secure/obtain a lien against the debtor’s patent, the creditor must procure a written agreement with the debtor to this effect.  Thereafter, to perfect the lien in California, the creditor must file a UCC-1 Financing Statement, which provides notice to third parties that the creditor has an interest in the personal property of the debtor.  To further perfect the lien, the creditor should file Form 1595 with the U.S. Patent & Trademarks Office (“USPTO”), for purposes of recording the security interest in the USPTO’s registry.  Note, courts disagree as to whether this step is optional or mandatory in order to perfect a patent lien.  Regardless, it is prudent to record a security interest in both forums in order to “put the world on notice” of the creditor’s lien against the patent.

Once the debtor defaults on the underlying obligation, the creditor should perform a lien and title search on the patent.  To do so, the creditor will first need to search UCC filings or encumbrances.  Next, the creditor should perform a search with the USPTO to determine if any third parties hold an interest in the patent.  The U.S. Patent Act requires assignments to be recorded with the USPTO within 3 months from date of transfer, or prior to any subsequent purchaser or mortgagee.

Once the searches have been completed, the creditor can initiate the foreclosure process.  Federal courts have ruled that patent foreclosure is a matter for state law application.  Sky Technologies, LLC v. SAP, AG, U.S. Federal Ct. of Appeals.  Thus the next step is to proceed with the foreclosure process under the forum state’s laws (i.e., the foreclosure laws of the State of California).

When collecting on debt in California, and in attempting to foreclose on personal property such as patents, the creditor can perform either a “friendly” or “unfriendly” foreclosure.  Friendly foreclosures are generally less cumbersome and take place when the debtor does not dispute the debt and is not resisting the foreclosure.  UCC Article 9-609 describes the 20-day notice process to other creditors and the requirement that a sale is required if the personal property is worth more than the debtor owes.  However, since patents are intangible property, the typical sale and self-help approaches available to other personal property are not available.  Consequently, creditors should utilize the “strict foreclosure” approach, whereby the secured party will keep the collateral in full or partial satisfaction of the debt, providing the debtor and other creditors have received notice and do not object within 20 days of such notice.  If there are no objections to the proposed strict foreclosure, the secured party takes title to the collateral, forgives either the full amount of debt or that portion of the debt on which the parties agreed, and all subordinate security interests and liens are discharged.

There are times when either the debtor or other creditors object to the proposed strict foreclosure.  In such instances the unfriendly foreclosure process should be employed.  This approach requires a court order directing the title to be turned over to the creditor.  Once the title is obtained, the last step is to follow the USPTO requirements outlined in the “Recordability of Foreclosures for Assignment Purposes” document.  Once this document is submitted, all USPTO patent records will be transferred to the new holder.

The foreclosure of a patent lien can be complicated – particularly when opposing parties are uncooperative.  Having an attorney that understands the intricacies of the foreclosure and collection process is key to success. The Wallin Firm is experienced in this area and has assisted many businesses in Orange County, Los Angeles County, Riverside County and throughout California with debt collection matters of all types.