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Australia – The PPSA And IP. Are You Ready?

20 July, 2012

 

The Personal Property Securities Act 2009 (Cth) ("PPSA") commenced on 30 January 2012. It introduced sweeping changes to the law of personal property securities in Australia that will impact on intellectual property assignments and other transactions.

 

In brief

 

  • The PPSA and new PPS Register of security interests commenced on 30 January 2012.
  • You need to be able to identify when a security interest is created in a transaction, and protect it by registration on the PPS Register where necessary. This may be the case for any IP assignment with reversionary rights, long term or indefinite leases of tangible property, and retention of title arrangements.
  • You should now search the PPS Register as part of any due diligence on title to IP. This will usually involve a search by the IP Australia serial number. Assignees of trade marks, patents and designs should take extra caution until 30 January 2014, and search the PPS for any general security interests against the assignor.
  • Pre-existing security interests registered on the Patents, Design or Trade Mark registers will not be migrated to the PPS Register but will be protected until 31 January 2014. Dual registration is recommended.

 

Background

 

The purpose of the PPSA reforms is to simplify and streamline the ability to use personal property as collateral for a loan. The PPSA establishes a uniform national law in relation to "security interests" over "personal property". Prior to the PPSA, there were over 40 different registers relating to security interests in Australia, and over 70 pieces of legislation.

 

IP as "personal property" under the PPSA

 

"Personal property" under the PPSA includes all traditional statutory based intellectual property (ie trade marks, patents, designs, plant breeder's rights, copyright and circuit layout rights) and licences of such rights. It may also cover confidential information and common law trade marks.

 

"Personal property" also covers almost all other property, other than land. This may be relevant to the supply of equipment, biological materials, or prototypes in association with an intellectual property licence or assignment.

 

What is a "security interest" under the PPSA?

 

The PPSA defines a "security interest" as an interest in personal property (the "collateral") that in substance secures the 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".

 

New rules for creation, priority and enforcement of security interests

 

The PPSA sets out new rules for the creation, priority and enforcement of security interests. It introduces the concept of "perfection" which provides the mechanism to best protect a security interest. Importantly, because intellectual property is intangible and cannot be perfected by possession, a security interest over IP or an IP licence can only be perfected by registration on the PPS Register. If it is not perfected it will not be enforceable against an insolvency administrator.

 

When might a security interest be created in IP transactions?

 

A significant change to the law is that the PPSA takes a "functional approach" to determining what is a security interest. Under the PPSA, ownership is largely irrelevant and a party can no longer rely on title to protect its interest. The key question is whether or not the interest secures payment or performance of an obligation.

 

The concept of security interest extends to many transactions beyond typical "secured loans". Some examples of security interests that might arise in IP transactions are:

 

  • An assignment with a reversionary interest. If IP is assigned on terms that provide for a transfer back to the original owner either on the expiration of a period of time or on default of the other party, this may amount to a security interest. These types of arrangements are sometimes used in place of an exclusive licence. They are not uncommon in the film and music industries in respect of copyright works (eg Crosstown Music v Rive Droite Music [2010] EWCA Civ 1222). 
  • Joint ownership clauses. IP joint ownership arrangements should be carefully reviewed in light of the PPSA. Any part owner who is not the registered proprietor on the IP Australia register may merely have a PPSA "security interest". They should either require that they be recorded as joint proprietor, or else register a financing statement to protect their interest on the PPS Register.
  • Joint ventures. Joint ventures are often used as vehicles for the commercialisation of IP. Parties should review the arrangements to consider whether or not they have PPSA security interests over any tangible or intangible property that should now be registered.
  • Retention of title clauses. These types of clauses are common in distribution agreements. Under the PPSA, the supplier/licensor now needs to perfect its interest to be able to enforce its interest against an insolvency administrator.
  • Long term leases. If any property (eg research equipment, prototype) is supplied for an indefinite period, or for a period greater than 12 months, it may be a "PPS lease".

 

IP due diligence – when do you need to search the PPS register?

 

A security interest over an IP right that has been perfected by way of registration on the PPS Register may survive a sale or licence of the IP to a third party. This means that the register should be searched as part of the due diligence for any IP assignment or licence transaction.

 

Assignment due diligence – s 44(1) protection

 

If the assignment relates to a PCT patent application, or an Australian trade mark, patent, design or plant breeder's right registration or application ("serial numbered IP") you should search the PPS Register by the IP Australia or PCT serial number. Under section 44(1) of the PPSA, a security interest will generally be extinguished by a sale of serial numbered property if the interest would not have been revealed by a serial number search of the PPS Register immediately before the assignment.

 

However, section 44(1) does not apply in respect of "transitional security interests" (ie interests created before 30 January 2012) until 30 January 2014. Therefore, until 30 January 2014, an assignee of serial numbered IP should undertake broader searches for any transitional security interests registered against the assignor and review whether or not they cover the IP. A transitional security interest over "all present and after acquired property" would obviously cover all IP of the assignor.

 

If the assignment relates to copyright or circuit layout rights, as there is no relevant serial number, an assignee would need to conduct a general search of all security interests recorded against the assignor.

 

Licence due diligence

 

A licensee may wish to conduct a search of the PPS register for all security interests registered against the licensor (and IP owner if different). If the licensor (or IP owner) becomes insolvent and a secured party exercises its power of sale over the licensed IP, the licensee will generally not be able to enforce its rights against the assignee unless the assignee has notice of the licence.

 

An IP licence itself is not a security interest, but is "personal property" which may be used as collateral. Section 106 of the PPSA provides that a security interest over an IP licence or sublicence continues to exist when the underlying IP is transferred (by the licensor) and will be enforceable against the assignee "to the same extent it was enforceable" against the licensor. A licensor will therefore want to include a provision in the licence that specifically precludes the licensee from granting a security interest over the licence. 

 

Ongoing role of the IP registers

 

Security interests in existence at the time of commencement of the PPSA are "transitional security interests". Securities registered on the Registers of Patents, Designs, Trade Marks have not been automatically migrated to the new PPS Register. However, as transitional security interests they will be transitionally perfected until 30 January 2014. Pre-existing security interests not registered on the IP Australia databases will also receive the benefit of transitional perfection.

 

It remains possible to register security interests on the IP Australia patent, design and trade marks registers in addition to the PPS Register, even though such a registration will have no impact on priority disputes. This is because the patents, designs and trade marks legislation has been amended so that any recorded interests that are "PPS security interests" will have no effect under that legislation, thereby encouraging holders of PPS security interests to record their interest on the PPS Register. There is an advantage to registering an interest on the IP Australia registers to enable registrants to receive notifications and be given an opportunity to be heard.

 

CHECKLIST – WHAT YOU NEED TO DO

 

To ensure that you are ready for the PPSA you should:

 

  • Perfect any transitional security interests (ie created before 30 January 2012) registered on the IP Australia databases by registration on the new PPS Register before 20 January 2014.
  • Audit current contracts to identify any other registrable security interests over IP or tangible property (eg reversionary interests of assignor under assignment agreements).
  • Licensors – Audit existing IP licences and amend licence precedents to ensure that the licensee cannot grant security interests.
  • Licensees – Search the PPS Register for any security interests registered against the licensor and/or IP owner.
  • Review retention of title clauses in any supplier terms of trade, or other supply agreements. If you are the supplier, amend your trading terms to reflect the new rules, and perfect your interest by registration on the PPS Register.
  • Identify and review any equipment supply or lease transactions that may involve PPS leases or other types of security interests.
  • Thoroughly review any joint venture or IP joint ownership arrangements.
  • Instigate a procedure for regularly reviewing the PPS Register for any security interests registered against you.

 

 

For further information, please contact:

 

Belinda Findlay, Partner, Ashurst

belinda.findlay@ashurst.com

 

Bruce Whittaker, Partner, Ashurst

bruce.whittaker@ashurst.com

 

Lisa Di Marco, Ashurst

lisa.dimarco@ashurst.com

 

Homegrown Intellectual Property Law Firms in Australia

 

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