Trade mark rights are increasingly the subject of commercial lending transactions. A security interest against a trade mark, also known as a debenture, is a way for the owner to raise funds, often by entering into a loan agreement with a bank or a creditor. The growing significance of intellectual property as a viable asset for security has made creditors increasingly willing to accept the inherent risks.

The Security Agreement

As part of the Security Agreement, the secured party may request the inclusion of a right to use, maintain or defend the mark in order to maintain its value. It may also request to limit the grantee’s ability to license or assign the mark, and to request a priority right over other creditors to get assignment of the mark upon default. In turn, to protect themselves from the secured party’s right to dispose of the mark in the case of default, a debtor may request a right to prevent any transfer of his rights before the first sale of a product launches or include a clause that safeguards the terms of licenses with third parties he or she may have.

As per most loans, the creditor or grantor will usually have the upper hand but the sounder the investment the more favourable to the grantee the terms can be.

Notice & Priority

A security interest is recorded on the official register for the purpose of placing third parties on notice as to the existence of a security interest, which will have a bearing on the way the owner uses their trade mark.

An EU recordal application for a security interest, also known as a right in rem or real right, is requested online on the EUIPO website at a fee of 200EUR per trade mark, capped at 1,000EUR.

An international, EU and beyond, recordal of a security interest is requested from WIPO (The World Intellectual Property Organisation) who in turn will notify the Offices of all contracting and designated in the trade mark registration parties.

Generally, the responsibility to make the recordal on the register falls upon the party granting the security interest. A recordal is in fact significant for the grantor because a trade mark can have several security interests against it and a registered interest has a priority over one that is unregistered.

The above-said is the position unless the proprietor of a later registered interest is shown to have had knowledge of the earlier unregistered interest in the trade mark. The concept of such knowledge however presents a difficult “state of mind” to prove if a legal battle of interests ensues.

Cancellation

A security interest is cancelled when a loan has been repaid and a deed of release has been issued. The deed of release is then recorded on the register, notifying third parties that the owner no longer has any obligations to the financial institution, and there are no encumbrances against the trade mark. This recordal is largely for the benefit of the trade mark owner.

If the trade mark owner is unable to meet the terms of his agreement, the rights of the trade mark would be transferred to the debtor, or if there are more interests involved, on the grounds of priority, the mark would be monetised to meet as many of the interests upon it as possible.

Worth noting here is that a security interest does not grant any rights of use of the trade mark. Should a breach of the agreement arise, however, the secured party, grantor of the interest, has the right to take control of the trade mark, and can renew or maintain it even before a transfer has been registered. For example, if the agreement requires the trade mark owner to use the trade mark, non-use would entitle the secured party to act upon their interest.

Final Thoughts

Bargaining with or mortgaging a trade mark has its practical challenges. These are mainly concerned with valuation and ownership in the case of multiple interests. Taking a security on intellectual property therefore carries an aura of a leap of faith for creditors and banks. Yet, it is impossible, even unwise, to ignore the value of intellectual property as a profitable asset, especially so when marks with reputation are concerned.