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Focus: IP and the transition to the Personal Property Securities Act

20 December 2011

In brief: Companies and individuals that own, license or hold security interests in intellectual property should be aware that the Personal Property Securities Register will go live on 30 January 2012, ushering in the reforms implemented by the Personal Property Securities Act 2009. Partner Tim Golder (view CV), Senior Associate Tom Reid and Vacation Clerk Geoff McGrath look at the transitional arrangements and the implications of the new regime.

How does it affect you?

  • The Personal Property Securities Register (the PPS Register) will open for registrations of security interests over personal property, including intellectual property, on 30 January 2012.
  • Security interests over intellectual property that were registered with IP Australia will not be automatically migrated to the PPS Register. Instead, they will need to be re-registered.
  • There will be a transitional period of 24 months from 30 January 2012 during which pre-existing security interests will continue to be protected, even if not registered on the PPS Register. At the end of that period, however, pre-existing security interests that have not been registered will risk losing priority.

Outline of the Personal Property Securities Act

The Personal Property Securities Act 2009 (Cth) (the PPSA) brings significant reform to the law relating to security interests in personal property, including registered and unregistered intellectual property. Central to the PPSA is the creation of a new public-access PPS Register, which has been promoted as a simple, quick and inexpensive 'one stop shop' for the registration of security interests.

A security interest, for the purposes of the PPSA, is defined broadly as an interest in personal property provided for by a transaction that, in substance, secures a payment or the performance of an obligation. Under the PPSA, protection of a security interest involves three steps:

Attachment – a security interest attaches to property when:

  • the grantor (the party giving a security interest) has good rights in the property; and
  • either the secured party (the party taking that security interest) has given value, or the grantor has acted in a way that creates a security interest.

Enforcement – a security interest becomes enforceable against third parties when attachment has occurred and any one of the following has occurred:

  • there exists a written agreement with a sufficient description of the property;
  • the secured party has taken possession of the collateral; or
  • (for certain financial assets), the secured party controls the property.

Perfection – a security interest is perfected when the security interest is attached and enforceable, and any one of the following has occurred:

  • the security interest has been registered on the PPS Register;
  • the secured party has taken possession of the collateral; or
  • (for certain financial assets), the secured party controls the property.

Perfection is particularly important because, in the event of the insolvency of a grantor, any unperfected security interests that exist in relation to the grantor's assets are vested in the grantor, and a secured party that has not perfected its rights loses that security interest.

The PPSA contains rules governing the priority of the security interests to which it applies. Once a security interest is perfected, there are two general rules that apply. First, perfected interests take priority over unperfected interests, and, secondly, perfected interests will take priority in the order of perfection. While there are some exceptions to these rules, including (importantly) under the transitional provisions described below, all the applicable rules are contained within the PPSA. The old common law and equitable principles have been replaced.

The PPSA applies to personal property, which is any form of property other than land and some statutory licences. This includes intellectual property, both registered (such as patents and registered trade marks), and unregistered (such as copyright), as well as rights under intellectual property licences (though a licence itself is not a security interest). In some circumstances, the PPSA also applies to security interests in intellectual property in overseas jurisdictions (see more on this below).

(For more discussion on the PPSA and IP, see our earlier Focus: Personal property securities reforms and intellectual property.)

Registration of security interests on the PPS Register

The Federal Government started automatically migrating the contents of various existing registers of security interests to the PPS Register on 21 September 2011. However, security interests over intellectual property that are registered with IP Australia, for example over patents or registered trade marks, will not be automatically migrated. It will therefore be necessary to re-register those security interests on the PPS Register, or in time they will risk losing priority.

The PPSA initially contemplated a preparatory period in which registrations of pre-existing security interests could be made before the PPS Register became open for registrations generally. Due to delays in setting up the PPS Register, however, it appears there will be no preparatory period, and that the first available date for registrations of all types of security interests will be 30 January 2012.

Registrations of security interests in personal property described by serial number (including patents, registered designs and registered trade marks, which will be described by reference to the registration numbers allocated to them by IP Australia) will last for seven years from the date of registration. Security interests in other personal property (including copyright and unregistered trade marks) may be registered either indefinitely, or until a specific date no further than 25 years after registration. After the applicable period, the registration must be renewed to maintain the priority of the security interest.

Although security interests over intellectual property will be registered on the PPS Register, ownership of registered intellectual property will continue to be recorded by IP Australia. So, for example, an assignment of a registered trade mark will need to be recorded with IP Australia, whereas an assignment of a security interest in the registered trade mark will need to be recorded on the PPS Register.

The transitional provisions

There are transitional arrangements to help with the shift to the PPS Register.

Broadly, any security interest that existed prior to 30 January 2012 is treated by the PPSA as a 'transitional security interest' (TSI). The PPSA deems a TSI to be perfected for the duration of the transition period of 24 months from the registration commencement time, ie until 30 January 2014. If not registered by the end of that period, the TSI becomes an unperfected TSI, loses the benefit of the transitional rules and risks losing priority to perfected security interests.

There are specific priority rules that apply to TSIs.

  • A perfected TSI has priority over subsequent security interests that are not TSIs (whether or not those subsequent security interests have been perfected by registration on the PPS Register), and also (after the expiry of the 24-month transitional period) over any remaining unperfected TSIs.
  • A perfected security interest (whether or not a TSI) has priority over an unperfected security interest, and (after the expiry of the 24-month transitional period) over any remaining unperfected TSIs.
  • Any unperfected TSI remaining after the expiry of the 24-month transitional period has priority over a subsequent unperfected security interest, but not against any perfected security interests (whether or not a TSI).

Notwithstanding these transitional provisions, parties that hold security interests over intellectual property should consider re-registering them on the PPS Register as soon as possible. Because the PPS Register will become a 'one stop shop' for registrations of security interests, registration on the PPS Register (sooner rather than later) will be the best way to ensure that third parties are made aware of what security interests exist in relation to particular personal property, including intellectual property.

Issues for owners, licensees, and holders of security interests in intellectual property

Owners and licensees of intellectual property should be aware of a number of issues with the new regime. Particularly important are the IP-specific provisions in Part 3.5 of the PPSA, and, for suppliers of goods, the effect of the PPSA on retention of title provisions in sales or supply contracts.

Descriptions of intellectual property on the PPS Register

Registered intellectual property, such as patents and registered trade marks, will be described on the PPS Register using the registration numbers allocated to them by IP Australia (eg the relevant patent or trade mark number).

Difficulties will remain, however, in describing unregistered intellectual property, such as copyright and unregistered (common law) trade marks. Registrations of security interests in unregistered intellectual property will need to be carefully worded to ensure that the intellectual property concerned is accurately and comprehensively described. Organisations searching the PPS Register for existing security interests will also need to be careful that sufficiently broad search parameters are used, so as to capture any vaguely worded descriptions.

Intellectual property associated with goods (section 105 of the PPSA)

Additional complications for identifying security interests may arise where intellectual property that is associated with particular goods is covered by a registration of a security interest in the goods, even though the registration does not refer to the intellectual property at all.

Section 105 of the PPSA contemplates that, in certain circumstances, the terms of a security agreement may cause a security interest over goods to extend to intellectual property associated with those goods. Examples may include patent-protected machinery or equipment, branded clothing, and devices with embedded software. If that intellectual property is necessary for the exercise of the security interest, the PPSA provides that a registration of the security interest describing the goods will be taken also to include a description of the associated intellectual property (unless the relevant security agreement states a contrary intention).

In other words, under the PPSA, a perfected security interest in intellectual property may exist even though the relevant intellectual property is not described anywhere on the PPS Register. A party taking a security interest in intellectual property, or in goods that may have associated intellectual property rights necessary for their use, will need to carefully confirm that there are no such 'hidden' competing security interests in that intellectual property.

Parties taking security interests in goods should not, however, rely on s105 of the PPSA to cover intellectual property associated with the goods. Under s44 of the PPSA, where a buyer searches the PPS Register for security interests in property that can be referred to by serial number (including patents and registered trade marks) using the serial number, and the search does not identify any such security interests, the buyer will generally take the property free of them. So, for example, where a registration of a security interest describes a robot, but not a patent that is necessary for the use of the robot, a buyer of the patent may take it free of the security interest, even if, under s105, the security interest is perfected for both the robot and the patent.

To avoid this, registrations of security interests on the PPS Register will (as a matter of best practice) need to specifically describe all of the property to which they relate, including intellectual property.

Transfers of intellectual property subject to a licence (s106)

The PPSA also has a specific provision related to the transfer of licensed intellectual property. Where a security interest has been granted over an intellectual property licence or sub-licence, and the intellectual property is transferred to another licensor, the security agreement will continue to bind the transferee to the same extent it bound the original licensor.

International intellectual property portfolios (s239)

The PPSA contains a number of provisions relevant to security interests in intellectual property in overseas jurisdictions, such as foreign patents and trade marks. Where the grantor of the security interest is located abroad, the security interest will generally be governed by the law of the grantor's jurisdiction, and not by the PPSA, including in relation to its validity and the effects of perfection or non-perfection. Parties dealing with security interests in international intellectual property portfolios will therefore need to be aware of the laws relating to security interests in the jurisdictions involved.

Retention of title clauses

Another significant change that the PPSA has introduced, which is relevant particularly to suppliers of goods, relates to the treatment of retention of title (ROT) clauses. An ROT clause allows a supplier to retain ownership of goods until a specified condition has been fulfilled, such as full payment for the goods, even if the buyer (eg a retailer of the goods) has taken possession. The benefit of an ROT clause is that in the event of the buyer's insolvency, the supplier can claim title to the goods, even if there are competing security interests in the buyer's other assets.

Under the present law, a well-drafted ROT clause is not a security interest, because title in the goods is not passed to the buyer until full payment has been made. This means that the supplier of the goods is still the owner, and third parties with security over the buyer's assets cannot claim entitlement to those particular goods.

The PPSA changes this position, and classifies an ROT clause as a 'purchase money security interest' (PMSI). A PMSI does have priority over other security interests, but like all other security interests it must be perfected by registration on the PPS Register to be effective. For inventory, a PMSI must be registered on the PPS Register before the buyer takes possession (and within 15 business days for other property), or the supplier risks losing the priority status that an ROT clause would normally provide.

Preparing for the transition

In order to prepare for the changeover to the PPSA, there are a number of things that you can do.

  • Audit your existing security interests to identify any that will not automatically be migrated to the PPS Register, including security interests over intellectual property currently registered with IP Australia.
  • Identify any transactions that will give rise to security interests under the PPSA that will need to be perfected, including supply agreements containing retention of title clauses.
  • Prepare to register your security interests on the PPS Register when it goes live on 30 January 2012.

Business impact scoping tool

To help with the task of identifying the ways in which the PPSA may affect your business, we have created a comprehensive online risk assessment Scoping Tool. The Scoping Tool includes a comprehensive survey of various business and legal units, a risk assessment report and consultation with Allens' team of PPSA specialists. If you are interested in hearing more about this tool, please contact your relationship partner or a member of our specialist team.

For further information, please contact:

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