Patent Security Interest

Recording Procedure

Filing the security agreement with the national patent office is necessary to establish the lender’s priority over other creditors. To record a patent security interest, the lender submits a formal request along with a copy of the security agreement or a memorandum of the interest. This public record alerts potential buyers and other lenders to the existing lien on the assets.

Without this registration, the lender’s interest might be overridden by a subsequent purchaser who buys the patents without notice of the lien. The recording process must occur within a short period after execution to ensure the highest priority under local insolvency laws.

Operational Risk

Borrowers must maintain the value of the collateral during the term of the loan by paying maintenance fees and defending against infringement challenges. If the borrower neglects to pay the renewal fees, the patent expires and the lender’s collateral becomes worthless. Lenders often include covenants in the loan agreement that allow them to step in and pay these fees to protect their security.

The agreement also specifies that any litigation regarding the patents must be reported to the lender immediately.

Enforcement Consequence

Default by the borrower allows the lender to exercise their rights and take ownership of the patent assets. This transfer of ownership is executed through the power of attorney clauses included in the initial security agreement. The lender can then sell the patents to a third party or license them to generate revenue to recover the unpaid loan balance.

This process can completely disrupt the borrower’s operations, as they lose the legal right to use their own proprietary technology.