Intellectual property often represents a significant portion of collateral in lending transactions. When a borrower pledges intellectual property, the lender must be the first to “perfect” its security interest to establish priority over other creditors. CPAs should understand how security interests in intellectual property are perfected, as missteps in this area can materially misstate financial risk, asset availability, and creditor priority.

The challenge is that perfection rules are not uniform: different types of intellectual property require different filing procedures, and the rules continue to evolve as new asset classes emerge. This article provides a practical overview of perfecting security interests in intellectual property under U.S. and Nebraska law.

Traditional Intellectual Property 

Traditional intellectual property presents tension between two legal systems: state law under Article 9 of the Uniform Commercial Code (UCC § 9-101 et seq.), and federal statutes governing patents, trademarks, and copyrights.

For patents and patent applications, Article 9 governs perfection against lien creditors. Under Nebraska law, a creditor perfects by filing a UCC-1 financing statement with the Nebraska Secretary of State. However, to protect against subsequent bona fide purchasers and mortgagees, the security interest should also be recorded with the U.S. Patent and Trademark Office (USPTO). The prudent approach is filing both.

The federal Lanham Act (governing trademarks) does not address security interests, so Article 9 governs perfection through a UCC-1 filing with the Nebraska Secretary of State. Though not legally required, recordation with the USPTO is advisable to provide notice to future purchasers who may search the public USPTO records.

The Copyright Act preempts state UCC filings. Creditors must record the security agreement with the U.S. Copyright Office to perfect a security interest in a registered copyright. However, no effective mechanism exists for recording security interests in unregistered works with the Copyright Office; perfection is thus accomplished through a UCC-1 filing. Given this complexity, creditors should encourage debtors to register copyrights before taking them as collateral.

Domain Names

Domain names present an emerging category of digital collateral with significant value for many businesses. Courts generally classify domain names as “general intangibles” under the UCC, with perfection accomplished by filing a UCC-1 financing statement. Creditors should note that domain names carry unique risks: registrations can expire if the debtor fails to renew, and unauthorized transfers may occur without the secured party’s knowledge. Accordingly, lenders may wish to obtain additional protections—such as a power of attorney or escrowed instruction letter—to facilitate control of domain names upon default.

AI-Generated Intellectual Property

Artificial intelligence can now produce work product integral to a business—software code, for example—with minimal human involvement. The U.S. Copyright Office has taken the position that works generated solely by AI, without meaningful human authorship, are not protected by copyright; thus, the traditional perfection path for copyrighted works does not apply.

A security interest may attach to AI-generated material if the lender and debtor agree it constitutes property in which the debtor has rights. Such material may have value as a trade secret, proprietary data, or general intangible. In these cases, perfection is accomplished by filing a UCC-1 financing statement.

Practical Tips

CPAs can assist creditors and debtors in taking several practical steps to protect their positions:

• Conduct thorough due diligence. Verify the type of intellectual property involved, whether it is registered with or issued by a governmental office, and whether existing liens or encumbrances apply. For copyrights, confirm registration status.
• Use precise descriptions in both the security agreement and UCC-1 financing statement. Vague language like “all intellectual property” may be insufficient. Instead, identify specific patents by number, trademarks by registration, and copyrights by title and registration number.
• Employ a “belt and suspenders” approach. For patents, trademarks registered with the USPTO, or copyrights registered with the Copyright Office, file both the UCC-1 financing statement and record the security agreement with the applicable federal office. The cost of an additional filing is minimal compared to the risk of losing priority.
• Revisit filings periodically. Intellectual property portfolios change over time, and emerging asset types (such as AI-generated content) may require updated filings as the legal landscape evolves.

Conclusion

Perfecting a security interest in intellectual property is not a one-size-fits-all process. Parties should carefully identify and classify intellectual property assets before entering into secured transactions. Security agreements should describe collateral with specificity, and filings should be made in all appropriate locations to avoid gaps in protection. CPAs play a critical role in advising clients on the financial implications of these decisions and ensuring that secured transactions are properly reflected in financial reporting. When questions arise about novel asset types or complex portfolios, consulting with legal counsel familiar with secured transactions and intellectual property law is advisable.