Financing Information Technologies: Fairness and Function

Abstract

Information technologies - intellectual property and data - will often be a business's most valuable assets. Thus, a business could easily grant a security interest in its copyrighted software or its proprietary customer database under Article 9 of the Uniform Commercial Code (which has recently undergone a significant revision). Yet, we understand only vaguely how to treat such security interests, especially as against third parties asserting rights in the same collateral. Because information technology assets are uniquely mobile and infinitely replicable - think of Napster - third parties will almost always have rights in these assets, setting the stage for staggeringly complex disputes. For example, if the third parties are other creditors or a bankruptcy trustee of the debtor, the security interest will have priority in the debtor's software and database if the secured party has perfected its security interest. Unfortunately, perfecting a security interest in intellectual property has become a notoriously complex and unpredictable process. Secured parties that finance intellectual property often have been (unhappily) surprised to learn that their attempts to perfect security interests in copyrights, for example, have been preempted by federal law, leaving them subordinate to the debtor's bankruptcy trustee. Different rules apply to other forms of intellectual property, leaving us with no discernible principle governing the perfection of security interests in intellectual property. If, instead, the third parties are purchasers or licensees of the software or database, the secured party will have priority unless certain special rules apply to limit the security interest. Unfortunately, these special rules probably will not apply to intellectual property or data, in which case the security interest will continue long after these forms of information have left the debtor's computer. In either case, a secured party would have the right, on a debtor's default, to "take" the collateral and dispose of it to satisfy the debtor's obligations, even though the third party may have no direct relationship with the secured party - or even the debtor. I propose a functional solution to these problems, although I use the term "function" in two different ways. First, a functional approach would recognize that intellectual property law and Article 9 serve different purposes, and should therefore peacefully co-exist. Thus, a number of decisions to the contrary should be reconsidered. Second, a functional approach would limit the rights of secured parties as against third-party purchasers and licensees of information technology assets. As information technology comes to dominate our economy, it will function like tangible collateral - e.g., inventory, equipment or consumer goods - in which a secured party would often have limited rights. I propose that, as information technologies come to function like tangible collateral, we consider corresponding limits on the rights of secured parties.