Securing creations of the mind: intellectual property security in finance transactions and the new Unified Patent Court

Securing creations of the mind: intellectual property security in finance transactions and the new Unified Patent Court

Securing creations of the mind: intellectual property security in finance transactions and the new Unified Patent Court

Where a corporate borrower has to provide security for a loan, a lender will often seek to take that security by way of a “debenture”. A debenture is a “global” security document setting out the terms on which that borrower will grant security over all or substantially all of its assets by way of security for that loan, including intellectual property (IP) rights such as patents. Charlotte Tillett (Partner and Head of our Life Sciences sector group) and Andrew Dodds (Senior Banking and Finance Associate) consider the implications of the new Unified Patent Court for finance transactions.

A new Europe-wide patent and patent court will be introduced shortly.  The new regime will allow borrowers to protect and enforce their patent rights across Europe in a more streamlined way with a single patent and through a single patent court (the Unified Patent Court or UPC). The UPC will be established via an international agreement: the Agreement on a Unified Patent Court (UPCA). There was some uncertainty about the UK’s participation in the UPC and the UPCA after the vote to leave the EU in June last year, but the UK government has recently confirmed that it will, notwithstanding Brexit, ratify the UPCA, and the new European-wide system is scheduled to go live in December 2017. Even if the UK withdraws after the consummation of Brexit, the new system will continue to affect borrowers who have patent rights in other EU countries; so it will remain relevant to those borrowers and their lenders.

Impact on finance transactions

The new system may have a negative effect on the value of existing European patents as security for lenders

Where, as is usually the case, there are multiple “European” patents in relation to a particular invention, each having effect in a different country, it is at present necessary to invalidate each national “European” patent separately.  Under the new system they may all be invalidated centrally – i.e. in one fell swoop on the basis of a single court action.  The ability to invalidate all patents in this way could clearly have a detrimental effect on a lender’s IP security (particularly where that IP is commercially valuable and forms a key component of the lender’s security package), because patent invalidation will be less administratively burdensome and quicker than is currently the case.

Failure to opt patents out of the new system could amount to a breach of undertakings in loan facility documentation

Loan facility documentation will typically contain a positive obligation (commonly referred to as an “undertaking” or “covenant”) on the borrower to ensure that the value of its IP is not affected by the way that IP is used, or by taking steps or failing to take steps in order to protect that IP. A borrower will have the ability to “opt out” its patents from the UPC regime during a transitional period of seven years (possibly to be extended to 14 years).  If the borrower fails to do so, that failure could amount to a breach of any IP undertakings in the loan facility documentation because the “single invalidation action” referred to above could be considered to damage the “value” of its patents. However, where a loan facility is silent on this point, it seems unlikely that a lender would take the view that a failure to opt out would constitute a breach under IP specific conditions or any general provisions.  The above issues should be considered when entering into a new facility.

Commenting on the UPC and the UPCA and its impact on finance transactions, Charlotte Tillett and Andrew Dodds note that “Lenders should consider the commercial importance of IP security in light of the sweeping new rules for invalidating patents across Europe under this new regime and whether or not a borrower should be required to “opt out” its patents from this regime for the duration of any financing with that lender.  Relatedly, borrowers should review carefully (or negotiate) the IP undertakings in their loan facility documentation to ensure that the new UPC regime does not inadvertently trigger a breach of any IP undertaking referable to the “value” of IP.”

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