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11 Conn. Law. 8 (2000-2001)
E-Business 101 - Part IV: Security Interests.Com

handle is hein.barjournals/conlyr0011 and id is 266 raw text is: E-Business 101 Part IV: Security Interests.Com By Myles H. Alderman, Jr. and Scott B. Allison INTRODUCTION Debt lenders look to cash flow, charac- ter of management and collateral when lending. The secured lender wants to understand, evaluate and secure the assets that collateralize the loan. Clients will look to their counsel for assistance in these transactions. The basic formula is deceptively sim- pie: Perfect the security interest in the assets. The devil is in the details of how. And the devil in the details is likely to be very present in the coming years. It is axiomatic that a growing economy with low loan defaults can mask a gross mag- nitude of lending mistakes, and that an increase in loan defaults will shine a spot- light on every error and omission. It is nov estimated that approximately half of all online e-tailers will be gone by the end of this year.' It also is predicted that some will be consumed by others in consolidations while others will end up in bankruptcy court.2 With the cooling of the market for e- businesses comes the realization of the risks associated with equity financing. While many businesses have recognized that their equity investment in an e-busi- ness will be subordinate to the interests of secured and unsecured creditors, a good number may be just awaking to some of the other risks associated with equity interests-for example, the fact that pref- erential payments' to a creditor are subject to a ninety-day look back in bankruptcy, while preferential payments to an equity holder are subject to a one-year look back. Further, depending upon the nature of the relationship, some equity holders may find themselves defending against claims to pierce the corporate veil of the e-busi- ness in trouble. These factors will converge to increase the pressure on investors to cast their posi- tions as debt rather than equity. The authors expect debt to play a larger role in those businesses that survive the current shakeout. TYPICAL INTERNET COMPANY ASSETS While an e-business may have some assets that fit into the traditional cate- gories of plant, equipment and inventory, the majority of the apparent value is likely to be in less traditional assets. Thus, the devil in the details arises when the debt financer seeks to perfect its security inter- ests in the assets of the e-business. In the case of most e-businesses, the primary assets will be intellectual prop- erty consisting of trademarks, trade names, copyrights, patents, customer information and general intangibles4 The perfection of security interests in intellec- tual property generally requires close attention not only to Article 9 of the Uni- form Commercial Code, but also the Patent Act,' the Copyright Act' and the Lanham Act.' PATENTS One strategy that has been employed by lenders providing venture capital to e- businesses is to take an assignment of the intellectual property interests, with the lender then licensing the use of the intel- lectual property back to the c-business. One risk arising from this strategy is that the lender may be responsible for registra- tion and maintenance of the intellectual property and enforcement of intellectual property rights against infringers.! An enforceable patent provides the owner a right to prevent others from mak- ing, using or selling the patented inven- tion, such as a process, business method. or device, for up to twenty years.' A popu- lar means for a creditor to protect its inter- ests in a U.S. patent is by filing a collateral assignment of the patent with the United States Patent and Trademark Office (PTO)0 and filing a financing statement under applicable state law. While some cases hold that a state UCC-I filing alone is sufficient to perfect a security interest in a U.S. patent, the better practice is to also make a proper filing at the PTO to take full advantage of federal as well as state law protections. TRADEMARKS Generally, a trademark is a unique name or symbol that identifies a business or product. While trademark rights arise primarily under state common law, a fed- eral system of registration exists under the Lanham Act.'2 When registered with the PTO, a trademark registration remains in force for ten years and may be renewed.1 An assignment of a federally registered trademark should be recorded in the (Please see page /0) U APRIL 2001 CONNECTICUT LAWYER Visit www~ctbar~org

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