About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline

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

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Already a HeinOnline Subscriber?

profiles profiles most