The Personal Properties Security Act: changing the landscape of IP due diligence in Australia
This article first appeared in the Chinese-language edition of Managing Intellectual Property. To download the article in Chinese, please click here.
The due diligence landscape in Australia is changing, with the Federal Government about to usher in a new regime for the registration, determination of priority and enforcement of security interests in personal property (which includes intellectual property (IP) rights), which will change the way due diligence is conducted on IP assets in Australia. This article briefly discusses the nature of IP due diligence and security interests in IP, the existing means for determining whether a security interest exists in an IP asset and the impact of the new regime on IP due diligence in Australia.
IP due diligence
Due diligence on IP assets is desirable for many reasons, but principally to identify the extent of a party’s right to a particular technology, branding or copyright work, and whether that party has the ability to grant the rights or interests proposed (whether those rights involve an assignment, licence or grant of a security interest in that asset).
In Australia, an owner of a registered IP asset (excluding plant breeder’s rights) may deal with that asset subject only to rights of a third party appearing in the relevant IP register for that type of IP. Accordingly, it is essential that any party seeking to acquire an interest in an IP asset determine whether that asset (or any right in the asset) is encumbered in any way. An IP asset may be encumbered, or an owner of rights in an IP asset may otherwise be prevented from granting certain rights in an IP asset, in a number of ways, including by way of an extant licence of rights (which overlap with the rights a party is seeking to acquire (eg, the granting of an exclusive licence to certain rights)) or by way of a security interest (eg, the granting of a charge over the IP asset).
In Australia, IP assets are categorised as a form of intangible personal property which, like other personal property, can attract security interests. All types of IP and licences of IP rights are forms of intangible personal property. In respect of licences of IP rights, such licences are considered personal property if they are transferrable by the licensee.
Existing regime for registration and identification of security interests in IP
There are currently over 70 separate Acts regulating security in personal property in Australia. There is inconsistency (eg, inconsistent priority rules) and significant overlap between these Acts. The various IP registers maintained by IP Australia form part of this existing regime. These registers identify recorded interests in an IP asset. However, the recordal of interests in IP is, in some instances voluntary, and as between the various registers, may contain different information. Accordingly, these registers are not a definitive source of all interests in IP assets. While the various IP registers are, prima facie, a record of the interests in the IP asset, this presumption can be rebutted by actual evidence of another interest. Accordingly, a search of the IP register may only identify some, but not all, of the interests (including security interests) in an IP asset.
Currently, to identify whether a security interest exists in an IP asset of a company, an interested party needs to search the Australian Securities and Investments Commission’s register for any registered security interest (such as a fixed and floating charge) over the relevant IP asset of a company. This regime only provides a system of registration of security interests in respect of assets owned by companies. IP assets can, of course, be owned by legal entities other than companies, such as individuals and registered associations. There is currently no independent source of information in Australia accessible by a prospective purchaser, licensee or financier to determine whether a security interest has been granted in respect on an IP asset owned by a non-corporate entity.
New personal properties securities regime
The Personal Properties Security Act 2009 (Cth) (as subsequently amended) (PPSA) was passed by the Australian Government in 2009, received royal assent on 14 December 2009 and is currently scheduled to come into substantive operation on 31 October 2011.
The PPSA is intended to harmonise the disparate Acts and provide greater unity and certainty in relation to dealings in securities in personal property in Australia. The PPSA follows similar schemes already in place in countries such as New Zealand and Canada. The new regime established by the PPSA provides for the registration of security interests in personal property on a national register (the Personal Properties Securities Register (PPSR)), the determination of priority amongst security interests in the same asset, the enforcement of those security interests and, relevantly, the circumstances in which a person will take personal property free of a security interest.
Even though it will still be possible to register security interests on the existing (and continuing) IP registers with IP Australia, the PPSR will be the only relevant register from the point of view of a prospective acquirer of rights in terms of security interests in IP assets, as it is the only register which will determine whether a security interest is enforceable or not and whether that interest is subordinate to other interests.
The PPSA takes a functional approach to determine what is and what is not a “security interest” (ie, it applies to all interests in personal property which serve the function of seeking to secure payment or performance of an obligation), regardless of the form of the transaction. Accordingly, interests which might not otherwise be classified as “security interests” are deemed to be security interests for the purpose of the PPSA. For example, retention of title arrangements typical in distribution arrangements (which, from a function perspective, are used to secure payment for those goods by the purchaser) will be a registrable security interest under the PPSA. Similarly, interests which might generally be classified as “security interests” are deemed not to be security interests. For example, whilst an IP licence may be seen as securing the performance of an obligation it will not be regarded as a security interest.
The scheme also operates in respect of personal property notwithstanding the nature of the legal entity which owns that property – so it applies equally to individuals and other non-corporate entities as it does to companies.
The regime will be voluntary. However, the Federal Government is confident that the fact that the register will govern priority in relation to security interests over personal property will encourage its adoption. It will, therefore, provide greater certainty when conducting due diligence of IP assets in the future.
Implications for IP
Two significant implications for IP assets arise under the new regime:
- Licences of IP rights are regarded as personal property under the PPSA. Accordingly, unless proscribed under the IP licence agreement, a licensee will be able to grant security interests in an IP licence in favour of a third party which security interest can then be registered by the third party. Under the PPSA, where a licensor transfers the underlying IP asset to a third party, that third party (and each of its successors in title) will be subject to that registered security interest, even if they purchased that IP asset without knowledge of that interest.
- Where the exercise of an IP right is required to exercise a security interest over tangible goods which have closely associated IP rights (eg, the use of hardware requires the exercise of an IP right to use embedded software or dealing with a pharmaceutical product subject to a patent involves the “exploitation” of the patent), and an additional security interest has “attached” (a term given a specific meaning under the PPSA) to those IP rights, the PPSA will deem the IP rights to be included in the description of the goods (over which security has been taken) in a security agreement registered on the PPSR. Accordingly, even if a security agreement granting a security interest in the IP asset is not registered on the PPSR, but the security agreement in respect of the associated goods is registered, the PPSA deems there to be a recordal of a security agreement in respect of the IP asset (for the purposes of enforcement of that interest). This provision is subject to agreement by the parties to the contrary. This will have a significant impact even when an interested party searches the PPSR for security interests in IP assets, because even if no security interest is registered in an IP asset on the PPSR, that IP asset may still nevertheless be subject to an enforceable security interest.
PPSA and IP due diligence
Interested parties will rely on IP Australia’s registers of IP assets for registered IP rights as the principal source of information about the ownership of registrable IP assets and the existence of any rights held by any third party in the IP asset.. For example, in the context of a financing arrangement where a financier is seeking to take a security interest in an IP asset to secure repayment, the financier will still need to rely on the IP registers maintained by IP Australia to determine whether the anticipated grantor of that security interest has an interest in that IP asset sufficient to grant that security interest and whether there might already be, for example, a mortgage over that IP asset (which might already be registered under the existing provisions of the relevant IP legislation). In relation to unregistered IP rights, such as copyright, it will still be necessary to conduct “traditional” due diligence (including reviewing relevant contracts of employment and assignment of copyright agreements between the purported owner and the author of the work) to ensure that the purported owner does actually own copyright in the particular work before an interest is acquired.
Upon the commencement of the new regime, it will be essential for a third party financier (or other interested party, such a potential purchaser of the IP asset) to also search the PPSR to determine whether any security interests exist in relation to an IP asset and, if so, whether those interests conflict with or even preclude the interest proposed to be granted by the owner of the IP asset to the third party.
Searching the register
Interested parties will be able to search the PPSR by using either the grantor details or the serial number of certain types of property. All registered IP rights will be described by serial number (eg, Australian Patent No. 2011123456). However, it is unclear how unregistered IP rights, such as copyright, will be described on the PPRS and, accordingly, how the PPRS can be searched to identify that property.
Adding to the complexity of searching the PPSR is the deeming provision in relation to tangible assets with closely associated IP rights discussed above. In this case, an interested party will not only need to search the PPSR for the associated assets with a view to assessing whether a closely associated IP right may also be encumbered, but it will also be essential for an interested party to obtain and review the details of a possible target’s existing security agreements to determine whether an IP asset has already been secured but not otherwise registered on the PPSR.
Charges and other security interests currently registered on the Australian Securities and Investments Commission’s register of corporate charges, and security interests registered up until 31 October 2011, will be automatically migrated from that register to the PPSR. There will not, however, be an automatic transition of registered interests from the existing IP asset registers to the PPSR.
While the PPSA aims to provide greater certainty for financiers and promote investment in new classes of assets, it is yet to be seen to what extent the new regime established by the PPSA will achieve this end, particularly in relation to IP assets in Australia.