 |
 |
|
|
In re Cybernetic Services, Inc.
252 F.3d 1039 (9th Cir. 2001)
Graber, Circuit Judge:
As is often true in the field of intellectual property, we must apply
an antiquated statute in a modern context. The question that we decide today is whether 35
U.S.C. § 261 of the Patent Act,
or Article 9 of the Uniform Commercial Code (UCC), as adopted in California, requires the
holder of a security interest in a patent to record that interest with the federal
Patent and
Trademark Office (PTO) in order to perfect the interest as against a subsequent lien
creditor. We answer "no"; neither the Patent Act nor Article 9 so requires. We
therefore affirm the decision of the Bankruptcy Appellate Panel (BAP).
FACTUAL AND PROCEDURAL BACKGROUND
The parties stipulated to the relevant facts: Matsco, Inc., and Matsco
Financial Corporation (Petitioners) have a security interest in a patent developed by Cybernetic Services, Inc. (Debtor). The patent is
for a data recorder that is designed to capture data from a video signal regardless of the
horizontal line in which the data is located. Petitioners' security interest in the patent was
"properly prepared, executed by the Debtor and timely filed with the Secretary of
State of the State of California," in accordance with the California Commercial Code.
Petitioners did not record their interest with the PTO.
After Petitioners had recorded their security interest with the State
of California, certain creditors filed an involuntary Chapter 7 petition against Debtor,
and an order of relief was granted. The primary asset of Debtor's estate is the patent.
Petitioners then filed a motion for relief from the automatic stay so that they could
foreclose on their interest in the patent. The bankruptcy Trustee opposed the
motion, arguing that Petitioners had failed to perfect their interest because they did not
record it with the PTO.
The bankruptcy court ruled that Petitioners had properly perfected
their security interest in the patent by following the provisions of Article
9. Furthermore, the court reasoned, because Petitioners had perfected their security
interest before the filing of the bankruptcy petition, Petitioners had priority over the
Trustee's claim in the patent and
deserved relief from the stay. Accordingly, the bankruptcy court granted Petitioners'
motion. The BAP affirmed.
Petitioners then filed this timely appeal.
. . .
DISCUSSION
Article 9 of the UCC, as adopted in California,
governs the method for perfecting a security interest in personal property. [Ed.
Note: The court is applying old Article 9 and its references are therefore to
sections in old Article 9. The analysis should be the same, however, under Revised
Article 9.] Article 9 applies to "general intangibles," a term that includes
intellectual property. Cal. Com. Code § 9106. The parties do not dispute that Petitioners
complied with Article 9's general filing requirements and, in the case of most types of
property, would have priority over a subsequent lien creditor. The narrower question in
this case is whether Petitioners' actions were sufficient to perfect their interest when
the "general intangible" to which the lien attached is a patent. The parties also do not dispute that,
if Petitioners were required to file notice of their security interest in the patent with
the PTO, then the Trustee, as a hypothetical lien creditor under 11 U.S.C. § 544(a)(1),
has a superior right to the patent.
The Trustee makes two arguments. First, the Trustee contends that the Patent Act
preempts Article 9's filing requirements. Second, the Trustee argues that Article 9 itself
provides that a security interest in a patent can be perfected only by filing it with
the PTO. We discuss each argument in turn.
A. Preemption
1. The Analytical Framework
"The Supremacy Clause, U.S. Const., Art. IV,
cl. 2, invalidates state laws that 'interfere with, or are contrary to, 'federal
law." Hillsborough County, Fla. v. Automated Med. Labs., Inc., 471 U.S. 707, 712, 85
L. Ed. 2d 714, 105 S. Ct. 2371 (1985) (quoting Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 92,
6 L. Ed. 23 (1824)). Congress may preempt state law in several different ways. Congress
may do so expressly (express preemption). 471 U.S. at 713. Even in the absence of express
preemptive text, Congress' intent to preempt an entire field of state law may be inferred
"where the scheme of federal regulation is sufficiently comprehensive to make
reasonable the inference that Congress 'left no room' for supplementary state
regulation" (field preemption). Id. (quoting Rice v. Santa Fe Elevator Corp., 331
U.S. 218, 230, 91 L. Ed. 1447, 67 S. Ct. 1146 (1947)). State law also is preempted
"when compliance with both state and federal law is impossible," or if the
operation of state law "'stands as an obstacle to the accomplishment and execution of
the full purposes and objectives of Congress'" (conflict preemption). G.S. Rasmussen
& Assocs. v. Kalitta Flying Serv., Inc., 958 F.2d 896, 903-04 (9th Cir. 1992) (quoting
Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 479, 40 L. Ed. 2d 315, 94 S. Ct. 1879
(1974)). In all cases, "congressional intent to preempt state law must be clear and
manifest." Indus. Truck Ass'n v. Henry, 125 F.3d 1305, 1309 (9th Cir. 1997).
The Patent Act does not contain preemptive text, so
express preemption is not an issue here. Concerning field and conflict preemption, the
Supreme Court has adopted a "pragmatic" approach to deciding whether the Patent Act
preempts a particular state law. Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S.
141, 156, 103 L. Ed. 2d 118, 109 S. Ct. 971 (1989). Congress, in the Patent Act, "has balanced innovation
incentives against promoting free competition, and state laws upsetting that balance are
preempted." G.S. Rasmussen, 958 F.2d at 904. "State regulation of intellectual
property must yield to the extent that it clashes with the balance struck by
Congress" in the Patent Act.
Bonito Boats, 489 U.S. at 152 (emphasis added).
Using this form of analysis, the Supreme Court has held, on numerous
occasions, that the Patent Act
preempts a state law that grants patent-like protection to a product. See, e.g.,
id.; Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 231, 11 L. Ed. 2d 661, 84 S.
Ct. 784 (1964); Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234, 237, 11 L. Ed. 2d
669, 84 S. Ct. 779 (1964). Those cases do not control, however, because we are confronted
not with a state law that grants patent-like protection to a product but,
rather, with a state commercial law that provides a method for perfecting a security
interest in a federally protected patent.
That distinction is key because the Supreme Court has instructed
clearly that the Patent Act does not preempt every state
commercial law that touches on intellectual property. For example, in Aronson v. Quick
Point Pencil Co., 440 U.S. 257, 262, 59 L. Ed. 2d 296, 99 S. Ct. 1096 (1979), the Supreme
Court observed that commercial agreements "traditionally are the domain of state law.
State law is not displaced merely because the contract relates to intellectual property
which may or may not be patentable; the states are free to regulate the use of such
intellectual property in any manner not inconsistent with federal law."
The Court also has held that the Patent Act does not preempt a state's trade
secret law even though the practical effect of the state law is to prohibit the public
dissemination of information that, under the Patent Act, is not eligible for protection.
Kewanee Oil, 416 U.S. at 474. In Kewanee, the Court examined the purposes of the Patent Act
and the state trade secret law at issue and concluded that the state law did not stand
"'as an obstacle to the accomplishment and execution of the full purposes and
objectives of Congress.'" Id. at 479 (quoting Hines v. Davidowitz, 312 U.S. 52, 67,
85 L. Ed. 581, 61 S. Ct. 399 (1941)). The Court observed that the state law also
encouraged invention, but did so by protecting a subject matter that was beyond the Patent
Act's horizon; therefore, "the two systems are not and never would be in
conflict." 416 U.S. at 484.
It is within this framework that we evaluate the Trustee's claim. The
Trustee argues that the recording provision found in 35 U.S.C. § 261 requires that the
holder of a security interest in a patent record that interest with the PTO in
order to perfect as to a subsequent lien creditor. Section 261 provides:
Ownership; assignment
Subject to the provisions of this title, patents shall have the attributes of personal property.
Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States.
A certificate of acknowledgment under the hand and official seal of a person authorized to administer oaths within the United States, or, in a foreign country, of a diplomatic or consular officer of the United States or an officer authorized to administer oaths whose authority is proved by a certificate of a diplomatic or consular officer of the United States, or apostille of an official designated by a foreign country which, by treaty or convention, accords like effect to apostilles of designated officials in the United States, shall be prima facie evidence of the execution of an assignment, grant or conveyance of a patent or application for patent.
An assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.
If the Trustee's reading of the relevant portion of § 261 is
correct, then to the extent that Article 9 allows a different method of perfection, it
would be preempted under either a "field" or "conflict" preemption
theory. That is because recording systems increase a patent's marketability and thus play an
integral role in the incentive scheme created by Congress. Recording systems provide
notice and certainty to present and future parties to a transaction; they work" by
virtue of the fact that interested parties have a specific place to look in order to
discover with certainty whether a particular interest has been transferred." Nat'l
Peregrine, Inc. v. Capitol Fed. Savs. & Loan Ass'n (In re Peregrine Entm't, Ltd.), 116
B.R. 194, 200 (C.D. Cal. 1990); see also Littlefield v. Perry, 88 U.S. 205, 221, 22
L. Ed. 577 (1874) (noting that the Patent Act's recording system "is intended
for the benefit of the public" and that "bona fide purchasers look to it for
their protection"). If, as the Trustee argues, the Patent Act expressly delineates the place where
a party must go to acquire notice and certainty about liens on patents, then a state law that requires the
public to look elsewhere unquestionably would undercut the value of the Patent Act's recording scheme. If, on the other
hand, § 261 does not cover liens on patents, then Article 9's filing requirements
do not conflict with any policies inherent in the Patent Act's recording scheme.
Article 9 itself recognizes the existence of preemption principles.
California Commercial Code § 9104(a) [ed. note: now see UCC 9-109(c)(1)] expressly subordinates Article
9's requirements to those of federal law. That section provides that Article 9 does not
apply to any "security interest subject to any statute of the United States to the
extent that such statute governs the rights of parties to and third parties affected by
transactions in particular types of property." Section 9104(a) may be broader than
federal preemption doctrine under the Patent Act. The text of § 9104(a) implies that
Article 9's requirements are inapplicable to the extent that a federal law governs the
rights of a party to a secured transaction, with or without a conflict between the state
law and the scheme created by Congress in the Patent Act. Cf. Levitin v. PaineWebber, Inc.,
159 F.3d 698, 704 (2d Cir. 1998) (speculating that § 104(a) of Article 9 "calls for
analysis more sweeping than traditional preemption analysis").
This possible difference in scope does not affect the result in the
present case, however. As noted, the Trustee argues that §261 required Petitioners to
record their interest with the PTO. If that is true, then the Trustee has priority to the patent's
proceeds, either because there is a clear conflict between the state and federal schemes
and the state scheme is preempted, or because the Patent Act "governs the rights of
parties" to the transaction and § 9104(a) operates to nullify Article 9's filing
requirements. We turn to that issue now.
2. The Patent Act
Requires Parties to Record with the PTO Only Ownership Interest in Patents.
As noted, the Patent Act's recording provision provides that
an "assignment, grant or conveyance shall be void as against any subsequent purchaser
or mortgagee for a valuable consideration, without notice, unless it is recorded in the
[PTO]." 35 U.S.C. § 261. In order to determine whether Congress intended for
parties to record with the PTO the type of interest that is at issue in this case, we must
give the words of the statute the meaning that they had in 1870, the year in which the
current version of § 261 was enacted. . . .
Our task is not an easy one because security interests, and the words
used to describe them, have changed significantly since the 19th Century. See generally 4
James J. White & Robert S. Summers, Uniform Commercial Code § 30-1, at 2 (4th ed.
1995) (noting that, before the advent of Article 9, "the lawyer had to work with a
variety of security devices, each governed by its own law"). For example, before
Article 9, a party could secure property using a pledge, an assignment, a chattel
mortgage, a chattel trust, a trust deed, a factor's lien, or a conditional sale. Grant
Gilmore, Security Interests in Personal Property § 10.1, at 296 (1965). Each type of
device carried with it elaborate rules that controlled its use, and each conferred
different rights and liabilities upon the contracting parties. See id. § 11.1, at 333
(noting that a "considerable amount of pre-Code case law was devoted to the
invalidation of security transactions on the ground that one of the specialized devices
had been used outside its 'proper' field"). Article 9, which was first enacted in
1962, brought the" long history of the proliferation of independent security devices
... to an end." Id. § 10.1, at 296. It did so in part by introducing a body of law
that would govern a "single, 'unitary' security device": the Article 9 security
interest. 4 White & Summers § 30-1, at 2.
With that history in mind, we must determine whether Congress intended
to include the kind of transaction at issue in this case within the scope of 35 U.S.C. §
261. The first phrase in § 261's recording provision -- "assignment, grant or
conveyance" -- refers to different types of transactions. The neighboring clause --
"shall be void as against any subsequent purchaser or mortgagee" -- refers to
the status of the party that receives an interest in the patent. Therefore, for the Trustee to prevail
in this case, (1) Petitioners' transaction with Debtor must have been the type of
"assignment, grant or conveyance" referred to in § 261, and (2) the Trustee,
who has the status of a hypothetical lien creditor, must be a "subsequent purchaser
or mortgagee." We hold that neither condition is met. n6
As we will discuss next, our conclusion finds support in the text of §
261, keeping in view the historical definitions of the terms used in the recording
provision; the context, structure, and policy behind § 261; Supreme Court precedent; and
PTO regulations. We will begin by analyzing the statute's text and context, as interpreted
by the Supreme Court. For the sake of clarity, we will discuss the two relevant phrases in
the recording provision of § 261 separately.
a. The Phrase "Assignment, Grant or Conveyance" Concerns Transfers of Ownership Interests Only.
. . .
In summary, the statute's text,
context, and structure, when read in the light of Supreme Court precedent, compel the
conclusion that a security interest in a patent that does not involve a transfer of the
rights of ownership is a" mere license" and is not an "assignment, grant or
conveyance" within the meaning of 35 U.S.C. § 261. And because § 261 provides that
only an "assignment, grant or conveyance shall be void" as against subsequent
purchasers and mortgagees, only transfers of ownership interests need to be recorded with
the PTO. . . .
In the present case, the parties do
not dispute that the transaction that gave Petitioners their interest in the patent did
not involve a transfer of an ownership interest in the patent. Petitioners held a "mere
license," which did not have to be recorded with the PTO.
b. The Phrase "Subsequent Purchaser or Mortgagee" does not Include Subsequent Lien Creditors.
The Trustee's argument fails not
only because a security interest that does not transfer ownership is not an"
assignment, grant or conveyance," but also because he is not a subsequent
"purchaser or mortgagee." Congress intended for parties to record their
ownership interests in a patent so
as to provide constructive notice only to subsequent holders of an ownership interest.
Again, we derive our conclusion from the historical definitions of the words, from the
context and structure of § 261, and from Supreme Court precedent.
. . .
In summary, the historical
definitions of the terms" purchaser or mortgagee," taken in context and read in
the light of Supreme Court precedent, establish that Congress was concerned only with
providing constructive notice to subsequent parties who take an ownership interest in the patent in
question. . . .
The Trustee is not a
subsequent "mortgagee," as that term is used in 35 U.S.C. § 261, because the holder of a patent mortgage holds title to the patent
itself. Instead, the Trustee is a hypothetical lien creditor. The Patent Act
does not require parties to record documents in order to provide constructive notice to
subsequent lien creditors who do not hold title to the patent.
3. Public Policies that Underlie Recording Provisions Cannot Override the Text of the Patent Act.
The Trustee argues that requiring lien creditors to record their
interests with the PTO is in line with the general policy behind recording statutes. It
may be, as the Trustee argues, that a national system of filing security interests is more
efficient and effective than a state-by-state system. However, there is no statutory hook
upon which to hang the Trustee's policy arguments. . . .
The Patent Act was written long before the advent
of the "unitary" Article 9 security interest. But we must interpret 35 U.S.C. §
261 as Congress wrote it. The Constitution entrusts to Congress, not to the courts, the
role of ensuring that statutes keep up with changes in financing practices. It is notable
that Congress has revised the Patent Act numerous times since its enactment,
most recently in 1999, see Pub. L. 106-113, but it has not updated the Act's recording
provision. We decline the Trustee's invitation to do so in Congress' place.
4. Cases Interpreting the Copyright Act do not Control.
The Trustee's final argument is that this court should follow
Peregrine, in which a bankruptcy court held that the Copyright Act preempts state methods
of perfecting security interests in copyrights. The court in Peregrine observed that the
"federal copyright laws ensure predictability and certainty of copyright ownership,
promote national uniformity and avoid the practical difficulties of determining and
enforcing an author's rights under the differing laws and in the separate courts of the
various States." 116 B.R. at 199 (internal quotation marks omitted). The court
reasoned that allowing state methods to stand would conflict with those goals. Id. But see
4 White & Summers § 30-12, at 86 (referring to Peregrine as "misguided").
Of course, Peregrine is not binding on this court although, in the
present case, we have no occasion to pass on its correctness as an interpretation of the
Copyright Act. We note, however, that the Copyright Act, by its terms, governs security
interests. The Copyright Act governs any "transfer" of ownership, which is
defined by statute to include any "hypothecation." 17 U.S.C. §§ 101,
201(d)(1). A "hypothecation" is the "pledging of something as security
without delivery of title or possession." Black's Law Dictionary 747 (7th ed. 1999);
see also Douglas J. Whaley, Problems and Materials on Secured Transactions 10 n.3 (4th ed.
1997) (noting that a "pledge is sometimes called a hypothecation").
By contrast, the Patent Act does not refer to a"
hypothecation" and, as we have demonstrated, does not refer to security interests at
all. The fact that one federal intellectual property statute with a recording provision
expressly refers to security interests (the Copyright Act), while another does not (the Patent
Act), is more evidence that security interests are outside the scope of 35 U.S.C. § 261.
. . .
5. PTO Regulations Require Only the Recording of Documents that Transfer Ownership in a Patent.
It is worthy of mention that the applicable PTO regulations parallel
our interpretation of 35 U.S.C. § 261. Title 37 C.F.R. § 3.11(a) provides that
"assignments" must be recorded in the PTO. That regulation also states that
"other documents affecting title to applications, patents, or registrations, will be recorded at
the discretion of the Commissioner" of Patents and Trademarks. (Emphasis added.)
Section 313 of the Manual of Patent Examining Procedure (7th ed. 1998)
explains that "other documents" that may be filed include "agreements which
convey a security interest. Such documents are recorded in the public interest in order to
give third parties notification of equitable interests ...."
Title 37 C.F.R. § 3.11 is illuminating because it shows that the PTO
does not consider security interests to be "assignments, grants or conveyances."
Under 35 U.S.C. § 261, certain conveyances -- those that transfer an ownership interest
-- must be recorded to be effective as against a subsequent purchaser or mortgagee. If
security interests were "assignments, grants or conveyances," then they would
have to be filed to provide constructive notice to a subsequent purchaser or mortgagee,
consistent with the Patent Act.
As a matter of law and logic, the Commissioner would not have the "discretion"
to reject federal filing.
. . . .
6. There is no Conflict Between the Patent Act and Article 9 in this Case.
Because the Patent Act does not cover security interests or
lien creditors at all, there is no conflict between 35 U.S.C. § 261 and Article 9.
Petitioners did not have to file with the PTO to perfect their security interest as to a
subsequent lien creditor.
B. Article 9's Step-Back Provision
The Trustee's second major argument is that Article 9 itself requires
that a creditor file notice of a secured transaction with the PTO in order to perfect a
security interest. California Commercial Code § 9302(3)(a) [ed.
note: now see UCC 9-311(a)(1)] states that the
filing of a financing statement pursuant to Article 9 "is not necessary or effective
to perfect a security interest in property subject to ... [a] statute ... which provides
for a national or international registration ... or which specifies a place of filing
different from that specified in" Article 9. If § 9302(3)(a) applies, then a party
must utilize the federal registration system in order to perfect its security interest.
Cal. Com. Code § 9302(4).
The question, then, is whether the Patent Act is "[a] statute ... which
provides for a national or international registration ... or which specifies a place of
filing different from that specified in" Article 9. Cal. Com. Code § 9302(3)(a). The
Patent Act
is clearly a statute that provides for a national registration. But that begs the more
focused question: a national registration of what? Courts have tended to use the
context of the statute to amplify the bare text and to answer the focused question: a
national registration of security interests. For example, in Aerocon Engineering, Inc. v.
Silicon Valley Bank (In re World Auxiliary Power Co.), 244 B.R. 149, 155 (N.D. Cal. 1999),
the bankruptcy court observed that § 9302(3)(a), if read literally,
would be absurd. It would provide that, whenever a particular type of collateral may be registered nationally, regardless of whether the federal statute specifies a place for filing a security interest different than that provided by the UCC, filing a UCC-1 financing statement would be neither necessary nor effective to perfect a security interest in the collateral.
Courts have thus read § 9302(3)(a) as
providing that federal filing is necessary only when there is a statute that
"provides for" a national registration of security interests. See, e.g.,
Trimarchi v. Together Dev. Corp., 255 B.R. 606, 610 (D. Mass. 2000) (holding that §
9302(3)(a) did not require the federal filing of a trademark because the Lanham Act does
not provide for a national recording system of security interests). We agree with that
interpretation.
Under that more restrictive definition, it is clear that the Patent Act
is outside the scope of § 9302(3)(a). As we have explained, a transaction that grants a
party a security interest in a patent but does not effect a transfer of title
is not the type of "assignment, grant or conveyance" that is referred to in 35
U.S.C. § 261. The transaction in this case did not transfer an ownership interest.
Therefore, § 9302(3)(a) did not require that Petitioners record their security interest
with the PTO.
The Comments to Article 9 of the UCC support this view. Comment 8
states that § 9302(3)
exempts from the filing provisions of this Article transactions as to which an adequate system of filing, state or federal, has been set up outside this Article and subsection (4) makes clear that when such a system exists perfection of a relevant security interest can be had only through compliance with that system.
The Comments instruct that " 17 U.S.C. §§ 28, 30
(copyrights), 49 U.S.C. § 1403 (aircraft), [and] 49 U.S.C. § 20(c) (railroads)" are
examples of the "type of federal statutes" referred to in § 9302(3). Each of
the statutes listed in the Comments refers expressly to security interests. See 17 U.S.C.
§ 101; 49 U.S.C. § 44107; 49 U.S.C. § 11301. The Patent Act is not among them.
C. Conclusion
Because 35 U.S.C. § 261 concerns only transactions that effect a
transfer of an ownership interest in a patent, the Patent Act does not preempt
Article 9, and neither California Commercial Code § 9104(a) nor § 9302(3) applies.
Consequently, Petitioners perfected their security interest in Debtor's patent by recording it with the California
Secretary of State. They have priority over the Trustee's claim because they recorded
their interest before the filing of the bankruptcy petition.
AFFIRMED.