[Congressional Record Volume 146, Number 71 (Friday, June 9, 2000)]
[Extensions of Remarks]
[Pages E926-E927]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




             SECURITY INTERESTS IN COPYRIGHTS FINANCING ACT

                                 ______
                                 

                          HON. GEORGE W. GEKAS

                            of pennsylvania

                    in the house of representatives

                        Wednesday, June 7, 2000

  Mr. GEKAS. Mr. Speaker, this statement was to be included in the 
Congressional Record with the introduction of H.R. 4351, the ``Security 
Interests in Copyrights Financing Act'' which was introduced on the 
floor on May 2, 2000.
  I was pleased to introduce the ``Security Interests in Copyrights 
Financing Act'' with the distinguished representative from Virginia, 
Mr. Boucher.
  This simple bill is focusing on curing a major source of legal 
uncertainty regarding the ability of owners of valuable copyrights to 
leverage that value as a source of working capital. Resolving this in a 
timely manner is becoming very important, and should not wait on years 
of further court decisions--at the end of which Congressional 
clarification would probably still be required.
  Intellectual Property (IP), including copyrights, is becoming an 
ever-larger portion of the Nation's total wealth, and new methodologies 
for objectively valuing these assets are coming into the marketplace. 
Once it can be valued in a standardized manner, IP can secure a loan as 
well as any tangible property.
  At the same time, other trends make resolving this uncertainty a 
pressing issue.
  First, most bankruptcy experts expect a coming wave of ``dot-com'' 
filings as some Internet related firms find that their business model 
is terminally flawed. The only valuable asset that most of these firms 
have is intellectual property, and it would be best for all parties in 
interest if the issue of whether or not their copyrighted or 
copyrightable IP had been secured under a UCC filing was clearly 
resolved, and not a matter of litigation in a variety of circuits. The 
value of these assets can wither quickly if they are not being utilized 
in the fast-moving technology sector, but that is just what will happen 
if ownership is contested through long court battles. That will be to 
the detriment of all parties in interest to these insolvency 
proceedings.
  Second, some of these firms can avoid insolvency, even in an emerging 
era of tightened equity financing, if they can borrow against their 
copyright assets: but their ability to do so is clouded by the current 
legal uncertainty.
  Finally, many firms may find that a developing market for IP-secured 
loans offers an attractive alternative to equity financing, both in 
regards to total borrowing costs as well as to retention of ownership 
in valuable assets.
  Until a decade ago, it was the general legal view that copyrights, 
like other intellectual property, were within the general intangibles 
category under the Uniform Commercial Code, and could be secured as 
loan collateral through a UCC-I filing with the Secretary of State in 
which a borrower resided. However, several 9th Circuit bankruptcy court 
decisions have put this whole area under a cloud. The 1990 Peregrine 
Entertainment decision held that the Copyright Act preempts all state 
law, including the UCC. Then, in 1997, the Avalon Software decision 
held that a security interest in copyrightable material, even if it had 
not been registered with the Copyright Office, could only be secured by 
a Copyright Office filing. Even within the 9th Circuit, the law has 
become more unsettled with the 1999 World Power decision, in which a 
different bankruptcy judge held that a loan could be secured in 
copyrightable but unregistered material through a UCC filing, directly 
contradicting the Avalon decision. However, even the World Power 
decision offers little comfort to lenders, since their lien would be 
lost if the material's owner registered it with the Copyright Office.
  There are many reasons why utilizing the copyright registration 
system is inappropriate and ill suited to the perfection of a security 
interest. The fundamental reason, of course, is that the UCC and the 
Copyright Act address disparate and largely incompatible goals. But 
there are many other practical reasons, including:
   A UCC filing quickly provides notice to other parties that a 
security interest has been taken in the material, whereas it can take 
months before the Copyright Office provides such public notice to third 
parties.
   A UCC filing is easy for others to locate, as it filed under 
the debtor's name in their state of doing business; whereas copyright 
filings are listed under the name or number of the registered work and 
are consequently difficult for lenders to locate.
   Commercial law has long incorporated the concept of a 
``blanket lien'' so that, for example, a lender that, through a single 
UCC filing, has secured a lien on version 1.0 of software will see that 
lien carry over to a subsequent version that enjoys marketplace 
success. Copyright law, however, requires a separate registration for 
each version and, consequently, a separate filing by a lender on each 
separate copyright.
   Borrowers may wish to obtain credit against material so that 
it can be developed to a state in which it is ready to be copyrighted 
and then marketed. Or they may wish to avoid registration so that, for 
example, they do not have to reveal a significant portion of software 
source code. Yet, since a lender can only register a lien with the 
Copyright Office against material that has already been copyrighted,

[[Page E927]]

their access to debt financing will be cut off in these scenarios.
  Mr. Speaker, last year my esteemed colleague, Rep. Coble, held a 
hearing in his Courts and Intellectual Property Subcommittee on a 
predecessor, draft version of the bill that I have introduced. Certain 
objections were raised against that earlier version, primarily on the 
grounds that it could have been interpreted to allow state law to 
prevail over the Copyright Act in certain instances. This new proposal 
has been narrowed and perfected to avoid such a result. Under H.R. 
4351, the UCC will only govern a priority contest between a UCC 
security interest and a lien creditor. That is, creditors who have 
perfected a security interest in copyright material via a UCC filing 
will prevail over lien creditors or a trustee in bankruptcy, but will 
remain subordinate to the rights of other transferees of interests in 
copyrights under the Copyright Act. This will return the system to its 
pre-Peregrine state and provide the same means of securing interests in 
copyrights that currently exists for patents and trademarks.
  The wisdom of this carefully targeted approach was attested to at 
last year's hearing. For example, Marybeth Peters, the Register of 
Copyrights, testified that ``It may make sense to recognize perfection 
of security interests in copyrights at the state level for the limited 
purpose of allocating rights among lien creditors.''
  Mr. Speaker, while this is a simple bill, it addresses the complex 
intersection of Federal copyright and bankruptcy law, as well as state 
commercial law. It also affects both the entire secured lending 
industry, both bank and nonbank, as well as those industries with 
substantial copyright interests, including the software and motion 
picture industries. My purpose in introducing this bill is to stimulate 
a productive dialogue that, hopefully, will lead to a near-term 
resolution of this matter.
  I know that other groups, including a task force of the American Bar 
Association, have proposed to address this issue in the context of far 
more complex, comprehensive, and controversial legislation that would 
substantially revamp the Federal intellectual property laws and alter 
their relationship to state commercial law. I do not know if such an 
ambitious project is required, but I certainly know that it is not the 
kind of undertaking that can be accomplished in this Congress, and 
perhaps not even in the next.
  My goal is simple: To avoid years of needless litigation while 
resolving a problem that prevents owners of copyright material from 
leveraging its value as a source of financing. It is my hope that, 
working with my colleagues and all the affected industries, we can 
reach quick agreement on a means of achieving that goal.

                          ____________________