This blog is the twelfth installment in Finkel Law Group’s ongoing trademark law series. In earlier articles, we explored how to monetize trademarks through licensing and assignment. In this article, we examine a lesser-known but increasingly valuable strategy: Using your trademarks as collateral to secure financing. If your business owns one or more valuable trademarks, lenders may be willing to extend credit backed by those legal rights. But leveraging trademarks in this way involves navigating both state commercial law and federal trademark law, especially under Article 9 of the Uniform Commercial Code. Here, we break down what businesses and lenders need to know to safely and effectively use trademarks as secured collateral.
Secured Transactions Basics
When you use any asset as collateral for a loan, you grant the lender a security interest in that asset. With trademarks, this is typically done via a security agreement in which the debtor-company pledges its trademarks and associated goodwill and registrations to the lender and secured party as collateral for repayment of the loan. Under the UCC Article 9, which California and all other states have adopted, with minor local variations, trademarks are generally categorized as “general intangibles.” A security interest in a trademark becomes enforceable against the debtor when:
- Value is given by the lender, which is the loan.
- The debtor has legal rights in the trademark collateral (e.g. owns the mark or an exclusive license in it).
- The debtor authenticates a security agreement describing the collateral.
Attachment is just the first step. To protect the lender against third parties, the security interest must also be perfected.
Perfection and Priority – Filing Requirements
To perfect a security interest in trademarks – which puts third parties on notice of the lien and establishes the lender’s priority claim on the asset – the general rule under Article 9 is to file a UCC-1 financing statement in the appropriate state office. For most business debtors, the correct place to file is the Secretary of State of the state where the company is organized. For example, a Delaware corporation files in Delaware; a California LLC files in California. In California, UCC-1 statements are filed with the Secretary of State.
The financing statement is a simple notice filing that identifies the debtor and secured party and broadly identifies the collateral, by stating, for instance, “all assets” or “all general intangibles including trademarks” or specifically list trademarks by name and registration number. Filing a UCC-1 perfects the security interest against later creditors of the debtor. This means if the debtor later tries to borrow money, and use the same trademark as collateral or goes bankrupt, your perfected security interest in the trademark gives you priority over other creditors to claim the trademark and either sell or license it to recover your money.
However, trademark as collateral for a loan presents an extra wrinkle: Federal law also comes into play. The Lanham Act provides for recording transfers, like assignments, at the U.S. Trademark Office. But the Act does not explicitly address security interests or liens. Article 9 of the UCC says that if another law – like a federal law – governs perfection of a security interest in a certain type of property, that law might preempt the UCC. For trademarks, courts have generally found that federal trademark law does not preempt the UCC for security interests. In other words, even though a creditor can record a security interest in a trademark at the U.S. Trademark Office doing so does not establish that creditor’s priority against other creditors. It still must file a UCC-1 with the Secretary of State to perfect the security interest under Article 9.
Prudent lenders double-file: They perfect their security interest by filing a UCC-1 with the state and record a copy of the security agreement or a short-form assignment indicating they have a security interest in the trademark with the U.S. Trademark Office’s assignment records. Why? Because a UCC-1 protects against other creditors, but it might not protect against a subsequent bona fide purchaser of the trademark who didn’t know it was encumbered. By recording at the U.S. Trademark Office, you put the world on notice in the trademark’s chain of title that you have a lien.
In fact, filing at the U.S. Trademark Office does not perfect the interest under the UCC, but it can protect the lender against a scenario where the trademark is sold to a buyer who might otherwise take it free and clear of an unrecorded interest. The U.S. Trademark Office record is often the first place a potential buyer or investor will check to see who owns a trademark and whether there are any encumbrances. Thus, the best practice for trademark collateral is to file a UCC-1 and also record the security interest with the U.S. Trademark Office. This two-pronged approach covers you under both state and federal legal regimes: the UCC filing perfects your interest among creditors, and the U.S. Trademark Office recordation gives notice of an encumbrance to anyone searching the trademark’s history.
California’s UCC and Secretary of State
In California, the rules align with the above. You file the financing statement with the Secretary of State and it becomes a public record. California’s Commercial Code section 9101 et seq. mirrors UCC Article 9. The California Secretary of State maintains a searchable database of UCC filings, which lenders and others can search when conducting due diligence. So if your California company pledges a trademark, a lender will want to see their UCC-1 filed in California. If the trademark is registered federally, the lender will likely also insist on recordation of the security agreement with the U.S. Trademark Office.
Impact on Brand Value and Operations
Putting up a trademark as collateral does not transfer ownership. Your company continues to own and use the mark in the ordinary course of business. However, the security agreement may place restrictions on what you can do with the trademark. For example, lenders often require that you not sell or further license the mark without consent, that you continue using the mark and not let it lapse or become abandoned, and that you use best efforts to preserve the mark’s value (e.g. pursuing infringers or maintaining quality). This is because the lender’s interest depends on the trademark retaining its goodwill and legal enforceability and value. If you stopped using the mark and it became abandoned, the collateral could become worthless, which is clearly not a situation a lender wants. Likewise, if you engage in naked licensing or otherwise degrade the mark’s distinctiveness, the value drops. So expect covenants in the loan agreement about maintaining the trademark.
From the borrower’s perspective, using a key trademark as collateral means you’re putting your brand on the line. If you default on the loan, the lender may foreclose on the trademark, in which case they could auction or sell it to satisfy the debt. This could result in you losing the rights to your brand name or logo, potentially crippling the business. Thus, a company should carefully weigh the necessity of the financing against the importance of the trademark to its business.
Often, IP-backed loans are considered when a company has significant brand equity but fewer tangible assets to pledge. This is a common scenario for startups and tech companies. This type of transaction can be a smart move if the borrowed funds will grow the business in a significant way, but it carries risk. Some businesses mitigate this risk by structuring the loan so that only non-core or subsidiary-held trademarks are collateralized, or by having an affiliate entity hold the trademarks and limit recourse. Sophisticated lenders usually see through such maneuvers and may demand personal guarantees before extending credit.
Due Diligence and Valuation
For lenders, accepting a trademark as collateral requires you to conduct due diligence on the mark’s legal status and value. Lenders and their counsel will typically:
- Verify the trademark is properly registered and owned by the borrower by checking U.S. Trademark Office records for status and any prior liens.
- Evaluate the trademark’s strength and market recognition, sometimes through brand valuation reports or examining revenue attributable to branded products.
- Check for any on-going litigation or TTAB proceedings involving the mark.
- Ensure the trademark isn’t subject to unknown licenses, agreements, or encumbrances that would diminish its value.
Often a lender will require the borrowing company to conduct trademark searches and perhaps even an appraisal. One challenge is that trademark valuation is inherently tricky. It’s tied to the business’s success so an independent valuation is hard to fix. Nevertheless, high-profile examples exist. For example, when fashion brands or franchise chains use their marks to secure loans, sometimes the valuations can run into tens of millions.
As a borrower, you should be prepared to disclose information about how the company’s mark is used and your plans to maintain it. You may also wish to negotiate what happens if the company wants to sell the trademark or if a re-brand occurs. Some loan agreements allow substitution of collateral if, say, you change a mark, so the new mark becomes collateral in place of the old one. Clear communication with the lender is key because any material change to the company’s trademark, like a significant logo re-design or a new brand name, could affect the terms of the security agreement and possibly trigger a breach.
Ideally, the security agreement will be drafted to cover not just the exact trademark as of that day, but also any “proceeds” or modifications. Typically it covers the mark “and the goodwill of the business symbolized by the mark, all registrations and applications for the mark, and all proceeds of the foregoing.” The term “proceeds” under the UCC can include whatever is received upon sale or disposition of the collateral, and can also cover insurance payouts if the IP is infringed or otherwise harmed. Essentially, lenders try to make sure that if the brand is sold or changed, they can grab the new form of the IP or the money generated by it.
Perfecting International Security Interests
As a brief note, if your trademark portfolio extends to foreign countries, and those marks are part of the collateral, the lender will need to perfect its security interest in each country according to its law. The UCC filing protects loans made primarily within the U.S. If you have a Madrid Protocol international registration, note that any security interest or assignment on such an international registration is typically handled via WIPO’s records. Many foreign jurisdictions allow or require recordation of security interests on their national trademark registers. This can be complex, so parties often involve foreign counsel for significant multi-country IP financing deals.
Enforcement of Security Interests
If all goes well, you repay the loan and the lender releases its lien. This is done by filing a UCC-3 termination statement and a release with the U.S. Trademark Office. If not, the lender can foreclose on everything in the security agreement including the IP assets and trademark. Foreclosure on trademarks is usually done by either a public or private sale of the trademark rights. Because trademarks require goodwill and proper use, a lender who takes ownership needs to either use the mark in connection with the same products or sell it to someone who will. There have been cases where a lender’s position was defeated because they didn’t act in a commercially reasonable manner to preserve the collateral’s value. For instance, letting the trademark registration lapse or not securing the goodwill upon foreclosure. Lenders are learning to navigate these issues by, for example, having a plan to transition the brand if necessary.
From the borrowing company’s standpoint, defaulting and losing the brand can be catastrophic. It might end up paying royalties to use the very trademark it once owned, as happened in some notorious leveraged buyout scenarios. Thus, tread carefully and ideally consult experienced counsel when considering IP-secured financing.
Conclusion
Using trademarks as collateral is a viable and increasingly common strategy for raising capital, particularly for startups and IP-rich businesses. But it requires attention to legal detail, including strict compliance with the UCC, state filing procedures, and federal trademark practices. Companies should weigh the risks and ensure the trademark’s integrity remains protected throughout the term of the loan. Lenders, too, must conduct careful due diligence and file properly to secure their interests. With sound legal advice and smart structuring, both sides can benefit from trademark-backed financing.
About Finkel Law Group
Finkel Law Group, P.C., with offices in San Francisco, Oakland and Washington D.C., has close to 30 years of experience helping clients maximize the value of their intellectual property, including structuring trademark licensing programs, negotiating trademark sales and assignments, and securing IP-backed financing. Our attorneys regularly assist startups, established companies, and investors in navigating the complexities of trademark transactions. When you need intelligent, insightful, conscientious, and cost-effective legal counsel to assist you in monetizing your trademarks or managing your trademark portfolio, please contact us at (415) 252-9600, (510) 344-6601, (771) 202-8801 or info@finkellawgroup.com to speak with one of our trademark attorneys about your matter.