Lending Against Westworld's Valuable Assets: Perfecting Security Interests In Intellectual Property

Readers of these e-mail blasts/blog posts seem to like some combination of pop culture scrutiny and legal analysis.  So do I, so here goes: 

Any reader of legal and lending industry literature is familiar with the promises (and frightening possibilities) that Artificial Intelligence (“AI”) is predicted to bring to all sorts of business, commercial, consumer and day-to-day activities and transactions.  But it is worth reflecting on how lenders and creditors can monetize these kind of assets before they rise against us humans like Dolores, Teddy and the rest of the hosts. 

The Approaching Frontier Of Robots And AI, And Why It Matters To Creditors.

On this season of the TV show Westworld, another one of my favorite shows, Delos Inc. is primarily concerned with getting its most important Intellectual Property (“IP”) out of the park(s) and delivered to a satellite or offshore facility.  Human life be damned.  (Whatever Delos’s motivations, the robot/AI hosts who have achieved something approaching human consciousness have different, but definite and legitimate, gripes.)  In Westworld’s near-future reality, the company’s IP includes the programming code, artificial narratives, physical plant and planned dreams/memories of the robot/AI hosts.  Almost like a future version of today’s social media empires, the company’s IP also includes the genetic, behavioral and personality data of every guest; unlike today’s social media giants (so far), the company’s IP might include a genetic/digital replica of the Delos founder mogul’s (and others’) human consciousness(es).  Setting aside the moralities of machine consciousness and storing human consciousness in a man-made device, the question becomes:  “how does a lender perfect a security interest in this kind of IP, whether one calls it code, a machine, AI, a robot, a form of data analysis, a ‘consciousness stack’ or something different or more transcendent?”

IP As Collateral In Commercial Lending.

In real life, in 2018 and beyond, commercial lending will rely more and more on the use of IP as collateral—a patent for a new robot or AI; a copyright or patent for the code therein; something else we conceptualize as a product or thought, rather than something we can manipulate by touch or dig a shovel into; some combination of all of the foregoing; or something we haven’t really begun to think about, much less understand—and IP will be increasingly important as an asset to be borrowed against.  Those liens will have to be perfected, just as they are now perfected against more tangible things like dirt or the machines in our garages, tools in our workshops, inventory in our warehouses and china in our cabinets.

Since at least 2011, our firm has always taken the position that security interests in intellectual property should be perfected by recording both: (a) a UCC-1 in the state where the debtor is located, as one would with any traditional personal property lien under the UCC; and (b) an instrument reflecting the lien with the appropriate federal IP authority, specifically including the United States Patent and Trademark Office (“USPTO”) and/or the United States Copyright Office (“USCO”).  We adopted this view during a workout where the borrower’s IP was to be expressly designated as new collateral (rather than just a constituent of “all business assets”), and we concluded that federal IP laws, which may or may not preempt state laws implementing Article 9 of the UCC, might invalidate a security interest in personal property that is properly-perfected under state law (especially as to copyrights).  While the law at that time was a little less clear—due to cases going in different directions—the prevailing opinion in 2018 amongst practitioners seems to endorse this approach of simultaneous recordation in state and federal offices.

Conclusion.

The point of this e-mail blast/blog entry—besides the uninspired observation that good stories about robots taking over will always play well to audiences—is that where there is uncertainty about something, taking the inexpensive and simple approach of protecting oneself on the front end is always the better approach.  Here, the statutes are clearer that recordation with the USCO is required to perfect of a security interest in copyrights, whereas there is more ambiguity as to whether recording with the USPTO is, by itself, sufficient to perfect a security interest in patents or trademarks.  Accordingly, the safest approach when a lender is looking to ensure that a debtor’s most important asset, such as Delos’s IP in Westworld, secures the payment of the indebtedness, is to record evidence of that security interest with both the state and federal offices.  Doing so might create a tiny amount of additional paperwork and cost a small additional amount for the recording fees on the front end, but will prevent an expensive, disastrous litigation fight that would ensue after a default and the lender attempts to realize its interest in the IP collateral. 

Predictions about Westworld’s plot and narrative arcs are probably impossible to make in any reliable way.  (Personally, I think Maeve may end up fighting Dolores at some point, although it may be a season or two away, as some kind of metaphor for the “good, woke” hosts vs. the “bad, woke” hosts.  And Bernard will have to make some kind of sacrifice to put an end to his miserable existence.)  But predicting whether a court will conclude that a security interest in IP is properly perfected is easy:  to protect against uncertainty, one simply records with both the applicable state and federal offices.  If you want to learn more about lending against IP assets, or if you want to discuss the future of machine consciousness (Ernie has studied this issue in depth at a national event dedicated to future technologies), call us at 615-372-0993, check out our website at www.mbslawtn.com, or email us at mikeschwegler@mbslawtn.com, erniewilliams@mbslawtn.com and lisarosado@mbslawtn.com

Michael Schwegler