18

Study on Governing Law on Security Rights
in Intellectual Property (*)
Research Fellow: Ikumi SATO

This study looks into the issue of which law to apply to security rights in intellectual property—a field
where currently there is no established private international law—, based on the United Nations Commission
on International Trade Law’s (UNCITRAL) 2010 publication “UNCITRAL Legislative Guide on Secured
Transactions: Supplement on Security Rights in Intellectual Property” (hereinafter referred to as the “IP
Supplement”). This publication raises doubts about governing international aspects of security rights in
intellectual property in accordance with the principle of territoriality—the basis of the existing intellectual
property law; and it tries to find a solution in the approach of using the law of the State of the debtor’s location,
as applicable to security rights in movable assets and receivables (this approach has been developed in the UnitedStates and has been rapidly gaining wider support in recent years). This study examines the conflict-of-laws
rules suggested by the IP Supplement from the perspective of whether these rules should be introduced in Japanin policy terms, thereby exploring an international law that will be vital to effectively promoting intellectual
property finance.

Ⅰ Introduction
This study looks into the issue of which law
to apply to security rights in intellectual
property—a field where currently there is noestablished private international law—, based on
the United Nations Commission on International
Trade Law’s (UNCITRAL) 2010 publication“UNCITRAL Legislative Guide on Secured
Transactions: Supplement on Security Rights inIntellectual Property” (hereinafter referred to as
the “IP Supplement”). This publication raises
doubts about governing international aspects of
security rights in intellectual property inaccordancewiththeprincipleofterritoriality—the
basis
of
the
existing
intellectual property law; and it tries to find asolution in the approach of using the law of theState of the debtor’s location, as applicable tosecurity rights in movable assets and receivables(this approach has been developed in the UnitedStates and has been rapidly gaining wider support
in recent years). This study examines theconflict-of-laws rules suggested by the IP
Supplement from the perspective of whether
these rules should be introduced in Japan inpolicy terms, thereby exploring an international
law that will be vital to effectively promoting
intellectual property finance.
Financing secured by intellectual property is

still in the process of developing not only in Japanbut also throughout the world. Under thesecircumstances, before discussing which law toapply to security rights in intellectual property, it
is necessary to focus on designing a substantive
secured transactions law. In fact, the concern of
the IP Supplement is largely concentrated onproviding guidelines for the development of law
on a national level. At the same time, the IP
Supplement presents vigorous debates on thelegal policy of promoting intellectual property
finance on both the national and international
levels. Accordingly, this study does not discussnational issues and international issues of
security rights in intellectual property separately
but proceeds to discuss them while placing bothissues on the same level, aiming to demonstrate,even partially, what law can do to promote
intellectual property financing transactions.
The composition of the report is as follows.
Chapter II gives an overview of the current
situation in intellectual property finance in Japanand identifies legal challenges that hinder thepromotion of intellectual property financing
transactions. Chapter III reviews how the IP
Supplement tries to overcome these challenges.
Chapter IV extends the focus to an international
level and considers which law should beapplicable to security rights in intellectual
property, while taking into account the discussion(*) This is an English translation of the summary of the report published under the Industrial Property Research
Promotion Project FY2012 entrusted by the Japan Patent Office. IIP is entirely responsible for any errors in
expression or description of the translation. When any ambiguity is found in the English translation, the original
Japanese text shall be prevailing.
●

IIP Bulletin 2013 Vol.22

1 ●presented in the IP Supplement. Chapter V
provides policy implications obtained throughthese discussions.

Ⅱ Limits of the Existing Systems
Relating to Security Rights inIntellectual Property
This chapter gives an overview of andidentifies problems with the existing systems
related to security rights in intellectual property,
which are the legal basis for intellectual property
finance.
1

Pledge vs. Transfer of Title for Security
Purposes

The systems usually employed when
conducting transactions secured by intellectual
property are a pledge and a transfer of title forsecurity purposes. A pledge is created on
intellectual property in favor of the secured
creditor, with the intellectual property remaining
to be owned by the debtor; and a transfer of titleof the intellectual property to the secured
creditor for security purposes is registered, andthe creditor, in form, becomes the owner of theintellectual property. This difference brings about
the following advantages and disadvantages interms of the respective security rights indifferent phases.
In the phase of creation and registration of asecurity right, a pledge, which is categorized as a
statutory security right, has a disadvantage inthat it cannot be created for a “right to obtain apatent.” It has also been said that a pledge ismore costly due to a difference in the calculation
method of registration costs.1 On the other hand,a pledge has an advantage in that when several
intellectual property rights are encumbered andregistered to secure a receivable, these rights aretreated collectively and registration fees arecalculated only for a single registration as long as
applicationsforregistration
are
filed
simultaneously. 2 Another reason for the
preference of a pledge is that if the secured
creditor has sold an encumbered intellectual
property right to a third party, the debtor cannot
assert its ownership of the encumbered rightagainst the purchaser, and therefore the debtor
would feel a greater resistance to a transfer of
title for security purposes.3
Looking at the phase of management of asecurity right, the use of a transfer of title forsecurity purposes can save monitoring costs that●

may be incurred in this phase because theinformation
relatingtoanencumbered
intellectual property right, such as an invalidation
trial, infringement or licensing, is addressed
directly to the secured creditor who is the formal
owner of the encumbered right.4 However, there
has been criticism that the use of a transfer of
title for security purposes would weaken thebasis of the right to license. 5 Furthermore, incases where an encumbered intellectual property
right is infringed, since the right to claim an
injunction against the infringer is vested in the
secured creditor (e.g., the bank) within theframework of a transfer of title for security
purposes, concerns remain about whether and towhat extent priority to the debtor’s businesswould be assured.6
In the phase of the enforcement of a security
right, foreclosure is possible both for a pledge anda transfer of title for security purposes if the
secured creditor is liable for liquidation. However,in the case of a pledge, since it is impossible forthe secured creditor or the purchaser to registera transfer of title of the encumbered intellectual
property independently, they would have to go
through a cumbersome procedure of filing alawsuit against the grantor that has created the
security right if it is not cooperative.7 A pledge
and a transfer of title for security purposes arechosen depending on circumstances of individualtransactions and while taking into account theadvantages and disadvantages of the respective
security rights summarized above.
2

Transaction Model

A pledge and a transfer of title for security
purposes have the following features in common.
First of all, both of these security rights enable
the debtor to continue to use the encumbered
intellectual property after a security right has
been created in it.8 This in turn enables the
secured creditor to receive repayment of principal
and interest from the profit that the debtor earns
by using the encumbered intellectual property.
Secondly, the effect of both security rights
created in intellectual property extends toroyalties arising therefrom. 9 Thirdly, bothsecurity rights must be registered for eachencumbered intellectual property right, whichmeans that it is necessary to identify the asset
subject to the security right upon registration.
Intellectual property-based loans can bearranged by applying these features. In this loantransaction, the creditor, upon providing a loan for
2 ●IIP Bulletin 2013 Vol.22

the debtor, acquires a security right created in theintellectual property owned by the debtor. The
debtor operates business using the loan money;
and if the business turns profitable, the debtor
repays the loan principal and interest from theprofit. If the business fails, the secured creditor
enforces the security right in the intellectual
property and collects the loan claim from themoney obtained by converting the encumbered
intellectual property. The Development Bank ofJapan has been proactively attempting to arrange
this loan scheme since 1995, while requiring
companies with poor creditworthiness to create
security rights in all intellectual property rightsthat they own for their technologies andproducts.10
3

Defining the Problem

This section discusses expectations for andrealities of intellectual property-based loans. Firstof all, this loan scheme is expected to serve as aneffective means of raising funds available toventure companies and new businesses that haveno or only limited tangible assets.11 Secondly, itenables the founders of venture companies tomaintain the controlling interest in theircompanies.12 Thirdly, banks are keenly aware of
the necessity to shift away from the loans basedon the collateral value of immovable property
along with the collapse of the myth that land
prices will never fall but continue to rise, and
under
such
circumstances,intellectual
property-based loans could be an alternative loan
scheme.13 The first and second factors relate to
the debtor’s situation, and the last one relates tothe creditor’s situation. This suggests that both
debtors and creditors have expectations toward
this loan scheme. But have these expectations
been reflected in actual loan transactions? The
records of loans actually provided by theDevelopment Bank of Japan and private financial
institutions clearly show that this loan scheme
has not been used very frequently. Thus, there isa large gap between the expectations and therealities in relation to intellectual property-basedloans.
What is it that creates such a gap? Although
the law for using intellectual property as security
is modeled on the law for using immovable
property as security, immovable property andintellectual property completely differ in nature.
The major characteristics of intellectual property
include (1) difficulty to assess the value, (2)instability in rights and value, (3) mutual●

IIP Bulletin 2013 Vol.22

dependence (with the business), and (4) difficulty
to sell or otherwise dispose of.14 None of thesecharacteristics apply to immovable property. For
this reason, intellectual property cannot be
regarded as suitable collateral in the same way as
immovable property. Thus, with regard to asecurity right in intellectual property, there is amismatch between the characteristics of the asset
subject to a security right and the securedtransactions law, and this may be the cause of the
problem.
In order to solve this problem, a scheme touse an intellectual property package or businessas security for loans has been undertaken, while
taking advantage of the third characteristic ofintellectual property mentioned above. 15 Inpractical terms, efforts have been made to find asolution by making a change in concept fromasset-based finance to business-based finance.16
With this approach, however, the necessity toidentify the asset subject to a security right underthe existing intellectual property law would
increase transaction costs. Hence, it follows thata law that can indirectly support the trends
toward intellectual property-centric businessfinance should be designed to meet the demand
for a large amount of long-term funds that will not
be available through the unsecured loan scheme.

Ⅲ Initiatives by UNCITRALAs shown above, intellectual property
finance cannot be invigorated without asubstantive law that enables business-based
security. The best material for discussing thisissue was provided by UNCITRAL in 2007: the
UNCITRAL Legislative Guide on Secured
Transactions (hereinafter referred to as the“Guide” or “G”).17
1

The Outline of the Guide and the
Features of the Recommendations

The Guide consists of 12 chapters and twoannexes, each chapter comprising general
remarks and recommendations (554 pages intotal). The purpose of the Guide is to assist
States in developing modern secured transactions
laws. Unlike a treaty or convention, the Guide
does not have any binding force on States; in thisrespect, it is only a reference book.
The Guide is greatly influenced by Article 9of the United States Uniform Commercial Code
(UCC). The overall picture of a securedtransactions law recommended in the Guide can
3 ●be understood by referring to its fourcharacteristics. First of all, the Guide adopts afunctional approach under which a security rightarises from any transaction that can in effectprovide security, regardless of the legal form of
the transaction (G, rec. 5, 8). A “security right”
mentioned here covers all rights created byagreement in any property other than immovable
property, including rights under retention-of-title
agreement and financial leases (G, rec. 8). Thisapproach rules out the existence of more than one
legal form, such as a pledge and a transfer of title
for security purposes, and provides a competitive
credit facility under a single secured transactions
law.
Secondly, under the recommended law, asecurity right may encumber all assets of the
debtor, regardless of type of assets, including not
only assets that the debtor presently owns but
also those that the debtor will acquire in the
future (G, rec. 17). This legal design would be
effective with the use of a general security rights
registry to be prepared by States. The Guide
regards the registration in this registry as themost common requirement for achieving
third-party effectiveness, and conceives of acompletely computerized registry (G, rec. 32).
This registry is to be compiled according to
debtor, not according to encumbered asset. There
are only three matters required to be stated in theregistry: (1) the identification information of the
grantor and the secured creditor, (2) the
description of the encumbered asset and (3) the
duration of the registration. A specificitem-by-item description of the encumbered asset
is not required (G, rec. 57, Chap. IV, para. 83).
Therefore, even a description of “all present andfuture movable assets” is acceptable (G, Chap. IV.,
para. 83). Thus, the Guide aims for the
all-inclusive use of assets for financing purposes,
and requires that any exceptions to these rules
should be limited and described in the law in aclear and specific way (G, rec. 17). In short, as
compared to the existing law in Japan, theprinciples and exceptions concerning encumberedassets are reversed under the law recommended
in the Guide.
Thirdly, under the recommended law, any
future loans may be secured by a security right (G,rec. 16). A security right needs not to have beencreated before the registration in the generalsecurity rights registry (G, rec. 33). It is up toeach State to determine whether to require uponregistration an indication of the maximum
monetary amount to be covered by a security●

right (G, rec. 57 (d)). In the case of a State that
does not require such indication, if a security
right is registered in the general security rights
registry in advance, it is possible to grasp all
assets of the debtor as security for subsequentloans. Thus, the Guide greatly relaxes therequirement to identify the claim secured by asecurity right as well as the asset subject to asecurity right.
The fourth feature is the weight attached on
the principle of party autonomy. This isparticularly noticeable at the enforcement phase.
The Guide positively allows a secured creditor tosell or otherwise dispose of, or license an
encumbered asset out of court (G, rec. 148), andpresents a set of procedural rules for thispurpose.
2

IP Supplement

In 2010, in order to include intellectual
property in the general security right system
under the Guide, UNCITRAL published the IP
Supplement (hereinafter also referred to as“S”). 18 The IP Supplement has the same
composition as the Guide, consisting of 12
chapters and two annexes (168 pages in total).
The overall objective of this publication is tofacilitate financing by intellectual property
owners and reducing credit costs (S, para. 1).
The secured transactions law suggested in
the IP Supplement is designed on condition that itshall not intervene in the basic rules of law
related to intellectual property (G, rec. 4 (b)). The
IP Supplement has been drafted by explaining
how the Guide would be applied in the context of
intellectual
property
andmakingrecommendations on some matters specific tosecurity rights in intellectual property (S. para. 4).
This approach is most clearly embodied in the
explanation of the scope of application of the
Guide. That is, the Guide does not address thevertical relationships in Figure 1 (transfer or
licensing), which should be governed by the law
related to intellectual property.

4 ●IIP Bulletin 2013 Vol.22

Creditor

Debtor
Security

IP
Transfer or
licenseTransfereeor licensee

Intellectual
property
registry(Asset‐based
registry)

General security
rights registry(Debtor‐based
registry)right by way of the intellectual property registry.
However, if the debtor is prohibited under a loan
agreement from exercising its own discretion in
concluding a licensing agreement or creating asecurity right in the encumbered intellectual
property, the secured creditor would be able tostrengthen the effectiveness of its security rightthat is publicly disclosed in the general security
rights registry to a considerable extent.
3

Figure 1 Dual Sources of Right Information
Let us look at the sharing of roles between
the intellectual property registry and the generalsecurity rights registry. The Guide allows asecurity right to be made effective against third
parties by its registration in a specialized registry
for the encumbered asset, as an alternative to theregistration in the general security rights registry
if such specialized registry has already been
compiled (G, rec. 34 (a) (iii), 38 (a)). Accordingly,
if a State chooses to have the intellectual
property registry continue to serve as public
disclosure of a security right, this would result in
the co-existence of two registries on security
rights in the same intellectual property. As for theorder of priority between these registries, there
is a rule that a security right in the intellectual
property registered in the asset-based intellectual
property registry has priority over a security
right in the same intellectual property registeredin the debtor/creditor-based general security
rights registry (G, rec. 77 (a), and S, para. 138).
What kind of rule should apply where the vertical
relationships and the horizontal relationships
cross each other? 19 A possible problem that may
occur in such a case is whether the secured
creditor is entitled to make its security righteffective against the transferee of theencumbered asset. The IP Supplement solves thisproblem by providing that if a security right has
not been registered in the intellectual property
registry, the secured creditor is not entitled tomake its security right effective against thetransferee or any other competing claimant invertical relationships (G, rec. 78, and S, para.
138).
In short, a secured creditor cannot make its
security right effective against all competingclaimants merely by registration in the generalsecurity rights registry. Therefore, in order forthe secured creditor to perfect its security right,
it might have to publicly disclose its security●

IIP Bulletin 2013 Vol.22

Transactions in Accordance with the
Guide and the IP Supplement, and the
Significance ThereofThis section attempts to conceive of astructure for an intellectual property-based loan
scheme that can be arranged in accordance with
the Guide and the IP Supplement as describedabove. Unlike the transaction discussed in II-2
above, in the transaction under this loan scheme,
it is possible to secure the business as a whole. In
other words, it is possible to stretch a net of
security over multiple assets involved in thebusiness, including intellectual property rights,
production equipment, accounts receivable andinventory. According to the Guide, since a
security right in an encumbered asset extends to
its proceeds, royalties arising from theencumbered intellectual property before being
mixed with other assets can be covered by thisnet of security (G, rec. 19). If such a security
right is registered in the general security rights
registry, the secured creditor may be entitled tomake its security right effective against third
parties. This relaxation of the requirement to
identify the asset subject to a security right andthe claim secured by a security right would, undersubstantive law and at low costs, result inenabling the secured creditor in the first rank toautomatically acquire the right to receive
payment in preference to others for subsequentloans from the total assets covered by the net of
security.20
The function of such an all-inclusive or
general security right can be explained as follows.
Under ordinary conditions, the secured creditor
can increase the monitoring of the debtor’sbusiness, thereby preventing the debtor’s default,
which may be caused by factors other than thebusiness, and reducing the default rate. In an
emergency, it would be possible for the secured
creditor to prevent the dispersion of the debtor’s
assets that are necessary for businessrehabilitation and carry out the rehabilitation planunder the secured creditor’s initiative. 21 This5 ●would make it easier for the secured creditor toraise the necessary funds for businessrehabilitation. It would also be possible for the
secured creditor to enforce the security right outof court and sell the business by making use ofknow-how on mergers and acquisitions.
Thus, the IP Supplement aims to achieve thepolicy purpose of promoting intellectual property
finance by strengthening the right of the secured
creditor. Looking at it another way, the IP
Supplement issues an alert that unless the rightof the secured creditor is strengthened to that
extent, it would be difficult to promote
intellectual property finance.

Ⅳ Connection with the Applicable
Law: Where the Encumbered
AssetsIncludeIntellectual
Property Protected in a Foreign
State
Theoretically, the applicable law may become
an issue in various cases that deal with security
rights in intellectual property. This section
focuses the discussion on the simplest and most
realistic case: where the debtor’s assets,
encumbered as security, include intellectual
property protected in a foreign state.
1

Principle of territoriality vs. Law of theState of the Debtor’s Location

The principle of territoriality and the law of
the State of the debtor’s location, which are therules under private international law for
determining the applicable law, are briefly
reviewed below, and the advantages anddisadvantages of the respective rules in thecontext of dealing with security rights in
intellectual property are examined.
(1) Definitionsoftheprincipleofterritoriality and the law of the State ofthe debtor’s location
There are two rules that may be employed todetermine which law to apply to security rights in
intellectual property. One is the principle ofterritoriality. According to this principle, theeffect of intellectual property established in Japan
shall be recognized only in Japan. The existing
intellectual property law is built based on thisprinciple. 22 When this principle applies, asecurity right that encumbers an intellectual
property right established in State X shall begoverned by the law of State X, a security right●that encumbers an intellectual property rightestablished in State Y shall be governed by thelaw of State Y, and a security right thatencumbers an intellectual property rightestablished in State Z shall be governed by thelaw of State Z. Hence, even where a net of
security is stretched over all encumbered assets
on a substantive law level, the all-inclusive net
would be cut into pieces on a conflict-of-laws
level.
The other rule is to apply the law of theState of the debtor’s location to govern security
rights in intellectual property. This approach has
been rapidly gaining wider support in recent
years as the law applicable to security rights inassets and receivables. According to this rule, in acase where the debtor is located in State X, notonly a security right that encumbers an
intellectual property right established in State X
but also security rights that encumber an
intellectual property right established in State Y
and an intellectual property right established inState Z shall be governed by the law of the Stateof the debtor’s location, that is, the law of State X.
In such a case, the all-inclusive nature of asecurity right in intellectual property under the
Guide and the IP Supplement would be able tofulfill its purpose on an international level.
(2) Relationship with cross-border insolvency
law
When determining which law to apply to asecurity right, it is necessary to take cross-borderinsolvency law into account because, in the stageof enforcement of a security right, the debtor is indefault and nearly insolvent. Therefore, a large
gap between the law that governs an international
aspect of security rights in intellectual property
and the law that governs cross-border insolvency
should be avoided.
As for cross-border insolvency, in line withthe 1997 Model Law on Cross-Border Insolvency
and other reference materials published by
UNCITRAL, a framework of international
harmonization in procedural aspects has beendeveloped rapidly among the major States, in aneffort to overcome the principle of territoriality.
Japan has finished enactment of a set ofcross-border insolvency laws in accordance with
the UNCITRAL Model Law. According to theserecent trends, the basic principle is to extend theeffect of an insolvency proceeding that has beencommenced in the debtor’s state (State X) to as
many of the debtor’s assets located in otherStates (State Y and State Z) as possible. Through
6 ●IIP Bulletin 2013 Vol.22

this approach, equal treatment among creditors ofdifferent nationalities can be achieved, and thecosts for insolvency proceedings can beconsiderably reduced, thereby increasing the
debtor’s liquidation value or promoting the
debtor’s rehabilitation.23(3) Comparisonofadvantages
anddisadvantages
Based on the points mentioned above, let uscompare the advantages and disadvantages of thetwo rules for determining which law to apply tosecurity rights in intellectual property. According
to the principle of territoriality, it is possible tohave both ownership rights and security rights in
intellectual property governed by the same law (S,page 133). This assures consistency between thevertical and horizontal relationships shown in
Figure 1 and allows a secured transactions law to
be incorporated in an international context
without causing conflict with the existing
intellectual property law. On the other hand,under the principle of territoriality, if a portfolioof encumbered assets includes intellectual
property rights protected in different States, it isnecessary to meet the requirements for
perfection of the security right in each protecting
State, and this would increase costs forregistration of the security right (S, page 133).
Furthermore, if an insolvency proceeding iscommenced in the State where the debtor is
located, the law of the State of protection would
be applied only to a limited extent by reason of
being contrary to public policy in said State or
mandatory law considerations (S, page 133). Thus,
the principle of territoriality is not affirmed in an
emergency. Adopting this principle nonethelessas the rule for determining the applicable law
under normal conditions may deprive secured
creditors of the benefits that they could haveenjoyed under the law of the State of the debtor’slocation (S, page 133). In short, the principle ofterritoriality does not provide an international lawthat can vigorously promote intellectual property
finance.
On the other hand, under the law of the Stateof the debtor’s location, the secured creditor canmanage all of the debtor’s present and future
intangible assets under a single law (S, para. 291).
This would reduce registration and search costs
and enhance the availability of credit (S, para.
291). In addition, it is often the case that the Stateof the debtor’s location is also the State where an
insolvency proceeding is commenced. As a result,one and the same law is to govern both normal●

IIP Bulletin 2013 Vol.22

conditions and an emergency, leading to increased
predictability and legal stability (S, page. 292).
2

Details of the Four Recommendations
and Their Common Features

From the entire discussion made thus far, thelaw of the State of the debtor’s location seems tobe appropriate as the law applicable to security
rights in intellectual property. However, the IP
Supplement does not recommend the approachbased on the law of the State of the debtor’slocation. The issue of the applicable law is said tohave been one of the most controversial issues inthe drafting process. The IP Supplement
discusses four recommendations, hereinafterreferred to as Recommendations A, B and C, andFinal Recommendation.24
Recommendation A provides that the law of
the State of the debtor’s location shall apply inprinciple to security rights in intellectual property,
with the exception that the third-party
effectiveness and priority of a security right asagainst a transferee or licensee of intellectual
property would be governed under the principleof territoriality.
On the other hand, the Final Recommendation
provides that only the enforcement of a security
right in intellectual property shall be subject tothe law of the State of the debtor’s location, andother matters shall basically be governed under
the principle of territoriality. The choice of law isallowed to some extent with regard to thecreation and third-party effectiveness of asecurity right in intellectual property, which may
be subject to either the law of the State of the
debtor’s location or the law of the State ofprotection. However, the Final Recommendation
adopts an approach wherein a security right thatmeets the requirements under the law of theState of the debtor’s location may be madeeffective only against the debtor’s insolvency
representative or judgment creditors.
The
comparison
of
these
four
recommendations is shown in Figure 2, in which“D” represents the “law of the State of the
debtor’s location” and “T” represents the“principle of territoriality.”

7 ●Approach. A

Approach. B

Creation

D

D

Third‐party
effectiveness

Securedcreditor
Insolvency
representative

Approach. C

Not registered
Registered inin the IP
the IP registry
registry

Transferee
LicenseeD* “T” may also apply byagreement.

Priority

Insolvency
representative

Transferee,licensee,securedcreditor

D

T

T
T
D

T

Recommendation
T or D
T or D* “D” may apply only
against judgment creditors
and the insolvency
representative.

T

Enforcement

D

D

D

* “T” may also apply byagreement.

D

Figure 2 Four Approaches
As shown in Figure 2, not only one law,either the principle of territoriality or the law of
the State of the debtor’s location, is
recommended as the law to apply to security
rights in intellectual property. Rather, allrecommendations divide a security right in
intellectual property into four aspects—namely,
creation, third-party effectiveness, priority andenforcement—and choose the best law to govern
each aspect. Another common feature of the fourrecommendations is that the law of the State ofthe debtor’s location is basically chosen in
relation to the creation and enforcement of asecurity right in intellectual property, with somevariations in conditions attached. To put it
differently, the principle of territoriality is chosen
mainly on the aspects of the third-party
effectiveness and priority. This raises thequestion, “What causes this tendency?” In thesection below, an attempt is made to explore adesirable applicable law, starting with thisquestion.
3

Exploring an Applicable Law That Will
Promote Transactions
Before addressing the above question, let us●

remember that there are dual sources of rightinformation on a substantive law level with regard
to intellectual property to be encumbered by asecurity right (see Figure 1). By considering thisissue, which arises mainly in relation tothird-party effectiveness and priority of a security
right in intellectual property, it will be possible torealize important implications regarding these
aspects in the context of conflict of laws.
(1) Transaction costs (domestic transactions)First, the impact of the existence of dual
sources of right information on the arrangementof an intellectual property finance scheme isexamined, focusing on domestic transactions.
How is a security right in intellectual property
created and registered in an actual case? Let us
assume that the creditor receives a generalsecurity right for ten Japanese intellectual
property rights owned by the debtor, and that for
all of these intellectual property rights, the debtor
is the inventor (or the initial owner).25 In thiscase, the creditor needs to investigate whether
the intellectual property rights that are supposed
to be encumbered by a security right actuallyexist and belong to the debtor. 26 Since these
items of information are managed by means of theviii ●IIP Bulletin 2013 Vol.22

existing intellectual property registry, thecreditor has to conduct a search in the registry foreach intellectual property right (ten searches intotal). If, as a result of the search, the existence
and ownership of all intellectual property rights
are confirmed, the creditor next needs toinvestigate whether there is any prior security
right that encumbers these intellectual property
rights. This time, the creditor has to use thegeneral security rights registry to confirm that
there is no prior security right, and if this isconfirmed, the creditor can receive and register asecurity right without anxiety. To sum up, in thishypothetical case, the creditor needs to conduct
ten searches in the intellectual property registry,
one for each intellectual property right, andconduct one search and make one registration in
the general security rights registry by debtor
name. Costs incurred from these steps constitutetransaction costs.27
Next, let us assume a variation of the abovecase and consider a case where each of the ten
intellectual property rights was previously owned
by ten different parties (that is, the debtor is thetenth owner of each intellectual property right). 28
In this case as well, the creditor needs to conduct
a search in the intellectual property registry foreach intellectual property right (ten searches intotal) to confirm that all of these rights exist andcurrently belong to the debtor. Then, the creditor
has to confirm whether each of those 100 priorowners of the intellectual property rights,
identified through the initial search, has createdany security right in the respective intellectual
property rights. The matter of concern here is theexistence of a secured creditor of the prior ownerof each intellectual property right; if such acreditor exists, the security right held by asecured creditor of the current owner might besubordinated. If it becomes clear that no security
right has been registered with regard to the 100
prior owners, the creditor can receive andregister a security right without anxiety. In thesecond hypothetical case, costs for conducting
110 searches in total and making one registrationin the general security rights registry constitutetransaction costs.29

affected by the application of either the principleof territoriality or the law of the State of the
debtor’s location. To examine this point, let us
assume the following transaction. The creditor
and the debtor are located in State X. Upon
providing a loan, the creditor has a security rightcreated to encumber ten intellectual property
rights established in State X, ten intellectual
property rights established in State Y, and ten
intellectual property rights established in State
Z—30 rights in total all owned by the debtor.
There are 10 prior owners for each of all 30 rights(that is, the debtor is the tenth owner of eachright). State X and State Y adopt the IP
Supplement and put in place both an intellectual
property registry and a general security rights
registry. On the other hand, State Z does not
adopt the IP Supplement and only has anintellectual property registry.
With regard to costs for arranging this loantransaction, a comparison is made between theprinciple of territoriality and the law of the Stateof the debtor’s location (see Figure 3). Under the
principle of territoriality, the amount of costs
incurred in State X for arranging this transactionis the same as the domestic transaction
mentioned above, that is, consisting of the costs
for 110 searches in total and one registration in
the general security rights registry. In State Y,
where the creditor is required under the principleof territoriality to meet the perfection
requirements as provided for in the law of State Ywith regard to a security right that encumbers
intellectual property rights established in State Y,
the creditor has to pay the same amount of costs
as that incurred in State X. In State Z, where only
the intellectual property registry exists, thecreditor needs to conduct ten searches, one foreach intellectual property right, and then registera security right in relation to each intellectual
property right.

(2) Substance of the issue
This discussion focuses on an international
level and aims to define the substance of theissue arising in the aspects of the third-party
effectiveness and priority of a security right in
intellectual property in the context of conflict oflaws, by examining how transactions would be●

IIP Bulletin 2013 Vol.22

ix ●a) Principle of territorialityb) Law of the State of the debtor’s location

State X

State X

n=10

Per IP

Per debtor

Transaction
costs

Search10

10×10Regis‐
tration‐1

110 searches intotal+
1 registration

n=10

Per IP

Per debtor

Transaction
costs

Search10

10×10Regis‐
tration‐1

110 searches intotal+
1 registration

n=10

Per IP

Per debtor

Transaction
costs

Search10‐Regis‐
tration10‐

10 searches+
10 registrations＝

State Y

n=10

Per IP

Per debtor

Transaction
costs

Search10

10×10Regis‐
tration‐1

110 searches intotal+
1 registration

n=10

Per IP

Per debtor

Transaction
costs

Search10

10×10

110 searches in
total

Regis‐
tration

‐

‐

n=10

Per IP

Per debtor

Transaction
costs

Search10‐

10 searches

Regis‐
tration‐‐State Y＞

State Z

State Z＞

Figure 3 Transaction costs (international transaction)
The amount of transaction costs incurred inState X under the law of the State of the debtor’slocation is the same as that under the principle ofterritoriality. However, in State Y and State Z,
where there is no need to meet the perfection
requirements, the creditor can save costs forregistration in these States. Thus, the law of theState of the debtor’s location may be moresuitable and more desirable for transactions
secured by a security right in intellectual property,
in the aspects of the third-party effectiveness andpriority, as well as in other aspects.
Then,
why
do
all
four
of
the
recommendations in the IP Supplement reject theapproach of simply applying the law of the State ofthe debtor’s location to the third-party
effectiveness and priority of a security right in
intellectual property? Perhaps it’s because theadvantage of the law of the State of the debtor’slocation could also become harmful. The fact that
State Y and State Z do not require registration of asecurity right means that the existence of asecurity right is not publicly disclosed in theseStates. At the same time, the information onownership of intellectual property rights
established in State Y and State Z is managed bymeans of the intellectual property registries
prepared respectively in these States. This meansthat the problem of dual sources of rightinformation exists across borders. Under suchcircumstances, if the law of the State of the●

debtor’s location is adopted, this would greatly
undermine the intellectual property laws of State
Y and State Z. In other words, it is inappropriate
to destroy the vertical relationships that currently
function well, in order to invigorate the horizontal
relationships.
(3) Final Recommendation vs. Recommendation A
As shown above, it is a big gamble to simply
apply the law of the State of the debtor’s location
to the third-party effectiveness and priority of asecurity right in intellectual property. One
possible approach is to leave these aspects to be
subject to the principle of territoriality, so as not
to damage the horizontal relationships under theintellectual property laws of the respective States.
For example, the Final Recommendation basicallyfollows this approach, while at the same time
giving consideration so that the secured creditor,
if it follows the law of the State of the debtor’slocation, would be permitted to make its security
right effective against at least the insolvency
representative (S, para. 315).
However, this is not the only possible
approach. Another approach proposed in the IP
Supplement is to divide third parties into two
categories and apply different laws to different
categories. A typical example of this approach canbe found in Recommendation A. Based on thisrecommendation, the secured creditor must
follow the law of the State of the debtor’s locationx ●IIP Bulletin 2013 Vol.22

in order to make its security right effective
against other secured creditors or the insolvency
representative, and must follow the law of theState of protection in order to make its security
right effective against a transferee or licensee.
Thus, Recommendation A leaves only the issue ofthe third-party effectiveness as against competingclaimants in the vertical relationships to be
subject to the principle of territoriality. Becauseof this, Recommendation A is criticized asincreasing registration costs when the secured
creditor intends to make its security righteffective against all third parties (S, para. 306).
Yet, this could also be an advantage.
Recommendation A leaves room for a secured
creditor to give a flexible response at low costs
depending on the type of risk (S, para. 305). If the
secured creditor is mainly concerned with theinsolvency of the debtor (and a dispute with othersecured creditors that may occur as a result), thecreditor can control the horizontal relationships
with competing claimants with regard to
intellectual property rights established in all
States, including the State of the debtor’s location,
just by registering its security right in the generalsecurity rights registry prepared in the State ofthe debtor’s location. On the other hand, if the
secured creditor intends to also make its security
right effective against competing claimants in thevertical relationships, the creditor has to meet therequirements under the law of each protecting
State. In practical terms, it has become a common
approach to add to a loan agreement suchprovisions as to prohibit free disposal of theencumbered assets for the purpose of preventing
involvement of competing claimants in thevertical relationships. In such a case, if the debtor
transfers or licenses an encumbered intellectual
property right, it would constitute a breach of theagreement. For this reason, the risk of involving
competing claimants in the vertical relationships
is referred to as the risk of fraud. In financing
schemes in general, the risk of fraud in this senseis only of a secondary nature as compared to theinsolvency risk.30 Hence, if the main concern of
the secured creditor is the insolvency risk rather
than the risk of fraud, Recommendation A, which
can lower the costs for meeting the requirements
for third-party effectiveness in the horizontal
relationships, would be considerably attractive tothe secured creditor.
Recommendation A also has a disadvantageof requiring costs for investigation in a casewhere the debtor’s assets include any intellectual
property right that the debtor has acquired from●IIP Bulletin 2013 Vol.22

the initial or intermediate owner located in aState other than the State of the debtor’s location.
In this case, the secured creditor has toinvestigate whether the transferor has created orregistered any security right for a particularperson in the State of the transferor’s location (S,para. 293). Hence, if the investigation costs do not
exceed the costs that can be saved as explained
above, Recommendation A is more desirable thanthe Final Recommendation.

Ⅴ Conclusion
If Japan, in earnestness, aims to promote
intellectual property finance, it is necessary to
first look straight at the current situation where
this financing scheme is not frequently used on anational level, and discuss a substantive securedtransactions law that is suitable to thecharacteristics of intellectual property. In thisprocess, the Guide and the IP Supplement will bevery helpful references. And if Japan goes ahead
with the construction of a general securedtransactions law that is recommended in the
Guide and the IP Supplement, it is necessary toconsider adopting Recommendation A, which canembody the legal policy of promoting intellectual
property financing transactions most faithfully on
an international level, as the law to apply tosecurity rights in intellectual property.
However, there is no guarantee that allStates will make the same conflict-of-laws rules.
In such a situation, if Japan alone adopts
Recommendation A, this would bring about theadverse consequence that security rights held byJapanese entities may not be effective or
enforceable in foreign States, thus bringing
secured transactions at a serious risk, rather thansaving costs. The IP Supplement mentions thispoint as another disadvantage of Recommendation
A (S, para. 306). Therefore, at present, there is no
choice but to adopt the Final Recommendation,rather than Recommendation A.
Be that as it may, it is obvious that the Final
Recommendation is not a definite solution to the
problems arising in relation to security rights in
intellectual property on an international level.
The conflict-of-laws rules based on the Final
Recommendation are nothing more than adesirable solution when States try to address the
problems by referring to the Guide. It would
rather be said that the discussion on
conflict-of-laws rules in the IP Supplement
highlights the limitations in solving the problems
by providing a legal form (a legislative guide) orxi ●by providing a methodology (an applicable law).
For example, to solve the problem of dual sourcesof right information under substantive law,
coordination of the intellectual property registry
and the general security rights registry throughthe application of electronic technology has been
proposed,31 and how to compile these registries
to enable this idea is being discussed at
UNCITRAL.32 Persistent efforts in this direction
will bring about a definite solution to this problem
over a medium term. In this respect, the IP
Supplement has opened up a discussion process
toward building national and international laws
relating to security rights in intellectual property.
1

Satoshi Tomii, “Kinyū Kikan kara mita Chiteki Zaisan
Tanpo” (Security rights in intellectual property from theviewpoint of financial institutions), Kaoru Kamata, ed.,Chiteki Zaisan Tanpo no Riron to Jissen (Theory andpractice of security rights in intellectual property), pp.
167–168 (Institute of Intellectual Property, 1997).
2
Article 13, paragraph (1) of the Registration and License
Tax Act.
3
Nishimura & Asahi, ed. Atarashii Fainansu Shuhō (Newfinancing techniques), p. 208 [Shinto Teramoto] (Kinzai
Institute for Financial Affairs, 2008).
4
Tomii, 1997, supra note 1, pp. 167–168.
5
Kamata, Kaoru, ed. Saiken, Dōsan, Chizai Tanpo Riyō noJitsumu (The practice of using security rights inreceivables, movable assets and intellectual property), p.
369 [Shinichiro Yoshiba, Tatsushi Omiya] (Shinnippon
Hoki Publishing, 2008).
6
Nishimura & Asahi, ed., 2008, supra note 3, pp. 209–210[Teramoto].
7
Kamata, ed., 2008, supra note 5, pp. 381–382 [Yoshiba,
Omiya].
8
Article 95 of the Patent Act and Article 34, paragraph(1) of the Trademark Act.
9
Article 96 of the Patent Act and Article 34, paragraph(2) of the Trademark Act.
10Intellectual Property Policy Office, Ministry of
Economy, Trade and Industry, Chiteki Zaisan no Ryūtsū,Shikin Chōtatsu Jirei Chōsa Hōkokusho: Me ni Mienai
Keiei Shigen no Katsuyō (Case study report onmarketing of intellectual property and financing withthe use of intellectual property: Effective use ofinvisible management resources), p. 49 (2007).
11
Kaoru Kamata, “Chiteki Zaisan Tanpo no Igi to Kadai”(Meaning and challenges of security rights in
intellectual property), Kaoru Kamata, ed., Chiteki
Zaisan Tanpo no Riron to Jissen (Theory and practice of
security rights in intellectual property), p. 1 (Instituteof Intellectual Property, 1997).
12
Kamata, 1997, supra note 11, p. 1, and Tomii, 1997,
supra note 1, p. 156.
13
Kamata, 1997, supra note 11, p. 1.
14
See Tomii, 1997, supra note 1, pp. 156–157, and Philip
Wood, Comparative Law of Security Interests and Title
Finance (2nd ed.), pp. 608–609 (2007).
15
Kamata, 1997, supra note 11, pp. 4–6.
16Intellectual Property Policy Office, Ministry of●

Economy, Trade and Industry, 2007, supra note 10, p.
47.
17
For the Guide, see Masami Okino, “UNCITRAL Tanpo
Torihiki Rippō Gaido no Sakutei” (Compilation of the
UNCITRAL
Legislative
Guide
onSecuredTransactions), Junkan Kinyū Hōmu Jijō (Financial Law
Journal, quarterly) Vol. 56, No. 20, pp. 14 ff. (2008), andMasami Okino, “UNCITRAL Tanpo Torihiki Rippō
Gaido no Sakutei” (Compilation of the UNCITRAL
Legislative Guide on Secured Transactions), Kinyūhō
Kenkyū Vol. 25, pp. 3 ff. (2009).
18
The IP Supplement is discussed by Naoko Ono,
“Chiteki Zaisan no Tanposei: Torihiki to iu sokumen
kara mita Chiteki Zaisanhō Seido no Genjō to Kadai [1,2]” (Security nature of intellectual property: Current
situation and challenges of the intellectual property law
viewed from the aspect of transactions [1, 2]),
Hitotsubashi Hogaku (The Hitotsubashi journal of law
and international studies), Vol. 11, No. 2, pp. 623 ff.,
and No. 3, pp. 933 ff. (2012).
19
Brennan clearly argued that controlling the vertical andhorizontal relationships
concerning intellectual
property would be a key to designing a law on security
rights in intellectual property (Lorin Brennan,"Intellectual Property Financing: An Overview," p. 10(2009) available at:
http://www.uncitral.org/pdf/english/colloquia/3rdSecTra
ns/Lorin_Brennan_Edited.pdf.
20
For the same legal policy provided for in Article 9 of
the United States Uniform Commercial Code, on which
the Guide was modeled, see Osamu Morita, Amerika
Tōsan Tanpohō: Shoki Yūshisha no Yū etsu no Hōri
(United States insolvency security law: the doctrine of
Financier Dominance), pp. 45 ff. (Shojihomu, 2005).
21
Tomii, 1997, supra note 1, p. 158.
22
Hidetaka Aizawa, Nishimura & Asahi, ed., Chiteki
Zaisanhō Gaisetsu (Overview of intellectual propertylaw), p. 428 (Kobundo, 4th edition, 2010).
23
Samuel L. Bufford, “Global Venue Controls Are
Coming: A Reply to Professor LoPucki,” 79 American
Bankruptcy Law Journal 105, 141 (2005). For theJapanese translation of this article, see Kazuhiro
Yanagida, “Kokusai Tōsanhō Jiken ni okeru Hōteichi
Kontorōru [Jō, Chū, Ge]” (Forum control incross-border insolvency cases [Volumes 1, 2, and 3]),
Kokusai Shōji Hōmu Vol. 36, No. 1, pp. 4 ff., No. 2, pp.
191 ff., and No. 3, pp. 319 ff. (2008).
24
For the outlines of the four recommendations, see S,
para. 304 for Recommendation A, para. 307 for
Recommendation B, para. 311 for Recommendation C,
and rec. 248 and para. 314 for Final Recommendation.
25
The content of this paragraph largely relies on theanalysis provided in the IP Supplement with regard totransaction costs incurred to ensure the third-party
effectiveness and priority of a security right in
intellectual property, using hypothetical cases (para.
150–151).
26
Kamata, ed., 2008, supra note 5, pp. 377–378 [Yoshiba,
Omiya]
27
In this hypothetical case, it is assumed that the creditor
registers a security right in the general security rights
registry. However, if the creditor intends to avoid therisk of debtor’s fraud, the creditor may be likely toregister in the intellectual property registry, in which

xii ●IIP Bulletin 2013 Vol.22

case registration costs for ten rights at the maximum
would be required.
28
The content in this paragraph largely relies on theanalysis provided in the IP Supplement with regard totransaction costs, using a hypothetical case (para. 152).
29
In this hypothetical case as well, it is assumed that thecreditor registers a security right in the generalsecurity rights registry.
30
Wood states that in the context of security rights inassets in general, because of this clause, the secured
creditor would not find the effectiveness of its security
right against the asset purchaser to be more important
than the effectiveness against other secured creditors(Wood, 2008, supra note 14, p. 275).
31
The IP Supplement proposes two systems, a mutual
forwarding system and a common gateway system(para. 139 and 140).
32
Working Group VI (Security Interests) has beenworking on the “Draft Technical Legislative Guide on
the Implementation of a Security Rights Registry.”
http://www.uncitral.org/uncitral/commission/working_g
roups/6Security_Interests.html(last accessed on March 23, 2013).

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IIP Bulletin 2013 Vol.22

xiii ●