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Aerocon Engineering, Inc. v. Silicon Valley Bank

Court of Appeals for the Ninth Circuit
48 U.C.C. Rep. Serv. 2d (West) 447, 303 F.3d 1120, 2002 Cal. Daily Op. Serv. 9355 (2002)
ELI5:

Rule of Law:

The federal Copyright Act does not preempt state law regarding the perfection of security interests in unregistered copyrights. Therefore, a security interest in an unregistered copyright is properly perfected by filing a financing statement in accordance with the state's Uniform Commercial Code (UCC).


Facts:

  • Three affiliated companies, including World Auxiliary Power Company, designed and sold products for modifying airplanes.
  • The companies owned copyrights in the drawings, technical manuals, and computer software used to make the modifications, but these copyrights were not registered with the U.S. Copyright Office.
  • The companies obtained financing from Silicon Valley Bank and granted the bank a security interest in their assets, including all present and future copyrights, whether published or unpublished.
  • Silicon Valley Bank perfected its security interest under California's Uniform Commercial Code (UCC) by filing UCC-1 financing statements with the California Secretary of State.
  • The bank did not record its security interest with the U.S. Copyright Office.
  • The three companies subsequently filed for bankruptcy.
  • Aerocon Engineering, a creditor, purchased the copyrights and the bankruptcy trustees' power to avoid (invalidate) pre-existing security interests from the bankruptcy estates.

Procedural Posture:

  • The three debtor companies filed for bankruptcy in the U.S. Bankruptcy Court for the Northern District of California.
  • Aerocon Engineering brought a consolidated adversary proceeding in the bankruptcy court against Silicon Valley Bank to avoid the bank's security interest.
  • The bankruptcy court granted summary judgment in favor of Silicon Valley Bank, holding that its security interest was properly perfected under state law.
  • Aerocon appealed the bankruptcy court's decision.
  • The appeal was transferred from the Ninth Circuit Bankruptcy Appellate Panel to the U.S. District Court for the Northern District of California.
  • The district court affirmed the bankruptcy court's judgment.
  • Aerocon Engineering appealed the district court's decision to the U.S. Court of Appeals for the Ninth Circuit.

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Issue:

Does the federal Copyright Act preempt state law, specifically Article 9 of the Uniform Commercial Code, for perfecting a security interest in an unregistered copyright?


Opinions:

Majority - Kleinfeld, J.

No, the federal Copyright Act does not preempt state law for perfecting security interests in unregistered copyrights. The Copyright Act's system for recording and prioritizing security interests applies only to registered copyrights, as it relies on a registration number or title for indexing and providing constructive notice. Since the Act is silent on perfecting interests in unregistered copyrights and provides no federal mechanism to do so, there is no conflict with state law. The Uniform Commercial Code (UCC) specifically governs security interests in general intangibles, which include copyrights, and its 'step-back' provisions do not apply here because the federal statute does not provide a national registration system for unregistered works. Therefore, perfection of a security interest in an unregistered copyright is properly governed by the UCC.



Analysis:

This decision resolves a critical ambiguity in intellectual property financing by creating a clear distinction between the perfection of security interests in registered versus unregistered copyrights. By limiting the preemptive scope of the Copyright Act and the holding of In re Peregrine, the court validated the common commercial practice of using state UCC filings to secure loans against unregistered works. This ruling provides certainty for lenders and makes it easier for creators, particularly in the software and technology sectors where works are created continuously, to use their intellectual property as collateral without the burdensome requirement of constant federal registration.

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