UNCITRAL SECURED TRANSACTIONS NEGOTIATIONS NEARING

UNCLAS SECTION 01 OF 03 UNVIE VIENNA 000525

DEPT FOR L/PIL, L/CID, L/EB
EMBASSIES FOR ECON/POL

SIPDIS

E.O. 12958: N/A
TAGS: AORC EINV ETRD UNCITRAL AU UN

SUBJECT: UNCITRAL SECURED TRANSACTIONS NEGOTIATIONS NEARING
COMPLETION


1. Summary. Excellent progress was made during the November 2-6
United Nations Commission on International Trade Law (UNCITRAL)
Working Group (WG) discussions on a Supplement to the 2007 UNCITRAL
Legislative Guide on Secured Transactions ("the Guide") that deals
with security rights in intellectual property (IP). Work is
expected to be completed at the February 2010 WG session. The
Supplement is then expected to be adopted at the next Commission
session in July 2010. The WG also discussed the plans of the
Secretariat for the International Colloquium on Secured Transactions
in Vienna, March, 1-3, 2010, concerning the WG's future work program
after completion of the IP Supplement. End Summary.

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WG Makes Progress
on Supplement
--------------


1. WG VI (Secured Transactions) continued its ongoing work on the
preparation of a supplement to the 2007 Guide on security rights in
IP ("Supplement") in Vienna from November 2-6. At its 40th Session
in 2007 UNCITRAL decided that the WG should undertake work on
security rights in IP in response to the desire to provide specific
guidance to States regarding the appropriate coordination between
secured transactions law as reflected in the Guide and IP law. The
WG made excellent progress and was able to complete a third reading
of the entire draft Supplement. At the conclusion of the session,
the WG was of the view that it should be able to complete its work
on the draft Supplement at its February 8-12, 2010 session. The WG
would then be in a position to submit the Supplement to the
Commission for final approval and adoption at its 2010 session.

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Special Priority Rights
Issue Resolved
--------------


2. The WG was able to resolve one of the key remaining
issues-whether the Supplement should recommend that the law should
provide for special priority rights for acquisition security rights
in IP in the same way that the Guide recommends special priority
rights for acquisition security rights in tangible assets. Even
though the proposal goes beyond U.S. law under Article 9 of the
Uniform Commercial Code (which provides such "superpriority" for
purchase-money security interests only for security interests in
goods),it was agreed that, for the same reasons the Guide provides
for an acquisition security right in tangible assets, the Supplement
should provide for an acquisition security right in IP or a license
of IP whereby the acquisition secured creditor would have priority
over competing security rights in the same IP previously granted by
the same grantor so long as the acquisition secured creditor follows
the applicable procedural requirements set forth in the Guide.


3. The WG also decided that the Supplement should not depart from
the approach followed in the Guide by providing more favorable
rights for acquisition secured creditors with respect to IP than the
Guide provides for such secured creditors with respect to tangible
assets (and, thus, rejected the suggestion that the "superpriority"
of an acquisition security right in IP should extend further to
proceeds of that IP than is the case for acquisition security rights
in tangible property). A number of States took the position that it
was essential for the Guide and Supplement to provide one
acquisition financing regime for all types of assets and not to
introduce several regimes depending on the type of asset involved-a
result that would make the Guide and Supplement very difficult to
understand and apply. Moreover, it was pointed out that it would be
too risky for the Supplement to adopt an approach for IP that would
change the balance established in the Guide after discussions over a
long period of time among the interests of the various credit
providers and that essentially was not followed in any legal
system.

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Non-Exclusive Licenses in Ordinary
Course of Business Tackled
--------------


4. U.S. law under Article 9 of the Uniform Commercial Code provides
that a non-exclusive licensee who obtains its license in ordinary
course of business takes free of a security interest granted by its
licensor. The Guide had previously adopted a recommendation along
the lines of U.S. law. Delegates from European countries and some
IP stakeholders had argued, however, that the concept of protecting

UNVIE VIEN 00000525 002 OF 003


"ordinary course licensees" does not exist in IP law and therefore
has no place in law governing security rights in IP. Accordingly,
the WG accommodated this objection and decided to bring about
substantially the same result by a different means. The WG decided
that, in the context of IP, the Supplement should supplant the
Guide's recommendation with a new recommendation that would
implement the results that would be brought about by the Guide, but
without use of the term "ordinary course of business." Instead, the
Supplement would provide that a non-exclusive licensee that obtains
its license in a transaction available to all from a rights holder
who has previously granted a security right in the licensed IP
(e.g., a consumer who purchases "off the shelf" copies of
copyrighted software) may enjoy its rights notwithstanding
enforcement of the security right so long as the licensee fulfills
all of its obligations on the license contract. While the precise
wording of the provision will need to be resolved at the next
session, the language will carefully indicate that this provision in
no way validates a license that is unauthorized under IP law (e.g.,
a "pirated" license).

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Thorny Issue of Applicable
Law Still to Be Resolved
--------------


5. The WG also made process on the most difficult remaining
conceptual issue concerning the choice of law for security rights in
IP. The Guide provides that all issues relating to security rights
in intangible property are governed by the law of the State in which
the grantor is located. There has been general recognition,
however, that this matter needed additional study for security
rights in IP. Several rules had been under consideration prior to
this meeting, ranging from a pure "lex protectionis" approach
pursuant to which all matters relating to security rights in IP
would be governed by the State under whose laws the IP is protected,
to an approach like that of the Guide, to a variety of "blended"
approaches pursuant to which "lex protectionis" would govern some
issues while the law of the grantor's location would govern other
issues. Several EU countries, along with some IP stakeholders, have
argued that the "lex protectionis" should govern all issues
concerning security rights in IP (creation, third-party
effectiveness, priority, and enforcement of a security right).
Others argued that applying the law of the grantor's location to
those matters (the general rule for security rights in intangibles
under the Guide) would provide the optimal result, since in typical
transactions in which the collateral consists not only of IP rights
but also of other intangible rights it would generally result in the
application of a single law for all issues. A third option-proposed
by the Permanent Bureau of the Hague Conference on Private
International Law and supported in principle as a possible solution
by the USDEL-would provide a blended approach under which the law of
the grantor's location would govern most issues, but the third-party
effectiveness and priority of a security right in IP as against a
buyer or similar transferee of the intellectual property would be
governed by "lex protectionis." At present there is no consensus
approach but variations of the blended approach appeared to gain
traction at the session, including among some IP stakeholders.

--------------
Agenda for 2010
Colloquium Discussed
--------------


6. The WG also briefly discussed the upcoming UNCITRAL
International Colloquium on Secured Transactions which will be held
in Vienna, March 1-3, 2010. The Secretariat stated that the purpose
of the Colloquium-consistent with the decision taken by the
Commission at its July 2009 session-is to develop a recommendation
for a future work program based on the views of governments,
international organizations and the private sector. The proposals
that will be discussed at the Colloquium include the following:
(a) A supplement to the Guide on security rights in securities not
covered by the Convention on Substantive Rules for Intermediated
Securities ("UNIDROIT") (i.e., so-called indirectly held
securities);

(b) A legislative guide on security rights registries, supplementing
the work of UNCITRAL's Legislative Guide on Secured Transactions.
(Note. This project might be similar to the project resulting in
the recently-adopted OAS model registry regulations. End note.);

(c) A guide on secured financing contracts and agreements, including

UNVIE VIEN 00000525 003 OF 003


a discussion of the issues that should be addressed in such
agreements and a set of rules that would be applicable in the
absence of contrary agreement of the parties;

(d) A guide on IP licensing contracts and agreements (the
Secretariat stated that this project would need to be conducted
jointly with the WIPO Secretariat);

(e) A model law on secured transactions incorporating the
recommendations of the Guide and the Supplement on IP; and,

(f) A text on franchising (initially proposed by Mexico) addressing
general practices including those relating to trademarks and taking
into account the UNIDROIT Model Franchise Disclosure Law.


7. The Commission will take a decision on the future work program
for the WG at its July 2010 session in Vienna based upon the
recommendations in the Secretariat report of the Colloquium. (Note.
The USDEL generally has informally supported the model registry
regulations option as the next work program for the WG because it
would provide an important framework for implementation of the
Guide. The vast majority of countries in the world do not have
general registries for secured transactions. End note.)

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Comment
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8. In initial negotiating sessions, discussions over the text of
the Supplement with European delegations and U.S. IP stakeholders
were difficult. These delegations and stakeholders repeatedly
expressed concern about the effects of the Guide on IP law.
However, through close cooperation with U.S. IP stakeholders,
including through a series of public meetings, innovative drafting
solutions, and with the Supplement nearing completion, negotiations
have moved more quickly and a consensus approach appears to be
achievable on all issues. A key point has been to explain to IP
stakeholders that the Guide and Supplement defer to and will not
interfere with rights established under IP law. USDEL will continue
to make this point in the WG to concerned parties.

DAVIES