In a prior post, I highlighted Professor William Mann’s recent article on patents as collateral. I asked him to provide a guest post that explains some of his research. – DC
Loan collateral typically calls to mind tangible assets like real estate that are easily valued and sold. However, companies are increasingly relying on the collateral value of their patent portfolios to raise financing. In a recent paper, I trace the growth of this activity from USPTO filings that record a creditor’s security interest in a patent. The volume of these filings has exploded in recent years. By 2012, 20% of patents held by domestic corporations during the 1990s had been pledged as collateral at some point in their lives.
To be clear, filing with the USPTO does not perfect a security interest in patents against future lien creditors – this is accomplished through UCC filings with the relevant state office. However, recording the security interest with the USPTO may still protect against bona fide purchasers, so creditors find it advisable to register the security interest in both places. The filings thus identify cases in which patents are important collateral, since the creditor went to the trouble to protect its security interest by filing with the USPTO as well as with the state.
Indeed, for the borrowers listed in these filings, patents are likely to be the most valuable assets they own, as the industries in which they are clustered feature low tangibility but high rates of patent production – for example, drugs, medical instruments and supplies, computer programming and data processing, and electronic components. And the creation of the patent security interest is associated with large financing and investment: In Compustat data, companies in these industries increase their debt issuance and R&D expense by 10% and 6% of total assets, respectively, in the year when they file with the USPTO. Secured debt seems to be a significant source of financing for many patenting companies, with the collateral value of their patent portfolios contributing heavily to their financing capacity.
In the paper, I further argue that strong creditor protections in bankruptcy increase financing and investment by patenting firms. I provide evidence by comparing patenting companies based on the creditor-friendliness of their state laws, and exploiting the development of caselaw addressing the interaction between state and federal laws governing patent property and contract rights. When creditors expect less delay and uncertainty in foreclosing against a patent portfolio during a potential bankruptcy, I find that they lend more against that portfolio in the first place, and borrowers use the funds to invest in research and produce more patents.
In general, the findings reflect the growing importance of intellectual property as an asset class in the economy, and increasing efforts by firms to monetize that asset class. Proposals to reform the patent system should take into account the effect this would have on patenting firms’ financing capacity, as patents would not be valuable collateral without effective patent protection.
William Mann is an assistant professor of finance at the Anderson School of Management, UCLA. The draft article