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Sweden: intellectual property

Author: | Published: 3 Dec 2003

The locomotive of the IT era has slowed down, but its rampage in the
late nineties increased consciousness of the economic value vesting
in information and know-how. Many businesses have realized the
value of their intellectual property rights, not only as assets in day-to-
day business, but also as tools for funding. Simultaneously, demand
for security in trademarks, patents and copyrights has increased.
Issues have also been raised regarding security interests in designs
and domain names. The legal area is thus becoming increasingly
important, but questions surrounding it are still unclear.

One question closely related to third-party rights in intellectual property

(IP) is an IP asset's value. The value of an IP right is affected by
several factors, which in general are of less importance for material
assets. IP rights may, for example, be challenged by third parties
claiming priority, lack of originality or lack of other basic criteria for
protection. The future value of an IP asset is often uncertain and hard
to estimate, partly because a company going bankrupt may lose
human resources closely connected to the maintenance of the asset's
value. The value is often higher in the hands of an entrepreneur than in
a creditor's.

Having touched upon the valuation problem, we move on to the more

heavily regulated third-party rights of industrial property, primarily
trademarks, with comments regarding particularities of patents.
Because there are registers for these rights, it is also possible to
register security in them. This increases third-party control and has
also made it easier for the legislator to set up a formal structure for
handling such securities. We continue with third-party rights in
copyrights, which is an area that, to a large extent, lacks statutory
regulation and formal structures.

Trademarks and patents

It is well known that patents and trademarks can represent substantial

values and sometimes even the greater part of the value of a
company. Statistics from the Swedish Patent and Registration Office
(PRV) indicate that the securing of investments through pledges of
trademarks has increased substantially in past years. Five
applications for pledges of registered trademarks and/or trademark
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applications were filed in 1997, in 2000 the number was 50 and up

until November this year about 160 applications have been filed.

Trademark protection can be established either through use or

registration. Registered trademarks and trademark applications can
be pledged, but trademarks established through use cannot.
However, all trademarks can be used as security in a security transfer.
The prevailing opinion is that security transfers become valid against
third parties through the transfer agreement. Security transfers will be
further dealt with below in relation to copyright; here we will focus on
pledging registered rights.

A trademark can be registered through national, international or

European Community (EC) applications. Pledges of the first two are
registered by PRV. The EC authority in Alicante, Spain deals with EC
registrations. A national trademark becomes valid through registration
with priority from the date of application or, if applicable, from the date
of an earlier international application. The protection runs for ten years
from the date of registration, and may be prolonged for an unlimited
number of ten-year periods, provided that the registered holder of the
right files for renewal and pays the renewal fees.

Registrations and applications for national and international

trademarks can be pledged by application and by filing the pledge
agreement with PRV. The pledge becomes valid through registration.
It is not possible to pledge part of a trademark. However, there may
be more than one pledgee of a trademark. If there is more than one
pledgee in a single transaction, PRV accepts that a security agent is
registered as a representative for all the pledgees.

Creditors obtaining pledge of a trademark should be aware of a

number of risks. The pledge may become worthless if the holder of
the trademark fails to renew the right. Further, a pledged trademark
can be challenged by another party. For example, if an earlier right to
a confusingly similar mark exists, or if the pledged mark is not used
continuously for five years, the pledged mark may be cancelled by a
court of law. A court may also find that the mark lacks distinctiveness
and therefore cannot serve the basic purpose of distinguishing the
user's goods from those of others. Registration is therefore not a
guarantee for protection, or for the value of the mark or pledge. Some
of these problems may be dealt with in the pledge agreement, for
example, the trademark holder could undertake to renew the
registration. Other criteria, such as the value-preserving use of the
mark, may be more difficult to handle contractually.

Creditors should consider whether the trademark holder has entered

into any licence agreements. If so, the licensee may have acquired a
prior right to the trademark, which is likely to survive irrespective of
whether the pledge is realized or not. A licence may therefore have
substantial effect on the value of the pledge. Further, trademarks may
be included in the floating charge on a company. However, the floating
charge does not include pledged trademarks.
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The rules regarding pledge of patents are similar to the rules

regarding pledge of trademarks. As opposed to a trademark right,
which can be established through use, a patent can only become valid
when granted by a competent authority or organization. All patents
valid in Sweden are registered by PRV, irrespective of whether they
are filed as national, international or EC patents. A patent is valid for
20 years from the date of filing of the patent application, subject to
registration, and provided that applicable fees are paid.

A patent can be cancelled due to lack of novelty or lack of any other

basic criteria for grant of the patent. Further, a third party may be
entitled to the patent, and it can be transferred to them. A good faith
user of the patent may, however, be entitled to continue its use after
the transfer in exchange for fair compensation. Particular rules apply
for supplementary protection of medicinal drugs and plant protection
products.

According to the preparatory works of the Patent Act, two or more

persons jointly holding the right to a patent may each pledge their part
of it. But if the right to a patent rests in different hands, the patent
might not be very useful as security. PRV has in some cases denied
registration of a security agent as representative for a collective of
patent pledgees. This is contrary to PRV's handling of trademark
pledges, and causes practical problems for pledgees. One such
decision is subject to appeal.

Copyrights

Just as with trademarks and patents, large parts of certain

companies' assets can vest in copyrights. Software, motion pictures
and music recordings are good examples of copyrights that are
essential value drivers for the companies exploiting them. However, a
copyright is more uncertain as a security than a trademark.

A copyright is valid for 70 years after the death of the author and
consists of two parts, the economic right and the moral right. The
rights originally vest in the author of the work. The economic right is
transferable. The moral right, that is, the right of the author to be
acknowledged and not to have his work distorted, is not. For software
created by an employee, the copyright automatically transfers to the
employer if nothing else has been agreed.

The author has the exclusive right to choose whether, when and how
the work is made available to the public. No one can force the author
to make the work public. In accordance with this, an author's copyright
cannot be seized to benefit his creditors. The same applies to
manuscripts, and artworks that have not yet been made public
(reserved copy). However, if an author executes a security transfer of
a copyright or pledges a reserved copy, the creditor can realize the
copyright or the pledged work according to the terms agreed.

The purchaser of a copyright cannot transfer the copyright, nor can the
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purchaser make changes to the work, unless this has been agreed.
Before using a copyright as security the creditor must make sure that
the debtor can transfer it, otherwise the creditor cannot seize it and a
security transfer would not be valid. The scope of the right is of course
also intrinsic to the value. If the debtor's transferable right does not
include a right to amend the work, the right's value is reduced.

Copies of works, as well as royalties and other earnings referable to

copyrights, can be seized in the same way as other tangible property,
and thus are not affected by the particularities of the copyright itself.

A copyright can either be completely transferred or a right/licence can

be granted for certain use of the copyright. There is consensus that a
transfer becomes valid against a third party through the agreement.
For licenses and security transfers the situation is less clear. Some
argue that a transferee would have priority over licensees and security
transferees. The prevailing opinion is, however, that a licensee or a
security transferee has priority against third parties through the
agreement.

Another debated issue is whether or not a copyright can be pledged.

In principle, property that is neither tangible nor registerable cannot be
pledged. Court decisions regarding other such property - buildings on
leased ground - indicate that a pledge might not be upheld. It is
therefore preferable to demand a security transfer in a copyright
rather than a pledge.

Because a copyright is generally part of the debtor's business, a

security transfer agreement often contains a licence that gives the
debtor the right to sub-license the copyright. The right of the creditor
will be subject to these licences and to other rights granted before the
security transfer. Regarding software, the source code should be put
into escrow, in order for the creditor to get full practical access to the
security.

Copyrights, just as trademarks and patents, can be part of a floating

charge. A prerequisite therefore is, as indicated above, that the
copyright is transferable.

Valuable security

Even if IP rights have common denominators, they also have inherent

differences that must be considered by a creditor seeking security.
Only registered trademarks and patents can be pledged, although all
IP rights can be part of a floating charge or subject to a security
transfer. A creditor seeking security in an IP right should, however, not
only make an informed decision about the form of security used, but
also be aware of the possibility of the right being challenged, as well
as other uncertainties, such as prior licences and time limitations.

There are many risks to consider and uncertainties to take into

account when evaluating an IP right as security. But it is possible for a

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well-advised creditor to avoid most of the difficulties. And correctly

handled, IP rights can serve as an important and valuable security.

Author biography
Per Victor
Advokatfirman Cederquist

Per Victor specialises in intellectual property, media and

information technology law. He has a master of
intellectual property from New York University and has
previously worked with a New York law firm. His practice
includes day-to-day work with several major domestic and
international media and software companies as well as transactional
IP counselling.

Email: Per.Victor@Cederquist.se

Gabriel Lidman
Advokatfirman Cederquist

Advokat Gabriel Lidman is a commercial litigator

specialising in intellectual property and media disputes,
and risk management. His legal background includes a
law degree from Uppsala University (LLM), IP studies at the University
of Minnesota Law School and work as legal counsel of a major
newspaper group in London. His practice includes day-to-day work
for major domestic and international media and software companies.

Email: Gabriel.Lidman@Cederquist.se

Advokatfirman Cederquist
Nybrokajen 15
PO Box 1670
Stockholm 111 96
Sweden
T: +46 8 463 6500
F: +46 8 678 0170

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