In re World Auxiliary Power Co.
303 F.3d 1120 (9th Cir. 2002)
Kleinfeld, Circuit Judge:
[Although the actual facts are complicated, in essence the case involves a contest over unregistered copyrights between a bank that got a security interest in the copyrights from the owners and perfected it under state law and the debtor in possession in the Chapter 11 bankruptcy, who exercises the powers of a bankruptcy trustee. The security agreement granted the bank a security interest in a broad array of presently owned and after-acquired collateral. The security agreement covered "all goods and equipment now owned or hereafter acquired," as well as inventory, contract rights, general intangibles, blueprints, drawings, computer programs, accounts receivable, patents, cash, bank deposits, and pretty much anything else the debtor owned or might be "hereafter acquired." The security agreement and financing statement also covered "[a]ll copyright rights, copyright applications, copyright registrations, and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired." The bank perfected its security interest in the collateral, including the copyrights, pursuant to California's version of Article 9 of the Uniform Commercial Code, by filing UCC-1 financing statements with the California Secretary of State. The copyrights were not registered with the United States Copyright Office, and the bank did not record any document showing the transfer of a security interest with the Copyright Office. The lower courts held for the bank.]
ANALYSIS
[We must decide whether by filing an Article 9 financing statement the bank perfected its security interest in the unregistered copyrights thereby making its security interest good against the trustee in bankruptcy.]
* * *
We are assisted in deciding this case by two opinions, neither of which controls, but both of which are thoughtful and scholarly. The first is the bankruptcy court's published opinion in this case, Aerocon Engineering Inc. v. Silicon Valley Bank (In re World Auxiliary Power Co.), [Fn 17]which we affirm largely for the reasons the bankruptcy judge gave. The second is a published district court opinion, National Peregrine, Inc. v. Capitol Federal Savings & Loan Association (In re Peregrine Entertainment, Ltd.), [Fn 18] the holdings of which we adopt but, like the bankruptcy court, distinguish and limit.
[Fn 17. 244 B.R. 149 (Bankr.N.D.Cal.1999).]
[Fn 18. 116 B.R. 194 (C.D.Cal.1990).]
Our analysis begins with the Copyright Act of 1976. [Fn 19] Under the Act, "copyright protection subsists ... in original works of authorship fixed in any tangible medium of expression...." [Fn 20] While an owner must register his copyright as a condition of seeking certain infringement remedies, [Fn 21] registration is permissive, not mandatory, and is not a condition for copyright protection. [Fn 22] Likewise, the Copyright Act's provision for recording "transfers of copyright ownership" [Fn 23] (the Act's term that includes security interests) [Fn 24] is permissive, not mandatory: "Any transfer of copyright ownership or other document pertaining to copyright may be recorded in the Copyright Office...." [Fn 25] The Copyright Act's use of the word "mortgage" as one definition of a "transfer" [Fn 26] is properly read to include security interests under Article 9 of the Uniform Commercial Code. [Fn 27]
[Fn 19. 17 U.S.C. § 101 et seq.]
[Fn 20. Id. At § 102(a).]
[Fn 21. Id. § 411(a) ("[N]o action for infringement of the copyright in any ... work shall be instituted until registration of the copyright claim has been made ...."); id. § 412 "[N]o award of statutory damages or of attorney's fees ... shall be made for ... any infringement of copyright ... before the effective date of its registration....").]
[Fn 22. Id. § 408(a) ("[T]he owner of copyright ... may obtain registration of the copyright claim.... Such registration is not a condition of copyright protection.").]
[Fn 23. Id. §§ 101, 205(a).]
[Fn 24. Id. §§ 101, 205(d).]
[Fn 25. Id. § 205(a) (emphasis added.)]
[Fn 26. Id. § 101 ("A 'transfer of copyright ownership' is an assignment, mortgage, exclusive license, or any other conveyance, alienation, or hypothecation of a copyright....").]
[Fn 27. See Grant Gilmore, 1 Security Interests in Personal Property § 13.3, at 415 (1965) ("The phrase 'may be mortgaged' in [the Copyright Act of 1909] should be read as equivalent to 'may be transferred for security.' ... A copyright would not in any case seem to be within the category of intangible property which can be pledged; under Article 9 of the [Uniform Commercial] Code it would be a 'general intangible.' "). See also In re Cybernetic Services, Inc., 252 F.3d 1039, 1056 (9th Cir.2001) ("[T]he Copyright Act, by its terms, governs security interests."); National Peregrine, Inc., 116 B.R. at 199 ("It is clear ... that an agreement granting a creditor a security interest in a copyright may be recorded in the Copyright Office.").]
Under the Copyright Act, "[a]s between two conflicting transfers, the one executed first prevails if it is recorded, in the manner required to give constructive notice ... within one month after its execution ... or at any time before recordation ... of the later transfer. Otherwise the later transfer prevails if recorded first in such manner, and if taken in good faith, for valuable consideration ... and without notice of the earlier transfer." [Fn 28]
[Fn 28. 17 U.S.C. § 205(d) (emphasis added).]
The phrase "constructive notice" refers to another subsection providing that recording gives constructive notice but only if
(1) the document, or material attached to it, specifically identifies the work to which it pertains so that, after the document is indexed by the Register of Copyrights, it would be revealed by a reasonable search under the title or registration number of the work; and
(2) registration has been made for the work. [Fn 29]
[Fn 29. Id. § 205(c) (emphasis added).]
A copyrighted work only gets a "title or registration number" that would be revealed by a search if it's registered. [Fn 30] Since an unregistered work doesn't have a title or registration number that would be "revealed by a reasonable search," recording a security interest in an unregistered copyright in the Copyright Office wouldn't give "constructive notice" under the Copyright Act, and, because it wouldn't, it couldn't preserve a creditor's priority. There just isn't any way for a secured creditor to preserve a priority in an unregistered copyright by recording anything in the Copyright Office. And the secured party can't get around this problem by registering the copyright, because the secured party isn't the owner of the copyright, and the Copyright Act states that only "the owner of copyright ... may obtain registration of the copyright claim...." [Fn 31]
[Fn 30. See id. § 409 ("The application for copyright registration shall ... include ... the title of the work ...."); id. § 410(a) ( "When ... the Register of Copyrights determines that ... the material deposited constitutes copyrightable subject matter ... the Register shall register the claim and issue ... a certificate of registration.... The certificate shall contain the information given in the application, together with the number and effective date of the registration.").]
[Fn 31. Id. § 408(a).]
The debtor argues that the Copyright Act's recordation and priority scheme exclusively controls perfection and priority of security interests in copyrights. First, the debtor argues that state law, here the California U.C.C., by its own terms "steps back" and defers to the federal scheme. Second, whether or not the U.C.C. steps back, the debtor argues that Congress has preempted the U.C.C. as it applies to copyrights. We address each argument in turn.
A. U.C.C. Step Back Provisions
[The court concludes that Article 9 does not "step back," that is, voluntarily defer to federal copyright law.]
B. Federal Preemption
It wouldn't matter that state law doesn't step back, however, if Congress chose to knock state law out of the way by preemption. Federal law preempts state law under three circumstances. The first is "express preemption," where Congress explicitly preempts state law. [Footnote omitted.] The second is "field preemption," where Congress implicitly preempts state law by "occupy [ing] the entire field, leaving no room for the operation of state law." [Footnote omitted.] The third is "conflict preemption," where we infer preemption because "compliance with both state and federal law would be impossible, or state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." [Footnote omitted.] We presume that federal law does not preempt "state law in areas traditionally regulated by the States." [Footnote omitted.]
The debtor argues, relying on Peregrine, that Congress intended to occupy the field of security interests in copyrights. The debtor also argues that the U.C.C. actually conflicts with the Copyright Act's text and purpose.
* * *
Although Peregrine did not specify whether the copyrights at issue were registered, it is probably safe to assume that they were, and that the Peregrine court did not have a case involving unregistered copyrights, because the collateral at issue was a movie library that got licensed out to exhibitors [Footnote omitted.] and, in the ordinary course, copyrights in such films would be registered. Also, as the bankruptcy judge in the case at bar pointed out, Peregrine 's "analysis only works if the copyright was registered." [Footnote omitted.] The district court in Peregrine held that Congress had preempted state law because of "the comprehensive scope of the Copyright Act's recording provisions." [Footnote omitted.] As applied to registered copyrights, the Act's recording scheme is comprehensive; it doesn't exclude any registered copyright from its coverage. But as applied to unregistered copyrights, the Act doesn't have comprehensive recording provisions. Likewise, Peregrine notes that "[t]o the extent there are competing recordation schemes, this lessens the utility of each." [Footnote omitted.] This holds true for registered copyrights. But there aren't two competing filing systems for unregistered copyrights. The Copyright Act doesn't create one. Only the U.C.C. creates a filing system applicable to unregistered copyrights. Peregrine reasoned that creditors could get conflicting results under the U.C.C. and the Copyright Act, because each provides a different priority scheme. [Footnote omitted.] That's true only for registered copyrights. The Copyright Act wouldn't provide a conflicting answer as to unregistered copyrights because it wouldn't provide any answer at all. Peregrine's holding applies to registered copyrights, and we adopt it, but as the bankruptcy court reasoned in the case at bar, [Footnote omitted.] it does not apply to unregistered copyrights.
We accordingly reject two other lower court opinions, Zenith Productions, Ltd. v. AEG Acquisition Corp. (In re AEG Acquisition Corp.) [Fn 63] and In re Avalon Software Inc., [Fn 64] that extended Peregrine 's holding to unregistered copyrights. [Fn 65] No circuit court has come to that erroneous conclusion. [Fn 66] In both cases, the courts held that security interests in unregistered copyrights may not be perfected under the U.C.C.; perfection could be obtained only by registering the copyrights and recording the security interest with the Copyright Office. [Fn 67] We reject these opinions because they miss the point made by the bankruptcy judge in this case, and discussed above, that Peregrine 's analysis doesn't work if it's applied to security interests in unregistered copyrights. [Footnote 68 omitted.] Moreover, such extensions of Peregrine to unregistered copyrights would make registration of copyright a necessary prerequisite of perfecting a security interest in a copyright. [Fn 69] The implication of requiring registration as a condition of perfection is that Congress intended to make unregistered copyrights practically useless as collateral, an inference the text and purpose of the Copyright Act do not warrant.
[Fn 63. 161 B.R. 50 (9th Cir.BAP 1993), affirming 127 B.R. 34 (Bankr.C.D.Cal.1991).]
[Fn 64. 209 B.R. 517 (D.Ariz.1997).]
[Fn 65. See Zenith Productions, 161 B.R. at 57 (BAP), affirming 127 B.R. at 40-41 (Bankr.C.D.Cal.) (holding security interests in copyrights in films unperfected because the creditor had not registered the copyrights); In re Avalon Software Inc., 209 B.R. at 521-22 (holding security interests in existing and after-acquired software unperfected because the copyrights were not registered and the security interests were not recorded with the Copyright Office).]
[Fn 66. In In re Cybernetic Services, Inc., 252 F.3d 1039 (9th Cir.2001), we held that state law governs perfection of security interests in patents. Id. at 1059. We distinguished Peregrine because the Patent Act, unlike the Copyright Act, doesn't contemplate the recordation of security interests. See id. at 1056. We neither approved nor disapproved Peregrine because patent law, not copyright law, was at issue. Id. See also Broadcast Music, Inc. v. Hirsch, 104 F.3d 1163, 1166 (9th Cir.1997) (distinguishing Peregrine on the ground that an assignment of royalties was not a "transfer" of an interest in copyright).]
[Fn 67. Zenith Productions, 161 B.R. at 57 (BAP), affirming 127 B.R. at 40-41 (Bankr.C.D.Cal.) In re Avalon Software Inc., 209 B.R. at 521-22.]
[Fn 69. See, e.g., In re Alvernon Software, Inc. 209 at 521-522 ("Perfection and constructive notice to the world is accomplished by . . . documenting the security interest with the U.S. Copyright Office and . . . insuring that a registration of the copyrighted product has also been made . . . ."; Zenith Productions, 127 B.R. at 40-41 (Bankr.C.D. Cal), affirmed at 161 B.R. at 57 (BAP) ("Perfection of a security interest in a motion picture, as in any copyright, requires two steps: the film must be registered with the United States Copyright Office, and the security interest must be recorded in the same office.")]
In the one instance where the Copyright Act conditions some action concerning a copyright on its registration the right to sue for infringement the Act makes that condition explicit. [Fn 70] Nowhere does the Copyright Act explicitly condition the use of copyrights as collateral on their registration. Second, the Copyright Act contemplates that most copyrights will not be registered. Since copyright is created every time people set pen to paper, or fingers to keyboard, and affix their thoughts in a tangible medium, [Fn 71] writers, artists, computer programmers, and web designers would have to have their hands tied down to keep them from creating unregistered copyrights all day every day. Moreover, the Copyright Act says that copyrights "may" be registered, [Fn 72] implying that they don't have to be, and since a fee is charged [Fn 73] and time and effort is required, the statute sets up a regime in which most copyrights won't ever be registered.
[Fn 70. See 17 U.S.C. § 411(a).]
[Fn 71. See id. § 102(a) ("[C]opyright protection subsists ... in original works of authorship fixed in any tangible medium of expression....").
[Fn 72. Id. § 408(a) ("[T]he owner of copyright ... may obtain registration of the copyright claim.... Such registration is not a condition of copyright protection.").]
[Fn 73. See, generally, Copyright Office Circular 4 (2002).]
Though Congress must have contemplated that most copyrights would be unregistered, it only provided for protection of security interests in registered copyrights. There is no reason to infer from Congress's silence as to unregistered copyrights an intent to make such copyrights useless as collateral by preempting state law but not providing any federal priority scheme for unregistered copyrights. That would amount to a presumption in favor of federal preemption, but we are required to presume just the opposite. [Footnote omitted.] The only reasonable inference to draw is that Congress chose not to create a federal scheme for security interests in unregistered copyrights, but left the matter to States, which have traditionally governed security interests.
For similar reasons, we reject the debtor's argument that congressional intent to preempt can be inferred from conflict between the Copyright Act and the U.C.C. There is no conflict between the statutory provisions: the Copyright Act doesn't speak to security interests in unregistered copyrights, the U.C.C. does.
Nor does the application of state law frustrate the objectives of federal copyright law. The basic objective of federal copyright law is to "promote the Progress of Science and useful Arts" [Fn 75] by "establishing a marketable right to the use of one's expression" and supplying "the economic incentive to create and disseminate ideas." [Footnote omitted.] The debtor argues that allowing perfection under state law would frustrate this objective by injecting uncertainty in secured transactions involving copyrights. The debtor conjures up the image of a double-crossing debtor who, having gotten financing based on unregistered copyrights, registers them, thus triggering federal law, and gets financing from a second creditor, who then records its interest with the Copyright Office and takes priority. We decline to prevent this fraud by drawing the unreasonable inference that Congress intended to render copyrights useless as collateral unless registered.
[Fn 75. U.S. Constitution, article 1, section 8.]
Prudent creditors will always demand that debtors disclose any copyright registrations and perfect under federal law and will protect themselves against subsequent creditors gaining priority by means of covenants and policing mechanisms. The several amici banks and banking association in this case argue that most lenders would lend against unregistered copyrights subject to the remote risk of being "primed" by subsequent creditors; but no lender would lend against unregistered copyrights if they couldn't perfect their security interest. As we read the law, unregistered copyrights have value as collateral, discounted by the remote potential for priming. As the debtor reads the law, they would have no value at all.
The debtor's argument also ignores the special problem of copyrights as after- acquired collateral. To use just one example of the multi-industry need to use after-acquired (really after-created) intangible intellectual property as collateral, now that the high-tech boom of the 1990s has passed, and software companies don't attract equity financing like tulips in seventeenth century Holland, [Fn 77] these companies will have to borrow more capital. After- acquired software is likely to serve as much of their collateral. Like liens in any other after-acquired collateral, liens in after-acquired software must attach immediately upon the creation of the software to satisfy creditors. Creditors would not tolerate a gap between the software's creation and the registration of the copyright. If software developers had to register copyrights in their software before using it as collateral, the last half hour of the day for a software company would be spent preparing and mailing utterly pointless forms to the Copyright Office to register and record security interests. Our reading of the law "promote[s] the Progress of Science and useful Arts" by preserving the collateral value of unregistered copyrights, which is to say, the vast majority of copyrights. The debtor's reading of the law which would force producers engaged in the ongoing creation of copyrightable material to constantly register and update the registrations of their works before obtaining credit does not.
[Fn 77. See , generally, Mike Dash, Tulipomania: The Story of the World's Most Coveted Flower & the Extraordinary Passions It Aroused (2001). C.A.9 (Cal.),2002. In re World Auxiliary Power Co. 2002 WL 31017352, 303 F.3d 1120, 2 Cal. Daily Op. Serv. 9355, 2002 Daily Journal D.A.R. 10,507.]
CONCLUSION
Regarding perfection and priority of security interests in unregistered copyrights, the California U.C.C. has not stepped back in deference to federal law, and federal law has not preempted the U.C.C. The bank has a perfected security interest in the debtors' unregistered copyrights, and debtor, standing in the bankruptcy trustees' shoes, cannot prevail against it.
AFFIRMED