UNIFORM COMMERCIAL CODE
In certain cases, usually as a result of either structural impediments or tax and accounting considerations, a royalty interest
transaction is structured purely as a secured financing, rather than a sale with a backstopping position as a secured financing.
In doing so, the buyer is able to avail itself of the protections afforded by Article 9 of the Uniform Commercial Code (UCC)
in dealing with the seemingly problematic anti-assignment provisions of the out-license. The UCC is a set of laws that are
enacted in relatively uniform fashion by each of the states for dealing with the rights and obligations of parties to commercial
transactions. Article 9 of the UCC deals with the subset of the commercial landscape consisting of secured transactions (dealing
with most types of personal property).
Under the UCC, as a contract arrangement, the out-license is likely characterized as a general intangible. General intangible is defined in Section 9–201 of the UCC and is a catch-all category for collateral (i.e., if the collateral is personal property
that doesn't meet the definitions of the other types of personal property subject to Article 9, in most cases it defaults
to the category of general intangible.) If an analysis of the out-license demonstrates that the licensee's principal obligation
is a monetary obligation, it will be classified as a special type of general intangible known as a payment intangible. This determination is relevant because different sections of Article 9 of the UCC address the anti-assignment problem depending
on whether a general intangible is or is not a payment intangible.
The UCC deals with the issue of anti-assignment provisions broadly speaking by permitting the granting of security interests
in general intangibles, explicitly including licenses, and other enumerated collateral types and providing that contractual
provisions establishing default rights or otherwise prohibiting assignment are ineffective with respect to the granting of
a security interest in the subject agreement. This is shown in Sections 9–406 (dealing with payment intangibles) and 9–408
(dealing with other general intangibles) of the UCC.
These provisions do not, however, entitle the buyer to enforce the out-license. Those rights remain with the seller, where
the UCC is concerned. In most out-licenses, the licensee's obligations are not restricted to the payment of money. They involve
significant undertakings to commercialize the subject IP, to protect the IP and not transfer or sublicense rights therein,
and to use the IP in accordance with applicable laws. If these other obligations are sufficiently broad, the better view is
that the out-license is a general intangible and not a payment intangible. However, if the licensee's obligations under the
out-license consist principally of a payment obligation, then the out-license would constitute a payment intangible.
The relevant distinction under the UCC between a general intangible that is a payment intangible and one that is not is that
Section 9–406 deals with security interests in payment intangibles and Section 9–408 deals with security interests in general
intangibles that are not payment intangibles. These sections operate in a similar fashion. It should be noted that Section
9–408 also deals with sales of as opposed to security interests in payment intangibles.
To deal with the enforcement rights under the out-license, the buyer in a royalty interest transaction must maintain the continued
involvement of the seller because the UCC does not render the anti-assignment provisions void relative to enforcement rights.
At a practical level, this is often a highly negotiated issue, particularly in circumstances where all or nearly all of the
seller's economic interest in the out-license is intended to be acquired by the buyer.
If the seller has no meaningful retained economic interest in the out-license, it has little incentive to vigorously enforce
its rights as putative licensor against the licensee. This problem is ultimately handled either by aligning the seller's interests
with the buyer's interests (e.g., creating a concurrent or tail economic interest for the seller) or by specifically negotiating
rights of prosecution in the name of the seller for the buyer with appropriate protections, usually in the form of expense
reimbursement and indemnification for the seller.
As part of an established and growing source of alternative investing, royalty interest transactions draw on multiple analytical
and legal disciplines. In dealing with the legal challenge presented by the out-license, the buyer has both legal protections
available from the UCC and common structural techniques for maximizing its rights relative to the out-license in relation
to the licensee and the seller and its creditors.
Timothy R.M. Bryant and Jeffrey A. Jung are both partners at McDermott, Will & Emery LLP, Chicago, IL, 312.984.2066, firstname.lastname@example.org