The economy is regaining momentum and companies are again considering raising larger investments and taking loans. Irrespective of the manner or objective of financing, the question is how a company will secure performance of its obligations. Upon encumbering the assets of a company, one alternative is pledging intellectual property, in addition to immovable property and other tangible assets. However, until recently the practice of pledging intellectual ownership has been quite modest in Estonia, compared to our Nordic neighbours, for example. While 29,593 trademarks were registered in Estonia as at the end of 2010, only 101 of them were encumbered with a pledge. At the same time, the statistics of pledge establishment demonstrate an upward trend – in 2009 trademarks were pledged only on four occasions, while in the figure for 2010 was 23 times. Insofar as other types of industrial property were pledged even less frequently, this article discusses only pledging trademarks.
How to pledge a trademark?
A trademark may be used to secure performance of any monetary obligation, whether arising from loan agreements, sales contracts or contracts for services. However, by its nature pledging of intellectual property is rather pledging of rights, with the respective right of security having been shaped as a registered security over movables because of the ability to register such rights. Therefore, only registered trademarks, not well-known, but unregistered trademarks, can be pledged.
To secure a trademark requires a notarised agreement and an entry in the Patent Office register. The requirement for notarisation of a contract pledging a trademark has sometimes come as a surprise even to notaries, illustrating lack of use of trademarks as a pledge. Establishing a pledge involves payment of a notary fee and state fee: these depend on the amount of the pledge. At the same time, the notary fee on pledging a trademark is several times smaller than upon establishing a mortgage of the same amount.
Problems related to pledging a trademark
Several problems may underly lack of popularity in using a trademark as security. The major problem probably concerns determining the value of a trademark. A trademark is not a thing in itself, but its value is influenced by several factors, starting with the reputation of the goods to be marked and ending with potential fluctuation of the market share of a company. Thus, the value of a trademark as security may quite easily fluctuate.
Upon pledging a trademark, account should also be taken of the limited duration of rights. The term of validity of legal protection of the trademark must be extended every ten years. Therefore pledgees should also keep an eye on that term and notify the proprietor of the need for extension, if necessary. The pledgee should reserve the right to cancel a secured contract before term and commence enforcing the pledge if the trademark proprietor fails to take the steps necessary to extend the term. A problem may also arise if anyone files an action against the trademark proprietor for the exclusive right of that proprietor to the trade mark to be declared invalid so that the grantor of security is deprived of its trademark.
Although the trademark register is freely available to anyone on the website of the Patent Office, its electronic version does not allow examination of trademark pledges, which may also be considered a problem. However, information on pledges is published in Kaubamärgileht (The Estonian Trademark Gazette). Information on a specific pledge may be obtained by filing an enquiry with the Patent Office. An enquiry is relevant mainly when the intention is to establish a pledge on a trademark, as the electronic register does not give information on licences of trademarks, which may significantly influence the value of a trademark. For example, if someone has been granted a long-term exclusive licence to use the trademark in exchange for a fee, it might be quite complicated to transfer the trademark when the pledge is enforced because the value of the trademark is small due to existence of the licence. As entering a licence in the register is not compulsory, the pledgee should certainly require the trademark proprietor to confirm in the contract absence of licences and the contract should set a sanction for breach of confirmation.
In addition to these problems, several practical issues have also emerged on pledging trademarks. For example, it is unclear whether it is possible to establish a combined pledge, i.e. whether one pledge can simultaneously encumber several trademarks. Combined pledges are mainly used to save expenses related to pledging. The advantages of combined pledges also include dispersion of risks, as no need would arise to divide the amount of pledge among different trademarks. Although combined pledges have been established on trademarks in Estonia, after amendment of the provisions concerning registered security over movables in the Law of Property Act in 2009, it may be stated that a trademark cannot be encumbered with combined pledges. This opinion is also shared both by the drafters of the amendment and the Patent Office itself.
As trademarks are mainly pledged in Estonia by companies from among our Nordic neighbours, the question has emerged as to whether a pledge contract can be entered into in a foreign language. Several notaries are ready to certify pledge contracts in English. In that case, the Patent Office does not see a problem with a foreign-language contract and asks for a translation only when doubts arise concerning correct understanding. This helps save expenses related to establishing pledges.
Enforcing pledges
If the obligor fails to fulfil its obligation, the pledgee may satisfy its claim by way of compulsory auction. The pledge contract must contain an agreement that the trademark proprietor will be subject to immediate compulsory execution. This makes it possible to directly address a bailiff who will organise an auction. If this agreement is absent, a court application is first required to satisfy the claim. An agreement under which the pledgee acquires a trademark encumbered with a pledge to satisfy its claim is invalid. In this way, the trademark proprietor is protected against a situation where only a small proportion of debt has not yet been paid but upon delay in payment the pledgee would become proprietor of a trademark that is significantly more valuable than the debt.
Conclusion
When the need arises to provide security for fulfilment of obligations, a company should critically examine its tangible as well as its intellectual property. Upon existence of a trademark, the parties concerned should more boldly consider it as an alternative or additional security. Problems can be prevented if timely attention is given to the issues discussed above. Well-contemplated contracts help hedge the risks of both pledgor and pledgee and to achieve more flexible solutions for securing obligations. In our experience, foreign trademark proprietors are becoming increasingly bolder in using this possibility. We hope that Estonian companies also come to realise that intellectual property is not needlessly specified as property.
Trademark as security – why so unpopular?
The economy is regaining momentum and companies are again considering raising larger investments and taking loans. Irrespective of the manner or objective of financing, the question is how a company will secure performance of its obligations. Upon encumbering the assets of a company, one alternative is pledging intellectual property, in addition to immovable property and other tangible assets. However, until recently the practice of pledging intellectual ownership has been quite modest in Estonia, compared to our Nordic neighbours, for example. While 29,593 trademarks were registered in Estonia as at the end of 2010, only 101 of them were encumbered with a pledge. At the same time, the statistics of pledge establishment demonstrate an upward trend – in 2009 trademarks were pledged only on four occasions, while in the figure for 2010 was 23 times. Insofar as other types of industrial property were pledged even less frequently, this article discusses only pledging trademarks.
How to pledge a trademark?
A trademark may be used to secure performance of any monetary obligation, whether arising from loan agreements, sales contracts or contracts for services. However, by its nature pledging of intellectual property is rather pledging of rights, with the respective right of security having been shaped as a registered security over movables because of the ability to register such rights. Therefore, only registered trademarks, not well-known, but unregistered trademarks, can be pledged.
To secure a trademark requires a notarised agreement and an entry in the Patent Office register. The requirement for notarisation of a contract pledging a trademark has sometimes come as a surprise even to notaries, illustrating lack of use of trademarks as a pledge. Establishing a pledge involves payment of a notary fee and state fee: these depend on the amount of the pledge. At the same time, the notary fee on pledging a trademark is several times smaller than upon establishing a mortgage of the same amount.
Problems related to pledging a trademark
Several problems may underly lack of popularity in using a trademark as security. The major problem probably concerns determining the value of a trademark. A trademark is not a thing in itself, but its value is influenced by several factors, starting with the reputation of the goods to be marked and ending with potential fluctuation of the market share of a company. Thus, the value of a trademark as security may quite easily fluctuate.
Upon pledging a trademark, account should also be taken of the limited duration of rights. The term of validity of legal protection of the trademark must be extended every ten years. Therefore pledgees should also keep an eye on that term and notify the proprietor of the need for extension, if necessary. The pledgee should reserve the right to cancel a secured contract before term and commence enforcing the pledge if the trademark proprietor fails to take the steps necessary to extend the term. A problem may also arise if anyone files an action against the trademark proprietor for the exclusive right of that proprietor to the trade mark to be declared invalid so that the grantor of security is deprived of its trademark.
Although the trademark register is freely available to anyone on the website of the Patent Office, its electronic version does not allow examination of trademark pledges, which may also be considered a problem. However, information on pledges is published in Kaubamärgileht (The Estonian Trademark Gazette). Information on a specific pledge may be obtained by filing an enquiry with the Patent Office. An enquiry is relevant mainly when the intention is to establish a pledge on a trademark, as the electronic register does not give information on licences of trademarks, which may significantly influence the value of a trademark. For example, if someone has been granted a long-term exclusive licence to use the trademark in exchange for a fee, it might be quite complicated to transfer the trademark when the pledge is enforced because the value of the trademark is small due to existence of the licence. As entering a licence in the register is not compulsory, the pledgee should certainly require the trademark proprietor to confirm in the contract absence of licences and the contract should set a sanction for breach of confirmation.
In addition to these problems, several practical issues have also emerged on pledging trademarks. For example, it is unclear whether it is possible to establish a combined pledge, i.e. whether one pledge can simultaneously encumber several trademarks. Combined pledges are mainly used to save expenses related to pledging. The advantages of combined pledges also include dispersion of risks, as no need would arise to divide the amount of pledge among different trademarks. Although combined pledges have been established on trademarks in Estonia, after amendment of the provisions concerning registered security over movables in the Law of Property Act in 2009, it may be stated that a trademark cannot be encumbered with combined pledges. This opinion is also shared both by the drafters of the amendment and the Patent Office itself.
As trademarks are mainly pledged in Estonia by companies from among our Nordic neighbours, the question has emerged as to whether a pledge contract can be entered into in a foreign language. Several notaries are ready to certify pledge contracts in English. In that case, the Patent Office does not see a problem with a foreign-language contract and asks for a translation only when doubts arise concerning correct understanding. This helps save expenses related to establishing pledges.
Enforcing pledges
If the obligor fails to fulfil its obligation, the pledgee may satisfy its claim by way of compulsory auction. The pledge contract must contain an agreement that the trademark proprietor will be subject to immediate compulsory execution. This makes it possible to directly address a bailiff who will organise an auction. If this agreement is absent, a court application is first required to satisfy the claim. An agreement under which the pledgee acquires a trademark encumbered with a pledge to satisfy its claim is invalid. In this way, the trademark proprietor is protected against a situation where only a small proportion of debt has not yet been paid but upon delay in payment the pledgee would become proprietor of a trademark that is significantly more valuable than the debt.
Conclusion
When the need arises to provide security for fulfilment of obligations, a company should critically examine its tangible as well as its intellectual property. Upon existence of a trademark, the parties concerned should more boldly consider it as an alternative or additional security. Problems can be prevented if timely attention is given to the issues discussed above. Well-contemplated contracts help hedge the risks of both pledgor and pledgee and to achieve more flexible solutions for securing obligations. In our experience, foreign trademark proprietors are becoming increasingly bolder in using this possibility. We hope that Estonian companies also come to realise that intellectual property is not needlessly specified as property.