Introduction
On February 8 2012 the Department of Justice proposed new legislation regarding the establishment of pledges on IP rights. The bill was introduced by the government in the form of a proposition one year later (Prop 101 L (2013–2014)) and was approved on January 1 2015, in a process which took a lot longer than what most practitioners had expected. The new legislation came into force on July 1 2015; it is thus now possible to establish pledges on patents, patent applications and patent licences in Norway, in accordance with Sections 4 to 11 of the Mortgage Act. The new rules also require that anyone with rights under a patent must record these in order to ensure protection. The priority of the pledge is the time of registration in the official Patent Register.
The main purpose of the new freedom to pledge is to make it easier for start-ups with no possibility of financing their business in other ways, and other companies seeking funds to develop new ideas, to acquire capital through collateral in their patents, patent applications and licences.
However, it is still not possible to establish a pledge in registered trademarks, registered designs or copyrights. These rights can be pledged only through the establishment of non-possessory pledges on operating accessories, in accordance with Sections 3 and 4 of the Mortgage Act.
Registering a pledge
To register a pledge in the Patent Register, written notice must be submitted – either in paper format or electronically via email or Altinn (the Norwegian public reporting portal). The Patent Office requires documentation in order to register the pledge, although a copy of the pledge agreement will normally suffice. The registration fee for a pledge on a patent, a patent application or a patent licence is Nkr500. If several patents, patent applications or patent licences will serve as security for the same claim, the fee is Nkr100 for each record beyond the first.
Establishing the value of the collateral
Before patents can be used as collateral, the likely value of that collateral must be determined. The company may value its patents on the basis of how they support its business strategy – including their defensive strength, their ability to support access to capital and their ability to provide negotiating power. However, a bank – which will obtain the patents only if the company defaults on the loan, which probably means that the company's business strategy has failed – is unlikely to be interested in those aspects of the patents; it will be interested only in selling on the patents, if it can.
The value of a patent as collateral against a loan therefore depends on the likelihood of finding a buyer and the value that the patent represents to such a buyer. These are hypotheticals, but it is reasonably safe to assume that a bank will value the patents lower than the patent owner.
There are three established methods for patent valuation. The simplest is the cost approach, which is based on cost spent on filing and prosecution. This is usually irrelevant to a buyer, but at least it is based on hard facts. The cost approach is most relevant when purchase of the patent represents an alternative to in-house development and subsequent protection of an alternative technology to the solutions covered by the patent.
The market approach is based on existing data from past transactions. This is possible only if there is a transparent market for patents and information on transactions involving sufficiently similar patents is available – which is not usually the case, particularly not in Norway.
Finally, the income approach uses available information about the market for the products covered by the patent, the relative value contribution that the patented invention makes to those products and assumptions on how the market will develop in the future. The income approach is usually the preferred approach; but it can be costly, involving legal assessment of the patent itself, analysis of the product(s) and the market, and analysis of possible financial models for making money on the product.
Comment
As the possibility of using patents as collateral has only just become available, it is as yet unknown how banks, auditors and financial and tax authorities will approach it, and how much trust they will put in the value of patents – let alone in the valuation estimates provided by consultants. However, there are clear advantages to these new opportunities. Securing a loan rather than taking money from investors will allow entrepreneurs and founders to maintain control of their start-ups – at least until their value and their own financial strength have increased. And if things go awry, it may be preferable for entrepreneurs and founders to lose the rights in the failed invention, rather than losing their homes or other personal collateral that might otherwise have been pledged.
For further information on this topic please contact Tom Ekeberg or Kristin Kjærheim Astrup at Zacco by telephone (+47 22 91 04 00) or email ([email protected] or [email protected]). The Zacco website can be accessed at www.zacco.com.
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