Petitioning Creditors Moldo v. Matsco

• Decision Date: 06 June 2001
• Docket Number: N,No. 99-56856,99-56856
• Citation: 252 F.3d 1039
• Parties: (9th Cir. 2001) IN RE: CYBERNETIC SERVICES, INC., D/B/A SILENT RADIO, INC., DEBTOR. PETITIONING CREDITORS; BYRON Z. MOLDO, CHAPTER 7 TRUSTEE OF THE ESTATE OF CYBERNETIC SERVICES, INC., DBA SILENT RADIO, INC. ("MOLDO"), APPELLANTS, v. MATSCO, INC., APPELLEE. IN RE: CYBERNETIC SERVICES, INC., D/B/A SILENT RADIO, INC., DEBTOR. BYRON Z. MOLDO, CHAPTER 7 TRUSTEE, APPELLANT, v. MATSCO, INC., AND MATSCO FINANCIAL CORPORATION, PETITIONING CREDITORS, APPELLEES. o. 99-56868
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1039

252 F.3d 1039 (9th Cir. 2001)

IN RE: CYBERNETIC SERVICES, INC., D/B/A SILENT RADIO, INC., DEBTOR. PETITIONING CREDITORS; BYRON Z. MOLDO, CHAPTER 7 TRUSTEE OF THE ESTATE OF CYBERNETIC SERVICES, INC., DBA SILENT RADIO, INC. ("MOLDO"), APPELLANTS, v. MATSCO, INC., APPELLEE. IN RE: CYBERNETIC SERVICES, INC., D/B/A SILENT RADIO, INC., DEBTOR.

BYRON Z. MOLDO, CHAPTER 7 TRUSTEE, APPELLANT, v. MATSCO, INC., AND MATSCO FINANCIAL CORPORATION, PETITIONING CREDITORS, APPELLEES.

No. 99-56856, No. 99-56868

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted April 17, 2001

Filed June 6, 2001

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

Lorin Brennan, Newport Beach, California; Damon G. Saltzburg, Saltzburg, Ray

& Bergman, Llp, Los Angeles, California; and Paul M. Brent, Steinberg, Nutter & Brent, Santa Monica, California, for the appellants.

James A. Tiemstra, Miller, Starr & Regalia, Walnut Creek, California, for the appellees.

Appeals from the Ninth Circuit Bankruptcy Appellate Panel Perris, Klein, and Riegle, Bankruptcy Judges, Presiding. BAP No. CC-98-01690-PKRi; BAP No. CC-98-01690-PKRi

Before: Harry Pregerson, Ferdinand F. Fernandez, and Susan P. Graber, Circuit Judges.

The opinion of the court was delivered by: Graber, Circuit Judge

OPINION

As is often true in the field of intellectual property, we must apply an antiquated statute in a modern context. The question that we decide today is whether 35 U.S.C. §§ 261 of the Patent Act, or Article 9 of the Uniform Commercial Code (UCC), as adopted in California, requires the holder of a security interest in a patent to record that interest with the federal Patent and Trademark Office (PTO) in order to perfect the interest as against a subsequent lien creditor.¹ We answer "no"; neither the Patent Act nor Article 9 so requires. We therefore affirm the decision of the Bankruptcy Appellate Panel (BAP).

FACTUAL AND PROCEDURAL BACKGROUND

The parties stipulated to the relevant facts: Matsco, Inc., and Matsco Financial Corporation (Petitioners) have a security interest in a patent developed by Cybernetic Services, Inc. (Debtor). The patent is for a data recorder that is designed to capture data from a video signal regardless of the horizontal line in which the data is located. Petitioners' security interest in the patent was "properly prepared, executed by the Debtor and timely filed with the Secretary of State of the State of California," in accordance with the California Commercial Code. Petitioners did not record their interest with the PTO.

After Petitioners had recorded their security interest with the State of California, certain creditors filed an involuntary Chapter 7 petition against Debtor, and an order of relief was granted. The primary asset of Debtor's estate is the patent. Petitioners then filed a motion for relief from the automatic stay so that they could foreclose on their interest in the patent. The bankruptcy Trustee opposed the motion, arguing that Petitioners had failed to perfect their interest because they did not record it with the PTO.

The bankruptcy court ruled that Petitioners had properly perfected their security interest in the patent by following the provisions of Article 9. Furthermore, the court reasoned, because Petitioners had perfected their security interest before the filing of the bankruptcy petition, Petitioners had priority over the Trustee's claim in the patent and deserved relief from the stay. Accordingly, the bankruptcy court granted Petitioners' motion. The BAP affirmed.

Petitioners then filed this timely appeal.

STANDARD OF REVIEW

We review for abuse of discretion orders granting relief from an automatic stay. Benedor Corp. v. Conejo Enters., Inc. (In re Conejo Enters., Inc.), 96 F.3d 346, 351 (9th Cir. 1996). We review de novo any conclusions of law. Vanderpark Props., Inc. v. Buchbinder (In re Windmill Farms, Inc.), 841 F.2d 1467, 1469 (9th Cir. 1988).

DISCUSSION

Article 9 of the UCC, as adopted in California, governs the method for perfecting a security interest in personal property.² Article 9 applies to "general intangibles," a term that includes intellectual property. Cal. Com. Code §§ 9106. The parties do not dispute that Petitioners complied with Article 9's general filing requirements and, in the case of most types of property, would have priority over a subsequent lien creditor. The narrower question in this case is whether Petitioners' actions were sufficient to perfect their interest when the "general intangible" to which the lien attached is a patent. The parties also do not dispute that, if Petitioners were required to file notice of their security interest in the patent with the PTO, then the Trustee, as a hypothetical lien creditor under 11 U.S.C. §§ 544(a)(1), has a superior right to the patent.

The Trustee makes two arguments. First, the Trustee contends that the Patent Act preempts Article 9's filing requirements. Second, the Trustee argues that Article 9 itself provides that a security interest in a patent can be perfected only by filing it with the PTO.³ We discuss each argument in turn.

A. Preemption

1. The Analytical Framework

"[T]he Supremacy Clause, U.S. Const., Art. IV, cl. 2, invalidates state laws that `interfere with, or are contrary to,' federal law." Hillsborough County, Fla. v. Automated Med. Labs., Inc., 471 U.S. 707, 712 (1985) (quoting Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 92 (1824)). Congress may preempt state law in several different ways. Congress may do so expressly (express preemption). Id. at 713. Even in the absence of express preemptive text, Congress' intent to preempt an entire field of state law may be inferred"where the scheme of federal regulation is sufficiently comprehensive to make reasonable the inference that Congress `left no room' for supplementary state regulation" (field preemption). Id. (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)). State law also is preempted "when compliance with both state and federal law is impossible," or if the operation of state law " `stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress' " (conflict preemption). G.S. Rasmussen & Assocs. v. Kalitta Flying Serv., Inc., 958 F.2d 896, 903-04 (9th Cir. 1992) (quoting Kewanee Oil Co. v. Bicron Corp. , 416 U.S. 470, 479 (1974)). In all cases, "[c]ongressional intent to preempt state law must be clear and manifest." Indus. Truck Ass'n v. Henry, 125 F.3d 1305, 1309 (9th Cir. 1997).

The Patent Act does not contain preemptive text, so express preemption is not an issue here. Concerning field and conflict preemption, the Supreme Court has adopted a "pragmatic" approach to deciding whether the Patent Act preempts a particular state law. Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 156 (1989). Congress, in the Patent Act, "has balanced innovation incentives against promoting free competition, and state laws upsetting that balance are preempted." G.S. Rasmussen, 958 F.2d at 904."[S]tate regulation of intellectual property must yield to the extent that it clashes with the balance struck by Congress" in the Patent Act. Bonito Boats, 489 U.S. at 152 (emphasis added).

Using this form of analysis, the Supreme Court has held, on numerous occasions, that the Patent Act preempts a state law that grants patent-like protection to a product. See, e.g., id.; Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 231 (1964); Compco Corp. v. Day-Brite Lighting, Inc. , 376 U.S. 234, 237 (1964). Those cases do not control, however, because we are confronted not with a state law that grants patent-like protection to a product but, rather, with a state commercial law that provides a method for perfecting a security interest in a federally protected patent.

That distinction is key because the Supreme Court has instructed clearly that the Patent Act does not preempt every state commercial law that touches on intellectual property. For example, in Aronson v. Quick Point Pencil Co., 440 U.S. 257, 262 (1979), the Supreme Court observed that commercial agreements "traditionally are the domain of state law. State law is not displaced merely because the contract relates to intellectual property which may or may not be patentable; the states are free to regulate the use of such intellectual property in any manner not inconsistent with federal law."

The Court also has held that the Patent Act does not preempt a state's trade secret law even though the practical effect of the state law is to prohibit the public dissemination of information that, under the Patent Act, is not eligible for protection. Kewanee Oil, 416 U.S. at 474. In Kewanee, the Court examined the purposes of the Patent Act and the state trade secret law at issue and concluded that the state law did not stand " `as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.' " Id. at 479 (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)). The Court observed that the state law also encouraged invention, but did so by protecting a subject matter that was beyond the Patent Act's horizon; therefore, "the two systems are not and never would be in conflict." Id. at 484.

It is within this framework that we evaluate the Trustee's claim. The Trustee argues that the recording provision found in 35 U.S.C. §§ 261 requires that the holder of a security interest in a patent record that interest with the PTO in order to perfect as to a subsequent lien creditor. Section 261 provides:

Ownership; assignment Subject to the provisions of this title, patents shall have the attributes of personal property.

Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent, or patents, to the...