(a) Except as otherwise provided in subsection (b), theThe creation of a financier's interest in a party's contractual rights under a license without the consent of the other party to the license is effective if the creation would be effective and permitted under Section 2B-502 and be effective under Section 2B-503. However, Eenforcement of a financier's interest that results in a transfer or a change of possession that results from is effective and permitted only if:

(b) The following rules apply to If the creation or enforcement of a financier's interest in a licensee's rights under a nonexclusive license that is not effective under subsection (a):, the following rules apply:

(1) Subject to paragraph (2), the creation or enforcement of the interest is effective notwithstanding subsection (a), but only to the extent that it does not result in:

(A) an actual transfer or change of the use or possession of or access to the information;, or

(B) a result precluded by Section 2B-502(a) other than as to the obligation to make payments to the licensor.

(2) Upon a material breach of the financial accommodation contract by the licensee, as between the financier and a the licensee, the financier has the rights of an aggrieved party under Section 2B-715. However, the financier may take possession or control of, or have access to copies of the information or copies or related materials covered by its interest, only if the licensor consents or if doing so taking possession would not create a result precluded is permitted under Section 2B-502(a). The financier may not transfer or otherwise use the information without the consent of the licensor.

(c) A person that obtains creates or enforces a financier's interest and any transferee of thate person financier is subject to the terms and limitations of the license and to the licensor's informational property rights. The financier may not use, sell, or otherwise transfer rights in the license or copies of the information or access to the information unless the conditions of subsection (a) are met as to enforcement of the interest.

(d) The creation or enforcement of a financier's interest imposes no obligations or duties on the licensor with respect to the financier or the licensee.

"Contract": Section 2B-102. "Financier": Section 2B-102. "Information": Section 2B-102. "Informational property rights": Section 2B-102. "License": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Nonexclusive license": Section 2B-102. "Party": Section 1-201. "Term": Section 1-201.

a. Consensus that Article 2B should allow creation of limited rights in licensee side of non-exclusive licenses, but not permit sale and the like without consent of the licensor.

1. General Rule. Subsection (a) makes clear that, in general, a financier's interest can be created in any contractual right that can be transferred under general transferability rules. Also, consent by the other party to the contract makes transfer possible.

In determining transferability, however, the act of creating a security interest and the act of enforcing that interest are separate events. Unlike in sales of goods, licenses create a situation where three parties have an interest in what happens to the property and the contractual rights associated with it: the lender, the debtor and the licensor. In many cases, the licensor's property rights dominate. In dealing with these three parties, a material difference may exist between creation of a non-possessory interest and enforcement by foreclosure and sale for purposes of applying Section 2B-502(a).

2. Non-exclusive Licenses. For non-exclusive licenses, the transferability of a licensee's rights is even further constrained in law by federal policy limitations that presume non-transferability without licensor consent. See 2B-502(b). See Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9^th Cir. 1996). See also In re Patient Education Media, Inc., 210 BR 237 (Bankr. SD NY 1997) (copyright license). This policy has been articulated and enforced by a number of courts of the years in reference to assignments of a licensee interest to third parties, either by contract or by operation of law. No reported cases discuss the application of the policy to security interests and it can be argued that mere creation of an interest without a change of possession, control or access to the information does not offend the general non-transfer policy set out in those cases.

This Article pushes the scope of secured lending in the absence of licensor consent as far are possible in light of that strong contrary federal policy. Subsection (b) tailors a right to create a security interest without the licensor's consent to satisfy the policy interests that underlie the basic non-assignability principle. It permits creation of an interest unless creation would be barred under the general standard of 2B-502. However, while an interest can be created, it and any effort at enforcement cannot, without the licensor's consent, result in an actual change of control, access or use or any sale of the information. This balance preserves the licensor's protected interest in controlling the resale market and the identity of the licensee.

This parallels Article 2A-303(3) which limits the enforceability of lease provisions restricting security interests. It applies here to both a contract clause and a non-exclusive license that contains no such clause because, unlike in leases, underlying law does not allow assignment. Comments to Article 2A-303 state: "[The] lessor is entitled to protect its residual interest in the goods by prohibiting anyone other that the lessee from possessing or using them." Article 2A-303, Comment 3. As in Article 2A, the licensor has a right to control who is in effective possession (including use and access) of the subject matter of the license.

The provisions here allow creation of a security interest in many cases because mere creation does not make an actual change of possession, use, or access, nor does it delegate obligations. The argument against federal preemption is that "creating" a security interest does not assign the interest under the license. The intellectual property rights holder has a protected interest in restricting the use of its intellectual property by persons other than those it specifically authorizes. The approach in this Article allows full pursuit of that federal policy, but gives substantial scope to the state law policy of allowing creation of security interests. The same would not be true, for example, with a rule that allows all assignment of rights under the other section of transferability, a rule that would be specifically subject to preemption.

3. Enforcement. The basic principle of this Section is that enforcement rights are measured separately under the transferability rules of federal law and this Article. Consistent with this, subsection (b)(2) allows the financier to enforce rights as between it and the licensee, but precludes acts of enforcement to the extent that those acts are prohibited under 2B-502. The financier may, for example, obtain a court order prevent further use of the information by the debtor, but cannot take possession of the information if doing so would be precluded under Section 2B-502. The licensor in a case governed by subsection (b) cannot transfer the information or the contract rights to a third party under any circumstances without consent of the licensor.

4. Taking Subject to the License. Subsection (c) states the basic principle, applicable to all cases, that the financier and any transferee of the takes subject to the limiting terms of the license and the intellectual property rights of the licensor. The license is the dominant agreement in that it defines the licensee's rights. A lender can not abrogate those rights and the limitations that are attached to the rights.

5. Roadmap. The effect of the financing rules of this Article is illustrated in the following:

Illustration 1. Financing a Licensor's Interest.

Creditor desires to finance the licensor's interest in a commercial license. To determine whether it can do so, creditor must make the following determinations: a) under 2B-502(a) would creation of the interest make a change that impinges one or more of the interests listed there; b) if not, under Section 2B-503 is there an enforceable "no transfer" term that precludes creating the interest without consent; c) if not, then the interest can be created under 2B-504(a). If transfer is precluded by either (a) or (b), no interest can be created.

If an interest can be created, the lender would make the same analysis in reference to any enforcement action.. The issues are different, of course, since enforcement such as by repossession or sale entails further acts that may adversely impact the licensee. The result of the analysis depends on the licensor's personal role in the on-going license. In cases of fully paid up, perpetual licenses, enforcement would not be barred unless, for example, it threatens trade secret rights of the licensee.

Illustration 2. Financing the Licensee in a Commercial License.

Creditor desires to finance the licensee's interest in a commercial, non-exclusive license. It would ask the following questions: a) is the creation permitted by 2B-502(a); b) if permitted under 2B-502(a), it is nevertheless prohibited by 2B-502(b) unless it falls into one of the exceptions there (mass market, or title without contract restriction); c) if the license is not within an exception, creditor would not need to consult 2B-503, if it did so, however, any contractual limitation on creation of an interest or transfer is effective since creation of an interest is barred under 2B-502; d) assuming that creation is barred under 2B-502 or 2B-503, 2B-504(b)(1) nevertheless permits creation if creating the interest does not violate 2B-502(a) or change possession, use or control of the information.

If an interest can be created, the analysis must be repeated for any effort to enforce the interest. The creditor asks first whether the proposed enforcement (e.g., repossession or sale) creates an effect barred by 2B-502 or 2B-503. Unless the license is in a Section 2B-502(b) exception, enforcement is barred by that section. If this is true, creditor asks whether there is an alternative under Section 2B-504(b). Under subsection (b)(1) enforcement is not permitted if it changes possession, access, or use. Subsection (b)(2) preclude enforcement if it otherwise violates Section 2B-502(a). In effect, enforcement without licensor consent cannot occur if it adversely affects the licensor's interest, including an adverse effect by making the licensor's return less likely to be received. In end user software, this will often allow a court order to prevent use under (b)(1), but not repossession. Section (c) precludes enforcement by sale in any case without the licensor's consent.

In most cases, the net effect allows creation of an interest in a non-exclusive license, but this does not permit the full panoply of enforcement ordinarily available to a lessor or secured lender.

Illustration 3. Financing an Entertainment Licensee Interest.

Assume that the commercial license in Illustration 2 involves a distribution license for a motion picture. Under 2B-502(a), while creation of an interest in the licensee rights may not be barred, any enforcement of those rights without consent would typically be barred because it would change (increase) the risk of the licensor not receiving a return expected from the contract. This is true regardless of the presence or absence of contract provision. Under Section 2B-504, creation of the interest may be permitted under (b)(1), but typically, no enforcement would be permitted because enforcement (barring use, taking possession) would adversely effect the interests of the licensor.

Illustration 4. Financing a Mass Market Licensee Interest.

The treatment of a mass market license parallels other non-exclusive licenses, except that the exception in 2B-502(b) shifts the result. Section 2B-504(a) requires analysis under Section 502 and 503. Under 2B-502 and 2B-503, a lender can create an interest in a mass market license if the creation of the interest does not result in a Section 502(a) injury to the licensor. The financier can enforce the interest if a) enforcement does not violate 2B-502(a); and b) enforcement is not barred by a contract term. If either of condition precludes enforcement, the focus shifts to 2B-504(b). This section does not allow sale, but does allow creating an interest and enforcement that does not violate Section 502(a).