BILL ANALYSIS                                                                                                                                                                                                    



                                                                            



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                                    THIRD READING


          Bill No:  SB 6
          Author:   Lieu (D)
          Amended:  4/8/13
          Vote:     27 - Urgency

           
           SENATE JUDICIARY COMMITTEE  :  7-0, 4/2/13
          AYES:  Evans, Walters, Anderson, Corbett, Jackson, Leno, Monning


           SUBJECT  :    Business

           SOURCE  :     Directors Guild of America
                      Screen Actors Guild-American Federation of  
          Television and Radio
                      Artists
                      Writers Guild of America, West


           DIGEST  :    This bill, until January 1, 2015, re-enacts repealed  
          provisions of California's Uniform Commercial Code, relating to  
          the rights that certain licensees take under a nonexclusive  
          license where a security interest exists in a general  
          intangible.

           ANALYSIS  :    Existing law provides that a lessee in ordinary  
          course of business takes its leasehold interest free of a  
          security interest in the goods created by the lessor, even if  
          the security interest is perfected and the lessee knows of its  
          existence. 

          This bill:
           
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           1.Provides that a licensee in ordinary course of business takes  
            its rights under a nonexclusive license free of a security  
            interest in the general intangible created by the licensor,  
            even if the security interest is perfected and the licensee  
            knows of its existence. 

          2.Defines "licensee in ordinary course of business" as a person  
            that becomes a licensee of a general intangible in good faith,  
            without knowledge that the license violates the rights of  
            another person in the general intangible, and in the ordinary  
            course from a person in the business of licensing general  
            intangibles of that kind.  The bill provides that a person  
            becomes a licensee in the ordinary course if the license to  
            the person comports with the usual or customary practices in  
            the kind of business in which the licensor is engaged or with  
            the licensor's own usual or customary practices. 

          3.States the intent of the Legislature to negate the repeal on  
            January 1, 2013, of, and to enhance, existing provisions  
            within Section 9321 of the Uniform Commercial Code relating to  
            a licensee in ordinary course of business in order to ensure  
            economic stability and continuity for purposes of contract  
            interpretation. 

          4.Includes a January 1, 2015, sunset date for the above added  
            provisions, unless a later enacted statute deletes or extends  
            that date, as specified.  

          5.Provides that, operative January 1, 2015, a lessee in ordinary  
            course of business takes its leasehold interest free of a  
            security interest in the goods created by the lessor, even if  
            the security interest is perfected and the lessee knows of its  
            existence.

           Background
           
          Article 9 of the Uniform Commercial Code covers security  
          interests in personal property.  It was rewritten and modernized  
          by the Uniform Law Commission (ULC, formerly the National  
          Conference of Commissioners on Uniform State Laws, or NCCUSL) in  
          the late 1990s and in the process the ULC addressed security  
          interests in general intangible property (such as intellectual  
          property).  Every state has adopted Article 9 as revised, and  
          California's revised Article 9 became effective on July 1, 2001.  

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          As a whole, the new Article 9 simplifies and clarifies the rules  
          for creation, perfection, priority and enforcement of a security  
          interest.  More specific to this bill, the 1999 revisions to  
          Article 9 of the Uniform Commercial Code created rights for  
          licensees of general intangibles such as intellectual property  
          comparable to the rights of buyers of goods in the ordinary  
          course of business. 

          At the time that California considered adoption of the revised  
          Article 9, the Directors Guild of America, Inc. and the Screen  
          Actors Guild expressed concerns about how the proposed revision  
          to Section 9321 would affect their operations.  As reflected in  
          the Senate Judiciary Committee analysis of the 1999 revisions:

               The Screen Actors Guild is concerned about the application  
               of this rule to their industry.  They say that with the  
               rapidly developing technology in their industry, it is  
               difficult for them at this time to forego the value of a  
               perfected security interest from a licensee, even if the  
               license is a nonexclusive license.  Example is given of an  
               actor's residuals from movie rights to a film rented out by  
               Blockbuster Video, a nonexclusive licensee.  Technology may  
               develop such that they should be able to enforce their  
               security interest against a nonexclusive licensee they say,  
               in three years or so, and therefore suggest that this  
               particular provision sunset in three years, subject to  
               reenactment.

               The drafters of Article 9 resist this vigorously.  They  
               state that a nonexclusive licensee will not "take free" of  
               a security interest created by the licensor to its  
               sublicensor if the first license was "exclusive." 

          While the ULC assured them at the time that the then-proposed  
          language of Section 9321 would not have a negative impact in  
          practice, the groups asked for time to evaluate the impact of  
          the new Section 9321 on their actual operations.  The  
          Legislature then agreed to limit the operative effect of the new  
          Section 9321 by including a sunset date of January 1, 2004.   
          That original sunset date was subsequently extended three times,  
          most recently to January 1, 2013.  However, no bill was  
          introduced in the 2011-12 legislative session to extend or  

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          repeal that sunset date.  Accordingly, the "new" Section 9321  
          was repealed on January 1, 2013, 12 years after it first took  
          effect.  

           Comments
           
          According to the author's office, "Section 9321 of the  
          Commercial Code sunset on January 1, 2013.  In order to ensure  
          that California's authors, creators and performers have the same  
          protections as other states, it is imperative that California  
          reinstates this uniform code with urgency."  

          Under this language, when a customer legally purchases a movie  
          from retailer, the customer would receive a nonexclusive license  
          for the movie, and the actors/directors/writers would not be  
          able to go after the consumer to collect on any security  
          interest in the movie itself.

          Senate Judiciary Committee staff notes that while this is the  
          first time since the enactment of the revised Section 9321 that  
          the sunset has been allowed to lapse, an urgency bill was  
          required in the 2009-10 legislative session to extend the sunset  
          to January 1, 2013.  

          While Senate Judiciary Committee staff also notes that any  
          uncertainty that arose after the lapse of Section 9321's sunset  
          date on January 1, 2013 cannot, as a practical matter, be  
          entirely erased, as a matter of public policy, it is arguably  
          preferable to reinstate those provisions immediately to both  
          minimize the effect of any confusion and provide certainty  
          moving forward.  

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  No   Local:  
           No

           SUPPORT  :   (Verified  4/1/13)

          Directors Guild of America (co-source) 
          Screen Actors Guild-American Federation of Television and Radio  
          Artists (co-source) 
          Writers Guild of America, West (co-source) 
          California Commission on Uniform State Laws
          Motion Picture Association of America, Inc.


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           ARGUMENTS IN SUPPORT  :    According to the Motion Picture  
          Association of America, Inc., "It is important to the conduct of  
          commerce within the state that section 9321 be reinstated.  This  
          section of the Commercial Code affords stability in commercial  
          dealings by protecting the transfer of intangible rights, such  
          as the licensing of intellectual property, and ensuring that a  
          license may be relied upon by the license."


          AL:nl  4/8/13   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

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