Intellectual Property

When the Value of the Asset Is Being Paid Out

When the value of the IP asset is being paid out ' assuming it is a valid representation of value ' that value should be accepted. Scenario 1: If an IP asset is sold, the sales price will presumptively reflect the value. This works when an IP asset is sold as part of a transaction, as when a beverage company sells the product and the drink formula (a trade secret). If a specific value is assigned to the trade secret, that value should be used, as was the case in Teller (Teller v. Teller, 99 Haw, 101 (2002)). Scenario 2: If payments are made by a third party for the use of the entity intellectual property, such as through royalty streams, net of taxes can be used to measure value. This works for recordings, television, etc.

When the IP Asset Is Quantifiable

Where the IP asset is quantifiable, a fair market analysis may be used. This is appropriate when the asset is ripe for valuation, but has not been sold or and has not yet created a stream of income, such as the payout or royalties. One example is a computer application that addresses a novel issue. The traditional accounting analysis can be used as to cash flow, risk, possible life span, costs, characteristics of uniqueness and whether one spouse is the sole creator. These are not marketability discounts, but factors to be weighed.

When the IP Asset Is Not Yet in Final Form

When the IP asset is incomplete at divorce, such as a book that has been written and is under negotiation to be published, a formula needs to be in place. A hybrid model utilizing certain aspects of the division of unvested stock options and the division of retirement assets not in payout status should be employed. A constructive trust should be imposed over the asset and a formula should be used similar to the coverture fraction establishing the marital portion of the asset. From the value of marital portion, costs should be deducted.

For example, when the husband and wife met, the wife was working on creating a unique widget. The work continued throughout the marriage and at time of the complaint, she had not sold the rights to the widget. However, she sold the widget after the divorce, has received a payout over several years, and has incurred marketing expenses. If the before-marriage period of work was two years, the marriage lasted for five, and the period after the filing of the dissolution complaint has been three years, one half of the total net value would be subject to distribution (five years of marriage vs. two years pre-marriage and three years post-filing). A percentage of the half could be determined, less actual cost and taxes at the time. The percentage could be lessened as the post-complaint time increases.

All of this would be fact-sensitive. A post-divorce analysis by an expert would be necessary. The asset would be preserved and subject to the formula set forth in a Judgment of Divorce. The formula would not be able to be fixed until the duration for economic realization is established. There can be an annual review; after some period of time, the parties or a court may determine the distance between the award and the post-divorce success is too great and the constructive trust may be dissolved. An entity life span may be imposed upon the plan, or a strict formula can be automatically imposed. The approach needs to be tailored to the case. However it is set up, this approach avoids an unanticipated windfall to only one party if the book becomes a hit. As a side-benefit, a potential legal malpractice claim may also be avoided.

Conclusion

Some IP assets, such as royalty streams, are easy to divide. However, other IP assets are less cooperative. The efforts of each party must be considered, such as for marketing or taking additional steps to create the IP asset. At the time of dissolution, a book may still need to be edited, a play produced, an invention acquired by a company, etc. Although not a complete asset, there is value.

It is risky to value an unquantifiable asset, and it is hard to negotiate a percentage where an unknown amount of time post-Complaint will be needed to recognize the value. What about the asset that looks like it has no value, and then becomes extremely valuable post-Complaint? To avoid a potential malpractice claim, rights need to be protected. Unfortunately, the case remains in part open ended. The clients remain bound to an incomplete asset. If a party waives a claim to such an asset, language needs to be included in a Matrimonial Settlement Agreement that the value is speculative and there is a risk in waiving the claim.

The cases we've cited are all very fact-specific, so we must keep in mind that all options need to be considered in crafting an approach that is specific to the facts of the case. With all the burgeoning areas of IP law, we must be prepared to address these assets as part of equitable distribution and community property, using the guidance of case law, expert opinion and some of the methods discussed herein. This discussion is just beginning.

Lynne Strober, a member of this newsletter's Board of Editors, is the chair of the Family Law Department at Mandelbaum Salsburg, P.C. Jennnifer E. Presti is an associate. Elizabeth Lai Featherman is co-chair of the firm's IP practice group, and Joan M. D'Uva, CPA, is a partner at Eisner Amper, LLP.