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The New Frontier in Asset Division

By Lynne Strober, Elizabeth Featherman of University of Pennsylvania, Penn Center for Innovation, Jennifer Presti; and Joan D'uva of Eisner Amper

Lynne Strober and Jennifer E. Presti are both with Mandelbaum Salsburg, P.C. Lynne is Co-Chair of the Matrimonial and Family Law practice group and handles all aspects of divorce. Jennifer is Counsel to the firm, focusing her practice on the areas of family, trust, estate and guardianship litigation.

As we know, equitable distribution is the division of assets and obligations acquired during a marriage, whether individually or jointly. Equitable distribution may be effectuated by agreement, or by a judicial decree. In states that follow equitable distribution laws, as opposed to community property states, property acquired during the marriage will be divided between the spouses in a fair and equitable manner; however, there is no set rule for determining who receives what or the percentage distribution to each spouse.  In the minority of states that apply "community property" laws, when dividing a divorcing couple's assets and obligations, a judge divides the couple's joint assets and debts in half between the parties, however, valuation remains an issue.  A court will not attempt to divide assets based on a framework of factors as states that follow equitable distribution laws do. There are only nine community property states; Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Assets to be divided include real estate, businesses, stock options and intellectual property.  The value of a piece of art created by a party, an invention, or a script must be assigned a value or a plan for future distribution must be established.  This area of the law of the division of intellectual property rights, has not yet been fully addressed by case law.  Methodologies need to be established setting forth the best way to value and divide these assets.

Courts across our country are now facing a new frontier in equitable distribution, where assets including but not limited to copyrights, patents, and intellectual property rights need to be valued and divided at the time of divorce.  These assets require special assessment to properly establish appropriate value.

As to the equitable distribution analysis, in Connecticut, as a general framework, “[t]here are three stages of analysis regarding the equitable distribution of each resource: first, whether the resource is property within the Connecticut General Statutes § 46b–81 to be equitably distributed (classification); second, what is the appropriate method for determining the value of the property (valuation); and third, what is the most equitable distribution of the property between the parties (distribution).” (Internal quotation marks omitted.)” Cunningham v. Cunningham, 140 Conn. App. 676, 681 (2013) citing Bender v. Bender, 258 Conn. 733 (2001).

In Florida, “the court must begin with the premise that the distribution should be equal, unless there is a justification for an unequal distribution based on all relevant factors, including:

(a) The contribution to the marriage by each spouse, including contributions to the care and education of the children and services as homemaker.(b) The economic circumstances of the parties.(c) The duration of the marriage.(d) Any interruption of personal careers or educational opportunities of either party.(e) The contribution of one spouse to the personal career or educational opportunity of the other spouse.(f) The desirability of retaining any asset, including an interest in a business, corporation, or professional practice, intact and free from any claim or interference by the other party.(g) The contribution of each spouse to the acquisition, enhancement, and production of income or the improvement of, or the incurring of liabilities to, both the marital assets and the nonmarital assets of the parties.(h) The desirability of retaining the marital home as a residence for any dependent child of the marriage, or any other party, when it would be equitable to do so, it is in the best interest of the child or that party, and it is financially feasible for the parties to maintain the residence until the child is emancipated or until exclusive possession is otherwise terminated by a court of competent jurisdiction. In making this determination, the court shall first determine if it would be in the best interest of the dependent child to remain in the marital home; and, if not, whether other equities would be served by giving any other party exclusive use and possession of the marital home.(i) The intentional dissipation, waste, depletion, or destruction of marital assets after the filing of the petition or within 2 years prior to the filing of the petition.(j) Any other factors necessary to do equity and justice between the parties.”

F.S.A. § 61.075 (West).

Under the New Jersey Equitable Distribution Statute, the court considers a variety of factors when making a determination with regard to the division of an asset or an obligation pursuant to N.J.S.A. § 2A:34-23.1;

(a) The duration of the marriage or civil union; b) The age and physical and emotional health of the parties; c) The income or property brought to the marriage or civil union by each party; d) The standard of living established during the marriage or civil union; e) Any written agreement made by the parties before or during the marriage or civil union concerning an arrangement of property distribution; f) The economic circumstances of each party at the time the division of property becomes effective; g) The income and earning capacity of each party, including educational background, training, employment skills, work experience, length of absence from the job market, custodial responsibilities for children, and the time and expense necessary to acquire sufficient education or training to enable the party to become self-supporting at a standard of living reasonably comparable to that enjoyed during the marriage or civil union; h) The contribution by each party to the education, training or earning power of the other; i) The contribution of each party to the acquisition, dissipation, preservation, depreciation or appreciation in the amount or value of the marital property, or the property acquired during the civil union as well as the contribution of a party as a homemaker; j) The tax consequences of the proposed distribution to each party;  k) The present value of the property; l)  The need of a parent who has physical custody of a child to own or occupy the marital residence or residence shared by the partners in a civil union couple and to use or own the household effects; m) The debts and liabilities of the parties; n) The need for creation, now or in the future, of a trust fund to secure reasonably foreseeable medical or educational costs for a spouse, partner in a civil union couple or children; o) The extent to which a party deferred achieving their career goals; and, p) Any other factors which the court may deem relevant.

Further N.J.S.A. § 2A:34-23.1 dictates that “[i]n every case, except cases where the court does not make an award concerning the equitable distribution of property pursuant to subsection h. of N.J.S.2A:34-23, the court shall make specific findings of fact on the evidence relevant to all issues pertaining to asset eligibility or ineligibility, asset valuation, and equitable distribution, including specifically, but not limited to, the factors set forth in this section.” Id. And, that “[i]t shall be a rebuttable presumption that each party made a substantial financial or nonfinancial contribution to the acquisition of income and property while the party was married.” Ibid.

Since the time of its enactment in 1974, the New Jersey equitable distribution statute has been further defined by New Jersey case law, with each case giving greater definition to the meaning of each term, and the process used to derive an “equitable result.” The first three cases addressing the Statute after the legislature enacted N.J.S.A. § 2A:34-23.1 were Painter v. Painter, 65 N.J. 196 (1974), Chalmers v. Chalmers, 65 N.J. 186 (1974), and Rothman v. Rothman, 65 N.J. 219 (1974).

In Painter, the New Jersey Supreme Court held that the new Statute governing equitable distribution of property was constitutional, and that all property a spouse acquires an interest in during marriage shall be eligible for distribution in event of divorce. Painter supra, 65 N.J. 196 (1974) The Painter Court went on to delineate that during the period of joint marital acquisition “should be deemed as terminating on date complaint is filed,” and “that any property owned by husband and wife at time of marriage will remain separate property of such spouse and, in event of divorce, will not qualify as an asset eligible for distribution, that if property, owned at time of marriage, later increases in value, such increment enjoys a like immunity, and that income or other usufruct derived from such property, as well as any asset for which original property may be exchanged or into which it, or proceeds of a sale, may be traceable shall similarly be considered separate property of particular spouse.” Id.

Decided the same day as Painter, the Court in Chalmers v. Chalmers addressed whether martial fault played a role in the calculus of equitable distribution at the time of the divorce and found that it did not:

The Court noted that in Painter v. Painter, 65 N.J. 196, 320 A.2d 484, also decided by us this day, we have held that the span of time embraced by the equitable distribution of property provisions of the amended statute, N.J.S.A. 2A:34—23, extends from the marriage of the parties to the date the complaint for divorce is filed. In finding this to be the legislative intent we rejected as unworkable the concept that no property should be included that was acquired after it could be shown that there was an irretrievable breakdown of the marriage or after a cause of action for divorce had arisen. For the reasons expressed in Painter, we conclude that in the instant case the trial court erred in excluding  from its order for equitable distribution property acquired by defendant after the date of plaintiff's admitted adultery

Chalmers v. Chalmers, 65 N.J. 192-93 (1974).

In Rothman v. Rothman, published shortly after Painter, the New Jersey Supreme Court created a three step process for courts to follow: “[t]he court must first decide what specific property of each spouse is eligible for distribution.  65 N.J. 219 (1974). Then a determination of its value for purposes of such distribution must be made. Id.  Lastly, the court must decide how allocation between the spouses can most equitably be made. Ibid.

In 1983, in Dugan v. Dugan, the goodwill of a law practice was reviewed for purposes of equitable distribution under N.J.S.A. 2A:34–23 with respect to attorneys, and in particular individual, practitioners, by the New Jersey Supreme Court. 92 N.J. 423, 432-33 (1983). The Dugan Court stated that the evaluation of the existence of goodwill is centered on “reputation.” Id. The New Jersey Supreme Court stated that goodwill “does not exist at the time professional qualifications and license are obtained.” Ibid. “A good reputation is earned after accomplishment and performance.” Dugan, 92 N.J. 423, 432-33 (1983).  The Court went on to state that “future earnings capacity has been enhanced because reputation leads to probable future patronage from existing and potential clients, goodwill may exist and have value.” Id. And, “[w]hen that occurs the resulting goodwill is property subject to equitable distribution.” Ibid.

In 1988, in Piscopo v. Piscopo, the issue of celebrity goodwill was first addressed by the New Jersey courts. 232 N.J. Super. 559 (App. Div. 1989). Celebrity goodwill is loosely defined as excess earnings capacity attributable to one's status or fame. Jack A. Rounick & Hon. R. William Riggs, "What's Perk- olating? How Courts Are Handling Perks, Fringe and Other Employment Benefits," Fam. Adv., Vol. 23, No. 3 (Winter 2001), 12, 17. Joe Piscopo is a comedian and entertainer who became famous while appearing as a headliner on Saturday Night Live from 1980 to 1984. The parties agreed that Mrs. Piscopo was instrumental in assisting Mr. Piscopo's move from penury to celebrity by taking care of the household, bearing and raising their children, and serving as a sounding board for his ideas. Id. at 577. The Superior Court, Chancery Division, determined that Mr. Piscopo’s celebrity goodwill was indeed marital property to be included in the equitable distribution calculous, and Mr. Piscopo appealed. The New Jersey Appellate Division affirmed the trial court’s holding that a celebrity's goodwill, attributable to his or her celebrity status, is an asset subject to equitable distribution. Id. The Appellate Division reiterated the trial court's ruling that valuation of goodwill is not based on future earnings, but rather on past earnings capacity, and the probability that such earnings would be realized in the future. Piscopo supra at 231 N.J. Super. 576, 580 (Ch. Div. 1988) aff'd, 232 N.J. Super. 559 (App. Div. 1989), citing Dugan v. Dugan, 92 N.J. 423, at 433 (1983).  In both the trial court and appellate decisions the courts did not discuss the value or an acceptable method of valuation of Mr. Piscopo’s celebrity goodwill, just that it could be valued.

With regard to celebrity goodwill, once the court recognizes celebrity goodwill as marital property, the next challenge is valuation. Valuation of celebrity goodwill depends on the level and duration of benefits as well as the associated risks. Jay E. Fishman & Christopher Waltrich, "The Business of Celebrity," Valuing Specific Assets in Divorce 1, 18 (Robert D. Feder ed., Supp. 2001). No set technique exists for valuing celebrity goodwill. Similar to other intangible assets, celebrity-goodwill valuation methodologies include: percentage of gross earnings or revenue, excess earnings, relief from royalty, and enhanced earnings. Id. at 18-24. These approaches are based on the premise that the value is the present worth of future benefits. Id. at 18.

In the 1990 decision of Scavone v. Scavone the New Jersey Appellate Division handled the issue of determining proper date of valuation for passive versus active assets and clarified that the date of valuation is dependent on whether that asset is considered a “passive” or an “active” asset. 243 N.J. Super. 134, 135-36 (App. Div. 1990). Passive assets are defined as those assets whose value fluctuations are based exclusively on market conditions, as opposed to active assets whose value fluctuates in proportion to the contributions or efforts of one party. 11 N.J. Prac., Family Law And Practice § 35.3.

After the parties’ 37 year marriage, at issue was the valuation and equitable distribution of the husband’s seat on the New York Stock Exchange (NYSE). Scavone, 243 N.J. Super. at 136.  In Scavone, during the course of the parties’ marriage the husband acquired a one-half ownership interest in a seat on the NYSE. Id. The parties’ agreed that the seat was an “an asset which [wa]s subject to fluctuations based on “market conditions.” Scavone at 135-36 (App. Div. 1990). “As of the date of the filing of the complaint, August 22, 1985, the value of the seat ranged from $350,000 to $400,000. Scavone v. Scavone, 243 N.J. Super. 134, 136 (App. Div. 1990). Its value reached in excess of $1,000,000 in 1987.” Id. “In September 1988, defendant's partner sold his 50% share in the NYSE seat for $250,000.” Ibid. “As of the date of the trial, October 12, 1988, it was stipulated that the value of the seat was $700,000.” Scavone at 134, 136 (App. Div. 1990). The husband appealed on the contention that the trial court had erred in valuing his seat on the NYSE as of the date of trial rather than the date the complaint was filed, or, in the alternative, as of the date defendant's partner sold his one-half interest.

The Appellate Division concluded that the NYSE seat was a passive asset whose value increased from the date of the filing of the complaint to the date of trial without contribution or effort by the husband but rather by the simple control of the market forces. Scavone supra, 243 N.J. Super. 138.  The Appellate Division found that the husband “conceded that the most important factor in determining value of the seat is the “market forces” and whether or not he work[ed] on the stock exchange floor ha[d] no influence on the seat's value.” Id. And, the court held that the “increment in value was caused solely by market forces and not by [the husband’s] efforts or diligence, it was not an abuse of discretion to apply the trial-date value.” Scavone v. Scavone, 243 N.J. Super. 134, 138 (App. Div. 1990).

In 1991, in New York, in the case of Elkus v. Elkus, the issue of valuing a celebrity’s status, and/or her goodwill as marital property arose again in the divorce between the well-known opera singer and her husband. 169 A.D.2d 134, 136 (1991). In Elkus the wife maintained that her career and celebrity status were not licensed, and were not “entities which are owned, like a business” and that they should not be considered marital property.” Id. The trial court disagreed with her, and the Supreme Court, Appellate Division affirmed the trial court’s ruling, finding that the wife's career as opera singer and/or her celebrity status constituted marital property subject to equitable distribution to extent that the husband's contributions and efforts led to increase in the value of her career. Elkus, supra at 169 A.D.2d 134 (1991).

The following is a brief introduction to the different types of intellectual property assets and valuation models that have been used to evaluate these intangible assets.

PATENTS

A patent for an invention is the grant of a property right to the inventor, issued by the U.S. Patent and Trademark Office. The inventor or the patent owner has the right to utilize an invention and/or to allow others to use it via a license. A patent is granted by the government that allows the inventor to use or allow others to use the invention for a limited duration (typically 20 years) in exchange for the inventor to publicly disclose the invention. After a patent term ends, anyone is free to use the invention. In some cases, during course of their employment, inventors are required to assign all their patent ownership rights in the invention to the company. Once the patent rights are assigned, the inventor will not retain any ownership rights.

TRADEMARKS

Trademarks are brand names that enable the public to identify the source of goods or services and distinguish the goods or services of one seller or provider from those of another. A trademark can be a word, name, symbol, graphic or other distinguishing mark, or even a sound or smell, or any combination. Examples of trademarks are brand names of products or services.

COPYRIGHTS

Copyright is a form of property that grants exclusive rights to the author of a work. The protected work must be fixed in a tangible medium of expression, such as videos, books, computer programs or source codes, plays, paintings, photographs, sculptures, architectural drawings, movies, music, television shows. Copyright protects expression of an idea but does not protect ideas alone.

TRADE SECRET

Trade secret is any confidential business information which provides an entity, person or company a competitive edge in business. It can be a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers. A well-known example of a trade secret is the Coca-Cola formula.

INTELLECTUAL PROPERTY VALUATION METHODS

The valuation analysts use numerous approaches in order to reach a reasonable indication of a defined value for the subject intangible assets on a certain date. One of the most important aspects in valuing an intellectual property asset is the ability of the asset to generate future income.

The four most common approaches to estimate the fundamental or fair value of the intellectual property are the Cost Approach, Market Approach, Income Approach, and Royalty Relief Approach.  Federal courts address the issues concerning copy right and patent law as they are both governed by federal law.

  1. Cost approach

The cost approach is based on the economic principle of substitution. This principle states that an investor will pay no more for an asset than the cost to obtain, by purchasing or constructing, a substitute asset of equal utility. This approach works best where the asset is not presently producing income or is not expected to produce income and is most commonly used when the goodwill or intrinsic value of the asset must be reported on the books. There are several cost approach valuation methods, the most common being the historical cost, replacement cost, and replication cost.

a.      Historic Cost

This valuation methodology measures the amount of money spent in the development of the intellectual property at the time it was developed. Unless the intellectual property was developed in the recent past, an historic cost measure tends to be unreliable due to the impact of inflation and the changes that occur in technology over time. In addition, it is not always possible to provide accurate information on the resources spent for such quantification.

b.      Replication Cost

This measures the amount of money that would need to be spent in current cost terms in order to develop the intellectual property in exactly the same way and to achieve the same final state as it currently exists. This includes costs incurred on any unsuccessful or inefficient prototypes. Technological changes and improvements to underlying technology thereafter are disregarded under this method.

c.       Replacement Cost

This measures the amount of money that would need to be spent in current cost terms in order to develop the intellectual property as it currently exists, but excludes the costs relating to unsuccessful or inefficient prototypes. Technological improvements to underlying technology are taken into account in the calculations under this method.

  1. Market approach

The market approach is based on competition and equilibrium. Supply and demand factors will drive the price of an asset at equilibrium point in a free market. Furthermore, it provides an indication of the value by comparing the price at which similar property has exchanged between willing buyers and sellers. Data on such similar transactions may be accessed in several public sources, including specialized royalty rate databases.

For patent evaluation, a market comparables approach should offer a good indication of a patent’s value, as it reflects the exchange of value between two parties. However, it is often difficult to find a suitable comparable transaction in valuing patents because of the lack of disclosed sale or licensure activity and the uniqueness of each patent.

  1. Income Approach

The Income Approach analysis focuses on the economic value of the future cash flow derived from a specific collective property entity, i.e., the cash flow. This approach estimates the fair value of intellectual property by discounting the future economic benefits of ownership at an appropriate discount rate – the net present value of the discounted future cash flow. The accuracy in obtaining the discount rate of interest is critical.  To determine the value of the future income stream, the following variables are required:

  1. A projected income stream either from product sales or license of the patent
  2. An estimate of the duration of the useful life or its remaining exclusive term of the patent
  3. Probability of success if it is not a commercialized product
  4. An understanding of risk factors such as the risk of invalidation, superceding technology or obsolescence and incorporating those into the valuation
  5. A real-world, market-appropriate discount rate
  6. A determination needs to be made if there are other assets that contribute to the income stream in addition to the intellectual property

Some of the risk factors, especially for patent evaluation, include:

  • New Patent Issuance: New patents can make existing technology obsolete or allow new competitors into the same field. If more competitors are allowed in the same field practicing their own patents, the value of the underlying technology will be diluted. To access the crowdedness in a given technology field requires research in the patent landscape in a particular technological field. It is often difficult to survey the patent landscape because we may not be able to ascertain what patent applications have been filed with the U.S. Patent and Trademark Office. Only issued patents and published patent applications are available for public viewing.  Therefore it is difficult to anticipate what new patent applications are in the field.
  • Patent Challenges/Declared Invalid: After a patent is issued, it still remains vulnerable and open to attack for invalidity. A challenge of invalidity comes in different forms, including for example, challenging someone other than the named inventor is the “real” inventor to the invention or the invention is “obvious” to persons skilled in the relevant technology. Formal challenges are lodged with the U.S. Patent and Trademark Office.  If the challenge is successful, the patent would immediately be rendered as invalid. Any patent licenses will also be rendered invalid as well. To protect against this risk, proper due diligence should be performed to anticipate potential problems.
  • Patent Infringement Suits: Defending a patent infringement suit is costly. It could include treble damages for willful infringement. To protect against such risks, due diligence should be performed prior to evaluation to survey the patent landscape and to anticipate any potential problems.
  1. Relief from Royalty Approach – A Hybrid of Income and Market Approach

Relief from royalty is based on deprival value theory and looks at the amount of income that a company would be “deprived” of, if it did not own the intellectual property in question but was required to rent it from a third-party instead. The royalty represents the rental charge that would be paid to the licensor if this hypothetical arrangement were in place. The ability to determine an appropriate royalty rate is fact-dependent and requires identifying suitable comparable transactions. A reliable sales forecast is also required for estimating the income stream.   There are many on line sources which have databases of licensing transactions that can be used to determine an appropriate royalty rate.

This method is useful because the market size and expected market share are generally easy to ascertain.  However, the assumption of a rental charge in the evaluation may not readily materialize in reality.  We must keep in mind that some patents are of little or no economic value to warrant a rental charge.

Other methods may include Real Options Method and Venture Capital Method.  Using the Real Options Method would entail determining certain inputs to the Black Scholes Option pricing model.  Such inputs include volatility of cash flows, our estimate of the time horizon and fixed costs invested to commercialize the product.  The Venture Capital Method is similar to the discounted cash flow model except that the discount rate is derived in a different manner.  Selecting the appropriate method may be based on whether it is an asset in early stages of development (often a cost approach or optional pricing model would be used) or it is a mature asset where future forecasts are not so speculative (a discounted cash flow approach or market approach would be appropriate.)

Regardless of the form of the intellectual property such as patent, copyright, trademark or trade secrets, courts need to divide intellectual property assets according to how the intellectual property can best be monetized and how the intellectual property assets can best be managed. While spouses may fight over the property both for financial reasons, courts award the intellectual property rights to the rights-holding spouse and award some portion of the residual or royalty income from the intellectual property to the non-rights-holding spouse. This is because the rights-holding spouse is more likely to know how to further develop the intellectual property portfolio and also to maximize the value of the intellectual property assets. For example, the inventor can further develop the patent portfolio by continuing to create more inventions in his patented field and to file for more patent applications to build up the patent portfolio.  Similarly, for writers who hold copyrights in their novels, screenplays or songs, they are the most familiar with their work and can best monetize or further develop subsequent work based on their rights.  In the meanwhile, the non-rights holding spouse can receive their interest

A review of some cases shows how courts throughout the United States have addressed the issue of valuing intellectual property in a divorce:

In Teller v. Teller, 53 P. 3d 240, the Supreme Court of Hawaii specifically found that the husband’s patents and trade secrets were subject to division.  A fair value approach was utilized.  It was also found the IP assets did not depreciate.  This case acknowledges the limited number of cases addressing this issue.  There is an in depth discussion of the fact finding including that a trade secret is an asset because it has value and is actionable if misappropriated.  The complex issues that may arise when an intellectual property asset becomes viable are discussed; if an asset is created before a marriage but the patent is obtained after the date of marriage the patent is subject to division.  The pre-marital aspect of an IP asset may have increased in value during the marriage.  These are fact based analyses.  As part of the valuation discussion the cost approach was rejected in favor or the fair market value methodology.  In Teller, the intellectual property had an actual sale with a specific value attributed to the IP.   As a result the resolution was easy in this case although that is not always the case.  Teller holds,

Inasmuch as intellectual property has not been the subject of equitable distribution in our courts, we have not developed a method of determining fair market value for such property.

It is interesting to note the value of IP is also addressed in criminal cases when dealing with the theft of IP assets.  The loss of a trade secret has been calculated as what a reasonably prudent investor would pay for the trade secret.

The issue of whether there should be a discount or reduction for depreciation of an IP asset is rejected as inconsistent with the law without significant fact proofs.  For example, the Coca-Cola formula does not get worn out.  On the other hand, IP assets such as royalty streams are easy to divide.

Jacoby v. Jacoby, 134 Hawaii 431 (2014) 341 P.3d 1231 addresses the issues as well.  It is interesting that Hawaii is somewhat of a hotbed for decisions addressing the valuation and division of IP.  In this case, the asset was not sold; the husband was going to receive a stream of income, i.e., royalties from his invention.  Once again, there was a clear basis for determining value.

In McDougal v. McDougal, 451 Mich 80 (1996) 545 N.W. 2d 307, 38 US PO 2d 1842 the Michigan Supreme Court affirmed an award relating to an IP asset that provided the recipient spouse with a percentage of the stream of income and not a percentage of the IP asset itself.  The determination was fact sensitive.  “The new judgment on remand shall provide that the patents and licensing agreements are the property of the defendant, subject to the defendant’s obligation to share the funds generated from those assets, as provided in the new judgment on remand.”

Some intellectual property assets are being paid out or have been paid and their values are easily determinable and divisible.  Other intellectual property assets may not be quantifiable at the time of divorce.  When funds are received the efforts of each party must be considered such as for marketing or taking additional steps to create one asset. 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. In this way, the value establishes itself; it is too speculative to value in a vacuum. 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.

This is a highly complex area of the law and type of property.  There are few cases addressing valuation of intellectual property assets in the context of divorce.

As a result of the emphasis on mediation and arbitration fewer cases are being litigated in the court system.  As a result there may be fewer court decisions addressing these complex matters.  When cases are resolved without a reported court decision there is less guidance for the practitioner.  The result may be different treatments of similar facts, or a great way to address an issue that will remain unknown.  This will make articles and seminars all the more important as we address new issues facing the practitioner.  We must devise a methodology for family lawyers and the expert to utilize in effectuating the valuation and division of the special assets.  The further development of case law will take time.

Therefore, the following methodologies are proposed for handling the division of IP in divorce cases going forward.

1. When the value of the asset is being paid out, assuming it is a valid representation of value, that value should be accepted.

a.         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; 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 in Teller.

b.         If payments are made by a third party for the use of the entity intellectual property, such as royalty streams net of taxes can be used to measure value.  This works for recordings, television, etc.

2.  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 has created a stream of income such as the payout or royalties.  For example, a computer app that addresses a novel issue.  The traditional accounting analysis can be used as to cash flow, risk, possibly life span, costs, characteristics of uniqueness, and whether the spouse is the sole creator.  These are not marketability discounts but factors as to be weighed.

3.  When the IP asset is incomplete at divorce, such as a book that has been written and is under negotiation to be published or a sculpture has been created and is in a gallery for sale but has not sold 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 utilized.  A constructive trust should be imposed over the asset.  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 husband and wife meet, wife is working on creating a unique widget.  The work continues throughout the marriage and at time of complaint she has not sold the rights to the widget.  She sells the widget after the divorce and receives a payout over several years and has had marketing expenses.  If the before marriage period of work is two years, the marriage was five and the period after complaint was three years, one half of the total net value would be subject.  A percentage of the half could be determined less actual cost and taxes at the time.  The percentage could be less 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.  This approach avoids the unanticipated windfall if the book becomes a hit.  A potential malpractice claim is avoided and rights are preserved.  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.  A strict formula however, can be automatically imposed.  The approach needs to be tailored to the case.

This discussion is just beginning.  The cases are very fact specific.  All options need to be considered in crafting an approach that is specific to the facts of the case. We need to see case law provide further guidance.  Expert opinion will be critical as well.  It is interesting that this relatively unchartered area of asset division remains.  With all the burgeoning areas of IP the law will have to become prepared to address these assets as part of equitable distribution and community property.  We will have to apply what we know to this new frontier.