When a couple divorces, dividing assets such as real estate, bank accounts, and brokerage funds, is an expected part of the separation and these divisions are often complex. For business owners, creators, and inventors, however, property division can also involve determining who gets intellectual property (IP), on top of any tangible assets. Intangible assets like IP can be difficult to accurately value, and if one spouse was either the principal or sole creator of the IP, they may feel strongly that their soon-to-be ex should have no rights to it.
Understanding how California law applies to intellectual property in the context of a divorce can help illuminate when IP may be subject to division. If there is a dispute over the characterization of such assets as either marital or separate property, the assistance of legal experts knowledgeable in both family and intellectual property law is essential. Finally, in any divorce involving IP, accurate assessment of the intellectual property’s worth is essential for ensuring a fair resolution.
- What Is Intellectual Property?
- When Is Intellectual Property Considered Marital Property?
- Intellectual Property Valuation in Divorce
- Protecting Your Intellectual Property in Divorce
Need Help Protecting Your Intellectual Property?
What Is Intellectual Property?
Intellectual property is any intangible property produced by the efforts of a person’s mind and creativity. This could be an invention, a novel or a film, an artwork, a design, computer code, or any range of intellectual creations. The law protects an IP owner or creator’s right to use and profit from it. Types of IP include:
- Copyrights: This gives creators of original works fixed in a tangible medium of expression (e.g., a book, painting, or film), whether published or unpublished, exclusive rights to reproduce, distribute, or perform their work, as well as allowing them to produce derivative works and authorize others to use their work.
- Trademarks: Trademarks are words, phrases, symbols, and/or designs that identify the source of a product or service. Businesses use trademarks such as brands and logos to distinguish themselves from competitors.
- Patents: Patents give inventors exclusive rights to use and manufacture a novel invention upon approval of an application to the U.S. Patent and Trademark Office. Examples of patentable inventions might include a new kind of electric device or a newly produced variety of plants.
- Trade Secrets: Trade secrets are valuable information that is not publicly known and that has been kept secret, but which may not be protectable in other ways. This can include recipes, formulas, algorithms, processes, financial information, etc.
These types of IP may produce ongoing income, represent the potential for future income, or form a significant fraction of the value of a business. As a result, it can be challenging to divide such assets in a divorce properly.
When Is Intellectual Property Considered Marital Property?
As in other community property states, in California, the property and the debt acquired by a couple during their marriage are generally considered to belong to both equally. Property that belonged to each before the marriage or which is acquired by either spouse after their separation is considered separate property and is not subject to division in a divorce. Gifts or inheritances received by either party during the marriage are also separate property. However, if separate property brought into the marriage or an inheritance is commingled with marital property, it can be difficult to clearly establish one party’s sole right to it.
Intangible assets like IP fall under community property rules in the same way that more traditional assets such as bank accounts or real estate do. If a copyrighted work was created during a marriage, or a patent or trademark was granted in that time, then in most cases, both spouses have a claim to a share of that IP’s value, even if only one spouse was directly responsible for its creation. If an IP was brought into a marriage separately, a spouse may come to have a claim on a portion of its value if they made contributions to its development that increased its worth, either through direct creative effort or support that enabled their spouse’s work.
An IP asset cannot be divided the way a stock portfolio could be, with each party taking a portion and going their separate ways. Courts can, however, require parties to split the income generated by IP assets, such as royalties, licensing fees, or damage awards from infringement, unless one party buys out the other’s interest in the asset as part of their settlement agreement. This makes accurate valuation of any IP assets a matter of utmost importance.
Intellectual Property Valuation in Divorce
Determining what intellectual property is worth can be a subject of considerable dispute. Bringing in an outside expert to help evaluate the assets at issue and identify the appropriate method for valuing them can help ensure that such property is neither under- nor over-valued. This type of valuation may be more frequently associated with business transactions such as mergers and acquisitions, where IP assets may make up a considerable fraction of a company’s worth. Common methods of valuing IP include:
- Income approach: How much income is the IP projected to generate in the future?
- Cost approach: How much did the IP cost to develop or acquire?
- Market approach: What would the fair market value for the IP asset be if it were sold?
While it may be easier for the spouse who created the IP to agree to share the profits it generates, such shared ownership of intellectual property may have consequences for future transactions involving that IP, possibly affecting its potential long-term value. In addition to an accurate valuation, consulting with an attorney knowledgeable in intellectual property law is strongly advised to determine whether it is better to seek sole ownership.
Protecting Your Intellectual Property in Divorce
For those who enter a marriage with IP they want to protect, a prenuptial agreement can help ensure that any IP remains separate property should the relationship end in divorce. If this has not been done, it can still be possible to show that some or all of the IP should be considered separate property through clear documentation that shows when it was developed and created. Showing that it was wholly or mostly created before the marriage can significantly impact what each spouse is entitled to. Most importantly, whether the IP is claimed as separate property or is marital property, working with legal experts familiar with both family law and intellectual property law can help inform the best strategies for protecting intellectual property assets and reaching an equitable distribution for both parties.
Family Law Expertise in the Silicon Valley
If you’re facing a divorce and worried that you will lose control of your intellectual property, the experienced attorneys at Hoover Krepelka can help. We’ve been representing professionals, inventors, creators, and investors in Northern California for over 60 years, with expertise in complex property division that enables us to negotiate and advocate effectively on your behalf. To schedule a consultation, fill out the form below today.
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