Classification of Intellectual Property as Marital Property Upon Divorce
National Legal Research Group Inc.)
Classification as marital property is of course relevant only in those jurisdictions which recognize the concepts of marital and separate property. Roughly one-third of all American jurisdictions allow the court to divide any asset owned by either spouse, regardless of how and when it was acquired. In these states, any intellectual property interest which constitutes property can be divided by the court. The concerns addressed in this section may, however, be considered as division factors.
Where the concepts of marital and separate property are recognized, marital property is generally any asset acquired during the marriage. Like retirement benefits, intellectual property interests are acquired gradually as the necessary funds and efforts are invested, and not all at once when the patent, copyright, royalty contract, or other formal document is prepared:
Intellectual property interests [are] acquired when the owning spouse expends the necessary effort and not when they are actually received. Thus, a copyright received shortly after the marriage begins should be separate property if the owning spouse performed the necessary work before the marriage. Similarly, if a spouse expends all of the necessary effort during the marriage, but actually receives the patent a week after the date of classification, the patent should be marital property. Where the work is done partly before and partly after the marriage, a patent would logically have both marital and separate interests.
Zalusky v. Zalusky, 2002 WL 31553133, at *2 (Va. Ct. App. 2002) (quoting Brett R. Turner, Equitable Distribution of Property 6.23, at 433-34 (2d ed. 1994)) (emphasis omitted).
In discussing ownership interests in trade secrets, the Court of Appeals of the Fourth Circuit stated "one ’owns’ a trade secret when one knows of it, as long as it remains a secret." DTM Research, LLC v. AT&T Corp., 245 F.3d 327, 332 (4th Cir. 2001). A trade secret, then, must "accrue" to become a property right for purposes of Hawaii equitable distribution law. This is an intensely fact-driven analysis because the moment at which an idea blossoms into a property right protected by statute will, in large part, be dependent upon the content of the secret.
Teller v. Teller, 99 Haw. 101, 53 P.3d 240, 249 (2002). To classify intellectual property, therefore, one must determine the extent to which it was acquired from marital funds or efforts.
Funds. Intellectual property interests are clearly marital property to the extent that actual marital funds were invested in the creation process. See Lorraine v. Lorraine, 8 Cal. App. 2d 687, 48 P.2d 48 (1935) (community funds invested in development of patent). A separate interest presumably exists when separate funds were so invested, but this fact situation has not been presented in any of the reported cases.
Premarital Efforts. Intellectual property rights are separate property to the extent they were created before the marriage. In McDougal v. McDougal, 451 Mich. 80, 545 N.W.2d 357 (1996), the husband received a series of patents both before and after the marriage. During the marriage, he licensed the patents to manufacturers and also enforced them against rival claimants. Applying an all-property division system, the trial court awarded the wife one-half of the patents developed during the marriage and one-third of the patents developed before the marriage. On appeal, the court held that this award was too large, but it remanded the case with instructions to make a smaller deferred award based upon the value of the licenses signed during the marriage (whether on marital or premarital patents), plus any future renewals of those licenses. The court therefore seemed to say that it must consider the extent to which the work necessary to produce income from the patent had been performed before as opposed to during the marriage. The court also expressly ordered that the wife receive no interest in two licensing agreements signed by the husband after the date of filing. The question of postmarital marketing efforts was irrelevant in McDougal, as the husband had died while the appeal was pending.
Postmarital Efforts. Intellectual property rights are also separate property to the extent that they were created after the marriage. For instance, in Hazard v. Hazard, 833 S.W.2d 911 (Tenn. Ct. App. 1991), the husband invented a tracheostomy kit during the marriage. The kit needed significant further development, as the initial patient on whom it was used unfortunately had died. The future efforts, however, would be built upon a substantial foundation of work done during the marriage. "The proof established that if [the kit] should have a marketable value it will be because of adjustments or refinements made in the device itself. This is distinguishable from someone starting from scratch to design, develop and refine such a device." Id. at 916. To reflect the need for further work, the court awarded the wife only 20% of the future revenues from the kit.
Likewise, in Michel v. Michel, 484 So. 2d 829 (La. Ct. App. 1986), the wife wrote a series of novels during the marriage. The novels were published after the marriage, but "some of her work and effort which served as a foundation for the completed works took place during the community." Id. at 834. The court held that 50% of the future revenues from most of the novels was community property. With regard to the wife’s most recent novel, however, the court found a much smaller degree of marital investment and therefore measured the community interest at only 10%.
When a work is almost completely created after the marriage, there may be no marital interest at all. In Frankenheimer v. Frankenheimer, 231 Cal. App. 2d 101, 41 Cal. Rptr. 636 (1964), the husband acquired after the marriage movie rights to the novel Seven Days in May. Even though preliminary negotiations to acquire the rights had begun during the marriage, the court held that the rights were entirely separate property. To some extent, the court glossed over the possibility that part of the work necessary to acquire the rights may have been done during the marriage. It appears from the opinion that the initial negotiations were highly preliminary, however, and it is entirely possible that they made only a minimal contribution to the ultimate acquisition of the rights.
Even where an invention or work has been completely created during the marriage, courts still recognize that time and effort must be spent developing it into a source of income. To the extent that the necessary development work is done after the marriage, intellectual property interests are separate property.
For example, in In re Marriage of Monslow, 259 Kan. 412, 912 P.2d 735 (1996), the husband owned a patent for a new cable television service. The patent was complete but undeveloped at the time of the divorce, and it remained to be seen whether the concept behind the patent would work in actual practice. To develop the patent into a source of income, the husband would have to spend substantial time and effort implementing the service on actual cable systems. Recognizing this fact, the court awarded the husband 60% of the future royalties. It rejected his argument that the foreseeable need for further services required a larger percentage award.
Postmarital development is particularly an issue with regard to textbooks which are released in multiple editions. When an edition written entirely after the marriage draws substantially upon material from a prior edition written during the marriage, there is a marital interest in the future edition. The court so held in In re White, 537 N.W.2d 744 (Iowa 1995), awarding the wife 20% of the royalties from the next edition of the husband’s textbook.
Another situation presenting difficult issues of postmarital development is the comic strip or book series involving a continuing set of characters. Here, again, future work is built upon a foundation established during the marriage. There are no reported cases addressing the point directly. A tax case reports that in the divorce case of Peanuts creator Charles M. Schultz the wife received a percentage of net profits declining from 27% to 15% over a period of 10 years to reflect the gradually decreasing role of the marital foundation. Doty & Doty v. Commissioner, 81 T.C. 652 (1983). A similar claim was made by author Tom Clancy’s wife regarding future profits from future works featuring Clancy’s continuing character, Jack Ryan. Judith R. Forman & Vincent M. Waldman, Identifying and Dividing Intellectual Property: Practical Considerations at Marital Dissolution, 1999 Wiley Family Law Update 75 (Eric Pierson, ed., 1999).
Along similar lines, a completely developed invention or work may still produce more income if postmarital efforts are spent marketing it to potential buyers. To the extent that future income is traceable to these marketing efforts, the income is separate property.
The leading case on this point is In re Heinze, 257 Ill. App. 3d 782, 631 N.E.2d 728 (1994). The wife in Heinze wrote during the marriage a series of speech therapy textbooks. After writing the books, she traveled around the country speaking at seminars and undertaking other efforts to promote the textbooks. The court awarded the husband only 25% of the future royalties, reasoning that a significant portion of the royalties would be the product of the wife’s postdivorce promotional efforts. See also In re White, 537 N.W.2d 744 (Iowa 1995) (where husband’s textbook would require substantial future promotional efforts to maintain sales and husband alone would pay taxes on royalties, proper to award wife only 30% of future royalties from present edition and 20% of royalties from next edition).
The court took a slightly different approach in Dunn v. Dunn, 802 P.2d 1314 (Utah Ct. App. 1990). There, the husband traveled for 28 days per year demonstrating the proper use of medical instruments that he invented. He divided the time equally between demonstrating his artificial hip and artificial knee instruments; the wife asserted a marital interest only in the knee instruments. The court ordered that the value of 14 days of the husband’s services be subtracted from the artificial knee instrument royalties, and that the remaining sum be divided equally between the parties. Thus, instead of directly making an unequal division, the court awarded the value of the postmarital services directly to the inventor spouse and then made an equal division of the remaining royalties.
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