by Kelly McClure and Robert Epstein
With the rise of computers, the Internet and Internet-based technology, intangible assets are becoming increasingly common in divorce and can provide novel issues when dealing with their characterization and division. In practice, some of the most common intangible assets that family law attorneys encounter are patents/intellectual property, goodwill, and royalties from oil and gas production. Recently, the term “intellectual property” has become an encompassing term that includes such things as patents, copyrights and trademarks.
The first step in characterization under Texas community property laws is inception of title. For patents, title “incepts” when the creator actually or constructively reduces the invention to practice. The time the creator physically constructs the invention and it performs the task it was constructed to complete is when it is reduced to practice. Constructive reduction is when the creator effectively describes the invention with sufficient specificity that a person knowledgeable in the field could reproduce the work. Copyrights are simpler in that title is incepted when the idea is reduced to “any tangible medium of expression.” 17 U.S.C. § 101.
The point in time at which title incepts in the intellectual property or patent is what determines how it is characterized and divided in divorce. Specifically, the question is whether the intellectual property or patent is created before or during marriage. Of course, if the creation occurs prior to marriage, the intellectual property or patent is the separate property of the spouse who created it. However, if the creation occurs during marriage, complex and intriguing division issues often arise. If the non-creator spouse seeks to be awarded the rights associated with the intellectual property or patent created during marriage, the courts have held that the income, royalties and other economic benefits that derive from the ownership of a patent are subject to division by the Court.
Royalties from oil and gas production are also an intangible asset that Texas practitioners often encounter. To determine the characterization of the royalty interest, one must first look to the ownership of the oil and gas itself. A typical community property characterization approach applies, but the interesting part comes when the oil and gas interest is the separate property of a spouse. Typically, income from separate property is community property. However, because royalties from oil and gas production are considered an extraction of land or sale of realty, if the underlying oil and gas interest is separate property, the royalties will also be considered separate property.
Goodwill has been defined by the International Glossary of Business Valuation Terms as an intangible asset that arises as a result of name, reputation, customer loyalty, location, products and similar factors not separately identified. Further, goodwill can be categorized into two different types: commercial and personal. If the goodwill is determined to exist independently of the personal ability of the spouse and if the goodwill is found to exist, then it must be determined whether that goodwill has a commercial value in which the community estate is entitled to share. Personal goodwill is nontransferable and attaches to the person who created it; therefore, upon divorce, it is not subject to division. However, both types of goodwill are subject to the traditional characterization rules, such as the community presumption and inception of title.
Characterization is not the final step in the advocacy process. Being able to explain to a client why they do or do not want to be awarded an asset is an important skill. For most intangible assets, valuation is the key component and a complex valuation analyses should be completed by a trusted financial expert. However, as a rule of thumb, the earlier in the life cycle of the intangible asset, the more risk there is associated with retaining an interest in it. The upside of retaining an interest in an intangible asset is that the value can increase at any time due to new technology or changes in market. The downside is that making sure one’s client receives the value they bargained for can be difficult due to the variability in demand for the asset he or she owns and the fact that the asset is not a tangible object.
Obtaining a grasp on the basic concepts of intangible assets can be a great tool to have in practice, and with the growing presence of intangibles, it is likely that clients will be needing additional assistance on this matter for years to come.
Kelly McClure, CEO and Managing Partner of McClure Law Group, PC, and her law partner Robert Epstein are both Family Law Board Certified by the Texas Board of Legal Specialization and can be reached at email@example.com and firstname.lastname@example.org, respectively.