What Happens to Intellectual Property in a Divorce?
Almost everyone knows that divorcing couples must divide up real estate, bank accounts, and retirement funds, or have the court do it for them. Less thought is given to handling the division of intellectual property in divorce.
Intellectual property (IP) may include valuable assets like patents, copyrights, trademarks, and trade secrets and is much harder than a bank account to value and split up.
If you’re facing a divorce in Arizona, it’s vital to understand how the law identifies, values, and divides IP under the state’s community property laws. The experienced divorce lawyers in Phoenix with Lincoln & Wenk share the following guide to this often complicated process.
Understanding Arizona’s Community Property Laws and IP Assets
Arizona is a community property state regarding divorce proceedings. That means most assets acquired during a marriage are jointly owned by the spouses and subject to equitable division. This includes tangible assets like real estate and intangible ones like intellectual property.
Separate property refers to assets acquired by a spouse before marriage, by gift, or by inheritance. The law presumes these assets to remain the owner’s individual property entirely unless the owner comingles it with marital assets.
However, courts may consider intellectual property created before marriage partially as community property if it earned income or grew in value during the marriage.
Courts dealing with intellectual property in divorce must look closely at:
- The timing of the IP’s creation
- The source of funds used for its development
- Any income generated from the IP during the marriage
- Evidence of commingling separate and community property
Identifying and Classifying IP Assets
Arizona state divorce courts are regularly called upon to properly classify different types of IP normally defined under federal law. The most common types include:
- Patents on inventions
- Copyrights protecting books, software, music, and art
- Trademarks tied to business branding
- Trade secrets like formulas or client lists
The parties in the case usually must present evidence like patent registrations, copyright certificates, or licensing agreements.
If a party patents an invention during marriage, even if developed before marriage, the court can consider the income derived as marital property.
Also, suppose one spouse authored a novel before marriage, but it became a bestseller during the marriage due to joint marketing efforts. The copyright itself may remain separate, but the court may divide the royalty income.
Valuing Intellectual Property in Divorce
Placing a value on a retirement account is straightforward. Simply pull up a current statement. While valuing assets like homes or cars is more subjective, there are longstanding processes for appraisals of tangible assets, normally based on comparison to similar assets with a determined value.
However, placing an accurate value on IP often becomes a much more subjective opinion about a truly unique asset.
Depending on the type of IP under consideration, common valuation methods include:
- Income approach: This projects future income streams (e.g., royalties) and discounts to present value.
- Market approach: This compares the IP to similar assets, if they exist, previously sold in a relevant marketplace.
- Cost approach: This estimates the cost to recreate the IP when appropriate.
In some cases involving more volatile assets like pending patents or emerging trademarks, courts may accept venture capital or real options models. Litigants and Arizona courts often rely on forensic accountants to perform detailed IP valuations.
When each side of the dispute presents different expert witness testimony about valuation opinions, the court can consider which opinion is most accurate based on several factors.
Dividing Intellectual Property
When a court reaches a decision about the value of an IP asset and whether it is completely or partially part of the marital estate, the parties must divide that value.
When a judge makes the decision, it’s often limited to a few options, including:
- Equal ownership, with each spouse taking a 50% interest
- Buyout, where one spouse receives the entire asset and the other receives the value of their share from other marital assets
- Ongoing royalty sharing of future licensing income streams
- Compulsory sale of IP, where the court orders division of the proceeds between the spouses
There are a multitude of ways that parties can reach an agreement to divide all of the assets in the marital estate. Creative representation or hands-on involvement by a qualified mediator quite often results in a more satisfactory outcome for all involved rather than having the judge make the decision.
How Courts Treat Different Types of Intellectual Property in Divorce Cases
The various classes of IP present different challenges during valuation and division negotiations or litigation.
Patents
Dividing patent ownership in divorce cases depends largely on the issuance date of the patent. A patent granted during marriage is presumptively community property. If the invention predates marriage but took promotional benefit from marital funds, a share of the value could be subject to division.
By way of example, consider a spouse who patents a medical device two years into marriage. Despite filing the initial application pre-marriage, the commercialization efforts during the marriage made the patent partially community property.
Copyrights
Copyright valuation in divorce cases requires an analysis of income potential. Works created during marriage are community property. Even pre-marital works can have marital components regarding royalties paid during marriage.
A songwriter in Arizona who produced valuable hits before marriage but earned substantial royalties during marriage would likely see those royalties divided, even if the copyright itself remains separate.
Trademarks
A trademark dispute after marriage dissolution in a divorce often centers on business goodwill. If a business name or logo developed during marriage generates significant brand value, courts must determine how much of that value relates to the trademark versus personal reputation.
For instance, if a trademark centers around one spouse’s personal brand (e.g., a professional chef’s name), courts may assign the mark to that spouse, compensating the other with equitable assets.
Trade Secrets
These types of intellectual property in divorce cases developed during marriage, like secret recipes or client databases, are community property. Protecting confidentiality during divorce proceedings may require NDAs or appropriate court orders to protect the value of the asset.
Special Issues With Business IP in Divorce Cases
When a business entity that one or both spouses own holds title to an IP asset, the process becomes even more complex. The parties or the court must also value the business interest itself as a marital asset. Of course, the IP rights it holds can form a significant part of that valuation.
Courts look at a business’s profitability and the contributions made by each spouse. Any changes in the business’s value during the marriage are also relevant.
Options for handling business IP include awarding the business to one spouse (with a buyout) or ordering its sale. Business IP can be separately valued if, for instance, a business uses a patent portfolio critical to its operations.
Licensing Rights After Separation
Licensing rights established during the marriage complicate IP asset division. Payments under these licenses can be marital property, even if they only come in after separation and divorce.
Existing licensing agreements usually bind both spouses until the agreement’s expiration or buyout. New agreements entered into post-divorce are generally treated as separate property.
In Arizona, effective and thoughtful settlements typically allocate future royalties or license fees explicitly and in detail to avoid unnecessary and expensive post-divorce disputes.
Protecting Your Intellectual Property in Divorce Proceedings
Whether you created a patent, built a brand, or developed software, protecting your IP during divorce requires proactive strategies:
- List every IP asset, including pending applications and provisional patents.
- Gather supporting evidence like USPTO filings, licensing contracts, royalty statements, and employment agreements.
- Hire the right professionals, including a divorce attorney with IP experience, a forensic accountant, and possibly a business valuator.
- Negotiate strategic outcomes, and if keeping the IP matters to you, work hard to propose a fair buyout.
- Address future income explicitly in a settlement that clearly covers all future royalties, licensing fees, and infringement recoveries.
IP owners sometimes consider creating corporate structures like LLCs or trusts pre-divorce to shield their property. Be absolutely certain that you consult with your attorney carefully in this regard to avoid serious problems that can arise from the presumption of fraudulent transfers.
Common Pitfalls To Avoid
When dealing with intellectual property in divorce, be wary of these frequent mistakes:
- Concealing IP assets, which courts view very harshly
- Underestimating future value, particularly with patents or trademarks that could explode in value
- Ignoring tax consequences, especially regarding future transfers or royalty splits
- Misinterpreting federal vs. state law, as Arizona law governs division, while federal statutes control IP ownership and licensing
Lincoln & Wenk Represents Clients Who Own Intellectual Property in Divorce Cases in Arizona
Navigating intellectual property in divorce cases in and around Phoenix requires a nuanced understanding of Arizona community property laws and federal IP protections. It’s not an area where you can afford to make any of the common divorce mistakes we encounter.
At Lincoln & Wenk, we understand the complexities of IP in divorce and work relentlessly to protect our clients’ interests.
Call us today at (623) 294-2464 to schedule a consultation.