DIVISION OF INTELLECTUAL PROPERTY INTERESTS UPON DIVORCE
2000 National Legal Research Group, Inc.

I. Introduction

Americans have always been an inventive people. Our founding fathers deemed inventiveness such a virtue that they included in the Constitution a provision protecting the rights of inventors and authors. "The Congress shall have the power . . . to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writing and Discoveries." U.S. Const. art. I, 8, cl. 8. In the years before 1900, Americans were responsible for such major inventions as the cotton gin, the light bulb, and the phonograph. During the 20th century, Americans literally changed the world with developments such as the automobile, the airplane, television, and nuclear weapons. American authors, dramatists, and composers have been equally productive over the years; works such as Herman Melville's Moby Dick, Rogers and Hammerstein's Oklahoma, and George Gershwin's Porgy and Bess have been read and performed worldwide. Moreover, our national creative pace shows no sign of slowing down. As we enter the 21st century, American movies and television programs are known worldwide, and we are leaders in developing the technology of computers and the Internet.

Given the inventiveness of the American people, it is not surprising that courts in divorce cases have been confronted with the need to classify, value, and divide a wide variety of intellectual property interests. The purpose of this article is to discuss the various ways in which the courts have accomplished these tasks. This article updates and supersedes Margaret B. Barrett's treatment of community property law on the subject in the November 1991 Community Property Alert. (Long-term subscribers may recall that Community Property Alert was a four-page supplement to Divorce Litigation focusing expressly on community property issues. It was merged into the main volume of the publication beginning with the January 1992 issue.)

II. Types of Interests

Intellectual property interests fall into three main categories. For some purposes, the distinctions between these categories can be ignored; for other purposes, the law applicable to each category will be different.

Patents. A patent is a bundle of legal rights granted to an inventor by federal law. See generally 35 U.S.C. 1 et seq. (1984). These rights consist in essence of the right to exclusive use of the invention for a limited period of time. Id. 271. To obtain a patent, the prospective owner must file an application with the federal government. Id. 111. The patent generally lasts, subject to various rules of extension, for a period of 20 years from the filing of the application. Id. 154 (Supp. 1999). A patent right does not formally exist until the government ascertains that the same invention has not already been patented and grants the requested patent.

Copyrights. Like a patent, a copyright is a bundle of legal rights granted to the author of a creative work by federal law. See generally 17 U.S.C. 101 et seq. (1996). Unlike a patent, a copyright need not be applied for; it vests automatically in the author of any creative work. Id. 201. A formal copyright notice, including the familiar symbol (see the bottom line on the first page of this issue of Divorce Litigation), is the traditional means by which a copyright interest is asserted. (It may be possible in some situations to assert a copyright without such a notice. See generally id. 401.) A copyright generally lasts for the life of the author plus 70 years, id. 302, a period of time much longer than the life span of a patent.

Contracts for Royalties. Royalties are periodic payments received by an inventor or creator in return for the right to sell an invention or literary work. A contract for royalties is simply an agreement, enforceable under the law of contracts, guaranteeing the right to receive royalties for some period of time.

The relationship between royalties and a patent or a copyright depends upon the facts. Some authors and inventors retain the patents or copyrights themselves and enter into contracts permitting others to market or develop their work. In this situation, a contract for royalties is essentially the form by which the author or inventor receives the economic benefit of his or her work. In other cases, the author or inventor will actually sell or lease the patent or copyright itself. In these cases, the agreement for royalties is not only a contract for royalties but also a conveyance of the patent or copyright itself. Finally, some inventors or authors permit publishers or developers to claim the copyrights or patents on the work, receiving in return for this permission a contract for royalties. For example, the author's treatise on equitable distribution, cited throughout this article, is copyrighted by the publisher. In these cases, the author has only a contract right to receive royalties and does not own any form of patent or copyright.

III. Federal Law

The United States Supreme Court has held that certain types of property must be divided according to federal substantive law and cannot be divided under state community property or equitable distribution statutes. See Mansell v. Mansell, 490 U.S. 581 (1989) (veterans disability benefits); McCarty v. McCarty, 453 U.S. 210 (1981) (military retirement benefits; overruled in large part, subject to limitations by 10 U.S.C. 1408 (1998)); Hisquierdo v. Hisquierdo, 439 U.S. 572 (1979) (railroad retirement benefits); see also 29 U.S.C. 1056(d) (1998) (retirement benefits under ERISA-regulated plans cannot be divided unless the order of division constitutes a qualified domestic relations order (QDRO) under federal law).

Copyrights

In the field of intellectual property, federal law limits the transferability of copyright interests:

17 U.S.C. 201(e) (1996). This provision is limited by 201(d)(1), which provides:

(Emphasis added.) The legislative history states:

H.R. Rep. No. 94-1476 (1976), quoted in 17 U.S.C. 201 note. By expressly approving the concept of an implied voluntary transfer, this passage materially reduces the scope of 201(e).

Do the above statutes prevent state courts from treating copyrights as community or marital property? A California court held that transfer incident to divorce is a transfer "'by operation of law'" under 201(d)(1). In re Worth, 195 Cal. App. 3d 768, 241 Cal. Rptr. 135, 137 (1987) (quoting 17 U.S.C. 201(d)(1)). A law review article written by a leading authority on copyright law accepted that holding, stating that the voluntary decision to marry is similar to the voluntary decision to declare bankruptcy or to hypothecate a copyright as stated in the legislative history. David Nimmer, Copyright Protection by the Marital Community: Evaluating Worth, 36 U.C.L.A. L. Rev. 383 (1988); see also Boutz v. Donaldson, No. 1999-NMCA-131 (N.M. Ct. App. Sept. 20, 1999) (federal law does not prevent copyright income from constituting income for purposes of child support; relying upon Worth).

Conversely, in Rodrigue v. Rodrigue, 55 F. Supp. 2d 534 (E.D. La. 1999), the court rejected the entire notion of implied voluntary consent from the act of marriage. It therefore held that federal copyright law completely preempted Louisiana community property rights. The opinion is very sensitive to the real need to divide the value of the copyright and openly suggests that the value be divided through a dollar award, while ownership of the actual copyright remain with the creating spouse. The court appeared to feel, however, that this common-sense balance must be struck by legislative rather than judicial action. Rodrigue is the sort of broad federal preemption decision which gives domestic relations attorneys nightmares.

In addition, occasional commentators have argued in favor of federal preemption. For instance, in Carla M. Roberts, Worthy of Rejection: Copyright as Community Property, 100 Yale L.J. 1053 (1991), the author argues that the actual division of copyrights would require spousal consent to all copyright transfers, thereby clouding title to creative properties. Her fears on this count are overstated for, in many community property states, copyrights are "sole management" community property which can be conveyed by one spouse alone. See Bell v. Moores, 832 S.W.2d 749 (Tex. App. 1992).

Roberts further argues that the federal policy of encouraging creativity through the awarding of copyrights requires that copyrights not be divided upon divorce. Strikingly absent from her article is any discussion of a very strong competing public policy the policy that value acquired during the marriage should be divided equitably upon divorce. While the latter policy is enforced by state courts rather than federal courts, it is fundamentally wrong to assume that an area of policy is less important merely because it is best handled at a lower level of government. A fair consideration of the preemption issue requires that the policies behind copyright and patent law be balanced against the policies behind domestic relations law. By considering only the former policies, Roberts reaches what is effectively a biased result. Cf. David Nimmer, Copyright Protection by the Marital Community: Evaluating Worth, 36 U.C.L.A. L. Rev. 383 (1988) (article by leading authority on copyright law, giving somewhat more attention to the policies behind community property and concluding that Worth is consistent with federal copyright law).

A review of prior federal cases on the preemption issue suggests that the policies behind state domestic relations law should carry substantial weight. In Hisquierdo v. Hisquierdo, 439 U.S. 572 (1979), the Supreme Court held that railroad retirement benefits could not be divided by state courts. Congress subsequently held to the contrary, permitting division of true retirement benefits and preserving preemption only for benefits analogous to Social Security, which clearly cannot be divided by state courts. See Bullock v. Bullock, 354 N.W.2d 904 (N.D. 1984). In McCarty v. McCarty, 453 U.S. 210 (1981), the Court held that federal law prevented the division of military retirement pay. Again, Congress took prompt action to overrule the decision, and the overruling legislation was retroactive to the day McCarty was decided. See 10 U.S.C. 1408 (1998). Congress has admittedly not overruled Mansell v. Mansell, 490 U.S. 581 (1989), which held that veterans disability pay cannot be divided; but disability is normally consideration for injuries suffered and not for past services. Thus, every Supreme Court case finding federal preemption of an earned benefit has been promptly overturned by Congress. This fact suggests very strongly that Congress agrees with the basic principle that property acquired during the marriage should be divided upon divorce.

It should also be noted that in Hisquierdo, McCarty, and Mansell the owning spouse was receiving benefits in return for services performed for the federal government. In the intellectual property cases, by contrast, the property rights at issue did not arise in any sense from government service; they were merely government regulated. They are analogous in that regard to retirement benefits from private plans regulated by ERISA, benefits which are clearly subject to division upon divorce if certain requirements of form are met. Brett R. Turner, Equitable Distribution of Property 6.07 (2d ed. 1994 & Supp. 1999).

Still, treatments such as the Roberts article show that there is clearly at least some risk that the Supreme Court would hold that federal law prevents the division of copyrights. If the Court were to reach that result, the distinctions set forth above between the various categories of intellectual property would become relevant. Even if copyrights themselves cannot be divided, most inventors and authors receive the real value of such interests through contracts for royalties. Contract rights are generally marital property, see Turner, supra, 5.06, and no federal law provides to the contrary in the case of contracts for royalties. Thus, even if a federal preemption argument were to succeed, its only effect might be to ensure that ownership of a copyright (and therefore creative control) remained with the owner. The division of a contract for royalties is probably not an impermissible indirect division of the copyright itself, for the provision preventing involuntary transfers, 17 U.S.C. 201(e), applies only when there has been no prior transfer of the copyright by the author. Moreover, there are still situations (such as the above-cited treatise) where the contract permits the publisher or developer to own the copyright. In these cases, it is hard to see how federal preemption could permit the division of contractual royalties upon divorce.

Patents

Unlike copyright law, patent law contains no broad provision against involuntary transfer. The general statute on transfer, 35 U.S.C. 261, states generally that patents constitute property and that they are generally subject to assignment. Courts considering the issue have held that an inventor's creditors can reach the inventor's patent, although with somewhat more difficulty than other types of assets. 60 Am. Jur. 2d Patents 1168 (1987). Accordingly, there appears to be no federal obstacle to treating patents as community or marital property.

IV. Intellectual Property Interests as "Property"

Property in General

There is general agreement that the court's powers under a community property or equitable distribution system apply only to interests which constitute "property." When an interest does not constitute property, it cannot be divided in a divorce case. The most common example of an asset which does not constitute property is a professional degree or license. See, e.g., Simmons v. Simmons, 244 Conn. 158, 708 A.2d 949 (1998); In re Sullivan, 134 Cal. App. 3d 484, 184 Cal. Rptr. 796 (1982); Archer v. Archer, 303 Md. 347, 493 A.2d 1074 (1985); Stevens v. Stevens, 23 Ohio St. 2d 115, 492 N.E.2d 131 (1986). See generally Turner, supra, 6.20. For additional examples, see Brandi v. Brandi, 302 S.C. 353, 396 S.E.2d 124 (Ct. App. 1990) (good credit rating); Boyd v. Boyd, 116 Mich. App. 774, 323 N.W.2d 553 (1982) (job seniority); Cooley v. Cooley, 32 Conn. App. 152, 628 A.2d 608 (1993) (limited power of appointment); Malhotra v. Gupta, 226 A.D.2d 682, 641 N.Y.S.2d 716 (1996) (green card); and Davidson v. Davidson, 19 Mass. App. Ct. 364, 474 N.E.2d 1137 (1985) (expectancy of future inheritance).



Mears v. Mears, 305 S.C. 150, 406 S.E.2d 376, 378 (1991).

In the course of holding that a professional degree is not property, a leading Colorado decision identified some of the common attributes of the term:



In re Graham, 194 Colo. 429, 574 P.2d 75, 77 (1978).

Intellectual Property Interests

Intellectual property interests generally meet the key elements of property identified by the Graham court. They are transferable from one person to another and are actually bought and sold on the open market. Indeed, inventors who prefer to focus upon new ideas often convey to another person or company the right to develop a new invention into an established product. In addition to selling intellectual property interests outright, holders of those interests will sometimes lease those interests to others for a specific period of years. The existence of an actual market for intellectual property interests shows that their value can be computed with a commercially reasonable degree of accuracy. In most cases, an intellectual property interest does not merely assist in the future creation of value; it provides by itself a steady stream of income, without the need for substantial future effort from the creator.

Based upon the above discussion, courts have had little difficulty concluding that intellectual property rights generally constitute divisible property. The only decision to address the point expressly is In re Marriage of Monslow, 259 Kan. 412, 912 P.2d 735 (1996), where the court expressly rejected an argument that a patent on a cable television service is not property:



912 P.2d at 744.

Id. at 745 (quoting 2 Arnold H. Rutkin, Valuation and Distribution of Marital Property 23.07[1] at 23-135).

Beyond Monslow, numerous cases have implicitly held that intellectual property interests are property by actually dividing them on the facts of the case. The following list of citations breaks the cases down according to the type of intellectual property involved.

Patents. For cases holding that a patent itself is divisible property, see Lorraine v. Lorraine, 8 Cal. App. 2d 687, 48 P.2d 48 (1935) (patent for oil, gas, and sand separator); McDougal v. McDougal, 451 Mich. 80, 545 N.W.2d 357 (1996) (patents on automobile engine parts); Allen v. Allen, 601 P.2d 760 (Okla. Ct. App. 1979) (patent on "Volt Minder," an invention not otherwise described by the court); and Rose v. Hatten, 417 S.W.2d 456 (Tex. Civ. App. 1967) (medical patents).

In In re Marriage of Monslow, 259 Kan. 412, 912 P.2d 735, 741 (1996), the court described the wife's award of 40% of future revenues as a "lien" upon the husband's patent. The court quoted extensively from the trial court's order, however, and nothing in the quotation awarded the wife any type of formal security interest.

Copyrights. For cases holding that a copyright itself is divisible property, see In re Worth, 195 Cal. App. 3d 768, 241 Cal. Rptr. 135, 137 (1987) (copyright on popular series of trivia books). See also Moon v. Moon, 790 P.2d 52 (Utah Ct. App. 1990) (right to reproduce works of art created by sculptor husband during the marriage; court did not use the term copyright but cited copyright law to support the notion that the right to reproduce the works was transferable).

In In re Perkel, 963 S.W.2d 445 (Mo. Ct. App. 1998), the court held that the husband's copyright interest in software he wrote during the marriage was marital property. The court did not divide that interest directly, however; it instead made a lump sum monetary award to compensate the wife for her interest in the copyright.

Royalties. A large number of cases have held that the right to receive contract royalties is divisible property. For cases involving royalties from inventions, see Hazard v. Hazard, 833 S.W.2d 911 (Tenn. Ct. App. 1991) (tracheostomy kit produced by husband during marriage), and Dunn v. Dunn, 802 P.2d 1314 (Utah Ct. App. 1990) (instruments for implanting artificial knees). Neither case mentioned whether the creating spouse actually owned a patent on the invention at issue.

For cases involving royalties from creative works, see Gallo v. Gallo, 184 Conn. 36, 440 A.2d 782 (1981) (textbook royalties); In re Heinze, 257 Ill. App. 3d 782, 631 N.E.2d 728 (1994) (speech therapy textbooks); In re White, 537 N.W.2d 744 (Iowa 1995) (college music textbooks); and Michel v. Michel, 484 So. 2d 829 (La. Ct. App. 1986) (novels written by wife). Again, it is unclear whether the copyrights on these works were owned by the author spouses or by the publishers.

In In re Zaentz, 218 Cal. App. 3d 154, 267 Cal. Rptr. 31 (1990), the court divided the right to receive future profits on the movie Amadeus, which was produced by the husband during the marriage. It seems clear from the opinion that the husband did not individually own a copyright on the movie, so the interest divided was pure contract royalties. The court also divided pure contract royalties in In re Perkel, 963 S.W.2d 445 (Mo. Ct. App. 1998) (menu and program launcher software).

For a case involving actual physical possession of a creative work, see Stainback v. Stainback, 11 Va. App. 13, 396 S.E.2d 686 (1990) (paintings created by husband and owned by corporation, which was his alter ego).

Fields of Endeavor

None of the cases suggests in any way that the divisibility of an intellectual property interest depends upon the field of endeavor involved. The following list breaks the cases down according to the general area of the relevant invention or work.

Books Nonfiction. In re Worth, 195 Cal. App. 3d 768, 241 Cal. Rptr. 135 (1987) (copyright on popular series of trivia books); Gallo v. Gallo, 184 Conn. 36, 440 A.2d 782 (1981) (textbook royalties); In re Heinze, 257 Ill. App. 3d 782, 631 N.E.2d 728 (1994) (royalties on speech therapy textbooks); In re White, 537 N.W.2d 744 (Iowa 1995) (royalties on college music textbooks).

Books Fiction. Michel v. Michel, 484 So. 2d 829 (La. Ct. App. 1986) (royalties from novels written by wife).

Works of Art. Moon v. Moon, 790 P.2d 52 (Utah Ct. App. 1990) (right to reproduce works of art created by sculptor husband during the marriage); Stainback v. Stainback, 11 Va. App. 13, 396 S.E.2d 686 (1990) (paintings created by husband and owned by corporation, which was his alter ego).

Television. In re Marriage of Monslow, 259 Kan. 412, 912 P.2d 735 (1996) (patent for new cable television service).

Movies. In re Zaentz, 218 Cal. App. 3d 154, 267 Cal. Rptr. 31 (1990) (right to receive future profits on movie Amadeus, produced by husband during the marriage).

Software. In re Perkel, 963 S.W.2d 445 (Mo. Ct. App. 1998) (menu and program launcher software for DOS applications; marital property even though the widespread use of Microsoft Windows made future profits questionable); see also Bell v. Moores, 832 S.W.2d 749 (Tex. App. 1992) (unspecified software royalties written by husband were community property, but wife had no right to intervene in litigation involving those royalties).

Medical Instruments. Kinchen v. Howes, 436 So. 2d 689 (La. Ct. App. 1983) (patent for "multiple-lumen catheter device" invented by husband during the marriage); Hazard v. Hazard, 833 S.W.2d 911 (Tenn. Ct. App. 1991) (future revenues from tracheostomy kit produced by husband during marriage, even though kit would require minor postmarital modifications); Rose v. Hatten, 417 S.W.2d 456 (Tex. Civ. App. 1967) (medical patents); Dunn v. Dunn, 802 P.2d 1314 (Utah Ct. App. 1990) (future royalties on instruments for implanting artificial knees; husband invented instruments during marriage).

Other Inventions. Lorraine v. Lorraine, 8 Cal. App. 2d 687, 48 P.2d 48 (1935) (patent for oil, gas, and sand separator); McDougal v. McDougal, 451 Mich. 80, 545 N.W.2d 357 (1996) (patents on automobile engine parts); Allen v. Allen, 601 P.2d 760 (Okla. Ct. App. 1979) (patent on "Volt Minder," an invention not otherwise described by the court).

Undeveloped Intellectual Property Interests

Intellectual property interests clearly meet the definition of property when they have an established and predictable ability to produce revenue. When an intellectual property interest is undeveloped, it does not meet the key elements of property as closely. Where the work or invention is incomplete, it may have a potential rather than an actual value upon the open market. For example, the first 10 chapters of Moby Dick or the first act of Oklahoma probably had little value without the remainder of the work. Even where a work or invention is complete, it may be difficult or even impossible to transfer on the open market because potential buyers may not believe that the invention or literary work has merit. It is doubtful, for instance, that the Wright brothers' first prototype airplane would have had substantial value before the owners proved it could fly. Both incomplete and undeveloped intellectual property interests also require substantial future work to complete. Thus, they may not have any inherent ability to produce income at the time of divorce. Like a professional degree, their value may lie more in the ability of the owner to create property in the future.

Two reported decisions hold that an undeveloped intellectual property interest did not constitute property. In Yannas v. Frondistou-Yannas, 385 Mass. 704, 481 N.E.2d 1153 (1985), the husband was a world-renowned scientist who invented an artificial skin designed to treat burn victims. There was no evidence in the record that the husband's interest in the artificial skin had any established capacity to generate income. The trial court refused to divide that interest. The court held in simple terms that the trial judge "was not obliged to place a value on the husband's royalties, patents or copyrights" and that the judge "could have concluded on the evidence that the present value of the husband's future income from [the artificial skin] was too speculative to consider." 481 N.E.2d at 32.

In Woodward v. Woodward, 294 S.C. 210, 363 S.E.2d 413 (Ct. App. 1987), the wife had a patent on an unspecified invention. The court did not describe the invention or its status, but it did note that the husband had conceded that it had little or no present value. The husband argued that the trial court had erred by failing to divide the interest, but the appellate court affirmed. "[T]o award [the husband] an interest in the patent upon the speculation that it may some day become valuable is contrary to the policy of finality desired in marital litigation." 363 S.E.2d at 417.

The court expressly rejected both Yannas and Woodward in In re Marriage of Monslow, 259 Kan. 412, 912 P.2d 735 (1996), holding that a patent for a cable television service invented by the husband was property even though it had little present value. Future income was divided on a deferred distribution basis so that the wife would receive a fair share of any future revenue which did develop. In addition, in Hazard v. Hazard, 833 S.W.2d 911 (Tenn. Ct. App. 1991), the husband had attempted to invent a tracheostomy kit, but it encountered what the court called an "unfortunate experience" when a patient died during a test. Even though the kit was obviously in need of further work, the court still held that the right to receive income from the kit was a divisible asset, once again dividing that income on a deferred basis.

There is also a good argument that Yannas and Woodward are unique decisions which are to be limited to their facts. Yannas affirmed the trial court's decision that he could not place a "present value" on the patents, thus suggesting that the wife sought a present award rather than a percentage of any future income derived from the patent. Courts often hold that highly unvested pensions should be divided by deferred distribution rather than by an immediate cash offset, see generally Turner, supra, 6.11, and the same concept probably applies to intellectual property rights. When such a right has no established ability to produce income, a present valuation and an immediate offset may be unduly difficult. Nothing in Yannas suggests, however, that the court would have rejected a deferred distribution if the wife had asked for one. "The Yannas decision, because it rests on the record made in that case, does not necessarily preclude assignment in a future case, on a proper record, of the present value of future income from property interests such as patents, royalties and copyrights." Monroe Inker et al., Alimony and Assignment of Property in Massachusetts: A Survey of the Last Decade of Massachusetts Law, 26 Suffolk U. L. Rev. 21, 27 n.46 (1992).

Woodward, like Yannas, is limited on its face to situations in which the intellectual property at issue has little or no present value. Many types of established intellectual property have substantial present transferable value on the open market. Moreover, at the time Woodward was decided, South Carolina held that unvested retirement benefits, and probably unvested benefits of all sorts, did not constitute property. Brown v. Brown, 279 S.C. 116, 302 S.E.2d 860 (1983). Given Brown, Woodward is a defensible decision. In Tiffault v. Tiffault, 303 S.C. 391, 401 S.E.2d 157 (1991), however, the South Carolina Supreme Court overruled Brown and held that unvested retirement benefits do constitute marital property. There is an excellent argument that Brown also overruled Woodward, at least to the extent of permitting a deferred distribution of a percentage of future income from an intellectual property interest.

It might also be possible to construe Yannas and Woodward to adopt some sort of de minimis value exception. A present distribution was obviously not possible in either case, and making a deferred distribution obviously imposes an administrative burden upon the parties and the court. When the interest at issue has substantial present or future value, the parties must tolerate this burden. For example, courts regularly make deferred distributions of the marital interest in retirement benefits and stock options, types of property which have thousands of dollars of value. At some point, however, the amount at issue becomes so small that it does not justify the administrative burden of deferred distribution. Some intellectual property interests may have such small present value and such speculative prospects for future value that dividing them is not worth the trouble.

If a de minimis exception does exist, it should be construed narrowly. Many valuable inventions and literary works were deemed worthless at early stages in their development. Indeed, it has become something of an axiom in the literary world that few authors are ever fully honored during their own lifetimes. The risk to a broad de minimis exception is that the interest at issue will eventually develop substantial value, value which was an actual fruit of marital efforts and which should be to some extent marital property. To avoid this risk, courts should refuse to divide intellectual property only where it is clear beyond a reasonable doubt that the interest involved will never generate substantial value.

Of course, where an intellectual property interest increases in value after the divorce, any value traceable to postmarital efforts will be property acquired after the marriage. Thus, any undeveloped intellectual property interest is likely to have a substantial nonmarital interest. The entire increase in value, however, will not necessarily arise from postmarital efforts; some of the increase may arise when the market finally grasps the full potential value of the work done during the marriage. For example, the value of the Wright brothers' airplane increased greatly when the world realized that the plane could actually fly, but the increase still arose from the brothers' past efforts in building the airplane. When incomplete or undeveloped intellectual property interests are involved, future increases in value are at least partly traceable to past efforts. Increases due to future efforts should absolutely be excluded when such interests are divided upon divorce, but the court should recognize the possibility that future value may be traceable to marital efforts.

Obsolete Intellectual Property Interests

The counterpart of the undeveloped intellectual property interest is the obsolete interest. Both interests have a doubtful future earning capacity, but for very different reasons. The undeveloped interest may or may not eventually realize substantial income. The obsolete interest has realized substantial income in the past, but the wave of advancing technology or popular culture threatens to sweep it aside.

Obsolete interests, like undeveloped interests, generally do constitute marital property. For instance, in In re Perkel, 963 S.W.2d 445 (Mo. Ct. App. 1998), the husband received royalties from menu and program launcher software. The software was aimed at computers running the DOS operating system. As any computer user knows, however, the widespread use of Microsoft Windows has largely superseded DOS. A DOS application will run under Windows, but Windows itself performs most of the important functions of a menu and program launcher. Moreover, a DOS program launcher cannot launch Windows applications, which form the great majority of all current software. Thus, the continued viability of any DOS program launcher software is questionable.

The court nevertheless held that the husband's copyrights on the computer software were marital property. While revenues were sharply declining, the husband still testified that he expected sales of $150,000 in 1997, the year of the divorce. It appears from this figure that there was still a body of older computers, running DOS and not Windows, which formed a viable market. The court affirmed a trial court order giving the wife a $60,000 monetary award as compensation for the imbalance in marital property owned by each party. The imbalance in nonsoftware assets was only $7,262.72, so the majority of the monetary award was software-related.

V. Intellectual Property Interests as Marital Property

In the simple case of where an invention or literary work is conceived, created, developed, and marketed entirely during the marriage, the resulting intellectual property interest is entirely marital property. But the real world is rarely so simple. Works of value take time to develop, and many inventors tinker with their work for many years before realizing any real income. Where the period of development extends before or after the marriage, the intellectual property created will be only partially subject to division.

It must be recognized at the outset of this discussion that there are two major types of division systems presently in force in the United States. Under the dual-classification system, the court is permitted to divide only those assets which meet the relevant statutory definition of marital or community property. See generally Turner, supra, 2.05, 2.08. These definitions vary somewhat, but all generally provide that marital property is property acquired during the marriage. The key word "acquired" is universally construed to mean not the mere inception of legal title but rather the creation of real economic value. Id. 5.09. Retirement benefits, for example, are "acquired" when they are earned and not when they actually reach pay status. Id. 6.10. Thus, in dual-classification states, the courts must exclude from division that portion of the value of any asset which was created either before or after the marriage. There are presently 35 dual-classification states, 28 following the law of equitable distribution and 7 following the law of community property. Brett R. Turner, Rehabilitative Alimony Reconsidered: The "Second Wave" of Spousal Support Reform, 10 Divorce Litigation 185, 205 (1998).

A respectable minority of 16 states (15 equitable distribution and 1 community property) follows the all-property system of property division. Id. at 205. Under this system, the court has the power to divide any asset owned by the parties at divorce, regardless of the time and manner of acquisition. Turner, supra, 2.07. In these states, property acquired before the marriage is normally subject to division. The literal language of most all-property statutes permits the division of property acquired after the marriage, but some all-property states are reluctant to divide such property. This split in authority on this point can be seen most clearly in the divided case law on whether retirement benefits acquired after the marriage are subject to division. Compare, e.g., Everett v. Everett, 660 So. 2d 599 (Ala. Civ. App. 1995) (benefits divisible), with In re Marriage of Reich, 150 Or. App. 311, 946 P.2d 319 (1997) (benefits not divisible). See generally Turner, supra, 6.10 n.224. In every all-property state, however, the courts have a strong tendency to divide unequally that property which was not a true product of the marriage. Id. 8.05. Thus, while assets acquired before or after the marriage may be technically divisible in all-property states, the extent to which an asset was acquired during the marriage is still a very important issue in determining the final distribution.

Courts generally hold that an intellectual property interest is acquired gradually, as the owner spends the necessary time and effort to create the invention or work. It is similar in that regard to retirement benefits, which are also acquired gradually over a long period of time. When the invention or work was created through efforts spent before or after the marriage, a portion of the resulting patent, copyright, or royalties will not be marital property.

Investment of Funds. Of course, intellectual property interests are clearly marital property to the extent that actual marital funds were invested in the creation process. 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.

Acquisition Before the Marriage. Intellectual property rights are separate property to the extent that 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.

Completion After the Marriage. 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 any 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 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.

Development After the Marriage. Even where an invention has been completely created during the marriage, courts still recognize that time and effort must be spent developing the patent into a source of income. To the extent that the necessary development work is done after the marriage, the patent and royalty rights 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 future 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 per- centage 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, in 1999 Wiley Family Law Update 75 (Eric Pierson ed., 1999) [hereinafter Forman & Waldman].

Marketing After the Marriage. 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). During the marriage, the wife wrote 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 his 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.

VI. Other Issues

Deferred Distribution vs. Immediate Offset

Almost all of the decisions dividing intellectual property interests award each party a specific percentage of future revenues. This division method divides equally between the parties the risk that the invention or work will not generate significant income. When the interest involved has no established value, an immediate offset of cash or other property would be unduly speculative and might well constitute error.

Where an established invention or work has an established value on the open market, an immediate offset is possible. In In re Perkel, 963 S.W.2d 445 (Mo. Ct. App. 1998), the husband owned the right to receive royalties from writing program launcher software for DOS applications. The advent of Microsoft Windows made the software obsolete, but there was a strong history of past revenues, and the husband testified that he expected revenues of $150,000 in 1997, the year of the divorce. The trial court awarded each party the property in his or her possession, an award which gave the wife $7,262.72 less in nonsoftware assets. To address this imbalance and to divide the software copyrights, the court made a $60,000 monetary award to the wife. Given the relatively small size of the asset imbalance, the award was primarily an immediate offset for the wife's interest in the husband's software.

Where future earnings history is reasonably predictable, an immediate offset has two specific advantages over a deferred distribution. First, it reduces the level of continuing ties between the parties, thus perhaps avoiding future litigation. Second, it ensures that maximum creative control remains with the inventor or author, an approach which maximizes the future value of the underlying intellectual property interests.

Future Services Agreements

It is important to draw a clear distinction between a contract for royalties and a future services agreement. A contract for royalties actually conveys from one party to another the right to use or market an invention or work in return for cash payments, generally stated as a percentage of future gross revenues. A future services agreement requires the inventor to assist a developer or publisher by refining, demonstrating, and/or marketing the invention. To the extent that intellectual property is marital property, the consideration received under a contract for royalties is likewise marital. The consideration received for a services contract, however, depends upon when the services are performed. In most cases, the future services will be performed after the marriage, and the compensation is accordingly separate property. The principles discussed in this article apply only to the consideration received as income from or in exchange for intellectual property interests. See generally Dunn v. Dunn, 802 P.2d 1314 (Utah Ct. App. 1990) (stressing the distinction between royalties and future services agreements).

In the real world, the same agreement often contains both a transfer of intellectual property and a promise to provide future services. This occurs in the first instance because future efforts by the inventor often increase significantly the marketability of the underlying invention. In addition, there are tax and even divorce planning reasons why the inventor may desire to take some of the actual consideration for the intellectual property interest as additional consideration for future services, thereby deferring taxable income over a longer period of time and possibly excluding it from the marital estate.

A good case study in the real-world relationship between royalties and future services is related by California attorneys Judith R. Forman and Vincent M. Waldman. Forman & Waldman, at 63. When comedian Jerry Lewis and his wife Patti were divorced, Patti received a 50% interest in all royalties that Jerry received from his prior movies. In 1993, Lewis negotiated an agreement to permit a remake of his 1963 movie The Nutty Professor, an agreement that led to the successful recent remake, starring Eddie Murphy. In a 1997 lawsuit, Patti alleged that, in an attempt to avoid paying her 50% of the royalties from the remake, Jerry negotiated a contract to provide services as writer, producer, consultant, and actor regarding the remake services which he never actually provided. The truth of Patti's allegations had not been determined as of the date of the Forman and Waldman article. The scenario she alleged is not, however, inherently incredible.

No reported case law expressly considers the stated breakdown of consideration between a royalty agreement and a future services agreement. The question has arisen, however, in the context of an agreement to sell an existing business, a situation in which sales contracts and future services (or future noncompetition) agreements are also commonly intertwined. The rule in that context is that the trial court has the discretion to determine the true consideration for the two agreements, which may differ considerably from the stated consideration.

For example, in Hoeft v. Hoeft, 74 Ohio App. 3d 809, 600 N.E.2d 746 (1991), the husband sold his dental practice late in the marriage and signed a covenant not to compete with the new owner. The stated breakdown of the consideration was $60,000 for the sale and $225,000 for the covenant. The court held that the stated allocation of the consideration between the sales agreement and the covenant was absurd on its face, as no one would pay $225,000 for lack of competition with a business worth less than one-third that amount. The case was therefore remanded to the trial court with instructions to allocate the total compensation fairly between the two agreements. The consideration for the sales agreement would have the same classification as the practice being sold; the consideration for the covenant would be separate property. See also In re Monaghan, 78 Wash. App. 918, 899 P.2d 841 (1995) (error to accept stated breakdown of $51,000 for sales agreement and $109,000 for a covenant not to compete; remanded for fair determination of actual consideration); Vestal v. Vestal, 28 Ark. App. 206, 771 S.W.2d 800 (1989) (trial court did not err by reallocating consideration between sales and consulting contracts). See generally Turner, supra, 5.06 at 136.

There is no reason why the reasoning in the above cases should not apply to royalty agreements as well as to sales contracts. Thus, when allocating the consideration between a contract to convey intellectual property rights and a related agreement to provide future services, the court is probably not bound by the stated breakdown of the consideration between the two contracts. The marital estate has an interest in the actual consideration for the sale of the intellectual property rights and not only in the stated consideration.

Expenses

In dividing future royalties from any intellectual property interest, the court should divide the net royalties after the subtraction of any reasonable, necessary development expenses. This result was reached directly in Allen v. Allen, 601 P.2d 760 (Okla. Ct. App. 1979), which held that the trial court had erred by dividing the royalties without dividing the related debts. See also In re Marriage of Monslow, 259 Kan. 412, 912 P.2d 735 (1996) (dividing net royalties).

Taxes

One decision expressly holds that the court should divide the net royalties after payment of any future income taxes. In re Heinze, 257 Ill. App. 3d 782, 631 N.E.2d 728 (1994).

Direct Transfer Versus Award of Royalties

When an intellectual property interest is divided by deferred distribution, the court and the parties must confront a mechanical issue. Should the nonowning spouse be given an actual ownership interest in the intellectual property itself, or should that spouse receive merely a set percentage of future revenues?

The first step in answering this question is to determine whether the actual transfer of the intellectual property rights is permissible. This means, at a minimum, that the court must confront the federal preemption issue discussed above. To summarize that discussion, the state courts have rejected federal preemption, but at least one federal court has accepted it. If federal law prevents the involuntary transfer of patents and copyrights, those types of assets cannot be directly transferred.

In addition, the court must also consider the rights of third parties. Where royalties come from an agreement with a publisher or developer, the court is bound by any restrictions upon trans- ferability set forth in the agreement. Cf., e.g., In re Paul, 821 P.2d 925 (Colo. Ct. App. 1991); Hughes v. Hughes, 311 N.J. Super. 15, 706 A.2d 261 (App. Div. 1998) (both holding that court is bound by ownership limitations in partnership agreement). Likewise, federal law provides that any transfer of exclusive copyright or patent rights must be made with the consent of all owners. David Nimmer, Copyright Protection by the Marital Community: Evaluating Worth, 36 U.C.L.A. L. Rev. 383 (1988) (noting that nonexclusive transfers may be made by any joint owner acting alone). Thus, the court's ability to order the transfer of a copyright owned jointly with third parties is also limited.

Assuming that a direct transfer is possible, the question then becomes whether it is wise. The advantage of joint ownership is that it provides the former nonowning spouse with a greater degree of protection. He or she receives royalty checks directly and can refuse to consent to transfers which are not in his or her best interests. The disadvantages are, first, that the nonowning spouse takes the risk that Congress or a future federal court may decide that federal law prevents divorce-related transfers of intellectual property rights. It can be hoped that any such change in the law would be applied only prospectively, but there is no guarantee on this point. Second, an award of joint ownership forces the parties to continue dealing with one another in a way which is conducive to future litigation. Joint ownership of tangible assets is highly disfavored for these reasons, see Turner, supra, 9.02 n.8, and there is no reason to apply a different rule to intangible assets. At a very minimum, joint ownership should be avoided where the parties' relationship is antagonistic. Third, if a direct transfer is made, the former nonowning spouse has a much greater degree of responsibility for the value generated by his or her interest. That spouse must independently make decisions regarding the sale, lease, or other transfer of the asset a decision which some spouses will not be competent to make. There will also be an acute need to retain counsel specializing in intellectual property and perhaps experts in the relevant substantive field as well, all of whom will charge a price for their services.

Balancing these advantages, Forman and Waldman strongly disfavor a percentage monetary award. Their rationale is essentially that this method creates too much risk of financial manipulation by the owning spouse, who can manage his or her affairs to maximize income from separate property interests. They acknowledge, however, that joint ownership methods "all require the spouses to continue to do business with each other after the dissolution," Forman & Waldman, supra, at 79 a powerful problem which in many cases has made an award of joint ownership reversible error. Turner, supra, 9.02 n.8. It seems unlikely that the courts would be more receptive to joint ownership of intellectual property than they are to other types of assets. Moreover, while joint ownership prevents some types of manipulative behavior by the former owning spouse, it opens the door to misconduct by the former nonowning spouse. That spouse can unreasonably refuse to consent to transactions which would be in both parties' interests for the purpose of inflicting financial, emotional, or even creative harm upon the other spouse. See generally Carla M. Roberts, Worthy of Rejection: Copyright as Community Property, 100 Yale L.J. 1053 (1991) (opposing actual division of copyrights on grounds that it would unduly interfere with the former owning spouse's creative control). The assembled experience of courts dividing property upon divorce suggests strongly that joint ownership works only for that small minority of divorced couples who can maintain an amicable business relationship.

As an alternative to joint ownership, Forman and Waldman suggest an immediate cash offset. This is the present author's preferred division method. An immediate offset avoids the need for co-ownership, protects both spouses from manipulatory actions, protects the court from the burden of future litigation, and creates a clean break between the parties. There must be sufficient other property in the divisible estate to permit an offset, however, and the intellectual property at issue must be susceptible to reasonably accurate valuation. In many cases, these conditions are not met, making an immediate offset impossible. Given the courts' long-standing dislike of joint ownership, it is not surprising that a deferred percentage monetary award is the most common method of division in the reported cases.

Where true joint ownership is not available, it might be possible to convey the interests into some form of trust, instructing a neutral trustee to pay benefits to both parties. This approach requires that a competent trustee be selected and compensated, making it both difficult and expensive. It also has the clear detriment of depriving the former owner of creative control. Such deprivation may be strongly objectionable to that spouse on emotional grounds. Also, management by the creator is probably the option best suited for maximizing the future value of the asset.

Sale suffers from many of the disadvantages of the trust option; it deprives the former owner of creative control and requires that the person conducting the sale be compensated. In addition, it suffers from an entirely new problem: the well-demonstrated tendency of divorce-related sales to command less than a fair price from third parties. Turner, supra, 9.04. Where the interest has a stable value and is readily marketable, sale is an option, but this is exactly the sort of situation best suited to an immediate offset. Where the interest is not readily marketable, which has been the situation in most of the reported cases, sale is in neither party's best interests.

Where a deferred-percentage monetary award is employed, provisions should be included to protect each party against possible future misconduct by the other. One court described such an award as a lien on the underlying patent, In re Marriage of Monslow, 259 Kan. 412, 912 P.2d 735 (1996), and this approach is absolutely worth trying. The lien approach suffers, however, from the same risk of federal preemption as a direct transfer. A modified approach would be to secure the award with a lien upon tangible property or retirement benefits, if those assets exist in sufficient size.

Another provision worth considering is an express statement imposing upon the owning spouse a fiduciary duty to manage the copyright for both parties' benefit or to use his or her best efforts to maximize future revenue. This type of language provides essential protection against financial manipulation of the sort alleged in the Jerry Lewis case. The risk of manipulation becomes smaller as the provision becomes more express and detailed. Also, the opportunities for abuse are obviously less where the intellectual property interest is settled and stable than where it is still under development. Still, as the Jerry Lewis case shows, stable intellectual property interests sometimes reinvent themselves and produce new revenue, particularly in the entertainment area. The only way to completely remove the possibility for abuse is to create a clean break by immediate offset of cash or other property.

VII. Conclusion

All property rights created through the efforts of either spouse should be subject to division during the marriage. It is fundamentally wrong to permit any particular group to carve out special-interest exceptions to this basic principle. Congress recognized this point in 1982 by emphatically overruling McCarty v. McCarty, 453 U.S. 210 (1981), which attempted to create a special-interest exception for military retirement benefits.

The public policy of encouraging creativity, as implemented by copyright and patent law, is less important than the public policy of compensating those who risk their very lives to advance our country's national interests. If the right of military servicemen to an honorable retirement must give way to the property division rights of their spouses, the rights of inventors and creators to the fruits of their efforts must give way as well. To reach a contrary result is to ignore the strong message that Congress sent when it overruled McCarty promptly, completely, and retroactively. State and federal courts must join in emphatically rejecting the argument that federal copyright law preempts state law dividing property upon divorce.

When dividing interests in intellectual property, state courts must be sensitive to the policies behind patent and copyright law as well as to the policies behind divorce law. Creative control should remain with the inventor or the creator spouse, unless a contrary result is a necessary response to a substantial and justified fear of future financial misconduct. This result is strongly in both parties' interests, as it maximizes the future income potential of the creative spouse, thereby making more dollars available for property and support awards. Value created during the marriage must be divided, but the courts should exclude from division any value created before or after the marriage. The courts should be sensitive to the need to spend time and effort not only creating the invention or work but also marketing it effectively.

The author is convinced that a proper application of the above principles, by state courts applying state law, will result in a fair balance between the rights of intellectual property owners and the rights of their spouses. No one seeks to destroy the right of any inventor or creator to realize the full economic benefit of his or her efforts. State property division law applies to all assets created during the marriage by all persons, however, regardless of how important the person involved might be. If we do not have special rules for military servicemen, policemen, and others who perform vital public services, we also should not have special rules for those who own intellectual property. The property rights of inventors and creators, like the property rights of all other citizens of this country, should be subject to fair and equitable division upon divorce.

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