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Intangible Assets in a Divorce

And how to divide them.
By D Partner Studio |
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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. When the creator physically constructs the invention and the invention 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 in 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 created 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.

“Recently, the term ‘intellectual property’ has become an encompassing term that includes such things as patents, copyrights, and trademarks.



Royalties from oil and gas production are also an intangible asset that Texas practitioners often encounter. To determine the characterization of the royalty interest, you 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 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.

For most intangible assets, valuation is the key component and a complex valuation analysis 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 you receive the value you bargained for can be difficult due to the variability in demand for the asset you own and the fact that the asset is not a tangible object.

This post was created by D Partners Studio on behalf of The McClure Law Group. Kelly McClure, a collaborative law advocate, board certified in Family Law by the Texas board of Legal Specialization, leads the firm with more than 25 years of mediation and trial experience. She and her team provide clients with extraordinary expertise in every method of resolution for their family law concerns. Visit mcclure-lawgroup.com to learn more about how to protect yourself and your fortune during divorce.

 

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