Divorce is a challenging and emotional experience for everyone involved. As difficult as it may be, it's essential to address the myriad of legal and financial issues that arise during the dissolution of a marriage. One such critical aspect is the equitable distribution of assets, including intellectual property (IP) holdings and royalties.
Intellectual property rights are the result of hard work, passion, and dedication. They represent the creative essence and innovative spirit of an individual or partnership. Therefore, it's crucial to determine a fair distribution of these assets that accurately reflects the contributions made by each party throughout the relationship. In this blog, we will discuss what intellectual property royalties are, state property division laws, and how these assets might be divided in a divorce (by the court and in negotiations).
Property Division in Tennessee
In Tennessee, the division of property during divorce is governed by the principle of "equitable distribution." This means the court will divide marital property equitably, or fairly, between the spouses, considering a range of factors. It is important to note that equitable does not always mean equal.
Marital Property vs. Separate Property
In Tennessee, marital property includes all assets acquired during the marriage, regardless of whose name the assets are in. Separate property, on the other hand, consists of assets owned by either spouse before the marriage, gifts, inheritances, and certain other exceptions. Marital property is subject to division, while separate property typically remains with the original owner.
It is also important to note that debts incurred during the marriage are also subject to equitable distribution. The court will consider factors such as which spouse incurred the debt, the purpose of the debt, and each spouse's ability to pay the debt when determining how to allocate it.
What Intellectual Property Is
Intellectual property (IP) can be a complex issue in divorce cases. IP includes patents, copyrights, royalties, and trade secrets. If IP was created or acquired during the marriage, it is considered marital property and subject to division.
While the asset itself is not divisible, the IP rights and/or royalty payments that either party receives may be subject to division. IP royalties are a form of compensation paid to copyright holders, patent holders, and trademark holders for the use of their protected creations by third parties.
These royalties serve as an essential component in the management and control of intellectual property rights, incentivizing creators to produce valuable content that can benefit various businesses or individuals. The royalty system rewards creators and protects their intellectual property rights, enabling them to have a steady stream of income. This income can help fund research and development for future projects, fostering innovation and creativity across various industries.
There are distinct types of royalties a person may receive including:
- Copyright royalties. Copyright royalties are paid to the creators or owners of original works, such as books, music, films, and software, when their work is used, reproduced, or distributed by third parties. The copyright holder may receive either a fixed amount or a percentage of the revenue generated from the use of their content.
- Patent royalties. Patent royalties are paid to inventors or patent holders when a third party uses, sells or licenses their patented invention. The patent holder can receive either a fixed amount or a percentage of the revenue generated from product sales that incorporate the patented invention.
- Trademark royalties. Trademark royalties are paid to the owner of a registered trademark when a third party uses the trademark for their products or services, usually as part of a licensing agreement. The trademark holder may receive either a fixed amount or a percentage of the revenue generated from the sales of products or services bearing the licensed trademark.
How to Divide IP Rights or Royalties
In a divorce, IP ownership may be divided if the IP is a marital asset. In dividing your assets, you should take the following steps:
- Identify and classify intellectual property. Determine which intellectual properties (IP) were created during the marriage and classify them as marital property, separate property, or a commingled asset.
- Engage professionals. Hire IP valuation experts, legal counsel, and financial advisors to ensure accurate valuation and fair division of the IP assets.
- Document contributions. Gather evidence to support each spouse's contribution to the creation, development, and maintenance of the IP.
- Choose a valuation method. Select an appropriate valuation method for each IP, such as the market approach, income approach, or cost approach, depending on the type of IP and its specific characteristics. If you work with a forensic accountant, they can advise you on what method would be best for the type of IP you have.
- Conduct a valuation. Perform a thorough valuation of each IP asset, considering factors like market potential, revenue generation, and remaining protection period. It is best to retain a professional to conduct the valuation.
- Consider tax implications. Consult with tax professionals to understand the tax consequences of transferring IP rights and royalties and to minimize potential tax liabilities.
- Negotiate the division of the IP rights or royalties. Discuss and negotiate a fair and equitable division of the IP assets and any associated royalty income, considering factors like each spouse's contribution, financial needs, and the duration of the marriage. If both parties can work together, they can work out the division of property themselves. It is often helpful to engage the services of a mediator or collaborative divorce professionals who can assist in reaching an agreement that is acceptable to both parties. If you and your partner cannot agree on the property division terms, the court will then have to decide how your assets, including your intellectual property royalties, are divided.
- Explore alternative arrangements. If dividing IP ownership is not feasible or desirable, consider alternatives such as royalty-sharing agreements or buyouts of one spouse's interest in the IP.
- Draft a detailed agreement. Prepare a comprehensive agreement outlining the division of IP assets and royalty income, ensuring that all relevant terms and conditions are clearly defined.
- Obtain court approval. Submit the agreement to the court for review and approval as part of the divorce settlement process. Once the court approves the agreement, complete the necessary paperwork and procedures to transfer the IP rights and royalties according to the agreed-upon terms.
Factors Considered by the Court in Division of Property
As we mentioned, if you cannot agree on how to divide your IP rights or royalties, the court will make a determination on whether to award either party the royalties or enforce a royalty sharing agreement. When dealing with IP, courts may consider factors such as:
- The contribution of each spouse to the creation or acquisition of the IP.
- The value of the IP.
- The income generated by the IP during the marriage and its potential future income.
- Any agreements between the spouses regarding the IP.
To be more specific, Tennessee courts consider several factors when dividing marital property, including:
- The duration of the marriage.
- The age, physical, and mental health of both parties.
- The contribution of each spouse to the acquisition, preservation, appreciation, or dissipation of the marital property.
- The value of each spouse's separate property.
- The economic circumstances of each spouse at the time the division of property is to become effective.
- The tax consequences of the property division.
- The vocational skills, employability, and earning capacity of each spouse.
- The custodial arrangements for any minor children.
- Any other relevant factors.
Experienced Tennessee Divorce Attorneys
If you are worried about what may happen to your intellectual property during your divorce, Conner & Roberts, PLLC is here to help. Our attorneys offer high-quality counsel, and once you retain our services, we can help you with determining your best course of action, handling negotiations or litigation, getting a valuation of the intellectual property, and other case legalities.
Learn more about how we can help you. Call (423) 299-4489 to schedule a consultation today!