How to Identify, Value and Divide Intellectual Property Assets During Divorce
ately marriages in Uganda are resulting in divorce. Courts look at many factors when deciding how to divide marital property including, but not limited to, the length of the marriage, any misuse of marital property by either spouse, tax consequences, the value assigned to each spouse’s share and the ability of each spouse to acquire assets and earn income in the future.
Intellectual property (IP) also falls under this factorial analysis. However, IP is often overlooked. IP is not regularly considered by the spouses at first because the evaluation and division of IP assets can be complex.
Various third-party agreements commonly associated with these types of property rights can be extremely involved and may affect the ability of the owner- spouse to transfer or dispose of his or her interest.
Here, I aim to simplify and provide a comprehensive review of how to identify, value and divide IP assets in divorce:
Identifying IP Assets
The general idea underlying IP law is that of incentive for innovation: Individuals expend more time, energy and resources in innovative, creative pursuits if the fruits of their labor are likely to lead to financial gains.
Giving creators limited, monopolistic control over their creations is thought to enhance the potential for profitable exploitation and increase in creative production. IP interests are acquired when the owning/creator spouse expends the necessary effort and not when they are actually received.
IP includes patents, trademarks, copyright, trade secrets, trade dress and various contract rights. A patent means the title granted to protect an invention under the industrial property Act 2014 is like a utility model, is an exclusive right granted by the government for an invention. Protected inventions can range from simple things like a safety pin to sophisticated items like juice processing machine. In Uganda the term protection for a patent invention is 20 years.
This right to exclude is distinguished from the right of a patent owner to use, make, sell, offer to sell or import the patented invention himself.
For patents, there are utility patents for any new and useful process, machine, manufacture or compositions of matter, or any new and useful improvement thereof; design patents for any new, original and ornamental design for an article of manufacture the appearance of which is protected; and lastly plant patents for asexually reproduced and distinct and new varieties of plants.
Patents are a form of personal property and are freely assignable.
Many entrepreneurs and corporations alike need to distinguish between trademarks and copyrights. A trademark is awarded to any word, name, symbol or device, or any combination thereof that is used by a person or which a person has a bona fide intention to use in commerce and applies to register on the principal trademark register to identify and distinguish the goods or services.
A copyright requires formal type of registration under the Copy Rights and Neighbouring Act. However, in order to sue for infringement of a copyright, the material must be registered with the Uganda Registration Services Bureau.
Importantly, a derivative work is work resulting from adaptation, translation or other transformation of an original work but which constitutes an independent creation in itself, such as a translation musical by Jose Chameleone and Slick Stuart.
How to discover, evaluate and divide IP assets in divorce
Dividing the intangible
Arrangement, motion picture version, abridgement, condensation or any other form in which a work may be recast, transformed, or adapted.
Further, a joint work is a work prepared by at least two authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole—this article for example.
Also, a work made for hire is a work created at the direction of, and with the resources of, a third party such as a company.
Copyrights last for the author’s life plus 50 years after his death.
Parties of a divorce should search through the patent, trademark or copyright filing databases to see if there is something that would imply the existence of valuable IP such as new product releases, and license agreements.
Examples when IP arises in divorce:
- A spouse’s novel is still in the draft stage on the household computer and a computer expert after years of experimentation, develops a novel computer app.
- A company formed by the spouses develops patentable materials post-divorce
- A spouse designs a specific ornamentation on a mechanical device and invests in a design patent.
- An author drafts and completes a novel during the marriage but tours post-divorce to promote the novel.
- A spouse dedicates his or her time to invention creation during the marriage and the other spouse pays the household finances
Evaluating IP Assets
There are several initial questions to ask after identifying IP – some of which
When was the IP created? Who actually owns the copyright, patent or trademark? Does the spouse own 1OO percent of the rights? Are there any restrictions on third party involvement in the copyrighted or patented property? Has the IP actually been published, patented or registered? Are royalties currently being paid? What are the terms of that scheme?
What, and how much, are the development costs needed to either complete the IP or to maximize its potential? What is the risk of the patent being declared invalid? Has the owner issued any licenses? What is the status of any derivative works emanating from the original work?
Arguably, the first two questions are of immediate importance upon discovering potentially divisible IP.
The parties should create a timeline of creation that delineates when and to what extent the IP was created in order to determine whether efforts were pre, during or post-divorce.
The second most important question is who owns the property. Copyrights, Patents are freely assignable. In many cases, they are assigned to the company that funded the research, and that a timeline of key milestones related to IP assets, for example, the issuance of a patent.
Valuation: Considering all the information above in order to arrive at a fair value using one of the following methods;
Cost Approach: The cost of replacing the IP is virtually impossible to calculate
Market Approach: Market value is based upon the notion of what a willing buyer and/or seller will pay for the asset with neither having an obligation to sell or purchase.
Value to the Owner: The owner of the IP is qualified to testify as to the market value of the property.
Income Approach: There is consideration of incremental income levels, estimation of relief from royalties income, difference in value of the enterprise without the IP and if the court or valuation expert should choose to treat the value of the IP as a residual.
Offers to Purchase IP: A valid offer to purchase IP may be a true measure of its value.
IP and the Business: The valuation expert may place a value on the business.
The uncertainty of the length of time the IP will or can be income producing, post-divorce efforts needed to continue an income stream and the legal, functional and economic life of the IP will undoubtedly impact and bring an accurate valuation.
Dividing IP Assets
After taking into consideration the rights of third parties, the question becomes whether the property was created before, during or after the marriage.
IP interests are marital property to the extent that actual marital funds were invested, and separate to the extent they were created before the marriage.
In Uganda, IP created before the marriage is considered separate property; IP created during the marriage is divided equally; and IP partially created after the marriage is divided equally once present property values and future incomes are considered.
For example, licensing fees from patents and trademarks may present considerable future income opportunities. However, these must be certain and not speculative values. Specifically regarding post-marital development, a completely developed invention or work may still produce more income if post-marital 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. A court may also award the non-creator spouse other marital assets to offset the IP given to the creator spouse.
Commonly used division mechanisms
Direct transfer/assignment: Direct transfer or assignment from the creator spouse to the non-creator spouse of the rights affecting any payments. This is a recommended method.
Third Party Recipient: Designate an independent third party to receive any and all payment contemplated by the award.
Creating a Constructive Trust: Must order the amount, method of payment, time for payment and place for payment – this language must be included whenever there is an instance for alimony.
Protecting IP Assets Proactively
To ensure businesses and their divorcing, IP-owning founders can move forward, there are a number of steps that can and should be taken:
- Have a pre-nuptial agreement that addresses IP developed during the marriage.
- File a complaint for divorce quickly once the marriage is over instead of informally separating. The date the complaint is filed serves as the cut-off for equitable distribution.
- Have the IP and anything created based on that IP put into a trust, out of the business owner’s name.
The couple is encouraged to employ the services of an Advocate to assist in assessing the nature, value and rights involved when faced with an IP asset in a divorce case. Every case is different, and the property division also depends on the valuation of the IP value.