How to determine the value of intellectual property in divorce cases

By Efrat Kasznik

With approximately 50 percent of all U.S. (first or second) marriages ending in divorce, the proper identification and allocation of all marital assets is critical to the post-divorce well-being of both spouses.

In a recent seminar sponsored by the Jewish Federation, financial advisor Tali Alon and family law attorney Esther Rosenfeld discussed strategies for spouses to gain control, advocate for themselves and come up with a transition plan for the next chapter in their lives.

One of the key recommendations made in the seminar was to take steps to uncover all the marital assets that need to be considered, as those are critical to support future investment, income generation and growth post-divorce.

Tangible assets, like bank accounts and real estate, are relatively straightforward to identify and value. On the other hand, intellectual property (IP) assets, such as patents, software, trademarks, copyrights and trade secrets, also referred to as “intangible assets,” are much more difficult to identify and value.

IP assets often drive the majority of the value of high-tech companies, particularly in early stage, pre-revenue startups, and special care should be taken to identify and measure them in divorce situations.

Common IP ownership situations

Intangible assets show up more and more in divorce cases where a spouse is a founder or an employee of a high-tech company. That spouse can acquire rights in IP assets in several ways — below are two of the common situations.

As an inventor or co-inventor on a patent

Inventors are not always the patent holder (assignee). The patent is assigned to the inventors if they created it independently while not being employed and using the resources of a company to develop the inventions.

If the inventor/s are the assignees, then they hold all rights to the economic benefits that result from the monetization (through sale or license) of the patent. In most other cases, the patents are assigned to the company that funded the research, and that company reaps the benefits of monetization.

Even if the company is the assignee, some companies give certain incentives (like a percentage of proceeds) to the inventors if the patents are sold or licensed.

As a shareholder in the company that owns the IP assets

Since in most cases, all IP created in a company belongs to the company (regardless of who invented it), every shareholder of the company also shares in the ownership of these IP assets. A shareholder can be either a founder, an employee or an investor, so if the spouse is involved in a high-tech startup, for example, chances are he or she has rights in the IP assets via equity ownership of the business.

This is a very important point, since so many startups don’t make it to commercial success, and the IP assets are often the only assets with any economic value in liquidation or bankruptcy.

IP assets identification and analysis

IP assets are often hidden because they are not regularly reported and valued in the financial statements of the companies that hold them. Identifying IP assets in marital dissolutions can be a particularly challenging task, due to the lack of full disclosure by the spouse holding the IP, which is a common occurrence (whether through ignorance, or by design) in these types of proceedings.

Add to that the lack of reporting transparency associated with IP assets in the company’s own financial statements, and the result is a complex process of discovery. We usually see this process done in three steps:

IP assets identification as of the date of separation

IP assets can be identified directly through searching the patent filing database of the U.S. Patent and Trademark Office (USPTO) as well as foreign patent databases. Additional identification can be done through ownership rights in startups and related events that would imply the existence of valuable intellectual property, such as new product releases, FDA approvals or license agreements.

When it comes to IP assets, and particularly patents, the timeline is a critical piece of information. Once the timeline has been established, it is important to remember that these IP assets are not always publicly disclosed at the time of filing and might not be disclosed during separation discussion.

The USPTO has an 18-month publication delay upon filing of applications which would prevent identification of additional IP assets in situations where full and open disclosure between spouses is not a reality. In these situations, identification can be difficult, if not impossible; however, a review of the filing history and public documents can typically reveal the presence of a high likelihood of these IP assets being filed and lead to targeted discovery in the next step.

Document discovery and research

The IP assets discovery process usually requires a joint effort by the spouse’s family lawyer, financial adviser, and IP expert, leading to the triangulation of information from various data sources to piece together the full picture of ownership. Due to the exploratory nature of data triangulation, the list of discovery documents related to IP assets is fairly elaborate.

The purpose of discovery is to validate the presence, ownership, transactions, key milestones, and valuation associated with the previously identified IP Assets. Independent research of data available in the public domain is also required in order to supplement any gaps in document discovery, in order to make the analysis as robust and complete as possible.

Analysis and valuation of IP assets

The information gathered through discovery and independent research is analyzed in several ways:

  • Asset validation— Making sure that the assets are still valid; for example, maintenance fees for patents are still being paid and the patents have not been abandoned.
  • Asset ownership— Establishing that the spouse retains legal and economic ownership rights in the asset as a co-inventor, shareholder, or any other type of ownership.
  • Transactions— Discovering and analyzing any transactions that the IP assets have been involved in, for example licensing, litigation, sale, or any other type of monetization event.
  • Key milestones— Establishing a timeline of key milestones related to the IP assets, for example the issuance of a patent, the filing of additional application, FDA approval for a medical device, etc.
  • Valuation— The expert takes into consideration all the information above to arrive at a fair market value of the IP assets. The valuation methodology to be applied is selected based on the data available and the circumstances of the case.

In summary, IP assets retain significant economic value but often get left out of marital asset allocations due to the inherent difficulty in identifying and valuing these assets. A methodical approach to data discovery and analysis can address many of these issues and lead to a better understanding of the value of IP assets, leading to a more equitable allocation of marital property.

[This post originally appeared at The Business Journals.]

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