Intellectual Property in Settlements

Intellectual property (IP) is an increasingly important consideration in property settlements in Australia. Intellectual property rights are considered part of the asset pool from a relationship if they were developed, acquired or significantly advanced during the relationship. With technological advances, as well as growth in creative industries and the entrepreneurial economy, IP assets are more frequently featured in the asset pool in property disputes. The courts recognise anything as property if it can be valued and transferred. IP is treated as an asset because it has economic value and could produce future income or royalties. However, it is different from traditional assets such as savings or real estate because of its intangible nature.

How are property settlements calculated?

When a couple decide to end their relationship, they also need to separate their finances and property. While many former married and de facto couples can reach a private agreement over the division of their property, if they cannot agree they can apply for property orders. Under the Family Law Act 1975, property from a relationship must be divided in a way that is  fair and equitable, taking into account factors such as each person’s contribution to acquiring and retaining the asset, and each person’s future economic needs.

The Federal Circuit and Family Court of Australia and the Family Court of Western Australia use a multi-step test when determining what is a fair and equitable property settlement. The first step is to create a list of the assets and liabilities of the couple and assign value to the property. Each party has a duty of disclosure to divulge all of their property for inclusion in the pool. The term “property” here includes all assets, real and personal property, financial resources, and intangible assets such as IP. As such, an unsold computer game developed during the course of the relationship may be considered an asset that must be included in the property pool.

What is intellectual property?

By definition, IP is the product of human intellect. The main types of IP that are considered in property settlements include:

• Copyright over creative works such as art, music, literature and software
• Patents over processes and inventions that have a commercial advantage
• Trademarks such as logos and brand names
• Registered Designs
• Trade Secrets such asconfidential business information

Historically, most intellectual property of any value were inventions, though today that has shifted so that the most valuable IP is copyright on software and patents for computer circuitry. Regardless of the type of IP, the court will look at the asset in terms of its market value and how it could contribute to the future income of either party in the future.

The court can face challenges when valuing such an intangible asset. Common challenges include:

• Uncertain Value: the value of the IP may depend on market conditions, the success of associated businesses and future income streams. For instance, a patent could have no current revenue but significant potential value in the future.
• Future Earnings: IP often derives value from licensing agreements and royalties, which require calculated projections of future income. Disagreements can arise over whether these potential earnings should be included in the valuation.
• Subjective Worth: some IP is more complicated to value than others because of its subjective value. For instance, creative works may have more value to the creator than the market.
• Co-ownership and Licensing: IP can be owned by more than one individual and subject to licensing agreements that limit its transferability and therefore diminish its value in property settlements.

Market value or future value?

During a family property matter, assets are assessed at their current market value. As such, the critical question is the amount that it could be sold for on the open market between willing but not anxious sellers and buyers. In the example listed above, there may be no current market value to an unsold video game. However, the rights to the game might eventually be sold for a great deal of money. It would be unfair for the spouse to receive nothing if they supported the video game development in the first place. As such, there must be a consideration of the potential future value of the IP, which takes the special nature of the asset into account.

Historically, the courts have been loath to assign a value to an asset based on a speculative potential worth. However, the courts are also reluctant to entirely deprive a spouse of an asset of the relationship, particularly one that has a high potential value. As such, current market valuations do take into account the potential for growth in the value of an IP asset.

It is likely that IP will become a more common asset in property settlement disputes. The challenge lies in assessing the value of these assets and determining how they can be divided equitably. Contact Go To Court Lawyers on 1300 636 846 for advice on how intellectual property will be treated in a family law proceeding, or any other legal issue.