Volume 1, Number 2
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EDITOR'S NOTE: The articles that follow apply established valuation principles to a range of specific types of businesses.
Celebrity divorces attract media attention. This year alone, television and magazines covered the marital machinations of Tom Cruise and Nicole Kidman, Michael and Juanita Jordan, Chuck Finley and Tawny Kitaen, and Jennifer Lopez and Cris Judd. The American public is fascinated with celebrities and naturally curious about how they divide their fortunes in a divorce.
Today, more than fortunes can be divided. Either spouse may have a property interest in the other's fame or celebrity goodwill. Celebrity goodwill is not limited to entertainers. Anyone whose earnings are enhanced by being in the public eye possesses this intangible asset. Professional athletes, high-profile executives, fashion designers, retired politicians, artists, authors and television reporters all have "human capital." Mel Gibson, Venus Williams, Wolfgang Puck, J.K. Rowling, Katie Couric, Steven Spielberg, Rudolph Giuliani, and Tiger Woods are prime examples of people who possess celebrity goodwill.
Celebrity goodwill is loosely defined as excess earning capacity attributable to one's status or fame. Jack A. Rounick & Hon. R. William Riggs, "What's Perk- olating? How Courts Are Handling Perks, Fringe and Other Employment Benefits," Fam. Adv., Vol. 23, No. 3 (Winter 2001), 12, 17.
The question facing family-law courts in divorce cases is whether celebrity status should be treated as an asset or a factor in determining an appropriate alimony award. If celebrity status is considered a divisible intangible asset, other complex issues must be addressed. How should celebrity status or public acclaim be valued? In dividing celebrity goodwill, how is it determined which share is attributed to the marriage versus human capital possessed before marriage? Should we weigh the celebrity goodwill of Tom Cruise against Nicole Kidman's? Or weigh high-profile executive John Z. De Lorean's celebrity goodwill against that of his third wife, model Christina Ferrare? If so, how? This unsettled area of the law welcomes creative lawyering.
Based on published cases, only New York and New Jersey currently recognize celebrity goodwill as a divisible marital asset. Surprisingly, California courts have not defined or recognized celebrity goodwill, despite California's being the entertainment-industry hub and home to many celebrities. See S. David Rosenson, "Celebrity Goodwill--Is It Time?," 32 Beverly Hills, B.A.J. (Summer/Fall 1997) 46 (setting forth arguments for and against California's recognizing celebrity goodwill). See also, Honey Kessler Amado, "To Have and Have Not," http://amado.lawoffice.com/newslett.htm (contending that California does not and should not recognize celebrity goodwill as a community asset).
Few cases address celebrity goodwill, despite the number of celebrity divorces that occur each year and the financial resources available for protracted litigation. Jay E. Fishman & Christopher Waltrich, "The Business of Celebrity," Valuing Specific Assets in Divorce 1, 7 (Robert D. Feder ed., Supp. 2001). Divorces involving celebrity goodwill tend to settle. Many celebrities avoid litigation out of fear of negative publicity that could affect their bankability. The lack of legal precedent makes celebrities unwilling to risk financial uncertainty.
How a state will treat celebrity goodwill depends largely on how the state views a professional license or degree or the goodwill of a professional practice. Jack A. Rounick & Hon. R. William Riggs, "What's Perk-olating? How Courts Are Handling Perks, Fringe and Other Employment Benefits," Fam. Adv., Vol. 23, No. 3 (Winter 2001), 12, 17. If a state recognizes licenses, degrees, and professional practices as divisible marital property, one may argue that celebrity goodwill also is a marital asset subject to distribution. Id. at 15-18.
The springboard for celebrity goodwill in New York was O'Brien v. O'Brien, 66 N.Y.2d 576 (Ct. App. 1985) . The parties were married on *22 April 3, 1971, and the husband obtained his license to practice medicine in October 1980. Two months later, he filed for divorce. The court held that this newly acquired license was marital property subject to equitable distribution.
The court reasoned that the professional license was a product of the parties' joint efforts and represented their investments in the economic partnership of marriage. The court emphasized that the wife played a major role in her husband's attaining his professional license. Throughout the nine-year marriage, the wife worked and financially supported her husband, sacrificing her own education and career opportunities. She moved to Mexico with her husband for more than three years while he attended medical school.
A few years later, in Golub v. Golub, 527 N.Y.S. 2D 946 (N.Y. Sup. Ct. 1988) , the court extended O'Brien. Id. at 949-50. Golub involved the divorce of Marisa Berenson, who was a famous model and television and film actress when she married Richard Golub in 1982. Mr. Golub was a successful attorney who also attracted media attention. During the marriage, Ms. Berenson's earnings appreciated due in part to Mr. Golub's legal skills and business acumen. He helped with her financial affairs and made efforts to advance her career.
In 1988, a New York trial court held that the increase in value of Ms. Berenson's career during her marriage was marital property. The court recognized this intangible source of income as marital property, in part, to avoid the celebrity spouse's receiving a windfall and the noncelebrity spouse's being unfairly deprived of the enhanced earning capacity that was derived from the marital partnership. Id. at 950. The court reasoned that the noncelebrity spouse was entitled to share in the celebrity's fame.
The troubling aspect of this case is the court's failure to address when marital property is created and how to determine its value. Ms. Berenson's acting and modeling career was well-established prior to her marriage. Although Mr. Golub's efforts to advance her career may have contributed to those increased earnings, it is equally likely that her earnings increased due to her own premarital efforts. Allan M. Parkman, " Human Capital as Property in Celebrity Divorces," 29 Fam. L. Q. 141, 158-160 (1995) .
When representing a celebrity spouse, you must distinguish between an increase in the celebrity's income and an increase in earning capacity during the marriage. An increase in income does not necessarily dictate that fame is a marital asset because it could be attributed to the celebrity's human capital, accumulated prior to the marriage. A noncelebrity spouse must prove that the increase in the celebrity's human capital during the marriage increased earning capacity. Only then should the noncelebrity spouse have a stake in celebrity goodwill.
Shortly after Golub, a New Jersey trial court rendered the landmark decision in Piscopo v. Piscopo, 231 N.J. Super. 576 (Ch. Div. 1988) , recognizing celebrity goodwill as marital property. Joe Piscopo is a comedian and entertainer who became famous while appearing as a headliner on Saturday Night Live from 1980 to 1984. The parties agreed that Mrs. Piscopo was instrumental in assisting Mr. Piscopo's move from penury to celebrity by taking care of the household, bearing and raising their children, and serving as a sounding board for his ideas. Id. at 577.
At trial, Mr. Piscopo argued that celebrity goodwill based on personal talent was distinguishable from goodwill associated with professionals such as doctors, lawyers, and accountants whose goodwill is derived from meeting educational and regulatory requirements. Id. at 578-79. Mr. Piscopo argued that professional goodwill is the excess earnings received over and above the average practitioner of similar age, education, and expertise. However, no average measure of personal goodwill exists in the entertainment industry because it is based on unique talent. The trial court rejected this distinction, claiming that an uncommon aptitude for any specialized discipline transforms the average member of that profession into one with measurable goodwill. Id.
The court further reasoned that tort laws exist to protect Mr. Piscopo's property rights in his status as a celebrity during his lifetime. If someone infringed on his pecuniary interest in his name and likeness by appropriating his acts or work product without consent, he would have recourse through the courts and may be entitled to monetary compensation. The court reasoned that it could not countenance the anomaly that would occur if one branch of the judiciary protected a celebrity's status from unjust enrichment by theft, while another branch foreclosed a spouse from sharing in that same predictable interest.
On appeal, Mr. Piscopo conceded that celebrity goodwill may exist, but that the entertainment industry is too volatile and, as a result, his future income could not be predicted with any accuracy. 232 N.J. Super. 559, 562 (App. Div. 1989) . In other words, it was too speculative. See generally Cutler & Schoonmaker IV, "Division and Valuation of Speculative Assets: Reasoned Adjudication or Courthouse Confusion," 15 J.A.A.M.L. 257 (1998).
The appellate court reiterated the trial court's ruling that valuation of goodwill is not based on future earnings, but rather on past earning capacity and the probability that such earnings would be realized in the future.
The next case to hold that celebrity status constitutes marital *23 property is Elkus v. Elkus, 572 N.Y.S.2d 901 (App. Div. 1991) , rev. denied, (N.Y. 1992). When the parties were married on February 9, 1973, Frederica von Stade Elkus was just embarking on her opera career. During the marriage, Ms. Elkus became extremely successful and her income rose dramatically. Mr. Elkus contended that by sacrificing his own career and contributing to Ms. Elkus's career, which included his role as her voice coach and teacher for ten years, he was entitled to an equitable share of the increase in her celebrity status during the marriage.
The trial court rejected Mr. Elkus's position and refused to extend the O'Brien holding. 572 N.Y.S.2d at 902. The court found that Mr. Elkus enjoyed a substantial lifestyle during the marriage and thus was sufficiently compensated by his share of the parties' assets. The court concluded that Ms. Elkus's career was not marital property.
The appellate court reversed and held that things of value acquired during marriage constitute marital property even though they may not fall within the scope of traditional property. The court found no legal precedent that would limit extending O'Brien's reasoning to an opera singer's career.
Again, as in Golub, in the interest of fairness, the court reasoned that limiting the definition of marital property to professions requiring licenses would discriminate against spouses in other careers. Id. at 903. The court followed the analysis in Golub, holding that to the extent Ms. Elkus's career appreciated due to Mr. Elkus's contributions, which in this case were direct and concrete, the appreciation is marital property subject to equitable distribution. Id. at 904.
Although only two states currently consider celebrity goodwill a marital asset, this trend may extend to other states that look to equitable principles to achieve a fair and just division of property. Once the court recognizes celebrity goodwill as marital property, the next challenge is valuation.
Valuation of celebrity goodwill depends on the level and duration of benefits as well as the associated risks. Jay E. Fishman & Christopher Waltrich, "The Business of Celebrity," Valuing Specific Assets in Divorce 1, 18 (Robert D. Feder ed., Supp. 2001).
No set technique exists for valuing celebrity goodwill. Similar to other intangible assets, celebrity-goodwill valuation methodologies include: percentage of gross earnings or revenue, excess earnings, relief from royalty, and enhanced earnings. Id. at 18-24. These approaches are based on the premise that the value is the present worth of future benefits. Id. at 18. Jay E. Fishman, ASA, CBA, & Christopher Waltrich explain each of these approaches in their chapter entitled, "The Business of Celebrity," Valuing Specific Assets in Divorce (Robert D. Feder ed., Supp. 2001).
Each method has been subject to criticism by valuation practitioners. The percentage-of-gross-earnings or revenue method requires the expert to apply an appropriate percentage to gross earnings, which is derived by comparing similar transactions in the market. Id. at 19. Because celebrity businesses rarely are sold, such comparisons are difficult to make. Thus, the expert must construct this percentage based on the "nature and duration of a celebrity's career, past earning power, bankability, and the expected life of the celebrity status."
The excess earnings and enhanced earnings approaches require the expert to compare a celebrity's compensation to that of an average person in the profession. Id. at 20-21, 23-24. Not only is finding a basis for comparison difficult, but by definition, an individual of equal stature should have similar earnings, thus generating no excess or enhanced earnings. This results in the value being closer to investment value than fair-market value.
The relief-from-royalty method applies a benchmark royalty rate to an estimate of the celebrity's future revenue over the remaining life of the individual's status as a celebrity. Id. at 22. Due to the ephemeral and unpredictable nature of celebrity, experts have difficulty in estimating the remaining life of celebrity status.
As family lawyers, we must be aware of celebrity goodwill and be prepared to educate judges about it. Clients who have the potential to be a rising star as well as those who are already celebrities may want to have their spouses sign a waiver to any right or interest in celebrity goodwill. When that protection does not exist, advise your celebrity client to retain his or her own accountant, rather than agreeing to retain a joint accountant. This enables a family lawyer to work with the accountant on calculating the most advantageous value of celebrity goodwill and attacking the other side's calculations.
*24 Celebrity goodwill is largely uncharted territory. It affords family lawyers an opportunity to be creative as they use their advocacy skills to impact the treatment of this intangible asset.
Family Advocate, Winter, 2003
Copyright © 2003 by American Bar Association; Laurence J. Cutler, Robin C. Bogan
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