General Practice, Solo & Small Firm DivisionMagazine
Volume 17, Number 3
SUCCESSION AND VALUATION: How to Transfer Intellectual Property Rights
BY DANIEL S. COOLIDGE
Intellectual property is now fashionable. No longer is the patent bar the redheaded stepchild of the legal profession. Suddenly, it seems, the entire bar sees the value in what we IP pros1 have been preaching for many years: Intellectual property rights are valuable, and need to be considered not only in the transfer of businesses but also when dealing with estates. Woe betide the general practitioner who fails to deal knowledgeably with what turn out later to have been valuable rights!
Many practitioners have some passing familiarity with patents, copyrights, and trademarks, but it is worthwhile to provide a brief refresher, if for no other reason than to provide context. This article will address how to recognize various intellectual property rights, point out some of the pitfalls that one may encounter when dealing with these rights, and discuss the problem of valuing them.Copyrights
Perhaps the easiest area of intellectual property rights to grasp in a general way, copyrights offer some of the deepest pitfalls and most vexing problems.2 In the simplest sense, copyright is a set of rights with respect to an expression. The expression may be in the form of a visual image, a sound recording, text, or combinations.3 It may be owned by a single person, or it may be jointly owned. Copyright is easy to create: The mere act of creation is sufficient to vest the copyright in the creator. No registration is required, no fees, and no umpires. Would that it were all so easy.
Let us consider creation. If the creation falls within the subject matter of what is copyrightable,4 what then? Say I am an artist and create a painting, "Blue Dribbles on Gray." What rights do I have? The basic law is that I have the exclusive right to (1) reproduction of my work; (2) making derivative works from it ("Son of Blue Dribbles on Gray"?); (3) public distribution and performance; and (4) public display. I sell the painting to an admirer and find months later that a photograph of my painting has been included in a book, "Noted Dribblers and Droolers of the Twenty-First Century." Do I have cause to complain?
Certainly! I sold only the tangible expression of my work, not the copyright. It is no different than had I sold a copy of a book I wrote: The buyer owns the copy, not the embedded work. My customer may hang the painting in his home, but he has no rights of public display or reproduction.
Let's change the context: It's 2015, and your client's deceased husband was an author who signed over all his rights to his book, Chewing Gum Memories, 36 years ago for a pittance. Last year, the book was rediscovered. It's now on the Times' Best Seller List. Can you help your client? Sure-the law always protects widows and orphans! Under existing copyright law, even though an author has signed away all his rights, and even though an author has passed on to his just desserts, his surviving spouse, or children if there is no spouse, or grandchildren if the kiddies are gone,5 have the right to terminate the transfer or license of the copyright made by the author at any time during the five years following 35 years from the date of execution of the author's original grant. It makes no difference if the author tried to waive the termination rights-such waivers are ineffective.
How long does a copyright last? That's not an easy question to answer. It depends on where it was created, when it was created, and what steps may have been taken along the way. Some rights may have gone into the public domain, only later to be reclaimed under a quirk of law. Generally, under today's U.S. copyright statute, the life of the author plus 70 years is the rule. But beware-other rules apply for works for hire.6
And let us dispel the notion that work for hire is simply work for hire: It is a group of statutorily defined categories of works.7 If the work isn't within the categories, it's not a work for hire-even if your client hired someone to create the work. For example, unless your client gets a written assignment of copyright in a painting that she commissions, she may own the oil but not the right to put it on the cover of her book. The artist still owns the copyright.
So your client shows up on your doorstep and says her Aunt Julie is dead, and your client is the executrix. You find out Aunt Julie was a professional photographer of some note, a painter, an author, and a singer with 11 Grammy awards to her name. What do you do? Call for help. Issues of valuation aside (which I address below), this is a job for an expert in copyright. Unless otherwise disposed, Aunt Julie's copyrights are part of her vast and complex estate. Just identifying them may be an impossible task.
Often it is adequate to deal with copyright issues in a simple estate by an omnibus residual clause, but the residuary legatees ought to be advised of the existence of such rights, including but not limited to the termination interest. In more complex cases, or where the value of the copyrights may form a material part of the estate, assistance from a copyright practitioner should be sought.Patents
Unlike copyrights, patents exist only when they have been granted by the government, which keeps a public record of them.8 It would seem that this is a safer area, in which a nonspecialist practitioner may tread. What is simpler, says the savvy solo, than looking up what patents are held by the deceased and simply including them in the estate?
I always worry about what I may have said or failed to say that may leave the client believing he owns more than he really does. Say you check and find that there are seven patents in the name of your deceased, and they all have at least eight years remaining in the term. You're even savvy enough to check to see if any have maintenance fees due, and see that the fees are paid. You have an expert opinion that says they are worth $100,000, you have a buyer willing to purchase them outright, and your heirs are willing to sell. No problems?
There may be. While ownership of patents generally is recorded at the Patent and Trademark Office (and there can be significant adverse results for failing to record a transfer within three months), there are no requirements that licenses to patents be recorded, meaning that the executor may have sold a patent to a purchaser who subsequently discovers that its biggest competitor has a permanent license to practice the invention. That can make a purchaser cranky. There is no absolutely certain means by which you can assure that no prior rights have been granted, which means a seller must craft her sale or license documents carefully-and so advise the heirs.
Another problem can arise where one or more patents may be in the application process, and thus are not yet available for public scrutiny. Patent applications are held in confidence until they issue. It will be important to determine if the deceased had any pending applications, and if so, discover who is prosecuting them and who has authority now to deal with them. Deadlines happen in patent prosecution that, unlike those in other areas of practice, are absolute-no excuse accepted. Failure to meet deadlines can result in the permanent loss of the patent rights, which can be uncomfortable to explain to a penurious and irate client. Beware especially of pending foreign filings (so-called PCT or Patent Cooperation Treaty filings), which have an entirely different set of deadlines and interplay with pending U.S. applications. And to make things interesting, the rules have just changed.Trademarks
Remember this: Trademarks and goodwill are inseparable. A trademark without goodwill is a goner.9 You learned about that (and were titillated by the idea of naked assignments) in law school.
That being said, does the goodwill of a sole proprietorship die with the proprietor? Of course not, and neither does the value of the trademarks and service marks associated with the business. Trademarks and service marks are heritable in the same way that the goodwill of the business is. Just because a mark has not been registered does not mean that it is neither valid nor valuable. Registered marks are just easier to find. Don't make the mistake of assuming that the only marks are those currently in use: Absent express abandonment, an unused mark may still be effective months, even years, after it has last been used in commerce.
Ownership of a mark may have more value in what it can prevent than in what it can provide. Some marks may be desirable, and while a mark may be worth only a few thousand dollars to one business, it may be worth several times that to another business that would like to adopt the mark but is prevented from so doing in an area because of prior rights.
One word about domain names: The USPTO recently issued guidelines for the registration of so-called dot-com trademarks.10 Domain names and trademarks and their interplay are confusing, and as of this writing the matter has not been definitively sorted out. If your client has a domain name, it's an asset, and it may be a trademark asset as well.Valuation
Surely the gentle reader will not be surprised to discover that valuation of intellectual property assets is a complex undertaking, especially given that merely identifying and cataloging such assets is so daunting. I know of no safe harbor rule for valuation.
For assets that have been licensed, or for which there is a ready, willing, and able buyer and seller, the problem can become trivial. Other assets, such as a portfolio of photographs, may have value only to a particular buyer, who may be hard to find. Often the best that can be accomplished is to obtain an appraisal from a qualified appraiser and obtain agreement from the concerned parties as to the appraisal figure, if possible. Whether the number is in fact meaningful may be an entirely different concept, and one needs to be aware of the hawklike vision of the party looking backward who gave up rights that now seem to have been undervalued at the time.
A difficult problem arises in a situation in which an estate must be liquidated. It is best for the executor and her advisor to be well informed when disposing of intellectual property assets, and where such disposal merits, it is worthwhile to bring an expert to assist in the valuation and disposal. Frequently, however, the value of an asset may not be apparent at the time it is being disposed of, so it is a good idea to document the steps that were taken to value the asset and to market it. Patent rights disposed of by auction with Uncle Edward's sofa may come back to haunt sooner than Uncle Edward.
There are a number of quite technical books on the topic of intellectual property valuation.11 Valuation of Intellectual Property and Intangible Assets, 3d ed., by Gordon V. Smith and, Russell L. Parr (John Wiley & Sons, 2000), is a great read for a sleepless night, and if nothing else will impress upon the casual reader the great complexity of valuing these assets.
- I can claim that appellation now that I've passed the patent bar examination. Before that, believe me, I felt the hierarchical nature of the IP bar! Back to Article
- And we will not even deal with, except in the most cursory manner, the problems posed by nonuniform international laws and treaties. Back to Article
- "Original works of authorship...fixed in any tangible medium of expression, now known or later developed, from which they can be perceived...either directly or with the aid of a machine..." 17 U.S.C.A. § 102(a). Back to Article
- Itself a subject of inquiry at the fringes, not within.Back to Top
- Strictly speaking, the termination interest holders of more than one half the author's termination interest may exercise. See 17 U.S.C.A. § 203. Back to Article
- For a useful summary of term and other copyright provisions, see the Copyright Office Circular on the web at http://lcweb.loc.gov/copyright/circs/circ1.html#hlc/. Back to Article
- A work for hire is either (a) a work prepared by an employee within the scope of their employment, or (b) a work that is created subject to a written and signed instrument that it be considered a work for hire falling within one of the following categories: (i) a contribution to a collective work; (ii) a part of a motion picture or other audiovisual work; (iii) a translation; (iv) a supplementary work; (v) a compilation; (vi) an instructional text; (vii) a test; (viii) answer material for a test; or (ix) an atlas. If it's not one of these, it's not a work for hire. Back to Article
- Mind you, there may be extant rights to apply for a patent for an invention created by the deceased but for which he or she has not applied for patent protection. This can be difficult to discover, it may well be imagined. Importantly, the failure to file promptly may result in the loss of the patent right due to applicable statutory bars. See, for example, 35 U.S.C.A. § 102. Back to Article
- And being pedantic as I am, may I add that the word "trademark" may not be used as a verb. It is now and always will be a noun, a thing created by usage, not by registration. Mostly. Back to Article
- Examination Guide No. 2-99 may be obtained at www.uspto.gov/web/offices/tac/domain/. Back to Article
- My inclination is to find an accountant willing to read these tomes and provide advice. Back to Article
- Daniel S.Coolidge is a partner and head of the intellectual property team at Manchester, New Hampshire's Sheehan, Phinney, Bass & Green. He can be reached via e-mail at email@example.com.