How meaningful is an award of future proceeds derived from a spouse’s copyrighted film scripts when there is no baseline value? This is only one of several valuation questions triggered by a recent New York court decision.
Backstory: The husband was a film and television director who also wrote screenplays, and the wife was a lawyer turned dentist who owned her own practice in New York City. The husband’s most recent film premiered at the Sundance Film Festival last year and is slated for release this November. He owned a production company, which he had formed for billing purposes one year before the marriage. At trial, the court considered the company little more than “a conduit to receive payment for work he is hired to do.” Because it was not a “true” business in the sense of being saleable and the wife did not contribute to it in any way, she had no right to any of the $124,000 value an appraiser had determined.
The husband also acknowledged that he had copyrighted four scripts, which he had not listed in his statement of net worth. He said he had optioned one and had one made into a film that was sold, but two remained unproduced and unsold. Since neither party had proof of the value of the works at trial, they agreed that there could be no distributive award or credit or offset to the wife at that time. But, said the court, because the husband created these works during the marriage, the wife had a right to “half of such sums paid to the defendant for the sale or use of these works.” But there was a caveat: The wife had no right to the compensation the husband earned as a result of making future modifications to the works, the court went on to say. And, in what appears to be a contradiction, it specified that the wife was to receive “25% of any fees or royalties [the husband] earns from the four copyrighted scripts, as well as 25% of any sums earned from the sale of all or any part of the copyrights, or any sums paid for the right to make any derivative works from the scripts.”
Muddy plot: The court did not set down a procedure for quantifying value changes in the scripts created during marriage, but its express limitation on the size of the award due to modifications is troubling to Jim Alerding (Alerding Consulting). It may diminish, if not eliminate, the wife's claim to any of the proceeds. “That seems like a hole wide enough to drive an 18-wheeler through for the creating spouse—a way to totally negate the value to the receiving spouse,” Alerding explains. Also, the order gives rise to more questions than it answers: “So does that mean that if the husband modifies a script even a little, any future royalties for it go only to the creator? Even though the judge talks about compensation for those changes only, how do you measure that if those changes are required to continue the existing royalty?” Alerding wonders.
Find a detailed discussion on A.C. v. J.O., 2013 N.Y. Misc. LEXIS 3524 (Aug. 12 2013) (slip op.), in the November Business Valuation Update; the opinion will be available soon at BVLaw.
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