The Future Is No
By Charles C. Abut
IN A CASE of first impression, it has now been affirmed that a celebrity's goodwill is an asset subject to equitable distribution. See Piscopo v. Piscopo, 231 N.J. Super. 576 (Ch. Div. 1989), affd 232 N.J. Super. 559 (App. Div. 1989), certif. den. 117 N.J. 156 1989). In that case, the reputation of nationally known comedian Joe Piscopo was deemed an asset of the marriage and distributable in a divorce proceeding.
This decision raises a number of questions:
* What is goodwill, who has it, how is it valued and how will it be distributed?
If a celebrity has goodwill, what other professions, occupations or trades can generate goodwill?
What practical steps should be taken in view of the foregoing, and what future developments are likely?
Initially, you must make a hard assessment of what goodwill is, from your jurisdiction's point of view. Your jurisdiction may or may not subscribe to the view of the Internal Revenue Service, as set forth in Revenue Ruling 59-60:
"In the final analysis, goodwill is based upon earning capacity. The presence of goodwill and its value, therefore, rests upon the excess of net earnings over and above a fair return on the net tangible asset. While the element of goodwill may be based primarily on earnings, such factors as the prestige and renown of the business, the ownership of a trade or brand name, and a record of successful operation over a prolonged period in a particular locality, also may furnish support for the inclusion of intangible value."
While some jurisdictions have firmly embraced the concept of goodwill (e.g., California, Colorado, Montana, New Jersey, New York, North Carolina, Oregon, Washington), other jurisdictions have rejected the concept, either partially or completely (e.g., Arizona, Indiana, Kansas, Louisiana, Nebraska, Oklahoma, Wisconsin), and still others have reached conflicting or divergent conclusions regarding goodwill (e.g., Texas).
Understandably, the resistance that the goodwill concept has met stems from its intangible nature. In the past, courts have often struggled with the valuation of "classical" intangibles, such as trademarks, copyrights and patents. It has been even more difficult to place values on or calculate damages arising out of such other intangibles as '"trade secrets" know-how, formulas or inchoate interests. Nevertheless, the practitioner must fight through the natural reluctance inherent in valuing the intangible of goodwill and insist on its inclusion and valuation wherever it may exists.
In Piscopo, the holding that celebrity goodwill exists as an asset subject to equitable distribution was premised on two firm principles of law.
Subject to Distribution
First, it was well-established in New Jersey that the goodwill of a professional practice was an asset subject to equitable distribution, even with respect to a law firm (where ethical considerations prohibit the sale of the underlying practice) and even though in that jurisdiction the professional's license or degree is not subject to equitable distribution; see Dugan v. Dugan, 92 N.J. 423 (1983).
Second, a number of federal and state decisions throughout various jurisdictions have clearly set forth the right of celebrities to protect their common law and statutory "right to publicity." This right has been repeatedly affirmed " to protect against unpermitted use of the celebrity's name, likeness, photograph or voice. As the Piscopo trial court observed:
"The court cannot countenance the anomaly that would result if one branch of Chancery vigorously protected [the celebrity's] person and business from another's 'unjust enrichment by the theft of [his] goodwill'...while another branch deprived a spouse from sharing in that very same protectible interest." Piscopo v. Piscopo, 231 N.J. Super. at 576.
It was this rationale that extended the concept of goodwill to a celebrity's reputation.
Valuation and Discovery
There is no magic formula for valuing goodwill or celebrity goodwill. However, any valuation is inevitably linked to past earnings and the probability of future earnings. Thus, the practitioner will engage in detailed discovery to establish dividends, actual cash flow, extraordinary debt, trade receivable and payables, tax return and balance sheet analysis, perquisites and an almost unlimited number of other factors.
After the appropriate gathering of raw data and its analysis, the valuation will involve subjective factors as well. Subjective factors may include the selection of a capitalization rate, or a determination of what constitutes "reasonable compensation."
The end result of the discovery and valuation process should be a substantiated figure, based on a combination of both objective and subjective factors. However, the practitioner's role is to prevent those factors that are subjective from being arbitrary. You will be using one or more experts, and it is your job to question each assumption relied upon and to insure the firm underpinnings of your experts' opinions.
In this context, Golub v. Golub, 139 Misc.2d 440, 527 N.Y.S. 2d 946 (Sup. Ct. 1988) , represents the pitfalls of an inadequate valuation presentation. In Golub, the court specifically found that celebrity goodwill was an asset subject to equitable distribution, and then declined to make any distribution of this asset, precisely because no valuation evidence had been offered. To avoid such a pyrrhic victory, it behooves the practitioner to have sufficient and credible valuation proofs.
Whenever you are engaged in the process of establishing any type of goodwill for equitable distribution purposes, you can expect to encounter a number of defensive theories.
The argument is that the spouse receiving equitable distribution is being paid twice: Initially, with alimony/child support, which are made from the paying spouse's future earnings. If the recipient spouse is then awarded an additional amount, as equitable distribution, based on the payor spouse's future earnings, doesn't the recipient get an unfair double payment? Not necessarily. First, no such double payment occurs whenever the recipient spouse does not receive support, as in a childless marriage or where children are emancipated or where no alimony is paid for one reason or another.
Second, there are situations in which the "double-dipping" defense falls short, on equitable grounds. The recipient spouse may have actively contributed to creation of the goodwill asset, such as the celebrity's goodwill.
Again, situations may arise where there are no tangible assets to distribute, and the court is left with the prospect of one spouse walking away from the marriage with greatly enhanced earning power, created during the marriage, and as a direct result of the recipient spouse's contributions.
This defense goes to the heart of the valuation process. The argument is that future earnings are impossible to determine with precision, as are future interest rates and future tax liabilities. Therefore, the argument goes, how can the court fix with precision for purposes of a present judgment the future asset upon which it is based?
The answer is that as difficult or as imprecise as the valuation process may be, there nevertheless is an underlying asset to be valued. Difficulties in valuation do not negate the existence of the asset. This should be the same response to such objections as lack of marketability, legal prohibitions against sale, elusive data and so forth.
Form Over Substance
In a goodwill case, the defense may be raised that any goodwill is personal to the spouse involved, and cannot form part of that spouse's business, profession or trade. Alternatively, the argument is made that any goodwill is only cognizable in a corporation, partnership or business entity, and does not vest in the individual. Either argument is an attempt to elevate form over substance.
The essential point is whether goodwill exists, whether by way of excess earnings, or any other formulation, and not the format of the entity through which the litigant chooses to do business. There is no end to cases whose collective teaching is that equitable distribution will be effected based on what the actual assets are, as opposed to how they happen to be held.
There is no question that courts will be dealing with goodwill, celebrity goodwill and other related concepts on an increasing basis in the future. See, for example, Getz v. Getz, N.Y.L.J., March 2, 1989, at 28-29 (N.Y. Sup. Ct. 1989).
Furthermore, in addition to the universe of celebrities who will be engaged in divorce and equitable distribution proceedings, there is an entire subset of individuals whose incomes derive from professional sports. The earnings from these fields do not grow solely out of the spouse's main contract. Rather, the practitioner frequently must get involved with discovery of a whole host of advertising, endorsement, book publishing, public appearance and other income-producing endeavors.
A compilation of such areas of earnings will produce, on a case-by-case basis, discovery and valuation issues that may frequently lead to a question of whether goodwill, in any form, exists.
The same may be true for occupations not involving celebrity status. For example, assume the hypothetical case of a registered nurse, working on a full-time basis, and earning approximately $80,000 a year. Your discovery and research may indicate that other similarly situated individuals, in the same geographic region, earn approximately $40,000.
Assuming that the spouse involved is not working extraordinary hours and is not otherwise subject to extraordinary factors, the question you must answer is: to what extent the "excess" earnings attributable?
If there are no readily identifiable other factors, the answer may be a form of goodwill, which may then constitute a distributable asset. Similarly, a recognized expert in a field such as law or medicine may possess goodwill that goes beyond the current excess earnings in that professional practice.
Moreover, there is no reason why this analysis should not apply to other occupations, such as real estate developers, farmers and ranchers, restauranteurs, beauticians, consultants and so forth. In the last analysis, the limits will be set by the lawyer's ingenuity and creativity.
One additional future development deserves mention, and that is the concept of negative goodwill. Research has not disclosed any matrimonial decision adjudicating the concept of negative goodwill. Nevertheless, the common assumption seems to be that the business that has no "excess earnings" has no goodwill and the valuation must be based only on the tangible asset value. This is not logical, however. It makes more sense to say that the entity in question is simply worth less than its tangible asset value. See Pratt, Valuing a Business: The Analysis and Appraisal of Closely Held Companies, p. 105 (2d Ed. 1989) (Dow Jones-Irwin).
The result? Negative goodwill, a concept awaiting matrimonial recognition; see Endicott Johnson Corp. v. Bade, 376 N.Y.S. 2d 103, 37 N.Y. 2d 585, 338 N.E. 2d 614 (1975)
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