dividing digital assets in NC

Digital assets are items of property stored in a digital or binary format. Examples of digital assets are iTunes music accounts or Kindle eBooks. There are also airline miles and credit card rewards points. When a couple goes through a divorce, divvying up the digital assets poses more than a few issues.

Identifying the Digital Asset

The first step to dividing digital property at divorce is figuring out just what digital assets the couple has. When it comes to identifying all of your digital assets, you need to make sure that you are thinking about everything. While there are some digital assets that quickly come to mind, there are a growing number of digital assets that may not be on your radar. If you’re not thinking about all of the possible digital assets, then chances are, your lawyer won’t ask your spouse about them during discovery. That could mean that thousands of dollars that your spouse used to acquire digital assets will go unnoticed, without you getting any benefit.

Let’s use one extreme example to illustrate my point. I recently read that an online gamer purchased virtual property on a gaming website for $100,000 and later sold the virtual property for over $600,000. Let’s say this online gamer’s name is Larry. Let’s say that Larry is married, and Larry used marital funds to acquire his virtual property. Let’s then say that because of Larry’s efforts (including countless hours upon hours parked in front of his computer screen and away from his spouse), Larry’s virtual property increased in value.

While Larry is having all types of success in the virtual world, his reality is anything but. Larry and his wife Lana have grown apart. Lana doesn’t appreciate Larry’s online gaming, and the two subsequently separate. Lana files for divorce and equitable distribution. Lana’s attorney asks for the customary items during the equitable distribution discovery process but neglects to inquire into Larry’s digital property. After the equitable distribution matters are settled, Larry sells his virtual property for $600,000, earning a $500,000 return on his investment. What is poor Lana to do? She could file a motion with the court to have the equitable distribution order set aside. Still, that is no guarantee, and absent some wrong doing on the part of Larry, Lana may be out of luck completely.

The above example is fictional, but not out of the realm of possibility. Every day, millions of married Americans acquire digital property. Chances are, you have some right now and your spouse does too. If you’re thinking about divorce, talk to your lawyer about all of your digital property. Failing to identify all of the assets could be a costly mistake.

Valuing the Digital Asset

Assuming all of the digital assets are identified, there is still the challenge of trying to put a value on each digital asset. How do we value the digital asset? For many digital purchases, you can simply trace the purchase and arrive at a value using that method. iTunes keeps a record of past purchases. You can quickly determine how much money was spent to amass your voluminous library of digital content. But is this a fair way to value the library? Probably not. Just like tangible assets, the value of digitally stored content changes over time as well. While a digital asset may have cost a certain amount when it was purchased, how do we know that its value has not decreased, or increased for that matter? Do we use the price of the item as it is currently listed for sale on the media platform as our measuring stick for valuation (i.e. should we look at the price of the digital asset presently to determine its value without regard to how much it cost to acquire the asset at the original date of purchase)?

This hardly seems fair. Consider this, is the digital copy of Adele’s “Hello” still cost the same as it did when you first downloaded it from iTunes? Better still, is the digital copy worth the same to you as it was when you first heard it and downloaded it from iTunes? I would argue that the good folks of Apple and iTunes are aware that the media content they provide decreases in value over time. Why else would a new single from your favorite artist cost $1.99 on iTunes, but the same song cost $0.99 or less after a few months? Since the purchase prices regularly go down on iTunes (and other media platforms as well), I don’t think we should consider the purchase price as the discussion ender for purposes of digital asset valuation. We don’t do that with tangible property like cars. Why should we do it with our digital property?

So how do we value the digital asset? Do we get each spouse to agree on a specific amount as to what each digital asset is worth? Perhaps we decide that each digital asset will be valued by taking the current price of the asset as it is listed on the digital content provider through which it was originally purchased. This could be a fair way to value an asset. It could also allow for one spouse to be compensated for the cost of replacing the digital asset. But what happens if the digital asset is no longer available for sale on the digital content provider? (Think about classic Disney films such as Bambi, Dumbo or The Little Mermaid. How do we value assets that are locked away in the Disney Vault?)

Dividing the Digital Asset

Suppose we are able to come up with a way to fairly value assets in a divorce. How then do we divide and distribute digital content equally among the spouses in a divorce? In the easy cases, one spouse has an iTunes account that he uses primarily, while the other spouse has a Kindle account that she uses primarily. In this scenario, both spouses agree to retain their particular digital accounts, there is no need to value or divide any of the assets, and the distribution of the couple’s digital property is complete. What a wonderful world!

But what of the couples who do not maintain separate digital accounts. I have not taken a poll or done the research, but I would surmise that there are a considerable amount of couples who share their digital asset accounts. Perhaps they enjoy the convenience of having access to each other’s media library. Maybe they don’t want the headache of multiple accounts. One digital account granting access to several devices sounds very appealing. With one account, there is no need to purchase content more than once. One account provides one central source for downloading and sharing. If you throw in the automatic download feature that many digital accounts now offer, it is just easier to have one account. Every time your spouse makes an iTunes purchase on her iPhone, it is added directly to your iPhone. This makes, even more, sense when you consider more expensive digital purchases such as books from Kindle and movies from Vudu, Amazon Prime, CinemaNow, or any of those other digital content providers available on your Smart TV. One account just makes sense…unless you get divorced.

For those couples that have used one account for their digital asset needs, it stands to reason that there is a commingling of resources used to acquire those digital assets. Most digital asset providers allow customers to list multiple credit cards on file for purchases. Digital asset providers have made adding and removing a credit card from accounts simple as well. Things can become quite complicated when each spouse has a credit or debit card on file for their shared digital access account. Perhaps each spouse uses any of the credit or debit cards on file at random to make purchases on the account. It can become very difficult if not impossible to ascertain who purchased what. It would also make it impossible to determine what digital asset is personal to whom.

Dividing and distributing property gets even more complicated when you consider that many of the digital content providers such as iTunes, Kindle, Vudu, Flixster, and Amazon Prime all grant licenses to their user customers at purchase. That means that when you purchase and download your media content, you do not own the content outright. Instead, you are merely given a license to use the media content. The user agreements are careful to explain that under no circumstances is the purchaser allowed to freely transfer the media content to other users.

What does that mean for equitable distribution and the division of marital property upon divorce? One school of thought is that the purchaser of the digital asset received only a license to use the song, movie, book, etc. The property is wholly owned by a third party, and as such, is not subject to distribution. This theory has not been tested a lot, but in a high volume digital asset case, it may be worth a shot. The fact is, there is not a lot of case law on the distribution of digital assets. While digital content is available everywhere, it is still relatively young. iTunes was first released on January 9, 2001. It is merely 15 years old. Much of the other digital media content available is far younger than that.

So let’s talk about the digital assets of a different couple. Suppose that for this couple, one spouse has spent countless amount of dollars building a large digital asset library. There are movies, songs, books, games. The other spouse never purchased any of the digital assets, but regularly enjoyed them. When it comes time to divide the marital property in the divorce, who gets the items in the virtual library? Is the spouse who purchased the digital items entitled to all of them? If so, what about all of the money that spouse used to purchase the digital content? Were marital funds used, and if so, how can the other spouse get credit for that money?

One way of dealing with these issues may be to offset one digital asset for a comparable digital asset or a different item of tangible property that is valued at the same amount. Perhaps we determine that the virtual library is worth $1,500.00. Instead of trying to divide that library, we instead give the other spouse another asset, or a collection of other assets, valued at $1,500.00. If the digital media is spread across various digital asset providers, perhaps one spouse keeps the entire iTunes library, while the other spouse keeps the Vudu account.

Offsetting the digital asset accounts presents a whole set of problems as well. For instance, suppose that one spouse does not want to do an offset of the digital account. I will provide a factual scenario explaining that spouse’s hesitance at dividing the digital account.

Spouse A and Spouse B have lived together in harmony for the past ten years. Each spouse makes $50,000 per year. Throughout the year, the spouses contribute equally to the household, save $2,000 that each spouse keeps yearly for personal use. Spouse A uses the $2,000 on personal clothing. Spouse B uses the $2,000 to purchase content for the digital library. Suppose then that the spouse who spends $2,000 on clothing per year, also regularly donates said clothing at the end of each year. After 10 years of marital bliss, Spouse A and Spouse B separate and file for equitable distribution. What happens to the digital library? Should Spouse B receive a portion of it? Must Spouse A give up another asset just to be able to retain the digital library that Spouse A purchased during the marriage?

I would argue that the digital library belongs to Spouse A. Over the course of ten years the couple developed a consistent practice of keeping $2,000 as separate funds which Spouse A used to acquire digital media. Spouse B chose to purchase clothing with the $2,000 that Spouse B kept aside. To that end, Spouse B is entitled to any and all clothing purchased with those monies that remains in Spouse B’s possession. This result just seems fair to me. Still, as I have mentioned before, the law on the division of digital assets is virtually (no pun intended) nonexistent.

The Hidden Assets

So far in this article, I have discussed the difficulties of dividing the digital assets that you are aware of. What about those digital assets held by your spouse that you know nothing about and cannot discover? Enter Bitcoin. Bitcoin is a peer to peer payment network offering a computerized form of currency that is very difficult, if not impossible to trace. The transactions are recorded on a public ledger but the identity of the person making the transaction is unknown. Were you to view the ledger, the only transaction detail that you would see is the individual’s Bitcoin address. Identifying the individual by his or her Bitcoin address is also difficult, given that Bitcoin recommends using a Bitcoin address only once, and changing it with each transaction.

Here’s how Bitcoin poses a significant problem in the context of property division at divorce. Suppose Spouse A has money in an account that Spouse B does not know about. Through discovery, Spouse B’s attorney will find out about Spouse A’s account fairly quickly. Spouse A may be tempted to take the money out and move it into a friend’s or relative’s account for safekeeping, but the penalties if caught would be very severe. With bitcoin, Spouse A can, prior to discovery, secretly move the money out of the account using Bitcoin and place it in a separate account immediately, or just exchange it for Bitcoins and keep it in that form until after the divorce. There would be no record of the transaction and no way for Spouse B or her attorney to prove what happened.

How do you combat Bitcoin? The short answer, who knows? Bitcoin can be a useful tool for a sneaky spouse. There simply is no way to trace the transaction, and that assumes you can prove that your Spouse has used Bitcoin to begin with.

Digital assets are a fun and exciting way of collecting property. Still, when it comes to divorce, dividing digital property can present a variety of problems. If you and your spouse have accumulated marital assets during your marriage, speak with a qualified family law attorney about strategic ways to identify, value, and divide those assets.

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David Simmons
Associate Attorney
When David is not practicing law, he enjoys exercising, playing pool, watching the Carolina Panthers, spending time outdoors, and traveling. He especially enjoys spending family time with his wife and son, David II.

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