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To Have and Have Not

(California law does not recognize celebrity goodwill as a community asset-and that is how it should stay)

By Honey Kessler Amado

As Published in the Los Angeles Lawyer Magazine
Volume 18, #2, April 1995

Honey Kessler Amado is a civil appellate attorney practicing in Beverly Hills. Many of her appellate cases are in the area of family law. Amado is a member of the Los Angeles County Bar Association Appellate Courts Committee. From 1988 through 1991 she sat on the executive committee of the Family Law Section of the State Bar of California.

When the rich and famous head for divorce court, they face the same ordeal as other less celebrated couples: the courts must divide their property and debts, fix support, and allocate time with their children. Each spouse's counsel will embark upon the task of identifying and characterizing the property.

When one of the spouses is a celebrity,1 a debate may ensue on the existence or nonexistence of "celebrity goodwill" as property-and its value. Some may avoid the legal argument by simply paying the ransom, even though celebrity goodwill has not yet been defined or recognized by the California courts of appeal. Yet "celebrity goodwill" is such a glib phrase that it invites itself into any discussion of community assets involving a couple with a well-known spouse.

In the absence of a California opinion, analogies to other states' holdings on the existence of celebrity goodwill are frequently proffered. This is unfortunate. Celebrity goodwill should not be recognized as an asset. A celebrity should not be required to "buy back" his or her reputation from the community.

Celebrity goodwill implies extraordinary earning capacity and a lavish life style. A distinction must be made, however, between earning capacity and the expectation that it will continue-which can be the basis for a support order2-and earning capacity as property. To require a celebrity both to pay support based upon a presumed earning level and to buy that same earning capacity from the community as an asset is double dipping. The same earning ability is giving rise to two distinct remedies: support and property distribution.

Earning capacity must also be distinguished from past earnings. Where a compensation package includes bonuses or percentages of a project, the community has an interest in that compensation to the extent that the work was performed and the compensation earned during the marriage.3 This interest grows out of traditional definitions of community property that all earnings and property acquired during marriage are community property,4 but earnings and accumulations acquired after the date of separation are the separate property of the earning spouse.5

Celebrity goodwill is understood in New York as the enhanced earning capacity of an exceptional wage earner.6 In California, the concept is defined by conventional wisdom as the expectation of continued popularity, with the resultant high earning capacity.7

Business goodwill has been defined by California statute as "the expectation of continued patronage."8 For a business or professional practice that is an ongoing concern, goodwill has long been considered an asset of the business, subject to valuation and allocation in marital dissolution actions.9 The issue that remains unsettled in California is whether goodwill in an individual-the celebrity-is a divisible asset.

In the absence of a California decision on point, the tendency is to cite New York and New Jersey case law for the proposition that celebrity goodwill is a divisible asset.10 This reliance is misplaced.

In New York and New Jersey, celebrity goodwill is the expertise that has allowed a person to become an "exceptional" wage earner: "The skills of an artisan, actor, professional athlete or any person whose expertise in his or her career has enabled him or her to become an exceptional wage earner should be valued as marital property subject to equitable distribution."11 This ability to be an exceptional wage earner is referred to as an "enhanced earning capacity."12

Looking exclusively to an individual's earning power, New York courts find "no rational basis upon which to distinguish between a degree, a license, or any other special skill that generates substantial income."13 It is not the license that has value, according to this argument-it is the increased earning power that is the valued asset. Thus, "[a]ll sources of enhanced earning capacity become indistinguishable."14

New York's definition of celebrity goodwill looks to earning power alone,15 necessarily relying upon future earnings for its existence. In contrast, valuing and dividing future, post-separation earnings violates the elemental California rule that an individual's post-separation earnings are separate property.16 Further, relying upon future earnings as a basis for celebrity goodwill violates the rule that goodwill, by definition, assumes the business will continue in the future.17

New York's definition of celebrity goodwill also assumes that a professional license is marital property and is distributable at dissolution.18 In California, however, one's professional training or license is expressly not community property, and expressly not apportionable at dissolution.19 In California, a spouse's professional education obtained during marriage, whether or not underwritten with community funds, is not community property.20 The resultant license is not subject to valuation and division at dissolution.21

California, like New York, recognized that a professional license increases an individual's future ability to earn money, but California refused to characterize the license or the enhanced earning capacity as property.22 In California, the community does not acquire an interest in one party's professional license or in its proceeds by having contributed to that party's education because to do so would require a division of post-dissolution earnings, which are separate property.23 In New York, the increase to one's future ability to earn is characterized as the "enhanced earning capacity" that is recognized, valued, and apportioned as property.24

Thus, the basic tenets for New York's celebrity goodwill-relying upon future earnings of the individual and assuming that a professional license is a marital asset-are incompatible with California law.25 The New York cases cannot fill California's void.

Any definition of celebrity goodwill must be grafted onto an existing understanding of goodwill. Goodwill assumes that a business or professional practice will continue into the future.26 California focuses on the existence of a business. A professional business is distinguished from a professional who is an employee of another. Where one is an employee, there is no professional goodwill.27 Also, because goodwill assumes the continuation of a business, the mere expectancy of future earnings is not synonymous with goodwill.28

The concept of celebrity goodwill focuses on the individual and the expectancy of future, extraordinary income. Celebrities are exceptional wage earners. They earn high dollars and the expectation is that they will command high dollars for each successive project. It is this future and continuing earning power that the noncelebrity spouse hopes to reach by characterizing celebrity goodwill as a marital asset.29 If deemed marital property, the celebrity goodwill would necessarily be awarded to the celebrity spouse as an intangible asset, with an off-setting distribution of an asset of equal value or a payment of one-half its value to the noncelebrity spouse.30

The unraveling of celebrity goodwill as an asset lies in the attempt to value it. Goodwill may not be valued "by any method that takes into account the post-marital efforts of either spouse...."31 To do so would run afoul of the basic California community property tenet that one's efforts and accumulations post-separation are separate property.32 Yet the celebrity's post-separation efforts are the essence of his or her value. The alleged celebrity goodwill is founded on the premise that the celebrity is an extraordinary wage earner who will command extraordinary future income.

The statutory definition of goodwill, "the expectation of continued public patronage,"33 has been expanded by case law:

It is the advantage or benefit which is acquired by an establishment beyond the mere value of the capital, stock, funds or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances, or necessities, or even from ancient partialities or prejudices. [I]t is the probability that the old customers will resort to the old place. It is the probability that the business will continue in the future as in the past, adding to the profits of the concern and contributing to the means of meeting its engagements as they come in.34

Thus, the three significant elements of goodwill emerge. There must be 1) "an establishment" or established businesses;35 2) constant or habitual customers; and 3) a probability that the business will continue in the future as it has in the past. All of these elements are absent for the celebrity.

First, a celebrity is an individual, not a business. While work may center around the individual celebrity, there is no business independent of the celebrity.36 The ability of a business to build and sustain itself lies at the core of goodwill.

Entertainers have no such sustained building power. The celebrity is the sole working unit. Associates or employees cannot assist with the workload. For the entertainer, there are only a finite number of roles or projects that the celebrity can undertake at any one time.

Entertainers are best likened to employees. Whatever their popularity, entertainers are employees of film or production companies for the duration of a project or a contract. They are paid for their services but, absent a compensation contract to the contrary, they do not acquire an interest in the company simply by virtue of their services.37

The first element of goodwill-a business-is absent. Second, the foundation of an entertainer's earning power is popularity at the box office. Yet few are as fickle as fans. Today's popular star is tomorrow's "what's his name"38-who is now having difficulty getting a job and, hopefully, living on residuals, investments, or a new business.39 A new starlet catches the attention of the public and the overexposed star fades.

The temptation is to measure the durability of a celebrity's popularity by endorsements or commercials. While product endorsements are an indication of current popularity, they are not a guide to an individual's staying power. Television commercials may be the best available job for a once-popular entertainer.

Celebrity popularity is neither constant nor habitual. The second element of goodwill-constant customers-is absent.

Third, there is no probability that the celebrity's career will continue at the same level achieved at the height of fame. For most, employment opportunities decline as the celebrity ages. In time, stardom wanes, the applause lessens, and the earnings shrink. The third element of goodwill-probability of continuation-is absent.

Even in New York, equitable distribution of celebrity goodwill is allowed only to the extent that the noncelebrity spouse contributed directly or indirectly to the creation or increase of the enhanced earning power of the celebrity spouse.40 Absent some participation by the noncelebrity spouse, the goodwill belongs exclusively to the celebrity.

This limitation brings New York's concept of celebrity goodwill much closer to California's right to reimbursement for community contributions that substantially enhance one spouse's earning capacity.41 California recognizes that a professional license will give rise to a greater earning capacity and, thus, the community should be compensated to the extent that it has not already benefitted from the enhanced earning capacity.42

The right to reimbursement serves as a remedy to the inequity resulting from the community intentionally depressing its income while one partner pursued his or her professional license and subsequently not enjoying the benefits of the enhanced earning capacity before separation.43 The statutes underscore that the community will not have an interest in a professional license by providing that reimbursement is the "exclusive remedy of the community or party for the education or training and any resulting enhancement of the earning capacity of a party."44

For an entertainer, the community has not intentionally depressed its income with the knowledge that pursuing the career for a limited, predictable period of time will yield an enhanced earning capacity. Stardom is a dream, but reality is that few entertainers will enjoy the gold that glitters and beckons. For most, the entertainment industry yields limited monetary success. The players-and their spouses-know this when they embark upon this career.

For the entertainer who does become a star during marriage, his or her extraordinary earnings are community property.45 The community does receive the benefit of the celebrity's enhanced earning capacity. The extraordinary earnings should be enjoyed while they or the marriage last. At the end of the rainbow, there is no community pot of gold.

Celebrity goodwill does not-and should not-exist in California. It is inconsistent with the state's definition of goodwill and violates California's principles of community and separate property. Indeed, there is no business like show business.

1 A "celebrity," for purposes of this article, is an entertainer of any kind, such as actors, singers, comedians, models, or athletes. The thesis of this article would not change if the celebrity was an executive, such as Lee Iaccoca or Michael Eisner, whose status is often called "executive goodwill."

2 Fam. Code §§4058(b), 4320(c). See Marriage of Ilas, 12 Cal. App. 4th 1630, 1638-39, 16 Cal. Rptr. 2d 345, 350 (1993).

3 Fam. Code §760. See Marriage of Kilbourne, 232 Cal. App. 3d 1518, 1524 n.5, 284 Cal. Rptr. 201, 204 n.5 (1991); Marriage of Harrison, 179 Cal. App. 3d 1216, 1226, 225 Cal. Rptr. 234, 239 (1986); Marriage of Hug, 154 Cal. App. 3d 780, 791, 201 Cal. Rptr. 676 (1984); Marriage of Shea, 111 Cal. App. 3d 713, 716-17, 169 Cal. Rptr. 490, 492 (1980); Marriage of Poppe, 97 Cal. App. 3d 1, 8-9, 158 Cal. Rptr. 500 (1979); Marriage of Judd, 68 Cal. App. 3d 515, 522, 137 Cal. Rptr. 318 (1977).

4 Fam. Code §760. See Marriage of Harrison, 179 Cal. App. 3d at 1226.

5 Fam. Code §771.

6 Golub v. Golub, 139 Misc. 2d 440, 445-46, 527 N.Y.S. 2d 946, 950 (1988).

7 Celebrity goodwill should not be confused with "name and likeness"-in California, a term of art which recognizes that certain personalities, by virtue of something unique to them, have a commercial interest in that uniqueness. Civ. Code §§990, 3344. A celebrity's name and likeness cannot be commercially exploited by a third person. See Eastwood v. Superior Court, 149 Cal. App. 3d 409, 417, 420, 198 Cal. Rptr. 342 (1983). Name and likeness is a right to privacy and to publicity. It is not marketable; it is not goodwill.

8 Bus. & Prof. Code §14100.

9 Marriage of Foster, 42 Cal. App. 3d 577, 582, 117 Cal. Rptr. 49 (1974) (goodwill may exist in a professional practice or business founded upon personal skill or reputation).

10 See Elkus v. Elkus, 169 A.D. 2d 134, 138, 572 N.Y.S. 2d 901, 904 (1991) (Frederica Von Stade); Golub v. Golub, 139 Misc. 2d at 445-46 (Marisa Berenson); Piscopo v. Piscopo, 232 N.J. Super. 559, 557 A. 2d 1040 (1989) (Joe Piscopo conceded that celebrity goodwill was a marital asset, subject to distribution. Thus, the New Jersey court never had to reach the issue of the existence of goodwill; the case focused on valuing celebrity goodwill as part of Piscopo's business corporation).

11 Golub, 139 Misc. 2d at 447.

12 Id. at 444.

13 Id. at 446.

14 Id. at 444.

15 Id. at 445-46; Piscopo, 232 N.J. Super. 559.

16 Fam. Code §771.

17 Marriage of Slater, 100 Cal. App. 3d 241, 246, 160 Cal. Rptr. 686, 689 (1980).

18 See McSparron v. McSparron, 597 N.Y.S. 2d 743, 190 A.D. 2d 74 (1993).> 19 Marriage of Aufmuth, 89 Cal. App. 3d 446, 461, 152 Cal. Rptr. 668, 677, 678 (1979), disapproved on other grounds in Marriage of Lucas, 27 Cal. 3d 808, 167 Cal. Rptr. 853 (1980).

20 In New York, a professional license is marital property. See McSparron, 597 N.Y.S. 2d 743.

21 Marriage of Aufmuth, 89 Cal. App. 3d at 461.

22 Id.

23 Id.; Fam. Code §771.

24 See Golub, 139 Misc. 2d at 445-46. New York now has a tiger by its tail. Relying upon the reasoning in the celebrity goodwill cases, New York courts value and apportion as property all sources of enhanced earning capacity, whether or not the enhanced earning capacity leads to extraordinary income, and whether or not the earning spouse is an exceptional wage earner. See McAlpine v. McAlpine, 143 Misc. 2d 30, 32, 539 N.Y.S. 2d 680, 681 (1989) (the court held that membership in a professional society, such as the Society of Actuaries, can be a marital asset subject to equitable distribution upon divorce); Allocco v. Allocco, 152 Misc. 2d 529, 535, 578 N.Y.S. 2d 995, 999 (1991) (the court held that an associate of arts degree and bachelor of arts degree in law enforcement, and passage of a civil service exam, was a divisible asset); Martin v. Martin, 200 A.D. 2d 304, 307, 614 N.Y.S. 2d 775, 777 (1994) (the court held that the husband's former career as a U. S. congressman enhanced his earning capacity and thus was marital property subject to equitable distribution).

25 Unlike California, which requires equal division of the community estate (Fam. Code §2601), New York is an equitable distribution state. According to N.Y. Dom. Rel. Law §236, pt. B:5: c. Marital property shall be distributed equitably between the parties, considering the circumstances of the case and of the respective parties. Marital property is defined by N.Y. Dom. Rel. Law §236, pt. B:1, as: c....all property acquired by either or both spouses during the marriage and before the execution of a separation agreement or the commencement of a matrimonial action, regardless of the form in which title is held, except as otherwise provided in agreement pursuant to subdivision three of this part. Marital property shall not include separate property as hereinafter defined.

26 See Marriage of Slater, 100 Cal. App. 3d at 247; Marriage of Watts, 171 Cal. App. 3d 366, 371, 217 Cal. Rptr. 301, 304 (1985); Marriage of King, 150 Cal. App. 3d 304, 310, 197 Cal. Rptr. 716, 720 (1984).

27 See Marriage of Slivka, 183 Cal. App. 3d at 164 (physician was paid for services rendered to a health maintenance group in the Kaiser network, and did not own or acquire an ownership interest in the group. The court held that he was an employee and thus had no goodwill).

28 Marriage of Slater, 100 Cal. App. 3d at 246.

29 A distinction must be made between exceptional earning power as an asset and exceptional earnings as a source of payment for support. Nothing prevents a spouse from reaching the extraordinary earnings of a celebrity for spousal and child support. Fam. Code §§4058(a), 4320.

30 Fam. Code §2550.

31 Marriage of Slater, 100 Cal. App. 3d at 247.

32 Fam. Code §771. See Marriage of King, 150 Cal. App. 3d at 309.

33 Bus. & Prof. Code §4100.

34 Marriage of Foster, 42 Cal. App. 3d at 581-82.

35 Goodwill exists in: small, specialty businesses-Marriage of Rives, 130 Cal. App. 3d 138, 149, 181 Cal. Rptr. 572, 577 (1982) (queen bee business); professionals-Marriage of Lopez, 38 Cal. App. 3d 93, 109, 113 Cal. Rptr. 58, 68 (1974) (law practice, whether "a sole practitioner, a professional partnership or a professional corporation"); Marriage of Watt, 171 Cal. App. 3d at 372 (medical practice); manufacturers' representatives-Marriage of Hargrave, 163 Cal. App. 3d at 353; and skilled entrepreneurs-Marriage of King, 150 Cal. App. 3d at 309 ("electro-magnetic compatibility" computer consultant).

36 Business agreements for endorsements, lines of clothing, look-alike dolls, or the like, are tangible contracts, which are subject to division as property. Fam. Code §760.

37 See Marriage of Slivka, 183 Cal. App. 3d at 164. In cases where compensation includes an interest in a film or project, that interest is property-subject to valuation and distribution upon dissolution of marriage. Fam. Code §760. See also Marriage of Harrison, 179 Cal. App. 3d at 1226.

38 See Where Are They Now? Remember When, People, Nov. 28, 1994.

39 Residuals, investments, or new businesses would be community property or have a community component if earned, invested, or begun during the marriage. See Marriage of Harrison, 179 Cal. App. 3d at 1226. They belong to the community as property or income, not goodwill.

40 See N.Y. Dom. Rel. Law §236, pt. B:5.d.(6). See also Golub, 139 Misc. 2d at 444; Piscopo, 232 N.J. Super. at 563.

41 Fam. Code §2641(b)(1).

42 Fam. Code §2641(c)(1).

43 See Marriage of Watt, 214 Cal. App. 3d at 351; Marriage of Slivka, 183 Cal. App. 3d at 166-67.

44 Fam. Code §2641(d). Reimbursement is the exclusive property remedy; consideration of the effect of education, training, or enhanced earning capacity is expressly allowed when fixing support. Fam. Code §§2641(d), 4320(b).

45 Fam. Code §760.