BY:Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal, June 23, 2000.)
Attendees at last week’s Licensing Show would have been interested in a recent decision of the United States Court of Appeals for the Second Circuit dealing with a company’s alleged theft of a concept for a toy.1 In an opinion that analyzes the law governing submission of idea cases, the Court vacated that part of the district court’s judgment that dismissed the complaints of the creator of that concept.
In 1996, Craig Nadel, an originator of new toy ideas, transplanted the “eccentric mechanism” found in several hanging Halloween toys then on the market to the inside of a plush toy monkey skin to develop the prototype for a new tabletop monkey toy. This plush toy sat upright, emitted sounds and, because of the “eccentric mechanism,” spun when placed on a flat surface.
In October of that year, Nadel met with Neil Wasserman, an executive at Play-By-Play Toys & Novelties, Inc. (“Play”) responsible for the development of its plush toy line. Nadel claims that Wasserman expressed interest in adapting the concept to a non-moving plush Tasmanian Devil toy that Play already was producing under license from Warner Bros. He also claims that, consistent with industry custom, the ideas he disclosed to Wasserman during that meeting were subject to an agreement to keep them confidential and to compensate Nadel in the event that Play were to use them.
Nadel asserts that he sent his prototype monkey toy to Wasserman and was told by him that he would receive the “skin” and voice tape so that he could make a sample spinning/laughing Tasmanian Devil toy for Play. However, these never were provided. Despite Nadel’s multiple requests, Wasserman did not return his prototype toy until February, 1997, by which time Play had introduced its “Tornado Taz” product at the New York Toy Fair. It is undisputed that “Tornado Taz” has the same general characteristics as Nadel’s prototype toy– it emits sounds, sits upright and spins by means of an internal mechanism.
Play contends that it independently developed the “Tornado Taz” product concept and, in support, cites a meeting held in June or July of 1996 in Hong Kong between Wasserman and another of its officers at which they discussed ways to create a spinning or vibrating Tasmanian Devil, including the possible use of an eccentric mechanism. It further contends that in September or October of 1996 it commissioned an outside manufacturing agent in Hong Kong to begin developing “Tornado Taz.”
Play also asserts that even if it did use Nadel’s idea to develop “Tornado Taz,” he is not entitled to compensation because his concept was not original or novel to the toy industry in October of 1996. To support this, Play submitted evidence of various toys commercially available prior to October of 1996 that used eccentric motors and allegedly contained the same characteristics as Nadel’s prototype monkey toy.
The district court granted Play’s motion for summary judgment dismissing Nadel’s claims for breach of contract, quasi-contract and unfair competition. It stated that under New York law “a party is not entitled to recover for theft of an idea unless the idea is novel or original.” It concluded that, even if the spinning toy concept were novel to Play at the time Nadel made the disclosure to Wasserman in October of 1996, his claims nevertheless must fail for lack of novelty or originality because numerous toys containing the characteristics of Nadel’s monkey were in existence prior to that date. In essence, the district court interpreted New York law as requiring that when a plaintiff claims that the defendant either has (1) misappropriated his idea (a “property based claim”) or (2) breached an express or implied-in-fact contract by using such idea (a “contract based claim”) the idea at issue must be original or novel generally. Thus, according to the district court, a finding that an idea was novel as to defendant – i.e., novel to the buyer – cannot suffice to sustain any of Nadel’s claims. The Court states that Nadel’s factual allegations present a familiar submission-of-idea case in which (1) the parties enter into a pre-disclosure confidentiality agreement; (2) the idea subsequently is disclosed to the prospective buyer; (3) there is no post-disclosure contract for payment based on use, and (4) plaintiff sues defendant for allegedly using the disclosed idea under either a contract-based or property-based theory.
In its analysis, the Court reviews Apfel v. Prudential-Bache Securities, Inc., the New York Court of Appeals’ most recent discussion of the law governing idea submission cases.2
In Apfel, the plaintiff disclosed his idea to the defendant under a confidentiality agreement, and after disclosure entered into another agreement in which the defendant agreed to pay a stipulated price for the use of the idea. The defendant used the idea but refused to pay under the agreement because plaintiff’s idea was not original or novel generally (having been in the public domain at the time of the post-disclosure agreement.) Accordingly, defendant asserted that no contract existed between the parties because the sale agreement lacked consideration. The defendant in essence sought to impose a requirement that an idea be novel in absolute terms, as opposed to only the defendant buyer, in order to constitute valid consideration for the bargain.
The Court of Appeals held that there was sufficient consideration to support plaintiff’s contract claim because the idea at issue had value to the defendant at the time the parties concluded their post-disclosure agreement. It noted that traditional principles of contract law provide that the parties are free to make their bargain, even if the consideration exchanged is grossly unequal or of dubious value.
In rejecting defendant’s argument, the Apfel court clarified the standards that exist for both contract-based and property-based claims in submission of idea cases. It refused to read prior cases as requiring originality or novelty generally in all cases involving disclosure of ideas. Rather, it clarified that there is a distinction between the requirement of originality or general novelty in a misappropriation claim as opposed to a contract claim. For the former, it is necessary to have general originality or novelty to support the claim but for the latter in submission-of-idea cases a showing of novelty to the buyer will supply sufficient consideration to support a contract.
Furthermore, the Apfel decision made clear that the “novelty to the buyer” standard is not limited to cases involving an express post-disclosure contract for payment based on the use of an idea. It explicitly discussed the scenario in which, prior to disclosure, the buyer and the seller contract for disclosure of the idea with payment based on use, but no separate post-disclosure contract for the use of the idea is made. In such a scenario, a seller might, as plaintiff did here, bring an action against a buyer who allegedly used his ideas without payment, claiming both misappropriation of property and breach of an express or implied-in-fact contract.
The Court notes that the mere disclosure of an unoriginal idea to defendant, to whom the idea is novel, will not automatically entitle a plaintiff to compensation upon the defendant’s subsequent use of the idea. The existence of novelty to the buyer only addresses the element of consideration necessary for the formation of contract. Other elements necessary for an implied-in-fact contract, such as mutual assent, legal capacity and legal subject matter also must be present.
The novelty to the buyer standard comports with traditional principles of contract law. Although an idea may be unoriginal or non-novel in a general sense, it may have substantial value to a particular buyer who is unaware of it and therefore willing to enter into a contract to acquire and exploit it. In contrast to a contract-based claim, a misappropriation claim only can arise from the taking of an idea that is original or novel in absolute terms, because the law of property does not protect against a misappropriation or theft of that which is free and available to all. The Court acknowledges that the determination of novelty in a given case is not always clear. It depends on several factors, including, inter alia, its specificity or generality, its commonality, its uniqueness, and its commercial availability.
In some cases an idea may be so unoriginal or lacking in novelty that its obviousness bespeaks widespread knowledge of the idea, and such knowledge is therefore imputed to the buyer. In such cases, a court may conclude as a matter of law that the idea lacks both the originality necessary to support a misappropriation claim and the novelty to the buyer necessary to support a contract claim.
In summary the Court finds that New York law in submission of idea cases is governed by the following principles: contract-based claims require only a showing that the disclosed idea was novel to the buyer in order to find consideration. Such claims involve inquiry that is fact specific and that focuses on the perspective of the particular buyer. By contrast, misappropriation claims require that the idea at issue be original and novel in absolute terms. This is so because unoriginal, known ideas have no value as property and the law does not protect against the use of that which is free and available to all. Finally, an idea may be so unoriginal or lacking in novelty generally that, as a matter of law, the buyer is deemed to have knowledge of the idea. In such a case, neither a property-based nor a contract-based claim for uncompensated use of the idea may lie.
The Court next considers whether Nadel’s toy idea was original or novel in absolute terms so as to support his misappropriation claim and whether it was novel as to defendant so as to support his contract claim.
Regarding the misappropriation claim, the Court indicates that the district court did not decide whether plaintiff’s idea, a plush toy that sits upright, emits sounds and spins on a flat surface by means of an internal electric motor – was inherently original. It therefore remands the issue to determine whether Nadel’s idea exhibited “genuine novelty or invention” or whether it was “a merely clever or useful adaptation of existing knowledge.”
The Court next examines plaintiff’s contract claims, noting that a finding of novelty as to Play will provide sufficient consideration to support same. Reading the record in a light most favorable to Nadel, the Court again concludes that there is a genuine issue of material fact as to whether his idea was, at the time he disclosed it, novel to Play. The Court leaves for the district court to address the determination of whether the other elements necessary to find a valid express or implied-in-fact contract are here present.
Accordingly, the Court vacates that part of the district court’s judgment granting Play’s motion for summary judgment dismissing Nadel’s complaint and remands for further proceeding consistent with its opinion.
Submission of idea claims are common in the entertainment industry. For example, in a footnote, the Court mentions a case in which an implied-in-fact contract was found for the reasonable value of plaintiff’s idea for a television program format where the parties had failed to reduce their agreement to writing. It also cites a decision involving misappropriation of an idea for a “Pop TV” music channel. Accordingly it is likely that the opinion of the Court will be referred to often in assessing the merits of entertainment-related claims.
1 Nadell v. Play-By-Play Toys & Novelties, Inc., 208F. 3D 368; 2000 U.S. APP. LEXIS 5122 (March 27, 2000) 281 N.Y.2d 470, 600 N.Y.S.2d 433 (1993).