ABA Section of Business Law
ABA Section of Business Law
Business Law Today
July/August 2000
From concept to contract A primer on intellectual property
By PERRY C. SIATIS
Your 10 o’clock appointment has arrived. She tells you she has a great idea for a television show. She asks you how to present her idea to a major network without losing her chance to receive payment for it. Unfortunately, you have no idea what to tell her.
At 11 o’clock, another client meets with you to discuss a situation about which you have little knowledge. He is an inventor. He is seeking advice on how to introduce his invention to the world without a bully manufacturer stealing his invention and denying him any compensation.
Later in the afternoon, yet a third client arrives. This client is an employee at a major manufacturing company and has developed a new device that would double the speed of the normal manufacturing process. The employee seeks to share this information with the company, but the employee wants a share of the profits derived from his invention.
Unfortunately for your new strand of clients, you are not an intellectual property lawyer. The situations are new to you. Then why would these clients seek your advice? Generally because obtaining intellectual property rights is often very expensive, and the client seeking your advice may not have a great deal of money to spend. This individual may be a friend, neighbor or relative seeking some friendly advice. So how would you advise them?
This article will provide a lawyer who is inexperienced in intellectual property law with answers to questions about dealing with the idea or the inventor client. Based on an examination of case law, the article will individually discuss how to advise each of the above clients — the idea client, the inventor client, and the employee idea or inventor client. After a brief introduction to the law governing each discussion, a hypothetical situation is included to demonstrate the typical problems that arise in these cases.
Idea law. Generally, intellectual property law, that is, patent, trademark, copyright, trade secret and unfair competition law, provides some protection for "products of the mind." Although intellectual property law encompasses a large domain, ideas themselves are not always clearly protected. For example, patent law protects processes, machines or compositions of matter that are new, useful and not obvious; copyright laws protect only the expression of ideas, not the ideas themselves. Consequently, the myriad of court decisions that provide guidance as to when ideas are protected comprise what is typically called "idea law."
Courts have found idea protection for the following types of ideas: literary, business and scientific. Ideas for television and radio programs, as well as motion pictures, are literary ideas. Business ideas involve methods of running a business, such as adding a visitor center to a popular tourist attraction, proposing the construction of a chemical plant, transferring clothing designs to the material from which the clothing is made, and issuing and selling municipal bonds through computerized entries. Scientific ideas can include ideas for recording temperature and pressure, inventorying a telephone system, and designing camouflaged parachutes. The law of ideas protects all three categories of ideas, regardless of the category under which your client’s idea falls.
When an idea has already allegedly been stolen or otherwise misappropriated, the idea person may bring an action for idea misappropriation. Even though the purpose of this article is to help the lawyer advise the idea client on how to protect his or her idea before any misappropriation would take place, a brief explanation of the elements of this claim is useful to better advise the client of what to do to avoid misappropriation of an idea. Since the law differs in various jurisdictions, each element will be examined, though some are more pertinent to certain jurisdictions than others.
Generally, for a claim of idea misappropriation to exist, a legal relationship between the parties must exist and the idea must be novel and concrete. Some courts, however, have eliminated or modified the latter element and no longer require either novelty or concreteness. A legal relationship is found when either a confidential relationship exists or when there is an express, implied or quasi contract between the parties. A brief overview of each contract theory and the confidential relationship theory follows.
The majority of courts will find "an enforceable express contract . . . if the person to whom an idea is submitted has expressly promised to pay for it in the event of its use." Nimmer on Copyright at § 16.01. The express contract theory aids the idea person, who may not have a way to launch the idea into practice, by giving him or her the means to communicate the idea to someone who can mature and market it. There are, however, three obstacles that the idea person must usually overcome when claiming an express contract relationship: consideration, the statute of frauds and federal copyright law preemption.
A second contract theory that can satisfy the legal relationship element is the implied contract theory. In an implied contract, consent of the parties involved is expressed by conduct not words. Courts generally will protect the idea person by finding an implied contract if no problems with consideration, statute of frauds, or federal preemption are present. The facts of each case determine whether an implied contract exists.
For example, courts will not recognize the existence of an implied contract if the idea is unsolicited and involuntarily received. If, however, the idea is "blurted" out, but the recipient of the idea requests a second copy of the submission, an implied contract may be created. Another way a court may find an implied contract is if the recipient of the idea is in a trade or industry that is accustomed to paying for the use of submitted ideas.
If the recipient of the idea had advance warning of the intended submission by the idea person and had the opportunity to reject or stop its disclosure before it was made, but alternatively, by inaction, permitted the submission, some courts find that a promise to pay for the idea may be implied. Other courts, however, hold that the recipient must solicit the idea for a contract to exist.
The majority of courts will hold that an implied promise to pay exists if the recipient of an idea solicits and uses the idea person’s idea. Additionally, courts will favor any ambiguous language to suggest that the idea was solicited. Some recipients issue release forms for submissions that release the recipient from any obligation to the idea person. Some jurisdictions will uphold such releases, while others reject them based on public-policy grounds.
The final contract theory that may fulfill the legal relationship requirement of an idea misappropriation claim is the quasi contract theory. Quasi contracts are not true contracts. "[They] are not based upon the apparent intention of the parties to undertake the performances in question, nor are they promises. They are obligations created by law for reasons of justice." Nimmer, at § 16.03. Unlike a situation involving an implied contract, when the parties have a quasi contract, the parties have not exhibited a mutual manifestation of assent.
An example of a situation where a court may use the quasi contract theory to compensate an idea person is where a company’s agent, who had no authority to make a promise to pay for the idea, promises to pay the idea person if the idea is used. If the idea person reasonably believed the agent had authority to promise to pay, and the company uses the idea, the idea person may collect compensation for the idea.
Additionally, some courts hold that if the idea person cannot establish a claim for either an express or an implied contract, then the quasi contract claim fails also. Many courts will also require novelty and concreteness if the idea person relies on a quasi contract theory. Still other courts consider the custom in the industry in determining the existence of a quasi contract.
Even if each contract theory fails, courts hold that if a confidential relationship exists, the legal relationship element of idea misappropriation is satisfied. The confidential relationship theory is one that is used by courts not only in traditional confidential relationship situations, but the theory is often established on one of the contract theories of protection. For example, courts may find a confidential relationship on the basis of either an express or implied contractual relationship.
Once the legal relationship element has been established, courts often require that the idea at dispute be either novel, concrete or both. Some courts require that the idea person prove that the idea was novel, that is, new, in idea misappropriation cases. The novelty requirement, however, depends not only on the jurisdiction but also on which theory of legal relationship is argued.
For example, under an express contract theory, most courts do not require the idea to be novel if the terms of the contract do not so require, because the parties are specifically bound by the terms of the contract. These courts reason that because the recipient used the idea after it was revealed suggests that the recipient did not require novelty. Yet some courts do require the novelty element, even if it is not indicated within the contract. Still others seek an element of originality, which is less burdensome.
Under an implied contract theory, novelty has traditionally been a requirement for an idea person to prevail. Particular jurisdictions, however, have rejected the novelty requirement even in implied contract cases. In confidential relationship theory idea cases, courts tend to waive the novelty requirement. However, under the quasi contract theory, novelty is generally required.
Concreteness is rarely defined in court opinions, but "[m]any courts apply the requirement of concreteness in the idea cases regardless of the particular [legal relationship] theory which the [idea person] may be pursuing." Nimmer, at § 16.08[A]. Those that do discuss it, however, generally apply one of two definitions: the "immediate use" definition, which queries whether the idea is "developed to the point where it is ready for immediate use without any additional embellishment," id., or an extension of the immediate use definition, which allows for both the idea to be 24 hours away from usefulness and for the recipient to assist in preparing the idea for use.
Courts differ on whether writing is required for an idea to be concrete. Some courts suggest that an idea is not concrete if it is not written on paper. Others, however, hold that a sufficiently developed idea can be concrete even without written proof.
So what do you tell the idea client? Your long-time client Mary comes to your office with a great idea for a TV show. She explains that she would like to tell a network about her idea but also wants to ensure that she is compensated if the network uses the idea. What do you tell her? Clearly, your first step is to check case law in your state to determine to which elements of idea law — that is, novelty, concreteness and type of legal relationship — your state adheres.
You will also want to advise Mary to keep her idea confidential, because if a television network received the idea through other means, the network would not be contractually bound to compensate her if no promises had yet been exchanged.
Since courts will recognize an express contract, advising your client in this direction is desirable. The express contract theory is the idea person’s safest route. Courts will recognize the existence of an express contract with more ease than they would any other theory.
The best way for Mary to disclose her idea to the TV network is to enter into a contract with the network stating that she will disclose her idea in consideration of the network compensating her if the network uses her idea. Because some courts hold that the disclosure of an idea is not adequate consideration, Mary may need to show additional consideration if she lives in such a jurisdiction. If Mary tells you that she has some type of preexisting duty to tell the network her idea, she may lose her chance to profit off the idea if courts in your state deny the existence of a valid contract because of her preexisting duty to disclose.
Likewise, if she already disclosed her idea to the network in full, she may have spoiled her chances to enter into an express contract if the courts consider the disclosure past consideration. She may, though, find relief under one of the other theories of recovery. Once you establish that Mary has adequate consideration, other concerns must be examined.
The majority of cases suggest that novelty of an idea is not required if the contract is written and express, unless novelty is itself a requirement of the contract. Thus, drafting a contract without using the word "novel" is the safest way to allow even a nonnovel idea to be bound by contract.
Reducing the contract to writing is important. Since some jurisdictions wrestle with whether oral contracts are enforceable in idea law, having the terms in a written contract form is a wise precautionary step. A written contract will also avoid problems that arise with the statute of frauds. Similarly, the contract will be governed by contract law and avoid federal preemption. The contract should include adequate consideration for a promise, solicitation or otherwise voluntary acceptance and a clause stating the confidential nature of the idea disclosure.
Mary may ask you if her letter of submission may constitute a contract. Some courts say a letter of submission does not constitute an express contract. Because you are a cautious lawyer, you advise a separate contract be drawn that documents both the recipient’s countervailing promise and mutual assent.
If Mary received a release form from a television network with specific terms for her idea submission, what should she do? Because this type of agreement typically constitutes a contract, unless it has terms "against public policy," Mary is likely to have only two choices with regard to that release form: to sign or not to sign. Entities with release forms generally have greater bargaining power, and the terms in their release forms will probably be tipped in their favor. These entities will presumably not honor Mary’s drafted contract. If, however, Mary agrees to the terms of the release form, she is signing a contract to which she will probably be bound. Thus, careful examination of any written release form is advised.
Finally, if Mary’s idea is solicited, most courts will imply a contract, but an express contract should be drafted and signed nonetheless. The safest measure that Mary can take is to sign an express contract to disclose her idea in return for the promise to pay if the idea is used.
Inventions. The laws governing submission of ideas for inventions and ideas for literary, business and scientific ideas are very similar. Comment h of Section 39 of the Restatement (Third) of Unfair Competition (Definition of Trade Secret) states that idea submissions include "suggestions for new and improved products submitted to manufacturers." Thus, express, implied and quasi contract theories and the confidential relationship theory can all govern the submission of ideas for inventions. Although contractual legal theories discussed above hold true in invention cases, many invention cases turn on the existence of a confidential relationship. Thus, when your client seeks to present an idea relating to an invention, it is vital to preserve confidentiality in communications when attempting to sell the invention idea.
For example, both the Fourth and Fifth Circuits used the existence of a confidential relationship as a determinative factor in deciding whether inventors should receive compensation for their ideas. See Hoeltke v. C.M. Kemp Manufacturing Co. , 80 F.2d 912 (4th Cir. 1935); Smith v. Snap-On Tools Corp., 833 F.2d 578 (5th Cir. 1987). The Fourth Circuit held as long as the patent has not yet been granted the inventor could recover if there is a breach of a confidential relationship, and the Fifth Circuit found the idea recipient corporation was able to manufacture the inventor’s invention without compensating the inventor because there was no confidential relationship between the parties.
Additionally, the Restatement (Third) of Unfair Competition states that the ideas for inventions must be novel and concrete. Nevertheless, some courts do not enforce the novelty requirement in invention cases.
And what should you tell the inventor client? Your friend David arrives at your office with news that he has invented a gadget. He wants to profit off the invention but fears that if he submits it to a manufacturer, he will be cheated out of his share. David cannot afford to manufacture and sell the product himself.
The first question David needs to consider is whether he wants to patent the invention, sell or license the invention to a manufacturer, or sell the invention himself (thus keeping the invention as a trade secret). Because David is not very wealthy, he chooses to try to sell the invention to a manufacturer. This will be the only option this article discusses.
The advice you give David is very similar to the advice you gave Mary. Your first step is to check the state law to familiarize yourself with idea misappropriation and trade secret cases, specifically related to ideas for inventions. You should advise David to keep his invention confidential to avoid any leaks that would deny him compensation. In addition, advise the inventor to keep copious notes, diagrams, records of sources, contacts and anything else that pertains to the invention to establish him as the inventor.
A written, express contract is again the best way to present the idea to a manufacturer. The contract should contain, at the very least, adequate consideration, a countervailing promise, mutual assent and any other terms that may be specific to David’s invention. Additionally, a clear statement of confidentiality should be included in the contract to avoid the problems that arise in the cases mentioned above. If confidentiality is agreed on in the contract, David will be better protected. Confidentiality should not be assumed — it should be contracted in the final writing between the inventor and the manufacturer.
The necessity of novelty will depend on the jurisdiction. If a state’s case law reflects the requirement that invention ideas be novel, then the outcome will depend on whether the invention is unlike anything else. If no novelty requirement is present in the case law, however, avoid using the term "novel" or "new" in the contract. The courts will likely interpret the contract only by its binding terms.
As a final note of advice, a company’s "suggestion form" is not a proper contract and should not be relied on if compensation for an idea is required. The advice you give David should include all the advice you gave Mary, with an extra emphasis for inclusion of a confidentiality clause in the disclosure agreement.
Ideas and inventions in the employment context. The primary issue to determine in the employment context is whether the employee was hired for the purpose of inventing for the employer. If the employee were hired to invent for the employer, presumably under contract, then those inventions and trade secret rights would belong to the company. If, however, the employee were hired to do work without the expectation of inventing anything, the employee would likely be entitled to all rights of his or her invention. But there is one further consideration.
In Wommack v. Durham Pecan Co., 715 F.2d 962 (5th Cir. 1983), Wommack was hired by Durham Pecan Co. to be a "general laborer" in a pecan-processing plant. While employed with Durham, Wommack developed a process to ease removing worms from shelled pecans. Wommack worked on the process at his home until he was ready to approach his employer. He allowed Durham to use the process in exchange for equipment to further test the process. After Wommack was discharged, Wommack insisted that the oral agreement that Durham could use the process was no longer valid. The court, however, disagreed, stating that since Wommack used Durham’s time and equipment, Durham acquired an implied license to use the process even though Wommack eventually patented the process.
An employer receives an "implied nonexclusive, royalty-free license," also called a "shop right," when "an employee makes and reduces to practice an invention on his employer’s time, using his employer’s tools and the services of other employees." Hobbs v. United States, 376 F.2d 488, 494 (5th Cir. 1967). An employer can receive a shop right even if the invention is later patented. Although the employer has a nonexclusive license, the inventor retains the patent, and the employer cannot sell the patent or exclude others from using it.
In reality, employees hired to invent for a company contractually waive ownership rights to all inventions created during the time of employment or contractually grant the employer a shop right. In such situations, the employer will likely prevail over a misappropriation challenge, because the employee signed the contract with valid consideration. Under alternative circumstances, however, where no such contract was signed, the outcome may differ if the employee took precautionary measures.
What to tell the employee inventor. Ed is a secretary at a local manufacturing company. He asks you for help because he invented a device that will help speed up the manufacturing process at the company. He invented the device in his garage, but he needs to test it with actual company equipment. He seeks your advice.
If Ed does not mind granting the company a shop right, Ed should contract with the company to allow him use of the company’s time and equipment to test his device in return for disclosure and license of his process. A written contract stating all the terms is necessary between the employee and the employer.
If Ed seeks to avoid granting a license to his employer, then Ed must avoid using any of the company’s equipment, tools or other employees. Ed must not use any of his time at work to further his invention. He cannot test his device on the company’s equipment. To do any of the above may cause a court to grant a shop right to the company. Ed’s other alternative is to contract with the company to use its time and equipment for testing his device with a provision stating that no shop right or implied license will be granted to the company.
In this hypothetical, Ed will need an express, written contract. The same terms described in the previous sections should be contained in Ed’s contract. Additional terms specific to his contract will include the shop right inclusion or exclusion, as well as specific details providing the equipment, tools, time or manpower that Ed requires for testing his device.
What if Ed expressly contracts with another company employee named Alan? Alan promises Ed compensation for the disclosure of his idea; however, Alan does not have authority to make such a promise on behalf of the company. Ed’s claim would likely fail under an express contract theory. This variation of the hypothetical, however, is an example of how the quasi contract theory may allow Ed to recover for misappropriation. Advise Ed to be sure that the person with whom he is contracting has the authority to do so on behalf of the company.
Although intellectual property law safeguards a great deal of objects that were created in the mind, ideas themselves are protected by the law of ideas. A thoroughly written contract containing, at the very least, adequate consideration, a countervailing promise, a confidentiality agreement and mutual assent will afford some protection to the idea person, whether the idea is tangible or intangible. If the person is an employee seeking to use employer resources, the inclusion or exclusion of an employer’s shop right should also be included in the contract. Furthermore you should examine the law of your jurisdiction to determine any novelty or concreteness requirements that courts may require.
Your clients’ ideas may very well be protected. While you may not be able to answer every question that each idea person entering your office may have, you at least have some idea of what is involved in the law dealing with objects that originate in the mind.
Siatis is an associate at Piper Marbury Rudnick & Wolfe in Chicago.
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