intellectual property — The BUSKLAW Newsletter

Where did the idea for this movie come from? It's amazing what you can find on the internet!

At any time (but typically at 4:55 p.m. on a Friday afternoon before a long weekend), you or another senior manager at your company will receive an enthusiastic voicemail, email, or tweet like this:

Hi [name]: I'm one of your best customers! I've been buying your widgets for the last 40 years. Recently, I thought of a way you could enhance your product line with a new widget, one that does "X" and looks like "Y." Please call me at XXXXXXXXXX to learn more! Or visit my website: www.thenextbigthing.com where I have a mock-up of my widget. You won't be sorry! Let's get rich together!

"Hmm," you think. "This guy could be on to something. I should contact him and learn what he has in mind." Or, more likely: "we thought of a new widget like this years ago and rejected it."

This may sound harsh, but engaging with a person (not your employee or contractor) over their idea for a new product (whether the product is tangible or intangible, such as a movie storyline) can set the stage for a lawsuit.

Consider the 2017 California federal district court case of Alexander v Metro-Goldwyn-Mayer Studios, et al. (The "et al" Defendants included Sylvester Stallone, a few of his pals, and other movie studios.) In 2008, Plaintiff Alexander, a "largely unknown TV and movie actor," dreamt up an idea for a Rocky movie sequel, called Creed. The gist of the screenplay was how Apollo Creed's son (Creed was a character in four of the Rocky franchise sequels) copes with his father's death and builds his own legacy with Rocky Balboa's advice. Alexander tweeted this screenplay idea to Stallone and his pals. The tweet included a link to Alexander's website that promoted the screenplay and contained a "pitch reel," i.e., a short promotional film about the screenplay. Subsequently, Stallone and his pals decided to develop Creed, a movie about Apollo Creed's son, and the film was released in 2015. The movie plot is similar to Alexander's Creed screenplay. So Alexander sued Stallone and company, alleging that Defendants stole his idea. Defendants filed a motion to dismiss the suit as having no basis in law or fact. Here's what happened.

The court examined Alexander's three legal theories behind the lawsuit, i.e., that Stallone and company:

misappropriated his idea;
breached an implied contract that he had with them; and
unjustly enriched themselves by using his idea for the Creed movie.

Let's examine how the court confronted each theory:

1. Misappropriation of an Idea. Most states (including Michigan, to my knowledge) don't recognize a cause of action for misappropriation of an idea, but California does (probably because of the State's movie industry). To win on this theory, Alexander had to allege first, that he made a substantial investment of time, effort, and money in creating the thing misappropriated such that the court can characterize the "thing" as a kind of property right; second, that the Defendants appropriated the "thing" at little or no cost, such that the court can characterize their actions as reaping where they haven't sown; and third, that the Defendants injured Plaintiff by their misappropriation.

The court dismissed Alexander's allegation that his idea for the screenplay created a property right. Citing established California judicial authority, the court stated that an idea is not recognized as a property right. This is especially true where an idea is publicly disseminated and not protected by a non-disclosure agreement. Here, Alexander made the Creed idea widely available via the internet.

2. Breach of an Implied Contract. The court next considered the allegation that Alexander and Stallone's pals created an implied contract that Stallone and company breached when they developed their own Creed screenplay. The court's discussion started out positive for Alexander: California law recognizes that an implied-in-fact contract arises when the writer submits material to a producer with the understanding that the writer expects to be paid if the producer uses his concept. But the court found that Alexander had no proof that he offered his Creed idea to the Defendants, or that they ever received it. All Alexander could show was that he tweeted his idea to Stallone's Twitter account, but Stallone (and the other Defendants) never responded. The Court also noted that Alexander plastered his Creed idea all over the internet. There can be no implied contract (and thus no breach) where there was no offer of the screenplay made specifically to, or accepted by, the other side (Stallone and company).

3. Unjust Enrichment. The final theory of Plaintiff's lawsuit was unjust enrichment. In California (and most other States), the elements of unjust enrichment are first, receipt of a benefit; and second, unjust retention of the benefit at the expense of the another. Alexander alleged that Defendants received a substantial benefit from using his Creed idea and should, in all fairness, compensate him.

The court quickly shot down this argument too, noting it had the same flaws as the breach of implied contract claim, i.e., Alexander had no proof that Defendants either knew about or accepted his Creed idea after he sent never-replied to tweets and otherwise spread it around the internet.

The crucial fact against Alexander was that Stallone and company didn't engage with him - at all. They didn't answer his tweets or acknowledge viewing his internet website promoting the Creed movie concept. They never even sent him a "thanks but no thanks" email. Had there been contact between the parties, the outcome of this lawsuit may have well been different.

Lesson: You should treat an unsolicited product idea from your customer in the same manner - ignore it! DON'T ENGAGE with the customer!

Three final thoughts:

1. It doesn't matter if Defendants actually visited Alexander's website, read his Creed ideas, or viewed the pitch reel. Alexander had no inkling that they did, so the lawsuit contained no such allegation. And the fact that Alexander's ideas are evident in the 2015 Creed movie is irrelevant.

2. Some years ago, I came across a suggested form agreement for a business to use for a customer who wants to present an unsolicited product idea. It attempts to limit the business's liability to the customer after it reviews the idea. But the agreement struck me as half-baked. I don't advise that approach.

3. This analysis (and court case) doesn't apply to product ideas that you receive from your employees or contractors. If you have the proper agreements in place with them, you (i.e., your company) owns their ideas. (Whether you have the "proper agreements" in place should be discussed with an experienced intellectual property attorney! Who might that be??)

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If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. And my email address is busklaw@charter.net. Thanks!

This post is directed to a small Michigan-based technology business with several employees who write code or produce other creative work. Start-up technology businesses may find this post especially relevant; established smaller technology firms may also find this useful. As always, the recommendations in this post should not be taken as legal advice and are simply general guidelines for your consideration.

Here are what I consider basic legal protections that you – the astute entrepreneur - should have in place for your technology business from the day that you open the door:

Protect Your Intellectual Property. Your creative output may be protected by U.S. patent, copyright, trademark, or trade secret law. Know the basics of these legal protections by reading this excellent article in the February, 2016 issue of the Michigan Bar Journal. Then, find a good intellectual property (I.P.) attorney to discuss the best cost-effective ways to protect your valuable I.P. assets.

Have Your People Sign Employment (or Independent Contractor) Agreements. Your employees should sign employment contracts as an integral part of the hiring process. Standard provisions should include confidentiality, I.P. rights assignment outside of the work for hire doctrine, non-compete, conflict of interest, and acknowledgment of any separate human resources policies such as vacations, benefits, leave of absence, etc. And consider including a mandatory arbitration provision in exchange for discharging an employee only for “good cause.” Finally, if you want to classify any of your people as independent contractors rather than employees, you will need to have special agreements with these folks to (hopefully) avoid tax and other liability problems.

Respect the Formalities of Your Business Entity. Whether you are a corporation, limited partnership, or limited liability company, there are statutory requirements to observe if you want to keep the legal protections afforded by these entities intact. Your attorney should help you understand these formalities. In the case of a corporation, you need to have annual shareholders’ and directors’ meetings with appropriate business actions. And it’s wise to have your lawyer attend these meetings, if only to make sure that the appropriate resolutions are properly enacted and put in the best legal form. The danger of ignoring the required formalities includes personal liability for debts incurred by the business entity.

Adopt a Record Retention Policy. Even a small business can be hit with a lawsuit, and when that happens, you’ll be glad that your board of directors adopted a record retention policy (RRP) and appointed one of your detail-oriented employees as a record retention manager. The RRP should detail how long and in what form your business must keep its documents, including emails, contracts, employment agreements, payroll records, purchase orders, invoices, receipts, licenses, etc. It should also specify when the policy will be suspended if there is litigation (this is called a “litigation hold”). An RRP is vital to justify the normal destruction of business data that may be requested by a plaintiff’s attorney on a "fishing expedition." Your business may be small, but you need an RRP! And once adopted, make sure that you follow it (as with all of your other company policies)!

Have the Necessary Insurance in Place. Find a good insurance broker who understands your business and then buy the necessary insurance to protect your people and assets. For a technology firm, consider technology errors and omissions insurance. If you keep customer data (especially credit card data) on your servers or subcontract that function to a third party, you should obtain a cyber and privacy insurance policy to protect you from claims resulting from a data breach. And you can also insure against cyber ransom, as this article notes.

Protect Yourself with Contracts. Even if you have only a handful of contracts, make sure they are signed, dated, safely stored, can be produced in a legible format, and don’t put you at a disadvantage. And don’t accept any contract that lands on your desk, however innocent it may appear, without first consulting with your attorney! Agreements to be wary of include leases (if you lease equipment or your business location), supplier agreements, customer agreements, bank loans, service agreements, and non-disclosure agreements. (And avoid letters of intent for the reasons discussed here.) These documents will contain legal jargon that you won’t understand. Consider having your attorney draft a set of plain-language purchase order terms and conditions that you can routinely send to your suppliers. And tell your attorney that you want a plain-language arbitration provision in all of your contracts to avoid the burdensome time and expense of litigation! Finally, don't try to save a few bucks by going to an Internet legal forms site and downloading a document that sounds okay to you. You're rolling the dice with that approach!

Do Lunch with These Three. You’ll be busy building your business, but you’ll still get hungry around noon. Resist the habit of avoiding lunch (exception: to exercise) and take the following three people to lunch on a regular basis: your attorney, your outside accountant, and your insurance broker. You “don’t know what you don’t know,” so you’ll benefit from talking to these folks. If you don't benefit, find a replacement for the unhelpful person.

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Smaller firms aren't immune to the risks of doing business in a litigious culture. You need to devote time, effort, and the necessary expense to keep your firm on an even keel by considering these basic suggestions.

If you find this post worthwhile, please consider telling your colleagues about it. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. Thanks!