One of the biggest fears that inventors and other developers of intellectual property disclose to me in my office is, “I’m worried that someone is going to steal my idea out from under me and beat me to the punch.” As I’ve discussed previously, it’s actually quite rare for someone to steal an invention and patent it. It happens, but very infrequently.
But let’s consider the larger question of having any sort of business idea—a product you’re thinking of selling, a methodology for improving business practices, an entirely new business idea. One day you sit down for lunch with a friend and brainstorm about your revolutionary new idea. Years later, you see the product or service you thought up out in the world with their name on it. Can you do anything about it? Do you have any rights you can enforce against the person who took your idea and ran with it (to the bank)?
In most cases, legal precedent has shown that there is no intellectual property protection for undeveloped ideas unless a contract has previously been signed between the concerned parties.
Way back in 1931, Colonel Jean Grombach dreamed up idea for a radio show he dubbed both Your Song and Stop, Look, and Listen. The idea was that the show’s audience would be encouraged to write to the sponsor of the program (the relationship between entertainment shows and advertisers used to be much more tightly knit) with the name of a popular song and a personal experience in their life which the writer associated it with. It would then be dramatized on the program with the mentioned song as an introduction. It sounds rather quaint now, but given today’s obsession among advertisers in promoting ‘engagement’ in social media postings, the concept was rather ahead of its time.
According to an October 1943 edition of Billboard, Grombach wrote a script for the show in 1935 and auditioned it for Stack-Goble Advertising Agency and a manager named John O’Connor in the hopes of getting it on the air. After hearing the audition, Grombach claimed that O’Connor took the idea and sold it to Grove Laboratories, Inc., which sponsored the program for a client of O’Connor’s, Fred Waring.
In 1941, Grombach filed suit against Waring, O’Connor, Stack-Goble, and Grove Laboratories, charging that they had pirated his idea. His suit was dismissed by Supreme Court Justice Morris Eder that same year. But in 1943, an appeals court reversed this decision, and a retrial was ordered. Grombach won the new trial in the New York Supreme Court and was awarded $13,000 ($188,000 in today’s dollars). Grombach’s victory was predicated on three findings:
- Waring had appropriated Grombach’s idea without payment.
- Waring had breached an implied contract.
- Grombach had submitted a plan for his show to O’Connor in a manner consistent with the custom of the advertising industry, with regard to having a concept evaluated for commercial consideration.
Waring appealed the ruling in 1944, claiming that the jury in the original case had been incorrect in its findings. The court ultimately found that there was no evidence that there had ever been an implied contract. There was testimony that Grombach had explained the basics of his idea to O’Connor over the phone prior to their lunch, but had not formally arranged an evaluation of his radio idea. Thus, any ideas supplied by Grombach were never solicited, and no “relationship of trust” was ever established. The only evidence of a contract was the supposed historical custom of the advertising and radio industries, which the appeals court found could not be used as evidence of a contract in lieu of an actual contract. You cannot rely on the argument that it’s “just the way things are done” to handwave away the need for a contract.
The appeals court’s ruling in favor of Waring explained this rationale concisely:
Such a custom — “…cannot create a contract where there has been no agreement by the parties and none is implied by law; nor can it give validity to a contract which the law declares void.” In the present case no “deal” was made between the plaintiff and defendant. The jury has so found. And if we accept the testimony of the plaintiff’s president that he explained to O’Connor “roughly over the phone” the “idea” which he desired to bring to the defendant’s attention, that disclosure, as we have seen, came to O’Connor unsolicited either by him or by the defendant. Even though it be assumed that on a subsequent occasion the defendant Waring caused to be arranged and performed in a radio broadcast an interlude in which there were elements common to the plaintiff’s idea, the prior gratuitous, unsolicited disclosure allegedly made by the plaintiff’s president, unprotected by contract, does not create an enforcible contract implied in law.
The object lesson here is that anyone who discloses an idea without previously protecting their efforts with a contract or other agreement has no right to control the use of the idea. If you sit down to lunch with someone and tell them about your idea, even if you have some sort of informal understanding, you have no legal protections. You might as well be posting it on Facebook at that point.
However, there are four meaningful exceptions to this rule.
If you establish a general partnership—even informally—with someone to whom you disclose an idea, the receiving partners is obliged to treat you equitably and fairly.
When the discloser of an idea and the receiver of that information co-own a business for profit, they are equal partners in the venture. If one partner absconds with partnership property, including undeveloped business ideas, they may face liability for their actions. Holmes v. Lerner (1999) delineates how this works in great detail.
In the early 1990s, Sandra Lerner was a woman of great means. She and her husband were the co-founders of Cisco Systems, and Lerner received $85 million after the company was sold in 1990. In 1993, Lerner met Patricia Holmes, a horse trainer. The two became friends, and Holmes became a trainer for Lerner, with the two traveling to various events together.
At a 1995 horse event, Lerner was wearing what Holmes described as “alternative” clothes—goth clothing with black nail polish. Lerner suggested that Holmes give it a try, but Holmes didn’t like the black polish. She experimented a bit at Lerner’s urging, and found that layering raspberry polish over black polish produced a color that both found attractive.
This led to further discussions and experimentation developing goth-themed shades of purple that the two eventually agreed to call “Urban Decay.” Lerner thought that the concept was worth pursuing further, saying “Do you think we should start a company?” Holmes agreed, with Lerner saying they would need to do further research. Lerner took the idea to her business consultant, whom she directed to fund the idea from a venture capital partnership she had previously established. A loose informal business structure was established. Eventually, Lerner made an offer of employment to a marketing specialist, with a percentage ownership interest—without Holmes’ knowledge.
When she learned of this, Holmes asked Lerner to define what her role in the company was, but Lerner refused. Holmes subsequently asked for formal declaration in writing as to her role and interest in the company. Eventually, Lerner’s business consultant told Holmes that nobody had an established percentage interest in the company, and asked what she wanted, and then made it clear that she would be paid a small percentage for her idea. Holmes reacted by stating, “I’m not selling an idea. I’m a founder of this company.”
After Urban Decay was launched and brought to market, Holmes was given an offer of 1% ownership interest. Holmes filed suit, and the jury found in her favor, awarding her total damages of more than $1 million. While no formal partnership had ever been established, the history of business relations between Lerner and Holmes—including the unpaid year Holmes spent working on the project—made it clear that the two had formed a partnership, and thus Lerner had no right to subsequently redefine their business relationship.
While non-disclosure agreements aren’t ideal, they can still offer some measure of legal protection.
I’ve written at length as to why confidentiality agreements and non-disclosure agreements are overrated with regard to protecting intellectual property. However, a non-compete agreements can sometimes be useful. In any case, having a written agreement in hand is usually better than nothing at all.
Trade secrets have valid legal protections, but you need to establish appropriate internal controls for your valuable IP.
The passage of the Defend Trade Secrets Act (DTSA) in 2016 helped to add new teeth to the protection of trade secrets. However, you cannot arbitrarily treat any idea as a trade secret. You need to take significant steps towards establishing appropriate control of trade secrets in order to have meaningful trade secret protection.
A useful way of thinking about trade secrets versus other forms of protection is this: Patents and copyrights work by disclosing a concept publicly and in full. They are placed into the public sphere, where any unauthorized use of a protected concept can be readily addressed through litigation. On the other hand, trade secrets place the responsibility for protecting the IP with the holder of the IP. If Coca-Cola or KFC no longer carefully safeguarded their recipes, they would have no right to file suit against infringers.
But with appropriate protection and safeguards, trade secrets can be valuable tools for protecting sensitive and profitable ideas.
Obtaining a patent is a time-tested way of protecting a developed concept.
As noted above, a patent is the opposite of a trade secret in many regards. Issued patents are published and disclosed to the world. But this affords you the right to enforce that patent against anyone who uses it without authorization, regardless of whether that person has learned the idea from you or anyone else.
There is no need to establish a figurative chain of custody for the idea, in which you can show that the receiver of the idea was obliged to protect it. If a person infringes a patent, they are in the wrong unless they can show that the patent is invalid—no small feat, and certainly one that requires the assistance of a patent attorney.