Facts
- Two professionals developed a computerized “book-entry” system for issuing and trading municipal securities without paper certificates.
- The parties executed a confidentiality agreement so the bank could review a detailed written summary of the techniques.
- After negotiations, they entered a sale agreement transferring plaintiffs’ rights in the techniques and certain trade names to the bank.
- The bank agreed to pay a stipulated rate based on its use of the techniques from October 1982 to January 1988.
- The agreement stated the bank’s payment obligation would continue even if the techniques became public knowledge or standard industry practice and even if patent and trademark applications were denied.
- Plaintiffs represented they had not previously disclosed the techniques and agreed to maintain confidentiality until the techniques became public.
- The bank implemented and promoted the system and, at least initially, was the only underwriter using it.
- After a personnel change, the bank stopped making payments, asserting the techniques were already in the public domain at the time of contracting and therefore plaintiffs sold nothing they owned.
- Patent efforts were unsuccessful.
- The trial court narrowed the case to breach of contract while allowing a lack-of-consideration theory to remain; summary judgment was denied.
- The intermediate appellate court held novelty was required for consideration in an idea-sale contract and treated novelty as a triable fact question.
- The state’s highest court reviewed whether novelty is required for consideration in an idea-sale contract.
Issues
- Whether an idea-sale contract fails for lack of consideration if the idea is not novel or is already in the public domain.
- Whether consideration is satisfied where the buyer receives value from the idea, regardless of novelty.
Decision
- The court modified the intermediate appellate court’s order and rejected novelty as a requirement for consideration in an idea-sale contract.
- The court held the decisive question is whether the idea had value to the buyer, not whether it was novel.
- The court treated the agreement’s risk-allocation clause (payment due even if public or unpatentable) as enforcing the parties’ bargain rather than importing intellectual-property prerequisites into contract consideration.
- The contract was enforceable on ordinary contract principles; the bank could not avoid payment solely by claiming the idea lacked novelty.
Legal Principles
- Consideration in an idea-sale contract turns on whether the idea confers value to the buyer, not on whether the idea is novel, patentable, or a protectable property right against the world.
- Lack of novelty does not, by itself, establish lack of value; a buyer may receive value through lead time, reduced development costs, or a ready-to-use package of information and related assets.
- Sophisticated parties may allocate the risk that information will become public or fail to receive intellectual-property protection, and courts will generally enforce that allocation.
- Contract consideration does not require the subject matter to be exclusive or legally protectable as intellectual property; the focus is the bargained-for exchange between the parties.
Conclusion
The court enforced the idea-sale agreement because the plaintiffs’ techniques had value to the bank as part of a bargained-for exchange, and the bank’s obligation to pay did not depend on proving the idea’s novelty or exclusivity.