On June 26, 2012, the Second Circuit, applying California law, followed the Ninth Circuit precedent in holding that the Copyright Act does not automatically preempt “idea-theft” claims arising under state implied contract law (Forest Park Pictures v. Universal Television Network, Inc., 683 F.3d 424 (2nd Cir 2012)). The Forest Park ruling comes months after the Supreme Court denied a petition for certiorari in the Ninth Circuit case, Montz v. Pilgrim Films & Television, Inc., 649 F. 3d 975 (9th Cir. 2011), which came to the same conclusion.

USA Network Sued for Idea Theft

Forest Park Pictures, along with actor Hayden Christensen and his brother, alleged that they developed and pitched an idea for a television series to USA Network, which USA then used as the basis for its popular show “Royal Pains.” In their suit in federal district court, Forest Park and the Christensens claim that USA Network entered into an implied contract to compensate the plaintiffs if it used the idea for a television show, but that USA Network breached that contract by refusing to compensate them after it released “Royal Pains.” The district court dismissed the case on the grounds that the implied contract claim was preempted by the Copyright Act. On appeal, the Second Circuit Court of Appeals, applying California law, reversed.

California Law Applied Even Though the Defendant Was Based in New York

Applying New York’s choice of law rules, the Court held that California law would govern. 683 F.3d 424 at 433. While the Second Circuit recognized that New York law is unsettled regarding whether implied contract claims are preempted by the Copyright Act, it identified at least one material difference between New York and California law–that “[u]nder California law, an implied-in-fact contract can have an open price term to be filled in by industry standards.” Id. at 434. Due to this conflict, the Court applied New York’s “center of gravity” test for contracts to determine the appropriate state law and found that California law applied. “Here, almost all of the significant contacts are with California: the sole face-to-face meeting between Forest Park and USA Network was in California; at least part of the performance . . . took place there; the written series treatment was physically located there; two out of the three plaintiffs are California residents; and, while Universal Television Network’s principal place of business is in New York, all of the activity related to this contract took place in USA Network’s California offices.” Id.

In applying California law to determine whether there was an agreement to pay for the use of an idea, the Court studiously avoided the question of whether other idea submission cases would survive preemption from the Copyright Act.“[W] e need not address whether preemption is precluded whenever there is a contract claim, or only when the contract claim includes a promise to pay.” 683 F.3d at 432. “A claim for breach of a contract including a promise to pay is qualitatively different from a suit to vindicate a right included in the Copyright Act and is not subject to preemption.” Id. at 433

Contract-Based Idea Theft Claims Alleging a Promise to Pay a Customary Amount Under California Law are not Preempted by Federal Copyright Law

In reaching its conclusion that the Copyright Act does not necessarily preempt California state-law breach of contract claims, the appeals court noted that Section 301 of the Copyright Act specifically preempts state law claims only if: (1) the work falls within the subject matter of copyright; and (2) the right asserted is “equivalent to any of the exclusive rights within the general scope of copyright.”

The court quickly disposed of the first prong, concluding that the plaintiffs had fixed their ideas in a tangible medium—the pitched treatment. Even though the plaintiffs’ work contained some ideas that were not protectable, the appeals court held that the treatment on the whole constituted a copyrightable work.

The court then held that the second prong of the preemption analysis favored the plaintiffs, concluding that the California-law breach of contract claims include an extra element beyond the infringement of the exclusive rights guaranteed in Section 106 of the Copyright Act. Here, the appeals court noted that the breach of contract claim was predicated on USA Network’s alleged commitment to pay for access to the plaintiffs’ idea, not on its unauthorized use of plaintiffs’ copyrightable expression of that idea. Concluding that there are a number of qualitative differences between a claim for breach of an implied contract under California law (where a promise to pay a price based on industry standards is implied) and copyright infringement, the appeals court held that the Copyright Act did not preempt the plaintiffs’ alleged California-law breach of contract claim.

Lessons for Studios, Producers, Technology Developers and Other Copyright-based Companies

While the appeals court did not finally dispose of the case—it was returned to the district court for further consideration—its decision serves as an important reminder to media and technology businesses. The New York and California courts now both agree, that when applying California state law, idea-theft claims grounded in breach of contract law and an allegation of a promise to pay based on industry standards are not automatically preempted by federal copyright law. When creators pitch their ideas to those in the business of developing copyright-protected products (e.g., books, games, toys, ads, graphics, art, sculptural works, audiovisual works, software, etc.) absent a well drafted submission agreement that makes it clear that there is no express or implied right to remuneration or attribution, and limits claims to copyright or patent infringement, the company accepting the submission is at risk of an implied contract claim down the road if they develop something similar without making a deal with the party that made the pitch.

Accordingly, companies must be conscious of an implied contract claim when drafting and administering submission practices and agreements, whether for the solicitation of specific content or for crowd-sourced content, such as internet submission contests. Furthermore, companies should consider adding language to any submission practices or agreements stating that New York or another preemption-favorable state law applies. This includes provisions for web site and mobile applications terms of use where users can submit user-generated content or send or post comments. Approaches include limiting claims to copyright and patent infringement, or even requiring a free license. The approach depends upon context (e.g., web site terms verses accepted pitches by know creators). Other provisions to consider are limitations on damages (e.g., a maximum royalty rate and a cap if infringement is found) and arbitration. Further, if negotiations for the contract take place in California – even if the studio has a New York office, companies can expect that California state law will be applied if another states law is not specified.

The ultimate lesson of Forest Park and Montz is that the diffuse nature of the creative process can be both valuable to media companies and replete with unforeseen hazards. In order to better capitalize on the sharing of ideas while minimizing risks, companies should create clear submission and solicitation practice guidelines and appropriate forms of agreement and terms of use clauses.