Appeals Court Hands USA Networks A Royal Pain

Appeals Court Hands USA Networks A Royal Pain

by Jerry Glover
July 16, 2012

At the end of June, the U.S. Court of Appeals for the Second Circuit (located in New York) aligned itself with the U.S. Court of Appeals for the Ninth Circuit (located in California) and held that the U.S. Copyright Act does not pre-empt a claim for breach of an implied-in-fact contract with a promise to pay for use of an idea.Forest Park Pictures v. Universal Television Network, Inc., 2012 WL 2382528 (2d Cir. 2012). At issue in this case was the USA Network series “Royal Pains.”

The plaintiffs, Tove and Hayden Christensen (the latter of Star Wars fame), and their production company, came up with an idea for a television series which they called “Housecall.” The series concerned a doctor who had been expelled from the medical community for treating patients who could not pay who then moved to Malibu becoming a concierge doctor for the rich. They created a written treatment that included character biographies, themes and storylines. They mailed the treatment to an executive at USA Network and then requested a meeting with that executive to pitch the show. According to the plaintiffs, the USA executive expressed fascination with the concept noting that he had never heard of a concierge doctor. Ultimately, discussions about the series ceased. Fewer than four years later, USA produced and aired a series entitled “Royal Pains.” In the USA series a doctor was expelled from the medical community for treating patients who could not pay. The doctor then became a concierge doctor to the rich in the Hamptons.

The plaintiffs filed a diversity action against USA and its parent Universal Television Networks for breach of implied-in-fact contract in the U.S. district court for the Southern District of New York. The federal district court held that their claim was pre-empted by the U.S. Copyright Act. Forest Park Pictures v. Universal Television Network, Inc., 2011 WL 1792587 (S.D.N.Y. May 10, 2011). The court did not address the defendants’ argument that any contract that may have existed between the plaintiffs and USA was too vague to be enforced.

On appeal, two issues were presented: (1) Whether the U.S. Copyright Act pre-empts an implied-in-fact contract claim and (2) if not, whether the plaintiffs had adequately pleaded a claim from breach of an implied-in-fact contract under applicable state law.

Pre-Emption

State law claims are pre-empted by the Copyright Act if two things are present: (1) the work in question is within the subject matter of copyright and (2) the state law claim asserts rights that are the equivalent of the exclusive rights granted to copyright owners by the Copyright Act. Since plaintiff’s “idea” for the series was embodied in a writing—the treatment—the work was within the subject matter of copyright which, among other things, protects literary works.

So the major question was whether the implied-in-fact contract claim was really just another way of claiming that defendants had infringed upon the plaintiff’s copyright in the treatment. To avoid pre-emption, the plaintiffs have to allege an extra element which goes beyond alleging infringement of one of the exclusive rights copyright owners hold in their material—the right to reproduce, perform, distribute or display the work.

The appeals court noted that the plaintiff’s contract claim was qualitatively different from a copyright infringement claim. The plaintiffs claimed that it was customary and understood in the entertainment industry that the creator of an idea who had pitched it to a studio would be paid if that studio actually used the idea even if the resulting production did not copy from any written materials the creator may have provided to the studio. The court stated that this element of payment for use of an idea was not one of the Copyright Act’s exclusive rights guaranteed to copyright owners.

The court added that the plaintiffs’ contract claim raised two other extra elements not governed by the Copyright Act: (1) mutual assent and valid consideration—two essential elements for any contract that are not required for a copyright infringement claim and (2) rights that are asserted only against the contracting party and not the public at large (i.e., a copyright protects the owner against all infringers; a contract claim effects only the parties to that contract).

The court stated that as long as a plaintiff sufficiently alleges the elements of a contract—offer, acceptance, consideration and breach—it does not matter that the contract is implied in fact (no written contract) or express (written). The court concluded that the Copyright Act did not pre-empt the plaintiff’s breach of an implied-in-fact contract.

Implied-in-Fact Contract Claim

But did the plaintiff adequately plead breach of contract, a state law claim not a federal copyright claim? To decide this issue the appellate court first had to decide which state law applied—New York (where the defendants were located) or California (where two of the plaintiffs resided). When a diversity action has been filed, the court must look to the forum state in which the suit was filed (in this case, New York) to determine choice of law rules. The court noted that New York requires courts to determine first whether there is an actual conflict between the laws of the two jurisdictions involved. The court found that there was a conflict between the laws of New York and California: whether a contract can be enforced without a definite, agreed-upon price. The court noted that under California law an implied-in-fact contract can have an open price term which can be determined by industry standards. But the court noted that New York was unclear on this point.

Since a conflict between state laws existed (or, at least, potentially existed), the court was required to apply New York’s “center of gravity” test to determine which state law applied to the contract claim. This test requires a court to consider the significant contacts the parties have with each state including the place of contracting, the place of performance, the physical location of an property that is the subject matter of the contract and the domiciles or places of business of the contracting parties. The court added that two elements—the place of contracting the place of performance—have great weight. The court found that the most significant contacts were with California—the place where the parties first met to discuss the plaintiffs’ idea, part of the performance took place in California where the plaintiff’s revealed their idea to USA, the treatment was located in California, two of the plaintiffs resided in California and all of the activity took place in USA’s California offices even though it is located in New York.

The court, citing the well-known California Supreme Court decision Desny v. Wilder, 46 Cal. 2d 715 (1956), stated that California law recognizes an implied-in-fact contract where the plaintiff reveals an idea (the offer) to a defendant who later uses the idea (acceptance) without paying the defendant (breach). The court noted that in California a plaintiff must be able to show that an idea was submitted with an understanding that the plaintiff would be paid for use of the idea and that the defendant knew or should have known of that condition.

But USA argued that even if the plaintiff alleged breach of an implied-in-fact contract in their complaint, the agreement would be unenforceable because there was no definite price term. The appeals court noted, however, that California courts do not require a definite price term in an implied-in-fact contract case and will use industry custom to establish that price. At trial, the plaintiffs will have to prove what the price would have been under industry standards.

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