Apfel v. Prudential-Bache Securities, Inc.

New York Court of Appeals · Contracts

ContractsConsiderationIdea submissionUnjust enrichmentconsiderationnoveltyidea contractspost-disclosure contract

Facts

Plaintiffs presented defendant's predecessor with a computerized "book entry" system for issuing and selling municipal bonds and, after a confidentiality agreement and negotiations, the parties entered a sale agreement. Plaintiffs conveyed rights to the techniques and certain trade names, and defendant agreed to pay based on its use of the techniques for a fixed term, even if the techniques later became public knowledge or patent and trademark applications were denied. Defendant reviewed the system before contracting, used it extensively, marketed it aggressively, and made payments for more than two years. In 1985, defendant stopped paying and argued the ideas were already in the public domain and therefore could not supply consideration.

Issue

When parties enter a contract after the buyer has fully reviewed and received disclosure of an idea, must the idea be novel in order to constitute valid consideration? Relatedly, can a party avoid payment under such a contract by arguing the idea lacked novelty if the idea had value to that buyer?

Rule

Under ordinary contract principles, adequacy of consideration is not judicially scrutinized absent fraud or unconscionability, and something of real value in the eye of the law is sufficient. In a contract to use or purchase an idea made after disclosure, novelty is not a separate requirement for valid consideration; the controlling question is whether the idea had value to the buyer. Where an express contract governs the transaction, quasi-contract recovery for unjust enrichment is unavailable.

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In Chicago, Lena Ortiz showed Harborline Capital, a fictional securities firm, a detailed workflow for electronically matching small municipal offerings with retail accounts. After reviewing the workflow for three weeks, Harborline signed an agreement to pay Lena a quarterly fee for five years for using the workflow, even if patent applications failed. Two years later, after using the workflow extensively, Harborline stopped paying and argued the workflow was already common in the industry.

If Lena sues for breach of contract, what is the strongest response to Harborline's lack-of-consideration defense?

Explanation. Under the majority rule, when the buyer enters a contract to use or purchase an idea after full disclosure, novelty is not a separate requirement for consideration. The decisive inquiry is whether the idea had value to the buyer. Harborline reviewed the workflow, agreed to pay, used it, and benefited from it, which strongly indicates value. (Derived from Apfel v. Prudential-Bache Securities, Inc. (n.d.).)