Opinion ID: 445240
Heading Depth: 2
Heading Rank: 3

Heading: The Misappropriation Claim

Text: 18 The doctrine of misappropriation, which is a distinct branch of the law of unfair competition, originated with the Supreme Court's decision in International News Service v. Associated Press, 248 U.S. 215, 39 S.Ct. 68, 63 L.Ed. 211 (1918) (I.N.S.). 8 The doctrine has been applied to a variety of situations in which the courts have sensed that one party was dealing unfairly with another, but which were not covered by the three established statutory systems protecting intellectual property: copyright, patent, and trademark/deception as to origin. 9 The doctrine has also been the subject of considerable scholarly attention. 10 Application of the misappropriation doctrine requires courts to contend with the basic problem of the law of intellectual property: balancing the rights of the creator of ideas or information to exploit them for commercial gain against the public's right to free access to those ideas. 11 Concomitantly, the dilemma posed by the doctrine can best be viewed as an attempt to provide the necessary incentives to the creators of intellectual property without unnecessarily restricting the public's free access to information. 12 The I.N.S. case illustrates the problem. 19 I.N.S., which was barred for political reasons by British censors from cabling its reports of the First World War to the United States, provided war coverage to the readers of its papers by buying early editions of A.P. papers and either copying or paraphrasing the A.P. reports in its own later editions. A.P. objected to this use of its stories, even though the stories were not copyrighted and even though A.P. had no protectible interest in the underlying facts it was reporting. The Court came down on the side of protecting A.P.'s investment of labor, skill, and money in reporting the news, against I.N.S.'s right to take that information and use it in direct competition with A.P. The Court noted that without such protection, A.P. would have little incentive to invest in newsgathering. 20 The language of the I.N.S. opinion is very broad, and courts have struggled over the years to define the limits of the doctrine. The Second Circuit, under the leadership of Judge Learned Hand, sought to limit I.N.S. to its facts, because of the broad implications of the doctrine for limiting the use of copying in commercial competition. See Cheney Brothers v. Doris Silk Corp., 35 F.2d 279 (2d Cir.1929) (dress designs not covered by I.N.S.), cert. denied, 281 U.S. 728, 50 S.Ct. 245, 74 L.Ed. 1145 (1930); Millinery Creators' Guild, Inc. v. Federal Trade Commission, 109 F.2d 175 (2d cir.1940) (design of high-priced hats), aff'd, 312 U.S. 469, 61 S.Ct. 708, 85 L.Ed. 955 (1941); RCA Manufacturing Co. v. Whiteman, 114 F.2d 86 (2d Cir.) (rebroadcast of recordings), cert. denied, 311 U.S. 712, 61 S.Ct. 393, 85 L.Ed. 463 (1940) (cases cited in chronological order). The doctrine survived, however, in the context of factual situations very close to that of I.N.S. E.g., Associated Press v. KVOS, Inc., 80 F.2d 575 (9th Cir.1935) (radio broadcast of news taken from A.P. newspaper). 21 After the Supreme Court's decision in Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1939), misappropriation became a question of state, rather than federal law. Although the I.N.S. doctrine was rejected by two federal courts interpreting the law of the state in which they were sitting, Addressograph-Multigraph Corp. v. American Expansion Bolt & Manufacturing Co., 124 F.2d 706 (7th Cir.1941) (Illinois law), cert. denied, 316 U.S. 682, 62 S.Ct. 1270, 86 L.Ed. 1755 (1942); Triangle Publications v. New England Newspaper Publishing Co., 46 F.Supp. 198 (D.Mass.1942) (Massachusetts law), some state courts took a more expansive view of the scope of the misappropriation doctrine in the post-Erie era. E.g. Metropolitan Opera Association v. Wagner-Nichols Recorder Corp., 199 Misc. 786, 101 N.Y.S.2d 483 (1950), aff'd, 279 A.D. 632, 107 N.Y.S.2d 795 (1951). 13 22 A federal aspect to the problem of the scope of the misappropriation doctrine was reintroduced by the Supreme Court's decisions in Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964), and Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234, 84 S.Ct. 779, 11 L.Ed.2d 669 (1964). The Court held that the decision by Congress to exclude certain types of intellectual property from protection under the patent and copyright laws was a policy decision that the societal interest in free access to those ideas outweighed the need to provide incentives for their production, and that state law doctrines which protected such intellectual property were preempted by that policy decision. Subsequent decisions of the Supreme Court have made clear, however, that the misappropriation doctrine has not been completely eviscerated. See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974); Goldstein v. California, 412 U.S. 546, 93 S.Ct. 2303, 37 L.Ed.2d 163 (1973). 14 The Court has not rejected the Sears-Compro doctrine, nor has it clearly defined where the power of the states to protect interests in intellectual property ends, and where the realm of federal preemption begins. The problem before us, therefore, is to apply the misappropriation doctrine as we believe the New Jersey courts would apply it, in light of the limitations which we believe federal preemption places on the permissible scope of state-law protection for intellectual property. 15 23 Two recent cases have grappled with these problems in a context analagous to this case. In Board of Trade v. Dow Jones & Co., 98 Ill.2d 109, 74 Ill.Dec. 582, 456 N.E.2d 84 (1983), the Illinois Supreme Court upheld an injunction that barred the Chicago Board of Trade (the CBT) from creating a stock index future contract based on the Dow Jones Industrial Average. The court based its decision on a number of factors: the fact that a significant part of the value of using the Dow Jones average is the association with Dow Jones; that there are an infinite number of stock market indexes which could be devised and that the CBT would be encouraged to develop a new index if it could not use Dow Jones's; and that, although Dow Jones was not licensing anyone to use its index as the basis for a stock index future at the time the CBT sought to use it, Dow Jones was entitled to protection against misappropriation of the index for that use. Justice Simon, joined by two of his colleagues, dissented. The dissent concentrated on the absence of direct competition--competition between the creator and copier in the creator's primary market--and argued that the majority's result broadly expanded the tort of misappropriation in Illinois. 98 Ill.2d at 124, 74 Ill.Dec. at 589, 456 N.E.2d at 91. 24 In Standard & Poor's Corp. v. Commodity Exchange, Inc., 683 F.2d 704 (2d Cir.1982), the Second Circuit, applying New York law, upheld a preliminary injunction against the Commodities Exchange (Comex), which was using the Standard & Poor's 500 (S&P 500) as the basis of its stock index futures contract. In Standard & Poor's, the court relied on the expenditure of time and money in creating the index, and the competition between Comex and the Chicago Mercantile Exchange, which Standard & Poor's had licensed to create a stock market index future based on the S&P 500. Judges Newman and Knapp concurred in sustaining the preliminary injunction, deferring to the district court's analysis of the public interest considerations in maintaining the status quo pending trial, but declined to address the different, novel and close legal questions posed by Comex's use of the S&P 500 in competition with a licensee of Standard & Poor's. 16 25 This case is similar to the stock market index cases in a number of significant respects. As in the stock market index cases, the plaintiff here is seeking to exclude a rival from using a formula it has derived for commercial gain. The formulas in all three cases serve useful functions--in the stock market cases, the index is designed to track the general movement of the stock market; in this case, the formula is designed to indicate a golfer's level of competence. None of these formulas, however, is unique to its function. As a result of their creators' efforts, the respective formulas are generally accepted by the public as reliable means of performing their respective functions. Although the plaintiffs spend some time and effort updating their formulas, and also compute results by means of their formulas, the primary value of the results produced are not their inherent value in performing the underlying functions, but rather in the fact that they enable the public to discuss the underlying matters (i.e., the direction of the stock market or the ability of golfers) by means of a common set of terms. 26 In determining whether the misappropriation doctrine should be applied in this case, however, we must keep in mind the basic policies that underlie the doctrine and its limits. In I.N.S., the Court based its conclusion in substantial part on the fact that I.N.S. was using information which A.P. had developed in direct competition with A.P. in its primary market, the sale of newspapers. I.N.S.'s activity, if not checked, could have destroyed A.P.'s incentive to create the information involved, and this would not only have harmed A.P. but also would have left the public without the information. If, on the other hand, I.N.S. had used the information in a different manner--for instance, in writing a story on American correspondents covering the war--the use of A.P.'s information would not have affected A.P.'s incentive to gather the information. Although A.P. might have been better off if it had exclusive rights to such derivative uses of its information, providing legal protection might also harm the public, since A.P. might never have produced the story about correspondents covering the war. Indirect competition of this sort--use of information in competition with the creator outside of its primary market--falls outside the scope of the misappropriation doctrine, since the public interest in free access outweighs the public interest in providing an additional incentive to the creator or gatherer of information. 27 The competition in this case is indirect. The U.S.G.A. is not in the business of selling handicaps to golfers, but is primarily interested in the promotion of the game of golf, and in its own position as the governing body of amateur golf. The handicap formula was developed to further these two goals. A member of a golf club who obtains his handicap through his club does not pay for that service, and the U.S.G.A. is not directly affected by the number of official handicaps the clubs calculate each year or by the number of golfers who obtain handicaps. Data-Max, on the other hand, is in the business of providing instant handicaps to golfers, either by selling or leasing its computers to golf clubs, or by providing handicaps directly to golfers who cannot obtain instant handicaps through their clubs. The U.S.G.A. does not object to the sale or lease of Data-Max's computers, and does not attempt to provide the direct services which Data-Max provides to golfers. Thus, it is inconceivable that Data-Max's business will interfere with the U.S.G.A.'s incentive to maintain or update the handicap formula. 28 The absence of direct competition with the producer's primary use of the information was not viewed as dispositive by either the Illinois Supreme Court in Dow Jones or the Second Circuit in Standard & Poor's. The court in Dow Jones concluded that direct competition was unnecessary, and the court in Standard & Poor's found direct competition between S&P and Comex, even though the competition was outside S&P's primary market. Neither of these cases makes a persuasive argument for dispensing with the direct competition requirement. 17 Since direct competition has generally been seen as necessary to a finding of misappropriation, 18 and since it properly balances the competing concerns of providing incentives to producers of information while protecting free access, we believe that New Jersey would require direct competition in a misappropriation case, absent a substantial justification for making an exception. 19 29 A possible justification for dispensing with the direct competition requirement in this case, which was also present in Dow Jones and Standard & Poor's, is the fact that the information involved is so closely associated with the creator and has so little intrinsic value that the use of the information by the competitors is really an attempt to trade on the good will of the creator, and thus should be prohibited. 20 The fact that the U.S.G.A. formula, like those involved in the stock market cases, is only one of a potentially large number of possible approaches to the underlying problem (quantifying the ability of golfers to enable them to compete with (and bet with) other golfers on an equitable basis) reduces the cost to the public of recognizing proprietary rights in the formula. 21 The presence of so many alternatives also indicates that the primary value to Data-Max of using the U.S.G.A. formula is the public acceptance that the U.S.G.A. has built up for it over the years. This public acceptance could be characterized as part of the U.S.G.A.'s good will. 22 We must determine, therefore, whether the New Jersey courts would interpret the misappropriation doctrine in such a way as to dispense with the direct competition requirement on the facts of this case. 30 We conclude that, at least on the facts of this case, New Jersey would not dispense with the requirement of direct competition. 23 The public acceptance of the U.S.G.A.'s handicap formula stems from the golfing public's desire to have a uniform system of quantifying recent performances in a way that will allow equitable competition among golfers of differing abilities. The U.S.G.A., in furtherance of its role as the governing body of amateur golf, has provided such a system and, in the absence of a better system, the public has apparently accepted it. Under this state of affairs, the emergence of a single standard becomes largely a function of the need for uniformity. To require Data-Max to use a different formula would effectively destroy its ability to provide a handicapping service, since the U.S.G.A. formula is widely accepted by the golfing public. The purpose of a handicap is comparison between golfers, and handicaps based on different formulas cannot be readily compared. 31 Because the U.S.G.A. formula is the equivalent of an industry standard for the golfing public, preventing other handicap providers from using it would effectively give the U.S.G.A. a national monopoly on the golf handicapping business. 24 Where such a monopoly is unnecessary to protect the basic incentive for the production of the idea or information involved, we do not believe that the creator's interest in its idea or information justifies such an extensive restraint on competition. This case provides a good example of why such a restraint would harm the golfing public. Data-Max has expended time and creative energy in devising its own products and services. It has not only created the program used to calculate handicaps by computer, but has devised a handicapping service which improves on that provided by the U.S.G.A., at least to the extent that Data-Max provides a golfer with a fresh handicap faster than the U.S.G.A. does. In addition, the U.S.G.A. has not been completely deprived of the opportunity to be compensated for its good will in connection with the handicap formula. To the extent that the approval of the U.S.G.A. would enhance the value of instant handicaps, the U.S.G.A. has an opportunity, if it wishes to exercise it, of offering either Data-Max or other companies the use of the U.S.G.A. name in marketing its products and services.