Nondisclosure Agreements in Business: The Business Forum Show, April 9, 2014

Sometimes pop culture can teach us valuable legal lessons.   For example, what in the world do Mayor McCheese and intermittent windshield wiper blades have to do with non-disclosure agreements?  Plenty, as we discussed in the April 9 edition of The Business Forum Show.

In 1977, the U.S. Court of Appeals for the Ninth Circuit issued an opinion entitled Sid & Marty Krofft Television Productions, Inc. v. McDonald’s Corp., 562 F.2d 1157. 

The salient facts of the case are as follows:  In 1968, Sid and Marty Krofft were approached by the NBC television network to create a children’s television program for exhibition on Saturday morning. The Kroffts spent the next year creating the H. R. Pufnstuf television show, which was introduced on NBC in September 1969. The series included several fanciful costumed characters, as well as a boy named Jimmy, who lived in a fantasyland called “Living Island,” which was inhabited by moving trees and talking books. The television series became extremely popular and generated a line of H. R. Pufnstuf products and endorsements.  In early 1970, Marty Krofft, the President of both Krofft Television and Krofft Productions and producer of the show, was contacted by an executive from Needham, Harper & Steers, Inc., an advertising agency. He was told that Needham was attempting to get the advertising account of McDonald’s hamburger restaurant chain and wanted to base a proposed campaign to McDonald’s on the H. R. Pufnstuf characters. The executive wanted to know whether the Kroffts would be interested in working with Needham on a project of this type.  Needham and the Kroffts were in contact by telephone six or seven more times. By a letter dated August 31, 1970, Needham stated it was going forward with the idea of a McDonaldland advertising campaign based on the H. R. Pufnstuf series. It acknowledged the need to pay the Kroffts a fee for preparing artistic designs and engineering plans. Shortly thereafter, Marty Krofft telephoned Needham only to be told that the advertising campaign had been canceled.  In fact, Needham had already been awarded McDonald’s advertising account and was proceeding with the McDonaldland project. Former employees of the Kroffts were hired to design and construct the costumes and sets for McDonaldland. Needham also hired the same voice expert who supplied all of the voices for the Pufnstuf characters to supply some of the voices for the McDonaldland characters. In January 1971, the first of the McDonaldland commercials was broadcast on network television. They continue to be broadcast.  Prior to the advent of the McDonaldland advertising campaign, plaintiffs had licensed the use of the H. R. Pufnstuf characters and elements to the manufacturers of toys, games, lunch boxes, and comic books. In addition, the H. R. Pufnstuf characters were featured in Kellogg’s cereal commercials and used by the Ice Capades. After the McDonaldland campaign, which included the distribution of toys and games, plaintiffs were unable to obtain new licensing arrangements or extend existing ones. In the case of the Ice Capades, the H. R. Pufnstuf characters were actually replaced by the McDonaldland characters.

In the District Court, the jury found for the Kroffts and awarded damages; the Court of Appeals affirmed the lower court’s decision.  In doing so, it focused on the similarities between Mayor McCheese (shown in the picture below on the left) and H.R. Pufenstuf (shown on the right):

Ultimately, the Court concluded that the use of a character with an oversized head to serve as mayor of a fictitious land was more than mere coincidence, and affirmed the findings of the District Court.

In the aftermath of the Kroffts’ legal victory, the offending characters in McDonaldland – Mayor McCheese among them – were phased out.  The characters that remained following the lawsuit were Ronald McDonald, Grimace, Hamburglar, and the French Fry Goblins.  Today, McDonaldland is a mere memory.

We also discussed the saga of Dr. Robert Kearns , the inventor of the intermittent windshield wiper who was featured in a movie entitled “Flash of Genius” which documents his battle against Ford Motor Co. over Ford’s alleged infringement of his patents.  After a decades-long battle which cost Dr. Kearns his job, his marriage and his sanity, he finally prevailed in infringement lawsuits against Ford and Chrysler.  Dr. Kearns was an obviously brilliant engineer but, in my opinion, naïve in the ways of business.  For example, at one point, Dr. Kearns and his investors demonstrate the invention in front of Ford engineers.  The engineers kept asking to look under the hood.  Wisely, Dr. Kearns and his team refused their requests.  However, there is no indication that Ford was asked to sign a nondisclosure agreement prior to the demonstration, which for my clients is standard operating procedure before demonstrating their product to investors and others. 

The lesson in these stories is fairly simple and straightforward:  before you ever disclose your confidential or proprietary information to a third party during business negotiations, be sure to take steps to protect your ideas before disclosing them to a third party by entering into a nondisclosure agreement. Nondisclosure agreements are one of the best ways to protect trade secrets — valuable confidential information that businesses want to keep under wraps. That information could be a sales plan, a list of customers, a manufacturing process or a formula for a soft drink. By using a nondisclosure agreement, you can ensure that your secrets stay secret — or have legal recourse if they are misused or disclosed to the wrong parties.  A nondisclosure agreement — also called an NDA or a confidentiality agreement — is a contract in which the parties promise to protect the confidentiality of secret information that is disclosed during employment or another type of business transaction.  If you have a nondisclosure agreement with someone who uses your secret without authorization, you can ask that a court order the violator from making any further disclosures. You can also sue for damages. 

People are not angels; if they are offered up a good idea with no prior agreement not to use or disclose it, you can almost guarantee that they’re going to do so.  And while you may have a slam-dunk infringement case, whether you have the resources available to pursue such an expensive legal battle (as did the Kroffts) is another matter altogether.

Archived segments are available by visiting The Business Forum Show page of my website, and be sure to tune in live (or listen to a podcast recording of the show) here.