Today, we're going to discuss whether consideration can be sufficient even if it loses its value following contract formation. We'll explore this question by looking at Apfel versus Prudential-Bache Securities, a case decided by New York State's highest court in 1993. The plaintiffs, an investment banker and lawyer approached an investment bank. The predecessor to credential based securities and they approached the bank with an idea for a new way of issuing municipal bonds. At the time, issuing stock or bonds involved issuing paper certificates. The plaintiffs proposed a new system that allowed the municipal bonds to trade paperlessly through electronic book entries. After reviewing a lengthy detailed summary of the techniques involved in the plaintiffs proposal, then after several weeks of negotiation, the defendant bank entered into a contract with the plaintiffs. The contract provided that the plaintiffs conveyed their rights to the techniques in return for a stipulated payment rate from the defendant for its use of the techniques for a period from October 1982 to January 1988. For at least the first year of the contract, the defendant company was the only underwriter in the industry using the paperless system. By 1985, by which time many other investment banks were using similar computerized models, the defendant company stopped making payments. The company alleged that the ideas Apfel conveyed in his proposal had been in the public domain at the time of the sale agreement. And argued that in order to constitute consideration for the party's agreement, Apfel's idea had to be, but was not novel. The trial court found for the plaintiff, the Appellate Division reverse to green with the defendant that an idea had to be novel to constitute consideration. And that novelty was a fact to be determined that trial, but the instant court reversed determining that an idea need not be novel to constitute valid consideration. Let's walk through the Court of Appeals's Holding. The court emphasize first that the parties to a contract are free to make their bargain even if the consideration exchanged is grossly unequal or of dubious value. It's enough that something of real value in the eyes of the law was exchanged. It rejected the defendants and the appellate divisions belief that novelty was required for contracts involving the disclosure of ideas, explaining that the cases on which the defendant and lower court relied for their contention only use novelty as a way to ascertain the value of an idea. Value at the time of contract formation was the crucial concern. So long as the idea offered as consideration had value to the defendant at the time of contract formation, the idea was valid consideration. Further, the court pointed out that even if the idea itself wasn't novel, it was novel to the defendant and indication that the idea had value to the company. The court also explained other reasons why the idea was quote, manifestly unquote of value to potential base securities. The company used out fills proposed computerized book entry system for several years. It did so in advance of its competitors and through its confidentiality agreement precluded the disclosure of the ideas to its competitors. A clear articulation of the relationship between novelty and value may be found in one of the cases upon which the defendant relied. Downey versus General Food Corporation, an opinion the Court of Appeals of New York had issued in 1972. In that case, the plaintiff submitted to an employ of General Foods an idea to market Jello using a Mr. Wiggle. The company rejected this marketing idea. But several months later, other employees apparently unaware of Downey's suggestion also came up with the idea of Mr. Wiggle and marketed. When the plaintiff sued, General Food Corporation showed evidence that they'd proposed a TV commercial years earlier involving variations of Wiggle and the Court of Appeals ruled in the company's favor. The point was simply that if General Foods already was aware of the Wiggle notion when Downey proposed it to them, Downey's disclosure had no value to General Foods. And so could not constitute valid consideration. In this case, by contrast, Prudential-Bache Securities fully conceded. It did not have knowledge of any similar electronic book entry proposal before hearing it from the plaintiff. Notably lacking in this opinion are any dollar figures. We do not know what Prudential-Bache Securities paid for the plaintiff's proposal. What if Prudential paid for the use of the idea, primarily because they believed it was a novel one and paid much more. Then it otherwise, would have been willing to pay assuming it would have more than a couple years a head start on its competitors in the paperless securities trading. With that in mind, do you see any problems with the courts determination that the idea was obviously a value to the defendant? So is the consideration doctrine concerned with the equivalence of exchange? That is whether there are disparities in the value of what the parties promised each other? No, the consideration doctrine does not police the equivalence of exchange, even very large disparities in the respective parties consideration typically will not give rise to an unenforceable contract. Because of this, consideration doctrine is a very poor policy instrument to assure substantive fairness. On the other hand, what if the plaintiffs in this case have represented that the idea was in fact noble or both parties wrongly believed this was so, should the court have heard an implicit representation from the plaintiff that the idea was noble or is the default of non-novelty preferable? We will discuss cases involving misrepresentation or mistaken inferences of fact later on in the course. So what have we learned from this case? We know that ideas do not have to be novel to constitute consideration. But more broadly and more importantly, decisions suggest that considerations should be judged at the time of contracting. Even if a parties consideration after formation ceases to have value as here, because midway through the term of the contract the defendant's competitors were using similar electronic book entry systems, the consideration remains adequate. Because at the time of contracting, it had value. It's what motivated the bank's promise. Finally, we emphasize again that the consideration doctrine generally does not inquiring to how equal the consideration of the parties is.
