A Mousetrap for Money

Four years after coming to the attention of authorities, two indictments from the federal district court now charge ten individuals for their involvement in a $60 million mail fraud scheme that defrauded over 34,000 victims while operating three invention promotion companies in Westfield, Massachusetts, from 1982 through 1996.

The companies, such as American Inventors Corp., portrayed themselves as invention promotion companies in the business of assisting inventors, who paid between $200 and $10,000 in fees, in patenting and marketing their ideas or inventions.

They spent millions on advertising, placing advertisements in national publications such as USA Today, Reader's Digest, and TV Guide, and mailing out millions of "deck cards" that encouraged you to call a "1-800" number.

Callers were initially mailed a promotional brochure which encouraged you to send in your ideas and obtain a free, professional assessment. It stressed the company's experience, professionalism, integrity, and track record in successfully bringing certain ideas to market. In 1993 alone, they mailed over 100,000 such information packets to inventors.

After you mailed in your idea, a salesperson phoned and delivered a sales presentation. You were encouraged to pay an initial fee that ranged from $169 to $289. You were told the fee was for a registered patent attorney's opinion letter and a marketing analysis report.

Those who paid the initial fee would be contacted approximately two months later and told that the opinion letter and the marketing report had been favorable, and that they wanted to schedule a "personal meeting" to discuss marketing and patenting services with you. If you agreed, a salesperson would meet with you in one of their leased offices throughout the country.

At this meeting you would be told that your idea had survived two rigorous screening processes and that only 5 or 6 inventors out of 100 ever made it as far as a personal meeting.

You were told that their services would include applying for a patent and beginning the marketing program which was to involve sending brochures to manufacturers and bringing your idea to trade shows.

You would also be told that they had established that a manufacturer would pay realistic minimum figures for a cash advance and a royalty in the amounts of $30,000 and $60,000 respectively for your idea. They would advise you for the first time about the company's fee plan and to help ensure your project's ultimate success you would be induced to buy the most comprehensive and expensive service plan.

The Indictment alleges that they defrauded inventors by making material misrepresentations and omitting material facts throughout their sales pitches and promotional brochure, such as that only those ideas that were determined to have commercial potential were accepted. In fact, positive patent opinion letters were generated almost 100% of the time.

American Inventors were selective in the clients they accepted and developed policies to avoid "potential problems." They turned down inventors who asked too many pointed questions and those whose drawings of the invention appeared sophisticated.

The marketing reports they gave to accepted inventors were "boilerplate", containing no research unique or specific to your ideas and always concluded that the ideas had market potential. The reports took between one and two hours to assemble, but the inventors were told researchers and engineers needed between four and eight weeks to produce the documents.

The cash advance and royalty figures were the same for every inventor's idea as well. In fact, the companies had never obtained either cash advances or annual royalties from any manufacturer, for any idea, that approached those figures.

The companies also misrepresented that they "shared the financial risk" with inventors by claiming that they received most of the profits from sharing in royalties or through agreements with manufacturers, when in fact all of their profits came from the up-front service fees.

The Indictment charges the defendants with conspiracy to commit mail fraud, mail fraud, conspiracy to commit money laundering, money laundering, conspiracy to defraud the U.S. Internal Revenue Service, and filing false income tax returns.

The money laundering charge was as a result of their having used the fraudulently obtained proceeds to promote their scheme through increased advertising in order to attract more inventors.

The various tax evasion schemes attempted to hide about $490,000 over a two year period using kickbacks from the doubling of employees salaries, fake employment income from sham organizations, inflated invoices and claiming personal expenses as though they were from business.

John Samson, 61 who was cooperative in the investigation, was sentenced to three years in prison, one year of house arrest and forfeiture of 50 percent of the value of his home.

He is credited with voicing the justification: "They sell ballet lessons to fat kids and the kids never become ballet dancers."

Touting Special Relationships

Some firms may claim to know or have special access to manufacturers who are likely to be interested in licensing your invention. In addition, they may claim to represent manufacturers on the look-out for new product ideas. Ask for proof before you sign a contract with any invention promotion firm that claims special relationships with manufacturers.

Marketing and Licensing for a Fee

Reputable licensing agents usually don’t rely on large advance fees. Rather, they depend on royalties from the successful licensing of client inventions. How can they make money when so few inventions achieve commercial success?

"We think your idea has great market potential." Few ideas "however good" become commercially successful. If a company fails to disclose that investing in your idea is a high-risk venture, and that most ideas never make any money, beware.

"Our company has licensed a lot of invention ideas successfully." If a company tells you it has a good track record, ask for a list of its successful clients. Confirm that these clients have had commercial success. If the company refuses to give you a list of their successful clients, it probably means they don’t have any.

"You need to hurry and patent your idea before someone else does."Be wary of high pressure sales tactics. Simply patenting your idea does NOT mean you will ever make any money from it.

"Congratulations !We’ve done a patent search on your idea, and we have some great news. There’s nothing like it out there." Many invention promotion firms claim to perform patent searches on ideas. Patent searches by fraudulent invention promotion firms usually are incomplete, conducted in the wrong category, or unaccompanied by a legal opinion on the results of the search from a patent attorney. Because unscrupulous firms promote virtually any idea or invention without regard to its patentability, they may market an idea for which someone already has a valid, unexpired patent. In that case, you may be the subject of a patent infringement lawsuit, even if the promotional efforts on your invention are successful

."Our research department, engineers and patent attorneys have evaluated your idea. We definitely want to move forward." This is a standard sales pitch. Many questionable firms do not perform any evaluation at all. In fact, many don’t have the "professional" staff they claim.

"Our company has evaluated your idea, and now wants to prepare a more in-depth research report. It’ll be several hundred dollars." If the company’s initial evaluation is "positive," ask why the company isn’t willing to cover the cost of researching your idea further.

"Our company makes most of its money from the royalties it gets from licensing its clients’ ideas. Of course, we need some money from you before we get started."If a firm tells you this, but asks you for a large upfront fee, ask why they’re not willing to help you on a contingency basis. Unscrupulous firms make almost all their money from large upfront fees.

What’s a Patent?

A patent is a grant issued by the federal government that gives inventors the right "to exclude others from making, using, offering for sale, or selling the invention throughout the U.S. or importing the invention into the U.S." Three types of patents are available:

Utility patents, which are granted to the inventor or discoverer of any new and useful process, machine, article of manufacture, or compositions of matter, or any new and useful improvement;

Design patents, which are granted on any new, original and ornamental design for an article of manufacture; and

Plant patents, whichare granted on any distinct and new variety of asexually reproduced plant.

Patent Facts

For more information about the Disclosure Document Program, call 703-308-4357. In addition, every state has a Patent and Trademark Depository Library that maintains collections of current and previously issued patents and Patent and Trademark reference materials.