Fraudulent Patenting and Invention Promotion Services
Every year, tens of thousands of people try to develop their ideas and commercially market them.
Some people try to sell their idea or invention to a manufacturer who would market it and pay them royalties. But finding a company to do that can be overwhelming. As an alternative, others use the services of an invention or patent promotion firm. Indeed, many inventors pay thousands of dollars to firms that promise to evaluate, develop, patent, and market inventions and then do little or nothing for their fees.
As a result of the FTC’s Project Mousetrap it was discovered that Eureka Solutions International, Inc. and OEM Communications, of Pennsylvania, misrepresented the likelihood of financial gain to consumers who purchased their invention promotion services. Few, if any, of their clients realized any appreciable amount of money from their inventions.
They ran one of five invention promotion schemes that together generated in excess of $90 million for the schemers — but very little for their clients. In addition to prohibiting unsubstantiated claims they must now disclose in writing to potential clients:
|the total number of clients with whom they have signed agreements in the past five years to research or promote the client’s idea;
|the total number of clients whose ideas or inventions were licensed by an unaffiliated third party;
|the total number of clients who received more in royalties or sales from the licensing agreement than they paid to the defendants for their services; and
|the total number of prototypes, market tests, or other pilot programs the defendants funded for clients.
Such unscrupulous promoters take advantage of an inventor’s enthusiasm for a new product or service. They not only urge inventors to patent their ideas or invention, but they also make false and exaggerated claims about the market potential of the invention. The facts are:
|few inventions ever make it to the marketplace; and
|getting a patent doesn’t necessarily increase your chance of commercial success.
There’s great satisfaction in developing a new product or service and in getting a patent. But when it comes to determining market potential, inventors should proceed with caution as they try to avoid falling for the sweet-sounding promises of a fraudulent promotion firm.
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.Ronald Boulerice admitted in federal court that he cheated some 34,000 inventors out of $60 million dollars. The government gave an eight-year sentence recommendation.
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?
They’re choosy about which ideas or inventions they pursue. If a firm is enthusiastic about the market potential of your idea, but wants to charge you a fee in advance, take your business elsewhere.
Many fraudulent invention promotion firms offer inventors services in a two-step process: one involves a research report or market evaluation of your idea that can cost you hundreds of dollars.
The other involves patenting or marketing and licensing services, which can range from $5,000 to $10,000. Reputable licensing agents rarely rely on large upfront fees.
Early in your discussion with a promotion firm, ask for the total cost of its services, from the "research" about your invention through the marketing and licensing. Walk away if the salesperson hesitates to answer.
In several states, disclosing the success rate is the law. Ask for its rejection rate, the percentage of all ideas or inventions that they find unacceptable. Legitimate firms generally have high rejection rates.
Fraudulent invention promotion firms may promise to register your idea with the U.S. Patent and Trademark Office’s Disclosure Document Program.
Many scam artists charge high fees to do this. The cost of filing a disclosure document in the PTO is $10. The disclosure is accepted as evidence of the date of conception of the invention, but it doesn’t offer patent protection.
Unscrupulous firms often promise that they will exhibit your idea at tradeshows. Most invention promotion scam artists don’t even go to these tradeshows, much less market your idea effectively.
Many agree in their contracts to identify manufacturers by coding your idea with the U.S. Bureau of Standard Industrial Code (SIC). Lists of manufacturers that come from classifying your idea with the SIC are usually of limited value.
|Make sure your contract contains all the terms you agreed to, verbal and written, before you sign. If possible, ask an attorney to review the agreement.
Here’s how to follow up if you hear the following lines:
"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.
The cost for a patent depends on the type of patent and whether the applicant is an individual inventor, a nonprofit organization, a small business, or a corporation.
|A U.S. patent protects your invention only in the U.S.
|Design patents are granted for a term of 14 years from the date of the grant. Utility and plant patents are granted for a term that begins on the date of the grant and ends 20 years after the patent was first filed. A patent holder loses exclusive rights to the invention when the term expires or when periodic maintenance fees are not paid.
|The Patent and Trademark Office cannot help inventors develop or market their inventions, but will publish a notice in the weekly Official Gazette that the patent is available for licensing or sale if the patent owner requests the notice and pays for it.
For More Information
Consumer Response Center
Minnesota Inventors Congress
National Congress of Inventor Organizations
The Patent and Trademark Office offers information about patents, trademarks, and copyrights. Write to the U.S. Department of Commerce, Patent and Trademark Office, Washington, D.C. 20231; call toll-free at 1-800-PTO-9199.
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.