Testimony of Deputy Commissioner Michael K. Kirk


Note: The following text is a Statement of Deputy Assistant Secretary of Commerce /Deputy Commissioner of Patents and Trademarks Michael K. Kirk before the Subcommittee on Regulation and Government Information, Committee on Governmental Affairs, U.S. Senate, presented September 2, 1994.

It was reprinted in the Journal of the Patent and Trademark Office Society, October 1994 issue, pp. 731-740.

As a document written by a federal employee in the scope of his duties, it is not copyrighted and thus may be freely reproduced without anyone's further permission.


Mr. Chairman and Members of the Subcommittee:

I welcome this opportunity to testify before your Subcommittee on the damage being done to the inventive community, particularly independent inventors, by unscrupulous invention development organizations.

For the United States to compete in the world economy we must create new products and new processes, indeed, entirely new markets. The reason is clear: increasingly, the value of goods and services is made up of creative new products and methods of manufacture. We as a nation can compete and win in this environment if we properly nurture our creative community. One of the ways we can do this is by protecting the fruits of creative labor through the intellectual property laws of the United States. It is these laws that recognize and reward creativity to provide an incentive to create.

An important pillar in our intellectual property system is the United States Patent and Trademark Office ("USPTO"). The USPTO receives applications for patents - over 180,000 last year. If an application meets the requirements of the patent laws, protection is granted. Applicants rely upon the USPTO to operate in an honest, open, and speedy fashion. Because of the complicated nature of the process, applicants also typically rely upon the help of registered attorneys or agents to represent their interests before the USPTO.

A number of inventors, however, confronted with a process they do not understand for protecting and commercializing their inventions, turn to invention development organizations. An invention development organization may offer to do several or all of the following: evaluate an invention, assist in its development, protect it, and promote it in order that it may be licensed or sold. While many of these organizations are legitimate, the unscrupulous ones take advantage of untutored inventors, requiring large sums of money up-front from inventors while providing no real service in return. In the process, some misuse and misrepresent the services of the USPTO - falsely claiming to obtain appropriate protection for their clients from our Office. Moreover, in addition to wasting their clients' money, some of their activities actually harm their clients' interests.

The result of the activities of unscrupulous invention development organizations goes beyond a loss of money and even beyond a loss of protection for inventions. If left unchecked, it could result in a general loss of confidence by independent inventors in the very institutions designed to encourage invention.

In order to better understand the activities of invention development organizations, let me explain the process for obtaining patent protection. The starting point is the invention. The inventor conceives of an invention and believes that the invention has or may have commercial value. Believing there is value in his or her idea, the inventor seeks to protect it.

The first step in determining whether and how to protect the invention is to decide what type of protection to seek. This decision turns on the nature of the invention. There are three different types of patents - utility, plant, and design. Plant patents protect new varieties of plants and are not usually of great importance to the independent inventors who turn to invention development companies.

To understand the difference between a utility and a design patent, let's take the example of a flower pot having a novel self-watering mechanism.

A utility patent protects the invention's structural or functional features, for example the self-watering mechanism. A utility patent application must describe the invention so that one skilled in the relevant technology can make and use it. In the example given, the application must include a written description of the watering mechanism, including drawings, if necessary. The utility patent application must also include one or more claims which define in words that which the applicant considers to be the invention.

A design patent protects the ornamental design for an article of manufacture - in a word, the way a product "looks." The protection is limited to the design shown in the drawings that comprise the application. For example, a design patent application may be drafted and filed for a flower pot having a floral design added to its surface. Assuming the application issues as a design patent, anyone is permitted to make the same flower pot, provided it does not have the same floral design. Indeed, such a design patent would not prevent anyone from making pots having the inventor's automatic watering mechanism. A design patent application is easier (thus, less costly) to draft than a utility application and, because of its limited scope of protection, relatively easy to get. It is also less valuable commercially because of its limited scope.

Clearly then, appreciating the nature of the invention is critical to determining the proper form of protection to be sought.

Typically, prior to preparing a patent application, a patentability search is conducted of the issued U.S. patents and other pertinent technical information. This search may be conducted in the public search room of the Patent and Trademark Office in Arlington, Virginia. There is no charge to anyone for searching through the paper copies of the five and one-half million U.S. patents. There are nominal charges for using the Office's automated search systems. There are also Patent and Trademark Depository Libraries located throughout the United States where collections of U.S. patents are maintained for searching. Several commercial on-line data bases are also available containing U.S. patents that may be searched. There is, of course, an access fee for the use of these services set by the company that establishes and maintains the data base.

Patent searching is a complicated art that requires an understanding of the invention being searched, the manner in which U.S. patents are classified according to their area of technology, and the criteria of patentability under U.S. law. While an independent inventor can master these skills, searching is often performed, for a fee, by persons having the requisite skills and experience. For independent inventors, the search results often show that no meaningful protection is possible and the prospect of making money off of the invention is, therefore, remote. If this is the case, the inventor should be so informed so that no further expense need be incurred by the inventor.

If the search results are positive, a patent application may be prepared and filed in the USPTO. A utility patent application is a compliated legal document to draft. Accordingly, we generally recommend that inventors seek competent legal counsel, admitted to practice before the USPTO, to draft, file and prosecute patent applications for them.

Complicated though it may be, filing for and obtaining patent protection is often the easiest step along the road from an invention to the marketplace. Commercial development-for independent inventors is usually more difficult. The inventor must obtain the financing to manufacture and market the invention or find someone else interested in manufacturing the patented device under a license or in buying the patent outright. Obtaining a patent offers no guarantee that the invention will ever achieve any commercial success. Our files are full of the dreams of inventors whose inventions have never seen the marketplace. But assuming there is some commercial possibility for an invention, where the inventor cannot or chooses not to manufacture and sell the invention, the process of licensing or selling the invention can be difficult and time consuming. It requires research to determine appropriate organizations to contact, making the contacts in an effective, professional manner, and following up on the contacts. Once an interested company is identified, a period of negotiation ensues to set the terms for the license or sale of the patent. All of this may take a long time to complete, depending upon the technology and how complicated the deal is likely to be.

The key to a proper result at each step along the road from an invention to the marketplace is that inventor be adequately informed about the protection available, how it is obtained, what the scope of protection is, and how the invention can be commercialized. Inventors having knowledge about the process are more likely to be prudent and less likely to be misled into paying for a service they do not need or into doing something against their interests.

THE GENERAL NATURE OF THE PROBLEM

In an article dated February 11, 1994, the Wall Street Journal estimated that invention development organizations take in about $100 million per year. But for the activities of some of their members, the size of the industry would not be of concern. Indeed, if they all operated in an honest, open, and effective manner we would hope for an increase in the size of the industry.

Unscrupulous invention development organizations attract inventors with tales of huge royalties, take their money, and provide little, if any, real service. Indeed, they often do real harm to the interests of those they are ostensibly trying to help. I want to emphasize that there are reputable invention development organizations. The basic problem for the unwary inventor, however, is that he or she lacks sufficient knowledge about the process of protecting inventions and information about invention development organizations to be able to distinguish between the good and bad.

After the inventor/customer discloses an invention, the organization will purport to conduct a patent search. The unscrupulous ones rarely do so with the rigor required, and invariably will report that the invention is valuable and patentable. Based upon this favorable report, the customer is lured into paying for invention evaluation, marketing, brokering, and/or promotion services and possibly for the preparation of a patent application.

At this point, unscrupulous invention development organizations have been known to play the system to obtain money from their customers and provide little in return. For example, the USPTO has a program whereby an inventor may file a "Disclosure Document." A Disclosure Document has a very limited purpose - to provide some evidence of dates of conception of an invention if the date of invention is ever put in question. The Disclosure Document is not a patent application, and the date of its receipt in the USPTO will not become the filing date of any patent application subsequently filed that refers to it. It establishes no exclusive rights as does a patent.

Notwithstanding its very limited purpose and effect, we have seen examples of invention development organizations misleading customers into believing that a Disclosure Document affords some form of protection or at least the promise of protection. Because the Disclosure Document has the imprimatur of the USPTO, a customer can be easily misled into believing that his or her invention is protected once one is filed.

We have also seen evidence of organizations that file design patent applications in cases in which a utility patent application should be filed. Recalling the example of the self-watering mechanism for a flower pot, an organization may file for design patent protection directed to a silhouette of the pot or a floral picture on the surface of the pot. While a design patent may prevent others from making a pot having the same silhouette or floral picture, it will provide no protection for the selfwatering mechanism. Taking this one step further, we have seen instances of a design patent being applied for where the design, such as a floral picture, has been added by someone other than the inventor by a draftsman hired by the invention development organization for example. This addition by someone other than the inventor throws into question the validity of any design patent that may issue from the application. This is because the named inventor (the customer of the invention development organization) did not invent the design claimed in the design patent.

Thus, the protection sought through a design patent is often wholly inappropriate in light of the nature of the invention. Moreover, even if a design patent is granted by the USPTO, the manner in which it was prosecuted before the USPTO may render it unenforceable in court.

We have seen instances where inventors have lost domestic and foreign patent rights due to way these organizations operate. This may happen in a number of ways. For example, the original invention may be of the structure or function of a product - an invention susceptible to utility patent protection. Nonetheless, the organization may arrange for a design patent application to be filed that only discloses the surface of the product. Because it is a design patent application, it need not disclose any structural or functional details of the product.

Once the organization begins its activities to market the invention, its disclosures frequently bar utility patent protection. This is for two related reasons. First, U.S. law bars utility patent protection to those who offer to sell their invention more than one year prior to filing for patent protection. Second, the only patent application that has been filed - the design patent application - did not describe or claim the structural or functional details for which utility patent protection could be sought. Under most foreign systems this bar is even stricter - patent protection is barred for public disclosure of the invention at any time prior to the filing date.

As a result, customers of unscrupulous invention development companies are left with a patent that is not useful, which was not competently prepared, and for which a high price has been paid. Frequently, no patent application will be prepared and filed and the inventor will have no protection. Moreover, if an application is improperly prepared, the applicant can and will obtain less protection than he or she needs or may be entitled to. Indeed, a patent application that is poorly drafted or not timely filed may result in a loss of rights in the invention not only in the United States but also abroad.

Whether or not these organizations provide real value to their customers cannot be accurately measured. However, in providing information required by some states, some invention development organizations have admitted they had few customers that earned more from an invention than was paid to the organization, sometimes as few as 1 out of 10,000.

When patent applications are filed in the USPTO on behalf of customers of invention development organizations, they are often submitted by practitioners admitted to practice before the USPTO. By statute, the USPTO registers these practitioners to practice before it. The USPTO regularly receives complaints from inventors about these practitioners, including lack of information about the prosecution and status of their applications. When complaints by customers are filed, or irregularities are identified by the USPTO, we investigate registered practitioners, some of whom have been affiliated with invention development organizations. The costs of these investigations are borne by all patent applicants whose fees fund the USPTO.

There are intangible costs as well, the most troublesome being a loss of confidence by independent inventors in a patent system they see as frustrating, rather than promoting, the recognition and protection of their ideas.

EXISTING LEGAL REMEDIES

Beginning with Maryland and California in 1975, a number of states enacted laws specifically to regulate invention development contracts. To date, 14 states have enacted such laws. Typically, they require invention developers to disclose certain information to customers prior to entering into an agreement. If the required information is not disclosed, the agreement is voidable. Moreover, invention development organizations desiring to do business in a state are typically required to post a bond, against which anyone damaged by the invention developer may claim. None of the state laws prohibits or limits invention development organizations from charging upfront fees.

These efforts to attack the problem at the state level are laudable and are to be encouraged. The lack of national coverage, however, has hampered the overall effectiveness of state laws. Companies can operate through the 36 states having no such laws, often providing services from those bases into states that do have such laws.

In addition to these specific statutes, virtually every state has statutory law to regulate unfair trade practices in general. Moreover, an aggrieved inventor may bring an action under state common law in contract and/or tort (including fraud, deceit and misrepresentation). Further, private actions for damages have been brought in some states under state statutes regulating the sales of securities, so called "blue sky" laws.

At the Federal level, there is yet no law to specifically regulate invention development contracts. The result is that an invention development organization desiring to avoid a state's reporting requirements need only ensure it does not operate in a state having such requirements.

The Federal Trade Commission has issued complaints against some invention development organizations under Section 5 of the Federal Trade Commission Act (15 U.S.C. 45) for deceiving customers who contracted for their services. The FTC obviously has limited resources for that work in comparison to the size of the invention development industry. Moreover, the FTC Act provides no private right of action to aggrieved inventors.

As I mentioned earlier, while the USPTO has jurisdiction over registered patent attorneys and agents, it does not have independent jurisdiction over invention development organizations or their activities.

Private actions for damages have been brought under the mail fraud statute (18 U.S.C. 1341), the wire fraud statute (18 U.S.C. 1343), and the RICO Act (18 U.S.C. 1962(a) and (d)). Moreover, private actions for damages have been brought under Section 10(b) of the Securities and Exchange Act of 1934 (15 U.S.C. 78j) for fraudulent sales of securities.

CONCLUSION

We strongly believe that the problem of unscrupulous invention development organizations is persistent and growing. It is a problem that threatens the independent inventors that are directly affected by the unscrupulous invention development organizations. Further, it tarnishes the reputation of the many legitimate organizations dedicated to assisting inventors and undermines the integrity of the system for the protection and therefore encouragement of inventions. Finally, it tarnishes the reputation of the USPTO.

We do not presume to have a complete solution to the problem at this time. One can, however, identify certain elements that a solution might contain. First, many of the state laws dealing with invention development organizations require certain warnings and information to be provided to prospective clients prior to entering into a contract. It may be advisable to require these same types of warnings and information of all invention development organizations. A failure by an invention development organization to provide the required warnings and information would provide an aggrieved inventor with a right to rescind the contract with that organization and a private right of action to recover damages, including attorney's fees.

For example, state laws generally require invention development organizations to warn prospective clients in writing that failure to inquire into the law governing patent, copyright or trademark matters may jeopardize rights in inventions. Moreover, they generally require that prospective customers be warned that only a registered attorney is competent to advise them about their legal rights in patents, trademarks, and copyrights. Though not found in current state laws, it may be useful to require a description of disclosure documents, patents (design and utility), copyrights, and trademarks and the process for obtaining them. The description could be brief, clear, accurate, and fixed by statute so that unscrupulous invention development organizations could not manipulate it to further mislead or confuse inventors.

In addition to a detailed disclosure of the terms of any contract, most state laws governing invention development organizations require them to disclose:

- the "success rate" - the number of clients a company has had that have made more money from their invention than they paid for services rendered; and

- the "turn-down rate" - the number of prospective customers a company has told they will not represent, either because the invention was not protectable or that it was not, in their opinion, commercially viable in comparison to the total number that have come through the door.

Presumably, if the success and turn-down rates of a given invention development company are low, no rational inventor will want to use its services. It appears that the true success rate and turn-down rate among the unscrupulous segment of the industry today is virtually zero.

Further, it may be advisable to require invention development companies to be accountable for the fees they charge inventors. One way to require this is to prohibit invention development organizations from charging an excessive up-front fee. That is, a large fee that bears no relation to the services that have been or will be offered. This will take away the financial incentive that unscrupulous organizations have to induce unsuspecting inventors to pay large sums of money up front for future services that are illusory, not provided at all, or harmful.

This, I believe, provides an outline of the USPTO's views on the problem caused by unscrupulous invention development organizations. We have suggested several elements of a possible solution, but more study is needed for a complete solution to emerge. We would be happy to collaborate with you and your staff in this effort.

EDITORIAL UPDATE

The hearings certainly hit a chord with inventors. During the hearing Senator Lieberman indicated that his office's switchboard was lighting up with inquiries from inventors watching on CSPAN. Mr. Kirk received a number of inquiries in response to his testimony, including one from a woman in Missouri. She's in her 60's, makes $150 per week, and lives with her daughter to make ends meet. She has an invention that she hopes will ease her retirement as she has little else to count on. Not knowing how to protect and commercialize her invention she turned to an invention development organization. When she contacted the PTO, she was contemplating signing a $10,000 contract for services she clearly did not need and could ill afford. Armed with more information about how the process works she was going to take a more rational approach to protecting her interests.

- Text provided by the Office of the Deputy Commissioner.


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