THE NEGATIVE IMPACT OF INVENTION PROMOTION SCHEMES ON CREATIVITY AND INNOVATION IN THE UNITED STATES TESTIMONY BEFORE THE SUB-COMMITTEE ON REGULATION AND GOVERNMENT INFORMATION, COMMITTEE ON GOVERNMENTAL AFFAIRS, UNITED STATES SENATE HEARING ON THE MARKETING PRACTICES OF INVENTION PROMOTION COMPANIES. WASHINGTON, DC SEPTEMBER 2, 1994. Gerald G. Udell, Ph.D. Wal-Mart Innovation Network, Center for Business and Economic Development, College of Business Administration Southwest Missouri State University Springfield, MO 65804 (417) 836-5671 INTRODUCTION My name is Gerald G. Udell. I am a Professor of Marketing at Southwest Missouri State University where I also serve as director of the Center for Business and Economic Development and director of the Wal-Mart Innovation Network which provides an invention evaluation and referral service for independent inventors. I am also a senior partner in the Innovation Institute which specializes in innovation evaluation and venture assessment. I have provided the Committee with an amplified version of my testimony here today as well as two supporting documents for the record. BACKGROUND I first became familiar with the marketing practices of invention promotion firms while serving as principal investigator of the National Science Foundation's Innovation Centers Experiment at the University of Oregon during the period 1974-1980. A significant purpose of that experiment was to develop a formal structured preliminary innovation evaluation format to provide independent inventors with an assessment of the risks associated with the development and commercialization of their inventions. A refined version of that format is currently being used by the Wal-Mart Innovation Network and a number of university- based evaluation services. During the past twenty years I have followed and studied the marketing practices of the invention promotion firms. Gathering quantitative data in this area is exceedingly difficult, and my research has been hampered by the lack of any published data relative to this so- called industry. In an effort to assess the impact of these firms I have held extensive interviews with individual inventors, leaders of inventor groups, industry licensing agents, patent attorneys, government officials, innovation center personnel, small business development center consultants, marketing professors, university researchers and other relevant individuals. Please note that this list does not include representatives of invention promotion firms. This is not because we have not tried to interview them. All of our efforts to obtain any meaningful information from these firms have ended in total failure. RESEARCH FINDINGS However, several significant findings have flowed from this research: 1. Protection of independent inventors from the abuses of the invention promotion industry is not just a matter of consumer protection; it is in the national interest if we are to be competitive in world markets. From a micro perspective inventors are consumers of services. The pervasiveness and persistence of the abuses in this industry present a prima facia case that consumer protection laws and regulations are not sufficient to eliminate these abuses. However, the issue before this committee is not one of just consumer protection. From a macro perspective it is an issue of national interest. The popular press frequently paints pictures of "crazy inventors," "re-inventors of the wheel," "champions of perpetual motion machines" or "purveyors of the silly." Oftentimes inventors are viewed as a national nuisance. In contrast, Japan often regards its inventors a national resource. To be sure, there are enough crazy inventors to cause many corporations and professionals to avoid inventors. Likewise, inventors sometimes champion perpetual motion machines. On occasion their ideas are silly, and re-inventions are fairly common. During the past 20 years I have evaluated in excess of 15,000 inventions and new product ideas. There has been the occasional silly idea and a small handful of perpetual motion machines. However, the vast majority of these inventions have been reasonably good ideas designed to meet some need or want, but a significant majority of them have lacked commercial feasibility. The same is true of ideas and inventions flowing from such respected sources as federal labs, universities, and corporations. An oft repeated heuristic in the corporate world is that it takes about 100 ideas to generate 1 new product. The estimates in the new product literature vary from about 1 in 35 to over 1 in 400, depending upon the market/industry involved. In a separate paper submitted herewith for the public record two colleagues and I use the data gathered through the Wal-Mart Innovation Network to develop a profile of the modern casual inventor. The picture painted by our research is far different from the commonly held view. Inventors represent a cross section of the population in general, but they tend to be better educated. Their greatest deficiency appears to be that they, like the average citizen, are not very sophisticated about how to get things done in the business world. Some inventors are difficult to work with, and good ideas are often impaled on a stake of inexperience. Their greatest need is for instruction and encouragement. It has been our experience that given some advice and guidance many inventors can and do reach the marketplace either through licensing their inventions themselves or launching their own ventures. For example, in the 3.5 years the Wal-Mart Innovation Network has been in operation, at least 60 and perhaps more of our clients have reached the marketplace. Our only assistance to them has been an unbiased evaluation of their invention or idea and perhaps a referral to other sources of assistance. The national importance of the independent inventor rests not on our experience with them, but rather on their track record of giving birth to significant innovations. The literature credits independent and small business inventors with from about one-third to two-thirds of major recent inventions. Some, like the personal computer and robotics, have been highly sophisticated technological devices. Others, such as sports drinks, weed eaters, and running shoes have impacted on what we eat and drink and how we work, play and dress and have created billion dollar new industries. The economic impact of these nontechnical brainchildren of independent inventors has been enormous. We need to encourage our inventors, not discourage them. The continued presence of abuses of invention promoters sends a very strong negative message to all inventors, including those who function in the high tech realm. It tells them that society does not appreciate their work nor care what happens to them. I have discussed this issue with a variety of relevant experts, including those who focus on high tech inventions. I found no one who disagreed with this statement. The United States has been a leader in innovation. We have led because it is part of our culture to create, invent and pursue the entrepreneurial dream. Invention promoters are changing that culture. Inventors today are more suspicious if not more paranoid than they were twenty years ago. The negative impact of this industry is obviously most keenly felt by the inventors who are victimized by invention promoters and those around them. Fees paid to these firms is money down the drain. It cannot be used to conduct meaningful research, development or commercialization activities. Preventure capital is the scarcest form of venture capital. Once it is wasted investing in false promises of the scam artist, projects often come to a halt, and all of us are potentially the poorer. However, the psychological impact of invention promotion abuses may be more important than the financial aspect. Society frequently loses the benefit of the creative talents of an inventor so victimized as the discouragement is frequently devastating. Many, perhaps three-fourths, quit inventing altogether. Those which do come back do so slowly and they are often filled with suspicion. Typically they are more difficult to work with. 2. The pickings are easy and highly lucrative in the invention promotion business. A 1978 survey by the Oregon Innovation Center indicated that nearly half (47.5%) of it clients which had previously contacted an invention marketing firm had ultimately used the services of that firm. Subsequent interviews with former clients of such firms indicate that the ratio may have improved somewhat because of negative publicity and an improvement in networking through inventors groups, but still a very rewarding 30-40% percent appear to be taken in. Three factors explain the easy pickings. First, there appears to be a correlation between creativity and gullibility. Inventors are obviously creative people and therefore may be more susceptible to fast talking salesmen. Second, a substantial majority of casual independent inventors (85-90%) have neither the background nor the inclination to develop their own inventions. The average casual inventor is no more sophisticated in the affairs of business than the average citizen. Third, casual inventors are typically highly dedicated to their cause. They are highly prone to believe good things about their inventions and frustrated by the lack of readily apparent sources of assistance. They, therefore, are easy prey to those who say nice things about their brainchild, and, with no other perceived source of help, sign up. Fees range from a few hundred dollars for initial services to over $55,000 for marketing services. Fees for so-called evaluation services and patent searches typically seem to range in the $400-$700 range with marketing fees ranging from $6,500 to $7,500 on average. It has been exceedingly difficult to obtain data on the scope of the industry, but a recent estimate by the Inventors Awareness Group places the number of inventors involved each year at in excess of 25,000 and the annual revenues of the industry at least $124,000,000 and perhaps more. 3. The industry has a terrible reputation and an incredibly low rate of success. As noted, my research on this topic has spanned 20 years during which I have conducted interviews with several hundred knowledgeable persons as well as hundreds of inventors. The information gained from this research paints a very consistent picture. The kindest words I have ever heard applied to this industry are "incompetent" and "ineffective." Far more frequently the overall assessment of those who have come in contact with this industry can best be summed up with words like "sleeze," "rip-off," "fraudulent" and "crooked." According to the Federal Trade Commission only 6 of the 35,000 inventors who used the services of the now defunct Raymond Lee Organization (RLO) ever made a profit of $1 or more. In other words, .017 percent (.00017) of the inventors reached or exceeded the breakeven point. Using this very generous definition of success, estimates of knowledgeable persons still place the success rate at well below 1 in 1,000. These estimates do not appear to be far off the mark as the Federal Trade Commission alleged in its action against American Idea Management, that although the firm's clients numbered in the thousands, the firm's success rate was zero. According to the Minnesota Inventor's Congress, in 1991 Western Submission Corporation listed 7,561 inventor clients, not one of which had made a profit of $1. Current "full service" fees appear to be in the $6,500-$7,500 range, up considerably from the $1,200 or so charged by RLO, but there is no data whatsoever to suggest that the success rate has increased appreciably. 4. Abuses are rampant in the industry. The ultimate abuse of invention promotion firms is their dismal performance record. Added to this are a host of questionable, if not downright fraudulent, marketing practices. At the top of this list is the failure of the industry to implement meaningful evaluation procedures. It is a well known fact that the overwhelming majority of inventions and new product ideas lack commercial feasibility. This is true regardless of source, be it corporation, university, federal lab or independent inventor. Thus, the first step in any commercialization effort is to screen or evaluate ideas. To skip this step is at very best irresponsible. Some firms attempt to duck the issue by claiming there are too many variables to consider. However, to move forward asking people to invest their money in efforts which a prudent individual should know to be of low potential is fraudulent. When someone holds themselves out to be knowledgeable in an area and capable of performing a certain task when they in fact have prior knowledge that they are likely to be unsuccessful, that individual is engaging in a fraudulent act. The list of malpractices in this industry does not end with the lack of a meaningful objective evaluation. During the twenty years I have studied the marketing practices, a consistent pattern of deceptive, misleading and questionable practices has emerged. These include: A. The use of evaluation to mislead inventors into believing their idea or invention has merit when such is not the case. One technique is to talk tough evaluation and then carefully select evaluation criteria which are not likely to produce negative results. For example, it has been my experience that few inventions are screened out by criteria which address such issues as legality, societal impact or ease of production. These are the types of criteria I find. Questions dealing with potential sales or profitability and the like are never asked. The result is an evaluation format which looks good, but offers little. A classic example of the abuse of evaluation is the case of an inventor who received a glowing evaluation of the market potential for a device which consisted of two small jet engines and which could be strapped to the top of the family car, thereby turning it into the family jetmobile; allowing the driver to blast off and fly over traffic and cut across country without benefit of roads. In my 20 years of evaluating inventions this is the worst idea I have ever seen. Yet, the inventor received an evaluation report which started out by saying, "We are very excited about the market potential of your idea." B. Patent searches often appear to be of very questionable value. Relevant areas of search sometimes appear to have been ignored or at least not searched. The presence of prior art is often ignored, and patent applications are recommended. For example, consider the case of an inventor with an idea for a second flag for rural-type mail boxes which would signal the arrival of the mail. After requesting a patent search from a well known invention promotion firm, he received copies of three or four fairly obscure patents, two of which were from other countries. He also received a very positive market research report, a recommendation that he immediately file a patent application, and of course, that he retain the firm to market this "exciting new product." What he did not receive is any information that with the exodus from rural areas, and more importantly, with a major reduction in the number of households in which someone is home during the day, the potential market had shrunk considerably. More telling, he received no information that the US Patent Office had well over 100 patents on file for similar devices. Incidentally, as of months ago the number stood at 168 patents. Obviously, either the search was incompetent, nonexistent or information was deliberately withheld. One might ask why someone would deliberately recommend filing for a patent in a case where there was little or no chance of issuance. There are two possible explanations. Either the firm hoped to collect patent application preparation fees or it had bigger fish to fry in the form of additional services to the inventor such a invention marketing. In the average inventor's mind patent application is a major step forward. I have never met an inventor with patent pending who didn't think and act like the patent was in the bag. Once the application has been made and the idea therefore protected (in the inventor's mind), it is much easier to move on to the high dollar services. Sometimes firms will recommend that a patent be applied for in the face of advice from their own patent search to the contrary. However, the biggest single abuse in the patent area is that when faced by ample prior art, the firm will recommend that the inventor pursue a design patent even though such a patent will have little relevance or commercial value to the patent holder should it issue. A classic example is provided by the case of an inventor who received a design patent through a well known invention promotion firm on an idea which has been in the marketplace for perhaps more than 4,000 years and of which there are likely thousands of designs--the Chinese backscratcher. C. Bogus and worthless marketing research reports abound in the industry. Typically such reports are filled with nonrelevant or useless information apparently taken from U.S. Census tapes or boilerplate about the patent system or other very general discussions about such topics as product commercialization. Descriptions and histories of the development of the invention usually furnished by the inventor generally round out a 50-70 page report. Almost uniformally there is little or no information which is useful in decision-making contained in the report. For example, the "inventor" of a new and improved paper clip (which had been on the market for about ten years) received a bulky report filled with information about sales of office equipment including typewriters, computers copiers and the like as well as data about paper sales to this market. The report failed to mention the prior art or provide any information about sales of competitive products. D. Woefully inadequate approaches to marketing inventions are the norm. Some invention promotion firms appear to be playing a numbers game in that disclosures are frequently mailed to firms for which the invention has no relevance. This is a very common complaint by corporate in-licensing executives. Repeatedly, I have been told by such executives that this practice is very common and a major factor why corporations often trash solicitations from these firms unopened. For example, consider the case of the automobile licensing executive who received from the same company solicitations regarding garden tools, kitchen gadgets and underwear.... In the majority of cases it appears that the firm has made no effort to identify the correct person in the corporation to send their materials, as generic titles or no title at all are used in the address. The disclosures or solicitations typically oversell the invention, and they are frequently full of trite language which may appease the inventor but will turn off most corporate readers. Of course, it is rare to find any reliable data included. The impression one gets from reading these disclosures is that the firm is weakly going through the motions. 5. Few casual inventors have the experience or expertise to commercialize their own inventions. Most need outside sources of assistance. As noted in a separate paper submitted herewith for the record, only a small percentage of the inventors are business people engaged in product development and/or commercialization. For the most part they have no more understanding of the process of which they are a part than the average citizen. Their major crime is they have dared to venture into the unknown. Unaware of sources of assistance or how to proceed, they frequently turn to the popular press for information. Late night television, radio commercials and advertisements are oftentimes their major sources of information. Occasionally the press will carry a story about legitimate sources of assistance. These do help considerably, but for the inventor who missed the article, the only source of information are the advertisements of the invention promoters. The typical corporate response from an inventor is usually a polite expression of noninterest or boilerplate protective covenants. Rarely are inventors provided with referrals to legitimate sources of assistance. In sum, the typical casual inventor lacks the knowledge to make an informed decision, and the channels through which information about legitimate sources of assistance frequently do not reach them. Consequently, the casual inventor is fair game for anyone promising they can help. 6. Still, inventors have a greater chance of getting a response from a corporation if they go it alone than if they rely on an invention promotion firm to commercialize their inventions. In 1975 I asked a corporate licensing executive how his firm responded to an inquiry from an invention marketing firm. His response was "We throw the stuff away unopened if we know the firm or as soon as we realize who we are dealing with." Since that time I have asked that same question of perhaps several hundred other licensing executives. In about 80-90 percent of the cases the answer has been the same. However, none of the executives took marketing practices of invention promotion firms seriously, and the overwhelming majority looked upon them with considerable destain. On the other hand, a sizeable majority of the executives indicated that it was their firm's policy to at least respond to inquiries from inventors. 7. With a minimal amount of guidance and meaningful assistance the chances that an inventor will be able to commercialize his/her invention appear to increase significantly. The corollary here is the inventor's chances will be much higher than if they rely upon the services of an invention promotion firm. As noted earlier, at least 60 of the 1200 or 5 percent of the inventor clients of the Wal-Mart Innovation Network (WIN) have reported they have commercialized their inventions. Inasmuch as we have not conducted a comprehensive follow-up of clients this number is very likely understated. In addition, insufficient time has passed for many of these projects to have reached the commercialization stage. Our only services to them have consisted of a preliminary innovation evaluation for $150 and a no-cost referral service for qualifying inventions. Our strategy has been to provide meritorious inventions with an unbiased third party evaluation from a source of hopefully high credibility, some guidelines in the form of an evaluation manual, perhaps a few suggestions and some possible sources of assistance. Our inventors are then turned loose to contact these sources of assistance and to pursue the development and commericialization of their own inventions. They have done the rest. To be sure, many inventors fall by the wayside, but the data indicates this simple strategy will yield a much higher success rate at about two percent of the cost ($150/$7500=.02). 8. Fees paid are only a part of the losses incurred by inventors utilizing the services of an invention promotion firm. The most recent estimate I have seen places the fees paid by 25,000 or more independent inventors at $180,000,000 or more. I do not have sufficient data to validate or invalidate this estimate, but it appears to be based on conventional and relatively conservative application of ratio analysis. Whatever the actual amount, the total losses suffered by inventor clients of these firms is considerably higher than that indicated by direct fees paid to the firm. First, encouraged by overly optimistic and oftentimes bogus evaluations and/or market research reports inventors make unwarranted investments in research and development, patent application fees, product development, production and marketing of inventions which should have been abandoned. These investments often dwarf the fees paid as they can easily run into the $10,000 range or a good deal more. It is impossible to quantify the size of this investment because of the lack of data. Nevertheless, in estimating the financial loss to inventors this aspect should be considered. 9. State regulation of this industry has been ineffective and of little value to inventors. In 1993 a colleague, Ms. Anne Velliquette, and I attempted to determine the impact of state regulation upon this industry and inventor welfare. We were unable to find any evidence that state regulation was a deterrent to invention promotion activities or that inventors in regulated states benefitted from these regulations. We did find evidence that many invention promotion firms were doing business in a regulated state, but were not complying with the relevant regulations. We also attempted to gain information about invention promotion firms through the state agencies responsible for enforcement. Our first problem was that we had extreme difficulty in locating the responsible agency. Even in those states where enforcement responsibility was clear we had difficulty in locating the individual responsible for enforcement. It appeared to us that the invention promoters were not the only ones who were ignoring the law. We had hoped to use the disclosure provisions of these laws to quantify the level of success in the industry. Here, too, we failed. We were able to get information on only one firm in two states. In some cases we were told the information was confidential. In several states we could not locate anyone who could answer our question. We did not contact all of the regulated states. We finally gave up after spending well over $100 in telephone calls without generating a penny's worth of information helpful to an inventor in making an informed decision about an invention promotion service. 10. The negative impact of the malpractices of the invention promotion industry extend beyond those inventors directly affected. That is, there is a discernable ripple effect which affects other inventors and discourages potential legitimate sources of assistance from reaching out to inventors. Twenty years ago there were just a few invention promotion firms around. The Federal Trade Commission put IRD, Raymond Lee Organization and the Peska group out of business. Those of us assisting inventors were hopeful that the problem had been contained. Now the industry has come back with a vengeance. The new generation is much more sophisticated, their sales practices are more persuasive, and their fees are about six-fold higher on average. In contrast to twenty years ago, inventors today are much more suspicious and, quite frankly, they are a lot more difficult to work with. During the last twenty years as I have seen their attitude change, I have seen a corresponding increase in their fear of being defrauded by those who offer to help them. Twenty years ago the near exclusive concern was that someone would "steal their idea." Independent parallel inventions and some well publicized cases fueled this concern. While this fear is still a major factor, their suspicion of invention promotion firms has emerged as a near equal concern. Because invention promoters have become more sophisticated and more persuasive, many inventors simply can't tell the bad guys from the good guys. This then taints their attitude making them more suspicious and more difficult to work with. The problem is greatly exacerbated if the individual has any direct experience at the hands of an invention promotion firm. Helping inventors is not for those with thin skins nor timid personalities nor cautious attitudes. The negative impact of the current environment may not be limited to just casual inventors of low tech consumer products. Discussions with professionals in the high tech area indicate that the ripple reaches even them. Their inventors be they corporate, university or government-funded take no comfort from the fact that they have not been targeted by these firms. They interpret the public tolerance of abuses of invention promoters to be evidence that our society does not understand nor appreciate the contributions of inventors in general. LEGITIMATE "INVENTION PROMOTION" Perhaps the marketing practices of the invention promotion industry would not be so nauseous if these practices were state of the art. They are not. There are other well known and effective tools and procedures available to anyone who is seriously interested in helping inventors. The reputation and practices of the invention promotion industry stands in stark contrast to that of their licensing counterparts in the professional world. There, invention marketing is known as licensing. Functionally, invention marketing and licensing are the same. In both instances, the objective is to transfer intellectual property from one party to another. I have not seen a recent estimate, but in 1980 licensing was a about a $4 billion industry worldwide. In North America licensing professionals, which include corporate, university and government employees as well as independent agents, are represented by a professional association, the Licensing Executive Society. Members of this organization are generally held in high regard and follow a very high set of ethical standards. The size of the licensing industry speaks for their effectiveness in getting the job done. There are two basic differences between licensing agents and invention promoters. First, licensing agents typically work on a commission basis, while invention promoters charge up front fees which are usually excessive given the level of service provided. Second, licensing agents are very selective in terms of the inventions and new product ideas they will represent. Invention promotion firms are not. Working on a commission basis puts the licensing agent at risk along with the technology holder. Consequently, the agent works harder at his or her task. Practices which do not produce results are soon set aside. Up-front fees offer no such incentive and set the stage for the abuses we are currently witnessing in the invention promotion industry. In addition, a commission system forces one to focus very early on commercial feasibility. I have discussed this issue with numerous licensing agents and this is their overriding concern. I have also examined several hundred evaluation and marketing research reports generated by invention promotion firms. Not once have I seen a serious attempt to determine the commercial feasibility of an invention either before or after taking large sums of money from an inventor. Again, legitimate evaluation tools and market research techniques are well known and readily accessible to anyone wishing to provide a real service to inventors. We are not plowing new ground here. CONCLUSION I try to be a very cautious and conservative researcher, and I am generally slow to draw definitive conclusions. I work overtime to limit my findings to the data at hand and to keep preconceived notions from biasing those findings. Based on the data I have seen over the past twenty years it is my conclusion that major components of the invention promotion industry are rotten to the core. In those twenty years I have not interviewed a single inventor who made a profit if $1 or more through the services of an invention promotion firm. Nor have I ever seen an evaluation or market research report which made any attempt to determine commercial feasibility or market potential. What I have seen has been a consistent pattern of ignoring feasibility, puffery, and useless canned information, much of which has no relevance to the invention at hand. Many of these deficiencies spill over to the invention disclosure information supplied to corporations, much of which is mailed indiscriminately apparently without regard to the recipient's interest in the subject technology. For twenty years I have observed an industry which expends considerable energy and displays a high level of creativity in getting inventors to invest in their services. This stands in stark contrast to the dearth of energy and creativity in helping inventors to make informed decisions and/or commercialize their inventions. I find words like "professionalism," "experience" and "integrity" used in the promotional literature of invention promoters. These same firms apparently offer no formal unbiased evaluation to their clients. They also go to some lengths to avoid, unless forced by lay, disclosing that only a pitifully small number and perhaps none of the inventors who have trusted their inventions to them have made a profit of $1 or more. The data at hand leaves me no other alternative save the conclusion that the sole purpose of the invention promoter is fulfilled once the inventor's check is in hand. Where there is no serious effort, there is no serious intent. Thus I am forced to conclude that fraud and deception are hallmarks of this industry. Criticism of the industry has been strong and of long standing. The industry has had ample opportunity to clean its own house. It has shown little inclination to do so. Regulation of this industry is overdue. America's inventors need to be free of the suspicion that they are going to be ripped-off by everyone who offers to assist them. Last year I lent my voice to an effort in Missouri to pass an invention promotion disclosure law. I did so despite the fact that I considered the law to be no more effective in protecting than three lashes with a wet noodle. Something would be better than the current state of nothing. I was told the bill would not pass because the legislature felt "...there is already too much regulation of business." It did not. While I have a great deal of sympathy for the legislature's alleged position of business regulation, they erred in applying it in this case. Invention promotion as it is frequently practiced in this country is not business. It is an intellectual and psychological rape of the creative minds of America. It is not an ethics issue. The practices highlighted here today fall well beyond the boundaries of any discussion of ethics. The real question here is will criminal acts be allowed to continue because the perpetrators wear white collars and its victims are unappreciated inventors and uninformed in the wiles of the industry?