FTC Settlement with Pennsylvania Invention Promotion Firm Requires $80,000 Payment, Disclosures & Cooling Off Period

Two senior corporate officers of National Idea Network, Inc., a firm based in Wexford and Indiana, Pennsylvania, that does business under the name The Concept Network, have agreed to pay $40,000 each as part of a settlement of Federal Trade Commission charges. The FTC had alleged that Harry E. Scharf, III, CEO, and Wayne R. Obitz, Executive Vice President, and the firm offered to sell invention promotion services while promising consumers who paid up to $12,000 each a reasonable likelihood of financial gain. The FTC charged, however, that only a handful of Concept Network’s hundreds of clients actually obtained a licensing agreement and only a few made any appreciable amount of money.

The defendants ran one of five invention promotion schemes that together generated in excess of $90 million -- and very little for their clients -- when the FTC filed charges in federal court against them in July as part of a law-enforcement sweep called "Project Mousetrap." As part of that project, the FTC has since issued a message of caution to consumers about using the very expensive, but almost always fruitless, services of invention promotion firms that insist on substantial up-front fees. According to an FTC brochure, Invention Promotion Firms (available at the FTC’s web site at www.ftc.gov), reputable companies are choosy about which ideas they pursue and typically work on a contingency basis rather than charging large fees up front. This is the first of the five cases to end in a settlement; the others are still in litigation.

If approved by the federal district court, the settlement would require the defendants in the future to disclose in writing to potential clients:

• the total number of clients with whom they have signed agreements to research or promote the client’s idea in the past five years;
• the total number of clients whose ideas or inventions were licensed by an unaffiliated third party; and
• 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.

In addition, the settlement would prohibit the defendants from initiating any contact with the potential client until three days after providing the written disclosure. Also, the settlement would require the defendants to give potential clients seven days to cancel any research or promotion agreement they have signed.

Finally, the settlement would prohibit the defendants from making a false statement about, or omitting, any material aspect of their invention-promotion or related services, and specifically would prohibit misrepresentations about the likelihood that clients will realize financial gain or that the defendants have successfully marketed clients’ invention ideas.

The settlement in this case also was signed by Robert J. Zarko, Senior Marketing Representative.

The FTC filed the settlement in the U.S. District Court for the Western District of Pennsylvania, in Pittsburgh, on Nov. 7. The Commission vote to approve the settlement, a stipulated order for permanent injunction, for filing in court was 4-0, with Commissioner Roscoe B. Starek, III, issuing a separate statement. In his statement, Commissioner Starek expressed concern regarding the "cooling-off" and rescission rights provision adopted in the settlement, suggesting that they may hamper efforts to prove deception in future enforcement actions. "The fact that the defendants agreed to cooling-off and rescission rights (perhaps in lieu of harsher relief) suggests that they believe the proposed relief will benefit them," Starek said. "...They would likely point to the existence of signed disclosure statements, cooling-off periods, and the limited rights of rescission as evidence that deception either did not occur or was offset by the affirmative disclosures and the rights and opportunities afforded consumers to terminate purchase agreements." Starek noted an analogy between the proposed relief in this matter and the Cooling-Off Rule. The Cooling-Off Rule does not apply to transactions consummated entirely by mail or by telephone. He further noted that applying cooling-off period relief in this case "appears to contradict the express limitations of this Rule." Starek also noted that adoption of cooling-off and rescission rights may impose unnecessary costs on legitimate sellers of invention promotion services or on other legitimate telemarketers by causing a delay in closing beneficial transactions with consumers.

NOTE: This stipulated order is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Court settlements have the force of law when signed by the judge.

Copies of the stipulated order, Commissioner Starek’s statement, the complaint detailing the July charges, and other documents associated with Project Mousetrap are available from the FTC’s web site at http://www.ftc.gov and also from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. X970064)
(Civil Action No. 97 1279)