Monday, August 29, 2011

Can an Inventor Ditch Her Investors?

Dear Rich: I entered into a corporate agreement with someone who had a patent pending idea. After a year of back and forth, we finally started a corporation in February 2010. In total we spent 1 year talking about creating a corporation together and 1.5 years involved in the corporation; she always kept meeting the next big investor at the club where she worked and would drop me until the investor lost interest. As per our agreement, she was to bring the patent into the corporation and I was to bring the business management and necessary prototyping funding. In the agreement, I was getting 38% of the company, she was getting the remainder. At the this point, the patent is close to being finalized, the trademark and slogan are now done, and the prototyping is virtually done. Unfortunately, she now wants to terminate the agreement and is going around me and telling the patent attorney and others not to speak with me. Her certified termination letter to me states nothing in regard to the amount of time, money, and work I have put into our company. We have a corporation formed with an operating agreement clearly indicating our roles and percentages. She now has amnesia and says she never agreed to give me part of the patent even though she has the original contract and corporate operating agreement. Ideally, I feel she has defaulted from the agreement and loses any rights whatsoever on the patent. This would have been the case had done something similar; I would lose my investment, work, time, and ownership if I defaulted and acted unethically behind her back. How should I best handle this situation? What would happen to one of the entrepreneurs on Shark Tank if they tried to do this to one of the Sharks? Please don't ask the Dear Rich Staff hypothetical questions about reality TV shows. We're not equipped to answer. It's not so much that we're old and out of touch (which is true), it's just that after the first season of Survivor -- the one where Susan and Richard got on each other's nerves ("Your inability to admit your failures without going into a whiney speech makes you a bit of a loser in life ...") -- we decided that the human race had created a fork in the road and we would take the path without reality TV.
Right, you had a question. The resolution of your problem depends on two things: your paperwork and the amount of money each party is willing to spend on a legal battle. Your lawyer needs to review the initial agreement, the corporate formation documents, and hopefully, if there is one, the assignment of patent rights. Even if there is no assignment to the corporation, your lawyer may still be able to force the transfer of rights (or at least a financial judgment tied to the value of the patent) if the remaining paperwork conclusively proves that the inventor was going to hand over the invention. In any case, based on the facts in your letter, it appears as if this matter is headed for some legal martial arts so we urge you to see an attorney ASAP.
Alternative courses of action. If you have an arbitration clause in your agreement, that may enable you to resolve the matter quicker, or you could always ask for arbitration if the inventor is willing to agree. More importantly, have you evaluated the patent's commercial potential? We know that you believe in the patent so much so that you're willing to fight about it, but the objectivity of a third-party evaluation my save you a lot of time and effort. As you may be aware, it's estimated that 50% of patent applications     never become patents and of those that do get issued, less than 2% are commercialized (offered for sale). (We're not sure how reliable these statistics are but they give you an idea.) In other words if the idea is uncommercial, its possible that your inventor friend is offering you a chance to walk away from your obligations without any more risk or investment. That may be a better choice than being trapped in a reality TV show with your so-called "partner."