What North Carolina Inventors Need to Know When (Before) Hiring a Developer
By: Ryan Vince
North Carolina is home to many famous inventions. The Wright Brothers and aviation may first come to mind, but others include Cheerwine, Pepsi-Cola (North Carolina enjoys its soda), Texas Pete, Putt-Putt, and Vicks VapoRub. All of these are highly prominent today, however, they first had to be originated, developed, and finalized by a single person or a group of people. You—the originator of the idea or the “inventor”—come up with an idea. Generally speaking, an inventor’s ultimate goal is to earn a profit from his or her “idea.” Nevertheless, most inventors will need to hire a professional to develop the “idea” because the cost of developing and/or manufacturing may be beyond the inventor’s financial capability. In order to do this, an inventor and a developer will engage in one of two types of agreements: (1) a patent assignment (i.e., one-time buyout); or (2) a license. Both of these agreements are used to transfer intellectual property rights, in whole or in part, from the inventor to the developer. While very few professional developers will attempt to swindle one of their customers, giving up rights to one of your ardent endeavors is something that needs to be handled prudently.
Although the above-listed inventions were all conceived before 1930 and not subject to current North Carolina law, more than half a century later, in 1989, the North Carolina General Assembly passed legislation concerning “Invention Development Services.” Today, these types of services are regulated by Article 29 (the “Article”) of Chapter 66 of the North Carolina General Statutes. The purpose of this blog post is to describe when the Article applies, the requirements that an Invention Developer must follow, and the protections afforded to you—the “inventor.”
Article 29 applies to Invention Developers doing business in North Carolina and mandates specific disclosures, certain contractual language, and other various requirements. According to N.C.G.S. § 66-209, an “Invention Developer” is “an individual, firm, partnership, or corporation, or an agent . . . of one of those entities, that offers to perform or performs invention development services for a customer.” However, expressly excluded from this definition are: federal, State, or local government departments or agencies; certain charitable, scientific, educational, or religious organizations; registered persons before the USPTO; licensed attorneys in North Carolina; or entities that do not charge a fee or receive reimbursement other than from part of the customer’s received income necessitated from the services. This Article provides broad coverage to the term “Invention,” which is defined as “any discovery, process, machine, design, formulation, composition of matter, product, concept, or idea, or any combination of these.”
Of great importance, the definition of an Invention Developer includes the terms “Customer” and “Invention Development Services.” Under N.C.G.S. § 66-209, “Customer” is defined as “any natural person who is solicited by, inquires about, seeks the services of, or enters into a contract with an invention developer for invention development services.” Secondly, “Invention Development Services” means “any act done by or for an invention developer for the procurement or attempted procurement by the invention developer of a licensee or buyer of an intellectual property right in an invention.” As you can see, when the Invention Developer renders its services, it will seek either to become a licensee in a license agreement or a purchaser of an intellectual property right. Thus, in order for this Article to apply, an entity that develops and/or manufactures Inventions must contract with a Customer (i.e., the inventor) for Invention Development Services.
Any Invention Developer doing business in North Carolina, according to N.C.G.S. § 66-214, is required to either “maintain a bond issued by a surety company authorized to do business in this State” or provide a cash deposit to the Secretary of State. In either case, this amount must be the greater of, five percent (5%) of the entity’s gross income during the last fiscal year or twenty-five thousand dollars ($25,000). Based on the numbers alone, these financial requirements provide Customers ample protection from “fraud, dishonesty, or failure to [be] provide[d] the services of the invention developer in performance of the contract.”
Invention Developers are required to make various disclosures before contracting with a Customer. As required by N.C.G.S. § 66-210, the disclosures are to be made when whichever is first to occur, “the first written communication from the invention developer to a specific customer, or at the first personal meeting between the invention developer and a customer.” The mandated disclosures are to be in writing and must include:
(1) The median fee charged to all of the invention developer’s customers who have signed contracts with the developer in the preceding six months, excluding customers who have signed in the preceding 30 days;
(2) A single statement setting forth (i) the total number of customers who have contracted with the invention developer, except that the number need not reflect those customers who have contracted within the preceding 30 days, and (ii) the number of customers who have received, by virtue of the invention developer’s performance of invention development services, an amount of money in excess of the amount of money paid by those customers to the invention developer pursuant to a contract for invention development services;
(3) The following statement: “Unless the invention developer is a lawyer or person registered before the United States Patent and Trademark Office, he is NOT permitted to give you legal advice concerning patent, copyright, trademark law, or the law of unfair competition or to advise you of whether your idea or invention may be patentable or may be protected under the patent, copyright, or trademark laws of the United States, or any other law. No patent, copyright, or trademark protection will be acquired for you by the invention developer. Your failure to inquire into the law governing patent, trademark, or copyright matters may jeopardize your rights in your idea or invention, both in the United States and in foreign countries. Your failure to identify and investigate existing patents, trademarks, or registered copyrights may place you in jeopardy of infringing the copyrights, patent, or trademark rights of other persons if you proceed to make, use, distribute, or sell your idea or invention.”
In addition and subsequent to the required disclosures, an Invention Developer must attach to its “contract for invention development services . . . a conspicuous and legible cover sheet.” The cover sheet cannot include “anything in addition to the information required by subsection (a) of this section.” Subsection (a) of N.C.G.S. § 66-211 has two separate requirements. First, an Invention Developer’s cover sheet must include the Invention Developer’s name and its home, office, and local addresses. Second, an Invention Developer must properly fill in the blanks to the following notice, which shall be bold-faced and, at a minimum, in 10-point font size:
THIS CONTRACT BETWEEN YOU AND AN INVENTION DEVELOPER IS REGULATED BY ARTICLE 29 OF CHAPTER 66 OF THE GENERAL STATUTES OF THE STATE OF NORTH CAROLINA. YOU ARE NOT PERMITTED OR REQUIRED TO MAKE ANY PAYMENTS UNDER THIS CONTRACT UNTIL FOUR WORKING DAYS AFTER YOU SIGN THIS CONTRACT AND RECEIVE A COMPLETED COPY OF IT.
YOU CAN TERMINATE THIS CONTRACT AT ANY TIME BEFORE YOU MAKE PAYMENT. YOU CAN TERMINATE THIS CONTRACT SIMPLY BY NOT SUBMITTING PAYMENT.
IF YOU ASSIGN EVEN A PARTIAL INTEREST IN THE INVENTION TO THE INVENTION DEVELOPER, THE INVENTION DEVELOPER MAY HAVE THE RIGHT TO SELL OR DISPOSE OF THE INVENTION WITHOUT YOUR CONSENT AND MAY NOT HAVE TO SHARE THE PROFITS WITH YOU.
THE TOTAL NUMBER OF CUSTOMERS WHO HAVE CONTRACTED WITH THE INVENTION DEVELOPER SINCE (year) IS (number) . THE TOTAL NUMBER OF CUSTOMERS KNOWN BY THIS INVENTION DEVELOPER TO HAVE RECEIVED BY VIRTUE OF THIS INVENTION DEVELOPER’S PERFORMANCE, AN AMOUNT OF MONEY IN EXCESS OF THE AMOUNT PAID BY THE CUSTOMER TO THIS INVENTION DEVELOPER IS (number) .
YOU ARE ENCOURAGED TO CONSULT WITH A QUALIFIED ATTORNEY BEFORE SIGNING THIS CONTRACT. BY PROCEEDING WITHOUT THE ADVICE OF A QUALIFIED ATTORNEY YOU COULD LOSE ANY RIGHTS YOU MIGHT HAVE IN YOUR IDEA OR INVENTION.
After making the preliminary disclosures and properly drafting the cover sheet, the Invention Developer’s last requirement(s) is to comply with sections N.C.G.S. § 66-212 (Contracting Requirements) and N.C.G.S. § 66-213 (Mandatory Contract Terms).
Article 29 sets out numerous Contracting Requirements under N.C.G.S. § 66-212. First, the Invention Developer’s contract must be in writing. Second, the Invention Developer must also provide a copy of the contract to the Customer “at the time the customer signs the contract.” If the Invention Developer normally seeks to use more than one contract, then the Invention Developer must provide the Customer—at the time of signing—with a written statement of the practice and a written summary, if any, of subsequent contracts to be used. Third, unless the parties contract otherwise, the Invention Developer cannot require or receive payment from a Customer “before the fourth business day after the day on which the customer receives a copy of the contract . . . signed by the invention developer and the customer.” An important caveat to this section is that “delivery of a . . . negotiable instrument of any kind . . . irrespective of the date or dates appearing on that instrument is payment.” Nevertheless, until payment is made, both parties “have the option to terminate the contract.” The Customer may exercise this option by simply refraining to make the payment, whereas the Invention Developer must give the Customer written notice of termination, which becomes effective on the Customer’s receipt.
Contained in this Article are several Mandatory Contract Terms. Contrary to the previous requirements of N.C.G.S. § 66-212, the required information set forth in N.C.G.S. § 66-213 may be handwritten. However, if handwritten, it must at least be equivalent to a 10-point font size. In the contract itself, the Invention Developer must include:
- A full and detailed description of the acts or services that are being contracted;
- Terms and conditions of payment and the parties’ termination rights required by C.G.S. § 66-212(e);
- Whether the Invention Developer contracts to construct one or more prototypes of the Customer’s Invention, the number of prototypes to be constructed, and whether the Invention Developer contracts to sell or distribute such prototypes;
- An estimate and the data upon which it is based—if the Invention Developer makes an oral or written estimate of projected Customer sales, profits, earnings, and/or royalties;
- The expected date of completion, whether it is “time is of the essence,” and whether there are provisions related to a delay past the expected completion date;
- That the Invention Developer is required to maintain all records and correspondence related to its services for three (3) years after contract expiration (and that such records will be made available to the Customer upon a seven days’ written notice);
- The name of the entity contracting to perform the Invention Development Services, all names that the entity is doing or has done business for the previous 10 years, the names of all parent and subsidiary companies to the entity, and the names of all companies that have contractual obligations to the entity to perform Invention Development Services; and
- The Invention Developer’s principal business address and the name/address of its North Carolina agent authorized to receive service of process in this State.
The Remedies section of Article 29, N.C.G.S. § 66-215, provides Customers with certain protections. First, a contract for Invention Development Services is “voidable at the option of the customer” when it does not “substantially comply with this Article.” In addition to this overarching remedy, a contract is “voidable at the option of the customer” when it was entered into based on his or her reliance on “any false, fraudulent, or misleading information, representation, notice, or advertisement of the invention developer.” This section provides even further protection when it states, “any waiver by the customer of any provision of this act shall be deemed contrary to public policy and shall be void and unenforceable.” These stringent protections are available even when the Customer is not injured by the Invention Developer’s noncompliance. Nevertheless, when “[a]ny customer or person” has been injured by a violation of this Article ((a) fraudulent misrepresentation or omission; or (b) failure to make all required disclosures), the injured party may recover court costs, attorney’s fees, and actual damages from the Invention Developer.
Based on the statutory language alone, it is evident that you (the Customer) are afforded great protection from Invention Developers’ wrongful acts. In essence, Article 29 is the “iron fist” for assuring that persons or entities that perform Invention Development Services do so properly and according to law. While there is no current case law related to this Article, North Carolina’s history of inventions shows how prevalent and lucrative this business can be. Whether you are an everyday-inventor or someone with your “first great idea,” this Article remains fundamental. Not only is it important to protect the intellectual property rights in your invention, but also to protect yourself from others—Invention Developers—who can potentially appropriate your idea, and in turn, your rightful earnings.