U.S. Government Accountability Office Report on Impact of 2020 Trademark Modernization Act and Fraud

Pursuant to the 2020 Trademark Modernization Act (TMA), the U.S. Government Accountability Office (GAO) released a report examining fraud at the U.S.Trademark Office.  The GAO made recommendations to the Trademark Office to reduce the number of fraudulent trademark registrations.  The GAO reviewed the impact of changes made by the TMA and stated:

Based on our analysis of USPTO data for the period December 21, 2021, through June 27, 2023, we found that the USPTO Director and trademark attorneys representing their clients used the TMA’s new expungement and reexamination procedures to remove 2,615 falsely or inaccurately claimed goods and services from trademark registrations. Specifically: • Reexamination proceedings accounted for 1,955 of the removals compared to 660 removals resulting from expungement proceedings (see fig. 4). • Director-initiated proceedings accounted for 592 of the removals and third-party petitions accounted for 2,023 of the removals.

The GAO recommendations provide:

Recommendation 1: The Commissioner for Trademarks should plan and conduct regular fraud risk assessments of the trademark register to determine a fraud risk profile that aligns with leading practices in the Fraud Risk Framework. Specifically, this process should include (1) identifying inherent fraud risks to the trademark register, (2) assessing the likelihood and impact of inherent fraud risks, (3) determining fraud risk tolerance, (4) examining the suitability of existing fraud controls, and (5) documenting the fraud risk profile. Recommendation 2: The Commissioner for Trademarks should identify and implement improvements to current data systems to strengthen trademark data analytics for stronger fraud risk management.

The report also discusses other methods the U.S. Trademark Office uses to detect fraud such as post registration audits. 

Guest Post: Intellectual Property, Finance and Corporate Governance

We are pleased to publish this guest post by former IP Finance contributor and Senior Lecturer in Law, Dr. Janice Denoncourt, at the Nottingham Law School at the Nottingham Trent University. 

The emergence of IP rich companies is the new corporate governance challenge. This is because IP is largely invisible, not only in the financial accounts, but also more generally in corporate law theory and the legal framework.  The research in my new book Intellectual Property, Finance and Corporate Governance demonstrates why companies need to communicate more about how they manage corporate intellectual property (IP) rights portfolios and their strategy for delivering shareholder value. Depending on their business model and corporate objectives, companies add value via their corporate IP assets in different ways to achieve their goals.   In the modern era, all companies, large and small, have intellectual property (IP) rights, sometimes across multiple jurisdictions.  They are corporate IP owners.  At the same time, the shift to intangibles and IP assets as the major driver of value in business is clear and unstoppable.  Since the Global Financial Crisis ten years ago there has been a renewed interest in our current understanding of capitalism.  As a result, shareholders, business people, stakeholders and the public, seek more relevant, accurate information about IP-dependent business models and their impact on commercial value.    

Dr. Janice Denoncourt

In the aftermath of the Theranos 'misleading investors' scandal, this is an increasingly important modern corporate governance issue.  Theranos, Inc. is an American consumer healthcare technology company based in Palo Alto, California founded in 2003 by inventor and Managing Director Elizabeth Holmes. In 2018 Holmes was subject to civil charges by the United States Securities and Exchange Commission (SEC) for massive fraud in excess of $700 million USD for having repeatedly yet inaccurately assured shareholders and regulators that the company’s patented blood testing technology was revolutionary (see https://www.sec.gov/litigation/complaints/2018/comp-pr2018-41-theranos-holmes.pdf).  Theranos’ 200 plus US patent portfolio is public information via the United States Patent and Trademark Office (USPTO) portal and a significant corporate investment in IP. Holmes co-invented more than 270 of the company’s patented innovations. While patents do not equate to innovation or commercial success, they do act as business indicators of inventive activity as well as a commitment to protect the results of innovation.  Holmes, of all people, was well placed (if not best placed) to understand the capability of the blood testing technology. The alleged misconduct, namely misleading investors and government officials, has generated a new global regulatory discourse about what companies need to tell us about their IP.  Arguing that it needed 'to protect its IP' to excuse material omissions and misleading disclosures is not acceptable according to the SEC.  In the SEC’s press release on 14 March this year, Steven Peikin, Co-Director of the SEC’s Enforcement Division stated:

            Investors are entitled to nothing less than complete truth and candor from companies and their executives... The charges against Theranos, Holmes, and Balwani make clear that there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or the subject of exuberant media attention.

Stephanie Avakian, Co-Director of the SEC’s Enforcement Division further confirmed:

            As a result of Holmes’ alleged fraudulent conduct, she is being stripped of control of the company she founded, is returning millions of shares to Theranos, and is barred from serving as an officer or director of a public company for 10 years...This package of remedies exemplifies our efforts to impose tailored and meaningful sanctions that directly address the unlawful behaviour charged and best remedies the harm done to shareholders.

Key corporate governance principles of transparency and disclosure are being more rigorously applied to corporate ownership of monopolistic IP rights that protect innovation and creativity.  In the US, SEC disclosure law Regulation S-K requires disclosure of the importance, duration and effect of all patents, trademarks, licences, franchises and concessions that a company holds.  The standard for 'material' corporate IP asset disclosures will continue to evolve in the US and other IP-rich jurisdictions.  The civil legal action brought by the SEC against Holmes is the catalyst highlighting a void in corporate practice.   IP-rich companies like Theranos will continue seeking corporate finance which falls under the corporate governance regulatory umbrella.   IP rich companies need to ensure they reflect on disclosure and transparency rules and take into account the growing magnitude of their corporate intangibles, IP assets and IP business models that potentially generate future wealth for their shareholders and potential investors.  

Closer to home, in 2017 the UK implemented the EU Non-Financial Disclosure Directive which requires large and listed companies to include additional disclosures of non-financial information in their annual reports, similar to the disclosure requirements in the Strategic Report.  The Non-Financial Reporting Regulations insert sections 414CA and 414CB into the Companies Act 2006, supplementing the existing strategic report requirements as set out in section 414C.  These new company law equirements potentially increase the reporting of non-financial information, better business and IP strategy reporting through the mandatory requirement to report the company’s business model.  This EU-wide reform highlights the growing importance of disclosure of non-financial information.

IP rights have evolved from being “a little pool to a big ocean” of corporate value and that corporate governance needs to respond to society’s rising expectations of directors and boards.  The astonishing lack of quantitative and qualitative public information about the growing magnitude of corporate IP assets makes it difficult to assess strategic value (“the IP value story”) and directors’ stewardship of those assets.  More relevant, accurate and 'joined up' corporate IP information (mostly known to internal management) is needed to triangulate intangibles financial data through cross verification with narrative disclosures and actual events.  The SEC stated that Theranos engaged in “elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business and financial performance.”  This is a new frontier in corporate governance thinking and practice. 

My research evaluates how corporate boards can ensure an appropriate level of transparency and make voluntary and mandatory ‘true and fair’ disclosures about a company’s corporate IP assets such as patents and trade secrets in traditional formats such as the accounts and the annual report.   The philosophies and principles that underpin debates on disclosure and transparency suggest that more 'open' disclosures about innovation, whilst preserving competitive advantage, are necessary so we have something to read, evaluate, react to and question. Countries including the US and the United Kingdom have mandatory obligations to report on gender balance, climate change and more, but not expressly corporate IP.  Patents, mini-case studies and an original business triage-style model for assessing corporate IP information, strategy and disclosures illustrate the gaps corporate governance theory needs to address.  Companies need to tell us how their corporate investment in R&D and IP rights contributes to the bottom line and regulators need to ensure boards of directors are accountable for IP management and strategy decisions, an important underside of the intangible economy.  

Intellectual Property, Finance and Corporate Governance contributes to the legal and economic literature for readers interested in what lies behind the headlines.  The foreword is written by Professor Nicolas Binctin, Universite of Poitiers. As for the future of the Silicon Valley biotech company Theranos, Inc., the company has since made hundreds of staff redundant to avert becoming insolvent.

Dr J Denoncourt, Nottingham Law School

A not-so-odd trio: medical marijuana, fraud and patents?

Dr. Joe Wyse, a partner (and colleague of this blogger) at the Israel-based IP boutique, Dr. Eyal Bresler & Co., has provided us with an interesting way of how the

patent system may be used to prevent fraud in connection with the business of legal uses of cannabis.

One of the most dynamic new areas of patent activity has been medical uses for cannabis, as start-ups seem to be cropping up at a pace commensurate with the legal production of the plant itself. An interesting angle on the possible financial risks in entering the space was suggested by Jeffrey H. Kramer of Kroll Global Fraud Report 2015-2016, who focuses on what he claims are the particular risks of fraud in the field. Kramer writes as follows:

“The risks of fraud in the medical marijuana industry are clear and pervasive. States, banks, private equity firms, insurance companies and others could unknowingly enter into a financial relationship that could prove disastrous without thorough domestic and international due diligence investigations being completed on the dispensaries, growers and their sources of funds. Growers and dispensary owners could have significant financial or legal problems, ties to U.S. or international organized crime, or a host of other issues”.

While vigilance about the risk of fraud is always a good practice, the question remains, as a colleague asked, “Why all the fuss about fraud in the medical marijuana industry?” Is the industry being unfairly singled out? Is there a case of moral panic here? Is the Kroll company seeking to create a new business market by (over?)-stating the special risks connected with medical marijuana? To get a feel for how to properly address these questions, I ventured into cyberspace to see what experts in other industries were saying and writing about fraud. Even a modest bit of online searching throws up references to instances of serious fraud, sometimes on a massive scale, in so many established industries that one may well wonder if the marijuana business, in comparison, is as tainted as suggested in the Kroll article. What follows are some observations concerning several industries:

Food Industry According to a 2014 NSF White Paper, “a number of factors have come together to make food fraud a significant global threat for the food industry”. Indeed, "… it is estimated that it costs the world economy $49 billion annually and is growing”. The UK horsemeat scandal is just one example. Fraud is so rife in the food industry that many patented technologies are being introduced, especially in traceability and authentication, to identify the precise origins of food products.

Crowd Funding Let’s consider the world of crowdfunding, such as Kickstarter. During the last two to three years, numerous scams have been unearthed, ranging from falsifying the experience and qualifications of principals involved in order to attract investors to bogus inventions, false results data, dubious theft of images, misuse of donations, and outright lying about deliverables promised. In fact, according to Engadget web magazine, “the Federal Trade Commission now has your back when the host sites' safeguards aren't enough. The government body has taken its first action against a crowdfunding fraudster, reaching a settlement with Erik Chevalier after he cancelled a Kickstarter board game project and reneged on promised refunds”.

Biotech What about biotech? William Baine, at Rufus Scientific, has researched fraud in this area, and his report makes for sobering reading. He estimates that fully 50% of the fraud is financial, with the rest split between scientific and clinical trials misconduct, market rigging and the 'normal' corporate stories of theft, bribery and unethical business conduct.

Pharmaceuticals Pharmaceuticals provide a number of opportunities for specialized fraud, including good manufacturing practice (GMP) violations, off label marketing, best price fraud, continuing medical education fraud, Medicaid price reporting, manufactured compound drugs and various instances of kickbacks. Some examples include the three billion dollar settlement by GSK for illegal promotion and failure to report safety data, and false price reporting and Pfizer's settlements in the amount of $2.3 billion for multiple civil and criminal allegations in the largest case of pharmaceutical and health care fraud in US history.

It may be that the relatively new legal medical marijuana and cannabis industry, while subject to heightened attention and regulation, is actually relatively small in the amounts at issue. There (still?) may not be that much fraud to detect, in comparison with some of the other industries mentioned above. Still, investors in this nascent area do wish to have as much proof as possible of the bona fides, traceability and accountability of a business or individual in which they are being asked to invest. I would maintain that, apart from the usual due diligence of probity, registrable intellectual property associated with the principals can be enlisted to good effect.Note that the PTO practice in the United States requires providing it with details regarding ownership and provenance of the IP right sought to be registered, and a false declaration can trigger allegations of perjury and allied federal offences. It would make sense, therefore for any business seeking funds from outside investors in this new area, who are chary about the possibility that they may be getting involved in fraudulent activity, to be provided with the additional comfort of registering IPR’s.

Provisional patent applications may be particularly suitable for this purpose, since they must be applied for by a named individual, and then reassigned to other entities, as appropriate. The point here is that in an innovative industry, registrable IPR’s are easily created and filed, they provide an excellent paper trail, and, in cases of false identity, or improper personal information, may be readily exposed. Fraudulent abuse may lead directly to the enforcement at the federal level. Given this, perhaps potentially shady individuals seeking to enter this area may nevertheless be loath to perjure themselves in such an easily discoverable manner.