SPEAKERS CONTENTS INSERTS
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63–845
2000
UNITED STATES PATENT AND TRADEMARK OFFICE
HEARING
BEFORE THE
SUBCOMMITTEE ON
COURTS AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
MARCH 9, 2000
Serial No. 109
Printed for the use of the Committee on the Judiciary
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For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida
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DAVID VITTER, Louisiana
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
Subcommittee on Courts and Intellectual Property
HOWARD COBLE, North Carolina, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
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ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
WILLIAM L. JENKINS, Tennessee
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
MARY BONO, California
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
BLAINE MERRITT, Chief Counsel
VINCE GARLOCK, Counsel
DEBBIE K. LAMAN, Counsel
ALEC FRENCH, Minority Counsel
EUNICE GOLDRING, Staff Assistant
C O N T E N T S
HEARING DATE
March 9, 2000
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OPENING STATEMENT
Coble, Hon. Howard, a Representative in Congress From the State of North Carolina, and chairman, Subcommittee on Courts and Intellectual Property
WITNESSES
Dickinson, Q. Todd, Assistant Secretary of Commerce and Commissioner of Patents and Trademarks
Dreyfuss, Rochelle, professor, director, Engelberg Center for Innovation Law and Policy, New York University School of Law
Kelley, Colleen M., national president, National Treasury Employees Union
Lamblin, Kina, vice president and general counsel, VISX, Inc.
Maier, Gregory J., chair, Section of Intellectual Property Law, American Bar Association
Muller, Kim, president, International Trademark Association
Myrick, Ronald, president, Intellectual Property Owners
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Stern, Ronald J., president, Patent Office Professional Association
Van Horn, Charles, board of directors, American Intellectual Property Law Association
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Cottone, James F., NIPRA: Prepared statement
Dickinson, Q. Todd, Assistant Secretary of Commerce and Commissioner of Patents and Trademarks: Prepared statement
Dreyfuss, Rochelle, professor, director, Engelberg Center for Innovation Law and Policy, New York University School of Law: Prepared statement
Kelley, Colleen M., national president, National Treasury Employees Union: Prepared statement
Kirk, Michael, executive director, American Intellectual Property Law Association: Prepared statement
Lamblin, Kina, vice president and general counsel, VISX, Inc.: Prepared statement
Maier, Gregory J., chair, Section of Intellectual Property Law, American Bar Association: Prepared statement
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Muller, Kim, president, International Trademark Association: Prepared statement
Myrick, Ronald, president, Intellectual Property Owners: Prepared statement
Stern, Ronald J., president, Patent Office Professional Association: Prepared statement
UNITED STATES PATENT AND TRADEMARK OFFICE
THURSDAY, MARCH 9, 2000
House of Representatives,
Subcommittee on Courts and
Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to call, at 3:25 p.m., in Room B–352, Rayburn House Office Building, Hon. Howard Coble [chairman of the subcommittee] presiding.
Present: Representatives Howard Coble, Bob Goodlatte, William L. Jenkins, Chris Cannon, Howard L. Berman, Zoe Lofgren, and Robert Wexler.
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Staff present: Blaine Merritt, chief councel; Vince Garlock, counsel; Eunice Goldring, staff assistant; Alec French, minority counsel.
OPENING STATEMENT OF CHAIRMAN COBLE
Mr. COBLE. Good afternoon. I will submit apologies for our belated arrival. As you all know, there is a vote on now. And Howard Berman, the gentleman from California, is on his way so I believe I will start and Howard should be here shortly. I apologize for having inconvenienced you all. I have a meeting at 4:15. I am going to have to depart around then and the full House Judiciary Committee will go back in session at 5. So we are on a short leash. So if you all will keep in mind the infamous 5-minute rule that we have here and I hate to confine you all to that, but we have your written statements and they will be examined again thoroughly and if you can hold it. Nobody will be keelhauled if you go beyond the 5 minutes but when the red light appears if you can begin to wind down.
Today we will review the operations of the Patent and Trademark Office. It pains me that the focus of our hearing, as it has been in the past, will be the continuing diversion of PTO funds from the agency to other government programs. More specifically, by the end of the present fiscal year, the agency will have lost more than half a billion dollars attributable to diversions, rescissions and other budgetary sleights-of-hand.
It is my further understanding that if the President's budget is adopted by the appropriators, this figure will grow to nearly $700 million by the end of fiscal year 2001. Our witnesses understand how this harms PTO operations, and ultimately how it can harm that sector of our economy that is dependent on the creativity of inventors. I pledge that our subcommittee will work in a bipartisan manner with those in the inventor community to do whatever is viable and necessary to reverse this trend.
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We will touch on other issues as well, including business method patents, the long awaited administrative transformation of PTO under the American Inventors Protection Act, and the operation of the current agency retrieval system. I look forward to the testimony of the witnesses here this afternoon, and I see Howard is not here yet. I think we will go ahead and move along and when Howard comes, we can let him have his opening statement.
Our government witness today will be the Honorable Todd Dickinson, who is the Assistant Secretary of Commerce and Commissioner of Patents and Trademarks. He is a member of the American Bar Association, American Intellectual Property Law Association, the International Trademark Association and the Copyright Society of the United States.
Todd, you don't like to hear this read out, but for the benefit of those who may not know Todd, he is a native of Pennsylvania and earned his B.S. degree in chemistry from Allegheny College in 1974 and his J.D. from Pittsburgh University School of Law in 1977. He is a member of the bars of California, Pennsylvania and Illinois and has practiced law extensively in the private sector.
The subcommittee has copies of Mr. Dickinson's testimony and, Commissioner, if you will come forward, we are pleased to have you.
STATEMENT OF THE HON. Q. TODD DICKINSON, ASSISTANT SECRETARY OF COMMERCE AND COMMISSIONER OF PATENTS AND TRADEMARKS
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Mr. DICKINSON. Thank you, Mr. Chairman. I will try to keep to the 5-minute rule. It is always a pleasure to appear before you, and I commend you on holding this hearing. This is my second appearance before this subcommittee, Mr. Chairman, and I want to reiterate how much I value the strong working relationship that I have enjoyed with you and with Ranking Member Berman and the other committee members and your staffs.
Your support for the USPTO and for enhancing intellectual property protection has been critical in helping us meet the needs of our customers: American inventors, small businesses, and entrepreneurs who have done so much to fuel the robust economic growth we have all enjoyed. Time does not allow me to talk about all of the developments that have transpired on the intellectual property front at the USPTO recently, but I will highlight some of particular significance.
As you know, the PTO's workload continues to grow significantly. In 1999 we received over 272,000 utility patent applications and nearly 300,000 trademark applications, an increase of 12 percent and 27 percent over 1998 respectively. We are tackling this increase through strategic hiring of a diverse, highly educated workforce, increased utilization on state of the art automation technology and an increased focus on quality management.
For example, last year we hired over 800 new patent examiners, the bulk of whom were assigned to software, computers, business methods and biotechnology divisions where we have seen significant filing growth. These new employees have an average of 4 years of practical experience in industry, and some 50 percent have advanced degrees. We have 350 Ph.D.s in our office. In order to ensure timely patent searches and high quality examination, we have augmented this hiring with improvements in our examiners' search capability resources. As a result, our examiners have access to more prior art than ever before in our history.
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We have also continued to improve automation technology through initiatives such as our award-winning TEAS, our trademark electronic filing system. It allows our customers to submit applications over the Internet and to use credit cards to pay the filing fees without ever leaving the comfort of their home or office. We have piloted electronic filing of patent applications and implemented on-line systems that allow customers to check on the status of their patent application or trademark registration.
Now, judging from the large increases we have recorded in our customer satisfaction, these efforts seem to be paying off. One user of the TEAS system, for example, commented to us that it was the nicest interaction she had ever had with the Federal Government. Another customer said that we had renewed his confidence in the government bureaucracy. I think you will agree that comments like these are not that easy to come by in government today. I am also pleased to report that the study by the National Partnership for Reinventing Government ranked the PTO number one in the Federal Government, with a score of 90 percent for service goals aimed at meeting customer expectations.
Not surprisingly, Mr. Chairman, the most significant item on our agenda currently is implementing the American Inventors Protection Act of 1999, the landmark patent reform bill, which owes its enactment to the leadership and the commitment of the members of this subcommittee, especially you, Mr. Chairman and ranking member Mr. Berman. We are currently drafting rules to implement the legislation, and we hope to have at least 4 separate rulemaking packages published in the Federal Register by early April.
Of course we are also looking forward to our new status, in exactly 20 days, as a matter of fact, as a performance-based organization, only the second PBO in the Federal Government.
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With respect to the PTO's budgetary situation, the President has recommended that we be given authority in fiscal year 2000 to spend $1.039 billion of the fee revenue we generate. This is an increase of $134 million over our fiscal year 2001 base and $171 million over the fiscal year 2000 enacted level. The President has also recommended 7,500 FTEs, an increase of 648 over the fiscal year 2000 level. The majority of these are for patent and trademark examination purposes but also for the implementation of the American Inventors Protection Act.
In fiscal year 2001, we expect to process $1.15 billion in revenue; that is about 17 percent more than the current year. Of this amount, $784 million will be available to us in fiscal year 2001 and $368 million, or 32 percent, will not be available to us until fiscal year 2002. Needless to say, 32 percent is a significant number. Therefore, in our transition to a PBO, we would like to work with the Congress and the administration to ensure that the PTO has the financial flexibility and appropriate oversight to operate as a first rate PBO. In that regard, I should mention that the Secretary of Commerce, Secretary Daley, is very interested in this matter as well, and we appreciate your support for these efforts.
To conclude, I look forward to continuing to work with this subcommittee to help ensure the PTO is given the resources and the flexibility it needs to meet the needs of our patent and trademark customers and American people as a whole. Again, thank you for your steadfast support for our office and for America's inventors and entrepreneurs. Thank you, Mr. Chairman.
[The prepared statement of Mr. Dickinson follows:]
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PREPARED STATEMENT OF Q. TODD DICKINSON, ASSISTANT SECRETARY OF COMMERCE AND COMMISSIONER OF PATENTS AND TRADEMARKS
Mr. Chairman and Members of the Committee:
Thank you very much for inviting me here today to testify on the operations and finances of the U.S. Patent and Trademark Office (PTO). This is my second appearance before your Subcommittee, Mr. Chairman, and I want to state at the outset how much I value the strong working relationship that I have enjoyed with you, Ranking Member Berman, the other Committee members, and your staff. Your support for the PTO and for enhancing intellectual property protection has been absolutely critical in helping us meet the needs of our customers—America's inventors, small businesses, and entrepreneurs—who have done so much to fuel our robust economic growth.
As you know, a great deal has transpired on the intellectual property front and at the PTO since I came before you a year ago. Indeed, our agency faces numerous challenges in the months ahead. I am pleased to report, however, that we are rising to meet these challenges through strategic hiring of a diverse, well-educated workforce, increased utilization of state-of-the-art automation technology, and an increased focus on quality management.
Mr. Chairman, let me begin by highlighting some of the more noteworthy developments at the PTO in the past year; then I will discuss in greater detail the current operational and financial issues before our agency.
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1999 was an exciting and active year at the PTO on a variety of fronts. We experienced record increases in our workload in both our patent and trademark operations, and in December we issued the six millionth U.S. patent. We continued to increase the size of our Patent examining corps, hiring just over 800 new patent examiners last year alone. We made more than two million patents issued since 1976 and all registered trademarks and trademark applications freely available on the Internet, established the Office of Independent Inventor Programs, and launched websites devoted specifically to independent inventors and school children. We were also designated to serve as co-chair, along with the Justice Department, of the new National Intellectual Property Law Enforcement Coordination Council.
In order to manage the growth in our workload and provide our customers with more efficient, high-quality service, we continued to improve our automation technology. These initiatives included: full implementation of electronic filing of trademark applications through our award-winning Trademark Electronic Application System (TEAS); the piloting of electronic filing of patent applications, and implementation of on-line systems that allow customers to check on the status of their patent and trademark applications or trademark registration.
Judging from the large increases we have recorded in customer satisfaction, these efforts seem to be paying off. For example, one user of the TEAS system emailed us to say that it was the ''nicest interaction'' she ever had with the federal government. Another customer said that we had ''renewed [his] confidence in the government bureaucracy.'' I think you will agree that comments like these are not easy to come by in government today. I am also pleased to report that a recent study by the National Partnership for Reinventing Government, in cooperation with the Office of Personnel Management, ranked the PTO #1 in the federal government (with a score of 90 percent) for ''service goals aimed at meeting customer expectations.''
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Last year on the international front, we continued consultations with other major patent offices to streamline the procedures for securing patent protection throughout the world. This included the issuance of a formal proposal to simplify the Patent Cooperation Treaty and preparation for the Diplomatic Conference on the Patent Law Treaty in May of this year. We also implemented the Trademark Law Treaty as part of our ongoing efforts to simplify and harmonize the requirements for acquiring and maintaining a trademark registration abroad.
Of course, the most significant event for our agency last year was something that would not have happened without the leadership and commitment of the members of this Subcommittee: passage of the ''American Inventors Protection Act of 1999.'' This landmark legislation contains the most sweeping reforms in U.S. patent law since the Patent Act of 1952, and it restructures our agency into a performance-based organization, giving us greater independence and flexibility to improve the quality and quantity of our work.
As you can imagine, this legislation is having a major impact on our work. We are currently drafting rules to implement the eight subtitles of the legislation, and we hope to have at least four separate rulemaking packages published in the Federal Register shortly.
Let me now turn to discuss our operations in greater detail.
PATENTS
The last several years have seen a significant increase in U.S. patent filings, with the volume of patent applications growing by 23 percent between 1997–1999. In 1999, the PTO received over 272,000 utility patent (patents for invention) applications, an increase of 12 percent over the previous year, and granted a record 169,154 patent documents, including 153,493 utility, 14,732 design, 421 plant, and 448 reissue patents, and 60 statutory invention registrations. Utility patent grants in 1999 represent a 4 percent increase over the total for 1998.
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Of the patents granted last year, 20,543 patents went to U.S. independent inventors, a slight decrease from 1998. This represented 21.8 percent of all patents issued to U.S.-resident inventors. The share of patents issued to U.S.-resident inventors stayed steady at 55.6 percent. California resident inventors claimed a 20.0 percent share (18,865 patents) of these patents, followed by inventors from New York (7.3 percent—6,900 patents), Texas (6.8 percent—6,424 patents), New Jersey (4.6 percent—4,372 patents), and Illinois (4.6 percent—4,308 patents).
Some of the largest increases in patent filings are occurring in the area of business methods and biotechnology. With respect to business methods, the 1998 decision of the Court of Appeals for the Federal Circuit in State Street Bank and Trust Co. v. Signature Financial Group Inc. has had a dramatic impact on the number of applications filed with our office. In fact, the number of new cases filed in class 705 (Data Processing: Financial, Business Practice, Management or Cost/Price Determination) more than doubled from 1,285 in FY 1998 to 2,600 in FY 1999. From those filings, we issued nearly 600 patents last year.
To handle the increase in our workload, the PTO hired 801 new patent examiners last year. Together with the 728 examiners we hired in FY 1998, our examining corps has increased to 3,224, up from 2,212 in FY 1997 and 1,806 in FY 1992. The bulk of the new examiners are assigned to our software, computer, business methods, and biotechnology divisions. They have an average of four years of practical experience in the industries described above, and some fifty percent have advanced degrees, including more than 350 Ph.D.s.
In order to ensure timely searches and high quality examination, we have augmented this hiring with improvements in our examiners' search capability resources. Indeed, our examiners have access to more prior art than ever before. Our in-house patent database and our commercial database provider provides access to more than 900 databases, including Westlaw, Lexis-Nexis, and Chemical Abstracts. From their desktop computers, patent examiners can also search the full text of over 2.4 million United States patents issued since 1971; images of all U.S. patent documents issued since 1790; English-language translations of 3.5 million Japanese patent abstracts; English-language translations of 2.2 million European patent abstracts; IBM technical bulletins; and over 5,200 non-patent literature journals. Our paper search files and libraries remain in place as well.
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While these improvements are encouraging, we continue working with private parties to expand examiners' access to non-patent literature. For example, last year we held hearings in San Francisco and here in Washington on this very matter. I am pleased that, as a result of these efforts, organizations such as the Securities Industry Association have come forward to help our office expand access to state of the art information in their areas.
Last year we also replaced our examiners' patent search system, the Automated Patent System (APS). We took this action because APS was not Y2K compliant, was limited to 200 concurrent users, and required costly custom programming. Unfortunately, we encountered some difficulty when we installed the new text and image database search systems. Known as EAST (Examiner Automated Search Tool) and WEST (Web-based Examiner Search Tool), these new search systems can handle up to 600 users at the same time and allow examiners to easily submit a single search transaction and concurrently search all five text databases.
Following the termination of APS on October 9, 1999, we encountered a number of unforeseen technical and performance-related problems with EAST and WEST. Examiners and public searchers were rightfully frustrated with delays that occurred in processing certain patent searches. However, we moved aggressively to remedy these difficulties, installing a new server (the largest server in Hewlett Packard's product line), purchasing faster disk drives, and working in close cooperation with senior representatives of the Patent Office Professional Association, the union representing our patent examiners.
I am pleased to report that these efforts have met with considerable success. Indeed, since November 26, 1999, EAST and WEST response times for examiners have achieved the goal of 80% of searches completed within 30 seconds. The performance goal for users of the Public Search Room has been met since October 29, 1999. While certain complex search queries are still taking longer than expected, software improvements are being developed that will improve these response times as well. As a result, we are confident that EAST and WEST are fast becoming productive and welcome tools for the patent examining corps.
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As I alluded to earlier, we also have deployed an Electronic Filing System (EFS) pilot to five of the largest patent filers. EFS allows patent applicants or their representatives to submit patent applications and related papers to the PTO using the Internet. The applicant can combine files into a single one, compress and digitally sign the file, and send it to our office over the Internet. EFS also provides automated assistance and real-time acknowledgement of submissions. We hope to offer electronic filing for all patent applicants by the end of this year.
TRADEMARKS
Much like the activity in patents, the trademark side of our operations is also experiencing significant growth. We received a record 295,200 trademark applications in 1999, an increase of 27 percent from the previous year, and registered more than 104,000 classes. To handle this growth, we hired 136 examining attorneys last year, bringing the size of that workforce to 367.
As I mentioned earlier, last year we implemented the TEAS system for the electronic filing of trademark applications, making us the first national intellectual property office in the world to do so. TEAS allows trademark customers to submit applications over the Internet and use credit cards to pay filing fees—24 hours a day, 7 days a week, 365 days a year—without ever leaving the comfort of their home or office. In fact, the first trademark application of the new millennium was filed electronically—on January 1st at 2:00 PM. It is a testament to how far our office has come and what the future holds for our electronic business systems.
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About 12 percent of our Trademark filings are now electronic, and we recently received 1,600 applications in just one day. Yahoo Magazine has cited TEAS as one of the most useful sites on the Internet, a commendation that is reaffirmed by feedback from our customers.
TEAS has a number of benefits for our office as well. For example, it lowers our processing time and costs because our employees no longer have to manually key-enter or scan the application information into our trademark database. This also will improve the quality of our database.
Last year, we also deployed the Trademark Application and Registration Retrieval (TARR) system, which allows our customers to access trademark application and registration status, mark, ownership, and prosecution information via the Internet. Last December, more than 33,000 customers made 243,000 Web queries using TARR. This relieved the burden on our office of having to handle nearly a quarter of a million telephone calls or responses to letters to Trademark customers with the current application status.
To ensure that we take full advantage of these systems—to make our operations even more user-friendly—we are starting to implement the concept of ''one stop electronic shopping'' in our Trademark Examining Operation. Under this system, electronic applications will be routed directly to an e-commerce focused law office for all initial processing, examination, intent-to-use processing, and publication for opposition. These applications will receive prompt examination, often much faster than their paper counterparts, and applicants will be encouraged to use electronic communication to handle all examination activities associated with the application. We anticipate that the e-commerce law office will be up and running later this year, and we are very excited about its potential.
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BUDGET
Mr. Chairman, let me close by discussing the PTO's budgetary situation.
For FY 2001, the President recommended that we be given authority to spend $1,038.7 million of the fee revenues we generate. This is an increase of $133.8 million over the FY 2001 base and $170.7 million over the FY 2000 enacted level. Excluding the $20 million to be transferred to the Office of Personnel Management to cover current employees' retirement health and life insurance costs, the President's recommendation represents an increase of 17.4 percent over the FY 2000 enacted level.
The President also recommended 7,449 FTE, an increase of 541 FTE over the 2001 base and 648 FTE over the FY 2000 level. The majority of these FTE are for patent and trademark examination purposes and implementation of the American Inventors Protection Act of 1999.
In FY 2001, we expect to process $1,151.6 million in revenues or 17 percent more than is expected to be processed in 2000. Of this amount, $783.8 million will be available to us in FY 2001 and $367.8 million (or 32 percent of revenues paid by customers) will not be available to us until FY 2002. In addition to the $783.8 million, we will have access to $25.9 million carried forward from FY 1999 and $229 million carried forward from FY 2000—for a total of $1,039.7 million.
FY 2001 funding would be used for the following priorities. First, we need $36.9 million for what we call ''adjustments to base.'' These include amounts to cover pay raises, increased contributions to retirement systems, and general pricing level adjustments.
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Second, we would use $25.7 million to increase the quality of PTO products and services. Quality and customer satisfaction are my highest priorities, and these funds would be used to create Patent Customer Service Representatives, enhance Patent Examiner Coaching, establish examiner-trainer positions, and offer technology and legal training with tuition assistance. We also want to enhance patent classification and searching activities by offering expanded access to commercial databases and refining our classifications of foreign patents.
Third, we are committed to managing the growth of patent and trademark applications, which we estimate will be 335,400 and 363,700 in FY 2001, respectively. Therefore, we would use $27.5 million to hire 566 new patent examiners (offset by 366 attritions) for a net increase of 200 positions and 30 new trademark attorneys for a complement of 397 by the end of the fiscal year. At the proposed funding level, patent cycle time will be 13.6 months compared to a target of 10 months. Similarly, Trademark pendency time to first action is expected to be 6.0 months (compared to a target of 3.0 months), and pendency to registration/abandonment will be 19.5 months (compared to the target of 13.8 months).
Fourth, an additional $28.8 million will be devoted to information technology, particularly the promotion of electronic commerce. We will begin expanding patent data on our website to ultimately include U.S. patent text and image data all the way back to 1790. As I mentioned earlier, we will also continue promoting electronic filing and expedited examination of trademark applications by establishing an additional electronic examining office, and we will provide employees and contractors with an adequate computer network infrastructure by replacing the existing network (PTONet).
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Finally, we have requested $21.8 million to continue implementing the American Inventors Protection Act of 1999; $10 million to meet our space consolidation requirements related to information technology, security systems, move planning, furniture, and project management; and $20 million to be transferred to the Office of Personnel Management to pay for PTO employees' post-retirement health and life insurance.
In our transition to a performance-based organization (PBO), we would like to work within the Administration and with the Congress to ensure that the PTO has sufficient resources, financial flexibility, and appropriate oversight to operate as a first-rate PBO. Naturally, the Secretary of Commerce is interested in this matter as well.
CONCLUSION
Mr. Chairman, despite the challenges for our agency that I have highlighted, I am very encouraged about the future of the PTO and our Nation's intellectual property system. The United States is blessed with the greatest intellectual property system in the world, and I am deeply committed to ensuring that we retain—and build upon—this status well into the new millennium.
Whatever technology comes along—and the possibilities in areas like nanotechnology are almost unimaginable—I am confident that the U.S. Patent and Trademark Office will be ready, with the resources and proven know-how, to ensure that innovative creations become enduring global industries. I look forward to continuing to work with this Subcommittee to help ensure that PTO is given the resources and flexibility it needs to do just that.
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Thank you very much.
Mr. COBLE. Thank you, Commissioner. We have enjoyed a very harmonious relationship with the PTO and the Copyright Office. I am going to bend the procedural rules and recognize the ranking member for his opening statement and then we can begin our questioning.
Mr. BERMAN. Thank you very much, Mr. Chairman, and I apologize for being a little late in coming back from that last vote.
I will skip a large part of my opening statement. Just a couple of points that I wanted to make. I think this issue of ensuring that the PTO is adequately funded to carry out its mandate is very important. I hope that the reauthorization legislation we mark up in a few weeks will authorize PTO to use all of the patent and trademark fees that it collects for operations and if there are other ways to try to enforce what could become an empty authorization if the appropriators nullify it is I think worth pursuing very seriously.
I am also interested in the course of this hearing in hearing how the PTO is coping with a number of the substantive legal changes, institutional reforms and some of the new mandates that were part of the patent reform law. You touched on them in your summary, and I assume that you addressed it more fully in your full testimony.
The final thing that I am interested in is a discussion about several substantive patent law issues which I think are appropriate to at least raise in the context of this hearing. Whether through rule makings, reexaminations or the patent examination process, the PTO is daily making decisions that establish the law on the patentability of business processes, software, genes, and plants. I am interested to hear the opinions of our witnesses today whether current patent law provides sufficient guidance, whether the PTO is making the correct decisions on these issues, whether it is doing so in a timely manner, and whether it needs additional resources to cope with those issues.
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The policy implications of widespread patenting of business processes, software, genes and plants are still murky. Do plant and seed patents lead to a monopolization of the food supply by large multinationals or do they provide our best hope for increasing crop yields to deal with the burgeoning world population? Does Amazon.com's patent for a business process of ''one click'' shopping stifle competition or spur competitors to invent new and better processes for on-line shopping?
I don't expect to get definitive answers to these policy questions today, but I think it is part of our role on this subcommittee to find the answers to some of these questions. Our search may lead us to the conclusion that current law will sufficiently address these questions and that the heated debate surrounding the patentability of new technologies is simply the manifestation of a difficult transition period as the law, courts and PTO adjust to new technologies or our search may lead us to the conclusion that some legislation is necessary. I don't have the answer now but I am committed to searching for it.
These issues are starting to pop up in the mainstream press. I think the L.A. Times has now run three or four front page stories on gene patents and additional editorials on the subject. The business sections of the daily newspapers are starting to talk about this. These are some very interesting issues that we ultimately have to deal with and to the extent that beyond the normal oversight we can get to some of these today, I thought it would be interesting.
Thank you, Mr. Chairman.
Mr. COBLE. I thank the gentleman from California.
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Commissioner, you mentioned the impressive credentials on the part of the patent examiners that you have hired in the last year. What is the attrition rate? I don't know that we have ever talked about that.
Mr. DICKINSON. Attrition is obviously a concern of ours, and thank you for that question. My understanding is that our attrition rate is somewhere at 15 percent. It has climbed from its traditional 10 percent in the last year or so. We have undertaken a study as to why that is. I think there was a common belief that it was compensation alone, but that is not the only issue and we are going to find out what some of the other concerns and issues are. Although 15 percent is actually less than comparable attrition rates in comparable industries for scientists, it is still a major concern. That is why we have enhanced the quality of work life for our examiners. We are also trying to wrestle, and I am hopeful that the AIPA will allow us to wrestle, with compensation questions. It is one of our major issues, and we are looking at it very seriously.
Mr. COBLE. If you can keep us current, we would be appreciative of that. As I said at the outset, I hate to revisit the funding question but revisit it we must. Which 1999 programs did you have to cut back for fiscal year 2000 and why was it necessary to make these cuts and, B, do you have any thoughts or suggestions as to what we can do to help you retain all of your revenues?
Mr. DICKINSON. Mr. Chairman. I know many in the IP community believe that this problem was solved by last year's legislation. That is not the case, and this issue has certainly generated a huge amount of interest. As I mentioned, Secretary Daley and Deputy Secretary Mallett, and even the President, have acknowledged the problem. Many of our constituents, and I have read all of the testimony of witnesses following me today, this is clearly their number one issue as well. As you know, we do what is called activity based cost accounting in our office. The kinds of activities which we do are costed out and the fees are adjusted accordingly so we don't make a profit at the PTO. And so every dollar that is unavailable to us is a dollar that does indeed require us to cut back or alter programs.
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This year we are going to look at reductions in our hiring. We had hoped to hire additional patent examiners and trademark examining attorneys this year to deal with the huge growth in our workload but we will not be able to hire beyond our attrition rate this year.
The other major area where we devote a huge amount of resources, particularly for long term re-engineering and for long term management of our workload, is in automation. Several of our key automation activities initiatives also have to be cut back this year.
Mr. COBLE. Ms. Lamblin from VISX will testify on the next panel about her company's experience before the International Trade Commission; and I assume, Commissioner, that you are probably familiar with the trending of ITC opinions against the American patent community in the past 2 years specifically and are you concerned over the decisions being rendered by the ITC administrative law judges and what can we do to improve the situation?
Mr. DICKINSON. Let me first start by acknowledging that we are engaged in litigation on this matter. A preliminary injunction has been filed against us in a very technical matter relating to the VISX patent, so I will adress it.
I have been made aware of what appears to be at least in the last couple of years, a trend with regard to patent decisions there. I am not an expert on section 337 cases at the ITC, but this is probably a situation that does bear watching. Only one of the ITC judges has a patent background, but there are no district court judges in the United States who have a patent background, except for maybe one senior judge. So, there are a lot of factors that enter into the question of patent infringement, and how the decisions are arrived at judicially has many factors that impinge on it, and I have been made aware of the dramatic fall off in the infringement area in patent cases before the ITC.
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Mr. COBLE. Commissioner, is the State Street decision causing major problems for your examiners?
Mr. DICKINSON. Well, I wouldn't say that it is causing major problems for our examiners. We have had a significant increase in the number of applications that have been filed as a result of State Street. But let me just say, we have been issuing patents relating to software for probably 25 years, and we have been issuing patents related to business methods software for about 10 or 15 years and some have already been litigated. Merrill Lynch, for example, litigated a patent related to business method 10 or 12 years ago.
We have a good staff in this area, but this increase has obviously required us to increase the examiner staff. Examiners are not fungible. We cannot move them from chemicals over to business methods, so we have to get additional examiners there.
And as we have pointed out a couple of times so far in this hearing, getting access to resources would help to make sure that we are able to get the highest quality of examiner and the number that we need. We also concern ourselves with the access to prior art and the databases that are available.
We held hearings last summer, for example, on nonpatent literature in the software area and got a wide variety of important testimony. We need more access. One key issue is that there is no standard database on-line for software as there is for chemical or for medical technologies. So we need to have someone, and I think there is a great business opportunity here, develop that kind of database.
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We also have the issue of rule 56, where quality begins at home, Mr. Chairman. The applications that come to us are written by those applicants and their counsel, and they are required by law under rule 56 to disclose to us the most material prior art of which they are aware. During our hearings last summer, we took testimony as well on whether rule 56 is being complied with and whether any changes need to be made there.
Finally, let me say that with regard to business methods, read the claims, don't believe the hype. Many companies put out press releases which seem to exaggerate what they did get. The claims almost invariably are a lot narrower than what the press releases say, and I think that we should remind everyone that the only thing that is legally effective in a patent are those claims and the limitations in them.
Mr. COBLE. Thank you, Commissioner, and we welcome the gentlelady from California and the gentlemen from Florida and Tennessee who have joined us since we began and I am now pleased to recognize the gentleman from California.
Mr. BERMAN. Thank you, Mr. Chairman. In response to the chairman's initial question, you talked about the things you are not going to be able to do. What is the consequence of inadequate numbers of examiners and inadequately trained examiners and examiners who are not knowledgeable in some of these particularly newer areas that you are getting into?
Mr. DICKINSON. Well, the impact is in two primary places. One, it is in pendency and the turnaround time that it takes for us to issue a patent or trademark registration. That is something that we planned to drive down further this year and into the future, and I think the budgetary limitations may complicate that significantly.
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The other question concerns quality and the quality of the issued product, if you will. If we don't have increasing access to these databases, particularly in new technology, or we are not able to provide the resources and training to examiners and get examiners with backgrounds that we need, I think you could see a complication of quality that would not be in the best interest of the system.
Mr. BERMAN. What do you need to move as fast as you can in a realistic way where you can maintain control? How much money do you need for fiscal year 2001?
Mr. DICKINSON. Well, we stand behind the administration's budget in this hearing. We understand the concerns very clearly of those who pay the fees.
Mr. BERMAN. Does that two-thirds that you talked about mean they suck up one-third of the fees to go to other purposes?
Mr. DICKINSON. There is a carryover that is proposed in the budget of about $368 million.
Mr. BERMAN. A carryover of fee moneys?
Mr. DICKINSON. Into the next year. The system works in very broad brush. We receive a certain number of dollars as revenue which is placed in a carryover fund. They are used for other governmental purposes, and traditionally we get that back in the following fiscal year. The following fiscal year, additional funds are taken into this carryover fund. In recent years the dollars that have come into that carryover fund have increased, so the net effect is that there is an ongoing issue in terms of access to those funds.
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Mr. BERMAN. Let me ask you a few other questions and follow up on that later.
The problem always is where you testify first and the panelists come on afterwards, we don't get to have you answer what the panelists are complaining about. One panelist is going to be suggesting that the first part of the State Street decision that authorizes the patenting of software is appropriate, but that the second part that allows the patenting of business processes is a mistake and has significant anticompetitive consequences. I guess they analogize it to the notion that if you could patent providing mileage for airline tickets, is that a business process? If that could have been patented, does that mean no other airline for 20 years could have offered mileage for flying with that airline? What would the consequences of that have been? I would like your reaction to that.
Mr. DICKINSON. I have read that witness' testimony, and I understand the distinction that is attempting to be drawn. We estimated somewhere in high mid-90's, as a percentage of business method patents, are software implemented. So they are software patents and they perform a business method. The witness in drawing that distinction, as I read it, believed that software implemented business methods were and should be patentable, and I hope that I have that correct.
I believe that history has shown that patent protection is indeed indispensable to spurring innovation. One example that has been widely cited in the media concerns a company that patented a technology called ''one click'' for access to their site and for transactions on their site on the Internet. And they have proceeded, as I understand it, in litigation against someone who has alleged to have infringed that particular patent. What I am also told is that the competitor then went to develop other technology and the system worked as it was supposed to. That other technology is apparently an improvement, better than the original technology. There you have the system working exactly as it should, and that is to spur innovation and additional improvement.
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Mr. BERMAN. My time is up. Thank you. I have so many other questions, but I yield.
Mr. COBLE. Thank you. The gentleman from Tennessee, Mr. Jenkins.
Mr. JENKINS. Thank you, Mr. Chairman. I don't have any questions for Mr. Dickinson, and I would be glad to yield to the gentleman from California.
Mr. BERMAN. That is very nice of you. Could you focus on the propriety of granting patents for plant varieties? What is your view, do opponents of plant patents have just cause to claim that such patents are a form of biopiracy from indigenous people or will allow agribusinesses to monopolize the food supply?
Mr. DICKINSON. We have been issuing plant patents in the United States for probably 70 years now, and I think the system has worked well. We have in recent years been granting utility patents on genetically modified plants, and that may be some of what the question gets to is to the propriety of doing that and to what the end result of that might be.
We do not grant patents to the native occurring plants unless they meet the plant patent standard, whether they come from a foreign country or come from the United States. We grant utility patents to those which have been genetically engineered, which have been changed in some way and which represent the innovation and invention which the technology as adapted to that plant reveals.
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Mr. BERMAN. My last question really is on this prior use defense that is in the law. This gets back to the business process of patents. Play out in your mind how you think that is going to work, how useful will that defense be? Will that have any application in the Internet world where all of the processes are so new and novel? Will anybody be able to take advantage of that?
Mr. DICKINSON. That is a very interesting question, because that has only come recently into effect. So, I can only talk anecdotally or from discussions about what might likely happen. I think it is an appropriate defense to have in the statute, particularly because there is widespread belief that State Street represented a significant shift in the law, and that many entities may have made patenting or trade secreting decisions more likely based on their belief that these were not patentable processes. Having made that decision, and to find out later that indeed they are potentially patentable processes, means that they need some relief, and the relief in the statute in this particular and narrow case is appropriate. If the processes on the Internet are indeed new and novel, that is one of the standards in the statute for patentability. And I think the other issue is that this is mainly intended to deal with trade secrets and it is hard to maintain a trade secret on the Internet, and so I wonder if it would define widespread applicability on the very narrow question of Internet patents. I think we will have to wait and see. No one has invoked this defense yet, and it will be very interesting to see what the courts do with it.
Mr. BERMAN. I yield back.
Mr. COBLE. The gentleman yields back. The gentlelady from California.
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Ms. LOFGREN. Thank you, Mr. Chairman. I have a couple of questions.
As you probably know, there is a columnist in the San Jose Mercury News that writes a column critical of your office. I read this column almost every day with great interest. I would appreciate hearing your comments on some of the criticisms lodged relative to patents in the new technology arena? Basically, when you talk about the ''one click'' issue, and I don't know whether the competitor is better or not, the argument is sometimes made that the patent should never have issued because what has been patented is not new, and it is obvious.
As I read through the testimony from those witnesses who are going to follow as it applies to you, particularly in terms of criticism of the State Street holding business methods, and crediting your comment about software, one suggestion is that there ought to be a finer review process within the patent office for these patent applications that generates much controversy. I don't know if that is a good idea or not. I am wondering, however, what your thoughts are?
Mr. DICKINSON. You are right. We have recently enjoyed fairly robust debate, and we do acknowledge those criticisms and work with them in our work. The question of whether or not something is obvious is one that our examiners have to deal with every day. And they deal with it under the statute; the statute charges us with proving that the application is indeed obvious. The burden of proof is on us to find in the literature the prior art which will indeed demonstrate prima facie that the invention applied for in its claims is obvious. That can be a high burden in many cases.
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I have said to many people publicly that if you have prior art which we haven't considered which you believe renders any patent obvious or non-novel, please send it in because we have a procedure for dealing with that. It is called reexamination, and the number of reexaminations has not increased significantly. It is a fascinating number. Despite the fact that the number of applications have gone up dramatically, the number of reexaminations which have been lodged has not. I know that this subcommittee dealt with the question of expanding reexamination last year, and many on the committee and others have argued that we have not yet and should have gone further. So, it will be interesting to see what happens with the new inter partes reexamination procedure, to see if any of this additional evidence comes to light.
Another issue is about reading the claims and reading them very carefully. It is hard to judge the scope of a patent by a press release, and I think it is important to really focus in on the claims. The only Internet patent that I understand that has been litigated so far, on which there is a ruling, is this ''one click'' patent of Amazon.com's, and I have the decision of the judge here. She found that despite the experience with prior art shopping models and on-line purchasing, technical experts on both sides acknowledged that they had never conceived of this invention. Apparently the expert for Barnes & Noble admitted that he had never considered making single action ordering an available option to users. So the question of whether something is obvious or not is not measured in hindsight. We are forbidden from using hindsight to determine obviousness. You have to look at the state of the art at the time.
Ms. LOFGREN. I have a further question. The Science Committee is taking a look at worldwide project and there is going to be lots more discussion. I wonder if you have any comments on that controversy. If you do, I would be very interested to hear your comments.
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Mr. DICKINSON. That is another major area that we have to deal with.
The question of whether genomic invention should be patented and whether particularly patents in the human genomic area should be patented, is a tough one. We have recently published examination guidelines, because a lot of the question comes down to the question of utility. Do the applicants demonstrate the appropriate utility for the genomic invention which they have applied for to meet our test of utility under 101? We have published utility guidelines—revisions of our utility guidelines recently for comment. In other words, have raised the bar and toughened the standard for utility. Many commentators so far have expressed their satisfaction with the way in which we have approached that question. But we have also, because we are guided very strongly by the courts in this regard, promulgated test cases which are working their way up through our system so that we will get the appropriate guidance from our court and the Court of Appeals for the Federal Circuit on the appropriateness of the guidelines that we are using.
Ms. LOFGREN. My time is up and perhaps it is not fair to raise this for the first time in public but, Mr. Chairman, you are always so gracious about accepting ideas.
While listening to the Patent Commissioner, it occurs to me that this committee might want to leap ahead of the Science Committee and have our own hearing since after all we do have jurisdiction on the whole gene patenting issue and because the human genome project will be completed very soon. I am not suggesting that we should change anything. Actually, the biotechnology community is very much divided on what should or should not happen. But to the extent that we want to learn or advise ourselves, if we wait until next year, it might be too late to have the kind of impact that might be useful.
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Thank you for allowing me to make that suggestion and to pose the questions.
Mr. COBLE. I thank the gentlelady. The gentleman from Florida.
Mr. WEXLER. Thank you, Mr. Chairman. I was just wondering, and you are probably very familiar with the issue, but the New York Times, the day before last, on the front page wrote an article about ''Napster.''
Mr. DICKINSON. His nickname is related to his hair.
Mr. WEXLER. Which is?
Mr. DICKINSON. I guess it is nappy.
Mr. WEXLER. I was wondering if you might share with us some of your thoughts about what, if anything, the Congress and this committee should be doing in terms of the issue presented?
Mr. DICKINSON. I think this committee's jurisdiction over copyright matters and copyright infringement matters makes it a very appropriate topic for committee review if you will permit me to suggest that. I think the concerns the various industries that have content on-line have about infringement on-line are real, very present ones.
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The challenge becomes the ease with which copying can be done on-line, and the magnitude of that copying presents unique challenges. The Congress passed DMCA, which was intended to deal with a lot of these questions. However, the question of whether the legal system is the appropriate vehicle for dealing with it in toto or not, and whether there are technological ways to deal with it or whether there are mechanisms through easier licensing to deal with it, need to be explored. This is certainly a good topic for continued discussion because I would wonder if many of the content communities are not going to suffer a downturn in their revenue, which might lead to a downturn in creativity, if something is not looked at.
Mr. BERMAN. Would the gentleman yield. You are not suggesting that there aren't legal remedies even within DMCA?
Mr. DICKINSON. Absolutely not. There are good legal remedies. The ease with which they can be enforced is a difficult question. Congress created last year something called the National Intellectual Property Law Enforcement Coordination Council of which I am the co-chair along with my colleague, Assistant Attorney General Robinson. This is a major topic for us, but I am not suggesting that the legal remedies that are available should not be used and cannot be used.
Mr. WEXLER. Thank you very much.
Mr. COBLE. I thank the gentleman.
Commissioner, thank you again. One final question. If you can bring us current on the facility acquisition in Alexandria, and I realize that may be a sticky wicket.
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Mr. DICKINSON. Yes, indeed that is one of our most interesting issues at the moment. The Alexandria City Planning Commission will actually vote tonight on whether to give the GSA and the developer the permits to proceed, and my understanding is that the City Council will likely vote a week from today. We await those votes. If the City Council votes in the affirmative and some litigation here in the District concerning the National Environmental Policy Act, if that decision is favorable, my understanding is that GSA will award the lease and we will proceed. If we stay on track, we will begin the move somewhere in the 2004 time frame.
Mr. COBLE. Very well. Thank you, Commissioner. There will be no second round today, but we will welcome you back.
Mr. DICKINSON. Thank you, Mr. Chairman and Mr. Berman.
Mr. COBLE. We will call the second panel to the table. Folks, I apologize for having to do this in a hurry but as I said at the outset, the full House Judiciary Committee will resume its session at 5. In the interest of time I will not introduce you. We will impose the 5-minute rule. We do need to try to accelerate a finish for 5.
Mr. Van Horn.
STATEMENT OF CHARLES VAN HORN, BOARD OF DIRECTORS, AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION
Mr. VAN HORN. Thank you, Mr. Chairman. I am Charlie Van Horn, representing the AIPLA. The AIPLA wants the Patent and Trademark Office to be the best Patent and Trademark Office in the world. The prompt issuance of valid patents and the early accurate indications regarding the registrability of trademarks and service marks are critical to our Nation's inventors, companies and the American public. Through your leadership, Mr. Chairman, this subcommittee has played a leading role in strengthening the USPTO and improving its ability to meet the challenges and opportunities in the 21st century.
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The robust growth in the number of patent and trademark applications coupled with the implementation of significant changes to our patent system provide a unique opportunity for the USPTO to serve the best interests of our country. Unfortunately, the administration and Congress continue to undermine the vitality of the U.S. patent system and handicap the USPTO in its ability to accomplish it mission.
The users of the patent and trademark systems have been unfairly subjected to a decade of fee diversion by the Congress and the executive branch. Increasingly over the years larger and larger amounts of fees collected by the USPTO have been diverted to other programs through a variety of mechanisms in the form of patent surcharge fees and the capping of the amount of fee revenue that the USPTO was permitted to use. Unless this pattern of fee diversion is stopped, the USPTO will not be able to provide the level of services commensurate with its responsibilities.
The successful implementation of recent reforms and keeping pace with the growth in application filing rates requires adequate funding. At least one of the impacts of the continued fee diversion will be even longer times to obtain patent and trademark protection coming at a time of accelerating technological and business development. Past experience has clearly demonstrated the USPTO cannot keep pace with increased filings if the administration and Congress continue to divert increasing amounts of PTO fee revenues.
Unfortunately, the proposed fiscal year 2001 budget transmitted to Congress on February 7 proposes to continue this destructive pattern of fee diversion. The fiscal year 2001 budget proposes to prevent the Office from spending an additional $113 million in fiscal year 2001. This will bring to a total of $368 million in fee collections which the office will have received during the last three fiscal years, fiscal year 1999 through 2001, but will have been denied the ability to use to process the work for which the fees are paid.
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The treatment by the executive branch and Congress of the fee collections in the USPTO is a national disgrace. The economic projections of the Congressional Budget Office reveal a worse case expected budget surplus of $148 billion for the fiscal years 2001 through 2005. In spite of this prosperity the President's budget proposes to take $577 million in USPTO fees and divert it to other purposes for the same period. This gives new meaning to the expression pennywise and pound-foolish.
Mr. Chairman, the AIPLA implores you and members of this subcommittee to take the lead in breaking this increasingly harmful pattern of fee diversion. There has been no time in the last 30 years more opportune than the current era of budget surpluses or more appropriate than the current era of unparalleled innovation to end this plague. The men and women of the Patent and Trademark Office can successfully meet the challenges and opportunities that they face today, but we must give them the support that they need and deserve.
Both political parties profess to support nurturing and encouraging the Nation's leadership in development and application of new, cutting edge technology for the benefit of the American public. It is time to put meaning into these platforms and end once and for all the destructive and misguided diversion of USPTO fee income. The AIPLA pledges, Mr. Chairman, to work with you and members of the subcommittee in any way you wish to achieve this.
Mr. COBLE. We will next hear from Mr. Kim Muller, president of the International Trademark Association. In the event that 5 comes before we are able to question you, keep in mind we do have your written testimony and we may be contacting you all subsequently, and again I apologize to you for having to do it this way.
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Mr. Muller.
STATEMENT OF KIM MULLER, PRESIDENT, INTERNATIONAL TRADEMARK ASSOCIATION
Mr. MULLER. Thank you, Mr. Chairman. As you indicated, I am President of the International Trademark Association and I serve on a completely voluntary basis. Today I draw your attention to the fact that the PTO is severely underfunded under existing appropriation mechanisms. We believe that if the PTO is permitted to use all of the revenues that it generates from its user community, it will have the funding necessary to deliver high quality timely services to the public.
The PTO plays a critical role in promoting, safeguarding and maintaining America's ingenuity and creativity so that our Nation can continue to enjoy a robust economy and be a leader in the global marketplace. Although to some the work of the PTO may be invisible, its work product has far-reaching economic impact. According to PTO figures, the number of trademark applications will substantially increase to as many as 360,000 in fiscal year 2001. This dramatic growth can be attributed to several factors, including the excellent health of the U.S. economy, the emergence of cyberspace marketing and a general awareness of the importance of protecting intellectual property rights.
Last year, recognizing the PTO's important mission, Mr. Chairman, you led the effort to gain passage of the PTO Efficiency Act. INTA was a strong supporter of this legislation and we thank you for your tireless efforts in this regard. Upon its implementation this month, the PTO Efficiency Act will free the agency from government red tape and allow it to run more like a private sector business.
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One of the most important structural reforms is separation of the patent operations and the trademark operations within the PTO. The Trademark and Patent Offices should act as distinct and separate organizations, each in control of the activities which are fundamental to their core examination functions. The Patent Office and Trademark Office each should have 100 percent expenditure control over revenue generated from their respective application fees. We recommend that the budgets be generated by each office, approved by the Director and sent to the OMB for adoption.
While it makes sense to continue to share some common overhead costs between separate Patent and Trademark Offices, these shared costs should be minimal. However, having control over money does not amount to much if the funds are not there to be spent. Unfortunately, Mr. Chairman, the agency is being repeatedly denied money raised by means of user funds.
This shortchanging is done in two ways, through rescissions and carryover funding. When the PTO falls behind in its work, PTO customers understandably blame the agency because they wrongly assume that the filing fees they pay to the PTO are sufficient to fund efficient operations of the PTO. They do not realize the severe underfunding which congressional scoring and carryover funding have created. Make no mistake, carryover and rescissions applied to the PTO are just dead wrong. They amount to a hidden tax on intellectual property owners.
As a result of lost money, the PTO has been forced to limit hiring of examining attorneys to replace attorneys who have left the agency. This prevents the PTO from adequately covering, in a timely period, the overwhelming number of trademark applications it has received in recent years.
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Rescissions and carryover have forced the PTO down a very dangerous path. The resolution to this situation we recommend is a statutory change which removes the PTO from congressional scoring sheets, prevents further rescissions and allows the agency to spend all of its user fee revenues. When a trademark applicant pays $325 as an application fee, each and every penny of that fee should go toward examining that application. This is fair, equitable and completely justified since the PTO has no other source of funding.
In conclusion, Mr. Chairman, let me leave you with this thought. The PTO does more than just grant patents and register trademarks. It protects America's ideas and safeguards our creativity. Because the PTO plays such an important role, we cannot continue to allow its funding resources to be diverted. As my predecessor David Stimpson previously testified, the PTO should not be a cash cow to be milked by other government agencies. Thank you again for this opportunity to present my views.
[The prepared statement of Mr. Muller follows:]
PREPARED STATEMENT OF KIM MULLER, PRESIDENT, INTERNATIONAL TRADEMARK ASSOCIATION: PREPARED STATEMENT
SUMMARY
The International Trademark Association appreciates the opportunity to assist the Subcommittee in its oversight of the United States Patent and Trademark Office. Because intellectual property owners supply the PTO with all of its funding, we are especially concerned with agency operations, whether goals are being met, and most importantly, how our money is being spent. Upon implementation of the ''PTO Efficiency Act'' on March 29, the agency will be freed from much of the government red-tape that has prevented it from being run like a private sector business—able to keep pace with customer demand through independent control of budget allocations and expenditures, personnel decisions and procurement.
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We are also pleased by the impending separation of the patent and trademark operations called for in the ''PTO Efficiency Act.'' As a result of this separation, the Patent Office and Trademark Office should act as distinct organizations, each in control of the services and functions that are fundamental to their respective core businesses. With this separation, we expect the Patent Office and the Trademark Office each to have responsibility and control over how revenue generated from their respective fees is spent. Having control over money, however, does not amount to much if the funds are not there to be spent. Unfortunately, despite the passage of the ''PTO Efficiency Act,'' the agency is being repeatedly denied money raised via user-fees—through rescissions and budget ''scoring.''
Make no mistake, ''scoring'' and rescissions applied to PTO are dead wrong. They amount to a hidden tax on intellectual property owners who pay their money to the PTO expecting to have each and every penny used to examine and protect their patents and trademarks. These fiscal practices are already having a detrimental effect on PTO operations. On the trademark side, as a result of lost money, the PTO will be forced to limit hiring of examining attorneys. This will prevent PTO from adequately covering in a timely period the overwhelming number of trademark applications it has received in recent years, including the well over 325,000 it is expected to receive in FY 2000 alone.
Rescissions and scoring have forced PTO down a dangerous path. The resolution to this situation is a statutory change which removes the PTO from the congressional ''scoring sheets,'' prevents further rescissions, and allows the agency to spend all of its fee generated revenues. We are not suggesting that Congress give the PTO a blank check. INTA firmly believes that strong congressional oversight is essential. What we are saying, is when a trademark applicant pays the $325 application fee, each and every penny of that fee should go toward examining that application. This is fair, equitable, and completely justified since the PTO has no other source of funding.
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PTO does more than just grant patents and register trademarks—it protects America's ideas and safeguards our creativity. Because PTO plays such an important role, we cannot continue to allow its funding resources to be lost.
STATEMENT
Good afternoon, Mr. Chairman. My name is Kimbley L. Muller, and I currently serve as Chairperson of the Board of Directors and President of the International Trademark Association. I am employed by INTA member Shell Oil Company in Houston, Texas as Senior Intellectual Property Counsel. As with all INTA officers, board members, and committee members, I serve on a completely voluntary basis.
INTA is pleased to be here today to assist the Subcommittee on Courts and Intellectual Property in its oversight of the United States Patent and Trademark Office (''PTO''). Our comments here today will focus on the mission of the PTO, the current level of trademark business, the PTO's membership in a special category of government agencies, and the one critical element that is missing from ensuring that reform efforts at the agency are a success. This element is funding, and as will be noted in more detail later in this statement, the PTO is being severely shortchanged under existing appropriations mechanisms. This shortchanging has a detrimental impact on agency operations and must, therefore, be remedied.
INTA is a 121-year-old not-for-profit organization comprised of over 3,700 members. It is the largest organization in the world dedicated solely to the interests of trademark owners. The membership of INTA, which crosses all industry lines and includes both manufacturers and retailers, values the essential role trademarks play in promoting effective commerce, protecting the interests of consumers, and encouraging free and fair competition. In short, Mr. Chairman, the membership of INTA, along with our colleagues on the patent side, are the customers of the PTO. INTA therefore has a vested interest in monitoring the agency's performance and working with the Congress, PTO officials, and others to ensure that the PTO can meet the needs of a rapidly changing commercial landscape.
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The Mission of the PTO
According to the submission of the President on the Fiscal Year 2001 Corporate Plan for the United States Patent and Trademark Office:
The PTO's mission is to promote industrial and technological progress in the United States and strengthen the national economy by administering the laws relating to patents and trademarks, and advising the Administration on patent, trademark, and copyright protection, and trade-related aspects of intellectual property.(see footnote 1)
More simply stated, the PTO plays a critical role in promoting, safeguarding, and maintaining America's ingenuity and creativity so that the nation can continue to enjoy a robust economy and be a leader in the global marketplace.
This is by no means an easy task, and while to some the job of the PTO may simply be to grant patents and register trademarks, the processes involved in examining an intellectual property application and issuing a registration are extremely complex. To obtain a trademark registration, for example, one must first submit an application which is prepared in accordance with the U.S. trademark law (commonly referred to as the ''Lanham Act'')(see footnote 2) and the PTO rules of practice. After this first step, the process continues as follows:
The Pre-Examination Division of the Trademark Office ensures that the application is complete and meets certain basic criteria; then the application is given a filing date.
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Next, the application is sent to the Examination Division, where it meets its most stringent tests by qualified attorneys specializing in trademark law.(see footnote 3) The examination process is the core of the Trademark Office's function.
If an Examining Attorney finds that the mark applied for cannot be registered, he or she prepares an office action. (Rulings of the Examining Attorney can be appealed to the Trademark Trial and Appeal Board [''TTAB'']. As part of the PTO, the TTAB is an administrative law body, comprised of experienced trademark lawyers who, for the most part, have served previously in other positions within the agency.)
If the application clears the examination stage, it is published for opposition in the Official Gazette. If there are objections lodged by the public, the matter is referred as administrative litigation to the TTAB.(see footnote 4)
If no opponents come forward, the mark is granted a registration.
Finally, there are a number of post-registration services, including the renewal of a trademark registration every 10 years.
All of these steps require highly trained professionals using the most up-to-date resources and technology available. In the end, a competent and thorough examination process avoids future difficulties and confusion in the commercial arena. The trademark registration itself, ''provides protection for the owner's business investment in goods and services sold under the registered mark,''(see footnote 5) as well as an easy-to-understand mechanism to assist and protect the consumer when making purchasing decisions.
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Current Level of Trademark Business
There has been an explosion in trademark business at the PTO. According to recent figures released by the PTO, the annual growth rate in trademark applications from fiscal year 1992 to 1999 averaged 12 percent. The increase reached its highest point between 1998 to1999, when there was a 27 percent increase.(see footnote 6) Beyond FY 1999, the PTO expects that the number of classes of applications will continue to grow. According to PTO officials, in FY 2000, trademark filings are running 18 percent above the original budget projection of 308,000 and 12 percent above the adjusted projection of 325,000. In FY 2001, 363,700 classes of applications are expected,(see footnote 7) although if FY 2000 is any indication, that number will likely increase.
INTA believes that this dramatic growth can be attributed to several factors, including the excellent health of the U.S. economy, the coverage of trademark issues by the media, and a general awareness of the importance of protecting intellectual property rights. The emergence of e-commerce, in particular, has had a significant impact on the number of trademark applications, as more and more on-line start-up companies seek to protect their identity in the world's fastest growing mode of mass communication—cyberspace. In addition, already established entities seeking to extend their markets into cyberspace with new products and services are securing the additional rights to proprietary names.
The PTO is in a Special Category of Government Agencies
Late last year, in recognition of the PTO's important mission, the tremendous growth in the number of patent and trademark applications, as well as the fact that not one penny of taxpayer money is used to operate or manage PTO operations,(see footnote 8) the agency was designated a Performance Based Organization (''PBO''). This was due in large part to the introduction and passage of the ''Patent and Trademark Office Efficiency Act.''(see footnote 9) INTA was a strong supporter of the PTO Efficiency Act, Mr. Chairman, and we thank you for serving as its sponsor and for actively promoting the concept that reform at the PTO is an absolute necessity.
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As a PBO, the PTO has been placed in a select group of government agencies. We expect that, as a result of this designation, it will be run more like a private sector business, able to keep pace with customer demand through independent control of budget allocations and expenditures, personnel decisions and processes, and procurement.(see footnote 10) This means that government red-tape, which drastically reduces PTO efficiency and operations, ought to be reduced to an absolute minimum. It is this red-tape that has often, in the past, led to delays in obtaining space, equipment and personnel.
Financial incentives offered to top agency personnel as a motivation for achieving specific corporate goals during the course of the year will prove helpful in making the PBO concept a success. We anticipate that these goals and objectives will be drawn up prior to the beginning of a fiscal year and will establish a course or general plan of action for the PTO's leadership in areas such as law, technology, quality assurance, customer service, and international relations.
Finally, newly created Patent and Trademark Public Advisory Committees, with greater oversight authority in the areas of management and budget, will better provide information and advice on the spending of user-fee money, which, as I have already noted, is the PTO's sole source of income. Focusing specifically on the composition of the Trademark Public Advisory Committee for a moment, INTA expects that the members appointed to serve shall, as the statute states, ''represent the diverse users'' of the Trademark Office.(see footnote 11) We think the purpose of the Advisory Committee provision was to upgrade the PTO's private sector advisory groups to include a stronger, more dynamic membership with greater responsibility and increased authority. The Trademark Advisory Committee should not merely be a rubber-stamp, but a board of advisors comprised of top-flight professionals from multiple disciplines, including those with expertise on Trademark Office operations, as is intended by the statute.
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In addition to the changes just listed, the implementation of the ''Patent and Trademark Office Efficiency Act'' will initiate a number of structural reforms which will create a more properly defined differentiation between the agency's core services. One of the most important structural reforms is the treatment of the patent operations and trademark operations as separate operating units within the PTO.(see footnote 12)
The ''separate operating units'' language was incorporated into the bill, because patent law and trademark law have no commonality in terms of genesis, substance, operations, or policy development. In practical terms, this means that the Patent Office and Trademark Office should act as distinct organizations, each in control of the services and functions that are fundamental to their respective core businesses. These services and functions include:
hiring of professional personnel and the acquisition of equipment and space;
setting of fees;
development of proposed changes to regulations affecting the examination of applications;
dissemination of information to the public through avenues such as separate Trademark Office and Patent Office websites; and
authority to authorize and conduct programs.
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Perhaps most importantly, the Patent Office and the Trademark Office should each have responsibility and control over how revenue generated from their respective fees is spent. Budgets should be generated by each office, approved by the Director, and then transmitted to Office of Management and Budget (''OMB''.)
While there will no doubt need to be some shared overhead costs between the Patent Office and Trademark Office, these should be minimal. General service units within the PTO (that is, those areas where overhead is shared and the services are not associated with a core patent or trademark operation) should be required to submit to both the Patent Office and the Trademark Office requests for funding which will benefit the agency as a whole. Each office should be in a position to adjust its expenditure on this overhead to suit their needs, and funding of general service units should be subject to the approval of the respective independent office. This way, both sides of the agency will be better able to control how user fees derived from their customers are being spent.
Funding Remains the Obstacle to True Reform
The establishment of operations that reflect a corporate environment is an important first step towards achieving reform at the PTO. However, to truly be a success as a PBO, the agency needs sufficient funding, something that it does not possess at the present time. Mr. Chairman, something must be done immediately to remove the PTO from the congressional ''scoring sheets,'' prevent rescissions of PTO money, and allow the agency to receive all of the funds its customers have paid for the express purpose of protecting their intellectual property.
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As you well know, ''scoring'' is the bookkeeping mechanism requiring that legislated increases in direct spending or reductions in receipts in a functional category must be offset by other legislated reductions in direct spending or increases in receipts in that particular category. Currently, monies derived from PTO user fees, monies which are labeled as ''carryover'' funds, are being diverted so that spending limits for a fiscal year are not exceeded. Under ''scoring,'' the ''carryover'' of these funds is a smokescreen. Carryover is not an escrow account, nor is it surplus fees. In a subsequent year, Congress provides the PTO permission to use the fee revenues it denied the year before, but then the PTO is further restricted by the imposition of an even greater ''carryover'' in that following year. As a result of this practice, PTO lost $34 million in fee revenue in FY 1999 and $113 million in FY 2000. If the President's proposed FY 2001 PTO budget is adopted, the agency stands to lose an additional $113 million. It should also be noted, that in addition to the money lost via ''scoring,'' PTO lost $72 million in rescissions in FY 1999 and $3 million in FY 2000.
INTA believes that ''scoring,'' and for that matter, rescissions, amount to a hidden tax on intellectual property owners and they are already having a recognizable detrimental effect on PTO operations. For example, as a result of past ''scoring'' and rescissions, the TTAB will be unable to hire additional attorneys to reduce to less than one year the amount of time it takes to issue final decisions in many contested legal motions. In addition, the Trademark Office will be forced to limit hiring to replace employees who have left the agency. This will severely hinder the ability of the PTO to meet the challenges posed by the large and steady increase in new application filings to which I referred earlier. Furthermore, according to the agency's FY 2001 Corporate Plan, the concept of ''first action'' pendency within a three month period is no longer a possibility. The PTO now expects that first action pendency will increase to six months by FY 2001. Overall application pendency will increase to 19.5 months, instead of the previous goal of 13.8 months.(see footnote 13) Given the value of a trademark to consumers and businesses alike, we cannot afford to allow these delays to continue to increase.
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Moreover, Mr. Chairman, ''scoring,'' in particular, is akin to borrowing money now, promising to pay it back later, but then borrowing an even greater amount to cover the obligation, and on and on. This practice is dead wrong, and it has forced the PTO down a dangerous path. If, someday, fee revenues decline substantially, the funding of the PTO could encounter a shortfall that might create a disastrous budgetary disruption in the agency's ability to provide service to the intellectual property community. For example, there may be severe difficulties in the implementation of the Madrid Protocol, a treaty, which, as you know through your sponsorship of the implementing legislation, offers tremendous benefits to American businesses.
The resolution to this situation, in our opinion, properly lies with the authorizing committees for the USPTO, that is, the Senate and House Judiciary Committees. We believe that during this Congress, a statutory change should be made which removes the PTO from the congressional ''scoring sheets,'' prevents further rescissions, and allows the agency to spend all of its fee generated revenues. We are not, Mr. Chairman, suggesting that Congress give the PTO a blank check. INTA firmly believes that strong congressional oversight is essential. What we are saying, for example, is that when a trademark applicant pays the $325 application fee, each and every penny of that fee should go toward examining that application. Trademark owners, and for that matter patent owners, expect this to happen. This is fair, equitable, and completely justified since the PTO has no other source of funding.
Conclusion
Thank you again, Mr. Chairman, for the opportunity to assist in the Subcommittee's oversight of the PTO. I hope that I have left you and your colleagues with a better sense of the PTO's mission and its overall importance for maintaining America's leadership in the world economy. Most of all, I hope that Members understand the critical need for a change in how Congress and the Administration appropriate monies raised by the PTO through user-fees. There must be an immediate halt to the ''scoring'' and rescission of money raised via PTO user fees. In the words of one of my predecessors, Mr. David Stimson, the PTO 'should not be seen as a 'cash cow'' ' that can be milked by other government agencies.(see footnote 14) INTA looks forward to working with you to ensure the passage of legislation which will fix the problems related to PTO funding.
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Mr. CANNON. [Presiding.] Thank you very much. We appreciate your comments.
All of you have entered your comments into the record and since we have a full committee hearing at 5 and we will have to adjourn at that time, we will have virtually no time for questions if we go through each of your statements which, again, are already in the record. So I would ask unanimous consent of the committee to allow us to go ahead and proceed, and with your permission I would ask the panel to proceed without having everyone's statement read again. Without objection, so ordered.
Mr. CANNON. Mr. Berman.
Mr. BERMAN. Literally, why did you want to come here today? Just summarize your statement please?
Mr. CANNON. If we can start with Mr. Myrick.
STATEMENT OF RONALD MYRICK, PRESIDENT, INTELLECTUAL PROPERTY OWNERS
Mr. MYRICK. I would be happy to start.
We are singing from the same hymnal on this side of the table. I gather it is a hymnal that you are singing from as well. We believe that the diversion of funds is a hidden tax upon the intellectual property system, and it should not be permitted.
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Mr. BERMAN. On that issue, to the extent that you are here to talk about that, we got that message. If you had a way of us on the subcommittee drafting legislation that would effectively remove the incentive of either the administration or the appropriators to continue to do this, that would be useful because that would help us figure out a way to make this stop.
Mr. MYRICK. I understand that there has been considerable discussion in regard to permanent definite authority and permanent indefinite authority, both of which might work. The details of their construction I am not fully familiar with, because they deal more with the internal workings of the Congress, but certainly we are open to any approach which would ensure that the funds that we pay as PTO users cannot be diverted. I have to leave to better congressional authorities than myself the appropriate construction of that methodology.
[The prepared statement of Mr. Myrick follows:]
PREPARED STATEMENT OF RONALD MYRICK, PRESIDENT, INTELLECTUAL PROPERTY OWNERS
SUMMARY
IPO congratulates Chairman Coble and members of the Subcommittee on passage of the landmark American Inventors Protection Act last November, and on their support for a strong Patent and Trademark Office (PTO).
IPO strongly opposes the proposal to withhold $368 million in new PTO user fees in 2001 and make available $255 million of previously withheld fees, which diverts $113 to unrelated government programs.
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The technique of withholding larger amounts of user fees from the PTO each year and freeing up larger amounts of fees each year from the previous year is a pyramid scheme. Money from earlier years that is said to become available in fact already has been spent.
Fee withholding will cause the pendency time of patent and trademark applications in the PTO to rise to levels that are totally unacceptable to U.S. industry.
Fee withholding will adversely affect the quality of patent examination, including quality of examination in fast-growing areas such as ''business methods.''
Withholding PTO user fees for the purpose of raising general federal revenue may be an unconstitutional direct federal tax on property, in violation of Article I, Section 9, Clause 4 of the United States Constitution.
IPO urges more funding for the PTO in 2000 and 2001 and permanent legislation to guarantee the PTO a dependable source of funding commensurate with its workload.
IPO recommends Subcommittee oversight of implementation of the American Inventors Protection Act, to ensure that this landmark legislation meets its objectives.
STATEMENT
Mr. Chairman and Members of the Subcommittee:
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I am Chief Intellectual Property Counsel for General Electric Company in Fairfield, Connecticut, and the current President of Intellectual Property Owners Association (IPO). I am presenting IPO's views on Patent and Trademark Office funding and related issues. Thank you for the opportunity to appear before the Subcommittee today.
IPO is a trade association of U.S.-based owners of patents, trade secrets, trademarks, and copyrights. Our members file about 30 percent of the patent applications that are filed in the U.S. Patent and Trademark Office by U.S. residents and pay about $200 million a year in fees to support operations of the PTO.
PTO Performance Standards
The performance of the PTO is of great interest to the members of our association. PTO performance, of course, is also very important to the economic strength of the nation. Patent laws administered by the PTO encourage invention, innovation and business investment. Trademark laws administered by the PTO encourage business investment and protect consumers.
In several past hearings before this subcommittee, IPO has pointed out 3 main standards the PTO should meet:
high quality professional examination,
prompt patent and trademark processing, and
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reasonable fees
The need for high quality professional examination of patent and trademark applications by the PTO cannot be overstated. The PTO should not grant a patent or register a trademark if the invention or mark in question fails to meet the statutory requirements.
Prompt processing of patent and trademark applications also is important to many of the members of IPO. We continue to support the Office's goals of 18 month average pendency for patent applications, or its equivalent in the newer measure of ''cycle time,'' and the goal of 3 months between the filing and first examination of a trademark application.
The cost of obtaining patent and trademark registrations must be kept at reasonable levels. We supported the actions taken by Congress in the last 2 years to reduce patent fees. Congress' leadership in controlling U.S. fees has served as a good example for other countries, some of which have begun to reduce the much heavier fee burdens that they impose on U.S. companies and inventors who file for patent protection abroad.
Congress took a historic step last year by passing the American Inventors Protection Act. (Public Law 106–113, Appendix I, Title IV, approved November 29, 1999.) Many people are calling it the most significant change in the patent statute since 1952. Chairman Coble and the members of this Subcommittee worked very hard on this legislation, for which we congratulate you. The new legislation will help in improving the performance of the PTO and increasing the reliability and certainty of patent rights. After I address the issue of withholding PTO fees, I want to mention some of the features of the American Inventors Protection Act.
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Understanding PTO User Fee Withholding
The practice of the Appropriations Committees and the Executive Branch of diverting PTO user fee income is certainly not a new issue—it has been an issue for IPO members ever since the practice started in 1992. We realize we are preaching to the choir when we discuss the issue with this Subcommittee, but we believe the magnitude of the problem is now such that fee withholding may be crippling the ability of the PTO to provide high quality professional examination and prompt patent and trademark processing.
The history of the problem is complex and confusing. Fee withholding began under the patent fee surcharge legislation that was in effect through 1998. When that legislation expired, we hoped the practice of diverting fees to other government programs was at an end. Unfortunately, as shown on Appendix A attached to my statement, the amounts of user fees diverted in 1999 and 2000 and proposed in the President's budget for 2001 are greater than the amounts diverted during the era of the patent fee surcharge. The President's 2001 budget proposes to withhold $368 million of fees that will be collected in 2001, out of estimated fee income of $1.152 billion. At the same time, the President's budget proposes release to the PTO $255 million in previously withheld fees. Appendix B shows that cumulative user fee diversion through 2001 will be approaching $600 million. The budget procedure used to withhold PTO fees and divert them to other government programs might be called ''smoke and mirrors.'' It seems to be designed to make fee withholding appear to be other than what it is—confiscation of money paid by users of the Patent and Trademark Office for services they expect to receive.
The money from earlier years that is said to be released in fact already has been diverted to other government programs. In 2001 the President's budget is calling for the Patent Trademark Office to receive an estimated fee income of $1.152 billion and to spend $1.039 billion, which is $113 million less. To call it withholding of $368 million of new fees and freeing up of $255 million of previously withheld fees does nothing to change the fact that $113 million is being diverted to other programs.
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When the money is diverted to other government programs, it is spent on those programs. The Commerce, Justice and State Appropriations Subcommittee and the other appropriations subcommittees operate under ''caps'' that limit overall appropriations for the agencies under their jurisdiction. Since money collected by the PTO is counted against the cap if it is spent by the PTO, withholding a portion of that money from the PTO makes an equal amount available to spend elsewhere.
The idea that each year a larger amount of money will be withheld and a larger amount of money will be freed up from the previous year is a pyramid scheme. The further into the future this scheme is carried, the more ridiculous it will begin to appear. According to a Department of Commerce budget table, in the years 2002—2005 amounts withheld from the Patent and Trademark Office are estimated to be $113 million, $114 million, $117 million and $120 million. If the accounting method now in use continues, next year's budget will say $481 million of new fees are being withheld and $368 million of previously held fees are being released. In 2003, $595 million will be withheld and $481 million will be released. In 2004, $712 million will be withheld and $595 million will be released. In 2005, $832 million will be withheld and $712 million will be released. Eventually, amounts ''withheld'' and ''released'' might exceed the size of the PTO budget.
In the minds of IPO members, this withholding is nothing more than a government tax on their intellectual property rights.
Policy and Legal Questions
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Innovation and creativity protected by intellectual property rights are among the last things the government should tax. The members of this Subcommittee are well aware that intellectual property rights have helped stimulate the technology and business investment that is driving the economic prosperity we are now enjoying. Companies and inventors who are paying the $113 million a year now diverted to other government programs could produce an extra increment of innovation if they had that sum available to them for more research, for example. It costs about $150,000 a year, with benefits and overhead, to employ a researcher in a typical company. Without the current fee withholding, IPO members and other U.S.-based firms could employ perhaps 400 additional researchers to produce additional technology to drive the economy. Have the Appropriations Committees considered this alternative to the current policy of taxing PTO users to fund unrelated government programs?
This is not to say PTO users should not pay the full cost of obtaining, maintaining and enforcing their intellectual property rights. But we believe they should not be forced to support unrelated government programs.
Apart from the public policy questions, it is time to ask whether Congress has authority to tax intellectual property rights any more than it has authority to impose a direct tax on real estate or other forms of property. Article I, Section 9, Clause 4 of the United States Constitution prohibits direct taxation of property. Over the last decade, patent and trademark applicants and owners have paid nearly half a billion dollars in ''user fees'' into the general federal revenue. Under current proposals, each year they will be paying more than $100 million a year indefinitely. The longer this continues, the more it substantiates that PTO users are not paying user fees at all, but are paying a tax on their intellectual property for the simple purpose of raising money for the general treasury of the federal government. It is a tax in the guise of user fees. Direct federal taxes on property, however, have been struck down as unconstitutional. See, e.g., Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601 (1895); Kohl v. United States, 226 F.2d 381 (7th Cir. 1955). In addition to all the other concerns about the diversion of PTO funds, we wonder if continued diversion of patent and trademark fees begins to raise serious constitutional questions.
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Continued Withholding of User Fees Will Harm the PTO
We then come to the question of the impact on the PTO of withholding and diverting user fees. Although the President's budget, sent to Congress on February 1 indicates pendency time of patent and trademark applications will not increase in 2000 and 2001, the PTO's ''Corporate Plan for 2001'' presents a bleak picture. Average pendency for patent applications is estimated to increase from 20.8 months in 1996 to 26.6 months in 2001. According to the Corporate Plan, even assuming full funding after 2001, patent application pendency will continue to increase after 2001, to 31.7 months in 2005. Since the Department of Commerce's budget projects continued withholding of $113 million to $120 million in user fees each year through 2005, pendency times for patent applications are headed to levels even higher that those projected in the PTO Corporate Plan—levels totally unacceptable to U.S. industry. The situation in respect to the time required for the PTO to take up trademark application is similar, and could be even worse, given the skyrocketing rates of trademark application filings.
We are also very concerned that the withholding of PTO fees is adversely affecting the quality of professional patent examination. To take but one example, for years many people in the software industry have been concerned about the inadequacy of the PTO's software invention search files. Common sense says that if the PTO had available another $113 million a year over the next several years, some of those funds could usefully be devoted to gathering existing published information on software inventions and making it more readily available to the PTO's professional patent examiners.
Recently the inadequacy of the PTO search files has been received attention in the media in connection with so-called ''business method'' patents. Until a few years ago, many business methods were widely thought to be ineligible for patent protection, so the PTO had inadequate search files on business methods and few professional patent examiners with specialized training in business methods. The PTO is now working to catch up. Again, it is impossible to imagine how the PTO could not put additional funds to good use. The PTO could use funds to hire new patent examiners with training in business administration or accounting, for example, in addition to the basic training in science or engineering required for patent examiners. The PTO could provide more specialized training in business methods for its existing examiners and send them on field trips to learn how business methods are used in industry. The PTO could accelerate its program for improving its business methods search files and computer tools for finding prior art relating to business methods.
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Solutions to the Fee Withholding Problem
It is essential to find a solution that will enable the Patent and Trademark Office to use the fees it collects and have more reliable and certain funding of its operations. The most immediate need is to find more money for the PTO in 2000 and 2001, in order to curb rising patent and trademark pendency times and improve the PTO search files and other resources that are necessary for granting high quality patents and issuing high quality trademark registrations. What better time than now, when the Federal Government is running multi-billion dollar surpluses, to draw on general revenues to fund unrelated government programs that are receiving patent and trademark fees?
It is important to understand that fees paid to the PTO are associated with work the PTO must perform. Experience has shown that once patent and trademark pendency begins to rise, it takes years to turn the situation around. Americans who already have paid for patent and trademark applications deserve to have their applications processed without months and months of waiting.
The second step is to amend the legislation governing the PTO, so the Office can depend on receiving funding commensurate with the workload that comes into the Office. By the time it is determined how much money will be diverted and the annual Congressional appropriations bills are passed, it is too late for the PTO to make sound hiring and work processing plans for the following year.
We congratulate you on your past efforts to solve the fee withholding problem and pledge to redouble our efforts to work with you this year to find a solution once and for all.
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The PTO and the American Inventors Protection Act
The comprehensive American Inventors Protection Act contains 8 subtitles, several of which affect the PTO. We urge the Subcommittee to exercise continuing oversight of the implementation of this landmark legislation to insure it meets its objectives.
Subtitle G, the ''Patent and Trademark Efficiency Act,'' will have a substantial impact on the PTO. It alters the administrative structure in the PTO and gives the PTO more authority in management and administrative matters. A key provision in subtitle G states:
The United States Patent and Trademark Office shall be subject to the policy direction of the Secretary of Commerce, but otherwise shall retain responsibility for decisions regarding the management and administration of its operations and shall exercise independent control of its budget allocations and expenditures, personnel decisions and processes, procurements, and other administrative and management functions in accordance with this title and applicable provisions of law.
In essence, this passage says that while the PTO continues to be subject to the policy direction of the Secretary of Commerce, the PTO is independent of the Department of Commerce for purposes of making decisions regarding the management and administration of its operations. We believe Congress intended to eliminate unnecessary layers of review of PTO operating decisions and to decentralize and speed up decision making. Although we have no reason to believe these and other related provisions in the new law will not be fully implemented, in view of the importance of the provisions we suggest the subcommittee should review implementing amendments that will be made to the formal administrative and organizational orders of the Department of Commerce and the Patent and Trademark Office.
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Another subtitle that will have a major impact on the PTO is Subtitle E, the 'Domestic Publication of Foreign Filed Patent Applications Act of 1999.'' That subtitle requires publication of U.S. applications 18 months after filing if a counterpart application is being filed in a foreign country that requires publication after 18 months. It also provides incentives for other applicants to have their applications published voluntarily. The PTO will be proposing significant regulations to implement publication. We suggest Subcommittee oversight of publication procedures to insure the benefits of publication will be fully realized.
One major question will be whether the contents of a patent application file, including amendments, additional correspondence and the like, should be publicly available on a continuing basis after the application has been published initially at 18 months. Although the IPO Board of Directors has not revisited this question recently, when IPO testified at a public hearing a few years ago on how publication should be implemented, it was our view that the contents of the patent application file should continue to be publicly available after the 18-month publication.
Other subtitles of the American Inventors Protection Act that will significantly affect PTO operations include Subtitle D, the ''Patent Term Guarantee Act of 1999,'' and Subtitle F, the ''Optional Inter Partes Reexamination Procedure Act of 1999.'' The PTO will be publishing proposed implementing regulations for these titles as well. Again, we suggest Subcommittee oversight as implementation proceeds.
In conclusion, we want to congratulate Subcommittee members on their great achievement in obtaining passage of the American Inventors Protection Act and emphasize our availability to assist in any way we can on the PTO funding problem. We appreciate the opportunity to present our views. I will be pleased to answer any questions.
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Attachments (2)
63845a.eps
63845b.eps
STATEMENT OF COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL TREASURY EMPLOYEES UNION
Ms. KELLEY. Good afternoon. My name is Colleen Kelley, and I am the National President of the National Treasury Employees Union. We represent 2,700 bargaining unit employees who work at the Patent and Trademark Office.
I am here to reiterate what you have heard so frequently of our interest in working with you, working with the Congress in any way possible to avoid the diversion of funds. I don't have an easy answer for you other than in these current years of surplus we do think that there should be some way found to do that.
I do have one other reason for being here today and that is to talk a little about what it is that employees at the agency are going through; and, hopefully, if we were able to find answers to this funding issue, we would be able to address those issues also.
In the past, we have asked the Congress and the administration to work with us to make the radical changes that are needed in the personnel policies at PTO. We have heard about the high turnover and the heavy workloads, and we have recommended in the past that legislation be passed to allow PTO to operate more like a private sector business with increased flexibilities balanced with normal collective bargaining.
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We haven't been successful in having that happen in the past, but what we are discussing this year is that legislation be created to recognize the separation between the Trademark Office and the Patent Office and to leave the status quo in place for the Patent Office but on the trademark side, where employees there are united in their support for some reform in the personnel and pay area, to work with NTEU, and this would allow the Trademark Office to respond to the fluctuating labor market demands and to bring in the best and to retain them also.
Because while we are having success, it appears in bringing in the best and the brightest we are having a very hard time keeping them at the agency. We would look forward to an opportunity to work with those flexibilities and see if we can make those changes happen.
The last reason I am here today is to comment on NTEU support for the planned PTO facilities in Alexandria. We are confident that those new facilities will provide an environment in which our members can work efficiently, productively and safely, and we have already come to agreement with management on important issues around that facility and are very much looking forward to working with them to make it happen. Thank you.
Mr. CANNON. Thank you, Ms. Kelley.
[The prepared statement of Ms. Kelley follows:]
PREPARED STATEMENT OF COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL TREASURY EMPLOYEES UNION
Good afternoon Chairman Coble and members of the House Judiciary Subcommittee on Courts and Intellectual Property. My name is Colleen Kelley. Since the last time you invited our Union to appear before this subcommittee, I was honored to have been elected National President of the National Treasury Employees Union (NTEU). I know this committee enjoyed an excellent relationship with my predecessor and I hope to continue that productive relationship. I also want to introduce two union leaders in the audience today, Melvin White, President of NTEU Chapter 243 and Howard Friedman, President of NTEU Chapter 245, our two units at PTO. We very much appreciate the Committee's invitation to be here today to present our Union's views on the operation and proposed budget of the U.S. Patent and Trademark Office (PTO).
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NTEU represents more than 2,700 employees in two bargaining units at the U.S. Patent and Trademark Office. The employees at NTEU Chapter 243 are involved in all phases of the patent and trademark application process—from handling mail, to other tasks directly related to the adjudication of the patent and trademark applications. The Trademark Society, NTEU Chapter 245, represents the attorneys who process trademark applications.
As the Subcommittee is well aware, the Patent and Trademark Office plays a critical role in the development of new industries in our economy. PTO's employees perform the quasi-judicial function of adjudicating patent and trademark applications—an inherently governmental function that appropriately belongs in the public domain and is of Constitutional authority. The American public and business community place great importance on the registration of patents and trademarks in the United States as a key to the protection of valuable intellectual property rights. The PTO's employees are vital to the successful operation of the Office and can and should play an important role in increasing efficiency and productivity.
PTO continues to receive an increasing number of patent and trademark applications and these applications are ones of increasing complexity. Agency management and the American public are very fortunate to have the young, progressive and innovative workforce represented in NTEU's bargaining units. They are extremely computer literate, professionally savvy and open to new ideas. In our testimony today, I want to outline some important issues that must be addressed if we are to obtain the high level of productivity and morale PTO needs in this demanding era.
Mr. Chairman, with the superb and hard working employees at PTO you might think this is a model federal agency. Instead, it is an agency in crisis. The Office is grossly understaffed for the growing workload it bears. Pendency for applications is at unacceptable levels. Turnover is at a magnitude that robs PTO of experienced workers and lengthens pendency because of the resources that must be diverted to new employee training. I am sad to report to you, Mr, Chairman, that this evening when our members at PTO go home from work, a good number of them will be updating and editing their resumes, looking for work elsewhere. This loss of good workers in not in our country's interest.
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In other parts of government you might find offices and divisions that are in total morass with no apparent solution. You might find agencies that are underperforming with the wisest minds in government having no clue as how to motivate personnel, boost productivity, restore morale and achieve efficiency. At PTO, however, we have obvious solutions staring us in the face. All that is needed is for leadership from the Congress and the Executive Branch. In the current tight labor market, workers are not going to be attracted to or stay at PTO unless the agency is able to reduce workloads by expanding staff and better compensate its current staff. Both of these goals could be achieved by simply stopping the practice of diverting fees collected from PTO customers into general revenues. The Department of Commerce's PTO FY 2001 budget request has $368 million in fee collected revenue transferred to the General Fund. We find this an inappropriate use of user fees and something that is severely damaging to the operations of PTO. This rightful and needed revenue should be used to give PTO customers better service, to meet the growing challenges of the Office and to hire the additional staff that is so needed to handle both the backlog of applications and the continuing increases. The $368 million raid on PTO is unprecedented. Never before has this amount of money been taken away from the agency. Mr. Chairman it has to stop and it has to stop this year.
Mr. Chairman, let me make another proposal to you. In previous testimony before this committee, NTEU has asked the Congress and the Administration to have the courage we have to make the radical changes needed in personnel policies at PTO. We have recommended that legislation be passed to allow PTO to operate more like a private sector business with increased personnel flexibilities balanced with normal collective bargaining. Others have been fearful of this path and we were unable to move forward in last year's legislation. So I make to this committee a new proposal. Last year's legislation created new separation between the Trademark Office and the Patent Office. Leave the status quo in place at the Patent Office but on the Trademark side, where the employees are united in support for reform, give us normal labor relations including bargaining over pay such as NTEU represented employees at FDIC now have. This will allow the Trademark Office to respond to fluctuating labor market demands and bring in and retain the best and brightest.
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Lastly, I wish to comment on NTEU's support for the planned PTO facilities in Alexandria. NTEU is in a partnership relationship with PTO management regarding space allocation and other issues concerning new space PTO will occupy after the year 2002. We are confident the new facilities will provide an environment in which our members can work efficiently, productively and safely. We have already come to agreement with management on important issues such as space allocation and look forward to the many benefits this new site will offer. We hope that no needless delays will obstruct this move.
Mr. Chairman, I appreciate the opportunity to testify today. I am happy to answer any questions you or the members of the committee may have. Thank you.
Mr. CANNON. Mr. Stern, would you mind going ahead? We are going to give you full time if that is acceptable. We will let everybody make a quick statement.
STATEMENT OF RONALD J. STERN, PRESIDENT, PATENT OFFICE PROFESSIONAL ASSOCIATION
Mr. STERN. I appreciate that. I am not known for brevity.
We thank you for the opportunity to provide the views of the Patent Office Professional Association. We represent approximately 3,300 patent professionals, the vast majority of whom are engineers, scientists and lawyers working as patent examiners.
When the American Inventors Protection Act passed, most people expected the PTO would get to keep all of its fees because that is what the statute says. It is a revolting development that that hasn't happened.
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I think Chairman Coble had it right. We need to tell everyone to keep their grubby paws off PTO funds. As I testified in years past, there is a critical need for improvement in the quality of examination. Patent examination needs to be enhanced by providing more time for examination, by improving the nonpatent literature files and by maintaining the U.S. classification system.
There has been no significant improvement in any of these areas. The most notable change has been that our problems regarding the quality of issued patents are becoming more public. More and more reporters are criticizing the agency for issuing overbroad or otherwise potentially invalid patents. Examiners who live the situation daily know the lack of adequate time and search tools is serious, but how do we communicate that seriousness to others?
It has been reported that the EPO staff union staged a 2-day work stoppage in January to dramatize the seriousness of similar problems. That is not our style here. The time factors we currently work under were last revised in 1976. Since that date, patent applications have become significantly more complex, searches have become significantly longer and more time-consuming, and the number of claims per application has increased.
In spite of this relentless inflation in the need for more time, the agency continues to pressure employees to work faster. There is no way to automate this work away. The only cure is to give examiners more time per application. Patent examiners must have fast, reliable search tools. The paper search files provide such a cheap, constantly available search tool. It would be a mistake of enormous proportions to abandon them. There is no cheaper backup system.
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We need more reclassification efforts even if we rely only on automated systems. Foreign patents, which have been excluded from our paper search files since March of 1995, need to be classified into the U.S. system and added to our files. Nonpatent literature needs to be accessible via the U.S. Classification system, especially for young technologies such as business method patents.
Business method patent applications are a particular problem because examiners must rely on nonpatent literature which is not organized by our classification system. We hope you will encourage the agency to make the needed investment in gathering and classifying this information. As the Commissioner said, we have an entrepreneurial opportunity there.
The history of the PTO's attempts to provide automated search tools has been marked by some early successes followed by some failures. The most recent upgrade to the EAST and WEST systems resulted in lost functionality and lost features. There were three major problems: Lack of training, system crashes and excruciating slow response times. Approximately 380 examiners expressed their frustration by signing a petition directed to the Senate requesting an investigation.
To the credit of PTO top management, the fiasco was not swept under the rug. They worked to mitigate the disaster, but still almost 11,000 hours of production time were lost in the last 3 months of 1999 alone. We still get reports that the system is excruciatingly slow when performing a search for only the stem of a word and when performing a search for multiple alternative commonly used terms. Even in February, 2000, a benchmark average search transaction in the computer art still took 48 minutes compared to less than 4 seconds using our prior system.
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We do have one suggestion for improving efficiency. In the past year, outside consultants were hired by the agency to develop alternative employee compensation strategies. All of the possible options for which there was a broad base of support are already authorized by title 5 of the U.S. Code with one exception relating to overtime. We believe it is possible to pay employees more and at the same time save money for the agency. We recommend enacting the language of H.R. 1770 so as to more fairly pay our senior employees for their overtime at a rate equal to their regular time pay. Thank you for the opportunity to present our views.
Mr. CANNON. Thank you, Mr. Stern.
[The prepared statement of Mr. Stern follows:]
PREPARED STATEMENT OF RONALD J. STERN, PRESIDENT, PATENT OFFICE PROFESSIONAL ASSOCIATION
SUMMARY
Most people, when the AIPA was passed, expected the agency would get to keep all the fees it collects, since this is what the statute says. Right now fees are being siphoned off to fund other people's programs. This diversion of inventor fees is directly contrary to the spirit and intent of the Act that was passed to protect American inventors. Please set our fees free!
The PTO has huge unmet needs for additional staff to handle the increased filings, to increase the quality of patents, and to improve the quality of our search systems.
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More and more reporters and writers are criticizing the PTO for issuing overbroad or otherwise potentially invalid patents. Examiners who live the situation daily know that the lack of adequate time and efficient search tools is serious. It has been reported that the EPO staff union staged a two day work stoppage to dramatize the seriousness of the similar problems faced by the EPO examiners. But, that is not our style here.
The time factors we currently work under were last revised in 1976. Since that date, patent applications have become significantly more complex on average, searches have become significantly longer and more time consuming, and the number of claims per application has increased. In spite of this relentless inflation in the need for more time, the agency continues to pressure employees to work faster.
In the past year outside consultants were hired by the agency to develop alternative employee compensation strategies. All of the possible options for which there was a broad base of support are already authorized by Title 5 of the U.S. Code, with one exception relating to overtime. We believe it is possible to pay employees more and at the same time save money for the agency. We recommend adapting the language of H.R.1770 so as to more fairly pay our senior employees for their overtime.
Patent examiners must have fast, reliable search tools which give them access to U.S. patents, foreign patent documents, and non-patent literature. Our paper search files provide a cheap constantly available search tool. It would be a mistake of enormous proportion to abandon our paper search files. However, they are currently in need of additional maintenance.
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We need more reclassification efforts independent of whether we automate our search system or maintain our paper files. Foreign patents need to be classified into the U.S. Classification system and added to our files. Non-patent literature needs to be accessible via the U.S. Classification system, especially for young technologies such as business method patents.
Unfortunately, the history of the PTO's attempts to provide automated search tools is marked by some early successes, followed by some dismal failures. The most recent ''upgrade'' to EAST and WEST has resulted in lost functionality and features. There were three major problems: lack of training; system crashes; and excruciatingly slow response times. Approximately 380 examiners expressed their frustration by signing a petition directed to the Senate Governmental Affairs Committee requesting an investigation. To the credit of PTO top management, the fiasco was not swept under the rug. Instead, management moved swiftly to attempt to mitigate the disaster. The jury is still out on whether or not the fixes have worked.
STATEMENT
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to provide the views of the Patent Office Professional Association. Our organization is the exclusive bargaining agent for the approximately 3300 patent professionals at the U.S. Patent and Trademark Office. The vast majority of the employees we represent are engineers, scientists, and lawyers who work as patent examiners and patent classifiers.
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There are three bargaining units at the PTO. POPA represents more than one and a half times the number of employees represented by the other two bargaining units put together. The percentage of organized employees that we represent in the PTO has continued to grow.
I have been invited here today to provide our perspective on the topics of PTO funding, the American Inventors Protection Act and agency operations, the effectiveness of PTO's search system, and the treatment of business method patents.
Frankly, there is good news and bad news to report. The good news is that business at the PTO is booming. We are experiencing double digit growth in patent filings. Our fee income has grown to record levels commensurate with the filing increases. The bad news is that we have huge unmet needs for additional staff to handle the increased workload and to increase the quality of patents, and for better search systems. The worst news is that we are not permitted to use the increased fee income to meet all of those needs.
PTO Funding
There is virtually universal agreement within our membership that the provision in last year's American Inventors Protection Act (AIPA) providing the PTO with the authority to retain all of its fee income was the right thing to do. Most people, when the AIPA was passed, expected the agency would get to keep all the fees it collects, since this is what the statute says. But the fees still must pass through the appropriations process, and it is in that process that our fee income is effectively siphoned off to fund other programs. It appears inherently unlikely that we will ever get this money back. We have funded other peoples' programs with this money and that money is spent!
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We all recognize that charging someone a fee for a promised service and then diverting a part of the fee to other purposes undercuts the ability to actually do what was promised. Siphoning off inventor's fees constitutes a tax on innovation which undercuts incentives to invent and, thus, is wrong for the country.
What we now better understand is that the mere deferral of the use of fee income is the equivalent of siphoning off the money for other purposes. Because of the scoring process for maintaining both Administration and Congressional commitments to budget caps, inventor's money that is collected in one year and not spent that year is used to offset spending for unrelated programs in other agencies. If in later years the PTO is allowed to spend any money that would decrease the amount used to support programs in other agencies, those other programs would either have to be cut or funded from new money. The practical impact of this process is to put pressure on those in charge of appropriations to continue to siphon off at least the amount taken in the prior year and perhaps even increase it, as is currently happening. You would think that this year of surplus would be the best time to return the money that has been taken away in recent years, but in fact the opposite has occurred! Those in charge are taking even more money away.
This continuing diversion of inventor fees is directly contrary to the spirit and intent of the Act you passed to protect American inventors. We need additional legislation to correct this defect. Please, set our fees free.
As you were quoted recently, Chairman Coble, we need to tell everyone to keep their grubby paws off PTO funds.
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Among budget professionals, there is a misconception that the PTO has excess fees and each year the Administration and Congress have taken a huge cut out of the PTO fee income. The PTO will always appear to have extra funds so long as we require applicants to pay the bulk of their examination fees in advance and then let the work pile up. The continual siphoning of fee income from the PTO undercuts the ability of the PTO to hire enough examiners and technical support staff to handle the ever-increasing filing of new applications.
Senior officials in the PTO predict that a corps of 6000 examiners will be necessary by the end of FY 2003 to cope with increased filings if we intend to process applications quickly enough to meet the time requirements established in the Patent Term Guaranty Act of 1999. By artificially limiting the hiring of new examiners and support staff, the new applications just keep piling up on our shelves and the creation of very valuable patent rights is delayed, adversely impacting applicants' businesses, their business investment and, indirectly, the U.S. economy.
Current PTO Operations
As I have testified in years past, there is a critical need for improvement in the quality of examination. Patent examination needs to be enhanced by providing more time for examination, by improving the foreign patent and non-patent literature files, by maintaining the U. S. Classification system and by training examiners. There has been no significant improvement in any of these areas. In fact, the agency's Quality Review statistics show a small, but significant, deterioration in quality. The most notable change has been that our problems regarding the quality of issued patents are becoming more public.
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More and more reporters and writers are criticizing the agency for issuing overbroad or otherwise potentially invalid patents. We are now at the stage where one internet news provider has made a business out of criticizing the quality of the PTO's work products. The attacks can only get worse when someone has a vested interest in showing the system has lots and lots of improper patents. Examiners who are living the situation know the lack of adequate time and search tools is serious.
What we don't know is how to persuasively communicate that seriousness to others. It has been reported that the EPO staff union staged a two day work stoppage in January to dramatize the seriousness of the time problems faced by the EPO examiners. That is not our style here in the States. But I assure you, PTO examiners (who get about half the time allocated per application as EPO examiners do) believe there is a dire need to allow them to spend more time per application.
The time factors we currently work under were last revised in 1976. Since that date, patent applications have become significantly more complex on average, searches have become significantly longer and more time consuming, and the number of claims per application has increased. In spite of this relentless inflation in the need for more time, the agency continues to pressure employees to work faster.
Since 1976, the minimum production level to be considered satisfactory has increased twenty percentage points from 75% of an individual's quota to 95% of that quota. In addition, the agency now requires examiners to write lengthy Office Actions with detailed explanations and motivation statements never envisioned back in the 1970's, when a one page short form with very limited size boxes for the examiner's explanation was used for communicating initial decisions on patentability.
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You need go no further than looking at the new design for patent application file wrappers (the file folder that contains a single application) to appreciate the increased burden on examiners. Where the file wrappers used to be just folded card stock, they now include cloth tape reinforced accordion folds to allow for the expected multiple inch stack of paper. Search files in areas of current technology have similarly exploded in size. One examiner provided us with the following example:
Taking a search from a currently pending patent application as an example, the examiner searched the following subclasses: 264/. . . {subclasses redacted}. In 1976, this search contained 49 shoes of U.S. Patents. In year 2000, this search has 164 shoes. More than three times the number of shoes must be searched in the same amount of time. Interestingly, the total number of U.S. patents in the search in 1976 was 1926 while the total now is 4536. So there are 2.3 times as many patents taking up 3.3 times as many shoes. This shows that the patents issued since 1976 are longer and thicker, i.e. more complex. One would assume that it takes an examiner longer today to read and understand these longer, more complex applications and prior art documents.
In the January 2000 issue of the POPA News, we reported on an analysis of the percentage of patents containing 23 or more claims by year between 1976 and 1999. The percentage of such high claim count patents went from 6% in 1976 to 20% in 1999. This tripling of high claim count patents represents a great deal of additional work. Of course the number of issued claims is only a fraction of the total number of claims considered by the examiner during prosecution.
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These details have been provided to demonstrate the substantial inflation in the amount of work required of examiners in each patent application. There is no way to automate this work away. The only appropriate cure is to provide examiners with more time per application. To pay for this improvement, we hope that the committee will help set our fees free!
Another important ingredient for achieving examination quality and efficiency is specialization. A couple of years ago, management made the biotechnology examiners examine semiconductor cases to meet somewhat artificial date goals. The biotechnology examiners protested to no avail that they were not qualified to examine these cases. This type of thing happens all too often at the PTO. We ask you to make this a focus of your oversight in order to make sure that inventors receive an examination by a qualified examiner.
Labor Relations
Commissioner Dickinson has been a fresh of breath air, but there are still squalls. Although labor relations have improved at the PTO since he took the helm, we were disappointed that we were not allowed to be a part of the transition team set up to implement the new PTO organization. It is axiomatic that if you want full buy in to an outcome, you need to get the employees involved in the process.
In the past year outside consultants were hired by the agency to develop alternative employee compensation strategies. All of the possible options for which there was a broad base of support are already authorized by Title 5 of the U.S. Code, with one exception relating to overtime. We believe it is possible to pay employees more and at the same time save money for the agency.
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By statute the maximum hourly overtime pay is time and a half of grade 10, step 1. What this means is that our senior people get paid only about two thirds of their regular pay when they are working overtime. Most folks are just not willing to work for 2/3 of their normal pay.
Another statute limits total pay including overtime for a biweek to the amount payable to a GS–15, step 10 employee with no overtime. This cap denies, or limits, our most experienced primary examiners the opportunity to work paid overtime. Since these people are the most productive examiners in the agency, providing them an incentive to put in extra time will have a valuable payoff.
We recommend that you provide a legislative fix for the PTO. H.R. 1770, which we understand has the blessing of the Office of Personnel Management and the Administration, has the right technical language to accomplish this. H.R. 1770 not only increases the hourly cap, but also increases the biweekly cap. The increases are limited to amounts that are already available to a few other Federal employees such as air traffic controllers and law enforcement officials. Because the bill is applicable to the entire federal government, it is unlikely to pass this year. We think it should be implemented NOW for the PTO because we are a production oriented organization in which overtime is directly linked to the examination of extra applications.
Lifting overtime caps is a win-win situation for both patent applicants—they get experienced examiners at a bargain rate—and for employees. Even though examiners will be paid at straight time rates, the agency will save money because there will be no payments for additional employee benefits (retirement, health care and life insurance), no recruitment expenses, no payments for additional office space, no payments for additional computer workstations, etc.
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Search Systems
To efficiently obtain the most pertinent prior art to support a patentability determination, patent examiners must have fast, reliable search tools which give them access to U.S. patents, foreign patent documents, and non-patent literature. One such tool has served examiners and inventors admirably for over 200 years: our paper search files. The paper files provide a cheap, easy to maintain, and constantly available search tool. According to a 1998 survey of examiners, 66.5% said that they usually or almost always find the most pertinent prior art from a search of U.S. patents in the paper files. However, this invaluable resource is now threatened. The PTO has failed to provide the reclassification work necessary to maintain the files and has announced plans to get rid of all the paper search files when the agency moves to its consolidated facility.
It would be a mistake of enormous proportion to abandon our paper search files. It was a mistake when our management, some fifteen years ago, envisioned the elimination of all paper search files. I told the Subcommittee then of POPA's opposition to the removal of paper search files. It is still a mistake now. There is no cheaper backup search system.
Foreign patents have not been added to the search files since March of 1995. Nor has there been any attempt to classify the electronic versions of these patents into the U.S. Classification system. Current access is only by way of a word search of what are often poorly translated abstracts. A year ago, we reported seeing many thousands of foreign patents boxed and labeled as trash. These patents have not yet been returned to the shoes and we know of no plans to do so.
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In addition to paper files, examiners need advanced tools to search advancing technology. Increasingly complex applications in biotechnology and gene sequencing require searching via automated methods, while access to recent publications and other non-patent literature, vital in the examination of applications concerning young technologies, is most convenient via computerized tools and the internet.
Business method patent applications are a particular problem for the agency, because there is no substantial established body of patent art which has been classified in the U.S. classification system and available for full-text search. Examiners must rely principally on non-patent literature which is not organized into the efficient search tool provided by the U.S. classification system. An investment in gathering and classifying this information is an essential precursor to an efficient search system. We hope that you will encourage the agency to make that investment.
Unfortunately, the history of the PTO's attempts to provide automated search tools is marked by some early successes, followed by some dismal failures. The most recent ''upgrade'' of our hardware and software has resulted in lost functionality and features. On October 9, 1999, the PTO removed the primary text search tool used by examiners for a decade, APS Messenger, leaving two new tools, EAST and WEST, available for examiner's use. In some areas of the PTO, this change resulted in ''near riot conditions'' as examiners with rigid production requirements struggled to do their job. There were three major problems: lack of training in the use of these new systems; system crashes resulting in total loss of work; and excessively slow response times. Approximately 380 examiners expressed their frustration by signing a petition directed to the Senate Governmental Affairs Committee requesting an investigation.
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To the credit of PTO top management, the fiasco was not swept under the rug. Instead, management moved swiftly to attempt to mitigate the disaster. A four point program was established, in which examiners were to receive emergency training, contractors were charged with making real improvements in the hardware and software, employees were permitted to shift their work times so as to reduce loads on the system at peak times, and most important of all, employees were given credit for the time lost due to system inadequacies. Almost 11,000 hours of production time were lost in the last three months of 1999 alone. We do not yet have the data for this year.
While we are pleased that Commissioner Todd Dickinson and Assistant Commissioner Nick Godici had the integrity to acknowledge the recent search system fiasco, some of our experts have told us that they believe the BRS search engine, which is at the heart of EAST and WEST, has a fatal flaw in that it handles certain searches very inefficiently compared to our old APS Messenger system. Since there is nothing that BRS does better, their recommendation is to simply get the old system back. Luckily the agency recognizes the need for using the old search engine, and has made available the commercial version of APS Messenger on a limited basis to some examiners. But they tell us that in the long term this is not an economically viable strategy.
The jury is still out on whether or not the fixes have worked. There have been some improvements in response time and reliability. However, we still get reports that the system is excruciatingly slow when performing a search including front and rear truncation of a word (a search for only the stem of a word), and when performing a search for multiple, alternative commonly used terms. In February 2000, an average search in the computer art for, as an example, (system or bus or host) adjacent (voltage or power) in February took 2837 seconds, or approximately 48 minutes. This is not the search itself, it is merely a part of the first step of gathering documents which must then be reviewed and tagged for later analysis. This is the kind of search transaction that was expected to take less than four seconds using APS Messenger.
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Patent examiners are computer savvy, dedicated to quality, and eager to embrace new tools which will improve their ability to provide the best possible products and services. They are eager to participate in the planning and development of new automated tools, at the earliest possible stages, in order to avoid repetition of the mistakes of the past. Before us lie the challenges of implementing electronic commerce and transitioning to a paperless application process.
As a result of the EAST/WEST travails, the agency appears to have changed its approach to employee involvement. We have just concluded an agreement to establish a partnership working group to treat all automation issues, and in particular to increase employee involvement in the development of automated tools. Management has agreed to provide advance notice on upcoming upgrades to the automated systems so as to permit early employee input.
Technical Corrections to the American Inventors Protection Act
In subsections (a), (b), and (c) of section 134, of Title 35, U.S.C., which deals with appeals to the Board of Patent Appeals and Interferences, the 1999 amendments incorrectly state that an appeal may be taken from the decision of ''the administrative patent judge'' rather than the ''primary examiner'' as was previously set forth. An administrative patent judge is a member of the Board to which the appeal is taken.
We believe it is important to correct this section by reinsertion of the full title of ''primary examiner'' as the person making the decision which is to be appealed. This section has been the benchmark for the position of primary examiner. This section has been the basis for defining the position of primary examiner as one requiring an incumbent who is fully competent in both patent law and the relevant technology being examined. It would be a shame to fail to continue to support the pride and dignity that historically has been associated with the title of Primary Examiner.
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Another title that is steeped in tradition is that of the Commissioner of Patents and Trademarks. We support the suggestion that this title be reserved only for the highest official in the agency.
In addition, we believe the historically significant option of appointing primary examiners to the Board of Patent Appeals and Interferences for 6 month periods so as to help keep the work of the Board current should be reinserted into 35 U.S.C. §6 (formerly §7). While this option has not been used recently, it has been used very effectively in years past. It is particularly useful for eliminating temporary backlogs quickly, when the staff that is necessary is too large to employ on a continuing basis.
Conclusion
We urge you to take legislative action to prevent inventor's fees from being siphoned away from the PTO. We believe those funds can be usefully invested in providing a larger staff to handle the increased workload, and to improve quality by providing more time for the examination of each application.
We also hope the committee will take legislative action to boost the overtime pay rate for our most knowledgeable and efficient examiners, so that more patent applicants can get their applications examined by an experienced examiner.
Thank you again for this opportunity to present our views.
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Mr. CANNON. Ms. Lamblin.
STATEMENT OF KINA LAMBLIN, VICE PRESIDENT AND GENERAL COUNSEL, VISX, INC.
Ms. LAMBLIN. I appreciate this opportunity to speak to you. My name is Kina Lamblin, and I am general counsel of VISX, Inc., based in Santa Clara. VISX invented laser vision correction, which is the technology used to correct nearsightedness, farsightedness and astigmatism. The founders of our company invented it, our shareholders invested $100 million to conduct the research development, clinical trials to prove that it is safe and effective, and bring it to people everywhere.
We have a tremendous investment in it. We continue to invest in improvements to it. We have 50 issued U.S. patents and 48 patent applications pending, which is why I am here to talk to you about my experience with the Patent Office, and it is that they are hard working, dedicated people with a lot on their plate, and that they need additional funds to fund their operations with qualified people that they can hire and retain, and a better computerized system of processing applications so that they are accurately and quickly processed.
I have two other issues that I would like to present as well. They are related, and the first is that I have made a proposal that the jurisdiction of the Federal circuit be amended so that the Federal circuit can hear appeals from Federal Trade Commission cases that relate to patents. It is a very unique situation that the only court to which a defendant in an FTC case on a patent law issue cannot appeal right now is the Federal circuit, the only court in the land qualified to hear appeals on patent issues and the only court in the land that has heard appeals on patent issues for the last 15 or more years. So it is in my submitted statement a proposal to amend the jurisdiction of the Federal circuit.
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The last issue I would like to present to you is an alarming trend in the recent decisions of the International Trade Commission summarized also in my statement. What you will see is over the last 5 years, something dramatic has happened, and that is, in the period 1995 through 1997, rulings in favor of U.S. patent holders ran at about 70 percent. And that in the last 2 years, by extreme contrast, only in 20 percent of the cases has the International Trade Commission ruled for the holder of the U.S. patent and granted an exclusion order.
It is an alarming trend, and I believe that one way to address the problem is to ensure that all ALJs at the ITC who hear section 337 cases, that is infringement actions, have a background and be qualified in patent law matters.
Those are the three issues that I have come to present to you. They are critically important to American innovation and leadership and technology and I appreciate your attention.
Mr. CANNON. Thank you.
[The prepared statement of Ms. Lamblin follows:]
PREPARED STATEMENT OF KINA LAMBLIN, VICE PRESIDENT AND GENERAL COUNSEL, VISX, INC.
Mr. Chairman and Members of the Subcommittee:
Good afternoon. I appreciate this opportunity to speak to you today.
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My name is Kina Lamblin and I am Vice President and General Counsel of VISX, Incorporated. VISX is a worldwide leader in the development of refractive laser technology used to correct nearsightedness, farsightedness and astigmatism. The founders of our company invented laser vision correction. Our shareholders invested more than $100 million dollars to conduct research, development and clinical safety and efficacy studies to ensure that this breakthrough technology would be made available to people everywhere. As the inventor of laser vision correction with a tremendous investment in the industry, VISX continues to create improvements in all aspects of the procedure. As a result, we hold more than 50 United States patents and have 48 patent applications pending in the United States Patent and Trademark Office (the ''USPTO'').
I would like to present three matters for your consideration today. The first is the importance of allowing the USPTO to use all filing fees paid by patent applicants to hire, train and retain a sufficient number of patent examiners to process patent applications within a reasonable amount of time. The second is a proposal to allow appeals of Federal Trade Commission decisions involving patents to be heard by the United States Court of Appeals for the Federal Circuit. The third is the disturbing trend in recent decisions of the U.S. International Trade Commission against holders of United States patents and the effect of those decisions on the competitiveness of U.S. companies in the global marketplace.
Adequate Funding and Staffing for USPTO
As general counsel to a company that interacts regularly with the USPTO, I have observed extensive delays at each step of the patenting process. In view of the expected level of funding, the USPTO business plan predicts that the average pendency of patent applications of 25 months in fiscal year 2000 will increase to approximately 32 months by fiscal year 2005. Given the importance of intellectual property to U.S. inventors and technology companies, this is an alarming trend. I strongly urge Congress to ensure that the USPTO be able to maintain or, even better, decrease the average pendency of patent applications. Providing adequate funding to this organization is the crucial first step in achieving this goal. With adequate funding, the USPTO will have the opportunity to attract, train and retain additional qualified patent examiners. Also, computerization of the prosecution process, if properly funded, promises to significantly decrease pendency, increase accuracy, and provide better and more timely access to USPTO documents such as file histories.
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Of the 10 patents that were issued to VISX in 1998 and 1999, the average time between filing and issuance was 30 months or 2 1/2 years. This is five months longer that the average pendency publicized on the USPTO website, but whether it is 25 months or 30 months, greater than two years is a very long time for inventors and U.S. companies to wait to receive patent protection for their inventions, the very inventions that are driving the unprecedented strength of our economy.
The fact is that many patents take much longer to prosecute. For example, one of the 10 patents issued to VISX in 1998 and 1999 had been pending for 52 months. We have encountered frequent delays of more than one year after responding to USPTO actions. For example, last month we received an office action two years after submitting a response in one pending patent application.
Patent reexaminations provide another illustration. When Congress authorized the reexamination of patents in 1980 it specified that ''all reexamination procedures under this section . . . will be conducted with special dispatch within the [Patent and Trademark] Office.'' 35 U.S.C. Section 305. One important VISX patent has been in reexamination for 26 months as of today. After the reexamination was declared, more than one year passed before even the first office action was issued by the USPTO. While waiting for over two years for the completion of this reexamination, VISX has effectively been deprived of the use of a valuable patent asset.
A working patent system is fundamental to United States innovation and technological leadership. Without it, there is little incentive to make the enormous investments needed to bring exciting new technologies to market, especially those medical technologies that require extensive safety and efficacy clinical trials for FDA approval. I understand that hundreds of millions of dollars have been taken from the USPTO's revenues to fund other government programs. I urge you to ensure that the USPTO be allowed to use all of the patent prosecution and maintenance fees paid by inventors and companies to fund important improvements in its operations, namely, (a) attracting, training and retaining additional qualified patent examiners so that more time can be devoted to processing each patent application with less delay due to severe backlogs, and (b) implementing and supporting a properly funded ''paperless'' patent prosecution system.
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Federal Circuit Appeal for Federal Trade Commission Decisions Regarding Patents
In March 1998 the Federal Trade Commission (''FTC) filed an action against VISX challenging the enforceability of certain VISX patents. The FTC focussed on one patent that was at the same time the subject of a reexamination proceeding in the USPTO. While this struck us as a wasteful duplication of scarce government resources, as well as a tremendous burden for an emerging growth company, we had no choice but to defend out intellectual property against the claims of the FTC.
After an extensive investigation and a six-week trial, in June 1999 the FTC's administrative law judge issued an order dismissing the FTC's complaint against VISX. Notwithstanding the judge's thorough 145-page opinion ruling in VISX's favor, the FTC staff attorneys elected to appeal the decision to the full Commission.
Under present law, a respondent cannot appeal a cease and desist order of the FTC to the United States Court of Appeals for the Federal Circuit, even if the order is based on patent law issues that are governed by Federal Circuit law.
Congress created the Federal Circuit in 1982 to eliminate uncertainty in patent law that developed through inconsistent decisions from the regional courts of appeals. In the years prior to the creation of the Federal Circuit, inconsistencies in patent law made it difficult for businesses to assess the value of patents. The effect, Congress found, was to chill innovation and investment in technology, with consequent adverse effects for the economy as a whole.
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Congress' solution to this problem was to establish a new court of appeals with jurisdiction over all patent appeals to create greater uniformity in patent law. In furtherance of its role in achieving uniformity in patent law, the Federal Circuit has determined that the law of the Federal Circuit controls the determination of hybrid issues of patent law and non-patent law.
Matters currently pending before the FTC include cases that fall squarely within the scope of what the Federal Circuit has determined are controlled by Federal Circuit law. Absent a change in the avenues for judicial review of FTC orders, however, the Federal Circuit is virtually the only federal court of appeals to which the appeal cannot be taken. This anomalous result easily can be avoided by amending the Federal Circuit's jurisdictional statute (28 U.S.C. §1295) to allow an appeal to the Federal Circuit from orders containing findings of fact or conclusions of law that raise a substantial question of patent law.
I propose that the following language be added to the statute that describes the jurisdiction of the Federal Circuit (28 U.S.C. §1295):
(d) Any person, partnership, or corporation required by an order of the Federal Trade Commission to cease and desist from using any method of competition or act or practice may obtain a review of such order in the Court of Appeals for the Federal Circuit if any factual findings or conclusions of law supporting the order raise a substantial issue of patent law, by filing in the Court of Appeals, within sixty days from the date of the service of such order, a written petition praying that the order of the Federal Trade Commission be set aside.
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This change would neither enlarge nor diminish the power or jurisdiction of the FTC. At the same time, it retains the discretion that parties currently have to select a regional forum if they determine that it is appropriate.
Because the FTC has not issued an order based on issues of patent law since the creation of the Federal Circuit in 1982, Congress has not previously had the opportunity to address this issue. Now, however, the issue is a timely one. Not only is there a case currently pending before the FTC that raises patent issues falling within the unique expertise of Federal Circuit, but the FTC has announced its intention to focus significant agency resources on competition issues relating to the enforcement of intellectual property. The problem is therefore likely to be a recurring one, absent appropriate legislative action.
Alarming Trend in Recent ITC Decisions
The third and final matter I wish to bring to your attention is the recent trend in International Trade Commission (ITC) decisions in patent cases and the effect those decisions may have on U.S. intellectual property and technology-intensive industries.
Under Section 337 of the Tariff Act of 1930 (as amended), Congress defined as an unlawful trade practice the importation of products that infringe U.S. patents. Congress entrusted the ITC with the authority to enforce this law by barring the importation of infringing foreign products. Given the importance of intellectual property to the U.S. economy, it is essential that the Commission give a full and fair hearing to complaints against importation of foreign products that are alleged to infringe U.S. patent rights.
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Since 1998, U.S. patent holders have encountered an alarming trend of unfavorable results when petitioning the ITC to stop importation of infringing foreign products. From 1995 to 1997, the ITC found infringement of a valid U.S. patent in 70% of its decisions. In contrast, in 1998 and 1999, infringement was found in only 20% of ITC cases. In the remaining 80% of cases, many U.S. patent holders seeking protection have had their patents found invalid and unenforceable by the ITC's administrative law judges (ALJs).
While each case involves its own facts, this trend is all the more alarming given that review of the ALJ decisions by the full Commission is discretionary and is not granted in the large majority of cases. The recent trend in ITC decisions is cause for concern regarding possible errors made by individual ALJs who do not have the technical or patent law training or experience to make complex patent infringement and validity decisions. Any such errors will have an enormous effect on U.S. intellectual property rights and growth industries.
Again, VISX's experience is illustrative. In January 1999, the ITC initiated an investigation of the importation and sale by Nidek Co. Ltd. of Japan of excimer laser systems used for laser vision correction on the basis that those activities infringed certain VISX patents. A hearing was held in August and the ALJ rendered an Initial Determination in December in which she construed the patents so narrowly that she not only found that Nidek had not infringed them, but also that VISX's own laser system did not come within the scope of their claims. She went further to rule that one of the founders of VISX was not the sole inventor of his patent and that, for that reason, the patent was not valid or enforceable. The day after the Initial Determination was issued, December 7, the value of VISX's stock fell more than 40% (nearly $2.5 billion dollars) and has continued to decline since then.
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On Monday of this week, the Commission issued a Notice that it had adopted portions of the ALJ's Initial Determination, ruling that the Nidek laser system does not infringe the VISX patent at issue and that VISX itself does not practice the patent. With regard to the validity and enforceability of the patent (including the inventorship issue), the Commission did not affirm the Initial Determination, but instead took no position.
With this decision in the VISX case, the Commission has continued a record of deferring to its ALJs in their findings of no violation of Section 337 of the Tariff Act (that is, rulings against U.S. patent holders in favor of importers of foreign products). As an interesting point of comparison, since its creation in 1982 through 1998 the Federal Circuit has reversed rulings that favored defendants in patent cases approximately 25% of the time, finding that despite a lower court's ruling to the contrary, infringement of a valid patent had in fact occurred.
Given the enormous degree of deference shown to its ALJs by the ITC, it is critically important that ALJs who hear Section 337 cases have the background necessary to make proper judgments regarding the complex legal and technical issues of patent infringement and validity. I ask that the Commission amend the law governing the appointment of ALJs to the ITC to require that those judges who will preside over Section 337 cases have significant training and experience in patent law.
Thank you for your consideration of these matters that I believe are of critical importance to continued U.S. innovation and technological leadership.
Mr. CANNON. Mr. Maier.
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STATEMENT OF GREGORY J. MAIER, CHAIR, SECTION OF INTELLECTUAL PROPERTY LAW, AMERICAN BAR ASSOCIATION
Mr. MAIER. Thank you, Mr. Chairman, for the opportunity to testify. I am Gregory Maier. I am Chair of the ABA Section of Intellectual Property Law.
Our section has more than 18,000 members and as such, we are the world's largest organization of intellectual property attorneys.
I would like to make three points. First of all, our position. The Section of Intellectual Property Law of the American Bar Association continues to support the principle that the Patent and Trademark Office user fees should be made available for the use of the PTO, and only for the use of the PTO, and that they should be made available for use as they are collected and as soon as they are collected.
Point two as to what to do about the current situation, we understand that the administration is considering recommending that Congress address these matters with some sort of permanent authorization for the use of PTO user fees. Clearly we are not experts in the workings of government, you are, but we ask you to please do what you can to solve this nagging problem through some sort of permanent authorization.
Thirdly, as to the need for more money within the PTO, first of all, we feel that the PTO has excellent leadership under Commissioner Dickinson, but it certainly needs more resources. I can tell you that I was an examiner in the Patent Office in the late 1960's, and we operated in the late 1960's pretty much the same as people did 100 years before us. We operated with pen and pencil, paper files. And when amendments came into the U.S. Patent Office in the 1960's, they were entered in the paper files by clerks with red ink and pens as they were a hundred years ago. When Abraham Lincoln received his patent in 1849, things were about the same.
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I submit to you today the same thing is happening. There is still a large staff of clerks entering amendments by hand in red ink. I don't think that it is appropriate for the greatest Nation in the world to have a Patent Office that continues to operate largely as it did 150 years ago. It is time to provide the USPTO with the funds to become an all-electronic Patent Office. This is the age of electronics. The United States created that age, and the United States Patent Office patented the technology for that age. It is time for them to receive the funds to operate in the 21st century. Thank you very much.
Mr. CANNON. Thank you very much, Mr. Maier. I think we would all like to know what President Lincoln patented in 1849 before he became president.
Mr. MAIER. I just happen to know that, sir. It was a flotation method for a vessel—the model is in the Smithsonian, of course. But the idea was, and certainly the Commissioner can address this also, but it was for river boats, and there was extra flotation attached to the river boats to permit them to carry heavy loads over shallow waters. That was in 1849, well before he became president and well before he made—I believe in 1859 he made his famous statement about the patent system adding the fuel of—what was it again—to the fire of genius. What did he add, Ron?
Mr. STERN. I am blanking on it. It is a very famous quote.
Mr. MAIER. It is a famous quote. I think it is engraved on the front of the Commerce Building, actually.
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Mr. CANNON. Did Lincoln actually make money on this invention?
Mr. MAIER. I am almost positive that he didn't make any money. There is quite a bit written about that, and I am sure that he didn't make any money.
Mr. CANNON. Thank you, Mr. Maier.
[The prepared statement of Mr. Maier follows:]
PREPARED STATEMENT OF GREGORY J. MAIER, CHAIR, SECTION OF INTELLECTUAL PROPERTY LAW, AMERICAN BAR ASSOCIATION
Chairman Coble, Members of the Subcommittee:
Thank you for your invitation to testify at today's oversight hearing on the U.S. Patent and Trademark Office (PTO). I understand that the focal point of the hearing will be the budget for the PTO.
I am Gregory J. Maier, Senior Partner in the Arlington, Virginia intellectual property law firm of Oblon, Spivak, McClelland, Maier & Neustadt. I appear today as chair of the Section of Intellectual Property Law of the American Bar Association. The views I will be expressing represent those of the Section of Intellectual Property Law. These views have not been approved by the House of Delegates or Board of Governors of the ABA, and, accordingly, should not be construed as representing the position of the American Bar Association as a whole.
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The Section of Intellectual Property Law has more than 18,000 enrolled members, and is the world's largest organization of intellectual property attorneys. We follow activities in the Congress relating to intellectual property laws, and deliberate on and debate issues about which our members have experience and knowledge. From time to time we offer recommendations to members and Committees of the Congress consistent with our deliberative process and our area of expertise. We hope that our observations and recommendations are useful to the Subcommittee and welcome suggestions on how we might be more helpful.
We are particularly grateful for the opportunity to share our views with the Subcommittee on the subject of funding for the Patent and Trademark Office. Funding and staffing of the PTO are issues that have been of long and continuing interest to the Section of Intellectual Property Law. In preparation for my appearance here today, I reviewed our Section's policy statements on these issues, and found that they go back several decades.
Thirty years ago, we approved ''the principle that the Patent Office be supported adequately to insure first class staffing, housing and equipment; that the Patent Office should not be self-sustaining; and that any fees charged should be reasonably apportioned in accordance with the cost of providing the particular service.''
We continue to support the principle that the PTO should receive adequate funding to insure that quality services can be delivered. The issue of whether the PTO should be self-sustaining, that is to say, fully funded by user fees, was resolved in 1990, with the enactment of the Omnibus Budget Reconciliation Act (OBRA). In the 1980's, Congress began to shift more and more PTO funding from appropriated taxpayer funds to PTO user fees. With the passage of OBRA in 1990, a final giant step was taken to reach full fee funding. A surcharge was imposed upon all statutory patent fees listed in section 41(a) and (b) of Title 35, United States Code. The surcharge was set to raise sufficient additional revenue to make the PTO fully self-sustaining.
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The objective of full PTO support from user fees was quickly achieved, but doing so placed a tremendous burden on America's innovators. Combined with other patent fee increases that Congress enacted a few months later, inventors saw their PTO fees more than double in just one year. Yet since that time not a dollar of public funds has been utilized to run the PTO.
It is true that this step was taken as a deficit reduction measure. However, it was not taken to raise money for deficit reduction over and above the amount of revenue needed to effectively operate the PTO. Rather, it was designed only to replace the amount of taxpayer funds then being appropriated for the PTO. For this reason, Section 10101 of OBRA specifies that all surcharge receipts ''shall be credited to a separate account established in the Treasury and ascribed to the Patent and Trademark Office . . . as offsetting receipts''. Section 10101 further specifies that these funds ''shall be available only to the Patent and Trademark Office, to the extent provided in the appropriations Acts, for all authorized activities and operations of the office,. . .''
For one short year, the OBRA surcharge was administered as designed and intended. In fiscal year 1991, $99,307,000 was collected and deposited in the fund, and this full amount was appropriated back to the PTO. The following year, $8 million of the $95 million collected was withheld from the PTO. In FY 1993, the amount withheld rose slightly to a little over $12 million. Another slight increase, to a little under $15 million, occurred in FY 1994. In fiscal year 1995, the level of diversion rose substantially, to more than $24 million, with the total amount diverted then reaching $59 million.
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These developments prompted our Section to call upon Congress to repeal the patent surcharge and transfer all the funds withheld since 1991 to the PTO Office Appropriation Account. We did not do so out of a desire to reopen the battle over full funding of the PTO by user fees. Like most people in the inventor community, we had accepted that as a reality. We simply did not then believe, and do not now, that users of PTO services should pay not just 100 percent of the costs of the PTO, but 110 or 120 percent. For this reason, we developed policy six years ago that we still maintain regarding replacement of fee funds lost by an end to the surcharge. In calling for an end to the surcharge because it was a proven instrument of diversion, we also made clear that we did not oppose adjusting existing statutory fees to offset this loss of revenue, so long as the adjustment in fees (1) did not exceed the amount necessary to offset the loss from the surcharge, and (2) all PTO fee revenue was made available to the PTO to support services to users.
Mr. Chairman, two years ago, under your leadership, this Subcommittee carefully examined the Administration's request for PTO fee increases to offset the loss of revenue from the then pending expiration of the patent user fee surcharge. In testimony at your hearing, our Section and others representing the intellectual property community sounded a common theme: adjust the fees to the extent necessary to fund timely and quality services by the PTO, but do not raise fees to produce revenue which will be diverted to other purposes. We are pleased to note that, following your lead, the Congress did just that. In its FY 1999 budget submission, the Administration had announced an intention to rescind $50 million in PTO fee revenue to be collected that year. Taking this into account, your Subcommittee adjusted fees to levels sufficient to offset the revenue lost from the expiration of the surcharge, minus the $50 million already earmarked for rescission. As a result, H.R. 3723, the legislation enacted to adjust patent fees, actually resulted in across-the-board patent fee reductions.
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Upon the expiration of the surcharge, if Congress and the Administration had made no changes other than to raise statutory patent fees to make up for the shortfall in fee collections, we would not be facing the continuing problems we face today. Until then, the budgetary chicanery practiced on PTO user fees had been confined to revenue obtained from the surcharge. Revenue raised by the statutory fees had always been appropriated for the use of the PTO in an open-ended fashion, in language setting no dollar limits, but merely providing that the Office could spend all the fee revenue it collected.
Authorizing the Office to spend whatever it raises, without knowing the exact amount in advance, is an important feature of the PTO funding mechanism. A change up or down in revenue signals a change in workload, and a corresponding change in the need for examiners and other Office resources. A ''floating'' budget allows for timely adjustments.
However, congressional appropriators have recently adopted a practice of ''capping'' the amount that the PTO may spend in a given year, at a level substantially less than the actual fee collections of the Office. Perhaps this technique was developed so that practices developed under the patent surcharge, which is now dead, can rule from the grave. Capping produces much the same results. For example, the FY 2000 appropriations Act caps the amount that the PTO can spend from fee collections at $755 million-$229 million less than estimated revenue. This disparity is made somewhat less dramatic by the fact that $116 million of 1999 fee revenue carried over as a result of last year's spending cap is made available for the PTO to spend in FY 2000. The ''withhold and carry over'' practice nonetheless carries with it a number of shortcomings.
The FY 2000 appropriation contains a legislative promise that funds collected above the cap will be made available next year. In fact, the current appropriation honors the commitment to this effect made last year. However, this does not mean that all PTO user fees will ultimately be made available to the PTO. First, the carry-over of fee collections above the cap is itself capped. The FY 2000 appropriation calls for $116 million carried-over from FY 1999 to be available in FY 2000; the actual carry-over will be at least $20 million higher due to increased filings in 1999.
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There is also a cap at the other end of the FY 2000 appropriation. Regardless of fee collections, the carry-over to FY 2001 is capped at $229 million. The PTO is experiencing double-digit increases in patent and trademark applications, with corresponding increases in fee collections. These increases are projected to continue into the foreseeable future, and are likely to produce a carry-over in excess of the original estimate of $229 million. Since fee revenue is tied directly to work load, such excess revenue brings with it an increased need for PTO examiners and other resources. However, the Administration and congressional appropriators seem to be set on a course of responding to these needs by withholding and carrying over ever-increasing amounts each year, a disturbing trend that is vividly illustrated by the pending PTO budget proposal.
The President's budget proposal for Fiscal Year 2001 has been sent to Congress, and it proposes that the gap between total user fees paid into the PTO and the amount of those fees which the Office can spend should continue to grow, not just next year, but every year for the foreseeable future. For example, the PTO budget history shows that $108 million in user fee collections was withheld from the PTO and carried over from FY 1998 to FY 1999. From 1999 to 2000, this grew to $142 million. Under the current enacted budget, this total amount will grow by $113 million to $255 million to be carried over into FY 2001. The President's budget proposal for FY 2001 calls for the total to rise by an equal amount, $113 million, meaning that $368 million will be withheld from FY 2001 fee collections and carried over into FY 2002.
Few, if any, persons who are knowledgeable in the workings of congressional budgeting and appropriations believe that, as these amounts grow into hundreds of millions of dollars, these funds will eventually all be made available to the PTO. This is particularly true if we suffer an economic downturn that results in diminished patent and trademark applications and reduced fee revenue.
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Two years ago, when this Subcommittee met to examine the issues surrounding funding for the PTO and diversion of PTO user fees, many of your witnesses called for an end to the patent surcharge, in the hope that ending the surcharge would end the practice of diverting PTO user fees to fund other programs. The surcharge was allowed to expire, but diversion of user fees continues. The techniques and the nomenclature may have changed, but the abusive practices remain.
This convoluted appropriation process is particularly detrimental to the quality of PTO services at this moment in our history when the workload of the PTO is growing at a double-digit rate. That growth in workload indicates that innovation and inventiveness are likewise growing both here and abroad. Yet inventors cannot reap the full benefits of their discoveries unless and until they have been issued patents by the PTO.
As Ronald Reagan said in his National Inventors Day Proclamation in 1983:
''. . . inventors are the keystone of the technological progress that is so vital to the economic, environmental and social well being of this country. Individual ingenuity . . . spurred by the incentives of the patent system, begin the process that results in improved standards of living, increased . . . productivity, creation of new industries, improved public services, and enhanced competitiveness of American products in world markets.''
Today we see all around us the improved standards of living, increased productivity and new industries that President Reagan spoke of, springing from the work of inventors spurred by the incentives of the patent system.
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It is the fees paid by these very inventors and their employers that fund the PTO. We believe that the PTO must have the freedom to commit all such fee income to improved services that will result in top quality examinations and quickly issued patents. These are the services that inventors pay for and are entitled to receive. We believe that it is damaging to inventors and to the continued well being of our country to deny PTO access to even a portion of these fees if the result is to limit the quality of PTO services or slow the issuance of patents.
The Section of Intellectual Property Law of the American Bar Association continues to support the principle that patent and trademark users' fees should be made available for the use of the PTO, and only for the use of the PTO, and that they should be made available for use as they are collected and as soon as they are collected.
The enactment of H.R. 3723, which specifically rejected a request for fee increases which would not have been made available to the PTO, was an excellent reflection of that principle, and we commend you for it. We also believe that the enactment of the American Inventors Protection Act of 1999 last November, and in particular Subtitle G giving the USPTO increased operational and budget authority, was a step in the right direction. We are disappointed that OMB and congressional budget and appropriations authorities do not interpret that enactment as freeing user fees from the tampering which we are addressing today.
As a result, we believe that more remains for you to do. Unless there is successful intervention to stop it, the budget process seems to set on a course of extracting a permanent annual surcharge of $115 to $120 million from PTO users each year above and beyond the amounts made available to run the Office. Regarding the best form for such intervention to take, I would simply repeat the recommendation offered two years ago by Roger Coe, one of my predecessors as Chair of the IPL Section. After recommending steps that you have already taken in adjusting the fee schedules, Mr. Coe stated:
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'' . . . we urge you to structure fee and funding provisions of the law within your jurisdiction so as to eliminate the possibility that the revenue will be diverted. You are of course better able than we to determine the measures that are most likely to be achievable and effective. Making collections from user fees available to the PTO without the necessity of being appropriated annually might be one possibility.
We understand that the Administration is considering recommending that Congress address these matters with some form of permanent authorization for the use of PTO user fees. We know that you will carefully consider any such proposal that is forthcoming, and we hope that you will move ahead toward a solution of your own initiation if needed. We stand ready to assist in any way we can.
Mr. CANNON. Ms. Dreyfuss?
STATEMENT OF ROCHELLE DREYFUSS, PROFESSOR, DIRECTOR, ENGELBERG CENTER FOR INNOVATION LAW AND POLICY, NEW YORK UNIVERSITY SCHOOL OF LAW
Ms. DREYFUSS. Thank you. I am Rochelle Dreyfuss, and I teach patent law at NYU Law School. I am here to address the question that Congresswoman Lofgren asked, and that is the question of patenting higher order concepts and principles of nature and business. The Federal Circuit's decision in State Street is a good example of the problems that causes. One upshot of that decision, which now makes software more easy to patent and brings business methods into the ambit of protection, is that it also brings more business to the PTO, and I do endorse a lot of what was said here about the PTO needing the funds to get its decisions right on those issues.
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But I think there is a more troubling aspect to State Street, and that is the effect that its business method holding has on competition. Congressman Berman has already stolen my thunder by giving the airline example. I also think the baseball example is a good one. Imagine giving a baseball team the exclusive right to use the split-fingered fastball or the curve ball. They would win the World Series. But on their legal advantages, not their athletic ability. If all of the patents that issued were valid, I might not be so worried. Innovators deserve rewards and distorting competition temporarily might be worth it to give it to them. But the problem is that not all of these patents are valid. For one thing, business inventions uniquely hamstring the PTO. Business methods are largely in the heads and practices of businessmen. They are documented in places where they can't be effectively examined, and even the practices that are documented are not fully available to the PTO, as other people have explained.
Now you might think that it doesn't really matter if these patents issue. If they are not valid, somebody will knock them out in court. That is largely true for most patents, but it is actually less true of business method patents. The courts are always at a disadvantage when they are working at esoteric and technical fields. There is a kind of ''gee whiz'' factor that leads courts to overvalue certain inventions. Since judges are not schooled in business generally, and e-commerce and computer implementation specifically, I think many business method patents will be upheld even if not valid. In addition, there is a huge potential for market distortion between the time of issuance and the time of invalidation, or between the time of issuance and the time that people invent around the patent. I disagree with the Commissioner about the effect of hype. I think patents have in terrorem effects. Nobody goes out to buy a lawsuit, even if it is a winning lawsuit. Patents may also insulate inefficient businesses during industry shakeout periods. I note that even very temporary advantages can be enduring, and that is especially true in e-commerce.
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I think Amazon's one-click checkout is a great example. One-click is terrific for customers because they input billing and shipping information once and they never have to do it again. But the patent on one-click meant that everyone who wanted that convenience needed to shop at Amazon. The Commissioner now tells us that Barnes & Noble has invented around that patent, but so what. Amazon customers are not going to go there because they have already entered their information once. Why would they tediously reenter it all over again?
As economists would say, they are locked in, they are stuck with Amazon. Customers may also not switch because of what economists call network effects. Amazon uses its database to give purchasers advice on books to buy. Now that it has a great big, gigantic database, it gives very good advice based on it. People won't go to other places because they won't get such good advice. Amazon could win the Internet wars not by being the best bookstore, but because of the patent that it had on the business model. It is not even necessary that the patent be valid, or not invented around, or that it remain in force for very long.
My conclusions are as follows. First of all, it is imperative to strengthen the PTO's expertise. I would also think about doing it by—or least consider—opposition procedures, widening reexamination even more, adding an exhaustion element so you have to go to reexamination first. That would take advantage of whatever expertise the PTO is developing and it would give the PTO two shots at looking at the patents. I can't help but think that would give the PTO even more understanding.
Third, I do think the law on business method patenting needs to be reconsidered. It is up to you. Congress took a baby step in limiting business method patents once. I think you need to consider it again. I would draw a distinction between business methods on the one hand and software on the other. I disagree with the Commissioner on that.
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First the numbers that he gave could change at any time. Second of all, by focusing on the inventiveness of the software, you stop having people focus on the nifty idea of implementing an old business method in software. Think about Amazon's other patent, the affiliate patent. The affiliate idea is what we used to call ''kickbacks.'' The fact that you implement it in software does not make it terrific unless you think that ''nifty'' is a Patentablity Factor.
The third thing that focusing on software does is it means that you can interpret the patent very narrowly, and you can do in many cases what the Commissioner has just said happened in Barnes & Noble. You can allow people to enter into the field of the patentee so that competition doesn't get distorted, but you can still give somebody some rights over the thing that they invented and worked hard to invent, so whatever competition does occur is fair competition. That is what intellectual property law is all about. Thank you for the opportunity to speak today.
Mr. CANNON. Thank you, Professor Dreyfuss.
[The prepared statement of Ms. Dreyfuss follows:]
PREPARED STATEMENT OF ROCHELLE DREYFUSS, PROFESSOR, DIRECTOR, ENGELBERG CENTER FOR INNOVATION LAW AND POLICY, NEW YORK UNIVERSITY SCHOOL OF LAW
SUMMARY
Two events make the quality of issued patents particularly worrying at this time. First, recent decisions make mistakes by the PTO harder to correct. In Dickinson v. Zurko, the Supreme Court held that factual determinations of the PTO can be reversed on direct review only when the findings are arbitrary or capricious. Further, a series of appellate court opinions holds that issued patents can now be challenged only when there is clear and convincing evidence—it is much more probable than not—that the patent is invalid.
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The second event is the Court of Appeals' decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc., which makes it easier to obtain patents on software and renders business methods patentable. This case will bring significantly more applications to the PTO. Worse, the business-method part of the decision threatens to distort the competitive marketplace and cripple the ability of Adam Smith's ''unseen hand'' to allocate resources to their highest and best uses.
The problem of invalid business method patents cannot be overcome by post-issuance court challenge because the effects of these patents endure beyond invalidation. Patents insulate inefficient businesses during industry shake outs. Moreover, patents covering e-commerce tend to protect ''sticky'' methods; methods that create network effects and lock-in. Once a customer is stuck, invalidation no longer matters because the customer will not switch.
My recommendations are as follows:
1. The PTO needs the resources to render correct decisions. This includes not only funding but also examiners trained in computer science and business, and a business library.
2. A mechanism allowing the PTO to revisit initial decisions should be put in place. This could take the form of an opposition procedure or expanded reexamination.
3. State Street should be reconsidered. Software is expensive to create and easy to copy, making exclusivity—and the first part of State Street-correct. The business-method part is the main problem. Usually, first-mover advantages provide sufficient return to business methods. The exception may be computer-implemented business methods, but these can be protected by the patent on the software implementation. Freeing the method itself for others to use with different software (or without software) would restore business competition and a healthy marketplace.
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STATEMENT
My name is Rochelle Dreyfuss. I teach Civil Procedure and Intellectual Property Law, including Patent Law, at New York University School of Law. I am also the Director of the Engelberg Center on Innovation Law and Policy. An interdisciplinary enterprise, the Center involves lawyers, economists, historians, social scientists, and representatives of the creative industries in examining questions about the allocation of creative resources, the forces (legal and cultural) that influence innovation, the exploitation of information, and the transfer of technology from creator to end-user, across fields, and among nations.
Like many other observers of the patent system, I have become concerned about the performance of the Patent and Trademark Office (PTO) and the quality of the patents that it is issuing. Of course, some bad patents always have issued and always will issue. Examiners are human; the information needed to properly assess patentability is not always available to them. And to be candid, not every invention has the kind of commercial potential that merits the expenditure of vast resources. But several important changes in the law now make quality a pressing issue.
Two are purely procedural. The first is the change that the Supreme Court made last Term in the relationship between the PTO and its reviewing court, the Federal Circuit. Until now, the Federal Circuit had the authority to scrutinize all aspects of the PTO's decisions (fact and law). In Dickinson v. Zurko,(see footnote 15) however, the Supreme Court altered that rule. It now requires the Federal Circuit to defer to the PTO's factual determinations, permitting reversal only when its findings are arbitrary, capricious, an abuse of discretion, or unsupported by substantial evidence. That means that factual mistakes by the PTO will now be harder to correct at the issuance stage.
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The second procedural change deals with the standard for challenging patents that have already issued. The Patent Act has always stated that issued patents are presumed valid.(see footnote 16) What has changed is that the Federal Circuit has given the presumption teeth. Challengers must now prove their cases by clear and convincing evidence, meaning that patents can now be invalidated only if it is much more probable than not that the patent is, in fact, not valid.(see footnote 17)
These procedural matters are causes for considerable concern. Giving the PTO more authority means that it must have the training and funding needed to do its job better.(see footnote 18)
But what has really begun to worry me about quality arises from an entirely different source: it is the Federal Circuit's 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc.(see footnote 19) State Street changed the law in two ways: it made the law on obtaining patents on software more straightforward and it brought business methods into the scope of patentable subject matter.
One ramification of this decision is also somewhat procedural: it greatly increases the business of the PTO. When Congress expands the responsibilities of an agency, it usually has the wisdom to simultaneously provide the additional resources needed; when a court expands the agency's work, the resource issue is not addressed. But it is already quite clear that State Street has sent the computer industry and the business world the message that their patent applications are welcome.
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The other ramifications of State Street are substantive. I actually agree wholeheartedly with the first part of the decision: the computer industry is mature and needs this protection to spur the very expensive sorts of advances that now take place. However, the second half of the decision is, in my view, a real problem. State Street is broadly drafted: it applies to all business methods. That means it could have a huge distortionary impact on the operation of the competitive marketplace.
Imagine, for example, what the airline industry would be like if the first airline to offer frequent flyer miles were the only one that could do so—we'd probably have only one airline, and it would not necessarily be the most efficient, the safest, or the friendliest. It would be like giving only one baseball team the right to use the split-fingered fast ball. That team might well win the World Series, but it would do so because its pitchers had a legal advantage, not for the traditional reasons of superior athletic ability or cunning strategy.
Just like giving one team an exclusive right to the moves of the game could distort baseball, giving one firm an exclusive right to the moves of business could distort the competitive marketplace. Yet market competition is what this society relies on to determine the best use for resources. If that mechanism is distorted, then Adam Smith's unseen hand is crippled.
Now, if the business method patents that issued were all valid, I might not be so concerned—after all, someone who invents a significant new business method deserves a special reward. It might be worth it to distort the market mechanism temporarily to provide it. The problem, however, is that not all of these patents are valid. Judging from the references cited in issued patents, much of the prior art that is relevant to determining validity is never seen by the PTO.(see footnote 20) This is not entirely the PTO's fault. Business methods are often not available in written form—rather, they are in the heads and practices of businessmen. Moreover, those materials that are documented may not be available at the PTO. Because business methods were not considered patentable in the past, there is no library of business method patents readily at hand for examiners to consult.
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Now in general, the way we deal with invalid patents is by making them vulnerable to challenge after issuance—that is why heightening the presumption of validity matters so much. But even if we put that problem to one side, post-issuance challenge may have limited value in the case of business method patents. Court decisions on patentability tend to be highly subjective—they receive coloration from the field to which the art pertains and from the familiarity that decision makers have with that field. Thus, decision makers tend to find patents invalid in areas they understand (or think they understand or think they should pretend to understand). There is a kind of ''I could have done that'' mentality at work in such cases. At the same time, they hold patents valid in areas that they do not understand, in areas that are esoteric and technical.(see footnote 21) Since judges (and most jurors) are unschooled in business generally, and in e-commerce and computer-implementations specifically, it is likely that they will regularly uphold these patents.
Most troubling, there is huge potential for significant market distortion during the time between issuance and ultimate invalidation. Patents have in terrorem effects—no one goes out to buy a lawsuit. Patents may also provide inefficient businesses with insulation during industry shake outs. Furthermore, even very temporary advantages can be enduring. This is especially true in e-commerce, where the business methods that are most prized are the ones that are most ''sticky.''
Take Amazon.com's patent on one-click check-out as an example. One-click is good for customers because once they input various bits of billing and shipping information, they never need to do it again; they can make their purchases with one click. Not surprisingly, Amazon has enforced this patent vigorously.(see footnote 22) That means that everyone who wants the convenience of one-click must currently shop at Amazon.
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Now, the issue of the patent's validity has yet to be litigated. But let us consider what will happen if it is found by a court to be invalid: will Amazon customers now shop at other on-line bookstores? Probably not. Why would they patronize a site that will require them to tediously re-enter all that billing and shipping information? As economists would say, they are now locked in (or as the rest of us would say, they are now stuck).
Customers will also be reluctant to switch vendors for another reason—what economists call network effects. Amazon analyzes the information it receives. It compares each customer's purchases with other information in its database to predict other books the buyer will enjoy. The accuracy of these predictions depends directly on the size of the database. Thus, the bigger the network of Amazon purchasers, the more valuable it is to patronize Amazon. Again, if the patent is invalidated, rival sites will be able to offer one-click. But their networks won't be as big, so customers are unlikely use them—why shop at a site that is both more work and also provides less value?
Amazon may, in short, ''win'' the internet bookstore war not because it is the best bookstore, but because of the patent on one-click. It isn't even necessary that the patent be valid. Or that it remain in place for very long.
My conclusions are as follows. First, it is imperative that the PTO receive the funds and support it needs to improve the quality of the patents it issues. For the business method problem in particular, the PTO needs, at the very least, better access to business literature, as well as examiners who are trained in business and in computer science.
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Second, we need a way around the presumption of validity and the concept of deference—we need a way to challenge invalid patents directly. Both the validity presumption and the deference idea come from statutes—the Patent Act on the one hand; the Administrative Procedure Act on the other.(see footnote 23) Accordingly, Congress could remedy the situation with a few relatively straightforward statutory modifications. But these would have impacts that go well beyond the specific problems we are discussing.
Less drastically, Congress could give the PTO a role of its own in the post-allowance period. It could, for example, adopt some form of opposition procedure. With expedited hearings and truncated discovery, opposition need not delay issuance too much or impose significant new costs on applicants. Another idea would be to expand on reexamination, perhaps even instituting an exhaustion element, requiring parties to go through reexamination prior to beginning litigation. These approaches would not only solve the standard-of-review problem, they would also make better use of expertise once it develops within the PTO.
Third, I suggest substantive changes in the law on business method patenting. Because of first mover advantages, especially as they are enhanced by network effects and lock in, businesses do not usually need patents to earn adequate returns on their business innovations. An exception may be the case of computer-implemented business methods, which can be very expensive to create (and probably easy to copy). But business method patents are not necessary to provide exclusivity in these situations. Computer-implemented business methods all use software, and the patents available on the software may be sufficient to allow developers to capture adequate returns. At the same time, effective competition would be possible, for anyone implementing the business method with different software (or without software) could do so. In such a regime, other bookstores could, for example, offer one-click check out so long as they did not infringe on Amazon's patented software.(see footnote 24)
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Indeed, there is an irony in State Street. The main reason for the increase in business method applications was because prior to that opinion, software could be patented only if the claims were drawn to a machine or placed in the context of a larger process (this was the so-called Freeman-Walter-Abele analysis(see footnote 25)). Those who designed software to implement business ideas therefore had no choice but to contextualize the programs they developed as processes—that is, to apply for business method patents. But State Street now recognizes as patentable subject matter any software that generates data producing ''useful, concrete, and tangible results.''(see footnote 26) Thus, there is no longer a need for what was, quite frankly, always a bit of a dodge. Business method patents distort the economy; if they are not even needed to create legal fictions, why recognize them at all?
There is an expression about throwing the baby out with the bath water. Perhaps what we are dealing with here is the opposite situation: we are keeping the bath water (business method patents) when all we really need or want is the baby (patents on software).
Thank you for your attention.
Mr. CANNON. I appreciate for all of the panel members' willingness to cut their time short. It gives us more time to pursue these very interesting areas before us.
Mr. Berman.
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Mr. BERMAN. On that ITC point, Ms. Lamblin, I am trying to understand the point. You are saying a few years ago when Americans challenged and sought to ban imports on the ground that it was a patent infringing import, the American side won a high percentage of times, and now they are winning a lower percentage?
Ms. LAMBLIN. Yes, a much lower percentage of times, much lower than the district court rate of ruling for patent holders as well.
Mr. BERMAN. Maybe the old ruling—the earlier percentages were wrong. We certainly don't want a competition-stifling thing, which would be to say, because it is an American who is claiming the exclusive right to something, the FTC rules that that patent is valid and what is coming in is infringing because we want to help the balance of trade.
Ms. LAMBLIN. No, it doesn't seem to me to be a protectionist issue. It seems to me to be one where Congress established the Tariff Act, which has a section under it, 337, which protects U.S. Companies from unfair trade, including patent infringement.
Mr. BERMAN. That seems like a good provision. It is just one more arsenal in trying to stop infringing activity.
Ms. LAMBLIN. Absolutely, and it was presented to VISX when it was considering its options in the face of a Japanese company coming in with a lower-priced, lower quality laser system to compete with us. It was presented to me as a good alternative as a shortcut because district court patent actions can take three years, as a shortcut alternative where you don't get the potential for an exclusion to stop this unfair importation of infringing systems, and I think the ITC is a very good institution.
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My concern is the way that it is running at this point and the implications of that for U.S. technology companies, basically taking it away as an alternative, because who would want to go into a forum in which the odds are 8-to-2, if you just take the statistics.
Mr. BERMAN. That is like saying the 9th Circuit should be split up because this Supreme Court overturned a certain percentage. They were right or they were wrong.
Ms. LAMBLIN. Right. I believe we can improve the changes that they are right by having them employ ALJs, who understand intellectual property.
Mr. BERMAN. You think that there is an aspect of who is ruling on this that is creating bad decisions, even if it was bad decisions up until 2 years ago or now?
Ms. LAMBLIN. Right. The full commission of the International Trade Commission relies heavily on its ALJs. In other words, they have not reversed an ALJ determination of no patent infringement. For that reason they need to have ALJs who fully understand patent law.
Mr. BERMAN. Right now where do appeals from FTC decisions go?
Ms. LAMBLIN. To the Federal circuit, which is the right place. It is the court of appeals that hears all patent decisions in the country.
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Mr. BERMAN. I thought you said you want to have a change in the law to have appeals from the FTC go to the Federal circuit.
Ms. LAMBLIN. I understand the question. Because of the shortness of time I may have been confusing. These are two separate issues. The ITC appeal issue is not a problem at all.
Mr. BERMAN. I said FTC.
Ms. LAMBLIN. Oh, FTC, a completely separate agency. I misunderstood your question. FTC appeals go to any circuit in the land to which the appealing party wants to take them.
Mr. BERMAN. You think that the expertise is better there. When it is a patent issue that the FTC, based on its antitrust competition authority is deciding, the appeal should go to the body that is expert in that?
Ms. LAMBLIN. Absolutely. When the Federal circuit was established in 1982, the FTC was not engaging in reviews of patents. Now they are. They brought a case against VISX challenging one of our fundamental patents. We won in court against the FTC in front of their administrative law judge with their own rules and one with the appropriate background to hear the antitrust issues presented to him, which is the point.
We won at the ALJ level. The FTC staff decided to appeal it to the full commission of the FTC. If that decision were to be reversed, it would be important to VISX to be able to appeal a case that involves patent matters, primarily to the one Federal circuit court in the land that has heard patent cases in the last 15 years, and that is the Federal circuit. If you are going to the 9th or the 7th circuit or anywhere else, those judges have not heard patent cases.
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Mr. BERMAN. The airline mileage issue, that sort of drives your point home, but is that a business method or business process that could have been patented had the first airline decided to patent it?
Ms. DREYFUSS. Well, State Street was about a computer-implemented business method, so you could confine State Street to its facts and say it is only for computer-implemented business methods, but the opinion is not written that way at all. The language of the opinion is very broad. And in fact, a lot of the inventions that have been patented now, yes, they are computer-implemented, but the computer implementation is not specifically part of the patent. It is not the program that is being patented, it is the fact of computer implementing X. Sooner or later people will catch onto that fact that there is nothing in State Street that limits them to computer-implemented business methods, so I think it is possible.
Now, could frequent flyer miles have been patented? You could ask if Green Stamps were prior art, perhaps they were prior art, and perhaps Green Stamps would have been patentable and we would have had only one supermarket.
The other question is the extent to which art in the real world anticipates art in the cyberworld, and that is another big issue that State Street didn't deal with, that ultimately the courts will have to, and the PTO has no instructions on that yet.
Mr. BERMAN. Thank you, Mr. Chairman.
Mr. CANNON. Thank you.
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Mr. Goodlatte, would you like to ask questions?
Mr. GOODLATTE. Thank you, Mr. Chairman. I think we are told that the number of patents issued in recent years has spiked up, and that may be a very good sign of productivity and creativity in our country. I am told that there are 30 to 40 percent more patents being issued now and that may be a reflection of the dynamic growth of the Internet and technology that is related to implementing that. I am also concerned that we may not be getting this right, since I understand that about 30 percent of all patent applications that are issued today have no previous references, no reference history at all attached to them, that the patent holder is not being required to stringently come forward with the kind of research that has been required in the past. Any comments on that?
Ms. DREYFUSS. On the business method side, as somebody pointed out, it is hard to find the prior art. It is not in searchable entities in the way that chemistry things are, and a lot of it is not at the PTO because it is not in prior patents.
Mr. GOODLATTE. Does that argue against the uniqueness or the obviousness of the patented item that is coming out as a business method patent?
Ms. DREYFUSS. I think it tells you that the PTO is engaged now in a very different enterprise from the one it was engaged in before. It is issuing patents on a human activity that previously was not the subject matter of patent protection, all based on a Federal Circuit decision that was never reviewed by the Supreme Court and does not come clearly out of anything that Congress has written. So I think it tells you something that is worth thinking about hard.
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Mr. MAIER. Mr. Goodlatte, I think your first question was that you believed 30 percent of patents were issued without any citation of prior art; is that correct? I believe that is not correct. I don't think that I have ever seen a patent that has been granted without any citation of prior art.
I actually tend to disagree with Professor Dreyfuss, respectfully of course, as to the business method patents. At my firm we work on many of these and we have not had great trouble in locating some prior art. Now, as in any new technology, you don't have necessarily the depth of prior art as you would in, let's say firearms or automobile engines, or something which has been around for 100 years, but you always have some technology. Essentially, nothing is created from nowhere. Every invention is an improvement on something, it is a combination of something, so there is always some prior art, in my opinion.
Mr. GOODLATTE. Let me ask you this from another perspective. It is my understanding that there have been 200 issuances of patents on secured credit transactions on the Internet. I am just wondering how that number could be issued and whether there wouldn't be an awful lot of overlap and infringement probability created when you have that kind of prolific issuance of patents in that one very narrow, specific area of ways of doing secured credit transactions on the Internet?
Mr. MAIER. In all due respect, there should be no problem in having 200 or 2,000 in that area. As the Commissioner explained earlier, the legal rights in a patent are defined by the claims. The claims can be very, very specific. They don't have to be broad. Obviously the earlier patents tend to be the broader ones, but in the area of the type you describe, there can be thousands of different methods of accomplishing the result that are completely different. Now it is possible that some patents, some later patents may actually infringe earlier patents, and there is nothing wrong with that. But that is not to say that it is improper that there are so many patents.
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Mr. GOODLATTE. Is the PTO doing a good job of sorting that out and making sure that we don't have an increase in the number of infringement cases because that I think is part of the concern expressed by Ms. Dreyfuss. That diminishes the value of not only the patent issued, but of prior patents having been issued because its marketability and usefulness in securing credit to grow an Internet company is diminished if you can't rely upon the validity of the patent. Are they doing a good job of sorting that very point out that you raised?
Mr. MAIER. My firm obtains more patents than any other and has for the past 10 years, and our experience with the Patent Office is that it does a very good job. Now is it perfect, of course not. The Patent Office, the patent examiner has to issue a patent after perhaps only 8 hours worth of work. He doesn't have the time. In some cases someone trying to break a patent might spend months or years searching the prior art. The Patent Office and the patent examiner does not have that resource. But considering not the amount of resources that they do have, and the speed at which they are forced to operate, they do a good job.
Mr. GOODLATTE. I take that as a yes.
Mr. Chairman, if I might, I have one other question that I would like to address to Ms. Dreyfuss. One, do you believe that the obviousness standard hasbeen diminished in recent years by the court decisions and by the application of the Patent Office; and, secondly, on this issue of business method patents, do you believe that you can separate the—draw a line between the business method and the software that implements that method? In other words, issue a patent for the software and find that the business method itself may or may not be patentable?
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Ms. DREYFUSS. On obviousness, of course we don't have very many decisions from the Federal Circuit on the question of patentability of business methods. Now, we know that they are patentable, but we need a whole new generation of cases on what constitutes obviousness. A couple of cases so far looked pretty good.
Obviousness, more generally, I think it is hard to comment on that. In biotechnology, the Federal Circuit has done some very interesting things on other aspects of patentability. I think they have a low standard of obviousness, but they have made up for it in other ways, and whether that is a good thing or bad thing is a hard question. I don't think that you can just take obviousness out in the biotech area and examine it on its own, so that makes it a really hard question.
As to software, I think if you wanted to break out business methods, you would have the same problem you have always had with principles of nature. There have always been very hard cases on when something is a principle of nature and when something is an application of a principle of nature. Was Morris's invention of the telegraph patentable? And if it wasn't, why was Bell's invention of the telephone patentable? These are really hard cases, but it is important to do it because things that are at the top of the pyramid of knowledge from which everybody needs to draw just have to be in the public domain, and I think that is true of business methods, too. So I think there are going to be really hard cases, but I think it is possible to draw that line. You will have a few cases where everybody is going to be upset and think that they are wrong, but I think it is important to try to draw that line.
Mr. STERN. On the prior topic, Mr. Maier was absolutely correct, examiners have very little time, on the order of 8 hours, to do the research that is necessary to find all of the prior art with respect to a particular application. That works if you have a huge body of art that is patent art and that has been classified according to our system—which means that we can find it quickly. When, in fact, an examiner has to go and research something in the nonpatent literature, it requires vastly more time. That is why I am here. I do want to make the point that the agency needs the resources in order to provide examiners with that extra time, especially in areas where examiners are going to go beyond the patent literature.
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Mr. CANNON. I would like to have the remaining time go to Ms. Lofgren. Ms. Lofgren, if you want to go ahead with the remaining few minutes?
Ms. LOFGREN. Thank you. We have to adjourn and go to the full committee very shortly. This has been a very useful hearing, and I always count it as a success when you sit through a couple of hours and learn something, and I have today. Thank you very much.
The issue on the appellate review of patent issues from the FTC is so obvious but I never thought about it before, and thank you for that good suggestion.
On the fees, this subcommittee unanimously, and on a bipartisan basis, agrees with you, so the question is how do we work our will. There has sort of been a history of bipartisan mistakes from the White House on this subject. I think, Mr. Chairman, what we ought to consider doing is something that Pat Schroeder mentioned when she was a member of this committee, which is if the diversion continues, we ought to statutorily reduce the filing fee because the filing fee can only be assessed if we allow that by law, and if there is a disincentive to the administration to divert the fees, then the diversion will stop. I am to the point where I would vote to do that now.
Secondarily, a couple of questions that I had for the Professor. Listening to the Commissioner on the issue of whether or not—and I am not saying that this is true because I don't know, but the controversy that exists in some sectors about the breadth of the business method patents that are being issued, the question or the belief in some sectors that they are obvious, too obvious, that they—the Commissioner seemed to be saying that really there is a perfectly good remedy for that right now which is the reexamination system, and that it is not being utilized, and therefore the public uproar is not really a valid one. What do you think of that point of view?
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Ms. DREYFUSS. Reexamination cannot be used for all of that. Reexamination is not going to get you a reading of the scope of the patent. You have to start infringing it and get out the question of whether you are within the patent. A reexamination is only about new forms of prior art that raise new questions. That is the way that it has always been. So a lot of issues can come up that really don't fit squarely within reexamination. Your new reexamination procedure, I am glad that third parties are going to talk. On the other hand, it is going to give them a disincentive to bring reexaminations, because then they are going to be bound in certain ways if they ever do get to court, so I am not sure that it is going to be totally utilized. So I think there are a lot of reasons why reexamination is not going to work, even he seems to think that it is going to work.
Ms. LOFGREN. On the whole issue of prior art, do you think that the burden of proof issue raised by the commissioner is worth examination in terms of the prior art finding; and that a review of that and potential change in that might address this issue?
Ms. DREYFUSS. The Federal Circuit has gone back and forth on this. For a while, they were heavily punishing people if they did not reveal art that they thought that they knew, and there were real problems—that the court thought that the parties should have revealed, and there were real problems with having an incredibly strict standard on that.
Although it sounds terrific in practice, there is a lot of sticking points in that also. I think relying entirely on the parties is hard. The parties are only going to do a certain amount of checking themselves. The parties are not going to have all of the prior art. The fact of the matter is that there is art out there in the files of competitors. The parties don't even have it, but the patent is still invalid. It is just that the parties never had it and the PTO never had it, and so you have got an invalid patent, and it is nobody's fault. So Rule 56 doesn't help there.
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Mr. MYRICK. Ms. Lofgren, I am Ron Myrick with IPO. I think your comments are worthwhile, but I am concerned about the approach of reverting to reducing the fees. Yes, we certainly would like to reduce fees. I think that is not the answer in this situation. The answer here is to use the fees that we have voluntarily paying. We send the Patent Office filings because we want them to do a good job. We need them to get those fees so they can use them for the purpose of building that prior art database.
Ms. LOFGREN. If I may interrupt, I don't disagree with you. It is just that we have done all of the things that we—one would think that would yield that good result that we agree with you on, including mandating it by law, passing resolutions, complaining to the White House. I remember years ago when I was in college, there was a humor magazine out and on the front cover there was a picture of a cute puppy, and it said ''buy this magazine or we will shoot this dog.'' and of course, the next month it was the dead dog, you didn't buy enough. What I am suggesting is something like whether we are going to shoot the dog if they don't do what we say. I think my time is up. Thank you, Mr. Chairman.
Mr. CANNON. Thank you. I would like to thank the witnesses for their testimony today. The subcommittee appreciates your contribution. This concludes the oversight hearing on the United States Patent and Trademark Office. The record will remain open for one week.
Thank you for your cooperation and the subcommittee stands adjourned.
[The prepared statement of Mr. Kirk follows:]
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PREPARED STATEMENT OF MICHAEL KIRK, EXECUTIVE DIRECTOR, AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION
The American Intellectual Property Law Association (AIPLA) appreciates the opportunity to present its views on the state of the United States Patent and Trademark Office (USPTO).
The AIPLA is a national bar association whose more than 10,000 members are primarily lawyers in private and corporate practice, in government service, and in the academic community. The AIPLA represents a wide and diverse spectrum of individuals, companies and institutions involved directly or indirectly in the practice of patent, trademark, copyright, and unfair competition law, as well as other fields of law affecting intellectual property. Our members represent both owners and users of intellectual property.
Introduction
The AIPLA wants the United States Patent and Trademark Office to be the best patent and trademark office in the world. The prompt issuance of valid patents is critical to our Nation's inventors and companies. Early accurate indications regarding the registrability of trademarks and service marks are essential for the protection of American consumers and businesses. These goals can only be accomplished if the USPTO is adequately funded to hire, train, and properly equip the examiners needed to expeditiously process the applications filed each year. Unfortunately for America's high-tech industries that have been the engine of the greatest period of economic growth in the Nation's history, the Administration and the Congress continue to undermine the vitality of the U.S. patent system on which these industries so heavily depend.
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Structural Reforms
This Subcommittee has played a leading role in strengthening the USPTO. During the 104th and 105th Congresses, the Subcommittee sought valiantly to implement the recommendations of the National Academy of Public Administration and the user community to transform the USPTO into a government corporation. Frustrated by continuing opposition from certain interest groups, Mr. Chairman, you and the members of the Subcommittee adjusted your sights and sought to achieve the needed reforms through a reorganization of the USPTO and its relationship with the Department of Commerce.
While retaining the USPTO as a government agency within the Department of Commerce, your bill, H.R. 1907, the ''American Inventors Protection Act of 1999,'' now Public Law 106–113, expressly gave the USPTO
''. . . responsibility for decisions regarding the management and administration of its operations and . . . independent control of its budget allocations and expenditures, personnel decisions and processes, procurements, and other administrative and management functions in accordance with this title and applicable provisions of law.''
While it is still too early to evaluate whether the USPTO will be given the operational flexibility that we believe Public Law 106–113 calls for, early indications from Assistant Secretary and Commissioner of Patents and Trademarks Dickinson have been encouraging. We understand that the Office will be empowered to operate a number of its functions—personnel, procurement, legal—independent of the corresponding offices in the Department of Commerce. Together with the structural changes such as separating the patent and trademark examination operations and placing each under a Commissioner appointed for five years with a performance agreement and a meaningful bonus for a job well done, the infrastructure for the kind of USPTO we all seek appears to be falling into place. Unfortunately, one critical element—the single most important element—is still not in place. This missing element is the ability of the USPTO to retain and use all of its user fee revenues.
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USPTO Fee Diversion History
The users of the patent and trademark systems have been unfairly subjected to a decade of fee diversion by the Congress and the Executive Branch. This is not a partisan issue; the users have been treated badly irrespective of which political party has been in control of the Congress or the White House. The taking of user fees began in FY 1992 when $8.1 million of the so-called patent surcharge fees were withheld by the Congress. The patent surcharge, you will recall, was initially imposed on patent fees for five years by the Omnibus Budget Reconciliation Act of 1990 (Public Law 101–508) to reduce the deficit by making the USPTO fully fee-funded.
Increasingly over the years, larger and larger amounts of the patent surcharge fees were withheld each year from the USPTO, allowing the Congress to fund other programs that it considered higher priority. By the time Congress finally allowed the patent surcharge authority to sunset at the end of FY 1998, the Congress and the President had siphoned-off $234 million of patent user fees.
Anticipating the replacement of the patent surcharge authority with an upward adjustment of patent fees, the Appropriations Committees planted the seeds of a new strategy to divert a portion of the USPTO's fee revenues in the FY 1998 Appropriations Act. This strategy was to ''cap'' the amount of fee revenue that the USPTO would be permitted to use in FY 1998. While you, Mr. Chairman, and Chairman Hyde intervened with your colleagues on the House Appropriations Committee and convinced them not to engage in this subterfuge, the Senate did impose such a cap and the House ultimately accepted it.
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The Executive Branch and the Congress fully utilized the capping technique in FY 1999. That fiscal year, the fee collections of the Office were subjected to two different caps and a rescission. First, the Office was denied until FY 2000 the authority to spend $116 million of the FY 1999 fee collections it estimated it would receive. Secondly, the appropriators added an upper limit cap preventing the USPTO from spending any fee collections in excess of the fee revenues the Office had estimated it would receive. Thus, when unexpected, higher application filings generated an extra $26 million of fee revenue in FY 1999, the USPTO could not use the fee revenue to process the increased workload for which the fees had been paid. Finally, taking advantage of the Office's identifying a significant amount of unrecorded fee income in FY 1998 resulting from accumulated mail room processing delays, the Administration proposed and Congress agreed in the FY 1999 Appropriations Act to simply rescind an additional $72 million of USPTO fee collections.
One point must be emphasized: while it may superficially appear that delaying the availability to the USPTO of fee collections by twelve months is somehow different than the earlier withholding of the surcharge fees, it is not. The denial to the USPTO of the authority to spend fee revenue in the fiscal year in which it is collected gives the appropriators the flexibility to appropriate an equivalent amount to some other program without exceeding the spending limits imposed on them by their section 302(b) allocation. The bottom line is that while the fee revenue is allegedly available to the USPTO in the following fiscal year, the money does not exist; it has been used to offset funding for other Government programs. The phrase ''used to offset funding'' is a euphemism which, in the real world, means the money was spent to fund other programs.
So how do Congress and the Executive Branch solve this awkward little problem of allowing the USPTO to spend money in a subsequent fiscal year when the money has already been spent in the previous fiscal year? The answer is for the Appropriations Act in the following fiscal year to increase the amount of fee collections which are not available to the USPTO to spend in that fiscal year by an amount sufficient to cover the alleged ''carry-over'' from the previous fiscal year..
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The USPTO appropriation for this fiscal year, FY 2000, provides a good illustration. The USPTO is scheduled to receive in FY 2000 $116 million in FY 1999 fee collections that it was prevented from spending in FY 1999. (see Appendix I) But this money does not exist. The spending authority it represents was used in FY 1999 by the appropriators to support other programs. To accommodate this dilemma, the FY 2000 Appropriations Act provides that the USPTO will receive $116 million from FY 1999 fee collections, but covers this amount by withholding from the Office the authority to use $229 million in FY 2000 fee collections. Thus, while the Office is allegedly permitted to spend $116 million of FY 1999 fee collections, in reality, the $116 million is simply a part of the $229 million of FY 2000 fee collections that the Office is not permitted to use in FY 2000. The difference, $113 million, was available to the appropriators—again to use to offset funding for (i.e., spend on) other government programs in FY 2000 without exceeding their section 302(b) allocation for FY 2000.
Proposed FY 2001 USPTO Budget
The proposed FY 2001 budget transmitted to Congress on February 7 continues this shell game. It proposes to allow the USPTO to spend the $229 million in FY 2000 fee collections that it was not allowed to use this year. In addition, the FY 2001 proposed budget would allow the Office to additionally spend the $26 million received in fee collections in FY 1999 due to greater than estimated application filings which the cap imposed that fiscal year prevented the Office from spending. So where will this $255 million come from? The FY 2001 budget proposes to prevent the Office from spending $368 million of FY 2001 fee collections. This covers the $255 million of prior year fee collections (that exist only on paper) and provides an additional $113 million which the Executive Branch and/or the Congress can use to support other government programs (see below). Assuming that Congress in its FY 2001 Appropriations Act withholds the fee collections as proposed in the President's budget, the total amount of patent and trademark fees that will have been diverted in the past ten years will exceed $675 million. (See Appendix II)
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Need for Protection of USPTO Fee Revenue
It was noted earlier that the critical missing element in the American Inventors Protection Act was the absence of any protection of the USPTO's fee collections from the Executive Branch and the Congress. A case in point is the President's Proposed Budget for FY 2001. Appendix III is a chart taken from briefing materials prepared by the Department of Commerce (DOC) to explain its FY 2001 Budget Authority Request. This chart shows in the center column that, excluding the Decennial Census, the DOC is requesting $4,978 million for FY 2001. This amount represents the ceiling which the DOC has been permitted to request by the Office of Management and Budget. What is significant about the center column is that it includes a $113 million contribution by the USPTO to fund other areas of the DOC. This means that the DOC is actually requesting authority to spend $5,091 million, an amount which will be within its ceiling of $4,978 million by virtue of the USPTO's being denied the availability in FY 2001 of $113 million in user fees.
To emphasize this point, note that the right hand column of Appendix III purports to show an increase in the requested funding for FY 2001 for all of the DOC agencies of $910 over what they received in FY 2000. In fact, excluding the USPTO, the requested increase in funding for these DOC agencies is actually $1,023 million, an amount which is offset by the $113 million in USPTO fees which are proposed to be withheld from the Office in FY 2001. Even the alleged $3 million increase for the USPTO is in reality a statement that the DOC proposes to take less from the Office in FY 2001 ($113 million) than was taken from the Office in FY 2000 ($116 million).
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Appendix IV, taken from the USPTO's ''Corporate Plan for 2001,'' illustrates the impact on patent application processing of this continuing withholding of user fees. Application filings are projected to increase by 75% from FY 1996 through FY 2001. During this time frame, average pendency is estimated to increase from 20.8 months in FY 1996 to 26.6 months in FY 2001. Appendix V from the ''Corporate Plan for 2001'' illustrates a similar problem in the processing of trademark applications which have increased by over 80% in the same period. The Plan acknowledges that the Office 'will be unable to meet [its] pendency goals.' '' Can there be any doubt that this is directly attributable to the Executive Branch and Congress taking over $600 million in fee revenues during this same period?
Consider the future and what impact this withholding of fees will have on the USPTO. Appendix VI is the Summary of Budget Authority for fiscal years 2001 through 2005 found on page 12 of the Commerce Department's ''Budget in Brief.'' This summary shows that the Commerce Department anticipates continuing to take from $113 million to $120 million annually in USPTO fee revenues over the next five years. Appendix VII, taken from the USPTO's Corporate Plan for 2001, illustrates the expected increases in patent pendency in a scenario where full funding is assumed for the outyears (see footnote 8). This table shows average patent pendency increasing from 26.6 months in FY 2001 to 31.7 months in FY 2005. But the Commerce Department ''Budget in Brief,'' informs us that full funding cannot be assumed; that from $113 million to $120 million in user fee revenue will be denied the USPTO in each of these years. This means that from FY 1999 through FY 2005, the Executive Branch proposes to deny the USPTO the authority to spend $832 million in fees. If one takes into account the surcharge diversions and rescissions since FY 1992, the sum is a staggering $1,066 million. One can only imagine the true impact which this continued under-funding of the Office will have on our Nation's technological leadership and prosperity.
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Conclusion
The treatment by the Executive Branch and the Congress of the fee collections of the USPTO is a national disgrace. The economic projections of the Congressional Budget Office (as reported in the January 27, 2000 CQ Congressional Monitor) reveal a worst case expected budget surplus of $11 billion in FY 2001 rising to $43 billion in FY 2005. (See Appendix VIII) In the face of this projected surplus of $148 billion for FY 2001 through FY 2005, the President's Budget proposes to take $577 million in USPTO fees for the same period. This gives new meaning to the expression ''penny wise and pound foolish.''
The United States is a leader in developing new technologies across the spectrum, but especially in cutting-edge fields such as biotechnology and new computer program applications in electronic commerce. It is important that this technology not only be promptly and securely protected in the United States, but also by our leading trading partners. The cost of obtaining and maintaining such protection globally led the AIPLA to sponsor four symposia where we worked with our colleagues in other nations to encourage the lowering of patent fees. Some successes have been achieved, but what kind of example does the government of the United States establish with its continuing pattern of fee diversion?
Mr. Chairman, the AIPLA implores you and the members of this Subcommittee to take the lead in breaking this sorry pattern of fee diversion. There has been no time in the last thirty years more opportune than the current era of budget surpluses to end this plague. Both political parties profess to support nurturing and encouraging the Nation's leadership in the development and application of new cutting-edge technology for the benefit of American citizens. It is time to put meaning into these platforms. We implore you to take up this cause with your Steering Committees and Caucuses, the Budget Committee, and the Appropriations Committee to end once and for all this destructive and misguided diversion of USPTO fee income. The AIPLA pledges, Mr. Chairman, to work with you and the members of this Subcommittee in any way you wish to achieve this goal.
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63845C.eps
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[The prepared statement of Mr. Cottone follows:]
PREPARED STATEMENT OF JAMES F. COTTONE, NIPRA
Good Afternoon Mr. Chairman.
My name is James Cottone, of Leesburg, Virginia. I'm here today testifying on behalf of the National Intellectual Property Researchers Association, NIPRA, which has been newly formed to represent the professional and business interests of nongovernmental professional people and firms who specialize in intellectual property information retrieval and dissemination.
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Mr. Chairman, our members are intimately linked to the information dissemination functions of the PTO and typically have many years of experience 10 to 20 or more—working with the PTO in various capacities, and in using all branches of the PTO's facilities. NIPRA's members serve as the world's main concentration point for intellectual property (IP) information from the PTO. Every single day of the year, they receive thousands of requests from clients worldwide, and, using their knowledge of and access to the PTO's facilities, locate and retrieve the information needed to respond to these requests.
The clients of NIPRA's members include the full range of IP users: independent inventors, small start up companies, major multinational corporations, and patent law firms here in the Washington area, as well as national and international patent law firms. Functioning as this concentration point, it is absolutely crucial that our members have rapid and unhindered access to patent and trademark information, and that the information retrieved be of the highest possible accuracy. These three factors are the life's blood of our members, and therefore of virtually the entire U.S. intellectual property community.
Over the last several years our members have seen a serious deterioration in the information dissemination functions of the PTO, and have especially noted in the past year or two, a near complete meltdown of several of the PTO's most important facilities. Due to a rash of recent problems at the PTO, it has become exceedingly difficult—in some cases impossible—to access the information needed for our member's clients. For reasons that defy rational explanation, the PTO is failing badly to fulfill its statutory requirement of ''IN GENERAL . . . the Office . . . shall be responsible for dissemination to the public information with respect to patents and trademarks.'' This is clearly spelled out in the recently enacted Patent and Trademark Office Efficiency Act. [S 1948 and 35 U.S.C. 2(a)(2)].
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My testimony today will cover three main areas of special concern to NIPRA: [A] the PTO's search system(s); [B] a brief overview of relevant testimony at the Commissioner's Hearing on Issues Related to Prior Art during Examination, of July 1999; and [C] proposed amendments to Title 35 U.S.C.
With respect to the shortcomings of the PTO's search system(s), consider a brief perspective on the nature and extent of automated search systems by a retired patent examiner with 25 years of experience who is now a member of NIPRA. As stated by Mr. Joseph E. Clawson, Jr. of McLean, Virginia—
''. . . from June of 1972 until my retirement in December of 1997, I worked as a patent examiner. I have done perhaps 10,000 to 12,000 searches of the Prior Art in the semiconductor and computer memory areas. In the early 1980s I had an opportunity to start using electronic database searching, using predominately 'key word' search strategies. My initial enthusiasm was soon blunted as I found that I could not locate, electronically, the references that I personally knew were there from my manual searching. Others who were expert in the various technologies also came to much the same conclusion. This finding was further buttressed by scientific evaluations such as the March 1985 paper by David C. Blair et al., in the Communications of the ACM, '' 'An Evaluation of Retrieval Effectiveness for a Full-Text Document-Retrieval System.' ''
While this published paper reports the results done using a generalized database of only 350,000 pages, when applied to a Patent database, another unique problem arises: in many, if not most, cases the invention is never fully described ''in the words.'' The Patent Law requires only that the Specification, including the Drawings, together be understandable and enabling to one of ordinary skill in the art to make and use the invention. ''The words,'' in many if not most cases, merely ''flesh out'' what is shown in the Drawings and do not replicate ''in words'' what is in the Drawings, but are ancillary thereto. Thus, in a Patent database electronic search one is often presented the additional problem of ''searching'' for ''words'' which were never there to begin with.
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Thus ''automated electronic searching,'' while useful cannot fully replace an actual properly classified manual paper search file, in my experience. You cannot, quite literally, ''find the references'' searching electronically. A more correct way to view an electronic database is to consider that ''ALL the information is lost,'' until you can discover some manner of getting a portion of it back. As above noted, in the Blair et al.paper, there was a staggering electronic loss of many tens of percent. My own experience showed me that only an unacceptably small percentage of relevant Prior Art could be routinely retrieved electronically, and what was recovered was most often NOT the best, and NOT the most pertinent Prior Art. If one considers a ''closed stack'' paper search file where ''nothing leaves,'' then one has absolute file integrity, and if properly Classified it then becomes easy for any person who can readily read English to find ALL the pertinent Prior Art in a particular subject area.
Thus in my opinion and experience, the use of electronic database searching is problematical, and particularly so when dealing with the unique nature of Patent specification disclosures. Paper search files, properly classified, are the only serious means by which Prior Art may be retrieved in an effective, efficient manner, and apparently the only search means fully in 6conformance with the requirements of 35 U.S.C. §131. While electronic database searching gives many who use it a great illusion of ''finding everything,'' this is true only to people unfamiliar with the particular technology. The reality is that this is indeed just an illusion, especially when dealing with the unique nature of Patents and Patent specifications.
Further, as was pointed out by Mr. James Cottone in his presentation at the July 14, 1999, PTO Public Hearing on Issues Related to the Identification of Prior Art During the Examination of a Patent Application, Figure 4 thereof shows that in a well maintained paper file Digest, one ''. . . can reasonably expect to find all the best art in well under three hours of search.'' Costwise, it is estimated that every dollar spent by the PTO in establishing and maintaining these Digests can replace about $100 in attempting to provide equivalent results via an electronic database.
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Thus, from both practical experience and scientific points of view, the use of large electronic database searching to providing a replacement for a properly classified paper search file has yet to be proven, and the present paper search files at the PTO—especially the Public search room files—need not only to be well maintained, but expanded to include all current publications, and foreign patents in order to rebuild the patent community's eroding confidence in the U.S. Patent system.''
The problems presented by automated searching are compounded significantly when the search system employed is not up to the task. The PTO's WEST Patent Search System (employing the BRS Database Search Engine) has repeatedly demonstrated itself to be an intrinsically flawed system, possibly fatally flawed. Evidencing both inconsistent and false results in numerous examples, NIPRA believes that a serious reconsideration of this system must be imposed on the PTO. Not only are public search room users fed up with WEST, but also examiners are complaining loudly about if not totally abandoning WEST, and are using its cousin EAST unhappily by default. A large collection of instances of WEST system blatant failures (not merely those normally encountered when debugging a new system) are on file with the supervisor of the public search room. At the present time, it was not possible to gain access to that collection to share with the House Committee. However, a selected few well documented and easy to understand examples are at hand and will serve here as illustrative of the utter hopelessness of WEST, and to demonstrate why its confidence level is exceeding low. An additional thirteen severe problems may be found in an attachment to a November 19th, 1999 letter to Commissioner Dickinson submitted by a panel of professional public users of WEST. The few examples below in no way represents all of the kinds of problems associated with this particular search tool, and if space and time allow, hard copies proving these statements will be made part of this testimony. If not, please contact NIPRA by fax at (703) 415–0621 for complete documentation of these examples, or of other articles or published papers cited in this testimony.
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CASE ONE: Patent Count for All Patents in Class 414—(414/$). Results: 4754 Actual Count is 57128 (3/6/2000). The implications of this example are that a text search in the area of material handling where textual terms are juxtaposed to determine inventive features but limited to patents classified in Class 414 (material handling) would be limited to less than 10 per cent of the patents within this classification. This error would be occur to both public users AND examiners.
CASE TWO: Thesaurus Search for a Patent Assignee (Procter and Gamble). Results: 19 or 4551 or 4587 or 6845. A thesaurus search is used when a search may be directed to a plurality of names for the same entity. In this case, Procter and Gamble could be P&G, Procter and Gamble, Procter and Gamble Company, Procter and Gamble, Inc., etc. This is also known as an ''EXPAND'' function in other more reliable search tools. The implications here are that it is no longer possible to know accurately an entity's complete patent portfolio.
CASE THREE: Search for a Patent bearing text of interest in combination with Patent Assignee's Country, ''sheltered device mount'' and Kuwait). Results: US 5950372 assigned to International Design Systems Company of Kuwait is NOT FOUND by Assignee Country but IS FOUND by the cited textin its abstract). The implications of this search is that either all the data on this patent has not been properly indexed in the USPT database or that the BRS search engine itself cannot keep track of data collected from polling the index when it must search for the confluence of two (or more) sub-searches.
These and other examples clearly support the contention of most WEST system users that this search tool is not adequate or accurate enough for the job it is intended to do. Both public users and examiners report a LOW-to-NO confidence level for this engine (WEST/BRS). We at NIPRA agree.
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On July 14th, 1999, the PTO sponsored a valuable Public Hearing on Issues Related to the Identification of Prior Art During the Examination of a Patent Application in Crystal City. At that time, a paper authored by myself was presented providing the first publicly available quantitative analysis of patent searching comparing the efficacy of manual searching of prior art vs. automated searching using the then available PTO's APS/Messenger system. As a result of several hundred search efforts, a statistical analysis was presented in a ground breaking series of probability of detection graphs, culminating in a Figure 4 which curve fitted manual vs. online searching results. Remarkably, it was shown that given the existence of suitably established and maintained paper file subclasses—or alternately a ''motherlode'' paper file Digest—a typical search that produced a §102 reference (effectively blocking the issuance of a duplicative, invalid patent) could be completed in just under three hours of search effort with just as high a probability of detection as the best automated searching combined with manual searching of standard (regularly classified and maintained) paper files. Reference to Figure 4 of that paper shows a cumulative probability of detection of a § 102 reference, given that one exists somewhere in the PTO, to be 0.92. This was a startling find that readily supported a conclusion stated then as:
''Presuming that online searching will assume a significantly larger role in prior art searching as time goes on, it is critically important that the theoretical benefits of online searching—of which there are many—are actually realized. At the very minimum, much more training time must be provided to the examining corps to make sure that the online potential is obtained in a professional and usable manner for patent applications being examined right now. Equally critical is the necessity for the PTO automation developers to slow down their rate of change so as to get better control of their work product, and to take the uncertainty and confusion out their systems. These three factors—training, uncertainty and confusion operate to greatly reduce the potential of the online systems to contribute to better prior art searching.''
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Since that time, sadly, the PTO has retired the APS/Messenger system and substituted for it the BRS EAST/WEST systems that are considered to have about 40% of the capability of its predecessor search system.
I turn now to NIPRA's proposed three amendments to Title 35 to address in part the several problems noted above.
Consider first a proposed amendment to 35 U.S.C. § 1
Section 1(a) of title 35, United States Code, is amended by adding the following sentence:
''The United States Patent and Trademark Office shall continue as an agency where all records, books, drawings, specifications, and other papers and things pertaining to patents and to trademark registrations shall be kept and preserved.''
Consider second a proposed amendment to 35 U.S.C. §4 Section 41(I)(1) of title 35, United States code, is amended by adding the following sentence:
''The Director shall not cease to keep and maintain, for use by the public, paper or microform collections of United States patents, foreign patent documents, and United States trademark registrations.''
Finally, consider:
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41(I)(4) The Director shall submit to the Congress an annual report on the automated search systems of the United States Patent and Trademark Office and the access by the public to such systems. The Director shall also publish such report in the Federal Register. Prior to the submission and publication of such report, [The] the [Commissioner] Director shall provide an opportunity for the submission of comments via public hearings by interested persons [on each such report] on the automated search systems and shall include these comments in their entirety in each such report.
Mr. Chairman, I want to thank you and the other officials who have provided us this much needed opportunity to discuss the many issues facing the PTO and its many constituencies. I especially want to thank those on the Subcommittee on Courts and Intellectual Property for the invitation to testify today, and for the first time to present the views and concerns of our new National Association, NIPRA. I pray that the views expresed herein find symphathetic ears and that the three proposed amendments to Title 35 are given swift consideration and approval for the benefit of the entire patent community.
That concludes my prepared remarks, and if my oral presentation today has departed from this written testimony, please consider this written version as the official position of NIPRA on all matters covered. I'll stand by for a few questions if our chairman will so allow.
[Whereupon, at 5:05 p.m., the subcommittee was adjourned.]
(Footnote 1 return)
Department of Commerce, United States Patent and Trademark Office at 13 (February 7, 2000) [hereinafter referred to as ''PTO Fiscal Year 2001 Corporate Plan''].
(Footnote 2 return)
15 U.S.C. §1051, et. seq.
(Footnote 3 return)
In the course of examining the application, the Examining Attorney, among other things, determines whether the mark is a merely descriptive or generic term, comprises immoral or deceptive matter, or is likely to confuse the public as a result of its similarity to another registered mark. See generally, 15 U.S.C. §1052.
(Footnote 4 return)
The TTAB handles Notices of Opposition and Petitions for Cancellation of a mark pursuant to the criteria established in 15 U.S.C. §1063 and 1064, respectively. Decisions of the TTAB can be appealed to a federal district court.
(Footnote 5 return)
PTO Fiscal Year 2001 Corporate Plan, 42.
(Footnote 6 return)
PTO Fiscal Year 2001 Corporate Plan, 42.
(Footnote 7 return)
PTO Fiscal Year 2001 Corporate Plan, 42.
(Footnote 8 return)
United States, General Accounting Office, Intellectual Property: Fees Are Not Always Commensurate With the Costs of Services at 32 (Washington: GAO, May, 1997).
(Footnote 9 return)
Pub. L. No. 106–113 (1999).
(Footnote 10 return)
H. Rep. No. 464, 106th Cong., 1st Sess. 113 (1999).
(Footnote 11 return)
Sec. 4714 of S. 1948, the ''Intellectual Property and Communications Omnibus Reform Act of 1999.''
(Footnote 12 return)
See, Sec. 4711 of S. 1948; see also, H. Rep. No. 464, 106th Cong., 1st Sess. 113(1999).
(Footnote 13 return)
PTO 2001 Corporate Plan, 54, footnotes 6 & 7.
(Footnote 14 return)
Testimony of David C. Stimson, President, International Trademark Association, ''Oversight Hearing on the Condition of the United States Patent and Trademark Office,'' House Committee on the Judiciary, Subcommittee on Courts and Intellectual Property, March 19, 1998.
(Footnote 15 return)
527 U.S. 150 (1999).
(Footnote 16 return)
35 U.S.C. §282.
(Footnote 17 return)
See, e.g., Medtronic Inc. v. Intermedics, Inc., 799 F.2d 734, 741 (Fed. Cir. 1986)(''§282 creates a presumption that a patent is valid and imposes the burden of proving invalidity on the challenger by 'clear and convincing evidence.' That burden is permanent and does not change''), cert. denied, 479 U.S. 1033 (1987).
(Footnote 18 return)
It is also worth noting that even the interpretation of valid claims now depends in a strong way on what occurred in the PTO, see Warner-Jenkinson Co., Inc. v. Hilton Davis Chemical Co., 520 U.S. 17, 30 (1997)(requiring a patentee who seeks to show infringement under the doctrine of equivalents to show why amendments were made to application).
(Footnote 19 return)
149 F.3d 1368 (Fed. Cir. 1998), cert. denied, 119 S.Ct. 851 (1999).
(Footnote 20 return)
See, e.g., Gregory Aharonian, Internet Patent News Service, June 23, 1999, available from srctran@world.std.com and patent-news@world.std.com.
(Footnote 21 return)
Compare Graham v. John Deere Co., 383 U.S. 1 (1966), with United States v. Adams, 383 U.S. 39 (1966). The first case concerned two mechanical inventions (mechanicals being one of the areas with which judges like to think themselves familiar); the second case was about a battery. All three inventions were fairly mundane, but only the mechanicals were held obvious—perhaps because judges do not feel the need to pretend to know much about electricity.
(Footnote 22 return)
See, e.g., Amazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F.Supp.2d 1228 (W.D.Wash. 1999).
(Footnote 23 return)
35 U.S.C. §282; 5 U.S.C. §706.
(Footnote 24 return)
Cf. Wang Laboratories, Inc. v. America Online, Inc., 97 F.3d 1377 (Fed. Cir.1999) (finding, in an infringement action, patent-significant distinctions between two ''favorite places'' or ''bookmark'' features, one using bit mapping protocols, the other using a character-based system).
(Footnote 25 return)
See In re Freeman, 573 F.2d 1237 (C.C.P.A. 1978); In re Walter, 618 F.2d 758 (C.C.P.A. 1980); In re Abele, 684 F.2d 902, 214 USPQ 682 (CCPA 1982); In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994); and Arrhythmia Research Technology, Inc. v. Corazonix Corp., 958 F.2d 1053, 1060 (Fed. Cir. 1992).
(Footnote 26 return)
State Street, 149 F.3d at 1373.