Statement of
Charles P. Baker
Chair, Section of Intellectual Property Law
American Bar Association
For
Hearing on
“The U.S. Patent and Trademark Office: Fee Schedule Adjustment and Agency Reform”
July 18, 2002
Subcommittee on Courts, the Internet, and Intellectual Property
Committee on the Judiciary
U.S. House of Representatives
Thank you for the opportunity to testify on behalf of the American Bar Association and that Association’s Section of Intellectual Property Law. I am Charles P. Baker, Chair of that Section. The views that I express opposing the diversion of United States Patent and Trademark Office user fee revenue to fund programs unrelated to the functions of that Office represent views of the Association. The Association’s House of Delegates adopted them as ABA Policy. Views expressed on other issues, including on individual components of the Administration’s proposal for the restructuring Office user fees, have not been approved by the House of Delegates or Board of Governors of the Association. Those views are those of the Section of Intellectual Property Law (IP Law Section) alone.
As requested by the Subcommittee, our comments today will focus on the new fee structure that has been developed by the Office and proposed by the Administration. Implicit in or contemplated by the proposed restructured fee schedule are numerous fundamental changes in the operations and services of the Office, in requirements imposed on the Office’s customers, and in utilization of Office resources, most particularly its human resources. To the extent these proposals are tied to the fee restructuring, we will also comment on them.
Congress faces critical decisions regarding the future funding of the Office, and indeed, the future of the Office itself and the U.S. system of intellectual property. A brief review of relevant recent history may be useful in understanding the proposed fee restructuring and its accompanying components.
BACKGROUND OF THE NEW FEE PROPOSAL
The Fiscal Year 2002 Funding Proposal and Business Plan
About 18 months ago, the President sent his budget proposal for funding the Office in Fiscal Year 2002 to Congress. Most noteworthy in that submission, it projected that patent pendency would rise to more than 38 months by Fiscal Year 2006. What made this prediction still more disturbing, the Administration based it upon an assumption that user fee diversion would end after 2002, hardly a likely prospect. At the time these projections were made, many who depend upon the services of the Office believed that quality, equally if not more important than pendency, also showed numerous signs of deterioration.
Congress made clear its serious concern about the inadequacy of the Administration’s response to the mounting problems. In its report on the bill containing the FY 2002 PTO appropriation, the Senate Appropriations Committee described its dissatisfaction as follows:
“The ability of the administration to formulate an adequate budget for the PTO is complicated by two factors. First, the agency historically has formulated an incremental budget based on the previous year’s budget, and does not provide the Committee with a thorough business plan that demonstrates how resources will be used and what results will obtain. Second, PTO management has not been sufficiently innovative. Although patent filings have increased dramatically over the past decade, PTO management chose to remain wedded to an archaic patent process and attempted to hire its way out of its workload problems.”
The counterpart House Appropriations Committee report sounded similar criticism, and also served notice on those of us in the PTO user community that the appropriators are not particularly impressed by our argument that all user fees should be made available to the PTO immediately upon collection, particularly when they saw no evidence that the existing fee structure is based upon the real funding needs of the Office. The House report stated:
“The PTO and the patent user community have continually criticized the Congress and the Administration for not allowing full access to their fees in the year they are received, yet PTO has been unsuccessful in proving that increased funding will decrease the amount of time it takes an applicant to receive a patent. PTO bases its budget submission on anticipated fee income, which is derived from an estimation of its anticipated workload. However, there is no indication that the existing level of fees was developed based on any direct relationship to the actual costs of doing business.”
To address the deficiencies they found in the Office’s budgetary planning and execution, both Senate and House appropriators directed the Office and Secretary of Commerce to submit long-range budget plans. The Senate demanded a 5-year strategic plan with three “core objectives,” expressed as “(1) prepare the agency to handle the workload associated with the 21st century economy, (2) improve patent quality, and (3) reduce patent and trademark pendency.” The report also directed the PTO to accelerate its implementation of electronic processing of patent applications, with a completion date of 2004, two years earlier than PTO projections.
Similar planning and reporting requirements are contained in H.R. 2047, the authorization bill authored by Chairman Coble and Ranking Member Berman, which the House passed last November, and in a counterpart Senate bill (S. 1754), which passed the Senate on June 26.
Despite this unified call for budget reform from the four key congressional entities with responsibility for authorizing and funding the Office, the Administration this February submitted a FY 2003 funding proposal which bore a striking resemblance to the FY 02 proposal that had drawn congressional criticism as lacking in innovation and based on little strategic planning other than for the agency to “hire its way out of its workload problems.” The PTO Business Plan that accompanied the budget proposal called for hiring 950 patent examiners in FY 2003. In order to finance this and at the same time continue user fee diversion to the extent of $162 million, a one-year surcharge of 19.3% on patent fees and 10.3% on trademark fees was proposed. The proposal also projected hiring 950 patent examiners in each of the succeeding four years.
In testimony before this Subcommittee on April 11, Director Rogan noted that the five-year Business Plan in the President’s budget was prepared before he took office in December. While calling it “an important first step toward a long-range strategy to refocusing the agency’s priorities on improving quality and timeliness,” he also characterized it as “a traditional response to attack increasing pendency . . . and stem the tide of rising pendency.” Perhaps signaling perception that the original budget proposal and its Business Plan lacked sufficient support in the user community and in the Congress to gain approval, Director Rogan expressed a view that there is a need to go beyond the measures proposed to date. Noting that he had begun a “thorough top-to-bottom review” of the PTO to identify non-essential functions and to shift resources to mission critical tasks, Director Rogan pledged to examine all options, “including the restructuring of our fee system and workforce.”
The proposal that is being considered today bears witness that Director Rogan has honored the commitment that he made before this Subcommittee in April. He, the Office, and the Administration are to be commended for the very serious dedication to self-analysis and reform that is embodied in or anticipated by the proposed new fee structure. This proposal and others that are said to follow are specifically designed to address congressional mandates to produce long-term strategic planning that deals with deficiencies in pendency and quality and expedites conversion to an end-to-end electronic environment. The objectives of improving patent and trademark processing and examination are worthy ones, and the proposals advanced to these ends certainly represent a departure from the “business as usual” approach that has hampered previous PTO planning and reform efforts. We also believe that certain concepts reflected in the bill can help form the framework for an effective overhaul of the PTO user fee system. For example, the IP Law Section supports setting fees at levels that reflect actual costs to the Office in providing the services involved, a concept that is reflected in some, but not all, of the revised fees proposed. We also approve of other initiatives the Office is contemplating. For example, we believe that the proposals for electronic processing, if properly implemented, will decrease processing time. We also support the proposals for certifying and recertifying all examiners to assure the qualifications of all examiners, who are the heart of the U.S. patent system and must be as qualified as possible.
While we applaud the commitment and effort that has gone into this proposal and we endorse some elements of it, we cannot endorse the final product as a whole. It suffers from a number of flaws, both in conceptualization and in individual components, which we address below, along with the features of the proposal that we do support.
The Fee Proposal Works Backwards, Rather Than Forwards
The proposed wholesale restructuring of patent and trademark user fees is represented as the product of a “top-to-bottom” review of Office service needs and resource allocation. It appears, however, to have begun with an end result in mind and worked backward to achieve that objective. That end result is to produce the same level of revenue as called for in the President’s original budget submission for FY 2003, including some $207 million to be raised by surcharges of 19.3% on patent fees and 10.3% on trademark fees. The imposition of such a limitation undermines the integrity of the process and the validity of the representation that individual fees proposed are based on improving the services of the Office. Increasing fees for punitive purposes, which we oppose in a discussion that follows, is one possible result of such a flawed approach to fee setting.
Fee Diversion, Which the ABA Opposes, Has Not Been Addressed
The American Bar Association and its IP Law Section cannot support the bill because neither it nor accompanying statements by the Administration suggest any end to the diversion for other purposes of fees paid by users for patent and trademark services. Indeed, the proposal takes a further step in the wrong direction. By building a margin for diversion into a permanent restructuring of fees, Congress would be codifying and institutionalizing user fee diversion. From the time this injurious practice began a decade ago up to the start of FY 2003, it will have removed $817,000,000 from the research and development budgets of those who use our patent system. This diversion is a tax which decreases investment in research and development in new technologies, and in turn diminishes the creation of new jobs.
The IPL Section Views the PTO’s Trademark Initiatives Favorably, but Prefers Incentives in the Form of Discounts over Penalties in the Form of Surcharges
Turning to specific features of the current proposal, the IP Law Section believes the Office has done a very good job in creating an electronic filing system for trademark applications and post-issuance trademark filings, and generally supports the Office’s new initiatives to continue to expand and encourage use of that system. While the system is still capable of being improved and made even more user-friendly, it is a success story of bringing Office operations into the modern electronic age, of which the Office can be justly proud. The Section also supports incentives to encourage members of the public to use the electronic filing option, as it reduces operating costs, reduces the potential for typographical errors through the transcription of paper documents into electronic formats at the PTO, and promotes overall efficiency.
The Section, however, opposes the fee increase included in the proposed amendment of Trademark Rule of Practice, published at 67 FR 35081 on May 17, 2002, to impose a surcharge of $50 per International Class as a processing fee for each document submitted on paper when an appropriate electronic document is available for use. The IP Law Section opposes that surcharge and believes the more appropriate and customer-focused way to encourage electronic filings is to provide a positive incentive - for example, a $50 per class discount when the document is filed electronically - rather than a penalty in the form of a $50 per class surcharge when the document is filed in paper form, especially when the Office is legally obligated under the Trademark Law Treaty to accept paper trademark filings as well as electronic filings.
Fees That Reflect Increased Cost Are Fair
The IP Law Section supports surcharge fees in the bill that reasonably reflect actual costs. For example, surcharges for specifications and drawings that exceed 50 pages, and surcharges for abnormally high numbers of claims seem appropriate, to the extent they reflect added costs in examining longer applications or applications with more claims. It is reasonable to charge those who file 200-page applications more than those who file 20-page applications. The IP Law Section does not have data to say what the correct amounts should be, but in principle, we believe this is a fair approach.
Increased Fees That Are Punitive Should Be Rejected
The IP Law Section opposes increased fees that are punitive and fail to reflect actual costs. For example, the bill proposes that the cost for presenting the sixth independent claim be four times the cost for presenting the fourth independent claim. Such a fee has no relationship to the cost of examining an extra claim. See Sec. 41(a)(2)(A). The difficulty of examining a sixth claim is not four times the difficulty of examining the fourth claim. Surcharge fees for total claims (Sec. 41(a)(2)(B)) also escalate at a rate unrelated to added cost, and hence they are also punitive. While the Office states that it wants to “modify behavior” by discouraging applicants from filing more that 3 independent claims or 20 total claims, in many situations more than those numbers of claims are reasonable and appropriate, and they should not be discouraged by punitive fees.
As additional examples of punitive charges contemplated by the Office’s proposal, the Office is seeking to impose punitive fees for filing related applications. Specific amounts are set forth in “Transitional Provisions” (Sec. 4(b)), and unspecified amounts are provided for in “Related Application Surcharge” (Sec. 2(a)(3)). We presume the amounts set forth in the transitional provisions are a prediction of what the unspecified amounts will be. Punitive fees would be imposed for related applications that are not “patentably distinct” from a pending application or an issued patent. See Sec. 41(a)(3)(B). There is also a proposed $16,690 charge for a terminal disclaimer if similar claims are presented in three other applications. The Office justifies this, in part, as a way to prevent applicants from avoiding the excessive claim fees mentioned in the previous paragraph. Similarly, to punish the filing of continuations, surcharges will be added when the benefit of parent applications is claimed. See Sec. 41(a)(3)(A). Also, escalating fees are proposed for claiming the benefit of more than one parent application ($1,000 for three; $4,000 for five), and these fees apply even if only one patent issues.
The proposal to raise the appeal brief fee from $300 to $1,600 also appears punitive. Historically the Office has not charged for an appeal, since it is frequently necessary to correct an error of the Office. Such a charge, if any, should not be required until after submission of the Examiner’s brief in opposition, because many appeals are settled in the applicant’s favor before the Examiner’s brief is filed, essentially conceding that the applicant was correct.
The practices which the Office proposes to penalize with excessive charges are entirely appropriate in many circumstances. There are times when it is reasonable to have more than three independent claims and more than 20 claims altogether. Applicants often claim several important embodiments of the same invention, some of which may be patentably indistinct from other pending or issued claims. Also, the question of whether a related application is patentably distinct from another is often a matter of dispute between the Office and the applicant, and it cannot be decided properly until after the examination process is completed. As another example, sometimes one accepts allowed claims to limited subject matter and permits a patent to issue, but refiles to attempt to get broader claims in a continuation. Such practices not only reduce pendency time but they rarely require an additional search of the art, and they also reduce the number or appeals, actually saving the Office money. Also, filing related applications can be a good tool for providing full protection for important inventions. Punitive fees would discourage these practices, discourage applicants from seeking the coverage they feel they are entitled to, and weaken the system. Finally, related applications are often necessary because of the Office’s action or inaction, and any excessive fees for them would be doubly unreasonable.
The burdens would be particularly heavy in some fields. For example, in the communications, data and software industries judicial rulings and legislation require various independent claiming forms and formats. One application may appropriately have transmitter claims, receiver claims, systems claims, method claims and means-plus-function claims. Such additional claims are unlikely to add substantially to examination time because they usually involve the same core combination of elements, but such claims might arguably not be patentably distinct.
Specifically, examples of punitive fees in the Act which we oppose by section numbers are,
Section 41(a)(2)(A) – Excess claim fees for independent claims;
Section 41(a)(2)(B) – Excess claim fees for total claims;
Section 41(a)(3)(A) and related transitional provisions – Surcharge for continuation applications;
Section 41(a)(3)(B) and related transitional provisions – Surcharge for continuation applications having patentably indistinct claims;
Section 41(a)(7)(B) – Surcharge for appeal brief.
In sum, the IP Law Section opposes legislation which would provide escalating filing and claim fees that are punitive. The Section also opposes legislation which would provide for punitive related application and other excessive surcharges.
Increases in Post-Grant Fees Are Preferable
To the extent necessary for Office operations (as opposed to matching an arbitrary, pre-set budget amount), the IP Law Section generally favors increases in maintenance fees over increases in filing and prosecution fees. Higher fees at the beginning of the patent process would discourage the filing of new applications, and hence they would discourage the disclosure of new technology. Also, higher fees would not necessarily increase revenue. For many companies, fewer applications will be filed in proportion to the increase in filing fees.
On the other hand, the costs of maintenance are easier to justify and pay once a patent has issued. Its value to the patent owner’s business then becomes plain. If maintenance fees are paid at all, they are usually paid because the patents are worth significantly more than those fees. Any particular patent application, however, is a more risky investment; the patent owner does not know if the invention is patentable, or, if it is, how broad the patent will be.
Hence, increased maintenance fees, rather than increased filing and prosecution fees, are a better way to raise necessary revenue.
Deferred Examination Should Be Rejected
The bill proposes replacing the present single fee for filing and examination with separate filing and examination fees, and examination could be requested before any action is taken by the Office.
The advantage of this change to patent applicants is that it would enable the applicant to withdraw an application if it is determined that the invention has insignificant commercial importance before substantial costs are incurred. Applicants, however, who have doubts as to whether they want to pursue a particular application, already have this capability in the provisional filing procedure. For most applicants, however, the major cost is in preparing the application, and most decisions to abandon are made in that period. Deferred examination would add a layer of unnecessary procedure.
Deferred examination, however, has no benefit for the public because the claims that will be allowed would remain uncertain until issuance. The primary function of the Office is to protect the public from improperly issued patents. With the publication of patent applications, the public sees broad claims that may, someday, be issued as a patent, not the final version of the claims, whose appearance would be delayed be deferred examination. Such broad claims may create uncertainty and reduce investments. Industry, both large and small, needs a rapid and robust examination of the application to reduce that uncertainty. Deferred examination would increase that uncertainty and public cost.
Incidentally, there is a suggestion in the materials on deferred examination that the Office may begin counting the examination period from the time examination is requested or begins. We do not object to reporting additional times in the prosecution process, but we believe strongly that the Office should continue to report pendency from the date of filing as the primary indicator of pendency.
While we understand that deferred examination is expected to reduce the Office’s workload, and hence reduce pendency, we believe the amount of that reduction would be small, and on balance any benefits of deferred examination are outweighed by the downsides to the users and the public.
Use of Private Sector and Foreign Patent Office
Prior Art Searches Presents Several Problems
The bill provides the Office unfettered discretion to reduce examination fees for applicants who provide a search report that meets conditions prescribed by the Office. This will make possible the implementation of a four-tier search proposal, which would reduce the amount of searching the Examiners have to do. As a result, the Office expects to hire fewer Examiners.
The use of independent searchers raises a number of problems, from insuring the quality and uniformity of search results, to how searches will be updated if different claims are presented after the initial examination, to providing adequate facilities to enable these searchers to perform this work. The IP Law Section believes the Office should still maintain overall responsibility of the searching function and use foreign search results as a starting point rather than a substitute for its own searches.
We are convinced that U.S. Examiners generally can perform the best, highest quality searches in the world. We are concerned about any proposal to decrease the role of Examiners in the search of the art.
Many of us have spent part of our careers as Examiners, and we understand the process from the inside. An Examiner who is going to make an obviousness decision begins to make that determination as the search proceeds. When in the course of this simultaneous search and examination a certain element becomes important, the Examiner can adjust the search accordingly to find the best art with respect to that element. (One must keep in mind that under U.S. law, in contrast to the law of other countries, it is important not only to find each element of a patentable combination in the prior art, but also a teaching to combine the elements. One who does the prior art search but not the examination may find the elements, but not the teachings to combine.)
More than that, each of the 3500 U.S. Examiners gets to know quite well her/his art areas, which are highly focused.
We therefore believe that the search is part of the examination, and if the Examiner does not do the search, it will not be done as well, which would weaken the presumption of that validity. That presumption gives certainty to U.S. patents, and without a reasonable level of certainty, investors will not invest to develop new technology and create new jobs.
Additionally, maintaining the quality of private sector search firms may be difficult, and the public may have little confidence that persons in the private sector can be counted on to protect these interests of the public. Another problem would arise if a private search authority is disqualified. Will the patents it searched before disqualification be presumed valid?
Even if the quality of searches were shown to be the same under some new procedure, we believe there are inefficiencies in the proposed process as a whole. While the Office may spend less if it puts the search on the shoulders of the applicant, as far as total costs to the applicant, the public, and the system are concerned, we believe they would be greater. The fee for the private search, which has been estimated at $1,000, combined with the increased filing and examination fees, would increase the basic filing fee from its current $740 to over $2,500. Also, we doubt that savings to the Office would be great. We have seen estimates that time and cost savings to the Office would be no greater than 5%.
The best testament against separating the search function and an examination function is the fact the European Patent Office, which has had such a system for years, has recently decided to abandon it.
Some of our concerns are speculative. If the Office will perform studies to support this major change, and the studies show that the searches are equivalent, the examinations equivalent, and that there are significant cost savings to the system as a whole – we will be glad to consider them.
The Office is also proposing, as part of its four-tier system, to amend its rules to include a mandatory prior art statement and a mandatory statement of relevancy. The advantage of the provisions for a mandatory prior art inquiry will be the issuance of stronger patents, provided the Examiner continues to perform a search. The disadvantages to the applicant will be the increased costs during prosecution and the cost of determining in later litigation whether the new duty of disclosure requirements had been complied with. A simple solution to these disadvantages is not available where the duty of disclosure is expanded.
Several of the reasons we have given for adhering to our present system of having Examiners do the searching disappear or have less effect if the search has been done by a qualified foreign patent office, but the similarities among patent laws are fewer than one might think. We have already mentioned the issues raised by whether there is a teaching in the art to combine elements. A foreign examiner may not search for such teachings, and a U.S. examiner presented with a search that includes none, may allow a patent improvidently. In such cases we believe it is proper for a U.S. Examiner to accept a foreign Office’s search as a starting point, but if the Examiner, based on a review of the art identified in that search, finds patentable subject matter, then a supplemental search should be mandated.
In sum, the IP Law Section believes that reliance by the Office on searches made by qualified Patent Offices of other governments may be appropriate, if supplemented when allowable claims are found, but the Section opposes the Director’s accepting searches of private companies or requiring the applicant to make mandatory searches and statements concerning what is relevant in the prior art.
Post-Grant Opposition Procedures Are Conceptually a Good Idea
While not presented by the current legislation, we would like to comment on a number of additional proposals that have come up in the planning process. One of them is a post-grant inter partes opposition procedure.
We do not consider it a safety net that will excuse a poor initial examination. The Office should do its best to get examination and issuance right the first time.
We do, however, see a need for something short of full-scale litigation to remove uncertainties. A post-grant opposition of that kind we find acceptable conceptually. It should utilize the Patent Office ALJ’s who currently handle interferences and have demonstrated that they can handle limited inter partes matters expeditiously. We contemplate that the procedure could be instituted within 12 months of a patent’s grant and be over in one year, with appeal by either party to the Federal Circuit.
Accelerated Examination Would Be a Useful Tool
The IP Law Section also supports the Office’s providing accelerated examination for an extra fee, which we understand the Office is considering, though it is not in the present bill.
Electronic Processing in Patent Operations Must Be Implemented Properly
The fee proposal contemplates funding of accelerated implementation of Patent e-Government, with an objective of “end-to-end” electronic processing by the end of FY 2004. The advantages of electronic processing to applicants will be expedited prosecution and issuance and in the long term, reduced costs. The disadvantages will be the additional up front costs, including hardware and software requirements, needed by applicants, their agents and attorneys to generate and prosecute cases electronically.
Initial experience with electronic filing in the U.S. has been that the Office has adopted software standards that are convenient for the Office, but they fail to comply with the requirements of practitioners. For example, the Office’s initial software for filing a patent application electronically was designed for stand-alone use where the attorney prepares and submits the application from his/her computer. It did not permit the electronic document to be prepared in a network environment where the application would be processed by a word processing department and receive final review by a docketing department.
We understand, however, from recent reports that the Office may abandon its existing e-filing technology and instead adopt some version of the EPO software, making the U.S. system compatible with the European and Japanese e-filing systems. This approach would solve at least some of the existing problems with the Office’s e-filing system.
We will be glad to answer questions and supply more detail on the recommendations we have presented. We would also welcome the opportunity to work with the Subcommittee and the PTO to develop a fee structure and other reforms that can attain the worthy objectives that are set out in, but not attained by, Director Rogan’s 21st Century Strategic Plan.