Summary of Statement

Ronald E. Myrick, President

Intellectual Property Owners Association (IPO)

Before the House Judiciary Subcommittee

on Courts and Intellectual Property

March 9, 2000

• 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.
• 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 of

RONALD E. MYRICK

PRESIDENT

INTELLECTUAL PROPERTY OWNERS ASSOCIATION

before the

HOUSE JUDICIARY SUBCOMMITTEE ON COURTS

AND INTELLECTUAL PROPERTY

on

PATENT AND TRADEMARK OFFICE OVERSIGHT

March 9, 2000

2:00 p.m.

Mr. Chairman and Members of the Subcommittee:

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
• 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.

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.

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

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 (7^th 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.

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.

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.

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.

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.

Attachments (2)