Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to testify today on behalf of Intellectual Property Owners Association (IPO). I am the current President of IPO. My company, PPG Industries, Inc., with headquarters in Pittsburgh, is an IPO member, and I am the Chief Intellectual Property Counsel for the company. The views I am expressing today are those of IPO.

IPO is an association of U.S.-based owners of patents, trademarks, copyrights, and trade secrets. Our members include about 100 American corporations that are among the largest patent filers in the United States and worldwide from all major industries. Our members file about 30 percent of the patent applications that are filed in the U.S. Patent and Trademark Office (PTO) by U.S. nationals, and pay about $200 million a year in fees to support PTO operations.

We view the PTO as one of the most important agencies in government, vested with the responsibility for making correct and timely determinations on whether to grant patent and trademark rights in order to encourage invention, innovation, and investment. The PTO has a highly dedicated and competent staff of professional employees who have worked very hard to maintain and increase the level of excellence in granting patents and registering trademarks during a time when the PTO’s workload has skyrocketed. We want to note that the PTO is in very capable hands under the leadership of its new Director, the Honorable James E. Rogan, and we congratulate him on his appointment. We strongly support Mr. Rogan’s efforts to make the PTO operations as effective as possible.

As patent owners, our members want to obtain high quality patents that can be relied upon. We need to avoid surprises arising from prior art that was overlooked by the PTO or other issues that may not have been properly considered by the PTO. Equally important, when our members are commercializing new technology, they want certainty as to the scope and validity of patent rights of other parties. And we want a patent system that operates at a reasonable cost. Similar considerations apply to trademark registrations obtained by IPO members and their competitors.

MORE RESOURCES FOR THE PATENT AND TRADEMARK OFFICE

A year ago when IPO testified at the annual PTO oversight hearing held by this Subcommittee, we said the PTO was likely to be in crisis soon if it was not there already. We were concerned about patent quality, and about backlogs of unexamined patent applications that were climbing out of control, with a projected patent application pendency of 38.6 months by 2006. The prospect of American companies waiting on average over three years to obtain a patent was unacceptable. Such delays would cause huge uncertainty about legal rights in new technology. And last year no relief was in sight.

This year, while the situation is still very difficult, and we are still deeply concerned about patent quality, the Administration’s 2003 budget for the PTO provides some hope for improvement. The proposed record 21.2 percent increase in funding for 2003, together with Director Rogan’s comprehensive review of all PTO operations, causes us to believe the PTO may have a chance of obtaining the resources it needs to do its job.

IPO enthusiastically supports the 21.2 percent increase in funding, which would raise spending to $1.365 billion in 2003, a level that for the first time in many years actually would be somewhat higher than projected fee income, if fees remained at their current levels. We believe a spending increase of this magnitude is necessary in order for the PTO to take steps to improve patent quality and to work down the backlogs of unexamined applications.

Our support for a such a major funding increase for the PTO, however, is premised on the PTO having finalized a 5-year strategic plan for (1) improving patent quality, (2) reducing patent pendency, (3) implementing full e-processing of patent and trademark applications, and (4) financing the PTO. Completion and implementation of such a 5-year plan, with greatest emphasis on patent quality, is an urgent matter.

SUGGESTIONS FOR 5-YEAR PTO PLAN

The recommendation for a comprehensive 5-year strategic plan – stressing enhanced patent and trademark quality, reduced patent pendency, and an effective electronic system for use by the PTO and the public for all aspects of patent and trademark processes – was first made in Chairman Coble’s bill H.R.2047, which has passed the House and is awaiting action in the Senate. That bill contains an excellent outline of the components for a 5-year PTO strategic plan, and we strongly support its enactment.

The plan must be cost effective and set priorities. It should seek accountability and feature measurable benchmarks that can be used by Congress, the Administration, and the user community to evaluate progress.

Patent Quality

Measuring and improving patent quality is vital to any 5-year plan for the PTO. Industry and inventors cannot be confident about the status of legal rights in technology without high patent quality. There is a huge cost to the economy from invalid patents, which is paid initially by industry but is borne ultimately by consumers. It is time to rethink the current practice of measuring national innovation and PTO productivity simply in terms of the absolute number of patents issued annually. Quality must become an integral part of these metrics.

Quality is an elusive concept with many facets. In essence, patent “quality” in the context of PTO work is the degree of excellence achieved by the PTO in (1) analyzing the written description and claims, (2) finding and analyzing the prior art relevant to the invention that the applicant is seeking to patent, (3) applying the substantive criteria for granting a patent, and (4) creating a reviewable record of the patent examination.

To illustrate what we are talking about, the following are examples from the many suggestions that have been made by IPO members and others for possible actions the PTO might take to improve patent quality:

· Insure that the PTO is able to recruit, train, and retain the best possible examiners and supervisors.

· Establish performance goals for examiners that will incentivize and reward superior quality, in addition to rewarding superior production.

· Expand the current business method patents “Second Look Initiative” to all classes of patentable subject matter.

· Reduce the number of patent examiners assigned to each Supervisory Patent Examiner to allow for more “hands on” supervision.

· Adopt procedures to ensure that an accurate and detailed record is made of all patent prosecution proceedings.

· Review whether the appropriate level of resources is being devoted to reclassification of search files, and promote international cooperation on harmonization of patent classification systems.

· Develop plans to use patent searches from other patent offices to save examiner search time.

In order to improve patent quality, the PTO also should plan to improve its capacity to measure quality. Measures of quality should be as objective as possible. Results of quality measurements should be published and used to drive improvements in quality. To measure quality, for example, the PTO could:

· Track reviews of examined applications conducted by the PTO or an independent outside organization and publish a detailed error rate index.

· Track changes in the confidence level of specific industries in the validity of patent granted in their industries as indicated by polls conducted by the PTO or an independent organization.

· Track patents for which a reexamination request was granted and claims were cancelled or amended, and patents in court litigation in which claims were invalidated.

· Track the number of and reasons for rejections of patent applications that are reversed by the PTO Board and the Court of Appeals for the Federal Circuit.

Patent Pendency

Patent quality is the most important issue for IPO members. The average pendency time of patent applications in the PTO, however, also is a very important issue. Pendency is now at about 26 months and climbing, compared with the long time goal of 18 months, which IPO has always supported. Pendency was last close to 18 months in the mid-90’s. Long pendency times cause enormous uncertainty about legal rights in new technology and discourage investments in the inventing, developing, manufacturing, and marketing of new products and services. Reasonable pendency time often is as important to manufacturers who are utilizing technology as it is to the patent applicant. The continued viability of the patent system requires both high quality and reasonable pendency time.

Moreover, pendency times of the magnitude now being experienced are resulting in automatic extensions of the life of many patents under the American Inventors Protection Act. Data presented at a meeting of the Patent Public Advisory Committee in March showed that 26 percent of patent applications are not receiving a first action within 14 months after filing, which is needed to avoid an automatic extension of the patent term. This is inconsistent with the Congressional decision that patents should generally expire 20 years after filing.

The 5-year plan must include measures for reducing pendency time and keeping it under control. The PTO’s recent Business Plan that give details of the proposed 2003 budget calls for hiring a large number of additional patent examiners in order to reduce patent pendency. We support the hiring of the additional examiners, but given the need for also addressing quality and e-processing of applications, it appears that resources will still be very scarce. We applaud Director Rogan’s statement that he is “preparing to begin a top-to-bottom review of all non-examination and administrative support operations, and will expect to see a compelling justification for every non-examination operation within the agency."

We note our concern, however, about a statement in the 2003 PTO Business Plan, prepared before Director Rogan took office, which indicates that the PTO expects to ask Congress for authority to allow applicants to opt to defer the examination of their applications. The business plan estimates that this would allow the PTO to avoid ever examining 10 percent of applications and free up resources to reduce pendency time of other applications. In principle, IPO is opposed to deferred examination, which creates uncertainty over patent rights in pending applications that have not been examined. Instead of deferred examination, the PTO needs a 5-year plan for substantially accelerating the examination of all patent applications. In response to the proposal in the PTO Business Plan, however, IPO will undertake a review of its position on deferred examination.

Electronic Processing

Despite the need to hire more examiners, PTO investments in information technology cannot be neglected. It appears that the PTO has had to forego information technology expenditures to focus on current workloads. The e-filing system for trademarks is proving very effective, but a great deal of work is needed before the PTO reaches the objective of an electronic system for use by the PTO and the public for all aspects of the patent and trademark processes. H.R. 2047 properly requires this objective to be a key part of the 5-year strategic plan.

DIVERSION OF $162 MILLION TO OTHER PROGRAMS

The President’s 2003 budget proposes to withhold or divert to unrelated government programs $162 million in patent and trademark fees. We believe the members of this Subcommittee already agree with us, but we want to take the opportunity to strongly reaffirm our opposition to withholding or diversion of patent and trademark fees. The PTO should have access to all of its fees collected in the current year and previous years.

This is a subject that we have raised with this Subcommittee and the Appropriations Subcommittee every year since fee withholding began in 1992. By the end of 2003, according to current projections, nearly a billion dollars will have been withheld or diverted. IPO believes this practice of withholding or diverting fees is a primary cause of the situation in which the PTO now finds itself.

We continue to support H.R.740 (Coble) and H.Res. 110 (Berman), which propose to limit or eliminate the authority of the Appropriations Committees to withhold fees. In the long term, this type of legislation may be the only way to assure adequate PTO funding. User fees in the PTO account in the Treasury are funds that have been paid by American corporations and inventors for specific services that they expect to receive.

We are opposed to an increase in patent and trademark fees only to enable more fee withholding. Indeed, if the previously unavailable fees are merely temporarily withheld, as accounting records indicate, then the previously unavailable funds should be made available to the PTO as a part of the 5-year plan.

PROPOSED PATENT FEE SURCHARGE

The President’s 2003 budget proposes a 19.3 percent patent fee surcharge (i.e., an across-the-board fee increase) and a 10.3 percent trademark fee surcharge, to raise $207 million. As we view it, $162 million of that surcharge is being diverted to other government programs. The budget also indicates that there is a forthcoming “fee-restructuring” proposal to support the PTO’s 5-year plan and goals and objectives, to be effective in 2004. The fee restructuring, as we understand it, will include a fee increase.

Subject to a satisfactory 5-year spending plan and an end to fee diversion, IPO would favorably consider appropriate legislation to restructure, and potentially, increase patent and trademark fees. The PTO should include the details of such fee legislation in its 5-year plan. Accordingly, at least for the present, IPO opposes the proposed 19.3 percent patent fee surcharge and 10.3 percent trademark fee surcharge for 2003.

We offer our assistance to the Subcommittee in working to find an acceptable financing plan for the PTO that will enable the PTO to improve patent quality, reduce patent pendency and implement full e-processing of patent and trademark applications. PTO users should not face the threat that any increase in fees will be accompanied by continued diversion of fees to unrelated programs.

PATENT REEXAMINATION LEGISLATION

We would like to reiterate our support for H.R.1866 and H.R.1886, bills developed by this Subcommittee that have passed the House and are awaiting action in the Senate. These two bills will improve the statute governing patent reexamination proceedings in the PTO, and passing them is one of the actions that can be taken to improve the quality of patents. Patent reexamination, based on earlier patents and publications that have a bearing on the validity of a patent, is a relatively quick and inexpensive proceeding for eliminating uncertainty about the validity of a patent. We hope these bills can be enacted in this Congress.

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I want to commend Chairman Coble, Ranking Member Berman and the other members of the Subcommittee for their excellent work in overseeing operations of the PTO. I will be pleased to answer any questions.