MANAGING CHANGE FOR GLOBAL CHALLENGES Fiscal Year 1996 A Patent and Trademark Office Review [Pics of PTO] [Pictures of the Commissioner] Message from the Commissioner ---------------------------------------------------------------------------- Never before has intellectual property played a greater role in stimulating America’s economy. As budgets for government research and development have declined, patents have assumed ever-increasing importance in stimulating investment in high-technology industries and in creating jobs for millions of Americans. Trademarks, meanwhile, have facilitated business development by offering protection from unfair competition while helping consumers select products and services that satisfy their needs. Because patents and trademarks are now so inextricably linked to our national economic well-being, the ability of the Patent and Trademark Office (PTO) to conduct business efficiently and effectively is more important than ever before. On the legislative front, we received strong bipartisan support in the 104th Congress, resulting in enactment of several bills that will enhance the protection of intellectual property. Our international negotiations and consultations continue to secure and expand protection of U.S. intellectual property throughout the world. We are working closely with other U.S. Government agencies, the private sector, and our foreign counterparts to enhance U.S. economic development on an international scale. To achieve our goal of customer satisfaction, we need resources that will enable us to manage change by adopting cutting-edge technology and proven business concepts. Achieving this goal is being made more difficult by budget cuts. The PTO relies totally on fee revenue—not taxpayer support—to fund its operations, and much of that fee revenue is subject to the congressional appropriations process. The Omnibus Consolidated Appropriations Act withheld approximately $54 million of PTO’s fee revenue from is budget for FY 1997. Since FY 1992, a total of $142 million in spending authority has been withheld from the PTO. These deep budget cuts have begun to affect PTO business operations. Meeting our fiscal challenge will be a daunting task, but it is one all of us in the intellectual property community must resolve if America’s innovators are to receive the support and assistance they rightfully deserve from the United States Patent ad Trademark Office. [Image] Bruce A. Lehman Assistant Secretary of Commerce and Commissioner of Patents and Trademarks Executive Summary ---------------------------------------------------------------------------- The Patent and Trademark Office (PTO) made significant progress in achieving its strategic goals while facing the challenges of FY 1996. * The PTO received 191,116 utility, plant, and reissue (UPR) patent applications, and issued 105,529 UPR patents in FY 1996. * The PTO received 22,353 provisional patent applications. * The PTO received 200,640 trademark applications and registered 91,339 trademarks in all classes of goods and services. * The PTO continued to strengthen its performance measurement system by redesigning its planning, budget, and evaluation process. * Bills were introduced in Congress in 1996 proposing to convert the PTO into a performance-based, wholly owned government corporation under the policy direction of the Secretary of Commerce. The bills did not pass; they will be reintroduced in the 105th Congress. * The PTO actively participated in international and legislative activities that influence the laws and agreements governing intellectual property rights. * In preparation for the 21st century, the PTO continued efforts to transform patent processing, trademark processing, human resource management, and resource management into more business-like, efficient systems. * The PTO expanded its customer outreach efforts by conducting customer focus sessions and surveys. [The Patent and Trademark ExecutiveCommittee] Our Mission ---------------------------------------------------------------------------- The mission of the Patent and Trademark Office (PTO)is to enhance industrial and technological progress in the United States by promoting the use of intellectual prop- erty rights—patents, trademarks, and copyrights—as a means of achieving eco-nomic prosperity. The PTO does this by: * administering the laws relevant to patents and trademarks; * advising the Secretary of Commerce, the President of the United States, and the Administration on patent, trademark, and copyright protection; and * advising the Secretary of Commerce, the President of the United States, and the Administration on the trade-related aspects of intellectual property. Our Business ---------------------------------------------------------------------------- The PTO has three core business activities: * processing patent applications; * registering trademarks; and * disseminating information about patents and trademarks. At the close of FY 1996, the PTO occupied a total of 1,601,371 square feet of space in 16 buildings in Arlington, Virginia, and two storage facilities in Springfield, Virginia. The PTO also leased storage facilities in Boyers, Pennsylvania. In FY 1996, the PTO employed 5,125 full-time-equivalent (FTE) staff who: * give inventors and entrepreneurs the protection and encouragement they need to turn their creative ideas into tangible products; * provide innovators, businesses, and entrepreneurs protection for their inventions and trademarks; * offer leadership in intellectual property rights policy and trade issues; and * ensure that PTO customers receive the highest possible level of quality and customer service in all aspects of PTO operations. Unlike most other government agencies, the PTO is funded entirely by user fees. This has been true since the passage of the Omnibus Budget Reconciliation Act of 1990. The PTO therefore has a unique responsibility to ensure that users receive efficient, cost-effective services and products that meet their needs and expectations. PTO programs are conducted under the following principal statutory authorities: 15 U.S.C. 1051-1127 contains provisions of the Trademark Act of 1946 that govern the administration of the trademark registration system of the Patent and Trademark Office. 15 U.S.C. 1511 states that the Patent and Trademark Office is under the jurisdiction and supervision of the Department of Commerce. 35 U.S.C. contains basic authorities for administration of patent laws, derived from the Act of July 19, 1952, and subsequent enactments. Revenues from fees are available to the Commissioner to carry out, to the extent provided for in appropriations acts, the activities of the Office. The Patent and Trademark Office is authorized to charge international fees for activities undertaken pursuant to the Patent Cooperation Treaty. Deployment of automated search systems of the Office to the public is authorized. 44 U.S.C. 1337-1338 contains authority to print patents, trademarks, and other matters related to the business of the Office. Our Strategy ---------------------------------------------------------------------------- Intellectual property rights are key to America’s success in the global marketplace. If U.S. businesses are to remain competitive, the effective protection of intellectual property rights must be guaranteed throughout the world. The two main goals of the PTO are: * to be a leader in developing intellectual property rights policy; and * to give our customers the highest possible level of quality and services. The PTO’s Strategic Plan for 1996 through 2000 reflects the Administration’s focus on the role of intellectual property in a global and technology-based economy. The Plan contains strategies for achieving the PTO’s two main goals. To achieve our first goal of playing a leadership role in intellectual property rights policy development, the PTO has established the following three strategies: * participate in international cooperative arrangements; * improve intellectual property systems in the United States and abroad; and * cooperate with other government agencies to ensure that intellectual property concerns are adequately addressed. To achieve our second goal of providing our customers with the highest possible level of quality and services, the PTO has established the following four strategies: * enhance human resources; * leverage information technologies; * employ better processes; and * manage resources effectively. Progress toward these goals is described in the pages that follow. [Pics from Our Progress] The Patent and Trademark Office has identified two goals for the agency. The first is to: ---------------------------------------------------------------------------- 1. Be a leader in intellectual property rights policy development. ---------------------------------------------------------------------------- Participate in International Cooperative Arrangements ---------------------------------------------------------------------------- The PTO participates actively in international negotiations, consultations, and information-sharing efforts to develop and improve systems for the effective grant and protection of intellectual property rights. FY 1996 was an especially active year for these efforts. Intellectual Property Conference of the Americas The PTO and co-sponsors from the private sector organized the Intellectual Property Conference of the Americas, which took place in July 1996 in Santa Monica, California. The U.S. Agency for International Development provided support and helped bring together almost 500 participants from the public and private sectors throughout the Western Hemisphere. Conference participants looked at ways they might cooperate in the search and examination of patent and trademark applications and explored the potential for hemisphere-wide patent and trademark applications. They also examined ways in which countries could exchange information, training, and technical assistance in order to meet their obligations under bilateral, regional, and international agreements and generally to improve enforcement of intellectual property rights throughout the Western Hemisphere. Participants significantly increased their understanding of the relationship between the positions and needs of the countries of the Western Hemisphere and the establishment and maintenance of effective intellectual property protection systems. Partici pants formed working relationships that will lead to information sharing and cooperation in planning, training, and technical assistance. Intellectual property owners throughout the Western Hemisphere will be the beneficiaries. [Intellectual PropertyConference of the Americas Photo] Berne Protocol, New Instrument and Database Protection The PTO is committed to making progress in the World Intellectual Property Organization (WIPO) to improve the protection of works protected by copyright and neighboring rights. We must build upon the international standards set in the Agreement on Trade-Related Aspects of Intellectual Property (TRIPs), especially because of the need to address intellectual property issues associated with the global information infrastructure. Accordingly, with the active support of the PTO, the members of WIPO are working to establish two new international agreements, as described below. * A Protocol to the Berne Convention for the Protection of Literary and Artistic Works would modernize the Berne Convention to take into account new forms of expression and new uses of copyrighted works that have evolved through technology since the Berne Convention’s most recent revision in 1971. * A New Instrument for the Protection of Performers and Producers of Phonograms would improve international standards of protection for sound recordings and grant protection to certain performers in their live performances. Many countries, including the United States, submitted treaty proposals in FY 1996. Three draft treaties, based on those submissions and views expressed in meetings of the Committee of Experts, were considered at the Diplomatic Conference on Certain Copyright and Neighboring Rights Issues, held in December 1996 at WIPO headquarters in Geneva. In preparing for that conference, the PTO held a public briefing in November 1996 to discuss the chairman’s text and invite interested parties to submit written omments on that text. Copies of the draft treaties and other information relevant to the Diplomatic Conference are available to the general public at the PTO’s World Wide Web site: (http://www.uspto.gov). Trilateral Cooperation The PTO continued its 13-year trilateral cooperation with the European Patent Office (EPO) and the Japanese Patent Office (JPO). The three organizations recognize the need for international cooperation in the field of industrial property systems, the need to address the rapid development of information and communication technologies, and the importance of protecting emerging technologies appropriately. Representatives of the three offices met in the Hague in April 1996 to pursue cooperative efforts in areas such as search tools, patent information, and electronic filing. Trade-Related Aspects of Intellectual Property PTO officials analyzed intellectual property laws of World Trade Organization (WTO) member countries in preparation for Trade-Related Aspects of Intellectual Property (TRIPs) Council meetings, at which developed countries’ progress in complying with the TRIPs obligations was reviewed. All developed countries were required to submit laws and regulations governing intellectual property to the TRIPs Council in early 1996. The PTO helped to assemble and prepare the U.S. submission. The TRIPs Council Copyright Review was held in July 1996; the Trademark Review was held in November 1996. North American Free Trade Agreement PTO officials have participated in several bilateral meetings of the U.S.-Mexico Intellectual Property (IP) Working Group to address implementation of the IP chapter of the North American Free TradeAgreement. Discussions focused on enforcement of copyrights and trademarks and on Mexico becoming a party to the International Convention for the Protection of New Varieties of Plants. Free Trade Area of the Americas PTO experts assisted in planning for this hemisphere-wide initiative, which will include provisions on intellectual property rights. PTO experts attended the first meeting of the Free Trade Area of the Americas (FTAA) Intellectual Property Working Group and drafted U.S. proposals for continuing work of the group, eventual negotiations of an IP chapter of the FTAA, and a paper on the effect of emerging technologies on IP. The U.S. proposals were presented at the second meeting in November 1996. The Hague Agreement Consultations on drafting a New Act of the Hague Agreement Concerning the International Registration of Industrial Designs continued in FY 1996. The U.S. delegation, led by PTO experts, moved the con sultations toward a system that conforms to the system for the protection of design patents. A Sixth Session of the Committee of Experts was held in early November 1996. Transatlantic Business Dialogue The PTO has been actively involved in the Transatlantic Business Dialogue (TABD) and its Issue Group on Intellectual Property Rights. The TABD brings together business and government officials from t he United States and the European Union to identify and eliminate barriers to transatlantic trade and investment and to forge closer economic relations between the parties. Key goals in this dialogue are to promote full and complete implementation of the TRIPs Agreement by the United States, the European Union, and key third-country markets. The TABD was launched in November 1995 and reconvened in November 1996. Asia Pacific Economic Cooperation In August 1996, at the meeting of experts of the Asia Pacific Economic Cooperation (APEC), the U.S. delegation presented a proposal for establishing a trademark mailbox system to simplify the filing of trademarks among APEC member offices. PTO officials provide technical advice on U.S. views concerning the Individual and Collective Action Agendas. Well-Known Trademarks U.S. citizens and businesses own many of the most famous and valuable trademarks in the world. Representatives of the PTO at WIPO meetings have been stressing the importance of giving these marks eff ective worldwide protection. Intellectual Property and the Environment At the Food and Agricultural Organization, the Convention on Biological Diversity, and the World Trade Organization’s Committee on Trade and the Environment, the PTO aided the U.S. Government in resi sting efforts by certain countries to weaken, rather than improve, intellectual property rights standards. Other Negotiations, Consultations, and Information Sharing The PTO has been active in U.S.–China Intellectual Property Rights (IPR) consultations to assess China’s adherence to the February 1995 Bilateral IPR Agreement in which China committed to improved pr otection and enforcement of U.S. copyrights and trademarks. In conjunction with the U.S. Trade Representative’s office and the American Institute in Taiwan, the PTO has been reviewing Taiwan’s progress in meeting its obligations under the 1992 U.S.–Taiwan IPR Understanding. PTO officials have been preparing for and meeting with the U.S.–Russia and U.S.–Ukraine bilateral IP Working Groups, which were created under the trade agreements to address intellectual property matters. PTO experts attended bilateral meetings of Trade and Investment Committees with Peru, Colombia, and Venezuela. PTO experts provided preparatory analysis to and participated in several rounds of negotiations with Honduras, El Salvador, and Nicaragua aimed at completing bilateral intellectual property agreements. Improve Intellectual Property Systems in the United States and Abroad ---------------------------------------------------------------------------- The 104th Congress saw considerable activity on intellectual property matters, and the PTO continued to work closely with the House and Senate Judiciary Committees and other congressional members and staff on a variety of legislative proposals. Congress passed and the President signed into law several bills, described below, that enhance the protection of intellectual property. Biotech Processes Public Law 104-41 (S. 1111), signed into law on November 1, 1995, clarifies patent law regarding “obviousness” to make it easier to receive patents for biotechnological processes. Digital Performance Rights P.L. 104-39 (S. 227), signed into law on November 1, 1995, gives copyright owners of sound recordings an exclusive right to perform their sound recordings publicly by means of digital transmissions. Trademark Dilution P.L. 104-98 (H.R. 1295), signed into law on January 16, 1996, amends the Lanham Act to create a Federal cause of action to protect famous marks from unauthorized users that trade upon the goodwill and established renown of such marks, thereby diluting their distinctive quality. [Pic of the Commissioner] Anticounterfeiting P.L. 104-153 (S. 1136), signed into law on July 2, 1996, increases civil and criminal penalties for counterfeiting copyrighted and trademarked products; makes trafficking counterfeit goods or services an offense under the Racketeer, Influenced, and Corrupt Organizations (RICO) Act; expands seizure authority; and makes it more difficult for seized goods to re-enter the market. Major legislation described below, though supported by the PTO and the Administration, was not enacted. Omnibus Patent Reform Omnibus patent reform bills (H.R. 3460 and S. 1961) were introduced in both the House and Senate but did not reach a floor vote. Bipartisan efforts to include the bills’ provisions in the end-of-the-session omnibus spending bill were unsuccessful. The bills would have converted the PTO into a wholly- owned government corporation under the policy direction of the Secretary of Commerce. The omnibus bills would have made important patent reforms such as: providing for early publication of patent applications (H.R. 1733); establishing a defense to patent infringement based on previous domestic use (H.R. 2235); regulating invention development service firms (H.R. 2419 and S. 909); and improving patent re-examination procedures (H.R. 1732 and S. 1070). The PTO anticipates that this legislation will be reintroduced by the 105th Congress. National Information Infrastructure Also introduced in the 104th Congress, but not passing, was legislation (S. 1284 and H.R. 2441) to assure copyright protection for works transmitted over the National Information Infrastructure. The bills were intended only to fine-tune copyright law as it applies to the new digital environment. Unfortunately, interested parties could not agree on how to deal with on-line service provider liability and devices used to circumvent copyright protectionsystems. Again, the PTO hopes that the parties reach agreement soon and that the 105th Congress produces a consensus bill. FY 1996 and 1997 PTO Appropriations Of fees paid by inventors, $29 million for FY 1996 and $54 million for FY 1997 were not appropriated to the PTO. The PTO is entirely fee-funded; all of its expenses are covered by the fees its customers pay for issuance of a patent, registration of a trademark, and other services. As a result of the Omnibus Budget Reconciliation Act (OBRA) of 1990, a surcharge islevied on patent fees, and the proceeds are placed in a separate account that is subject to the appropriations process. The surcharge fees amount to approximately 20 percent of PTO’s annual revenues. For FY 1996, congressional appropriators gave PTO $82million from the $111 million deposited in the account; approximately $29 million in budget authority was withheld. For FY 1997, congressional appropriators gave PTO just over $61 million out of the $115 million deposited in the account; the other $54million in budget authority was diverted to other government programs. Including these amounts, almost $142 million in budget authority, consisting of fees paid by inventors, has not been appropriated from the patent surcharge account to the PTO since FY 1992. This arrangement is scheduled to expire after FY 1998. Cooperate with Other Government Agencies ---------------------------------------------------------------------------- Visiting Scholars Program Since 1985, the PTO has offered the Visiting Scholars Program to intellectual property officials from more than 30 foreign countries. In two weeks of classroom and “hands-on” study, participants len about the administration of intellectual property law, patent and trademark examination, and copyright protection, and gain an understanding of intellectual property protection as a tool for economic development. The program includes an introduction to elements of patent and trademark examination such as classification, search, office action preparation, communication with applicants, and final application processing. The program also includes a review of copyright law. This year’s program (held late Oc tober through early November 1996) welcomed participants from Brunei, Cambodia, China, Estonia, India, Mexico, Saudi Arabia, United Arab Emirates, Ukraine, and Venezuela. 2. Provide our customers with the highest possible level of quality and services. ---------------------------------------------------------------------------- The PTO’s second goal for the agency is to provide its customers with the highest possible level of quality and services in all its operations. Customer Standards ---------------------------------------------------------------------------- Patent and Trademark Customer Survey During 1995 and 1996, surveys were conducted to measure the satisfaction of the PTO’s patent and trademark customers. The PTO is using the results of the 1996 survey to target customer service areasthat need improvement and to measure change in customer satisfaction since the 1995 survey. Findings of the study are classified by Patents and Trademarks. Patents The Patent Process Customers’ overall satisfaction with the patent process in 1996 did not change from the 1995 results. The mean score for overall customer satisfaction remained at 3.3 on a 5-point scale, and the percentage of satisfied customers remained at approximately 50 percent. As in the 1995 survey results, 1996 customers identified the “outcome” as the most important component of the patent process with “staff competence” the second most important. Customers’ satisfaction with “outcome” and “application procedure” imp from 1995 to 1996. Customers’ satisfaction with “timeliness,” “competence of staff,” “handling of problems,” and “responsiveness of staff” was lower in 1996 than in 1995. The best predictors of overall satisfaction were “outcome of the process,” “competence of the staff,” and “decision-making process.” In these three categories the greatest gap existed between importance and satisfaction. Patent Standards The top three customer priorities have not changed since 1995: (1) “conducting thorough searches,” (2) “clear written communications,” and (3) “direct you promptly to the proper office or person.”> Although most 1996 respondents are satisfied with the patent standards, several areas show significantly lower satisfaction ratings than in 1995. Main areas of concern include: “clear written communications,” “conducting thorough searches,” and “reing telephone calls within one business day.” The two areas that did improve are: “provide legible correspondence” and “widely disseminate information on changes in practices and procedures before their effective date.” The best predictors of overall satisfaction were “conduct a thorough search,” “set forth clearly in written communications the technical, procedural and legal position of examiners,” and “direct you promptly to the proper office or person.” In these three categories the greatest gap existed between importance and satisfaction. Customer Priorities in Patent Processes Customers rated the seven patent process categories from “not at all important” to “extremely important.” These scores were then ranked in order of importance using mean scores. The results for 1995 and 1996 are presented below. All seven process categories were ranked at the same level of importance in both 1995 and 1996. As would be expected, “outcome of the process” was rated the most important. [Comparison of 1995 and 1996 PatentCustomer Priorities] Trademarks Trademark Process Customers’ overall satisfaction in 1996 with the trademark process did not change from the 1995 results. The mean score for the overall customer satisfaction item remained at 3.5 on a 5-point scale, and the percentage of satisfied customers remained at approximately 64 percent. As in the 1995 survey results, customers identified the “outcome” as the most important component of the trademark process. Customers’ satisfaction with “outcome” and “application process” improved from 1995 to 1996 along with “staff competence,” “staff responsiveness,” “decision-making process,” and “price.” Customers’ satisfaction with “handling of problems” was l1996 than in 1995. Three of the best predictors (exclusive of price) of overall satisfaction were “outcome of the process,” “application process,” and “timeliness.” “Timeliness,” “responsiveness,” “handling of problems by staff,” and “competence of staff” show the largest gap between importance and satisfaction. Trademark Standards The top two customer priorities have not changed since 1995. “Clear written communications” remains the top priority, followed by “direct you promptly to the proper office or person.” Although most 1996 respondents are satisfied with the trademark standards, in several areas satisfaction was significantly lower than in 1995. Areas of concern include “direct you promptly to the proper office or person,” “widely disseminate informaon on changes in practices and procedures,” “return telephone calls within one business day,” “respond to status letters within 30 days of receipt,” “mail correct filing notices within 14 days of receipt,” and “provide written first communication regardinregistrability within three months of filing date.” The one area that did improve was “clear written communications.” The best predictors of overall satisfaction were “set forth clearly in written communications the technical, procedural and legal position of examining attorney;” “direct you promptly to the proper office or person;” and “return telephone calls withione business day or, if requested by the caller, provide an alternate point of contact.” “Determine the registrability of trademarks within 13 months,” “provide written first communication within three months of filing date,” and “direct you promptly tohe proper office or person” show the largest gaps between importance and satisfaction. Customer Priorities in Trademark Processes Customer respondents rated the seven trademark process categories on a 5-point scale from “not at all important” to “extremely important.” These scores were then ranked in order of importance using mean scores. The top process category was ranked the same in level of importance in both 1995 and 1996. As would be expected, “outcome of the process” was rated as the most important. “Application process” moved from the sixth priority in 1995 to second i1996. “Timeliness” moved from the third priority in 1995 to seventh in 1996. [Comparison of 1995 and 1996 TrademarkCustomer Priorities] Patent Protection ---------------------------------------------------------------------------- Processing of patents, one of three core businesses of the PTO, has experienced steady growth in the last decade and is expected to continue growing well into the next century. The PTO is focusing it s efforts to improve the patent process using re-engineering and quality techniques so our customers will be assured of the best possible service. Applications In FY 1996, the PTO received 191,116 utility, plant, and reissue (UPR) patent applications and 15,160 design applications. The UPR patent application filings workload decreased by 13.6 percent from the previous year. This unusual decrease is the result of the transition to a 20-year patent term. The PTO experienced a surge in patent application filings during the week prior to June 8, 1995, the date the legislation making the change became effective. During that week, the PTO received 28,483 UPR patent application filings, over 500 percent more than in the same week of the previous year. Issues In FY 1996, the PTO issued a total of 116,875 patents, including 11,346 design patents. This was an overall increase of 2,634 patents over the FY 1995 level. Pendency End-of-year average pendency to issue/abandonment time rose to 20.8 months, up from 19.2 months last fiscal year, reflecting the effect of personnel restrictions, restructured funding in the first half of the year because of the lack of full-year appropriations, and the surge in application filings in the years before FY 1996. [Patent Applications and Production(Examiner Disposals): FY 1992-1996] Changes in Patent Law As a result of implementation of the Uruguay Round Agreements Act (P.L. 103-465), the PTO designed a new model for tracking and measuring pendency. The PTO will begin reporting cycle-time statistics in lieu of pendency effective FY 1997. Cycle time measures PTO time only (discounting waiting time caused by the applicant) per invention from original filing date to disposal by invention. Such reporting will allow for comparisons of examination time attributable to both the PTO (in terms of cycle time) and the applicant (total examination time from receipt to issue or abandonment, less cycle time). These statistics will be further divided by industry sector. Trademark Protection ---------------------------------------------------------------------------- Milestones Several significant trademark milestones were observed in FY 1996. The PTO celebrated the 50th anniversary of implementation of the Lanham Act (Trademark Act of 1946) that modernized early trademark law and still forms the basis of the Federal registration system today. The number of applications filed exceeded 200,000 classes, and the PTO issued trademark registration number 2,000,000. The level of filings and registrations is notable because the current annual increases continue a trend that began with implementation of the Trademark Law Revision Act in 1990. Applications In FY 1996, the PTO received 200,640 trademark applications, over 14 percent more than last year’s 175,307. The number of applications has increased at higher than anticipated rates, approximately 11 to 14 percent annually, over the last five years. In that time, the trademark application workload has increased 60 percent, though fiscal year staffing levels for the trademark process have increased by less than 10 percent. Registrations The number of certificates of registration for trademark applications, including extra classes, issued during FY 1996 was 91,339, representing an increase of 21 percent over the number issued in FY 1995. [Trademark Applications and Production(Examiner Disposals): FY 1992-1996] Pendency Trademark pendency in FY 1996 was 5.9 months from filing to first action and 16.5 months to registration. First action pendency increased from the previous year, although pendency to registration showed slight improvement. Continual increases in workload combined with less than adequate staffing have kept pendency at a level higher than planned. Trademark examining attorneys completed 198,160 first actions on trademark applications in FY 1996, or 21 percent more than the goal and 12 percent more than the 176,764 actions taken in FY 1995. First actions provide an early indication of the likelihood that an application will be approved and thus are crucial to businesses in making decisions on commercializing their product or service. Total first examination disposals in FY 1996 were 156,234, an increase of eight percent or 12,183 over the previous year. As the PTO establishes new work processes, increases efficiency, and attains requested staffing levels, we expect pendency to first action and to registration/abandonment to return to our goal levels beginning in FY 1998. Changes in Trademark Law Congress amended the Lanham Act in FY1996 to increase the protection of famous marks against piracy by trademark counterfeiters. It also increased the civil and criminal penalties for counterfeiting copyrighted and trademarked products and made trafficking in counterfeit goods or services an offense under the RICO Act. Finally, Congress expanded the Federal Government’s seizure authority and made it more difficult for seized goods to re-enter the maketplace. Information Dissemination to the Public ---------------------------------------------------------------------------- In FY 1996, the PTO disseminated patent and trademark information to customers through its search facilities in Arlington, Virginia, the nationwide network of Patent and Trademark Depository Libraries (PTDLs), commercial vendors, and direct sales to end users of the data. The PTO also assisted its customers through its General Information Services Division (GISD). The goals of the information dissemination program are to develop products and systems to assist current and future customers and to take advantage of new technologies and capabilities as they arise. Public Search Facilities In its public search facilities, the PTO provided reliable, low-cost access to: * the Automated Patent System’s Text Search and Retrieval (APS-Text), * Classified Search and Image Retrieval (APS-CSIR), and * the Trademark Search System (X-Search), and free access to: * the Trademark Reporting and Monitoring (TRAM) system, * the Patent and Trademark Assignment Search Systems, and * PTO CD-ROM products. PTDL Program Through the PTDL program, the PTO disseminates patent and trademark information and supports diverse intellectual property needs of the public. During FY 1996, the New Hampshire State Library, Concord, New Hampshire, and the Texas Tech University Library, Lubbock, Texas, were designated new PTDLs. In addition, 28 libraries across the country offered access to APS-Text for on-line patent searches. The PTO established a PTDL business partnership with the Great Lakes Patent and Trademark Center at the Detroit Public Library to encourage new interest in intellectual property throughout the Great Lakes region, including nearby Canadian cities. This is our second partnership—the first is with the Sunnyvale, California, Center for Invention, Innovation, and Ideas, which expanded services to States on the West Coast. Designated the National Performance Review Reinvention Laboratories, the two centers participated in programs to identify and meet customer needs and to forge relationships with government agencies with related missions. A long-term goal for each is to become a full-service help center, perhaps offering government and commercial publications on patenting, marketing, and exporting inventions. Once the pilot partnerships in Sunnyvale and Detroit are evaluated and the programs are deemed successful, work will begin on establishing partnerships in other regions of the country. PTO on the Internet The PTO continues to use the Internet to give users around the world access to patent and trademark information products. The PTO World Wide Web (WWW) site (http://www.uspto.gov) contains the following information about PTO products and services; PTO forms; notices of PTO rule changes, public meetings, and policy announcements; procurement documents; and links to other Intellectual Property Offices. Many products are also available on the PTO’s File Transfer Protocol (ftp) site. Accesses to the PTO’s WWW site average more than 30,000 per day. The PTO now has two searchable patent databases on the WWW that are accessible through the PTO’s Home Page. The first, under the AIDS Patent Project, is a collection of the full text and full images of U.S. patents related to AIDS research. The EPO, JPO, and WIPO have now joined in the project to provide their own AIDS-related patent information. In November 1995, the PTO established a second patent database on the WWW. It offers more than 20 years of searchable patent bibliographic text at no charge to the public. The database consists of the front-page text for all patents issued since 1976. It is updated weekly and receives on average more than 45,000 successful requests per day. [Our Progress Photo] PTO on CD-ROM The PTO continues to use CD-ROM technology to provide patent and trademark information to the public. CD-ROM products contain searchable text, indexes, and search tools that are updated bimonthly and quarterly. In addition, the PTO produces a weekly patent image CD-ROM that allows electronic delivery of documents to PTDLs, other industrial property offices around the world, and the public. All CD-ROM products can be used, at no cost, in PTO public search facilities and PTDLs, and are sold to the public through annual subscription. Copies of internal databases on magnetic tape are also available. PTO Through GISD The PTO’s General Information Services Division (GISD) responds to inquiries from the public for general information about patents and trademarks. Modernization efforts allowed GISD to serve more than 520,000 customers in FY 1996 with telephone, mail, and walk-in requests. GISD can be reached toll-free at 1-800-PTO-9199, or in the Washington, DC, area at (703) 308-4357. Enhance Human Resources ---------------------------------------------------------------------------- In FY 1996, the Office of Human Resources collaborated with all other areas of the PTO to define its role in the transformation of PTO’s business functions. Following is the PTO’s vision for human sources management, developed to meet the needs of PTO employees and support its business areas’ needs: In the transformed PTO, human resources consist of self-motivated employees who understand their role in providing customer satisfaction and accomplishing the PTO mission. These employees are valued as key assets and customers; there is respect for the balance between work and family issues; and a learning environment is fostered to enable employees to adapt to change and excel in performance. Human Resources Re-engineering In March 1996, the PTO initiated a business process re-engineering effort under the Administrator for Human Resources and Public Affairs, which also includes the Office of Civil Rights. The project is examining all aspects of PTO human resources management (HRM), operations, and organizational structure for each of these offices. The goal is to support the needs of PTO’s three business areas (patents, trademarks, and information dissemination), s well as all other areas of the PTO. The PTO will initiate a variety of pilot programs to explore options for delivering human resource services, including moving many operations to the business units and contracting out targeted recruitment initiatives. In FY 1996, the Office of Human Resources (OHR) completed an analysis of current operations and began work on a Concept of Operations (ConOps), which will describe the future OHR environment and operations. In addition to the ConOps, OHR will develop an HRM Business Plan containing the schedule and plans for moving from current human resource management processes to the new re-engineered environment. A final report of this analysis is available from the Office of Human Resources. The ConOps and busines s plan are expected to be completed early in calendar year 1997. The Office of Human Resources conducted a study of more than 100 private and public human resource organizations to identify the best practices of these world-class organizations. OHR also conducted a customer focus survey of all human resource functio ns to establish a baseline from which the office will measure its performance improvement, once re-engineering efforts are under way. Budget reductions may, however, require scaling back, postponing, or eliminating this project. [pto university photo] PTO University In 1994, the PTO created PTO University to promote lifelong learning among current PTO employees. PTO University strives to meet the demands of an increasingly technological and automated workplace. Employees who participate in PTO University programs learn new skills that further their career development and contribute to PTO’s competitive place in the global economy. Since FY 1995, PTO University registrations have increased by more than 40 percent; in 1996, over 1,300 employees registered for on-site classes. [summer intern students photo] Patent Academy The Juris Masters Certificate Program (JMCP), a voluntary after-hours program for patent professionals, began in February 1996. The JMCP enables patent professionals who are not attorneys to improvetheir legal knowledge. The program enrolled 192 students in its first year. [Image] Quality of Work-Life In FY 1996, the PTO opened its on-site fitness center. All PTO employees are eligible to join the fitness center for a small fee that is deducted from their paychecks. As a result, the center is nearly self-funded. The center offers state-of-the-art cardiovascular and weight-training equipment, aerobic classes, personal trainers, and much more. In addition, the PTO’s Partnership Council extended the Compensatory Time Pilot Program, which is an additional tool to help employees achieve a good balance between their work and personal lives. PTO employees continue to make use of flexible work schedules, on-site health programs, and transportation subsidies. Community Service The PTO continued to establish itself as a good corporate citizen and progressive employer through programs that improved education, health, and personal empowerment. These programs included Project XL, Partnership in Education, and the Lakota Project, a Native American community project in South Dakota. Leverage Information Technologies ---------------------------------------------------------------------------- Customers using the patent and trademark systems expect ready access to information and the ability to interact electronically with the Office in a self-service manner. The following vision guided the Office’s efforts in FY 1996 to leverage information technology: In the transformed PTO there is an information technology environment for the Office, its international partners, and the public where patent and trademark information is created once, managed effectively and used often, and where our environment evolves over time to electronic commerce whereby most internal and external transactions are performed electronically and are accessible through the Global Information Infrastructure. The PTO refined its Strategic Information Technology Plan, publishing an update for FY 1996–2001 in December 1995. The Plan emphasizes the following areas, which are critical to leveraging information technology at the Office: * maintain current workload production capability; * make PTOnet robust, reliable, and scalable to meet future needs; * make all PTO applications accessible from desktop workstations; * expand the content of and improve access to patent and trademark search databases; * redesign legacy systems to operate in an open systems environment; * implement re-engineered patent and trademark business processes; and * improve electronic information dissemination to external customers. Budget reductions to programs funded by patent fees, however, may make it necessary to scale back, postpone, or eliminate many of these projects soon. Patent Automation The PTO greatly enhanced patent automation capabilities in FY 1996. Highlights appear below. Desktop Deployment -—The PTO deployed approximately 570 desktop workstations to patent examiners. Group Printer Deployment - —The PTO deployed four additional high-speed printers to patent examiners, bringing the total number of group printers available in a shared environment to 55 machines. Patent Text Search - —The PTO was linked with the premiere Scientific and Technical Network. Through this link, patent examiners are able to search critical foreign patent information. The Office’s own text database was expanded to include more tha n 1 million EPO abstracts and about 500,000 additional JPO abstracts. The PTO also completed an evaluation of a search software prototype. FormWriter - —The PTO replaced handwritten forms with computer-generated, laser-printed forms. Research and Development Contracts - —The PTO and the Defense Advanced Research Projects Agency jointly awarded $11 million in research and development contracts to the University of Massachusetts Center for Intelligent Information Retrieval and the San Diego Supercomputer Center. These awards will enhance the Office’s ability to access and evaluate complex technical data in patent applications relating to electronic commerce. [our progress photo] Trilateral Workstation Exchange - —The PTO installed workstations that will allow patent examiners to conduct electronic patent searches of the EPO and JPO databases. Trademark Automation The PTO released the initial version of the Trademark Electronic Toolkit. The Toolkit allows access to the Trademark Reporting and Monitoring (TRAM) system and the trademark search system (X-Search) via a personal computer over the PTO computer network. It is a major improvement over the existing TRAM query process in that all information for a trademark is retrieved at once, eliminating the need to perform multiple queries. [textbox] Administrative Automation A select number of users have received the Executive Information System, which provides critical management information to users on-line in a format appropriate to their needs. Also, the Office of Human Resources successfully implemented a paperless system for approving and tracking training forms. Finally, the Office of Finance began processing invoices from vendors with use of an electronic imaging system that enables payments to be approved without distributing paper copies throughout the PTO. The Office of Finance processed more than 17,000 invoices. Infrastructure Information Systems Support Contract - —The System Development and Maintenance (SDM) support procurement seeks to acquire technical professionals to staff information system development and maintenance projects. This $511 million acquisition is a pilot effort under the Office of Federal Procurement Policy’s Past Performance Program. A request for proposals was issued in January 1996. Proposals were received in March 1996, and the PTO expects to award a contract in the spring of 1997. PTOnet Upgrade - —The PTO finished replacing its file server infrastructure with updated components, reducing server downtime from a high of 50 hours per month to around two hours per month. Magnetic Storage - —The PTO acquired 25 terabytes of magnetic storage that will be installed during FY 1997. The new magnetic storage will replace the optical storage devices now used to store patent images, support new and existing requirements such as patent image capture, access to EPO and JPO full patent images, and patent and trademark assignments. Employ Better Processes ---------------------------------------------------------------------------- Private sector organizations have responded to changes resulting from a technology-based economy, increased global trade, a changing work force, and advances in information technology by right-sizing themselves. The National Performance Review suggests that government agencies follow the private sector’s lead by eliminating obsolete and redundant programs and making better use of automated technologies and advanced telecommunications. The PTO has created the following vision for employing better processes: The transformed PTO continually strives to produce and deliver products and services in a manner that is responsive to customer needs. We operate in a modern, streamlined organization to fulfill and exceed our customers’ expectations and enable ouremployees to achieve their full potential. Patent Process Re-engineering Recognizing the need to operate differently in the new global economy, the PTO is re-engineering the entire patent process. A proposed patent process was presented to and approved by PTO executives in November 1995. Budget reductions, however, may require scaling back, postponing, or eliminating this program. Since then, more detailed discussion and analysis of the proposed re-engineering have taken place, and an annotated Concept of Operations (ConOps) was completed in November 1996. The new process parallels the principles of the Strategic Direction for Patents, which states that by 2003 the PTO will: * reduce the PTO’s processing time to 12 months or less for all inventions; * establish fully supported and integrated industry sectors; * receive applications and publish patents electronically; * exceed our customers’ quality expectations through the skills and empowerment of our employees; and, * assess fees commensurate with resource utilization and customer efficiency. The patent process of the future reflects a new vision of service to the intellectual property community. Pivotal concepts in this process are maximizing value-added activity and using cycle time (cycle time measures PTO processing time only, and doesnot include any waiting time caused by the applicant) as a primary measure of success, abandoning the pendency-driven system. A series of test projects is required for transitioning from the current to the envisioned process. FY 1996 project initiatives that will continue in FY 1997 are described below. Examination Quality - —Pilot and evaluate two major components: Coach/Counseling and Customer Involvement. We will emphasize improving the quality of the search performed by the examiner and the thoroughness of the Office action prepared by the examiner. Industry Sectors - —Determine the most efficient organizational units of the Patent Organization for processing patent applications and other service requests. The sectors, which may be correlated to industry, the marketplace, commercial endeavors, etc., will be composed of work groups that examine applications from related technologies. Patent Assistance Center - —Provide trained staff who will offer customers general and technical patent information. Customer Feedback Cards - —Develop and design a Customer Feedback Card to measure the level of customer satisfaction and identify areas for improvement. [customer feedback card] Desktop Workstations - —Deploy 1,600 desktop workstations that will allow examiners access to the Automated Patent System. Patent Image Capture System - —Establish processes for high-volume scanning that will enable staff to use electronic images of patent applications. Prep-Electronic Examination Process - —Patent re-engineering automation concepts in a limited electronic examination process. Technical Support Supervisor Training - —Establish training modules and programs for technical support supervisory personnel. Individual Development Plan - —Identify and address training needs and professional development activities for each employee. Create a comprehensive training program. Monitor the progress of employees toward developmental goals. [launching the design industry sectorpilot program] Industry Sectors The PTO has initiated a major structural reorganization—the move to industry sectors. Through industry sectors, resources applied to patent applications can be customized to meet the unique requirements of various customer bases. To improve customer service, components of the patent application processing pipeline will be integrated with the functions traditionally performed in the examining groups. The economies of scale of industry sectors will enable scarce resources to be used most efficiently. Each industry sector will act as a platform for future patent re-engineering initiatives, which can be tailored to the needs of the sector’s customer community. Patent Pre-examination Pilot Review In December 1995, the PTO initiated the Patent Pre-Exam Process Improvement Project to identify and implement short-term improvements in the processing cycle time. This project was an early step in bringing the current processes closer to the re-engineered solution as documented in the Patent ConOps. In January 1996, a sample of pending documents in the Office of Initial Patent Examination (OIPE) was reviewed to establish baseline cycle times for application and fee processing. Teams were created to identify problems with the current processes, facilities, technology, and people/organization. By March 1996, the teams had identified short- term solutions to those problems. Solutions included modified designs of the workflow, cross-training of employees, elimination of redundant tasks, using technology to eliminate several manual processes, and reducing the number of processing queues by combining functions through automation. The improvements were implemented in a pilot that began in July 1996. Pilot development was coordinated with acquiring and configuring an image capture system. The pilot also incorporated improved internal tracking mechanisms for collecting performance measurements and for providing enhanced management review and control. Results of the pilot indicate a reduction in pre-examination application processing time, improved fee processing, and reduced time to match time-sensitive correspondence to applications throughout the PTO. The image capture system prototype successfully endorses application papers with serial numbers and dates and is close to moving from testing to a production system to capture patent application images. Trademark Re-engineering To respond to the rapid growth in the number of trademark applications received by the PTO since the late 1980s, the PTO has developed a vision of its optimum business environment. This vision emphasizes process restructuring and information technology to achieve large improvements in productivity and customer satisfaction. The PTO eventually hopes to encourage all applicants who can do so to do business using electronic filing and e-mail. In exchange, applicants will receive substantially improved customer service and quality, and the entire process will work more quickly. The PTO should be able to handle the rapidly increasing number of trademark applications with minimal increases in cost to future applicants and registrants once improvements are in place. The PTO initiated numerous projects in 1996 that will continue through 1997. Four of these projects have the greatest opportunity to improve production and reduce pendency. Implementation of these four projects is a high priority for trademark re-engineering: 1.Developing the ability to prepare full in-house camera-ready text and images of the Trademark Official Gazette (TMOG) and print registration certificates —The transfer of TMOG materials electronically to the Government Printing Office (GPO) will speed up a process that now requires taking drawing pages from files weekly to create camera-ready copies needed to produce the TMOG and registration certificates. The new process, which will allow for printing certificates inside the Office as needed, will benefit a number of Office functions and improve customer service by eliminating the delays caused by submitting requests to GPO. 2. Personal Computer (PC)-based data entry/text editing, including bar code capabilities to update TRAM from a PC —All data entry and transactions are now limited to dedicated terminals that cannot be replaced or expanded. Data entry from new applications is limited to 15 dedicated terminals. Improvements are needed to facilitate accurate data entry and text editing features. Expanded access to TRAM from a PC for status information became available in 1996. 3. Scanning paper to capture data and images through Optical Character Recognition (OCR) technology —The initial focus will be on learning to use OCR to retrieve documents; this process is dependent on the success of TRAM enhancements. 4. Scanning of incoming documents (drawings first, followed by applications and other materials) —The process would allow for records management of scanned documents and distributed printing capabilities, with the goal of eliminating paper. Scanned drawings will be used to establish processes and pilot the concept. Eventually, applications would be received in electronic format through the Trademark Electronic Data Interchange (TEDI). This project’s completion will allow for full implementtion of electronic filing. Procurement Re-engineering The PTO participated in two Department-wide re-engineering projects. The first covers the acquisition process for contract awards greater than $100,000 in value. This project’s initial effort focused upon envisioning a new environment with drastically reduced cycle time, improved customer satisfaction, streamlined reviews and approvals, reduced risk, and improved project management. Six pilot teams, three at PTO and three at the Bureau of the Census, tested the concepts independently. Performance goals have been identified and an independent evaluation team has been established to assess overall program benefits. [textbox] The other re-engineering project covers simplified acquisitions under $100,000 in value. A multidisciplinary team representative of Department bureaus formulated a new target environment. The team completed its work in August and will begin operational testing once the software for the Commerce Acquisition and Management System procurement module is ready. PTO Reorganization In December 1995, the PTO made several additional organizational changes, including establishing the position of a Deputy Administrator for Legislative and International Affairs; consolidating the Offices of Human Resources, Civil Rights, and Public Affairs under an administrator reporting to the Associate Commissioner; transferring the Office of Computer and Telecommunication Operations to the Chief Information Officer; and realigning functions between the Deputy Assistant Commissioner for Patents and the Deputy Assistant Commissioner for Patent Policy and Projects. These changes further streamline management responsibility and provide a flatter and more customer-focused grouping of functions throughout the Office. Effectively Manage Resources ---------------------------------------------------------------------------- To maintain and strengthen the viability and soundness of the PTO’s financial position and meet the challenges of implementing new government financial management laws (e.g., the Government Performance and Results Act, the Chief Financial Officers Act, and others), the PTO has placed more emphasis on the effective and efficient use of its resources. The PTO’s strategy to improve current resource management is to conduct internal evaluations, benchmak the best in business, adopt best practices, eliminate non-valued-added processes, and conduct periodic evaluations. The following is the PTO’s vision for effectively managing resources: The transformed PTO is a performance-oriented organization where managers and employees are empowered and held responsible for making efficient and cost-effective decisions, where innovation and risk-taking are fostered, and where a strategic, comprehensive, and integrated approach to planning and resource management is in place. Budget reductions to programs funded by patent fees, however, may soon require scaling back, postponing, or eliminating many of the programs implementing this vision. Fee-Restructuring Study The PTO began developing cost calculations for PTO current and future products and services. This comprehensive effort, which will continue throughout FY 1997, will result in the development of unit cost models by the end of FY 1997 for products and services of each PTO business area that meets Federal accounting standards. In FY 1996, a limited number of analyses of workloads were in progress that will support future pricing decisions, but much work needs to be done. The fee restructuring study took advantage of several opportunities in FY 1996 to present customer groups with information on the study and to obtain initial feedback on some fee-setting concepts under consideration. Numerous organizations that represent small inventors also were informally contacted, given general information on the effort, and encouraged to share this information with their members. As additional cost and pricing research data are developed in FY 1997, further communication between the PTO and its customers will be necessary to evaluate how well different fee-setting options meet their needs. Streamlined Planning, Budget, and Evaluation (PBE) Process In 1996, the Office continued to implement the redesigned model for the planning, budget, and evaluation (PBE) process that was initiated in FY 1995. The redesigned PBE process is viewed as an integrated, seamless process with a single product. This product, the Corporate Plan, is tailored to meet the requirements of PTO customers, the Administration, and the Congress for planning, budget, and evaluation products. When fully implemented, the comprehensive Corporate Plan will replace our traditional planning and budget documents, although mandatory control documents will continue to be developed as needed. In FY 1996, PTO Corporate Plan submissions replaced our traditional budget submissions for the Department and the Office of Management and Budget (OMB). Full implementation of the PBE process will take place over several years and will be closely tied to other change projects taking place in patents, trademarks, human resources, and other areas. Facilities Acquisition The PTO’s leases in Crystal City began to expire in FY 1996, and others will expire in FY 1997. The PTO has developed a facilities acquisition strategy to acquire new leased space or renovate existing space in order to improve and consolidate facilities, allow for more efficient use of PTO resources, and permit greater flexibility in meeting the PTO’s needs in FY 2002 and beyond. Federal regulations require full competition for new leases. Therefore, the PTO has extended certain of these leases and will acquire additional space in our present location to allow both for complete competition for the new leases as well as time for building or renovation. [boundaries map for the new ptoconsolidated hq facility] The PTO and GSA worked together in FY 1996 to outline the PTO’s needs in a space prospectus. A Solicitation for Offers (SFO) was issued on June 26, 1996. Each potential offeror met with GSA/PTO to discuss the SFO. Under an amendment issued on October 1, 1996, offers for Phase I of the competition will be due by the end of the first quarter of FY 1997. The five best offerors will be selected, and the Phase II request will be issued in the second quarter of FY 1997. Offers for Phase II will be due in the fourth quarter of FY 1997, and a lease will be awarded in the fourth quarter of FY 1998. The earliest date PTO will occupy the new space will be in FY 2002. Transformational Efforts Transformational efforts in FY 1996 included business process re-engineering of human resource management, resource management, the acquisition process, and the patent and trademark processes. To prepare for implementation of these major changes, the PTO split operational activities from transformational activities, forming teams of transformational and operational leaders. Operational leaders were responsible for maintaining current operations and for preparing for the implementation of the redesigned processes. Transformational leaders were responsible for test-piloting the redesigned processes and for developing performance measures and critical success factors that will be used to assess the benefits of the redesigns. They were also responsible for developing implementation plans and for the final implementation of the redesigned processes. Promote Awareness and Encourage Creativity ---------------------------------------------------------------------------- The Office of Public Affairs continued to expand its informational and educational efforts at the PTO. Public Affairs began several new initiatives, and refined and improved existing programs, as described below. The Patent and Trademark Museum - —During FY 1996, the museum took on a new look and installed two new periodic exhibits. “The Bicycle: A Century of Technology” celebrated the evolution of the bicycle from a vehicle for the rich to an establishedethod of transportation and exercise around the world. An exhibit entitled “1946” commemorated the 50th anniversary of the passage of the Lanham Act, the foundation of modern trademark law. In addition, permanent exhibits were consolidated and updated. American Innovator Award - —The American Innovator Award was established to recognize the vital role inventors play in America. This year’s recipients, all 1995 inductees into the National Inventors Hall of Fame, were: Dr. Forrest Bird, inventor ofthe respirator; Dr. Joseph H. Burckhalter and Dr. Robert J. Siewald, inventors of the process of identifying antigens to diagnose infectious diseases; Stephanie Kwolek, inventor of Kevlar; Dr. Waldo L. Semon, inventor of PVC (and also bubble gum); and Drs. Robert D. Maurer, Donald B. Keck, and Peter C. Schultz, inventors of fiber optic wire. In honor of the late Commerce Secretary, this award was renamed the Ronald H. Brown American Innovator Award. Trademark Expo - —The 13th annual Trademark Expo was held at the Andrew J. Mellon Auditorium in Washington, DC, in October 1995. Once again, thousands of visitors enjoyed their favorite trademark characters along with historical and educational exhibits tracing the trademark story throughout history. Project XL - —Educators and students continued to look to Project XL, the PTO’s educational outreach program, to inspire ingenuity and creativity. In addition to exhibiting at annual conferences and conducting workshops for teachers, Project XL worked with the National Inventive Thinking Association and the Copyright Office on the popular Young Inventors and Creators Program. National Inventors Hall of Fame - —The PTO continued to work closely with and support the National Inventors Hall of Fame and Inventure Place in FY 1996. The PTO again provided financial and human resources for the annual induction ceremony. In addition, the PTO signed an agreement to jointly produce a 10-part radio series entitled “Discover the Inventor in You” for National Public Radio. Performance Measurement ---------------------------------------------------------------------------- In FY 1996, the PTO maintained its commitment to early implementation of the Government Performance and Results Act (GPRA) to strengthen its performance measurement (PM) system. The PTO views a strong PM system as a crucial management tool for improving agency performance. During the year, the PTO integrated PM activities with all process improvements and redesigns and began each of these efforts by establishing a mechanism to integrate customers’ nd stakeholders’ input and concerns. The PTO, like most Federal agencies, has an abundance of performance measures that focus on finances, inputs, and outputs. The PTO directed its business area managers to design goals and indicators to monitor performance from many perspectives (quality, efficiency, effectiveness, customer and employee satisfaction, and innovation). The most challenging effort has been the creation of outcome- and results-oriented goals and indicators that determine if the PTO is performing efficiently, is providing the best return to its investors, and is addressing the needs and concerns of its customers and stakeholders. From late August 1995 through November 1996, the PTO trained an additional 40 senior, staff, and line managers, increasing the number of senior and mid-level managers trained in-house in GPRA and PM to more than 190. The PTO will re-examine the proposed performance goals, listed below, during FY 1997 to ensure that each provides the best reflection of the PTO’s progress toward its vision, mission, and strategic agenda. Performance Goals and Measures Two important performance goals of PTO policy are to support the economic infrastructure of the United States through the promotion and protection of intellectual property rights in the United Statesand to expand intellectual property rights systems abroad. The performance measure for this goal is the frequency of exchange of information with foreign countries’ intellectual property offices. Two important patent performance goals are to grant exclusive rights, for limited times, to inventors for their discoveries and to provide service to customers. Performance measures include the following: the percentage of patent holders who have paid maintenance fees (first stage, second stage, and third stage), the overall index of customer satisfaction, the number of weighted applications disposed per FTE adjusted for each fiscal year, the unit cost of weighted applications disposed, the number of total applications disposed per year, the number of patents issued per year, the average cycle time of applications, the rate of customer confidence in the accuracy of the decision (customer survey), the overall index of employee satisfaction from the Culture Survey (11 categories), improving employees’ skills, and the number of process changes. The primary trademark performance goal is to enhance trademark protection. This goal is intended to address the outcome or benefits of the trademark registration process. The performance goal will direct the trademark planning and budget process and ultimately the way we conduct business. Performance measures include increases in the number of applications filed, the number of trademark disposals per Full-Time Equivalent (FTE), the unit cost of trademark disposals, pendency, and the percentage of files that achieve the Trademark Office’s pendency goals. The primary information dissemination performance goal is to promote awareness of, and provide access to, patent and trademark information. Performance measures include the percentage increase in customers served, the overall index of customer evaluation of ease of access/effectiveness, the overall index of customer satisfaction, the unit cost of key products and services, the percentage of key products meeting published time standards, the percentage of key products filed accurately, and the overall index of employee satisfaction from the Culture Survey. Baseline data are available for only a few of these business measures. We anticipate that most of the performance information will be available before FY 1999. Once available and validated, this information will help the agency to direct resources appropriately to achieve our goals and mission. [the 2 millionth trademark] Support for the Department of Commerce Mission In FY 1996, the Department of Commerce (DOC) articulated its overall approach to promote job creation, economic growth, sustainable development, and improved living standards for all Americans through its mission statement and three strategic themes in a strategic plan. The PTO supports the DOC mission and contributes to DOC’s strategic themes by: * leading the development of intellectual property policy in order to open and expand foreign markets and increase U.S. exports; * strengthening the intellectual property rights system and disseminating patent and trademark information effectively; and * administering the laws relating to patents and trademarks; advising the Secretary of Commerce, the President, and the Administration on patent, trademark, and copyright protection; and advising the Secretary of Commerce, the President, and the Administration on trade-related aspects of intellectual property. [The Year Ahead Photo] THE YEAR AHEAD Critical Areas for Financial and Management Improvement ---------------------------------------------------------------------------- The PTO continued to address the following critical areas for financial and management improvement in FY 1996: * restrictions in the number of PTO employees; * continued withholding of funds by Congress; * proposals to make the PTO a wholly owned government corporation; and * re-engineering projects. Personnel Ceilings The PTO continues to be challenged by personnel ceilings set at levels below those required to attain production and customer service goals. Pendency and inventory are rising in patents and trademarks as growth in incoming work has exceeded the growth in staff needed to address this work. The PTO has responded to this challenge by contracting work where possible in the short term and re-engineering processes in the long term. The PTO will continue to seek personnel levels commensurate with customer demand for our services. [fiscal year dollars] Withholding of PTO Funds The enactment of the Omnibus Budget Reconciliation Act of 1990 (Public Law 101-508) put the PTO on path to be funded entirely through sales of its products and services. This was accomplished by increasing patent fees by 69 percent, followed by a smaller subsequent increase. This 69 percent increase was a surcharge to be deposited to a specific Treasury account. Subsequent legislation removed the specific percentage but required the PTO to deposit exact dollar amounts of surcharges. By law, these deposits are scheduled to continue through FY 1998. Because of declining funds allotted to House and Senate appropriations subcommittees, the subcommittees have not appropriated the full amount of the surcharge back to the PTO. An increasing amount of the surcharge has been withheld since FY 1992. To date, $141.5 million has been withheld. Of our FY 1997 surcharge deposit of $115 million, congressional committees withheld nearly $54 million, which is more than 46 percent of our deposited amount. The following table shows the amounts that have been withheld to date and scheduled deposits through FY 1998: Corporation Proposals Various proposals were introduced in Congress during FY 1996 to transform the PTO into a performance-based, wholly owned government corporation. All of these proposals would result in a more commercial entity that could provide more flexible service to its customers. Potential flexibilities as a government corporation include borrowing authority, investment authority, relief from personnel ceilings, and exemption from certain Federal building regulations. While action was not completed on these bills, the PTO intends to work toward reintroduction of the Administration’s proposal in FY 1997. Re-engineering Projects Re-engineering efforts are under way in both patent examination and trademark examination. The focus of these projects is to deliver to customers a re-engineered process that meets their business needs, in terms of both cost and service. Transition planning in these projects will continue in FY 1997. The movement from our current processes to our re-engineered processes will involve significant one-time development and transition costs. These costs will be an investment in our infrastructure, primarily in automation, that will pay long-term benefits to agency customers. Benefits from the re-engineered processes will be realized over time, resulting in shorter processing times and a more responsive system despite continued growth in workload. When fully implemented, the PTO should realize significant long-term cost savings. Budget reductions in areas funded by patent fees, however, may force scaling back, postponing, or eliminating many of these programs. The Year Ahead ---------------------------------------------------------------------------- * Congress will again consider significant intellectual property legislation, including bills to: recast the Patent and Trademark Office as a performance-based, wholly owned government corporation under the policy direction of the Secretary of Commerce; make important patent law reforms such as early publication of patent applications and improvement of re-examination procedures; and ensure copyright protection for works transmitted over the National Information Infrastructure. * The Conference on Fair Use (CONFU), convened by the Working Group on Intellectual Property Rights, will bring together copyright owner and user interests to discuss fair use issues and, if warranted and feasible, to develop guidelines for uses of copyrighted works by librarians and educators. * The PTO will continue to be an active participant in a variety of international multilateral and bilateral activities, with the goal of securing and expanding protection of U.S. intellectual property. * The PTO will hold hearings and solicit public comments on Internet domain name registration policies to assess the public’s views on whatis considered essential to reduce the legal liabilities and conflicts between the use of domain names and trademarks and to determine the role, if any, for the PTO. * During FY 1997, the PTO expects to receive approximately 212,000 patent application filings, and to receive trademark application filings for more than 218,000 classes. * The Trademark Office has begun work on the first phase of 53 transition projects that will result in a re-engineered trademark process. Phase I consists of 35 projects that will result in enhancements to existing information systems as well as the development of policies, procedures, personnel, and functional technology requirements to be used in building and implementing the future Trademark Information System. Significant changes, expected to be in place by the end of the year, will streamline the processing of new applications and the publication and printing of registered marks. * The Trademark Office worked in conjunction with the National Institute of Standards and Technology to implement requirements of the Fastener Quality Act (P.L. 101-592). The PTO will begin receiving and processing requests filed under the Act, which requires recordation of the insignia of manufacturers and private label distributors to ensure the traceability of a fastener to its manufacturer or private label distributor. * Eighteen trademark examining attorneys will begin working from home two days a week as the Trademark Flexiplace Pilot program is implemented. The results of the pilot will be evaluated during the next two years. [bob anderson leading a customer focussession] [dollars and cents] FINANCIAL REVIEW Message from the Chief Financial Officer ---------------------------------------------------------------------------- Fiscal year 1996 was a productive time for the Patent and Trademark Office. Revenues climbed to over $621 million as we continued to supply quality products and services to hundreds of thousands of customers. Moving through the new fiscal year, we find ourselves managing myriad changes to meet increasing global challenges, while remaining steadfast in our commitment to provide our customers with the highest level of quality and service. Our financial management organization represents a solid team of professionals who are dedicated to full accountability and sound management practices. As a result, our financial management organization has made significant advances throughout this fiscal year. Most significantly, we began to re-engineer our resource management processes, which will facilitate our transition to a performance-based organization. Key to this transition is early implementation of the Government Performance and Results Act (GPRA), which we began in earnest this year. The GPRA requires that we establish a performance measurement system that integrates the budget process and functional programs with our strategic planning and goals and provides periodic measurement of our progress in reaching those goals. A number of these measures appear throughout this report. During fiscal year 1996, we also saw improvements in our technological capabilities as financial management system modifications were initiated to enhance the property subsystem, the procurement subsystem, the travel subsystem, and the budget formulation and allocation modules. We are on course to realizing my goal of a fully integrated financial management system that provides accurate, timely, and accessible information. As Chief Financial Officer, I am resolute in providing effective management and stewardship of our resources and assets to ensure sustainable economic opportunities. Our fiscal year 1996 financial statements have demonstrated this commitment by earning an unqualified opinion from the Office of Inspector General for the Department of Commerce. These financial statements include the Statement of Financial Position, the Statement of Operations and Changes in Net Position, and the Statement of Cash Flows. These statements reveal that our assets grew 25 percent during fiscal year 1996, rising from $467 million to $586 million, while liabilities increased at a rate of 29 percent, increasing from $293 million to $377 million. Further, these statements demonstrate our stewardship as we realized a 17 percent return on our equity during the year, despite a 49 percent increase in the revenue withheld account. Last, these statements show that $103 million was provided from net cash flows for operating, capital investing, and financing activities. [Image] Bradford R. Huther Associate Commissioner and Chief Financial Officer Financial Review ---------------------------------------------------------------------------- Fiscal year (FY) 1996 was a landmark year for Federal financial management, as agencies throughout the government strive to fulfill the requirement of producing auditable FY 1996 financial statements in compliance with the Chief Financial Officers Act of 1990 (CFO Act), as amended by the Government Management Reform Act of 1994 (GMRA). The PTO has been at the forefront in implementing Federal financial management reform. Indeed, this is the fifth year we have provided our customers and stakeholders a set of financial statements. These statements have been compiled in accordance with guidance issued by the Office of Management and Budget (OMB) and supplementary guidance provided by the Department of Commerce (DOC). The DOC Office of Inspector General (OIG) audited the three FY 1996 statements: the Statement of Financial Position, the Statement of Operations and Changes in Net Position, and the Statement of Cash Flows. As it did in FY 1994 and FY 1995, the PTO has received an unqualified opinion on these financial statements. In the Inspector General’s Report on Internal Control Structure, the OIG made recommendations for improving internal controls and promoting operating efficiencies. Actions have been initiated by PTO management to implement these recommendations. The PTO is also moving forward with early implementation of the Government Performance and Results Act (GPRA). GPRA is the primary legislative framework through which agencies will be required to set strategic goals, measure performance, and report on the degree to which goals are met. The PTO is committed to developing and implementing a strong performance measurement system that supports our strategy and enhances our customer focus while providing us with the metrics necessary to sustain continuous improvement in the services and products we deliver. Moreover, we are progressing toward becoming a performance-based organization and are working to incorporate performance budgeting in our resource allocation processes. In assisting management in moving toward a performance-based operation, the PTO undertook several initiatives in FY 1996 in the areas of cost accountability, fee structuring, data warehousing, and service standards integration. Regrettably, the outlook for FY 1997 is not as bright as we would wish. The Omnibus Consolidated Appropriations Act mandates a revenue withhold of $53.7 million for FY 1997. A restriction of this magnitude will delay implementation of many of our initiatives. Activities related to improving business processes will be cut by $30 million. There will be further delays in the purchase of important software and hardware enhancements for improving the patent search process, and training programs designed to increase the quality of examinations will be eliminated. Additionally, the number of new patent examiners hired to help reduce the rising backlog in patent applications will be cut in half, creating further delays in the pendency process. Also, information technology projects will be decremented $20 million, impeding the PTO’s progress in moving to a performance-based organization. The remainder of the $53.7 million cut will be applied across the board as a 5 percent reduction to already lean administrative staffs. Together, these cuts will negatively affect the business operations of the PTO and further deprive our customers of the quality of services for which their fees are intended. Redirection of PTO Funds The Omnibus Budget and Reconciliation Act of 1990, as amended in 1993, provided for a 69 percent increase in statutory fees to allow the PTO to become fully funded by its customers through the collection of user fees. This customer fee increase was initially collected by the PTO and placed in a special account in the U.S. Treasury. Although the fees were collected by the PTO, the use of the funds was controlled by Congress, and thus budget authority had to be appropriated in order for the PTO to use the fees. Subsequent legislation removed the fee percentage requirement, but still requires the PTO to deposit specified amounts of fees into the special account. During FY 1996, the PTO collected and deposited $111 million in customer fees into the special account. Congress provided budget authority for the PTO to spend $82 million, with $29 million remaining in the Treasury account. Although the cumulative amount of the withheld fees appears on our Statement of Financial Position, it is a restricted account and the PTO has not been given the authority to use them. Instead, the budget authority equivalent to the amount of the withheld fees has been redirected each year to other government programs. [trends in annual and cumulative revenuewithheld] Since FY 1992, Congress has continued to withhold increasing amounts of PTO customer fees. Initially, the amounts withheld were small compared with PTO revenues in total. They ranged from $8.1 million in FY 1992 to $28.7 million in FY 1996. PTO was able to absorb these revenue restrictions in its operating budget with controlled adverse effects on programs. Indeed, the annual amount of fees withheld has risen more than 254 percent since FY 1992, and the cumulative total of fees collected by, but unavailable to, the PTO as of the end of FY 1996 was $87.8 million. In FY 1997, the customer fees withheld will almost double, rising from $28.7 million to $53.7 million. This revenue restriction of $53.7 million can be absorbed only in the operating budget of the PTO. For FY 1997, the cumulative amount of fees withheld will reach $141.5 million according to current appropriations and apportionment schedules. By law, these restrictions are scheduled to continue through FY 1998 and will be available to the PTO only through the appropriations process. If, in FY 1998, the PTO were to experience an even larger withholding of its fee revenue, it would reduce the PTO’s ability to pay for any service except basic compensation of employees and necessary support services. Future upgrades or investments in information technology would be inhibited. With a reduction in overtime for examination and the reduction in examiner hiring, patent pendency would continue to rise. Those familiar with the patent process understand that the full cost of examining a patent is not recovered through the payment of the initial fee. The cost of examining and issuing a patent is paid for in an elongated revenue stream that begins with the application fee and continues through the issue date, in the form of the issue fee, and well past the date of issue in the form of maintenance fees. Less profitable patents are allowed to expire by their owners; more successful and profitable patents are kept in force through the payment of maintenance fees at three years, seven years, and 11 years after issue. These maintenance fees paid on profitable patents are used to cover the costs of newly received patent applications, as the application fee alone does not recover the full cost of examination. However, both issue fees and maintenance fees are time sensitive (i.e., they are both dependent upon pendency or the time it takes to examine and prepare a patent for issue). For example, if the pendency time were to increase from 18 months to 20 months to 22 months, the revenue stream for the PTO would become elongated. Immediately, less issue fee revenue would be available to support the patent process. Eventually, the impact would be felt on maintenance fee income and this would continue to have an effect for up to 11 years. There would be no “quick fix” for this lengthened revenue stream. Allocation of Cash and Fund Balances User fees are the source of all revenues earned by the PTO. Patent and trademark rights, grants, registrations, and related products and services are sold to the public for fees assessed. As the demand for PTO products and services has increased, fee collections have continued to climb, with a concurrent increase in the amount of work waiting to be processed and in process. In turn, this increase in workload has given rise to an increase in deferred revenues that has resulted in large year-end balances in the Fund Balance with Treasury and Cash accounts. Although the balances in these accounts may appear substantial, it must be remembered that the PTO, while operating as a fully customer fee-funded operation, is still an entity of the U.S. Government, subject to Federal appropriations law, and is not authorized to invest its cash and fund balances. While the PTO prepares and publishes financial statements in accordance with the CFO Act requirements, it still operates on the cash basis required by appropriations law. The PTO has no investment authority, no borrowing authority, and no lines of credit. In order for the PTO to spend $1.00, it must have collected or anticipate the collection of that dollar in the same fiscal year. For the PTO to enter into a contract for $5 million worth of services, it must have collected or anticipate the collection of $5 million in fees during the fiscal year. By the end of the fiscal year, there must be collected fees in the Fund Balance with Treasury and Cash accounts to cover all outstanding obligations. However, under the generally accepted accounting and reporting requirements, these obligations, or outstanding contracts, do not appear on the financial statements. These are only referenced in the footnotes to the statements. Unobligated balances of total funds available to the PTO amounted to only $27.0 million at the end of FY 1996. This is only a small percentage of the Fund Balance account with the U.S. Treasury. The nature of the CFO financial statements, if interpreted as a cash-basis, appropriated government entity, can lead to the conclusion that the PTO’s fund balances are funds available for obligation, rather than funds that have already been obligated and will be required to liquidate outstanding contractual liabilities. No private enterprise would keep such large fund balances on hand; rather, fund balances would be invested. However, the PTO is not a private enterprise; it is a government entity that has no choice but to present large fund balances on its financial statements. The chart below demonstrates the differences between accounting for fund balances on an appropriations accounting basis used in the budgeting process and a financial accounting basis as reported under the requirements of the CFO Act. The appropriations accounting basis shows that once all fund balances are allocated to cover Obligations and net Accounts Payable and Accounts Receivable, Cash In Transit, Deposit Accounts, and Revenue Withheld, only $27 million in unobligated funds remains. Of this amount , $26.1 million is in unobligated advance fees in excess of the amount that the PTO had authority to use, and $0.9 million is reserved pending resolution of a restricted funds rescission. The Cash in Transit of $64.9 million represents undeposited checks as of September 30, 1996. The Deposit Accounts of $41.5 million are monies paid to the PTO for future services. Revenue Withheld of $87.8 million is the cumulative revenue withheld since 1992, which is unavailable for the PTO’s use until appropriated by Congress. Last, Obligations and net Accounts Payable and Accounts Receivable represent the total of undelivered orders, net of Accounts Payable and Accounts Receivable as of September 30, 1996. [claims against fund balance withtreasury] From a financial accounting basis, the Remaining Fund Balance of $44.4 million represents the cumulative margin since establishment of the PTO. The Deposit Accounts of $41.5 million are monies paid to the PTO for future services. Revenue Withheld of $87.8 million is the cumulative revenue withheld since 1992, which is unavailable for the PTO’s use until appropriated by Congress. Liabilities consist of $48.3 million in Accounts Payable, Accrued Payroll and Benefits of $22.9 million, the Other Liability Due to Treasury of $0.9 million, and the Actuarial and Leave Liabilities of $20 million, representing annual leave owed to PTO employees and the PTO’s portion of the Federal Employee Compensation Act for its employees. Finally, Deferred Revenue of $243.8 million represents undeposited checks at year end and fees received for services, but not fully earned as of September 30, 1996. Allocation of Net Position In the aggregate, the various components of the Net Position section on the Statement of Financial Position are also referred to as “equity.” Equity is the residual interest in the assets of the entity that remains after deducting its liabilities. Components of the PTO’s Net Position for the most recent three years are shown above. The Total Net Position increase of $34.0 million from FY 1995 to FY 1996 includes $28.7 million that is not available for the PTO’s use because it has not been granted the budget authority to access it. [net position] For FY 1994 through FY 1996, the PTO had no Unexpended Appropriations or Future Funding Requirements. However, before FY 1995, the PTO reported a Future Funding Requirement for the noncurrent portion of the liability for employee leave and capital leases. This presentation was changed in FY 1995, and the FY 1994 financial statements were restated. Thus, for financial statement reporting purposes, the PTO reports the noncurrent portion of the employee leave liability as a liability covered by budgetary resources, as long as there are sufficient resources available. Also, because PTO is no longer funded from an annual appropriation, the balance in the Invested Capital (an appropriated fund account) will decrease each year by the amount of depreciation as sociated with the respective capital accounts, eventually zeroing out. The Cumulative Results of Operations (CRO) represents the cumulative unrestricted net operating gain recognized by the entity since its inception. The CRO increases or decreases each year by the amount on the line of the Statement of Operations and Changes in Net Position titled “Excess of Revenues and Financing Sources Over Total Expenses.” This line represents the difference between (1) revenues and financing sources and (2) expenses. However, in practice, not all of that line is allocated to the CRO. Instead, a portion of the amount is diverted each year into a restricted revenue withheld account at Treasury. These fee collections are used by Congress to offset increased spending in other Federal programs, which reduces the PTO’s budget authority and restricts its ability to spend all of its customers’ fees to accomplish patent work. As of the end of FY 1996, the PTO’s CRO was $116.5 million. Thus, of the total assets presented on the PTO’s Statement of Financial Position, the government’s interest consists of net property and equipment (P&E), as there are no outstanding liens against any of these assets. P&E appears on the balance sheet in the amount of $71.4 million; however, $3.9 million of the P&E was purchased with appropriated funds and appears on the Invested Capital line, leaving $67.5 million in P&E in which the PTO’s CRO has an interest. The Accounts Receivable of $4.6 million also represents a portion of the PTO’s CRO. The remaining balance of $44.4 million is the PTO’s interest in the Fund Balance account. Trends in Revenues and Expenses Fee collections have continued to climb as the demand for PTO products and services has increased. Customers pay fees when they order the products and services. The increase in collections caused the PTO to record large year-end balances in the Statement of Financial Position accounts titled Fund Balance with Treasury and Cumulative Results of Operations. The three-year trends in revenues, expenses, and margin are shown below. [trends in revenues, expenses, andmargin] Most revenue represents income from the sales of goods and services; however, $2.3 million was from another financing source, appropriated capital, used during the year. Total income from fee collections (patents and trademarks) in FY 1996 was $618.9 million; an increase of 2.6 percent from FY 1995 fee income of $603 million. Maintenance fees accounted for $211.8 million of the FY 1996 collections. Patent maintenance fees are collected by the PTO from owners of previously issued patents over the life of the patent. If maintenance fees are not remitted at each of three stages, patents will expire. Anticipated renewal rates are planned based on the most recent historical data, which are currently: 79 percent at the first stage (at the end of the third year after a patent is issued); 55 percent at the second stage (at the end of the seventh year after a patent is issued); and 32 percent at the third stage (at the end of the 11th year after a patent is issued). Although revenues from Patent and Trademark applications rose $16 million, the margin decreased between FY 1995 and FY 1996 by $44 million due primarily to four reasons: (1) expenses for personnel services rose $21.2 million; (2) expenses for contractual services increased by $27.2 million; (3) depreciation expense climbed $8.1 million reflecting increased capital investments; and (4) the calculation for deferred revenue was refined. The PTO received 191,116 utility, plant and reissue (UPR) patent applications and 15,160 design applications. The UPR application filings workload decreased by 13.6 percent below the previous year and the design applications decreased slightly by 1.4 percent. This decrease in UPR filings is an anomaly, resulting from a change in the law during the previous year, which created a surge in patent application filings in FY 1995 prior to the legislation becoming effective. Despite recent decreases, the forecast is for increased UPR and design applications. In FY 1996, the PTO received 200,640 trademark applications, an increase of 14.5 percent from last year’s filing level of 175,307. The number of applications has continued to increase at higher than anticipated rates, increasing 60 percent over the past five years while staffing levels for the same period increased less than 10 percent. Total Expenses for FY 1996 amounted to $584.9 million, of which Operating Expenses accounted for $553.7 million. This is a 10.2 percent increase in Operating Expenses from FY 1995, primarily the result of an increase in contractual services. As a provider of products and services, the PTO’s personnel costs represent its greatest expense. In FY 1996, salaries and benefits were $330.8 million, accounting for 59.7 percent of total operating expenses, rising from $309.6 million in FY 1995, although decreasing slightly as a percent of total operating expenses from 61.6 percent. The decrease reflects the effect of Federal hiring constraints, as workloads rise disproportionately higher than increases in the number of employees. Investments in new automation technology have increased as some processes transform from paper-based to electronic systems. This increase will be significantly reduced in the future because of restrictions placed on the PTO’s ability to spend the feesit collects. One of the PTO’s largest automation efforts is the deployment of the Automated Patent System (APS). While a portion of the costs associated with deploying the APS is expensed as incurred, other costs are capitalized and depreciated over the useful life of the system. Thus, the Statement of Operations includes both APS costs expensed in FY 1996 and the annual depreciation recognized. To provide market incentives for those seeking patents, the current patent fee structure allows for lower initial fees that are supplemented by income from other sources, such as maintenance fees, to cover the full cost of the patent examination and issuance process as well as other PTO operations (e.g., patent documentation and quality review). As with the decision to apply for a patent, the decision to renew a patent rests entirely with the patent owner and is subject to industry and market considerations. However, since the maintenance fees are the largest category of fee income, fluctuations in rates of renewal can significantly affect revenues. PTO analysts compare fee plans to actual revenue received, project income using regression analyses and other economic models, and adjust projections accordingly. The result is that, in FY 1996, the PTO experienced growth in its revenues and expenses, with a decrease in the operating margin from FY 1995. However, growth in revenues was limited due to an increase in deferred revenues. The examination processes rely heavily upon trained and experienced patent examiners and trademark attorneys. With recruiting efforts being further curtailed by the FY 1997 budget cuts, backlogs of PTO applications will increase. Changes in Principal Accounts Most of the assets managed by the PTO are funds deposited at Treasury, cash, and capital equipment. To expedite the collection and deposit of funds, customers are offered various mechanisms for remitting fees. These include payment by mail, payment by electronic transfer, payment to cashiers located in the PTO office complex, and establishment and use of deposit accounts. Capital equipment includes hardware, software, and office furniture and equipment. Liabilities are divided between Intra- governmental Liabilities and Governmental Liabilities. Most PTO liabilities result from deferred revenues, i.e., undeposited checks at year-end and fees received for services requested, but not fully earneduntil the services are completed. Other significant PTO liabilities include the deposit accounts and accounts payable. The PTO reports its equity in three components: invested capital, cumulative results of operations, and other -- revenue withheld. A detailed discussion of each component was provided earlier. Comparisons of the ending balances of selected asset, liability, and equity accounts for FY 1994 through FY 1996, as reflected in the respective year’s Statement of Financial Position, are shown in the charts that follow. The graphs presented do not display ending balances by line item, and all amounts are rounded to the nearest million dollars. Amounts contained in the narrative are rounded to the nearest tenth of a million dollars and percentages are rounded to the nearest tenth of a percent. All numbers are derived from amounts appearing in the financial statements. Also, it is important to note that the restricted fund balances and equity segments associated with patent revenue withheld are not available for use without additional appropriations by Congress. SELECTED ASSET ACCOUNTS ANALYSES portrayed are to assist the reader in understanding the nature of the assets included in the balance sheet, the current three-year trends, and the extent of the future economic benefit to the PTO. The accounts presented below include Fund Balance with Treasury and Property and Equipment. Fund Balance with Treasury includes the amounts set aside for the payment of outstanding obligations and restricted funds for the deposit accounts, nonentity funds, and revenue withheld by Congress. Of the $444.7 million total balance for FY 1996, the unobligated funds available totaled only $26.1 million, a decrease of 62.5 percent below the FY 1995 unobligated amount of $69.6 million. The unobligated fund balance of $26.1 million is in excess of the amount which the PTO had the authority to use. Of the $130.1 million in restricted funds, $0.9 million is reserved pending resolution of a restricted funds rescission. Property and Equipment (P&E) is stated at net book value of $71.4 million, which is the original acquisition cost of $161.5 million less the total accumulated depreciation of $90.1 million. Reducing the carrying value of P&E balances by depreciation values provides for the economic distribution of the cost of using these assets over time. The P&E increase of 34.2 percent from the FY 1995 balance of $53.2 million is the result of purchases of APS equipment and software, other Automated Data Processing (ADP) equipment and software, a network/telecommunications upgrade, and office furniture. Since FY 1994, net P&E has grown 38.8 percent. [fund balance with treasury] SELECTED LIABILITY ACCOUNTS ANALYSES are discussed to assist the reader in understanding the nature of liabilities included in the Statement of Financial Position. The graphs portray three-year trends in selected liability accounts. The PTO classifies the accrued annual leave as a Liability Covered by Budgetary Resources instead of a Liability Not Covered by Budgetary Resources, as there are sufficient resources available at year-end. However, these amounts remain unobligated for budgetary purposes at the close of FY 1996. Accounts presented include Accounts Payable, Deposit Accounts, and Deferred Revenue. Accounts Payable balances shown include Federal and non-Federal [Image] accounts payable. These are monies owed for goods and services received for which the PTO has not yet made payment. At the end of FY 1996, payments owed other Federal agencies (intragovernmental) totaled $5.3 million, a 5.5 percent decrease from $5.6 million in FY 1995. In addition $43.0 million was owed to non-Federal entities (governmental), a 30.3 percent increase from $33.0 million in FY 1995 resulting primarily from the effects of the Continuing Resolution. The total balance has realized a net increase of 66.6 percent since FY 1994. Deposit Accounts are maintained by the PTO as a service to its customers. The associated liability results from monies paid to the PTO in anticipation of a future demand for services. Upon receipt of a service request from a customer m aintaining a deposit account, the PTO deducts the appropriate fee from the respective account. At the end of FY 1996, the liability was $41.5 million, an increase of 15.8 percent over the FY 1995 balance of $35.8 million. This reflects a decrease in charges against customer deposit accounts resulting from a rise in unprocessed applications, as well as a small increase in the number of accounts. The balance has increased 27.9 percent since 1994. Deferred Revenue represents undeposited checks at year-end and fees received for services requested, but not fully earned until the services are completed. This differs from advances to deposit accounts for which a specific service has not yet been requested; however, funds to cover future requests are held by the PTO. Deferred revenue at September 30, 1996, was $243.8 million, an increase of 40.6 percent from the FY 1995 balance of $173.4 million. The increase resulted, in part, from a o ne-month increase in the pendency cycle and an increased backlog of undeposited checks at year-end. A business process re-engineering effort is currently under way to help abate the rising backlog. In addition, the deferred revenue calculation was refined, resulting in additional deferrals. The balance has risen 88.8 percent since FY 1994. [deferred revenue and trends inequity accounts graphs] EQUITY ACCOUNTS ANALYSES are presented for comparative fiscal years. Equity is the residual interest in the assets of the entity that remains after deducting its liabilities. From FY 1995 to FY 1996, the equity or “net position” increased $34.million. However, $28.7 million of this resulted from an increase in revenue withheld. The PTO reports its equity in three components: invested capital, cumulative results of operations, and other -- revenue withheld. In the aggregate, these components of equity comprise the PTO’s net position and each component is discussed below. Invested Capital is the net book value of capitalized fixed assets that were purchased with appropriations from general taxpayer revenue. Because the PTO is no longer funded from taxpayer revenues, this account balance will decrease each year as depreciation expense is realized. The balance in this account was $3.9 million on September 30, 1996, a decrease of 37.0 percent from the balance of $6.2 million on September 30, 1995. Since 1994, the balance has decreased 53.5 percent. Cumulative Results of Operations represents the cumulative unrestricted net operating results recognized by the entity since its inception. The balance in this account does not include the revenue withheld that has been earned, but not appropriated for use. The equity account for revenue withheld is shown separately. The balance in the CRO account was $116.5 million on September 30, 1996, an increase of 7.0 percent from the balance of $109.0 million a year earlier. Since 1994, the balance has grown 98.4 percent from $58.7 million. This growth results, in part, from increased capital investments. Other -- Revenue Withheld is the third component of PTO net position. This portion of the equity is segregated because of restrictions associated with the unavailability of the customer-paid fees. Although these fees were earned, additional action by Congress is required to make these balances available for use by the PTO. Total revenue withheld reached $87.8 million at the end of FY 1996, an increase of 48.5 percent over the FY 1995 balance of $59.1 million. Since 1994, the revenue with held has increased 150.1 percent. Significant Actions, Accomplishments, and Results Financial Management: Quantitative indicators, as prescribed by the Office of Management and Budget (OMB), monitor progress toward improved financial management. The preceding chart depicts the goals or target performance established by OMB for FY 1996 and the performance of the PTO during that period. [graph] Financial Systems: At the beginning of FY 1992, the PTO implemented the Federal Financial System (FFS) and assumed responsibility for all accounting records. Software and hardware support for the core system are supplied via a cross-servicing arrangement with the U.S. Geological Survey of the Department of the Interior. Improvements for FY 1996 and enhancements planned for FY 1997 to PTO’s financial management system include: * interim upgrade to the procurement subsystem that was implemented in FY 1996; * subsequent major upgrade to the procurement subsystem scheduled for mid-1997; * improvements to the travel subsystem; * redevelopment of the revenue accounting system, planned for implementation in May 1997; * continuing implementation of the re-engineered budget process; * implementation of an interface between the capitalizable property subsystem and the core financial system, which began in January 1996; * continuing implementation of a pilot Electronic Data Interchange to enhance Electronic Commerce capabilities and improvement initiatives; * deployment of a data warehousing pilot on September 30, 1996, and continuing efforts for an enterprise-wide data warehouse; * enhancements to the Budget Formulation Module for preparing budget estimates; and * enhancements to the Budget Allocation Module for preparing operating plans after budget enactment. Management Controls: For FY 1996, the PTO provided reasonable assurance of compliance with the provisions of the Federal Managers Financial Integrity Act. Weaknesses in existing subsystems were identified in past years and reported to the Department of Commerce. Additional weaknesses were identified by the Office of Inspector General during its audit of the FY 1995 financial statements. Reported weaknesses and anticipated dates for full correction follow. [section 2 / section 4] Limitations of Financial Statements Pursuant to the requirements of the Chief Financial Officers Act of 1990, as amended by the Government Management Reform Act of 1994, the financial statements that follow have been prepared to report the financial position and results of operations of the Patent and Trademark Office. The fiscal year 1996 financial statements consist of the Statement of Financial Position, the Statement of Operations and Changes in Net Position, and the Statement of Cash Flows. The following limitations apply to the preparation of the fiscal year 1996 financial statements: * While the statements are prepared from the books and records of the entity in accordance with the formats prescribed by the Office of Management and Budget (OMB), the statements are different from the financial reports used to monitor and control budgetary resources that are prepared from the same books and records. * The statements should be read with the realization that they are for a component of a sovereign entity, that liabilities not covered by budgetary resources cannot be liquidated without the enactment of an appropriation, and that the payment of all liabilities other than for contracts can be abrogated by the sovereign entity. Statement of Financial Position Statement of Operations and Changes in Net Position Statement of Cash Flows (Indirect) Notes to the Financial Statements ---------------------------------------------------------------------------- NOTE 1. Summary of Significant Accounting Policies Basis of Presentation As required by the Chief Financial Officers Act of 1990, these financial statements report the financial position and results of operations of the Patent and Trademark Office (PTO) of the United States. The books and records of the PTO serve as the source of the information contained herein. The financial statements were prepared in accordance with the guidance specified by the Office of Management and Budget (OMB) in Bulletin 94-01, as well as the accounting policies of the PTO; therefore, they may differ from other financial reports submitted pursuant to OMB directives for the purpose of monitoring and controlling the use of the PTO’s budgetary resources. Reporting Entity The Patent and Trademark Office is a program of the U.S. Department of Commerce (DOC) that administers the Nation’s patent and trademark laws. Since the passage of the Omnibus Budget Reconciliation Act of 1990 (OBRA), the program has been funded almost entirely by user fees. Prior to FY 1993, the appropriated funds from general taxpayer revenue gradually decreased until PTO became fully fee funded in FY 1993. The bulk of the fees collected are offsetting collections that are retained by the PTO until expended; however, the revenue withheld imposed on statutory patent fees with the enactment of the OBRA constitutes an offsetting receipt. These offsetting receipts are deposited into a restricted account at the U.S. Treasury. The PTO is only authorized to use monies from this account to the extent appropriated by Congress. Thus, the U.S. Treasury makes these funds available to the PTO by the issuance of a warrant each month to the extent such funds were authorized for use. The excess monies are not available to the PTO and are retained in a restricted receipt account by the U.S. Treasury. Any authorized funding that is not expended during a given fiscal year is carried forward for use in the following fiscal year. The accompanying financial statements include the accounts for salaries and expense (13X1006), surcharge (revenue withheld) (13X5127), and customer deposits (13X6542) appropriations, which are under the control of the PTO. The PTO has no lending or borrowing authority. Budgets and Budgetary Accounting In FY 1993 through 1996, the majority of funding was received through the collection of user fees. User fee rates are established by rule and law. Revenue withheld on patent statutory fees was established by the OBRA. Subsequent pieces of legislation removed the reference to a specific surcharge withholding of 69 percent, required the PTO to deposit exact amounts of revenue withheld, and extended the revenue withheld through the end of FY 1998. These represent offsetting receipts and are available to the PTO only to the extent appropriated by Congress. All revenue withheld is recorded as revenue. However, any revenue withheld by the PTO, but not appropriated by Congress for use, is maintained by the U.S. Treasury as restricted funds. Fees other than the revenue withholding fees referenced above are offsetting collections and are available to the PTO until expended. Funds authorized but not used in a given fiscal year are carried forward for use in future periods. Basis of Accounting Transactions are recorded on the accrual basis of accounting as well as on a budgetary basis. Under the accrual method, revenues are recognized when earned, and expenses are recognized when a liability is incurred, without regard to the receipt or payment of cash. Budgetary accounting facilitates compliance with legal constraints and controls over the use of Federal funds. The accompanying financial statements are presented on the accrual basis of accounting. Revenues and Other Financing Sources In FY 1993 through 1996, the majority of revenues were derived from the collection of user fees. Appropriations expended in prior years for the purchase of property and equipment are recognized as revenues, as the assets are consumed in operations. Advance payments made by customers for services not yet requested are recorded as liabilities in customer deposit accounts until services are rendered. Fees that are remitted with initial applications and other services are recorded as revenue when received. A manual calculation is made at year-end to estimate deferred revenue for services that have not been performed. The methodology for calculating deferred revenue was expanded to include new sources of deferred revenue, most significantly, issue fees. Although not material in amount, some financial gifts and gifts-in-kind are received from anonymous donors. Most gifts-in-kind are used for official travel to further the attainment of the mission and management objectives of the PTO. The results of these transactions are not reflected in the PTO statements, but are included in the consolidated Gifts and Bequests Fund statements prepared by the Department of Commerce. Funds with the U.S. Treasury Commercial bank accounts are maintained to deposit revenues collected. All monies maintained in such accounts are transferred to the Federal Reserve Bank on the next business day following the day of deposit. In addition, some customer deposits are wired directly to the Federal Reserve Bank. All banking activity is conducted in accordance with the directives issued by the Financial Management Service of the U.S. Treasury Department. With the exception of those that are restricted, funds with the U.S. Treasury and cash are available to pay current liabilities and to finance duly authorized purchases. All disbursements are processed by the Philadelphia Regional Finance Center of the U.S. Treasury Department. Accounts Receivable Governmental accounts receivable represent amounts due from non-Federal entities, the majority of which are due from former employees for the reimbursement of education expenses. Intragovernmental accounts receivable represent amounts due from other Federal entities, of which $3.9 million is due to a financing agreement entered into in FY 1995 with the Department of Commerce to fund the Commerce Administrative Management System. Advances and Prepayments Advances and prepayments have decreased significantly in the current fiscal year for two reasons. First, management elected not to prepay 1997 servicing of the Federal Financial System (FFS) by the U.S. Geological Survey (USGS) after exhausting the existing prepaid balance. Second, American Express card usage has been rising, particularly among frequent travelers, reducing the need for travel advances. Cash The majority of the cash balance consists of checks not yet deposited at the U.S. Treasury Department that are a result of fees collected by the PTO that have not been processed due to the lag time between receipt and initial review. Small cash balances are also held outside the U.S. Treasury Department that are not material and are used as imprest funds to facilitate small purchases, local travel, and emergency salary advances. The cash balance includes undeposited checks of $64,857,387 and $41,579,809 in FY 1996 and 1995, respectively, and an imprest fund of $15,000 in both years. Property and Equipment The buildings in which the PTO operates are leased from private concerns by the General Services Administration (GSA). Long-term leases are negotiated by GSA and appropriate rent charges are levied. The rental rates assessed by GSA and paid by the PTO approximate the market rates for similar commercial properties. Automated data processing software purchased “off the shelf” with an estimated service life of two years or greater is capitalized when the cost exceeds $25,000. The costs for developing custom software are capitalized when incurred for creating the detailed design, coding, and final testing of the software. Bulk purchase costs of furniture, with an estimated service life of two years or greater are capitalized when the total monetary value of the purchase order/delivery order equals or exceeds $50,000 (including shipping and installation). Automated Patent System (APS) equipment and other assets with an individual unit cost of $5,000 or greater (including shipping and installation) and an estimated service life of two years or greater are capitalized. In instances other than those listed above, the entire cost is recorded as an expense upon receipt of the equipment or other asset with the following exceptions: (1) The total amount of the order, including shipping and installation, is capitalized if the equipment procured is made via a major contract. (2) The total amount of the order, including shipping and installation, is capitalized if the procurement represents the initial purchase of equipment in connection with the installation of a major system. (3) If the procurement represents the purchase of additional items for an existing major system, only those items with an individual unit cost of $5,000 or greater will be capitalized. Depreciation is calculated using the straight line method over the following service lives: APS equipment 3-10 years, APS software 3-11 years, ADP equipment 3-5 years, ADP software 3 years, PTOnet equipment 3-5 years, equipment 3-5 years, and furniture 5 years. Liabilities Liabilities represent the amount of monies or other resources that are likely to be paid by the PTO as the direct result of an event that has already occurred. All such liabilities recognized in FY 1993 through 1996 have been fully funded. However, no liability can be paid by the PTO unless funding is available. Also, liabilities of the PTO arising from other than contracts can be abrogated by the government acting in its sovereign capacity. Annual, Sick, and Other Leave Annual leave is accrued as it is earned, and the accrual is reduced as leave is taken. An adjustment is made at the end of each fiscal year to ensure that the balance in the accrued annual leave account reflects current pay rates. Accrued annual leave is reported as covered by budgetary resources for financial statement presentation only. No portion of this liability has been obligated. To the extent current or prior year funding is not available to cover annual leave earned but not taken, funding will be obtained from future financing sources. Sick leave and other types of non-vested leave are expensed as taken. Any liability for sick leave that is accrued by an individual but not taken is transferred to the Office of Personnel Management upon the retirement of that individual. Retirement Plan The PTO employees participate in the Civil Service Re