Patent Public Advisory Committee Annual Report November 30, 2000 PATENT PUBLIC ADVISORY COMMITTEE VOTING MEMBERS Margaret A. Boulware, Chair Partner Jenkens & Gilchrist Houston, Texas James L. Fergason Independent Inventor International Liquid Crystal Company-ILIXCO Menlo Park, California Andy Gibbs Independent Inventor PatentCafe.Com, Incorporated Yuba City, California Patricia Ingraham Director Alan K. Campbell Public Affairs Institute Syracuse University Binghamton, New York Roger L. May CEO and General Counsel Ford Global Technologies, Incorporated Ford Motor Company Dearborn, Michigan Gerald Mossinghoff Senior Counsel Oblon, Spivak, McClelland, Maier & Neustadt Arlington, Virginia Ronald E. Myrick Chief Intellectual Property Counsel General Electric Company Weston, Connecticut Vernon A. Norviel Vice President and General Counsel Affymetrix San Jose, California Katherine E. White Assistant Professor of Law Wayne State University Detroit, Michigan NON-VOTING MEMBERS Ronald J. Stern President Patent Office Professional Association (POPA) United States Patent and Trademark Office Arlington, Virginia Melvin T. White President National Treasury Employees Union (NTEU) Local 243 United States Patent and Trademark Office Arlington, Virginia Julie Watson Vice President National Treasury Employees Union (NTEU) Local 245 United States Patent and Trademark Office Arlington, Virginia BACKGROUND The Patent Public Advisory Committee (P-PAC) is a newly created body appointed on July 17, 2000, to advise on "policies, goals, performance, budget and user fees of the United States Patent and Trademark Office (USPTO) with respect to patents."1 The P-PAC shall prepare a report annually and transmit the report to the Secretary of Commerce, the President, and the Committees on the Judiciary of the Senate and the House of Representatives.2 In its first report the P-PAC will review the USPTO's role in promoting and protecting innovation and the Committee's advisory role. For over 200 years, the basic purpose of the United States Patent and Trademark Office has been to administer the patent and trademark laws of this Nation. For patents, these laws derive from the United States Constitution to promote the progress of the useful arts by securing for limited times to inventors the exclusive right to their respective discoveries (Article 1, Section 8, of the United States Constitution). Under this system of protection, American business has flourished. New products have been invented and marketed, creating employment opportunities for millions of Americans. Through the issuance of patents, the USPTO encourages technological advancement by providing incentives to invent, invest in and disclose new technology worldwide. By disseminating patent information, the USPTO promotes an understanding of intellectual property protection and facilitates the development and sharing of new technologies worldwide. The P-PAC is composed of nine voting members appointed by the Secretary of Commerce to advise the USPTO and represents interests of the diverse users of the USPTO5, and three non-voting members representing each labor organization recognized by the USPTO4. The inaugural appointments were made by Acting Secretary of Commerce Robert L. Mallett on July 17, 2000. To reflect the rapidly changing intellectual property community, the P-PAC includes members from small entrepreneurial businesses, small inventors and universities to large U.S.-based corporations in a wide range of technical fields, including biotechnology, Internet technology and consumer products.5 At the outset, the P-PAC wishes to state its unanimously held appreciation of the critical importance of high quality U.S. patents -- to sustain economic growth in the United States and to human progress everywhere. Patents drive technological innovation and, in turn, such innovation has driven the remarkable increase in U.S. productivity and the resulting real growth of the economy. Across ever- broader sectors of the global market, more and more companies are discovering that patents are among their most valuable assets. Conservative economic estimates place the value of patents and other forms of intellectual property as accounting for two-thirds of the market value of corporate America. The appreciation of the importance of patents to our national well-being is dramatically reflected in the substantial increase in the number of patent applications filed in the USPTO. Ten years ago, in Fiscal Year 1990, the USPTO received 163,569 patent applications, which number has grown to 293,244 in Fiscal Year 2000. The USPTO projects a doubling of the filings from the current rate by 2006. The following graph tracks the past and expected filings from 1990-2006: Congress, at the Administration's urging, wisely established the USPTO as a performance-based agency to handle that workload. The P-PAC applauds that development. But the finances must keep pace with the capabilities of the USPTO and the challenges it will face. Every dollar invested by inventors and corporate America in the self-supporting USPTO has enormous leverage. If the USPTO is permitted to retain that investment by USPTO users--without it being diverted to other unrelated Government programs-- the Committee is convinced that it will be able to handle the exponential growth of projected workload. If not, the Committee is gravely concerned that the USPTO will become a bottleneck to small inventors and corporate America and to technological and economical growth generally. The Committee believes that we cannot permit this to happen. The P-PAC's first meeting was on August 23, 2000, which was a public meeting to broadly review the USPTO's policies, goals and performance. The transcript of the public meeting is available on the Internet.6 Prior to the public meeting, the P-PAC was briefed by the Under Secretary of Commerce and Director of the USPTO, Q. Todd Dickinson, Commissioner of Patents, Nicholas Godici, and members of the staff, including Chief Financial Officer and Chief Administrative Officer, Clarence C. Crawford, to acquaint the P-PAC with current USPTO activities, and to tour the facilities. The P-PAC has reviewed rule packages on user fees, legislative implementation and business goals that were in the comment and finalization process. The institution of the P-PAC after initiation of the rulemaking process for numerous rule packages prevented the P-PAC?s advisory function on the front end of the rulemaking process in the last fiscal year. The P-PAC met on October 11, 2000, in Executive Session to review and provide comments on the draft USPTO budget for 2002. The budget is privileged and confidential, and the 2002 budget will not be referred to specifically in this report. However, there are significant budget issues that override the operations of the USPTO apart from the review of the 2002 budget that will be the subject of the first section of this report. Although the P-PAC was in operation for only a part of the last fiscal year, it has had an opportunity to work with the USPTO and prepare this report on important issues for the USPTO and user community. The report will be broken out in sections that correspond to the categories for statutory review by the P-PAC. BUDGET There is a budget crisis at the USPTO that will adversely and seriously impact future operations, particularly with the escalation of patent application filings and the desire to enhance the quality of issued patents. The only funding comes from users of the USPTO, primarily patent applicants. The USPTO operates on cost-based accounting so that the work performed on processing and examining the patent applications relates directly to fees paid by applicants. The USPTO has endeavored to fulfill its role to examine and issue patents despite the diversion of significant fee income from its users. The USPTO has not been able to retain all the income received from its users, which has included a diversion of $108 million in Fiscal Year 1999, $116 million in Fiscal Year 2000, and $113 million in Fiscal Year 2001. This diversion has had its costs with the increasing number of applications filed each year. There is an insidious aspect to fee diversion. The USPTO has had to defer certain imperatives in automation, electronic filing and other implementation of technology to improve the current ability and efficiency of the USPTO to handle increased workload and complex technologies. The diversion of funds has also impaired the USPTO's ability to recruit new examiners. There is a lack of adequate funds to hire the full complement of examiners needed to keep up with the increased filings. Also, there is more industry competition than ever for qualified graduates to work as patent examiners, especially in the electrical engineering and computer fields. The Office needs to be able to both operate in today's framework and paper environment and have sufficient funds to build to the future and move toward an electronic government environment. The legislation creating this Committee also recast the USPTO as a Performance-Based Organization (PBO), only the second in the U.S. Government. To have a PBO operate without use of its own user fees defeats the purpose. The value of a PBO is to measure the effectiveness of the agency against the income received from its users for services. The P-PAC unanimously passed a resolution at its August 23, 2000, meeting strongly emphasizing the serious consequences of the budget shortfall as one of our priorities in this Report. There must be a permanent fix for access to all USPTO fees. POLICIES AND GOALS The P-PAC will review the policies and goals together since they are interrelated. The USPTO has the exclusive statutory authority to issue patents and administer other patent functions. Overlayed on the mandated functions are the priorities on how to administer the functions, and particularly the interaction with the USPTO user community -- its customers. The policies and goals developed by the USPTO not only affect its internal operations but also its users. The USPTO has developed a Patent Strategic Plan for Fiscal Years 2002- 2006. The P-PAC has reviewed this Plan. There are five goals, and the performance target rated Goal One is "Enhance the Quality of Our Products." The P-PAC agrees that quality is a priority goal of the USPTO, and at its public meeting resolved that the Director's and USPTO's top priority of putting quality first is supported unanimously by the P-PAC. The enhancement of the quality of issued patents is not a goal that can stand without full funding levels at the USPTO. The second goal is improvement of the quality of the USPTO's services, which the P-PAC supports, and is closely tied to enhancing the quality of the patents issued. The third goal is optimizing processing time. The P-PAC agrees that processing should be secondary to quality goals, but the severe delays in receiving patents will have adverse consequences. The P-PAC agrees with the USPTO that quality should be the first priority. If there are budget deficiencies, then processing time will increase rather than sacrificing quality. The P-PAC has concerns that processing delays may create an incorrect public perception of the inability of the USPTO to do its job properly. This is notwithstanding the recent legislation to assure patent terms if there are processing delays in the USPTO. If the funds are not available for both quality of examination and timely examination, the choice for quality examination will be made, and the receipt of quality patents in a timely manner will suffer. Application processing before allowance consumes 93% of USPTO costs. However, this front-end process brings in only 43% of the fee income. The USPTO relies on issue fees and maintenance fee income from patents previously granted to process applications. An increase in Office cycle time delaying patent issuance and the maintenance fee income stream would have an adverse impact on fee income. Delay in processing patents, which may extend the life of the patents past the 20 years from the filing date standard term, will impact consumers and businesses alike. There will be a delay in the patented inventions going into the public domain, which will affect future competition. Patents are valuable assets for emerging technologies, such as biotechnology, and start-ups in the Internet field need issued patents in their asset portfolios to attract funding. Some important industries, such as the computer chip technologies, have a relatively short product life. Delay in issuing patents for these industries adversely impacts the market development that comes with patent protection. The P-PAC was briefed on the e-commerce e-government goals by the USPTO. The programs include electronic filing of patent a pplications over the Internet, searching and other processing of applications. The P-PAC will continue to review and advise on these e-commerce initiatives. Progress in the e-commerce area is tied directly to the funding to develop the technical infrastructure and personnel training to implement the programs. The P-PAC has been asked to provide comments on the following rule packages since the formation of the Committee to the end of Fiscal Year 2000: 1. Changes to Implement the Patent Business Goals (RIN 0651-AA98) 2. Revision of Patent Fees for Fiscal Year 2001 (RIN 0651-AB01) 3. Rules to Implement Optional Inter Partes Reexamination Proceedings (RIN 0651-AB04) 4. Changes to Implement Eighteen-Month Publication of Patent Applications (RIN 0651-AB05) 5. Changes to Implement Patent Term Adjustment Under Twenty-Year Patent Term (RIN 0651-AB06) 6. Utility Examination Guidelines (RIN 0651-AB09) 7. Guidelines for Examination of Patent Applications Under the 35 U.S.C. 112, 1 "Written Description" Requirement (RIN 0651-AB10) 8. Request for Continued Examination Practice and Changes to Provisional Application Practice (RIN 0651-AB13) 9. Treatment of Unlocatable Application and Patent Files (RIN 0651-AB19) 10. Public Information, Freedom of Information and Privacy (RIN 0651-AB21) As previously discussed, the P-PAC was not in existence, and therefore was not involved at the start of the rulemaking process this year. The P-PAC looks forward to participating in providing meaningful input to the USPTO in the next year. The USPTO is statutorily mandated by the AIPA to conduct a Study of Alternative Fee Structures, which impacts both the p olicy and user fees review role of the P-PAC. The Committee looks forward to participating in this project if alternative fees are proposed by the USPTO. PERFORMANCE The intent of Performance-Based Organizations in the public sector is to replicate as nearly as possible market and competition factors found in the private sector. The USPTO is a natural candidate for a PBO designation because its fee structure revenue base essentially provides a private sector-like bottom-line approach. For the PBO model to operate, however, certain base conditions must be present. The most important of these are the ability to predict and strategically utilize budgetary resources and the ability to manage the human resources of the organization in a flexible and strategic way. This means that PBOs must operate with substantially more discretion than "average" public organizations. It also means that PBO status needs to be flexible and responsive to changing market and technological demands. The overall performance of the USPTO is going to be increasingly dependent on its ability to implement goals that parallel the development of e-commerce in the private sector. The P-PAC strongly supports the USPTO's initiatives and priorities to encourage electronic filing for patent applications and the paperless processing and examination of those applications. The USPTO has been hindered in implementing the e-government initiative due to budgetary constraints. As previously reviewed, patent application filings are continuing to grow every year. The USPTO, at this point, is playing catch-up, building infrastructure and re-engineering the internal operation of the patent examination process due to diversions of user fees in earlier fiscal years. USER FEES The P-PAC has been asked to review rule packages, which comprised user fee provisions, including the Revision of Patent Fees for Fiscal Year 2001; Changes to Implement Eighteen-Month Publication of Patent Applications; and Changes to Implement Patent Term Adjustment Under Twenty-Year Patent Term. The P-PAC looks forward to working more closely with the USPTO on a comprehensive fee study and proposals. CONCLUSION The P-PAC looks forward to its role in advising the USPTO for the next year. The P-PAC is a resource for the USPTO during challenging times of rapid technological advances impacting intellectual property protection. 1 American Inventors Protection Act of 1999 (AIPA); 35 U.S.C. 5(d). 2 AIPA, 35 U.S.C. 5(d)(2). 3 AIPA, 35 U.S.C. 5(b)(2). 4 AIPA, 35 U.S.C. 5(b)(3). 5 http://www.uspto.gov/web/offices/com/speeches/00-43.htm. 6 http://www.uspto.gov/web/offices/com/advisory/ppacmeet0008.html.