Under Secretary Rogan House Testimony

Statement of James E. Rogan, Under Secretary of Commerce for Intellectual Property
and Director of the United States Patent and Trademark Office

before the

Subcommittee on Courts, the Internet and Intellectual Property
Committee on the Judiciary
U.S. House of Representatives

April 11, 2002

Mr. Chairman and members of the subcommittee:

Thank you for this opportunity to appear before you to discuss the operations and funding of the United States Patent and Trademark Office (USPTO). It is a pleasure to be here in my first appearance before the subcommittee as under secretary for intellectual property.

Let me begin, Mr. Chairman, by thanking you, Ranking Member Berman, and the members of the subcommittee for your continued strong support for our agency and for intellectual property generally. As a former member of this subcommittee, I know first-hand of your commitment to ensuring that the U.S. intellectual property system remains the very best in the world. Let me assure you that I intend to do all I can to bolster the American intellectual property system during my tenure as under secretary for intellectual property and director of the USPTO.

President Bush has set forth two primary goals for his administration: homeland security and economic security. While our intellectual property system certainly affects homeland security by encouraging innovative ways to protect our country, it has a direct vital link to our nation's economic security. As the subcommittee is well aware, intellectual property (IP) has become increasingly vital to our nation's economic competitiveness, our standard of living, and our global security. In fact, according to the International Intellectual Property Alliance, IP industries represent the largest single sector of the American economy-almost 5 percent of Gross Domestic Product (GDP)-and employ over 4 million Americans. Copyright industries, for example, are creating jobs at three times the rate of the rest of the U.S. economy.

As the importance of IP assets-patents, trademarks, and copyrights-has increased, so too has the USPTO's workload. Since 1996, patent filings are up over 70 percent and these levels of growth are expected to continue. In addition, the complexity of the technology and the number of claims in these applications is growing rapidly. On the trademark front, filings in FY 2001, while down 21 percent, follow two consecutive years of 27 percent increases.

The difficulties the USPTO faces today do have historical precedent. For example, after reaching an all-time high of 35 months in 1964, patent pendency was reduced to 18 months in 1977. By 1980, however, pendency had climbed to 23 months and was projected to reach 48 months by the end of the decade if bold measures were not taken. Consequently, in 1982 legislation was signed into law to substantially raise USPTO fees. Under the able leadership of Commissioner Gerry Mossinghoff, the USPTO used these resources to reduce pendency to 18 months by the end of the 1980s. Average pendency stayed between 18.2 - 19.5 months until the end of 1995.

However, from 1996 through 2000, annual application growth rates of more than 10 percent and a crippling attrition rate, caused by more experienced examiners going to higher paying private sector jobs, began to take their toll, and pendency grew dramatically. Average pendency surpassed 24 months in 1999, and we expect it to average 26.5 months this year.

The increasing volume and complexity of our workload poses serious issues for the USPTO. Some might even use the word "crisis." Let me give one historical representation of how serious these challenges are. I mentioned that the patent system faced significant problems in the 1980s-this situation was highlighted in a 1981 U.S. News & World Report article entitled "Patent System a Drag on Innovation." What had led to such a dramatic pronouncement? In 1980, average patent pendency was 22.6 months. In FY 2001 it was 24.7 months, and absent a new course, it is projected to grow beyond three years. In 1980, the backlog of applications was about 81,000. By the time I was sworn in a few months ago, the backlog of applications stood at more than 330,000. I believe the challenges the USPTO faces today, while similar to the situations in the mid-1960s and early 1980s, are on a much larger scale.

The current projections-where patent pendency remains in excess of two years because of backlogs (and much longer in certain critical technologies) should be deemed unacceptable. Our customers deserve - and the reality of our high-tech economy demands - that we provide the highest quality patent in the shortest feasible timeframe. Issuing a quality patent is our primary goal. Issuing it in a timely manner is essential. Balancing those goals is our challenge.

To chart a course to lower pendency and higher quality, last year the USPTO developed a five-year business plan as part of the administration's FY 2003 budget submission. That business plan, which was developed before I assumed office last December, presented a traditional response to attack increasing pendency and proposes a way to stem the dangerous tide of rising pendency. Under the business plan, the projected patent pendency rate in FY 2006 would not rise to the projected 38 months but instead would be held to 26 months.

While I consider the business plan to be an important step toward a long-range strategy to refocusing the agency's priorities on improving quality and timeliness, I firmly believe that the USPTO, the administration, the Congress and our user community can-and must-go even further. With that in mind, I have begun an aggressive review of the USPTO to identify new and possibly nontraditional ways to improve quality and reduce pendency. This process includes a thorough top-to-bottom review of the USPTO to ensure that resources are fully devoted to mission critical tasks. I have made clear that I expect to see a compelling justification for every non-examination operation in the agency, and I am committed to shifting available resources to the frontline examination process to the maximum extent possible.

I also am conducting a comprehensive analysis of how the USPTO and its applicants conduct business. Fundamental changes in the way we do business may be required in order to meet the demands of today's high-tech world. Therefore, in the coming weeks I will be examining all options, including the restructuring of our fee system and workforce, in order to maximize our operations.

I intend to evaluate every way that the USPTO can improve internally, including looking at productivity. I want to seek ways that the system can be improved only with the cooperation and approval of the administration and the Congress. Finally, I want to identify possible ways to improve cooperation with other nations and possibly share workload problems. I fully expect to report back to you what additional information we have found and will seek your support to implement the appropriate changes.

Despite the many significant and daunting challenges facing the USPTO at this time, I am optimistic. I view this as a time filled with opportunity. Because the issues facing our system are so significant, we do not have the luxury to nibble at the edges. We have before us an opportunity to look at our system, determine how it should be structured, and then make it happen. In fact, I believe we have more than just an opportunity-we have a responsibility to do just that. I am reminded of the phrase, "you can be a part of the problem or a part of the solution." I am confident that all of us here today can and will be a part of the solution.

The administration's 2003 budget request for the USPTO lays the groundwork for these efforts.

It would give the USPTO the largest increase in its funding history.

The president's budget request would allow us to spend $1.365 billion of the fee revenues we expect to generate, an increase of $237 million or 21.2% over the FY 2002 enacted level. Of the $1.527 billion in revenues we expect to collect next year, $1.265 billion will be available to us in FY 2003. In addition, we will have access to $100 million carried forward from FY 2002.

In effect, the president's budget provides the USPTO with the equivalent of 100 percent of our traditional fees, plus an additional $45 million. This additional funding will enable us to: (1) hire 950 patent examiners; (2) transform trademarks to a fully electronic operation by 2004; and (3) implement the president's management agenda, including e-government, outsourcing, and workforce restructuring.

In order to fund the USPTO's and the president's priorities, the budget request includes a one-time surcharge on both patent and trademark fees that will generate an additional $207 million in FY 2003. A 19.3 percent surcharge will apply to all patent statutory fees, including the filing, issue, maintenance, extension, appeal and revival fees. Discounted fee rates for independent inventors and small businesses will remain in effect. For trademarks, a 10.3 percent surcharge will apply to the initial filing and post registration fees.

Let me now slightly shift focus and highlight some of the noteworthy developments in the agency since the subcommittee's oversight hearing last year.

In keeping with our goal to minimize patent and trademark processing time and enhance the quality of our products and services, the USPTO has undertaken a number of initiatives over the last year to manage our growing workload. For example, we continue to be a leader in providing user-friendly e-government services to our customers. Approximately 30 percent of our trademark applications are now received electronically through our award-winning Trademark Electronic Applications System (TEAS). In addition, we are in the second year of our patent Electronic Filing System (EFS). EFS currently has over 560 unique users and has received over 3,000 filings.

Our website (www.uspto.gov), which receives over 36 million visits each month, also continues to expand the array of services it offers. In addition to TEAS and EFS, visitors to our website can find everything from procedural updates and notices to the Patent and Trademark Manuals of Examination Procedure. Our customers also can search U.S. patents, published pre-grant patent applications, and trademarks.

Attracting and retaining top quality employees is also integral to managing our workload, and we have undertaken a number of important initiatives in this area. For example, the USPTO is a leader in government telecommuting. In fact, we have recently received awards from the International Telework Association and the Metropolitan Washington Council of Government for our achievements in this area. Currently, 122 trademark examiners and paralegals (of 295 eligible) are telecommuting three to four days a week. This represents more than 40 percent of the eligible workforce. Our Patents operation has also started a telecommuting pilot program one day a week for over 300 patent employees.

Lastly, I am pleased to report that the development of our new consolidated facility in Alexandria, Va., is on track. The consolidation project took a significant step forward on December 19, 2001, when the developer, LCOR, Inc., secured financing for the project. As a result, the construction phase is officially underway. We are hopeful that we can begin the move at the end of calendar year 2003 with completion in 2005.


In 2001, the USPTO received 326,081 utility, plant, and reissue patent applications (UPRs), an increase of 11.2 percent over the previous year. Some of the largest increases in patent filings are occurring in the electrical technologies, which have experienced 19 percent increases in each of the last two years.

Last year we granted a record number of patent documents, including 169,576 utility, 563 plant, and 504 reissue patents as well as 17,179 design patents. Total office disposals for FY 2001 were 239,493. Annual grants of UPR patents increased by 3.1 percent over the previous year. In 2001, the share of all UPR and design patents that were issued to U.S.-resident inventors was 54.1 percent, down from 55.2 percent in 2000. 18,843 patents were granted to U.S. independent inventors in 2001-or 19.1 percent of all patents issued.

So far in FY 2002, patent filings are running about equal to last year's level. The mail interruptions caused by the discovery of anthrax in a Washington, D.C., postal facility in October 2001 caused a decrease in our filings for about two months. However, we have recently experiences filing levels above those from 2001 and we expect to receive over 350,000 patent filings by the end of the year.

To handle the increase in our patent workload, the USPTO hired 414 patent examiners in 2001.

With 263 attritions, our end-of-year total examining staff was 3,061. With respect to attritions, I am pleased to report that our examiner attrition rate fell from 13.8 percent in FY 2000 to 8.2 percent in FY 2001. This encouraging trend is continuing this fiscal year with our projected attrition rate currently at 6.9 percent, which would be the lowest level since 1995.

Pursuant to the American Inventor Protection Act of 1999 (AIPA), the patents operation is managing to the "14-4-4-4-36" timeliness standard. These benchmarks provide commensurate restoration of a patent term to diligent applicants when the following requirements are not met by the USPTO: (1) issue a first office action on the merits within 14 months from the filing date; (2) respond to an applicant's reply to a rejection or appeal within four months of receipt by the office; (3) act on an application within four months of a decision by the Board of Patent Appeals and Interferences or the federal courts; (4) issue a patent within four months from the payment of the issue fee; and (5) issue a patent within 36 months from the filing date.

In FY 2001, 74.3 percent of applications received a first office action within 14 months of filing and 87.2 percent of patents were granted within 36 months from the filing date. Of the patents that qualified for additional patent term, the extra term averaged 32 days. End-of-year pendency to first office action averaged 14.4 months and total pendency averaged 24.7 months.

With regard to computer-implemented business method patents, an area that is of interest to many on the subcommittee, business methods filings increased from 1,300 in FY 1998 to 8,200 in FY 2001. At the same time, the allowance rate for business method patents (Class 705) has decreased from 55 percent in FY 2000 to 45 percent in FY 2001. The number of examiners in Class 705 has expanded from 17 in 1997 to 120 today, and I hope to increase that number to 130 examiners by the end of this year.

As part of our on-going Business Methods Patent Initiative, since August 2000 we have tripled the number of customer partnerships (from 10 to 31) with the patent community and the software, Internet and electronic commerce industries. As part of these partnerships, we are soliciting input from our customers on additional sources of prior art that our examiners can utilize. For example, in June 2001 we published a Federal Register notice identifying the current core databases for Class 705 to help our customers and partnership organizations understand and comment on the searching requirements in business methods. Included in the notice is a detailed description of the required mandatory search for all applications in Class 705.

I believe that these initiatives are working well, but I want to assure the subcommittee that I will closely monitor developments in the business methods area in the event that additional administrative measures are needed.


As I mentioned earlier, unlike the workload increases in patents, the trademark side of our operations has experienced a decline in filings as a result of the downturn in the economy. In FY 2001, we received 296,388 trademark application classes, a decrease of 21 percent over FY 2000, and registered 124,502 classes. So far this year, application filings are about 20 percent less than a year ago.

At the end of FY 2001, pendency to first office action was 2.7 months, the lowest level in thirteen years. Our objective is to sustain a level of 3.0 months to first office action in FY 2002. Total pendency currently stands at 17.4 months.

To ensure that we make our operations as efficient and user-friendly as possible, Trademarks continues to aggressively move to e-government services. Reducing or eliminating the number of processing activities in the production process, with end-to-end electronic processing of trademark applications, offers the greatest potential for performance improvement. Our goal is to transform the Trademark examining operation from a paper-based process to a fully electronic operation by 2004.

The filing of trademark applications via the Internet-a key part of this initiative-increased to 24 percent at the end of FY 2001. Currently, 30 percent of trademark applications are filed electronically. Our goal is to achieve 50 percent electronic filing by the end of this year and 80 percent electronic filing in 2003. In addition to filing electronically, customers are able to search the status of pending and registered trademarks, conduct a preliminary search prior to filing an application, access examination manuals and regulations, and obtain weekly information on marks published, registered and renewed.

We intend to make greater use of electronic communications by taking steps to eliminate preferences for filing trademark applications in paper. In response to comments we received from a notice published in the Federal Register last August, we are considering two options to that end. The first is a phased approach requiring all trademark application forms to be filed electronically within 18 months of a final rule, with exceptions provided for those who do not have access to the Internet or for those filing under treaties where filing requirements have been previously established. The second option is establishing a processing fee for those who would choose to file in paper when an electronic alternative is available.


Let me discuss our efforts in the international arena, an essential but less well-know part of our mission. In addition to the examination and issuance of patents and trademarks, USPTO works to promote protection of the intellectual property of American innovators on both the domestic and international levels. Under the AIPA (P.L. 106-113), USPTO is directed to advise the president, through the secretary of commerce, and all federal agencies, on national and international intellectual property policy issues including intellectual property protection in other countries. USPTO is also authorized by the AIPA to provide guidance, conduct programs and studies and otherwise interact with foreign intellectual property offices and international intergovernmental organizations on matters involving the protection of intellectual property.

In keeping with this directive, the USPTO continues to be active in a number of different venues to streamline and strengthen protection for patents, trademarks, and copyrights abroad. Through our Office of Legislative and International Affairs, we: (1) negotiate and implement international IP treaties; (2) provide technical assistance to foreign governments that are looking to develop or improve their IP laws and systems; (3) train foreign IP officials on IP enforcement; (4) draft/review IP sections in bilateral investment treaties and trade agreements; and (5) work with both the Office of the U.S. Trade Representative (USTR) and industry on the annual review of IP protection and enforcement under Section 301 of the Trade Act of 1974. The USPTO also serves as co-chair of the National Intellectual Property Law Enforcement Coordination Council (NIPLECC), which coordinates domestic and international IP law enforcement among federal and foreign entities.

The goal in the international arena is to move toward greater consistency in intellectual property protection around the world. Just as the framers of the Constitution created standard intellectual property rules for the nation, we are working to develop consistent rules for the rest of the world.

In the patents area, we seek uniform treatment of patent applications and patent grants worldwide, which will reduce costs for American patent owners in obtaining and preserving their IP rights abroad. Today, the cost to U.S. companies and inventors of applying for and obtaining separate patents in individual countries is prohibitive. Therefore, USPTO is leading the effort to reform the Patent Cooperation Treaty, which implements the concept of a single international patent application. To help cut procedural red tape, we will soon submit implementation and ratification legislation for the recently negotiated Patent Law Treaty. We also are in the early stages of discussions at the World Intellectual Property Organization regarding possibilities for a more harmonized worldwide patent system. In the trademark and copyright areas, we are working to implement international IP treaties, such as the Madrid Protocol and the WIPO Copyright Treaties.

As part of our international efforts, the USPTO focuses significant attention on the enforcement of IP abroad and combating IP piracy. Today the illegal duplication of software, music, DVDs, and other digitized information takes a toll on our economy. Last year the U.S. copyright industry reported losses of nearly $22 billion due to piracy oversees. According to the Business Software Alliance, software piracy alone cost the U.S. economy over 118,000 jobs and $5.7 billion in wage losses in the year 2000. By 2008, those numbers will rise to 175,000 lost jobs, $7.3 billion in lost wages and $1.6 billion in lost tax revenues.

Let me briefly highlight just a few of the enforcement activities we have recently undertaken.

In October 2001, USPTO attorneys conducted a one-week IP enforcement program to train IP enforcement officials from Nigeria, Ethiopia, Egypt, and various Central American countries on how best to develop an enforcement system that is compliant with the WTO Agreement on the Trade Related Aspects of Intellectual Property (TRIPs). In November 2001, we conducted two technical assistance programs in Hanoi and Ho Chi Minh City, Vietnam, on the enforcement of IP rights. The program, cosponsored with the Vietnam National Office of Industrial Property, focused on compliance with the enforcement provisions of the Bilateral Trade Agreement and the TRIPs Agreement. In December 2001, USPTO developed and conducted a technical assistance program for 16 Russian government officials on specific problems in implementing the enforcement obligations in TRIPs. Later this month, we will conduct an IP enforcement program in China geared towards prosecutors and customs officials. The programs will be held in two "second tier" cities where rampant counterfeiting and piracy problems are developing.

As the effective protection of intellectual property rights becomes an increasing focus of worldwide trade, Mr. Chairman, the demands for our office's expertise and resources in this area are growing significantly.


Mr. Chairman, as you know, President Bush and Secretary Evans are firmly committed to ensuring that the USPTO continues to lead the world in producing the most timely and reliable intellectual property rights protection for American innovators. Their FY 2003 budget proposal for the USPTO is a powerful testament to that commitment.

I am hopeful that the continued support of the members of this subcommittee, coupled with the administration's dedication to our agency, will enable the USPTO to meet the challenges that lie ahead. Mr. Chairman, I look forward to working closely with you, Ranking Member Berman, and the other members of the subcommittee to that end.