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U.S. PATENT AND TRADEMARK OFFICE:

OPERATIONS AND FISCAL YEAR 2003 BUDGET

HEARING

BEFORE THE

SUBCOMMITTEE ON COURTS, THE INTERNET,

AND INTELLECTUAL PROPERTY

OF THE

COMMITTEE ON THE JUDICIARY

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

APRIL 11, 2002

Serial No. 64

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://www.house.gov/judiciary

(II)

COMMITTEE ON THE JUDICIARY

F. JAMES SENSENBRENNER, JR., WISCONSIN, Chairman

HENRY J. HYDE, Illinois

GEORGE W. GEKAS, Pennsylvania

HOWARD COBLE, North Carolina

LAMAR SMITH, Texas

ELTON GALLEGLY, California

BOB GOODLATTE, Virginia

ED BRYANT, Tennessee

STEVE CHABOT, Ohio

BOB BARR, Georgia

WILLIAM L. JENKINS, Tennessee

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOHN N. HOSTETTLER, Indiana

MARK GREEN, Wisconsin

RIC KELLER, Florida

DARRELL E. ISSA, California

MELISSA A. HART, Pennsylvania

JEFF FLAKE, Arizona

MIKE PENCE, Indiana

JOHN CONYERS, JR., Michigan

BARNEY FRANK, Massachusetts

HOWARD L. BERMAN, California

RICK BOUCHER, Virginia

JERROLD NADLER, New York

ROBERT C. SCOTT, Virginia

MELVIN L. WATT, North Carolina

ZOE LOFGREN, California

SHEILA JACKSON LEE, Texas

MAXINE WATERS, California

MARTIN T. MEEHAN, Massachusetts

WILLIAM D. DELAHUNT, Massachusetts

ROBERT WEXLER, Florida

TAMMY BALDWIN, Wisconsin

ANTHONY D. WEINER, New York

ADAM B. SCHIFF, California

PHILIP G. KIKO, Chief of Staff-General Counsel

PERRY H. APELBAUM, Minority Chief Counsel

SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

HOWARD COBLE, North Carolina, Chairman

HENRY J. HYDE, Illinois

ELTON GALLEGLY, California

BOB GOODLATTE, Virginia, Vice Chair

WILLIAM L. JENKINS, Tennessee

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOHN N. HOSTETTLER, Indiana

RIC KELLER, Florida

DARRELL E. ISSA, California

MELISSA A. HART, Pennsylvania

HOWARD L. BERMAN, California

JOHN CONYERS, JR., Michigan

RICK BOUCHER, Virginia

ZOE LOFGREN, California

WILLIAM D. DELAHUNT, Massachusetts

ROBERT WEXLER, Florida

MAXINE WATERS, California

MARTIN T. MEEHAN, Massachusetts

TAMMY BALDWIN, Wisconsin

ANTHONY D. WEINER, New York

BLAINE MERRITT, Chief Counsel

DEBRA ROSE, Counsel

CHRIS J. KATOPIS, Counsel

ALEC FRENCH, Minority Counsel

(III)

C O N T E N T S

APRIL 11, 2002

OPENING STATEMENT

Page

The Honorable Howard Coble, a Representative in Congress From the State

of North Carolina, and Chairman, Subcommittee on Courts, the Internet,

and Intellectual Property .................................................................................... 1

The Honorable Howard L. Berman, a Representative in Congress From the

State of California, and Ranking Member, Subcommittee on Courts, the

Internet, and Intellectual Property .................................................................... 2

WITNESSES

Honorable James Rogan, Undersecretary of Commerce for Intellectual Property and Director of the U.S. Patent and Trademark Office

Oral Testimony ..................................................................................................... 5

Prepared Statement ............................................................................................. 7

Mr. Michael K. Kirk, Executive Director, American Intellectual Property Law

Association

Oral Testimony ..................................................................................................... 12

Prepared Statement ............................................................................................. 13

Mr. John K. Williamson, President, Intellectual Property Owners

Oral Testimony ..................................................................................................... 19

Prepared Statement ............................................................................................. 21

Ms. Colleen Kelley, National President, National Treasury Employees Union

Oral Testimony ..................................................................................................... 25

Prepared Statement ............................................................................................. 26

APPENDIX

STATEMENTS SUBMITTED FOR THE HEARING RECORD

The Honorable Howard Coble, a Representative in Congress From the State

of North Carolina, and Chairman, Subcommittee on Courts, the Internet,

and Intellectual Property .................................................................................... 45

The Honorable Howard L. Berman, a Representative in Congress From the

State of California, and Ranking Member, Subcommittee on Courts, the

Internet, and Intellectual Property .................................................................... 45

The Honorable John Conyers, a Representative in Congress From the State

of Michigan, and Ranking Member, Committee on the Judiciary ................... 46

International Trademark Association .................................................................... 47

MATERIAL SUBMITTED FOR THE HEARING RECORD

Letter from the Honorable James Rogan, Undersecretary of Commerce for

Intellectual Property and Director of the United States Patent and Trademark Office ........................................................................................................... 51

Letter from Mr. David Peyton, Director, Technology Policy, National Association of Manufacturers .......................................................................................... 86

(1)

U.S. PATENT AND TRADEMARK OFFICE:

OPERATIONS AND FISCAL YEAR 2003 BUDGET

THURSDAY, APRIL 11, 2002

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY, COMMITTEE ON THE JUDICIARY, Washington, DC.

The Subcommittee met, pursuant to call, at 10:02 a.m., in Room

2141, Rayburn House Office Building, Hon. Howard Coble [Chairman of the Subcommittee] presiding.

Mr. COBLE. [Presiding.] Good morning, ladies and gentlemen.

Welcome to 2141 again. The Subcommittee will come to order.

Today we will review the operations of the Patent and Trademark Office in light of the Administration’s budget submission for

fiscal year 2003.

As I have stated before, specifically at our last hearing, our last

oversight hearing on PTO, it pains me that we must continue to

address the ongoing issue of diversion of agency funds to other government programs. Our witnesses understand how this harms PTO

operations and ultimately how it can harm that sector of our economy which is obviously dependent on the creativity of inventors

and trademark owners.

Once more, I pledge that our Subcommittee will work in a bipartisan manner with those in the intellectual property community to

do whatever is viable and necessary to reverse this trend.

That said, I am a realist. And realistically speaking, I do not believe that the appropriators will generously cede their authority to

control PTO funding in the near future. We can no longer afford

to chant the same mantra of more money.

To my mind, the agency will be better positioned to acquire

greater appropriations if it can do a better job of demonstrating

how it is using available resources to meet clearly defined objectives, which ultimately means improving quality and reducing existing pendency rates and backlogs.

And speaking of money, the Congress cannot blindly endorse a

request by the Administration to raise patent and trademark fees

as a stopgap or even a long-term solution to this problem.

Anyone who has reviewed the fiscal year 2003 budget request for

PTO is aware that it contains a recommendation that Congress

apply new 1-year surcharges to existing fees. That is 19 percent in

the case of patents, 10 percent in the case of trademarks.

I will be most interested to learn whether the user community

endorses this request. Will implementing this change really reduce

2

pendency and backlogs, or will it merely subsidize other government programs?

I emphasize that I retain the highest confidence in Director

Rogan to help us solve these problems.

Jim, I think you may well be the person best suited to lead the

PTO into the 21st century. It’s good to have you back on the Hill.

I look forward to the testimony of the witnesses here this morning.

[The prepared statement of Mr. Coble follows in the Appendix]

Mr. CHABOT. And I am now pleased to recognize my good friend,

the Ranking Member from California, Mr. Berman.

Mr. BERMAN. Thank you very much, Mr. Chairman. I’m happy to

join you for our annual hearing on the Patent and Trademark Office.

And I welcome our former colleague—he knows some Members

of this panel well—the distinguished PTO Director, Undersecretary

of Commerce, in his first appearance before this Subcommittee.

The man actually gave up a lucrative private practice to take on

this office. And we’ll talk to him later on about his judgment.

[Laughter.]

I want to welcome our other witnesses as well. Many of them are

quite familiar to this Subcommittee.

And I think we have cause this year for a muted celebration. It

appears that our collective efforts over the past few years to secure

adequate funding for the PTO have had measured success. Based

on the pressure applied by relevant stakeholders, including the

ones testifying today, the PTO itself, and many Members of Congress, the President has submitted a fiscal year 2003 budget that

recommends that the PTO have use of all its projected fees. This

request indicates that our message has finally gotten through.

Without adequate funding, the PTO cannot carry on its critical

role in stimulating innovation, technological advancement, and

business growth.

Unfortunately, this forward movement comes with a price. The

Administration has not repealed the innovation tax; it has simply

renamed it a surcharge.

The Bush administration’s fiscal year 2003 budget request proposes a surcharge on patent and trademark fees. This surcharge,

which will generate $162 million to be used for non-PTO purposes,

would be almost 20 percent on patent fees and over 10 percent on

trademark fees.

In other words, the Bush administration doesn’t end the fee diversion or innovation tax of which we have long complained. It simply raises the fees in order to have its cake and eat it, too.

I do not intend to place the blame entirely at the feet of the Bush

administration, because there’s no reason to believe our appropriators will the end the practice on their own initiative. Indeed, we

need to remain vigilant less they attempt to divert more.

To be sure, the surcharge approach to diversion is an improvement over the previous situation, but it’s still not the preferred

course. Ideally, there would be no innovation tax, regardless of

whether it was called a carry-forward, a diversion, or a surcharge.

I believe the surcharge approach—I want to make clear, I’m not

against redistribution, but I just don’t think this is redistribution

3

based on ability to pay. This is not—this is what gives redistribution a bad name.

I believe the surcharge approach is not an adequate solution because it will not solve the pendency, quality, staff retention, and

technology problems facing the PTO. Even assuming that the PTO

has use of all its projected fee income through 2006, the fiscal year

2002 corporate plan of the Department of Commerce still predicted

that patent pendency would increase to 38.6 months by fiscal year

2006.

I want to repeat that: Even if the PTO can keep all its projected

fees, patent pendency increases from about 24 months to nearly 39

months.

Whether 24 or 39 months, such patent pendencies are too long.

Such pendencies hamstring the ability of inventors to commercialize their innovations and, when combined with increased fees,

may even persuade inventors to rely on trade secret protection

rather than patenting their inventions. This result will be the

worst outcome as it would deny the public, other innovators, and

research the benefits of public disclosure of innovations.

For these reasons among others, Chairman Coble and I have insisted that the PTO complete a 5-year strategic plan. This strategic

plan, as proposed in H.R. 2047, would set a course of the PTO to

achieve its critical mission by improving patent quality, reducing

pendencies to reasonable levels, and increasing PTO efficiency.

We look forward to receipt of the strategic plan and look upon

it as a key to demonstrating that patent and trademark fees bear

a direct relationship to achievement of the PTO mission.

In conclusion, Mr. Chairman, I believe the President’s fiscal year

2003 budget request doesn’t keep a bad situation from getting

worse. It just keeps it from getting a lot worse.

I do not believe that the surcharges are an adequate permanent

solution to the challenges the PTO faces.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Berman follows in the Appendix]

Mr. COBLE. I thank the gentleman.

We’re pleased as well to have Ms. Lofgren, the gentlelady from

California, join us this morning.

Now, what I’m about to say really has nothing directly to do with

today’s hearing, and pardon my immodesty for sharing this with

you. Someone came to me the other day, and he said, ‘‘I appreciate

very much the way you and Howard Berman have worked together

on this Subcommittee.’’

And I want to, at this time, express my thanks to Howard. I

think we have worked pretty well together. And in no small reason,

that’s because of the cooperation that we have enjoyed from many

people, some of whom are in this hearing room today.

We will continue to try to hammer out the problems as they continue to surface and plague us. But with your help, we’ll try to

keep plowing through this thing and hopefully come up with a solution.

Some folks have criticized me for my lengthy introductions of

witnesses. Now oftentimes, many people in the audience don’t

know the background of some of the witnesses, and I think if you’re

4

uninformed, you need to be informed. So that’s why I may give

these extended biographies. So you all bear with me.

Our first witness does not fall in that category. I think we all

know him: Jim Rogan, the Undersecretary of Commerce for Intellectual Property and Director of the U.S. Patent and Trademark

Office. He was nominated by President George Bush on May 25,

2001, and confirmed by the U.S. Senate on November 30, 2001. We

all remember him as a valued colleague who served on our Subcommittee from 1997 through 2001.

Judge Rogan has a distinguished career in public service. He was

a gang murder prosecutor in the Los Angeles County District Attorney’s Office, and became California’s youngest sitting State

judge since 1990 before his election to the California State Assembly in 1994.

Judge Rogan earned a B.A. degree from the University of California at Berkeley in 1979 and his J.D. from the UCLA School of

Law in 1983, where he served as a member of the UCLA Law Review.

Our next witness is an old friend—strike that. Our next witness

is a friend.

‘‘Old’’ has a bad ring to it, Mike. [Laughter.]

Mike Kirk serves as the executive director of the American Intellectual Property Law Association. Prior to AIPLA, he served as

Deputy Assistant Secretary of Commerce and Deputy Commissioner of Patent and Trademarks from May 1994 through March

1995. In 1993, Mike Kirk also served as the Acting Assistant Secretary of Commerce and Acting Commissioner of Patents and

Trademarks.

Mr. Kirk earned his bachelor of science in electrical engineering

at the Citadel in 1959, his juris doctor in 1965 from the Georgetown University Law Center, and his master’s of public administration in 1969 from Indiana University.

Our next witness is Colleen Kelley, who is President of the National Treasury Employees Union, NTEU, the Nation’s largest

independent Federal sector union. As the union’s top elected official

and as spokesperson for the union, Ms. Kelley represents NTEU in

the media and testifies before Congress on issues of importance to

NTEU members and Federal employees.

An NTEU member since 1974, Ms. Kelley was an IRS revenue

agent for 14 years. She served in various NTEU chapter leadership

positions, including chief steward, vice president, and president of

NTEU Chapter 34 in Pittsburgh, Pennsylvania.

In August 1999, delegates to NTEU’s 47th national convention

elected Ms. Kelley as national president.

Ms. Kelley received a bachelor’s degree in accounting from Drexel

University and earned a master’s degree from the University of

Pittsburgh. She is a certified public account.

Our final witness this morning is John K. Williamson, who is

president of the Intellectual Property Owners and is a past president of the Pittsburgh Intellectual Property Law Association. He

has worked exclusively in the area of intellectual property law for

25 years in both corporate and private practice.

5

Prior to joining PPG in 1996, he had been the chief patent counsel for Westinghouse Electric Corporation and for Allegheny International.

Mr. Williamson is an adjunct professor of law at Duquesne University and has written and lectured extensively on intellectual

property issues.

He received a B.S. in mechanical engineering, a juris doctor from

the University of Missouri. He is admitted to practice before the

U.S. Patent and Trademark Office.

Good to have all of you with us. We have written statements

from each of the witnesses, and I ask unanimous consent to submit

into the record in their entirety.

So if you witnesses will come forward and, as we have previously

requested, if you could confine your oral testimony within the confines of our 5-minute rule, we will be appreciative.

And the 5-minute rule will be invading your area when you see

the red light appear in front of you.

Why don’t we start, Judge Rogan, with you?

And before you do that, let me welcome furthermore the gentleman from Florida and the gentleman from Tennessee. And with

unanimous consent, the gentleman from Texas, although he does

not sit on the Subcommittee, he has asked if he can sit in. We will

not permit you to ask questions, Lamar. But without objection,

we’ll invite Lamar Smith to join us as well.

Judge Rogan, you’re on.

STATEMENT OF THE HONORABLE JAMES ROGAN, UNDERSECRETARY OF COMMERCE FOR INTELLECTUAL PROPERTY

AND DIRECTOR OF THE U.S. PATENT AND TRADEMARK OFFICE

Mr. ROGAN. Mr. Chairman, first, I want to thank you and the

Members of the Subcommittee——

Mr. COBLE. Jim, put that mike a little closer to you, if you will.

Mr. ROGAN. Mr. Chairman, I wanted to thank you and Members

of the Subcommittee not only for the kind introductory remarks but

also for the invitation to testify here today.

You have allowed me now to keep a promise I made just before

the election of 2000. I told you all I would be back. I am here.

[Laughter.]

This is not exactly what I had in mind, but a promise is a promise. [Laughter.]

Mr. Chairman, thank you. and also, Congressman Berman,

thank you, as well as 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 firsthand 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 will do all I can to bolster American intellectual property during

my tenure at the U.S. PTO.

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 enVerDate 11-MAY-2000 12:29 May 22, 2002 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\WORK\COURTS\041102\78675.000 HJUD2 PsN: HJUD2
6

couraging 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 has become increasingly vital to our Nation’s economy. By some estimates, IP industries represent the largest single sector of the

American economy, almost 5 percent of GDP, and employ over 4

million Americans.

The increasing volume and complexity of our workload poses serious issues for the U.S. PTO. Some might even use the word ‘‘Crisis.’’ In 1981, a U.S. News & World Report article highlighted the

serious backlog of patent applications at our agency. At that time,

pendency was 22 months and the backlog was 81,000.

By the time I was sworn in a few months ago, pendency was over

24 months and the backlog stood at something like a third of a million applications.

Current projections for pendency to remain in excess of 2 years

and much longer in certain critical technologies should be deemed

unacceptable. Our customers deserve—and the reality of our hightech 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 the goals is our challenge.

Before I assumed office last year, the U.S. PTO developed a 5-

year business plan as part of the Administration’s 2003 budget submission. That business plan presented a traditional way to stem

the dangerous tide of rising pendency.

While I consider this business plan to be an important step forward, I believe the U.S. PTO, the Administration, the Congress,

and our user community can and should do much more.

With that in mind, I have begun an aggressive review of the U.S.

PTO to identify new and possibly nontraditional ways to improve

quality and reduce pendency. This process includes a thorough topto-bottom review to ensure that resources are fully devoted to mission-critical tasks.

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 we conduct our business. I believe fundamental changes in the way we do

business may be required.

Some of these reforms may require the approval of the Administration, and some will require the approval of Congress. Others will

involve greater cooperation with other nations, to share workload

problems.

I intend to report back to this Subcommittee on what additional

information we have found and will seek your support and guidance as we attempt to implement those changes.

Despite the daunting challenges facing the U.S. PTO, I’m optimistic. I view this as a time filled with opportunity. It’s a chance

to look at our system, determine how it should be structured, and

then make it happen.

The Administration’s budget request lays the groundwork for

these efforts. It would give us the largest increase in our funding

history and enable us to hire 950 patent examiners.

7

I am hopeful that the continued support of the Members of this

Subcommittee, coupled with the President and Secretary Evans’

firm commitment to our agency, will enable the PTO to meet the

challenges that lie ahead.

Mr. Chairman, I look forward to working closely with you, with

Ranking Member Berman, and the Members of this Subcommittee,

to that end.

[The prepared statement of Mr. Rogan follows:]

PREPARED STATEMENT OF JAMES E. ROGAN

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% 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.

8

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-tobottom 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

9

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% 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, Virginia 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.

PATENTS

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

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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.

TRADEMARKS

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 endto-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.

INTERNATIONAL

Let me discuss our efforts in the international arena, an essential but less wellknow 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.

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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.

CONCLUSION

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.

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Mr. COBLE. You even beat the red light, Judge. You’re very—the

pressure is on you now, Mike.

Mr. Kirk, good to hear from you.

STATEMENT OF MICHAEL K. KIRK, EXECUTIVE DIRECTOR,

AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION

Mr. KIRK. Thank you, Mr. Chairman.

The vitality of our Nation’s patent and trademark systems has

steadily eroded during the last decade. Companies are increasingly

being subjected to litigation on the basis of questionable patents.

Pendency is 25 months and rising. First opinions on patentability

in some rapidly growing areas are not received by applicants for

more than 40 months after filing.

While the office has made significant strides in creating electronic databases in both the patent and trademark operations, the

internal electronic processing capabilities of the office fall woefully

short of the goal of a paperless office announced 20 years ago.

Mr. Berman mentioned in his opening remarks H.R. 2047 which

we strongly support. How has the Office reacted to that? The Office

published its business plan in February, as Undersecretary Rogan

noted. We find nothing in the plan that reveals a true appreciation

of the patent quality issue, and a willingness to take meaningful

steps to address it.

While we appreciate the plan’s promise to hire 950 new examiners each year, the plan acknowledges that the current situation

will worsen.

Finally, the plan falls far short of offering any real hope that patent operations will be processing applications electronically by FY

2006.

Turning to trademarks, it is difficult for us to evaluate the promised comprehensive internal quality review program without details. On the positive side, however, the pendency goals for trademarks are commendable and should certainly be achievable.

We are also heartened by the plan’s goals to complete the transition to a fully electronic trademark operation during 2004. We are

very pleased that the President has requested $1.365 billion for the

office in 2003. Unfortunately, as has been noted, the request includes a proposal to place a surcharge on patent and trademark

fees with only $45 of the $207 million that would be raised targeted for the PTO.

Thus, the user community is being asked to accept a fee increase

to generate additional revenues, only 25 percent of which are targeted for the PTO, with no guarantee that even that amount will

reach the PTO to implement a plan which has serious shortcomings.

We wish to make it perfectly clear that our critique of the plan

is not directed at the new management team in the U.S. PTO nor

at career employees. Undersecretary Rogan had essentially no opportunity to shape the 2003 PTO budget. In addition, the lack of

an appointed political leader made it very difficult for the career

employees to be heard in terms of submitting an effective plan.

We are very encouraged by what Undersecretary Rogan is doing

and by his characterization of the business plan published in February as ‘‘first step business plan.’’

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On the budget request, no one will be surprised that AIPLA

strongly opposes any diversion of fees, irrespective of how it is

clothed.

We also oppose any fee increase by means of a surcharge inserted in an appropriations act, as proposed by the President. This

procedure denies the user community any opportunity to participate effectively in the evaluation of the increase or the purposes to

which it will be put. It also undercuts the role of this Subcommittee in its oversight function of the PTO.

We wish to be very clear on one point: If the current level of

funding from user fees is inadequate to allow the office to achieve

our desired quality, timeliness, and electronic processing goals, we

are prepared to consider the fee increases needed. We would support a reasonable statutory fee increase to implement a 5-year plan

that would achieve the goals that Congress and AIPLA seek.

In the long term, we believe that the perennial problem of underfunding of the PTO will be solved only by transforming it into a

wholly owned government corporation. As this Subcommittee

knows well, previous bills that would have corporatized the office

met with strong opposition, due in large part to other features that

those bills contained. We believe it is time to try once again to

achive this change, but this time with the authorities needed to effectively manage the PTO. The earlier bills, for the most part,

never solved the funding problem. They never gave the managers

the authority they needed to set competitive salaries to attract and

retain the skilled men and women needed to provide the quality

services the public desires, and they never effectively overcame the

cultural constraints that placed the policy and management authority in one position. These and many other details need to be

discussed and debated to develop an appropriate legislative remedy

for the problems facing the PTO. If we do not pursue this or some

other permanent fix, we will return here next year at this time for

our annual hand-wringing exercise.

Thank you for the opportunity to be heard.

[The prepared statement of Mr. Kirk follows:]

PREPARED STATEMENT OF MICHAEL K. KIRK

Mr. Chairman:

I am pleased to have the opportunity to present the views of the American Intellectual Property Law Association (AIPLA) at this oversight hearing on ‘‘The U.S.

Patent and Trademark Office: Operations and Fiscal Year 2003 Budget.’’

The AIPLA is a national bar association of more than 13,000 members engaged

in private and corporate practice, in government service, and in the academic community. The AIPLA represents a wide and diverse spectrum of individuals, companies and institutions involved directly or indirectly in the practice of patent, trademark, copyright, and unfair competition law, as well as other fields of law affecting

intellectual property. Our members represent both owners and users of intellectual

property.

AIPLA’S VISION FOR THE USPTO

The AIPLA believes that a strong and effective Patent and Trademark Office is

critical to maintenance of a robust economy. However, AIPLA believes that achieving that end result will require focus on three critical objectives: quality, timeliness

and improved electronic filing and processing capabilities. AIPLA also believes that

these critical objectives, of necessity, will only be achieved through the joint efforts

and renewed commitment of Congress, the USPTO and the USPTO user community.

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Quality. Quality of the patents and trademark registrations granted by the

USPTO must be at the forefront of efforts to strengthen and improve the operation

of the Patent and Trademark Office. Granting patents or trademark registrations

that cannot withstand the rigors of a court challenge does not serve the interests

of the USPTO user community. It is costly and wasteful of valuable resources that

could be put to better use in other endeavors. Moreover, the existence of patents

and trademark registrations that grant unwarranted rights of exclusivity may deter

otherwise lawful activity by others in technical and marketing endeavors. On the

other hand, the ability to protect investment in research through the grant of strong

patent rights, and the ability to protect investment and development in the marketing of products under strong trademark rights, is equally critical. The AIPLA believes that efforts to strengthen and improve USPTO operations should therefore be

governed in every instance by a concern, first and foremost, for improving quality

of the ultimate rights granted under patents and trademark registrations.

Timeliness. Timeliness in granting strong, enforceable patent and trademark

rights is also of critical importance. Long delays in granting patents, even if they

are strong and enforceable, are not in the best interests of patent owners and their

competitors alike. Such delays place the technology in which investment has been

made at risk for undue periods of time in the face of encroachment by others. In

addition, these delays subject competitors to uncertainty and stifle efforts to lawfully invent around such patent rights. Likewise, prompt indications of the

registerability of trademarks are essential for businesses to plan marketing strategies to launch new products and to enable competitors to avoid infringement of others’ marks. While admittedly quality on the one hand, and timeliness on the other,

will at times create tension as to whether certain efforts will or will not ultimately

serve to strengthen and improve USPTO operations, the AIPLA believes that both

of these objectives must be met.

Electronic Filing and Processing. The United States transacts its daily commerce

electronically through the Internet. Efforts to make electronic filing and processing

of patent and trademark applications the norm, rather than the exception, must be

redoubled. AIPLA believes that in so doing, both quality and timeliness of the patent and trademark rights granted by the USPTO will be well served.

BACKGROUND

The AIPLA believes that its vision for the USPTO is more critical than ever to

the continued viability of our nation’s patent and trademark system. In fact, that

viability has been steadily eroded during the last decade. As this Subcommittee is

well aware, the Executive Branch and the Congress have participated in diverting

fee revenues from the United States Patent and Trademark Office (USPTO) since

1992. To date, approximately $700,000,000 in patent and trademark fees paid by

USPTO users have been diverted from, rescinded, or made unavailable to the

USPTO. The result is that longer delays in obtaining protection for valuable new

technologies and marketing efforts are increasing the uncertainty in the marketplace, and are diminishing the value of the rights ultimately obtained. And while

the USPTO has and continues to make efforts to stem these increasing delays notwithstanding the budgetary strictures imposed upon it, the reality is that quality

has suffered.

Large and small companies are increasingly being subjected to litigation (or its

threat) on the basis of questionable patents. This undermines the confidence of

USPTO users and the public in general, and threatens ultimately to undermine the

position of the U.S. as a world leader in encouraging and capitalizing on the development of new technologies.

Former Federal Trade Commission Chairman, Robert Pitofsky, asked last year:

‘‘Does the patent office have the resources to conduct a rigorous review of patent

applications?; and

‘‘Are patent grants justified in terms of utility, novelty and invention, or is the

scope of patents that are granted unnecessarily broad?’’

These are serious questions which we fear are not being properly addressed.

After an average total pendency for patents of between 18 and 19 months was

achieved in 1989 through 1991, patent pendency has risen to 24.7 months. Today,

first opinions on patentability (first actions) in some rapidly growing fields are not

received by applicants for more than 40 months after filing. While the trademark

goals of three months to a first opinion on registerability and an average total pendency of 13 months were also achieved in 1989, these times have generally risen

through the last decade until last year. The sharp decrease in filings related to the

downturn in the economy permitted the Office to turn the corner on the rising pendency to first action last fiscal year and overall pendency this fiscal year.

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The electronic processing capabilities of the Office also fall woefully short of the

goal of ‘‘a paperless office by 1990’’ announced twenty years ago. To be fair, the Office has made significant strides in creating electronic databases in both the patent

and trademark operations. Examiners now have the ability to search electronically

every U.S. patent from 1790 to date, along with the applications published under

the American Inventors Protection Act, the patents of many foreign countries, and

much of the world’s non-patent technical literature. We are on the threshold of seeing the paper search files, which are still stored in the same manner as in Thomas

Jefferson’s day, finally give way to complete, accurate and robust electronic search

tools. Similarly, in the trademark operation, examining attorneys have long had access to an electronic search of all federally-registered and abandoned trademarks

and have moved away from using the paper files several years ago.

The trademark operation has also developed and implemented a user friendly and

effective electronic trademark application filing system. Currently, nearly one quarter of all trademark applications are filed electronically, which speeds the process

and reduces errors.

Unfortunately, the same cannot be said for the filing of patent applications. While

the USPTO has made an electronic patent application filing system (EFS) available

to applicants and has worked with applicants to instruct them in its use, the vast

majority of patent applicants find the system very user-unfriendly. So few applicants have been able to master the EFS that, following the recent Anthrax problems

at the Brentwood Postal Facility, the Office was forced to request patent communications to be filed by express mail, by facsimile, and by hand (in addition to electronically).

Moreover, once the twenty-five percent of trademark applications filed electronically and the very small percent of patent applications filed electronically reach the

Office, the Office converts them all into paper for processing through the Office in

the same manner as it always has. Communications to applicants are sent by mail

and replies by applicants return the same way. If the Office receives the 368,000

patent applications and 300,000 trademark applications it has forecast for this fiscal

year, on top of the existing backlogs, the Office must store, manage, and keep track

of well over one million paper files. It is not hard to understand the burdens under

which the Office struggles with this mountain of paper.

A NEW APPROACH

While not abandoning our strong opposition to the diversion of patent fees, we

have been working with this Subcommittee to try a new approach to address the

comments of the appropriators. The House appropriators observed last year in the

report accompanying the appropriation bill, H.R.2500, that:

‘‘PTO and the patent user community have continually criticized the Congress

and the Administration for not allowing full access to their fees in the year they

are received, yet the PTO has been unsuccessful in proving that increased funding will decrease the amount of time it takes an applicant to receive a patent.

PTO bases its budget submission on anticipated fee income, which is derived

from an estimation of its anticipated workload. However, there is no indication

that the existing level of fees was developed based on any direct relationship

to the actual costs of doing business.’’

(House Report No. 107–139)

Accordingly, Chairman Coble together with Mr. Conyers and Mr. Berman introduced H.R. 2047, the ‘‘Patent and Trademark Office Authorization Act of 2002’’ on

June 7, 2001, calling for the Office to make the type of showing requested. This legislation calls for the Director, working with the Patent and the Trademark Public

Advisory Committees, to develop a five-year strategic plan that would—

‘‘(1) enhance patent and trademark quality;

(2) reduce patent and trademark pendency; and

(3) develop and implement an effective electronic system for use by the Patent

and Trademark Office and the public for all aspects of the patent and

trademark processes...’’

The strategic plan is to include milestones and objective and meaningful criteria for

evaluating the progress and successful achievement of the plan.

Another section of H.R. 2047 called for an accelerated effort to develop an electronic system for the filing and processing of patent and trademark applications

that is user friendly and includes the necessary infrastructure (A) to allow examiners and applicants to send all communications electronically; and (B) to allow the

16

Office to process, maintain, and search electronically the contents and history of

each application.

The House Appropriations Committee called for similar information in its report

on H.R. 2500:

‘‘. . .the Committee directs the United States Patent and Trademark Office,

in consultation with the Department of Commerce, to develop a requirements-based budget structure. This revised budget structure proposal

should include the number of actual trademark examiners required to perform the examinations, the number of examiners the PTO would be able

to hire and train during the fiscal year, the number of patent applications

to be processed while maintaining accuracy, and a timeline and incremental

budget plan for technological requirements to assist the processing of applications.’’

The Senate Appropriations Committee also called for the development of such a

plan in its report on H.R. 1215, Senate Report No. 107–42.

USPTO BUSINESS PLAN

The USPTO published a Business Plan in February of this year to accompany the

FY 2003 Budget submission of the President. In the critical areas of quality, pendency, and electronic processing, the Plan states that the Office will:

In patents:

Improve quality by 55% by FY 2006 by reducing the ‘‘error rate’’ from 6.6 to 3%

Reduce total pendency to 26 months by FY 2006 by hiring 950 examiners

Initiate the TEAM* project to prepare for electronic processing of applications

*‘‘Tools for Electronic Application Management’’

In trademarks:

Improve quality by 50% by reducing the ‘‘error rate’’ from 6 to 3%

Reduce total pendency to 12 months by FY 2004

Complete its transition to fully electronic operation during FY 2004

The goals of the Plan need to be evaluated in terms of whether they truly meet

the critical objectives toward which they are aimed. In the patent quality context,

it is difficult to have confidence in a program that is in part dependent on the agreement of the judged. Before a patent application can be re-opened to prosecution on

the basis of a finding of an ‘‘error’’ by the Quality Review Office, the relevant Group

Director must agree. If a Group Director does not agree (and they do not in nearly

20% of the cases), no ‘‘error’’ is counted. We need the quality of the patents granted

by the USPTO to convince critics such as former FTC Chairman Pitofsky that they

are ‘‘justified in terms of utility, novelty and invention,’’ and that their scope is commensurate with the patentable contribution of the inventor.

Let me hasten to add that we fully recognize that it is easy to criticize the ‘‘quality’’ of patents; it is far more difficult to identify how patent ‘‘quality’’ can be measured, and to offer constructive suggestions to enhance quality. For this reason,

AIPLA has created a special Task Force to work with the USPTO to develop some

practical and effective proposals on how the Office can enhance patent quality.

We appreciate the Plan’s promise ‘‘to hire 950 new examiners each year,’’ but this

statement must be considered in the context of the President’s Budget which calls

for adding only 250 FTE patent examiner positions. We also note that, even with

this promised increase, the goal in the Business Plan is to reach an average total

pendency of 26 months by FY 2006, essentially making no inroads on the current

situation. We would like to see more progress on this front; however, the effort to

reduce pendency should not be permitted to overshadow the more important objective of patent quality. Thus, the goal of reducing pendency through increased hiring

needs to be tempered by realistic measures for improving and strengthening examiner training and supervisory capacity, not simply increasing the sheer number of

examiners.

Finally, we note that the stated goal of ‘‘initiating’’ a project ‘‘to prepare for electronic processing’’ of applications, absent more, falls far short of offering real hope

that the patent operations will be fully electronically processing applications, from

initial filing through examination and prosecution, by the end of the five-year period

covered by the Plan.

Turning to the trademark side of the Office, we applaud the plans to develop ‘‘a

comprehensive internal quality review program focused on improving examination

quality to complement the corporate quality review program already in place,’’ but,

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without details, it is difficult to evaluate the planned effort. The pendency goals in

the trademark operation of 2 months to first action by FY 2004 (down from 3

months for FY 2002 as reported in the Plan), and total pendency of 12 months by

FY 2006 (down from 15.5 months for FY 2002 as reported in the Plan) are both commendable and appear to be achievable in light of the respite in the number of trademark applications currently being filed. Finally, we have previously applauded the

advancements made by the USPTO in implementing electronic filing of trademark

applications. We are heartened to see the goals of increasing the number of new

trademark applications filed electronically to 80% in FY 2003 and to complete the

transition to a fully electronic trademark operation during FY 2004.

THE PRESIDENT’S BUDGET

The proposed budget would fund the Office at a level of $1.365 billion. This would

come from three different sources:

(1) $1.220 billion from existing statutory fees

(2) $0.100 billion from the nearly $0.500 billion in fees classified as ‘‘unavailable’’ in the year they were received

(3) $0.045 billion from a new ‘‘one time’’ surcharge (which will raise $0.207 bil- lion, with $0.162 billion being used for non-USPTO programs)

A major problem with the President’s Budget Proposal is that there is no guarantee that the Congressional appropriators will use the revenues as proposed. They

may well agree to impose a surcharge, but then use the revenues generated elsewhere. Similarly, there is no guarantee that they will make available any of the

monies previously withheld.

Thus, the user community is being asked to accept a fee increase to generate additional revenues, only 25% of which is targeted for the USPTO (and there is no guarantee that even that amount will reach the USPTO), to implement a USPTO plan

which has serious shortcomings.

USPTO MANAGEMENT

We wish to make it perfectly clear at this juncture that our observations are not

directed at the new management team in the USPTO or at the career employees.

Under Secretary Rogan did not officially assume the duties of office until December

10 of last year. It is our understanding that on his second day in office, he was given

a copy of the ‘‘passback’’ from the Office of Management and Budget for the

USPTO’s budget for FY 2003. The ‘‘passback’’ informs an agency what level of funding the financial officials in OMB have decided to allow it to request. The budget

proposals requested by the USPTO, to which the passback responds, were sent to

the Department of Commerce and then to OMB many months earlier. Thus, Under

Secretary Rogan essentially had no realistic opportunity to shape the operating plan

or to press the case for adequate funding for the Office.

This is also not a criticism of the career employees in the USPTO. Having observed first hand what occurs when a new Administration comes into power, I can

say that it is very difficult for career officials to represent adequately the interests

of the patent and trademark systems to a new Commerce Department administration. The lack of an appointed political leader in the Under Secretary’s position

makes it very difficult for the career managers to be heard. In fact, a very good plan

could have been prepared and forwarded, but then rejected: we will never know.

Of course, a roadblock that continues to plague anyone in the Office who seeks

to develop an effective plan for addressing the problems confronting patent applicants, trademark applicants, and, very importantly, the public, is that the individuals who control the decisions never have to publicly justify their decisions. While

no Under Secretary/Director or career official can do anything but support the position dictated by Commerce Department and OMB officials, the individuals who

make those decisions never have to justify those decisions before this Subcommittee.

You have heard from Under Secretary Rogan, this morning. We are extremely

heartened with what he is saying and doing at the USPTO. He has instituted a topto-bottom review of the entire Office to eliminate duplicative, wasteful, and low priority programs. In the statement issued late last month, Under Secretary Rogan observed:

‘‘The Business Plan was completed before I assumed office last December; in reviewing it, I prefer to think of it as a ‘‘First Step Business Plan.’’ I am preparing

to begin a top-to-bottom review of all non-examination and administrative support operations, and will expect to see a compelling justification for every nonexamination operation within the agency.’’

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We are encouraged by these comments; we hope he will be permitted to succeed.

AIPLA POSITION ON THE 2003 PTO BUDGET AND BUSINESS PLAN

It will come as no surprise to anyone on this Subcommittee that AIPLA strongly

opposes any diversion of patent and trademark fees—irrespective of the clothes it

wears. If there is a need for additional resources for some urgent program or service, the President and the Congress should explain that need and, if the existing

tax revenues are insufficient, propose a tax increase on all citizens who will receive

the benefits of such program or service. It should not be hidden away as a stealth

tax increase only on America’s creative community.

In addition, we strongly oppose any fee increase through the mechanism of a ‘‘sur- charge’’ as proposed by the President. This procedure denies the user community

any opportunity to participate effectively in the evaluation of the increase or the

purposes to which it will be put. It also, quite frankly, undercuts the role of this

Committee in its oversight of the USPTO. This procedure not only dictates the details of the operation of the Office, but also the level of contribution that users are

forced to make to the general tax coffers.

Finally, we wish to be very clear on one point. As we stated at the outset, AIPLA

wants the United States Patent and Trademark Office to be, simply, the best in the

world in terms of quality, timeliness, and full electronic processing. If the current

level of funding from user fees is inadequate to allow it to achieve this status, we

are prepared to consider the increases needed. We would support a reasonable statutory fee increase to implement a five-year plan that would achieve the goals Congress and we seek.

The AIPLA looks forward to the next iteration of the Business Plan promised by

Under Secretary Rogan. As previously noted, we urge that the next iteration include

an action program designed to enhance patent and trademark quality. While we

agree that pendency is important, especially for applicants in rapidly moving fields,

the competitors of those applicants and the public have an equally strong claim to

freedom from challenges based on questionable patents.

With the assurance that only quality patents will issue, we also wish to see the

Office propose a detailed plan to achieve the long standing goal of 18-months average total pendency. In this regard, it is very important that the fluctuations in

pendency among the various technical fields not have great disparities. Not only do

rapidly advancing technologies deserve protection before obsolescence, but the public

also has an interest in patents expiring twenty years after their U.S filing dates.

Finally, we urge the Office to develop an effective, user friendly, electronic filing

system and an internal electronic processing system. The Office should look to every

source available for assistance in developing an electronic filing system, especially

the European Patent Office, which a number of observers believe has already developed such a system. The obvious savings in personnel, space, and the elimination

of errors which would flow from the ability of the Office to electronically receive,

process, and communicate with applicants make the prompt development of such a

system an imperative.

The AIPLA recognizes that these objectives will not be attained without a price.

As we have already noted, however, we are prepared to support a reasonable statutory fee increase to fund a sound plan to achieve them. This may mean that this

Subcommittee should hold a follow-on hearing when the USPTO has developed its

‘‘Second Step Business Plan,’’ perhaps in conjunction with the fee restructuring

promised in the President’s Budget submission.

LONGER TERM SOLUTION

As the members of this Subcommittee are fully aware, the USPTO has gone

through twelve consecutive years during which it has failed to receive all of the fee

revenues it collected. During this same period, we have seen the services the Office

provides gradually deteriorate. Concerns about patent quality are higher now than

at anytime in memory.

Congressional appropriators are not solely to blame for this situation. The Executive Branch budget proposals have similarly followed the political expedient of funding other more favored programs by suggesting the use of USPTO fee revenues. Is

it realistic to expect that the USPTO can engage in sensible long range planning

for major automation projects such as electronic processing when the funds available fluctuate year to year?

We believe that the perennial problem of under-funding the USPTO will be solved

only by transforming it into a wholly owned government corporation. As this Subcommittee knows well, this suggestion has been raised several times during the past

decade. This question has been studied by the National Academy of Public AdminisVerDate 11-MAY-2000 12:29 May 22, 2002 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\041102\78675.000 HJUD2 PsN: HJUD2
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tration (NAPA) several times. In its 1989 study, NAPA concluded that USPTO

‘‘meets the criteria for conversion to a wholly-owned federal corporation’’ and ‘‘could

be placed on a fully self-sustaining basis within a reasonable period after its activation.’’ In a follow-on study in 1995, NAPA again found the USPTO an appropriate

candidate for becoming a government corporation and added that it should have the

power ‘‘To retain and utilize its revenues for any purposes of the corporation.’’

A number of bills that would have ‘‘corporatized’’ the Office were considered in

the 104th( 105th, and 106th Congresses, including H.R. 1659 and H.R. 3460 in the

104th Congress, H.R. 400 in the 105th Congress, and H.R. 1907 in the 106th Congress. All of these measures met with strong opposition due in large part to other

features such as inter partes reexamination, prior use defense, and 18-month publication of pending patent applications. We submit that it is timely to try once again

to achieve this change, but with the authorities needed to effectively manage the

USPTO.

The earlier bills, for the most part, never solved the funding problem. Funding

for the proposed corporation was generally subject to the flawed process that we

have today. Contrary to the recommendations in the NAPA reports, these measures

did not allow the corporation to actually run like a corporation where it could set

its fees to obtain the funds needed to carry out its responsibilities under the oversight of this Subcommittee and a representative body of users. Although efforts were

made, these bills did not, for the most part, give the managers of the corporation

an exemption from title 5 of the United States Code so that they could set competitive salaries to attract and retain skilled engineers and attorneys to provide the

quality services users and the public desire.

In addition, these earlier measures flirted with, but never quite overcame the cultural ties that placed the policy authority and the management authority in the

same individual. The President needs an individual of his choosing to whom he can

turn for advice on intellectual property questions, both here and abroad. This is a

critically important and demanding, full time assignment; America’s future depends

on worldwide protection of its intellectual assets. However, a $1.365 billion government corporation responsible for the examination and grant or registration of reliable patents or trademarks also needs full time attention. Moreover, while there are

dedicated public servants like Under Secretary Rogan who are prepared to serve at

Executive Level II salaries to assist in conducting the President’s agenda, we should

be realistic and understand that talented COO’s are not going to be attracted to a

job paying that same salary and offering job security only until the next Presidential

election.

These and many other details need to be discussed and debated to develop an appropriate legislative remedy for the problems which the USPTO is facing. But we

need to become engaged in this exercise now. If we do not pursue this or some other

permanent fix, we will return here next year at this time for our annual handwringing exercise.

Thank you for the opportunity to present our views. We will be pleased to work

with the Subcommittee in any way we can to resolve these difficult funding and

operational problems.

Mr. COBLE. Thank you, Mr. Kirk.

Mr. Williamson, before you come on, I went to the PTO office recently. Spent a couple of hours there. And I would urge any Members of the Subcommittee who have not gone down there to do so.

It was an illuminating exercise for me, and I learned very much

having been there, seen it hands on. And I benefited from that visit

and, as I say, urge the rest of you to do likewise if you’re so interested.

Mr. Williamson? Pull that mike a little closer, if you will, Mr.

Williamson.

STATEMENT OF JOHN K. WILLIAMSON, PRESIDENT,

INTELLECTUAL PROPERTY OWNERS

Mr. WILLIAMSON. Thank you, Mr. Chairman. I was going to say

I believe the idea for your visit to the U.S. Patent and Trademark

Office came from a visit that we paid to you and suggested that

that would be a good idea. I’m glad that you followed up on that.

20

I appreciate the opportunity to testify today on behalf of IPO. As

some of you know, IPO is an association of U.S.-based owners of

patents, trademarks, copyrights, and trade secrets. In the world of

business-speak, we would probably be known as the ultimate endusers of the products coming from the Patent and Trademark Office.

Our members account for about 30 percent of the patent applications filed in the U.S. Patent and Trademark Office by U.S. nationals and pay about $200 million a year in fees to support PTO operations.

We acknowledge the important work being performed by the

many dedicated employees of the Patent and Trademark Office and

want to congratulate Judge Rogan on his appointment as Director.

We strongly support his efforts to make the PTO operations as effective as possible.

And not surprising, IPO enthusiastically supports the President’s

proposal for a 22 percent increase in PTO funding for 2003. We believe a spending increase of this magnitude is necessary in order

for the PTO to take steps to improve patent quality and to reduce

the backlog of unexamined applications.

However, our support for this major funding increase is premised

upon the PTO having in place a 5-year strategic plan that addresses four important issues: improving patent quality, reducing patent

pendency, implementing full electronic processing of patent and

trademark applications, and financing the PTO.

The 5-year plan must be cost-effective, and it must set priorities

that should incorporate measurable goals and objectives that can

be used by Congress, the Administration, and the user community

to evaluate progress.

Improving patent quality is vital to the 5-year plan for the PTO.

There is a huge cost to the economy as a consequence of granting

invalid patents, a cost which is paid initially by industry but which

is borne ultimately by consumers. It is perhaps time to rethink the

current practice of measuring national innovation and PTO productivity solely in terms of the number of absolute patents issued annually, and time to eliminate the incentive simply to grant more

patents without an opportunity for appropriate counterbalancing

quality.

Patent quality in the context of the PTO requires excellence in

analyzing the written description of claims; finding and analyzing

the relevant prior art; applying the substantive criteria for granting a patent; and, finally, creating a reviewable record for the patent examination.

IPO members have a number of suggestions for improving patent

quality, a few samples of which are given in my full statement.

The average length of time it takes the PTO to examine and

grant a patent application is also a very important issue to us.

Pendency now is about 26 months on average and is increasing,

compared with the longtime goal of 18 months, which IPO has always endorsed.

Long pendency times cause enormously uncertain legal rights

and can discourage investments in inventing, developing, and commercializing new technology. The 2003 budget proposes hiring a

large number of additional patent examiners in order to reduce

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pendency. We support hiring additional examiners. But given the

need for also addressing quality and electronic processing of application, it appears that resources will still be very scarce.

We applaud Director Rogan’s statement that he is preparing to

do a top-to-bottom review of all non-examination and administrative support operations and that he will expect to see a compelling

justification for every operation within the agency.

I should add that despite the need to hire more examiners, PTO

investment in information technology also must be given high priority. We must give the new examiners and their colleagues the

necessary tools to do their jobs effectively.

Finally, IPO strongly opposes the proposal in the President’s

2003 budget to divert $162 million in patent and trademark fees

to unrelated government programs. The President’s budget contemplates raising $207 million in additional income through fee

surcharges. Subject to a satisfactory 5-year spending plan and an

end to fee diversion, IPO would favorably consider appropriate legislation to restructure and potentially increase patent and trademark fees.

We cannot at this time, however, support an increase in fees

merely to facilitate more diversion of fees.

I want to commend Chairman Coble, Ranking Member Berman

and the other Members of the Subcommittee for their excellent

work in overseeing the PTO. Thank you.

[The prepared statement of Mr. Williamson follows:]

PREPARED STATEMENT OF JOHN K. WILLIAMSON

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to testify today on behalf of Intellectual Property

Owners Association (IPO). I am the current President of IPO. My company, PPG

Industries, Inc., with headquarters in Pittsburgh, is an IPO member, and I am the

Chief Intellectual Property Counsel for the company. The views I am expressing

today are those of IPO.

IPO is an association of U.S.-based owners of patents, trademarks, copyrights, and

trade secrets. Our members include about 100 American corporations that are

among the largest patent filers in the United States and worldwide from all major

industries. Our members file about 30 percent of the patent applications that are

filed in the U.S. Patent and Trademark Office (PTO) by U.S. nationals, and pay

about $200 million a year in fees to support PTO operations.

We view the PTO as one of the most important agencies in government, vested

with the responsibility for making correct and timely determinations on whether to

grant patent and trademark rights in order to encourage invention, innovation, and

investment. The PTO has a highly dedicated and competent staff of professional employees who have worked very hard to maintain and increase the level of excellence

in granting patents and registering trademarks during a time when the PTO’s workload has skyrocketed. We want to note that the PTO is in very capable hands under

the leadership of its new Director, the Honorable James E. Rogan, and we congratulate him on his appointment. We strongly support Mr. Rogan’s efforts to make the

PTO operations as effective as possible.

As patent owners, our members want to obtain high quality patents that can be

relied upon. We need to avoid surprises arising from prior art that was overlooked

by the PTO or other issues that may not have been properly considered by the PTO.

Equally important, when our members are commercializing new technology, they

want certainty as to the scope and validity of patent rights of other parties. And

we want a patent system that operates at a reasonable cost. Similar considerations

apply to trademark registrations obtained by IPO members and their competitors.

MORE RESOURCES FOR THE PATENT AND TRADEMARK OFFICE

A year ago when IPO testified at the annual PTO oversight hearing held by this

Subcommittee, we said the PTO was likely to be in crisis soon if it was not there

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already. We were concerned about patent quality, and about backlogs of unexamined

patent applications that were climbing out of control, with a projected patent application pendency of 38.6 months by 2006. The prospect of American companies waiting on average over three years to obtain a patent was unacceptable. Such delays

would cause huge uncertainty about legal rights in new technology. And last year

no relief was in sight.

This year, while the situation is still very difficult, and we are still deeply concerned about patent quality, the Administration’s 2003 budget for the PTO provides

some hope for improvement. The proposed record 21.2 percent increase in funding

for 2003, together with Director Rogan’s comprehensive review of all PTO operations, causes us to believe the PTO may have a chance of obtaining the resources

it needs to do its job.

IPO enthusiastically supports the 21.2 percent increase in funding, which would

raise spending to $1.365 billion in 2003, a level that for the first time in many years

actually would be somewhat higher than projected fee income, if fees remained at

their current levels. We believe a spending increase of this magnitude is necessary

in order for the PTO to take steps to improve patent quality and to work down the

backlogs of unexamined applications.

Our support for a such a major funding increase for the PTO, however, is premised on the PTO having finalized a 5-year strategic plan for (1) improving patent

quality, (2) reducing patent pendency, (3) implementing full e-processing of patent

and trademark applications, and (4) financing the PTO. Completion and implementation of such a 5-year plan, with greatest emphasis on patent quality, is an urgent

matter.

SUGGESTIONS FOR 5-YEAR PTO PLAN

The recommendation for a comprehensive 5-year strategic plan—stressing enhanced patent and trademark quality, reduced patent pendency, and an effective

electronic system for use by the PTO and the public for all aspects of patent and

trademark processes—was first made in Chairman Coble’s bill H.R.2047, which has

passed the House and is awaiting action in the Senate. That bill contains an excellent outline of the components for a 5-year PTO strategic plan, and we strongly support its enactment.

The plan must be cost effective and set priorities. It should seek accountability

and feature measurable benchmarks that can be used by Congress, the Administration, and the user community to evaluate progress.

Patent Quality

Measuring and improving patent quality is vital to any 5-year plan for the PTO.

Industry and inventors cannot be confident about the status of legal rights in technology without high patent quality. There is a huge cost to the economy from invalid

patents, which is paid initially by industry but is borne ultimately by consumers.

It is time to rethink the current practice of measuring national innovation and PTO

productivity simply in terms of the absolute number of patents issued annually.

Quality must become an integral part of these metrics.

Quality is an elusive concept with many facets. In essence, patent ‘‘quality’’ in the

context of PTO work is the degree of excellence achieved by the PTO in (1) analyzing the written description and claims, (2) finding and analyzing the prior art relevant to the invention that the applicant is seeking to patent, (3) applying the substantive criteria for granting a patent, and (4) creating a reviewable record of the

patent examination.

To illustrate what we are talking about, the following are examples from the

many suggestions that have been made by IPO members and others for possible actions the PTO might take to improve patent quality:

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

• Establish performance goals for examiners that will incentivize and reward

superior quality, in addition to rewarding superior production.

• Expand the current business method patents ‘‘Second Look Initiative’’ to all

classes of patentable subject matter.

• Reduce the number of patent examiners assigned to each Supervisory Patent

Examiner to allow for more ‘‘hands on’’ supervision.

• Adopt procedures to ensure that an accurate and detailed record is made of

all patent prosecution proceedings.

23

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

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

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

in quality. To measure quality, for example, the PTO could:

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

• Track changes in the confidence level of specific industries in the validity of

patent granted in their industries as indicated by polls conducted by the PTO

or an independent organization.

• Track patents for which a reexamination request was granted and claims

were cancelled or amended, and patents in court litigation in which claims

were invalidated.

• Track the number of and reasons for rejections of patent applications that are

reversed by the PTO Board and the Court of Appeals for the Federal Circuit.

Patent Pendency

Patent quality is the most important issue for IPO members. The average pendency time of patent applications in the PTO, however, also is a very important issue.

Pendency is now at about 26 months and climbing, compared with the long time

goal of 18 months, which IPO has always supported. Pendency was last close to 18

months in the mid-90’s. Long pendency times cause enormous uncertainty about

legal rights in new technology and discourage investments in the inventing, developing, manufacturing, and marketing of new products and services. Reasonable

pendency time often is as important to manufacturers who are utilizing technology

as it is to the patent applicant. The continued viability of the patent system requires

both high quality and reasonable pendency time.

Moreover, pendency times of the magnitude now being experienced are resulting

in automatic extensions of the life of many patents under the American Inventors

Protection Act. Data presented at a meeting of the Patent Public Advisory Committee in March showed that 26 percent of patent applications are not receiving a

first action within 14 months after filing, which is needed to avoid an automatic extension of the patent term. This is inconsistent with the Congressional decision that

patents should generally expire 20 years after filing.

The 5-year plan must include measures for reducing pendency time and keeping

it under control. The PTO’s recent Business Plan that give details of the proposed

2003 budget calls for hiring a large number of additional patent examiners in order

to reduce patent pendency. We support the hiring of the additional examiners, but

given the need for also addressing quality and e-processing of applications, it appears that resources will still be very scarce. We applaud Director Rogan’s statement that he is ‘‘preparing to begin a top-to-bottom review of all non-examination

and administrative support operations, and will expect to see a compelling justification for every non-examination operation within the agency.’’

We note our concern, however, about a statement in the 2003 PTO Business Plan,

prepared before Director Rogan took office, which indicates that the PTO expects to

ask Congress for authority to allow applicants to opt to defer the examination of

their applications. The business plan estimates that this would allow the PTO to

avoid ever examining 10 percent of applications and free up resources to reduce

pendency time of other applications. In principle, IPO is opposed to deferred examination, which creates uncertainty over patent rights in pending applications that

have not been examined. Instead of deferred examination, the PTO needs a 5-year

plan for substantially accelerating the examination of all patent applications. In response to the proposal in the PTO Business Plan, however, IPO will undertake a

review of its position on deferred examination.

Electronic Processing

Despite the need to hire more examiners, PTO investments in information technology cannot be neglected. It appears that the PTO has had to forego information

technology expenditures to focus on current workloads. The e-filing system for trademarks is proving very effective, but a great deal of work is needed before the PTO

reaches the objective of an electronic system for use by the PTO and the public for

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all aspects of the patent and trademark processes. H.R. 2047 properly requires this

objective to be a key part of the 5-year strategic plan.

DIVERSION OF $162 MILLION TO OTHER PROGRAMS

The President’s 2003 budget proposes to withhold or divert to unrelated government programs $162 million in patent and trademark fees. We believe the members

of this Subcommittee already agree with us, but we want to take the opportunity

to strongly reaffirm our opposition to withholding or diversion of patent and trademark fees. The PTO should have access to all of its fees collected in the current year

and previous years.

This is a subject that we have raised with this Subcommittee and the Appropriations Subcommittee every year since fee withholding began in 1992. By the end of

2003, according to current projections, nearly a billion dollars will have been withheld or diverted. IPO believes this practice of withholding or diverting fees is a primary cause of the situation in which the PTO now finds itself.

We continue to support H.R.740 (Coble) and H.Res. 110 (Berman), which propose

to limit or eliminate the authority of the Appropriations Committees to withhold

fees. In the long term, this type of legislation may be the only way to assure adequate PTO funding. User fees in the PTO account in the Treasury are funds that

have been paid by American corporations and inventors for specific services that

they expect to receive.

We are opposed to an increase in patent and trademark fees only to enable more

fee withholding. Indeed, if the previously unavailable fees are merely temporarily

withheld, as accounting records indicate, then the previously unavailable funds

should be made available to the PTO as a part of the 5-year plan.

PROPOSED PATENT FEE SURCHARGE

The President’s 2003 budget proposes a 19.3 percent patent fee surcharge (i.e., an

across-the-board fee increase) and a 10.3 percent trademark fee surcharge, to raise

$207 million. As we view it, $162 million of that surcharge is being diverted to other

government programs. The budget also indicates that there is a forthcoming ‘‘feerestructuring’’ proposal to support the PTO’s 5-year plan and goals and objectives,

to be effective in 2004. The fee restructuring, as we understand it, will include a

fee increase.

Subject to a satisfactory 5-year spending plan and an end to fee diversion, IPO

would favorably consider appropriate legislation to restructure, and potentially, increase patent and trademark fees. The PTO should include the details of such fee

legislation in its 5-year plan. Accordingly, at least for the present, IPO opposes the

proposed 19.3 percent patent fee surcharge and 10.3 percent trademark fee surcharge for 2003.

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

accompanied by continued diversion of fees to unrelated programs.

PATENT REEXAMINATION LEGISLATION

We would like to reiterate our support for H.R.1866 and H.R.1886, bills developed

by this Subcommittee that have passed the House and are awaiting action in the

Senate. These two bills will improve the statute governing patent reexamination

proceedings in the PTO, and passing them is one of the actions that can be taken

to improve the quality of patents. Patent reexamination, based on earlier patents

and publications that have a bearing on the validity of a patent, is a relatively quick

and inexpensive proceeding for eliminating uncertainty about the validity of a patent. We hope these bills can be enacted in this Congress.

I want to commend Chairman Coble, Ranking Member Berman and the other

members of the Subcommittee for their excellent work in overseeing operations of

the PTO. I will be pleased to answer any questions.

Mr. COBLE. Thank you, Mr. Williamson.

And we have been joined by the other gentleman from California,

Mr. Issa. Good to have you with us.

Ms. Kelley.

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STATEMENT OF COLLEEN KELLEY, NATIONAL PRESIDENT,

NATIONAL TREASURY EMPLOYEES UNION

Ms. KELLEY. Thank you, Chairman Coble, Representative Berman and Members of the Subcommittee.

As the national president of the National Treasury Employees

Union, I very much appreciate the opportunity to be here today.

NTEU represents over 2,300 employees in two bargaining units

at the U.S. Patent and Trademark Office. The employees of Chapter 243 are involved in all phases of the patent and trademark application process, from handling the mail, to other tasks directly related to the adjudication of the patent and trademark applications.

The Trademark Society, Chapter 245, represents the attorneys

who process trademark applications. With me today are Ollie Pearson and Amy Perkins, vice presidents Chapter 243, and Howard

Friedman, the president of Chapter 245.

The PTO’s employees are vital to the successful operation of the

office, and they can and should play an important role in increasing efficiency and productivity.

Agency management and the American public are very fortunate

to have this dedicated, progressive, and innovative workforce. They

are extremely computer literate, professional, and open to new

ideas.

Two years ago I testified before this Subcommittee, and I said

that PTO was an agency in crisis. I stated that the Office was

grossly understaffed for its growing workload and that pendency

for applications was at an unacceptable level, and that turnover of

staff was entirely too high. Some things have changed, at least on

the trademark side, and let speak to that first.

Thanks to cooperative labor-management relationships, the leadership of Director Rogan and past directors, and the ongoing interest and support of this Subcommittee, the situation is much improved at the trademark office.

Staff turnover is down and customer satisfaction is heading in

the right direction. Greater efficiency is being achieved thanks to

labor-management initiatives such as electronic filing, flexiplace,

and flexible work schedules.

I believe the trademark office has turned the corner. But it will

take ongoing attention to stay on course.

The resources proposed in the President’s budget for trademark

will provide an opportunity to reduce trademark pendency and to

address those challenges.

One example of a near-future challenge is the proposed Madrid

Protocol, which, if adopted, will require significant changes at the

trademark office. Resources need to be allocated so that employees

can be trained and prepared for those changes.

Additionally, the trademark office needs to direct resources to

improving the quality of trademark registrations. As the national

economy improves, even greater numbers of trademark applications

are likely. And now is the time to put in place systems to improve

the quality and the efficiency before the trademark office is overwhelmed with new work.

On the patent side, as we have already heard, staffing and inventory problems exist. Pendency will continue to climb even next year

with increased resources in the President’s proposed budget.

26

American inventors deserve better. The Federal Government has

an obligation to see that the inventors receive patents in a timely

manner. And for reasons of privacy and accountability, the work at

the PTO should not be contracted out to private, commercial entities. Funding is needed to provide services that inventors expect

and deserve.

And, of course, last of all, I would like to address the issue of the

proposed surcharge on the patent and trademark application fees.

NTEU certainly supports setting the fee for patent and trademark

applications at a level which produces the needed revenues to run

the agency properly. But as has already been noted, under the

President’s proposal, $163 million of the revenue will be diverted

to the general revenue.

NTEU has objected to this diversion in the past, and we object

to it today. We believe that PTO should keep all of the revenue

from the fees it collects. The Administration has said that these

monies are needed for homeland security. NTEU fully supports

every authentic initiative for homeland security at our borders, our

airports, our seaports and across the country. But this surcharge

will be deposited into general revenue and is not dedicated to any

particular program from these diverted fees.

With these diverted fees, if it were retained by PTO, PTO could

give the customer speedier and higher quality service, more staff

could be hired, better training could be implemented, and improved

retention incentives could be developed.

Mr. Coble, you and Mr. Berman have been very outspoken on

these issues, and I know we can count on your continued leadership, help, and support.

Again, I appreciate the opportunity to be here and look forward

to any questions you might have.

[The prepared statement of Ms. Kelley follows:]

PREPARED STATEMENT OF COLLEEN M. KELLEY

Good morning Chairman Coble, Representative Berman and members of the

House Judiciary Subcommittee on Courts and Intellectual Property. My name is

Colleen Kelley. I am the National President of the National Treasury Employees

Union (NTEU). I very much appreciate the Committee’s invitation to be here today

to present our Union’s views on the operation and proposed budget of the U.S. Patent and Trademark Office (PTO).

NTEU represents more than 2,300 employees in two bargaining units at the U.S.

Patent and Trademark Office. The employees at NTEU Chapter 243 are involved

in all phases of the patent and trademark application process—from handling mail,

to other tasks directly related to the adjudication of the patent and trademark applications. The Trademark Society, NTEU Chapter 245, represents the attorneys who

process trademark applications. In the audience today, are Amy Perkins, Vice-President and Legislative Coordinator of NTEU Chapter 243, and Howard Friedman,

President of NTEU Chapter 245, our two units at PTO.

As the Subcommittee is well aware, the Patent and Trademark Office plays a critical role in the development of new industries in our economy. PTO’s employees perform the quasi-judicial function of adjudicating patent and trademark applications—

an inherently governmental function that appropriately belongs in the public domain and is of Constitutional authority. The American public and business community place great importance on the registration of patents and trademarks in the

United States as a key to the protection of valuable intellectual property rights.

The PTO’s employees are vital to the successful operation of the Office and can

and should play an important role in increasing efficiency and productivity. Agency

management and the American public are very fortunate to have the young, progressive and innovative workforce represented in NTEU’s bargaining units. They

are extremely computer literate, professionally savvy and open to new ideas.

27

Mr. Chairman, two years ago I testified before this subcommittee. At that time

I told you that PTO was an agency in crisis. I stated that the Office was grossly

understaffed for the growing workload it bears, that pendency for applications was

at unacceptable levels and that turnover was at an intolerable magnitude. You may

wonder what I think today.

Let me first speak to the trademark side. Thanks to cooperative labor-management relations, the leadership of the current and past directors Todd Dickinson and

James Rogan, and the poking and prodding of you and Mr. Berman, the situation

is much improved at the Trademark Office. Staff turnover is down and customer

satisfaction is heading in the right direction. Further, greater efficiency is being

achieved thanks to labor-management initiatives such as electronic filing, flexiplace,

and flexible work schedules.

I believe the Trademark Office has turned the corner. But having turned the corner, let us not reverse course. Pendency in trademarks is starting to creep up. With

the resources proposed in the President’s budget, we have a chance to reduce trademark pendency. This is the right step, but many challenges remain. One example

of a near future challenge is the proposed Madrid Protocol, which, if adopted, will

require significant changes at the Trademark Office. Resources need to be allocated

so that employees can be trained and prepared for these changes. Another challenge

is the need to retain experienced and skilled staff and for the agency to invest for

the long term in its human capital. Additionally, with the advances the Trademark

Office has had on some fronts, it needs to direct resources to improving the quality

of trademark registrations. Mr. Chairman, let us move to address these challenges

now. As the national economy improves, even greater numbers of trademark applications are likely. Let us put into place systems to improve quality and efficiency

before the Trademark Office is overwhelmed with new work.

While on the trademark side, things are getting better presuming PTO stays the

course,

I cannot say the same on the patent side. Pendency will continue to climb next

year even with the increased resources in the President’s proposed budget. American inventors deserve better. Patents are the institutional protection of intellectual

property rights. The ability to lay claim to the fruit of one’s intellect is a basic right

and one of the examples of positive rights mentioned in our Constitution. The federal government has a fundamental and Constitutional obligation to see that inventors receive patents in a timely manner. I would emphasize that the Constitution

gives this obligation to the government. For reasons of privacy and accountability

work at the PTO should not be contracted out to private, commercial entities.

Let me also point out an issue that may be otherwise overlooked. The PTO will

be moving to new facilities in Alexandria in 2003. NTEU is in a partnership relationship with PTO management regarding space allocation and other issues concerning new space PTO will occupy after the move. We are confident the new facilities will provide an environment in which our members can work efficiently, productively and safely. We have already come to agreement with management on important issues such as space allocation and look forward to the many benefits this new

site will offer. As much as I think the issues around the move have been a model

of labor-management cooperation in the federal sector, even in the best of circumstances, office moves are disruptive to employees. Commuting patterns change

and car pools dissolve. We must make sure that this does not result in the loss of

productive and experienced PTO employees.

Finally, I would like to address the issue of the proposed surcharge on patent and

trademark application fees. NTEU certainly supports setting the fee for patent and

trademark applications at a level which produces the needed revenues to run the

agency properly. I must note however, that under the President’s proposal, $163

million of the revenue from these fees will be diverted into general revenue. NTEU

has objected to this diversion in the past and we object to it today. We believe that

PTO should keep all of the revenue from the fees it collects. The Administration has

said these monies are needed for homeland security. NTEU fully supports every authentic initiative for homeland security at the border, in our airports, through the

movement of currency or any other means. But to be honest, this surcharge is simply deposited into general revenue and is not dedicated to any particular program.

It is unfair to the inventors that they pay a fee for a service they are not getting

the full benefit from. With the resources from these diverted fees, our members

could give the customer speedier and higher quality service, more staff could be

hired, better training could be implemented and improved retention incentives could

be developed. Mr. Coble, you and Mr. Berman have been very outspoken on this.

We need your continued leadership.

Mr. Chairman, I appreciate the opportunity to testify today. I am happy to answer

any questions you or the members of the committee may have. Thank you.

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Mr. COBLE. Thank you, Ms. Kelley.

We impose this red-light rule against us as well. You all have

complied very favorably.

Let me start with Mr. Williamson and Mr. Kirk. Gentlemen and

panelists, you all and the Subcommittee have one thing in common,

if not more: We want the PTO to succeed.

What is the reaction of the user—I think you’ve touched on this,

but I want to reiterate it for emphasis.

What is the reaction of the user community to the surcharge and

fee restructuring proposals in FY ’03 budget without having a compelling 5-year plan in hand, A? And if your members are not willing to make a leap of faith in the absence of such plan, are there

circumstances in which they could support the proposed fee increases?

Mr. Williamson, why don’t you start off? And then we’ll hear

from Mr. Kirk.

Mr. WILLIAMSON. Well, as stated in my testimony, and maybe

more lucidly in the written testimony, we are opposed to the surcharge as it’s currently proposed. It’s probably best stated by one

of our members who, in discussing the proposed increases with his

chief scientist, received the response that we must pay what we are

charged to protect our technology in the U.S. through patents; however, every dollar I give you is a dollar that I cannot spend on research and development. That from the chief scientist of a major

construction equipment manufacturer, who is competitive internationally and accounts for a favorable balance of payments to the

U.S.

As to the second part of your question, we understand that some

of the things that we’re asking for has a price tag. And our members are willing to pay that price tag, provided that we can be

guaranteed that we are going to get, in return, what is promised

to us.

Mr. COBLE. Mr. Kirk?

Mr. KIRK. Mr. Chairman, AIPLA cannot support the surcharge

under the current conditions. We have yet to see a 5-year plan that

gives us the encouragement we need to agree to an increase in fees.

Of course, as I indicated, any increase in fees should not involve

a diversion of fees to some other agency. But at this point, that’s

not even an issue, because the 5-year plan has not shown us any

compelling need.

Like Mr. Williamson, however, we would be prepared to support

an increase in fees for a 5-year plan that provided the quality,

timeliness, and electronic processing goals that we have.

In this regard, AIPLA congratulate the Undersecretary. I am

aware that he has started a team to—not only took at the top-tobottom review of the PTO to eliminate any nonproduction-type activities that may not be affordable at this particular time, but also

to look at developing a 5-year plan which, it is my understanding,

at least, and I stand to be corrected, is targeted for roughly the

June time frame to be available.

And we would think that, if it were possible to perhaps have a

review of that plan in the June time frame, then it might be appropriate to come back and revisit a statutory fee increase to support

29

those parts of the plan that we felt and believed were going to accomplish our goals.

Thank you.

Mr. COBLE. Thank you, sir.

Would each of you, starting with you Judge Rogan, summarize

the ongoing success of the ongoing effort to make the PTO

paperless agency? Now, I think I’m correct in assuming that the

trademark sphere is doing a better job with regard to electronic filing, assuming I am correct there.

And along these lines, why are the patent filers are experiencing

problems with the electronic filing system at the agency?

Judge, if you would respond to that?

Mr. ROGAN. Mr. Chairman, during my time at the agency, what

I have been hearing from our management and also from the user

community essentially is this: It’s been very difficult to plan ahead

on the patent side for moving to a totally paperless office because

of the uncertain funding stream and the type of investment that

has to be made up front.

The decision had been made to essentially deploy that on the

trademark side first. We’re moving in that direction.

And in fact, under the President’s budget submission, it would

enable us to have a fully automated trademark operation by 2004.

The decision was made to try to work the kinks out on the trademark side first before fully deploying on patent side. Under the circumstances, I think that was a wise decision.

But the Administration is fully committed to moving to an electronic operation on both sides at the earliest possible date.

Mr. COBLE. Thank you, sir.

My time has expired, but we will have a second round.

Mike, I will get to you on the second round.

Mr. Berman?

Mr. BERMAN. Thank you, Mr. Chairman.

A couple of issues that have been raised from the outside, and

Judge-Congressman-Commissioner-Undersecretary Rogan —— [Laughter.]——I was wondering if you could react to them.

One is on the issue of the business plan and—to the calendar

year 2002. You filled 750 new positions at full-year cost $770,600;

500 of these positions were for new examiners, who make about

$50,000 a year. For the other 250 staffers, then people say, ‘‘Well,

that leaves an average of $210,500. Yes, we want to upgrade the

quality and hire the best people, but that seems like a high per

capita rate.’’ Can you give us an explanation of how this adds up and where

the money is going?

Mr. ROGAN. The short answer is no. And it’s not because I don’t

have it available; it’s because if I read it into the record, I’m not

sure it would explain it to you.

I understand where the question is coming from, Congressman

Berman. And we’ve actually looked into getting the appropriate answer for you.

It has to do with OMB’s forward hiring mathematical accounting

calculations. I can assure you that there are a number of examiners at the PTO who probably deserve to earn a quarter of a million dollars for the work we do, but we operate under title 5.

30

I will be happy to get for you, from our CFO, the actual accounting explanation of how all of those figures work.

Mr. BERMAN. Great. I can understand any explanation that puts

the blame on OMB. [Laughter.]

We’ve all talked about going to an electronic filing system. We

get complaints about PTO plans to get rid of the paper files of patents. People complain that electronic files are incomplete, particularly with regard to foreign patents, or they’re unusable. Some

claim that PTO is violating statutory mandates contained in the

AIPA.

Can you address these concerns?

Mr. ROGAN. We’re sensitive to the requirements under the American Inventors Protection Act. Last year, I understand, they had

two public comment periods. We’re going to have an open forum

some time in May to allow further public commentary. We have

published a Federal Register notice that we would like to remove

the paper in the public search room and rely on the other formats

that are available, such as CD-ROM, electronic searching, DVD,

and microfilm.

The truth of the matter, Congressman Berman, is that the paper

takes up an inordinate amount of space. It eats up an awful lot of

resources. If somebody removes paper to photocopy it, the file is

therefore incomplete anyway.

And to those folks who just don’t want to move to an electronic

system, they won’t be able to do a search there that’s complete anyway, because ever since March of 2001, when we went to the 18-

month publication, all of those applications are only stored in the

public search room in electronic format. So for them to do an electronic search, they would have to—for them to do a full search,

they would have to do it electronically anyway.

Mr. BERMAN. Thank you. My last question for you on this time,

because I think it will be running out fairly soon, is, do you think

it’s consistent with the spirit and philosophy behind the Contract

for America to take the patent fees and divert them to general fund

purposes, as opposed to spreading those costs over the taxpayers

generally.

Mr. ROGAN. Congressman Berman, thank you for that question.

[Laughter.]

The Administration believes that, at this time, a 1-year surcharge would be appropriate, particularly because of homeland security and homeland defense issues.

The President has proposed a one-time surcharge that would give

the PTO what would be the equivalent of all of its statutory filing

fees, the first time that I believe that’s occurred since it went on

to become a fee-based institution. And of course, the balance the

President would like to see appropriated to homeland security and

homeland defense.

Mr. BERMAN. Well, I have a little more time. On the issue—and

I do appreciate and I think I acknowledged in my opening statement the importance of the President’s budget, but that it still

leaves, under a different name, the fundamental diversion problem.

I’d like to ask Ms. Kelley, though, one of the—there’s a bit of an

inconsistency in the budget submission. One of the arguments for

the surcharge is to cover the retirement, full retirement costs for

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the U.S. Patent and Trademark Office employees. Then, of course,

we note that a substantial amount of that money from the surcharge will go to homeland security.

What does—well, you sort of told us what you think of the diversion. But at this point, what is your opinion about the proposal in

the context of retirement security for Patent and Trademark Office

employees?

Ms. KELLEY. We are opposed to the requirement of funding retirement in the agency budgets. And we have been briefed by OMB,

and we have expressed our concerns at every opportunity, because

all this proposal does is really call for an accounting movement of

money, if you will. And it only provides that the money will be

funding in the agency’s budget for this first year. After that, it’s not

clear that the agencies will be provided with funding to in fact continue to absorb those retirement costs.

So we believe that should not be occurring, and that the system

that’s currently in place to fund those through OMB, through other

OMB vehicles, is what should remain in place.

Mr. COBLE. Thank you, Mr. Berman.

The gentleman from Tennessee.

Mr. JENKINS. Thank you, Mr. Chairman.

And, Mr. Rogan, welcome back to the Committee. You’ve had

some nice compliments here on your work, and I’m sure those are

going to continue.

You mentioned that it may be time to make some changes in the

basic ways that you do business in your office. We’ve heard that

thought expressed before in this Committee by folks who have been

here from the office and who’ve testified. Are you far enough along

in your analysis of what needs to be done that you could outline

for us any of those very basic changes that you feel, at this point,

we should look at and possibly make in the future?

Mr. ROGAN. Congressman Jenkins, it would be premature for me

to do that at this point. I recently was able to coax back to the PTO

a gentleman by the name of Brad Huther, who spent about 32

years at the PTO and is known by all here at the table with me.

He spent, I think, the last 4 or 5 years at WIPO.

And he has just undertaken the lead role, in the last week or so,

of putting together a working committee where we have been able

to start really diving into that. And I’m afraid it would be premature and probably unfair to the individuals who are working on

that if I attempted to go any further than that right now.

May I just say, while on——

Mr. JENKINS. Judge, are you relying on the fifth amendment,

too? [Laughter.]

Mr. ROGAN. Well, as a former Member of this Committee, I know

how that’s been used.

I don’t want to give anybody the impression that I’m somehow

distancing myself from the business plan that has been submitted.

Quite frankly, Congressman Jenkins, under the current structure

of the PTO, that may be about as good as it gets. If it ends up that

the government and the user community are unwilling to take a

real hard look at the way we do business there, then we have to

deal with some very basic facts.

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And the facts are that we will get this year about 350,000 new

applications. We will have 3,200 examiners to review them, and we

have about 350,000 files sitting in the backlog.

Every examiner gets about 20 hours per application. We will

issue about 176,000 patents, and it will just get worse.

Unless we are going to take a look at the structure under which

Thomas Jefferson used to examine these patents over 200 years

ago, and take a real hard look as to whether we can do better in

the 21st century, that business plan may well be about as good as

it gets.

Mr. JENKINS. How long is it going to take to make a determination?

Mr. ROGAN. I’m hoping that we’ll have a preliminary outline to

share both with the Administration as well as with Congress in the

next month or so.

Mr. JENKINS. Okay.

Mr. ROGAN. But I’m a very cautious fellow, Congressman Jenkins. Before I upend 212 years of practice, I at least like to take

a month to give it some thought. [Laughter.]

Mr. JENKINS. Thank you.

Mr. COBLE. I’m sorry. I was talking to Mr. Berman. You’ve finished, Mr. Jenkins?

The gentlelady from California?

Ms. LOFGREN. Thank you, Mr. Chairman, and also Mr. Berman.

I appreciate that we are having this hearing today, and that the

witnesses are all here—all of your testimony was useful and enlightening.

I have, and I know Mr. Rogan was frustrated when he was sitting on this side of the room. And now he’s on the other side, probably also still frustrated that we can’t seem to get ahead of the

problems that the agency faces in terms of backlog. And that’s despite everybody really being in agreement that we need to put the

resources in, and people working hard. We’re not getting to where

we need to be.

And as I look at the proposal and the resources available, as

you’ve just mentioned, Jim, it’s going to get worse. It’s not really

going to get better, best-case.

So I very much support your looking at reinventing the way we

do business. Obviously, I’ve got to reserve judgment, depending on

what it is, but clearly it’s not just working faster. It’s working

smarter, it’s working differently, that we need to look at.

Having said that, the idea that we would up the fees to divert

them is very offensive to me. And I really think—you know, as I

was listening, really what that is, is it’s a tax. I mean, if it were

going into the operation, it would be a fee. But if it’s going to be

diverted, it’s a tax. And of all the things that we would want to single out in this country, to tax inventions is craziness. I think it’s

just—I mean, let’s tax bullets instead.

I mean, taxing the engine for the economy is a crazy thing to do.

And so I was captivated, Mr. Kirk, by your suggestion that we

revisit the idea of a separate corporation and do only that, strip out

the things that drove some of our colleagues crazy on the floor and

maybe seriously pursue that.

33

And I’m wondering, if I could, Ms. Kelley, I don’t know if you’re

authorized to speak for your association, but what would the employees say if we were to seriously, in a collaborative way, put renewed emphasis on a government corporation that would, by its

structure, prevent this kind of diversion?

Ms. KELLEY. Well, I think, in general, the—I would need more

information about what that would like, obviously.

Ms. LOFGREN. Of course.

Ms. KELLEY. And I know there have been past looks, and I’m

very interested in what Mr. Kirk suggested.

But in general, on the question of employees’ interest in being involved in change, and a pretty drastic change, I have found Federal

employees to be very, very interested in being a part of the change

process, rather than having change happen to them and being told

what will happen. They are very interested in playing a role in defining how the agency, how the office, can do its work better.

Most recently, NTEU has been involved with the IRS in the largest reorganization of a Federal agency that’s ever been undertaken.

And frontline employees, NTEU and the IRS, work together and

have been for a number of years to not only look at the structure

and reorganize in accordance with a law that was mandated by

Congress but also to look at processes and literally reengineer processes of how the work of the IRS is done. And that work is ongoing.

And I believe that the employees represented by NTEU at PTO

would welcome the opportunity to be fully engaged in that kind of

a venture and to build something better for the inventors as well

as for themselves as employees in the office.

Ms. LOFGREN. Mr. Kirk, we made an effort with H.R. 400 a while

ago, and fell short despite our very best efforts on the Committee.

And I think, unfortunately, one of the key elements was the structure that really I think were not the gist of the objections to our

colleagues.

What is your vision of what would be in the stripped down structure version that you alluded to in your testimony? What would the

elements be?

Mr. KIRK. I would see, first of all, the structure fundamentally

being changed. The position of Undersecretary of Commerce for Intellectual Property would be separated from the Director of the

United States Patent and Trademark Office. They are both fulltime jobs. I think it’s inappropriate and unwise, really, to ask a

single individual to try to hold down both those jobs and do them

both well. I think it’s an impossibility.

We came very close to having a structure like that during the restructuring discussions, but, unfortunately, we were not able to

make it.

I think the Undersecretary position has to be a political appointment to serve the President, to advise the President on intellectual

property issues domestically and internationally. It’s a very important full-time job.

The management of the Patent and Trademark Office is also a

very important full-time job. You’re talking about a medium-sized

corporation with a $1.3 billion budget with 7,000 employees. That

is a serious management task that takes full time.

I don’t believe the two jobs can adequately be done together.

34

Secondly, I think title 5 needs to be relaxed. The employees in

the Patent and Trademark Office need to be paid their value. Right

now, we’re losing patent examiners and trademark examiners to

private practice because we cannot keep up with the private sector

salary demands. They get paid less, considerably less, than their

counterparts in the European Patent Office, and their counterparts’ pay is tax-free. It is no wonder that we lose people and there’s constant turnover.

It’s inappropriate, I think, to have the positive employment situation that we have right now that results from the fact that we’ve

just been through a mild recession. We should not have to rely on

that to make this occur.

The most important thing of all, in my opinion, however, is to

deal effectively with the funding issue. As long as the funds have

to go through the Department of Commerce and the Office of Management and Budget and the Appropriation Committees, I see no

end of diversion and no real opportunity for the office to improve

itself.

Mr. COBLE. The gentlelady’s time has expired.

The gentleman from California.

Mr. ISSA. Thank you, Mr. Chairman.

Returning to what the gentlelady from California had said earlier, since the obligation of the government to provide for patents,

trademarks, and copyrights to their inventors for an exclusive period of time in order to promote their continuation is an obligation

of government, Mr. Rogan—Jim, you’ve got so many titles, I’m not

sure anybody knows which one to use anymore. But ‘‘Mr. Secretary’’ is the one I’ll use for now.

Would you say, not as a member of the Administration, but sort

of if you were back on this side, would it be fair to say that—— Mr. ROGAN. I’m starting to wiggle uncomfortably in my chair,

Congressman. [Laughter.]

Mr. ISSA. Well, then I’m doing what I need to do.

Would you say that it is fair to say that if something is a constitutional obligation, and if you divert a fee, then you are taxing

a constitutional obligation, and, thus, perhaps violating the original

intent within the Constitution that this be a service provided for

which there was no statement that it could be taxed in the—while

you were providing it?

Mr. ROGAN. Congressman Issa, thank you for the question. I’ve

learned long ago never to sit at a Committee hearing table and

start to preach to Members of the House Judiciary Committee my

opinion of the Constitution. It cost me my job the last time I did

that. [Laughter.]

Mr. ISSA. Thank you, Mr. Secretary. I’ll take that as a yes, you

agree—— [Laughter.]——it would be inappropriate to tax a constitutional obligation of the government.

And so I would second the gentlelady’s statement that, although

I’m not sure we can talk about taxing bullets in this particular

Committee, but that in fact this diversion of funds, it’s just flat

wrong and should be reconsidered by the Administration.

But switching gears for a moment, as you probably know, I have

about 36 of my own patents. My company has quite a few beyond

that. And I’m concerned that there doesn’t appear to be, as part of

35

the ongoing reform, an effort to reduce the number of patents

granted; that, in fact, we have a pervasive problem within your

agency, which is that there’s a belief that the applicant is entitled

to a patent. And as a result of that, the patents you grant have a

tendency not to be upheld in court.

Now, we could go through categories of companies, and we could

look at pharmaceutical companies of very large size versus a small

inventor, but are you doing something under your leadership to do

a reality check on the patents you grant and particularly the patents that you re-exam and affirm that are later not upheld by the

CAFC?

Mr. ROGAN. Congressman Issa, that certainly is nothing unique

to my limited leadership, my temporary—or, my 4-month leadership, rather, I should day, at the office. That has been the standard

for all of my predecessors, Democrat and Republican.

I’ll give you a perfect example of that. There was a lot of criticism after the Supreme Court essentially opened the floodgates for

business method patents. At that time, some 60 percent of the patents were being granted. My predecessor, Todd Dickinson, stepped

in and instituted a number of reforms, such as further education

of the examiners and bringing that education from private industry

in partnership with them; instituting a second look on all business

method patents.

In fact, right now, because of the—and significantly increasing

the number of examiners from I think 16 or 17 back a couple years

ago to about 120 now.

We reject now almost, I think, something like 60 percent of those

business method applications.

The fundamental principle behind the United States Patent and

Trademark Office is, in relation to patents, is to make sure that we

do not give that right of exclusivity that the Constitution contemplated unless someone’s invention is new, useful, non-obvious,

non-infringing, and meets all of the statutory guidelines. And if we

fail in that regard, the statutes allow for a reexamination.

That opens another area that I think is ripe for discussion, as to

whether our current reexamination procedures are adequate or

whether those should be reformed.

This Committee has been in the forefront, with Chairman Coble,

Mr. Berman, Congresswoman Lofgren, in that area. And those

have been bills that the PTO has supported and have been working

very closely with, irrespective of who was the head of the PTO or

who was the President at the time.

Mr. ISSA. Just one follow-up question. If you had some of those

funds that are not being diverted, would you say it was fair to put

some of those funds into improving the quality circle, if you will,

of: You grant a patent; it goes out there; it gets challenged; it goes

to court; it fails to prevail, if you will; and bringing a loop back in

to find out where the mistake, if there was one, was made, whether

it was too little time being spent on it or some other problem that

led to a patent that ultimately, under the light of day, did not survive.

Mr. ROGAN. Congressman Issa, I’ll take it a step further than

that. When all is said and done, after all of the reviews and all of

the restructuring proposals have been unveiled and rolled out, if at

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the end of the day it really comes down to deciding whether we’re

going to put out a patent quicker for the sake of pendency of we’re

going to take longer to ensure quality, while I am Director, we will

always err on the side of quality.

Mr. ISSA. Thank you.

Thank you, Mr. Chairman.

Mr. COBLE. The gentleman’s time has expired.

By the way, folks, as I said before, I think this warrants a second

round, so we will have a second round of questions.

The gentleman from Florida.

Mr. WEXLER. Thank you, Mr. Chairman.

I think Ms. Kelley’s comments were very apropos in terms of reviewing what you said about 2 years ago, in terms of your characterization of the condition at the Patent and Trademark Office. And

I think it bears repeating in some sense, in that we have obviously

made great strides, as you have said. And in that regard, I compliment everyone that has been a part of the process and also

share the compliment with Secretary Rogan.

It seems obvious to me—one of the things that I enjoy very much

about intellectual property is that the issues are rarely partisan, if

ever, so it gives us an opportunity to objectively evaluate people’s

performances without respect to partisanship.

And I think you’ve got an incredible opportunity as an individual

to transform an agency whose economic ramifications are so extraordinary. And I think you’ve brought a degree of energy, a refreshing degree of energy, and a degree of sensitivity to this process that will greatly enhance your ability to do innovative things.

And I think the idea or reference that Congresswoman Lofgren

made, for instance, is something that I think you should pursue in

a very bold fashion.

And in the context of the kinds of changes I think you’ve talked

about, I would just highly encourage you to be as aggressive as possible, because I’ve think you’ve got now a scenario where all the

parties that are related to it will support you in your efforts after

you’ve had time to consider them.

And I think it bears noting that the increase to 21 percent is significant. And I congratulate everyone for obtaining it. I hope it’s

the first of many.

And I think that you’ll be very sensitive and very critical in

terms of how that money is spent. And I think you’ve heard some

very good comments today from the Committee Members as to the

division of the money and so forth.

I just, without going on and on, I just want to make the point

that, at least from this one Democrat’s point of view, you’ve got an

opportunity that’s incredible, and I support you in your efforts.

Mr. ROGAN. Thank you.

Mr. WEXLER. And I think the President made a very good choice

in terms of you, in terms of bringing about a lot of change.

I guess I would make one other observation, and I know you

know this or appreciate this. Intellectual property issues are not

just extremely important in California and North Carolina. They’re

very important in South Florida; they’re very important in many

parts of the country where the institutions are not as strong.

37

And I would highly encourage you, in my limited experience in

talking with people in my community that are involved in the process, one of the things they feel is that they’re very isolated from

the opportunity of participating. And to the degree you have the

opportunity, if you as an individual, as a leader in this process, can

go out to the communities, and it’s a small universe of people, and

just present yourself and talk about your ideas, I think you

would—and I think you’ve done this already—but I think you

would find an incredible reception, and it would do an enormous

amount of positive good for particularly the smaller people in the

process, if they had an opportunity to hear from you at their associations as to the changes you’re hoping to make. And I think that

would generate a lot of—a groundswell of support that would help

the political process as well. So I would encourage you to do that.

The one question I would ask of you is, as it relates to the piracy

issues, international piracy issues. At the end of the game here 2

years from now or 3 years from now or whenever that is, what

would you hope that we, the Committee and you together, could accomplish in terms of protecting American rights oversees? And how

would you suggest we go about doing it?

Mr. ROGAN. I’m first compelled, Congressman Wexler, just to

thank you for your very gracious comments. That means a lot to

me, and I appreciate it.

If you saw my travel schedule, and the number of IP groups before whom I speak, you would agree with my wife. She thinks I’m

going through congressional withdrawal. [Laughter.]

Piracy is a fundamental responsibility, not just of the U.S. PTO

but clearly for the Administration as a whole and the United

States Congress. One of the things I keep reminding people is that

it is my job to help protect American intellectual property. And nowhere is American intellectual property more threatened than the

areas of piracy and infringement.

And you certainly don’t need a lecture from me as to how that

is playing out on the worldwide stage.

I don’t want to go beyond the red light, Mr. Chairman. I will——

Mr. COBLE. You may finish your response.

Mr. ROGAN. From an agency perspective, we’re working with

multiple agencies across the government, from Customs to the

United States Department of Justice, with the USTR. We’re working at numerous fora, from WTO, WIPO, and trying to work as

closely as possible with all of our counterparts, to make sure that

we get as tight a rein on that as possible.

Mr. WEXLER. Thanks.

Mr. COBLE. Mr. Wexler, you just mentioned piracy.

Folks, piracy and these diversion tactics are going to make an old

man out of me. Strike that. I am an old man. [Laughter.]

But piracy and the diversion tactics are accelerating me chronologically. [Laughter.]

And I hope we can resolve both of them. It’s going to be a full

day’s work.

The distinguished gentleman from Utah.

Mr. CANNON. Thank you, Mr. Chairman.

I’d like to associate myself with some of those remarks by my associate from Florida, Congressman Wexler. This is a matter of

38

great opportunity now in the transition that we have going on. I

think it bodes well.

And I’m thrilled to have you over there, Jim. It’s nice to have you

back. I think you’re a great choice for the job, and you’re doing a

great job.

John left; I was just going to point out it was bad enough for you

to go, but to take the brains with you and take John Dudas was

maybe a little over the edge. But you can pass that on to him when

he gets back in.

You have a huge job. You and the PTO are largely responsible

for the orderly processing and legitimizing of innovation in this

country. And you have this job in an age where the pace of innovation is increasing exponentially.

Moreover, when you don’t have the resources to do your job to

process innovation and invention quickly, it creates a bottleneck

that slows technological process on a massive scale in America and

creates a backlog.

I know that you have a budget request this year that you back,

and you must deal with the Appropriations Committee, too. But hypothetically, if you’re allowed to retain an even greater percentage

of the fees collected by the PTO this year, what would be your top

priorities for additional funding?

Mr. ROGAN. I think if you look at the President’s budget request,

Congressman Cannon, you’ll see where the top priorities are. And

he’s right on target.

The amazing thing is that the Administration recognizes the importance of American intellectual property and the function of the

PTO even in these heightened days of national security concerns.

I’m told that most non-homeland defense, non-defense related

budgets, have been increased across the board about 2 or 3 percent.

The President is recommending a 21.2 percent increase for the U.S.

PTO.

And those funds, if we get them, will go directly into hiring more

examiners, trying to move to an electronic file wrapper as quickly

as possible, and modernizing the PTO so that we cannot only keep

up with the pace of technology but that we’ll be able to start addressing the backlog.

But having said that, it will not be a silver bullet in 1 year, 2

years, 3 years, 4 years. You could let us hire 10,000 new examiners

today and pendency would go up because we have to pull experienced people off the line to train new examiners.

And when we lose one, it’s not like we can replace them if you

lose a hamburger-maker at McDonald’s. It’s not 20 minutes of

training. It takes about 6 years before one new examiner can sign

off on a patent without supervisorial review.

And so it requires a sustained investment for us just to tackle

the backlog that we’re facing, not to mention what I expect will be

a continued increase.

Mr. CANNON. I agree with Mr. Kirk’s assessment earlier stated

about the importance of paying these examiners in a way that will

allow you to retain them. That seems to me to be the key, especially considering the intense training, and then their increased demand out in the market where companies are looking to hire.

39

Let me ask you about the move toward electronic filing, how

that’s proceeding. I’ve had a couple of visits over the year or so

with lawyers in the IP field who have cited a study on electronic

filing at the PTO, and that study showed that while great strides

have been made toward the initial electronic filing of applications,

the processing once a filing arrives is not electronic at all.

In fact, it was shown that sometimes a filing went through 60

separate human touches in hard copy form from the time it arrived

electronically to the time it reached the patent examiner’s desk.

To your knowledge, have we made any progress since you’ve arrived toward actually processing the filings electronically once they

arrive and eliminating some of the hard copy shuffling that was

cited? And if not, is this also a question of inadequate resources to

upgrade your system?

Mr. ROGAN. I had indicated earlier that the decision had been

made before my arrival to essentially role out the entire process on

the trademark side. And that’s what the PTO has been attempting

to do.

We’re hoping to have it fully automated by 2004. They’ve been

making tremendous strides in that regard.

It’s been slower on the patent side. The patent side is far more

complex. And if there are bugs in the electronic filing and application system, we would prefer to find them out on the far less expensive—in an area where there were far less resources committed,

where the fix would be much easier.

We have a wonderful fellow named Doug Bourgeois who came

over from FedEx who is leading our IT program over at the U.S.

PTO. He’s bringing a business model to it.

Beyond that, I’ve asked Brad Huther, who is heading up the

team looking at restructuring, to look at other alternatives. Are

there technologies that are already on the shelf being used in other

major offices that we might be able to license or get our hands on

that will allow us to move quicker in this area?

I said earlier that one of the difficulties that bedeviled my predecessors was the inability to plan in advance for what would be—

to be able to plan in advance to upgrade systems when the system

relating to funding was always in question.

Mr. CANNON. Thank you, again. It’s a pleasure to have you back

with the Committee, one way or the other.

Mr. ROGAN. Thank you, Congressman Cannon.

Mr. CANNON. I yield back my time, Mr. Chairman.

Mr. COBLE. Thank you, Mr. Cannon.

The gentlelady from Pennsylvania.

Ms. HART. Thank you, Mr. Chairman.

I apologize for my temperamental attendance today. We have a

markup in Financial Services.

I want to thank the panel as well for dealing with this. And if

I’m a little redundant in my questioning, I apologize. But I believe

that the gentleman from California has properly briefed me.

Regarding technology development in the United States and

some of the, I guess, the really growth spurt that we had during

the ’90’s, I understand the Patent and Trademark Office is extremely busy with new innovations. Has there now, as a result of

40

the economic downturn, been a downturn in the actual applications

for new technology patents?

Mr. ROGAN. On the patent side, Congresswoman Hart, filings are

flat. Right now, they’re about where they were last year. It’s hard

for us to tell whether that is from any downturn economically or

as a result of September 11th.

We’ve been dealing with a very practical problem post-September

11th, dealing with the United States mail service delivery. We’ve

had to encourage filers now to use FedEx or some other method to

try to get their applications to us because, for months and months,

hundreds of thousands of letters apparently directed to the PTO

were diverted off to Ohio. They sat on flatbed trucks for months to

be irradiated sometimes three, four, five, six, seven times. And by

the time we do get them, many of them on diskettes, are coming

in warped and unusable. We have to then contact the applicant

and have them start afresh.

And so I’m not sure how much—I guess what I’m saying is, we’re

not really able to put our finger on whether that is why they’re flat

at this time or whether there are some economic factors involved

on the patent side.

Ms. HART. With the current flat situation, is there still a very

large need for new examiners, then?

Mr. ROGAN. Yes, a huge need.

Ms. HART. Even if you don’t see an increase or any kind of spike

in the upcoming years, you need—I don’t know. The number that’s

been tossed around is like 950 more people. Is it that many?

Mr. ROGAN. That’s what the President’s budget would allow us

to hire. That doesn’t mean we expect to net 950, because there will

always be a natural attrition rate.

I think the estimates, if we were able to hire them in this fiscal

year, would be about 700. But as I explained earlier—I’m not sure

that you heard it—hiring an examiner, it’s not like hiring somebody for a food service job, because the amount of training and experience that has to go into preparing them involves years. It takes

about 6 or 7 years before one is able to just sign off on a patent

on their own.

And so for those examiners that we bring on board, even if we

brought on a 1,000 a year this year and next year, we might even

see a drop initially in pendency because we have to pull experienced examiners off the line to train the new examiners.

So it is a very complex process that involves a commitment to investing in the examining corps and helping us to retain experienced examiners, because when we lose them to the private sector,

it’s more than just losing one person and replacing them with another. There is a tremendous economic cost to our government.

Ms. HART. Okay, thanks.

And I guess this next question I’m going to direct really to anybody on the panel. And I apologize again if you’ve discussed it already, because I believe you have to some degree.

But the issue of quality—and, basically, there have been some indications, especially some complaints, that quality has become a

problem at the U.S. Patent and Trademark Office, not necessarily

recently.

41

But I think maybe from the organizations that would represent

applicants maybe the answer.

Can you explain to me what they mean by that? And has it been

addressed in the new Administration?

Mr. KIRK. Ms. Hart, I think the issue of quality, first of all, in

terms of what it means: It means that a patent has issued with

claims in that patent that are not valid in view of prior information—called ‘‘prior art’’— that exists that the examiner may not

have found or that may not have been in the files. A patent could

also be found to be invalid in court because there’s an inadequate

disclosure of the invention.

There are many reasons why a patent could be found to be invalid.

The concern that exists is that—there appears to be, because of

the turnover the office has experienced with constantly having to

bring on new examiners, train them, get them up to speed, there

continues to be examples of patents that should not have issued.

And I think right now that, within the user community, we are

100 percent in agreement with the statement that Undersecretary

Rogan made regarding quality first. If you have to chose between

quality and pendency, quality first.

We have got to establish some means by which to bring quality

up. How will we do that? I know that within AIPLA we have established a task force to work with the PTO to address this issue. In

fact, we’re meeting with them tomorrow morning. The task force

that we’ll be meeting with is headed by Brad Huther, the individual that Undersecretary Rogan has mentioned.

We would endorse efforts to think outside the norm. It was mentioned that, in the business method patent area 705, they’ve established a second-look technique, so that every patent that issues

goes through a second pair of eyes before it leaves the organization

to become a patent. That has caught numerous situations where

there was an error that was called back and corrected. Maybe this

is a technique that needs to be expanded more broadly into other

troublesome areas or maybe across the board.

Another area to look at is the span of control of supervisory examiners. If you have a small unit called an art unit, which is the

basic management unit in the PTO, and you’ve got 15 examiners

with 11 or 12 of them brand new, it’s unrealistic to think they can

get adequate supervision by their supervisory primary examiner.

Maybe what we need to do is shrink the size of the art units to

allow better supervision, to allow better training.

There are a number of steps of this nature that could be taken.

They all have a price tag. And we are looking forward to working

with the office to design the most cost-effective way to deal with

the patent quality issue.

Mr. ROGAN. Mr. Chairman, may I just follow up on that for 30

seconds——

Mr. COBLE. Sure.

Mr. ROGAN [continuing]. Because I think it’s important that everybody understand this.

I will be coming forward with some proposals, both for the Administration and for Congress and for the user community. But ultimately, we’re not trying to propose things that just sound good

42

for us in government. The purpose of these proposals are so that

we can treat the PTO like a business that is servicing customers,

and our customers are seated—represented here at the table.

If it’s not going to work for them, then it certainly doesn’t do me

or the Administration or the Congress any favor to start making

structural changes that are going to be of no benefit to those who

are depending upon the service that we are supposed to provide.

Mr. COBLE. The gentlewoman’s——

Ms. HART. Thank you. I’d like to say, with that philosophy, it

sounds like you’re on the way to, you know, answering everybody’s

concerns.

I want to thank you, Mr. Chairman.

Mr. COBLE. Thank the gentlelady.

And, folks, I hate to impose inconvenience upon you all, but I

want to have a couple more questions. We have three votes. I assume it’ll be one 15 and two 5s, so if you all will rest easy, we will

return imminently.

And without objection, I want to have the Ranking Member of

the full Committee’s statement, the gentleman from Michigan, Mr.

Conyers, his statement will be made a part of the record.

[The prepared statement of Mr. Conyers follows in the Appendix]

Mr. COBLE. So you all rest easy, and we will be back shortly.

[Recess.]

Mr. COBLE. Folks, I apologize. My comment was correct. It was

one 15 and two 5s; I didn’t know the 15 was going to run into 30.

But we’re back.

I felt this was important enough to go a second round.

Mr. Kirk, your body language told me you wanted to insert your

oars into the water regarding the electronic filing question I put to

the judge.

Mr. KIRK. The one comment that I wanted to add, I think the

electronic filing system, I believe the question you put was whether

or not—what our reactions and views were on that. And I would

share the views of I think of a lot of users, that the patent electronic filing system is lacking, it is very difficult to use, and it obviously needs a great deal of work.

I think there are reasons why it is where it is. Among those reasons I think is what I would call a rapid turnover in the position

of Commissioner of Patents and Trademarks at the time, now Undersecretary and Director, because each new Commissioner had his

own view as to how that should work.

Funding is an issue, because if you get lots of funding for a given

year, you can gear up to begin moving in the direction of letting

contracts and bringing people on to design and implement an electronic processing system in the office. The following year, the funding is not there; you cannot renew the contracts; you have to let

the people go. So you’re on a constant yo-yo, which makes it impossible, I think, to really design this kind of a system.

The other thing I would mention is that it is my understanding

is that the PTO is looking now to work with the European Patent

Office on their electronic filing system, to try to, in effect, workshare and come up with a common system. The European system

I think is somewhat more advanced than what we have here in this

43

country. And I think that kind of cooperative endeavor should be

fruitful.

And certainly, we look forward to seeing what results come from

that.

Mr. COBLE. I thank you, sir.

Ms. Kelley, you stated in your written testimony that you oppose

outsourcing work at PTO. Now, I think—I may stand corrected, but

I think there’s very limited outsourcing going on right now. I don’t

think there’s that much going on. Is that correct, first of all?

Ms. KELLEY. My understanding is that is correct, Mr. Chairman.

Mr. COBLE. Okay. How about elaborating a little bit in more detail, Ms. Kelley, on your concerns about this?

Ms. KELLEY. Where it is occurring now, as far as I know, seems

to be in areas like information technology. We have concerns about

that, about any work of the Federal Government that is being performed by contractors, and we will look into that.

But the bigger issue of competitive sourcing is—and my concern

comes from the Office of Management and Budget’s recent directive

to each agency to look at positions on their FAIR list of commercial

activities and to competitively source 5 percent this year and 10

percent next year.

And one of the things that I wanted to have on the record was

the concern that the work of PTO is work that I believe is exactly

the kind of work that should always be done by the Federal Government and by Federal employees.

Mr. COBLE. In-house? In-house, you’re saying?

Ms. KELLEY. Yes. Yes.

Because I believe that if Federal employees and agencies are provided with the appropriate budgets, with the appropriate training

and support, there’s no one who can do the work of the Federal

Government better. So the concern is just ensure—keep this is as

a visible issue and ensure that that work continues to be done by

Federal employees.

Mr. COBLE. I thank you.

Judge Rogan—well, strike that. I’m going to ask it a different

way.

Will you be tying the fiscal year ’04 fee restructuring to the 5-

year plan?

Mr. ROGAN. Yes.

Mr. COBLE. Good. I think that’s a good idea to do that.

Finally, let me ask Mr. Kirk, Messrs. Kirk, Williamson, and

Rogan this question. In which technical fields are pendency rates

most acute? And what, in your opinions, is the best way to eliminate or reduce such fluctuation?

Mr. ROGAN. Well, if I may, Mr. Chairman, I think, hearkening

back to something Mr. Kirk said before the break relating to title

5, that could be an area where we could get a lot of help.

For instance, we have the most acute pendency problems in the

electrical arts. Part of that is something Congress and the PTO

cannot fix. We graduated last year I think about 60,000 electrical

engineers here in the United States of America. Law firms are very

competitive for those engineers, and I think our starting salary is

somewhere around $40,000 or so a year. We have a signing bonus

44

up front to try to get the, but we simply cannot compete with the

private sector. And that’s one of the problems we have.

The average pendency right now, across the board at the PTO,

is about 2 years, but in the electrical arts, it’s over 3 years, because

we just simply don’t have the talent that we need to attack that.

Mr. COBLE. Anybody else want to be heard on this?

Mr. KIRK. I would just like to second the comment about title 5.

Right now you have lawyers graduating from the top law schools

with an engineering background, some going into clerkships and

then going into private practice.

Many of these recent graduates going to work for law firms

where, were they to take the Undersecretary’s job, they would have

to take a pay cut. That’s wrong.

Mr. COBLE. I don’t disagree with that.

Ms. KELLEY. Title 5 surely is an issue that NTEU would be willing talk about to address issues, human capital issues, at PTO.

But I think we need to take a step back in that the whole issue

of Federal pay goes a step below even the title 5 issue. There is

such a gap today in the Federal pay comparability system by every

estimate and every study—what was supposed to happen, based on

a bill passed by Congress in 1990, was to close that gap that exists

between the Federal employee pay system and the private sector.

Today that gap is somewhere between 16 and 30 percent, no

matter what the occupation and what the location is. And I would

hope that Congress would address the issue of the gap between the

private and Federal sector as a first giant step. And it would be

a giant step that would begin to address some of the very valid

issues that are being raised in addition to the question of title 5.

Mr. COBLE. Well, folks, I want to thank you all for your attendance today, your appearance. I apologize for the belated return.

Mr. Rogan, I think you have heard from the Members of the Subcommittee: You have our support.

Mr. Kirk, always good to see you.

Mr. Williamson, it’s good to have you and Ms. Kelley here.

You all know that our door remains open. You need no visa to

come acalling on us, and I hope we don’t need visas to come

acalling on you.

The Subcommittee very much appreciates your contribution

today.

This concludes the oversight hearing on the U.S. Patent and

Trademark Office operations and fiscal year 2003 budget. The

record will remain open for 1 week.

Thank you again, and the Committee stands adjourned.

[The prepared statement of the International Trademark Association follows in the Appendix]

[Whereupon, at 12:12 p.m., the Subcommittee was adjourned.]

(45)

A P P E N D I X

STATEMENTS SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE HOWARD COBLE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NORTH CAROLINA

‘‘Good morning. The Subcommittee will come to order.

‘‘Today we will review the operations of the Patent and Trademark Office in light

of the Administration’s budget submission for fiscal year 2003. As I stated at our

last oversight hearing on PTO, it pains me that we must continue to address the

ongoing diversion of agency funds to other government programs. Our witnesses understand how this harms PTO operations, and ultimately how it can harm that sector of our economy which is dependent on the creativity of inventors and trademark

owners. Once more, I pledge that our Subcommittee will work in a bipartisan manner with those in the intellectual property community to do whatever is viable and

necessary to reverse this trend.

‘‘That said, I am a realist, and realistically speaking, I do not believe that the appropriators will cede their authority to control PTO funding in the near future. We

can no longer afford to chant the same mantra of more money. To my mind, the

agency will be better positioned to acquire greater appropriations if it can do a better job of demonstrating how it is using available resources to meet clearly defined

objectives, which ultimately means improving quality and reducing existing pendency rates and backlogs.

‘‘Speaking of money, the Congress cannot blindly endorse a request by the Administration to raise patent and trademark fees as a stop-gap or even long-term solution

to this problem. Anyone who has reviewed the fiscal year 2003 budget request for

PTO is aware that it contains a recommendation that Congress apply new one-year

surcharges to existing fees: 19% in the case of patents, and 10% for trademarks. I

will be most interested to learn whether the user community endorses this request.

Will implementing this change really reduce pendency and backlogs, or will it merely subsidize other government programs?

‘‘In closing, I emphasize that I retain the highest confidence in Director Rogan to

help us solve these problems. There is no doubt in my mind that he is the person

best suited to lead the PTO into the 21st Century.

‘‘I look forward to the testimony of the witnesses here this afternoon, and I now

turn to the Ranking Member from California, Mr. Berman, for his opening statement.’’

PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Chairman,

I am happy to join you for our annual, oversight hearing on the operations and

budget of the Patent and Trademark Office.

I welcome our former colleague, the distinguished PTO Director and Undersecretary of Commerce, in his first appearance before the Subcommittee on which he

served. He is to be commended for sacrificing his lucrative private practice to take

on the difficult challenge of running such a large and complex agency.

I also welcome our other witnesses, some of whom are quite familiar to the Subcommittee, having testified before us many times. Your willingness to appear here

and continued engagement on these outwardly mundane issues is much appreciated.

This year, I think we have cause for a muted celebration. It appears that our collective efforts over the past few years to secure adequate funding for the PTO have

had measured success. Based on the pressure applied by relevant stakeholders testiVerDate 11-MAY-2000 12:29 May 22, 2002 Jkt 000000 PO 00000 Frm 00049 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\041102\78675.000 HJUD2 PsN: HJUD2
46

fying today, the PTO itself, and many Members of Congress, the President has submitted an FY 2003 budget that recommends the PTO have use of all its projected

fees. This request indicates our message has finally gotten through: Without adequate funding, the PTO cannot carry out its critical role in stimulating innovation,

technological advancement, and business growth.

Unfortunately, this forward movement comes with a price. The Bush administration has not repealed the innovation tax, it has simply renamed it a ‘‘surcharge.’’ The Bush Administration’s FY 2003 budget request proposes a surcharge on pat- ent and trademark fees. This surcharge, which will generate $162 million to be used

for non-PTO purposes, would be almost 20% on patent fees and over 10% on trademark fees.

In other words, the Bush Administration does not end the fee diversion, or innovation tax, of which we have long complained, it simply raises the fees so it can

have its cake and eat it too. I do not intend to place the blame entirely at the feet

of the Bush Administration, because there is no reason to believe our appropriators

will end the practice on their own initiative. Indeed, we need remain vigilant lest

they attempt to divert more.

To be sure, the surcharge approach to diversion is an improvement over the previous situation. It is still not the preferred course, however. Ideally, there would be

no innovation tax regardless of whether it was called a carryforward, diversion, or

surcharge.

I believe the surcharge approach is not an adequate solution because it will not

solve the pendancy, quality, staff retention, and technology problems facing the

PTO. For instance, even assuming that the PTO has use of all its projected fee income through 2006, the FY 2002 Corporate Plan of the Department of Commerce

still predicted that patent pendancy would increase to 38.6 months by FY 2006. I’ll

repeat that: Even if the PTO can keep all its projected fees, patent pendancy increases from about 24 months to nearly 39 months.

Whether 24 or 39 months, such patent pendancies are too long. Such pendancies

hamstring the ability of inventors to commercialize their innovations, and when

combined with increased fees, may even persuade inventors to rely on trade secret

protection rather than patenting their inventions. This result would be the worst

outcome, as it would deny the public, other inventors, and researchers the benefits

of public disclosure of innovations.

For these reasons among others, Chairman Coble and I have insisted that the

PTO complete a 5-year strategic plan. This strategic plan, as proposed in H.R. 2047,

would set a course for the PTO to achieve its critical mission by improving patent

quality, reducing pendancy to reasonable levels, and increasing PTO efficiency. We

look forward to receipt of this strategic plan, and look upon it as a key to demonstrating that patent and trademark fees bear a direct relationship to achievement

of the PTO mission.

In conclusion, I believe the President’s FY 2003 Budget request doesn’t keep a bad

situation from getting worse . . . it just keeps it from getting a lot worse. While

we can feel some optimism that, throughout 2003, the PTO will not fall further behind in achieving its mission, I do not believe surcharges are an adequate permanent solution to the challenges the PTO faces.

Thank you again, Mr. Chairman, and I yield the balance of my time.

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN

I’d first like to commend our former colleague and current Director of the PTO,

Jim Rogan. In a short time, he has done a wonderful job of addressing the challenges facing American inventors.

The U.S. Patent & Trademark Office always has played a crucial role in America’s

economy. The last decade has seen an unprecedented boom in technology, due mainly to the invention of new technologies and patents granted on them by the PTO.

The importance of patents to technological advancement is evidenced by the rapid

increase in the number of patent applications. As our economy grows and technology

advances, our oversight over the PTO becomes even more important.

Past oversight indicated that we needed to streamline the PTO. We were able to

accomplish that to a certain extent with the American Inventors Protection Act of

1999. Among other things, the bill restructured the agency to make it more efficient

and effective at examining patents and registering trademarks. Unfortunately, the

PTO still faces obstacles to becoming completely efficient.

As you all may be aware, the PTO takes no money from taxpayers; instead, it is

fully funded by user fees and generates approximately $1 billion per year in reveVerDate 11-MAY-2000 12:29 May 22, 2002 Jkt 000000 PO 00000 Frm 00050 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\041102\78675.000 HJUD2 PsN: HJUD2
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nues from those fees. This success has been an Achilles’ heel—appropriators take

advantage of the revenues and treat the PTO as a cash cow, diverting hundreds of

millions of dollars of fees every year for other government programs. That diversion

is making it exceedingly difficult for the PTO to hire or even retain qualified examiners.

But these are not just concerns about personnel and efficiency—there are real

world issues. The lack of resources has caused the time period between the filing

of a patent application and a final decision on it to grow from 19.5 months to 26

months in just a few years and is expected to be 38.6 months by 2006. At that rate,

inventions will be obsolete by the time they’re patented. Our technological advancement and our economy can only suffer if Congress and the Administration sit idly

by while this happens.

Fortunately, Chairman Coble, Ranking Member Berman, and I have worked on

several pieces of legislation to address these issues and hope to work with other interested parties to secure their enactment into law.

PREPARED STATEMENT OF THE INTERNATIONAL TRADEMARK ASSOCIATION

Chairman Coble:

The International Trademark Association (‘‘INTA’’) is pleased to submit a statement in connection with the subcommittee’s oversight of the United States Patent

and Trademark Office (‘‘PTO’’). We respectfully request that it be made part of the

record for the hearing of April 11, 2002.

INTA is a 123-year-old not-for-profit organization comprised of over 4,000 member

companies and firms. It is the largest organization in the world dedicated solely to

the interests of trademark owners. The membership of INTA, which crosses all industry lines and includes both manufacturers and retailers, values the essential role

that trademarks play in promoting effective commerce, protecting the interests of

consumers, and encouraging free and fair competition. The members of INTA, who

routinely apply for and maintain trademark registrations, are the customers of the

PTO. INTA therefore has a strong interest in the agency’s performance and in working with the Congress, PTO officials, and others to ensure that the PTO can operate

efficiently and in an effective, business-like manner.

INTA’s statement will deal principally with the operation and examination procedures on the trademark side of the PTO, and acknowledges the following:

• That the slowdown of the American economy in 2001 and early 2002 led to

a reduction in trademark applications, which permitted the PTO to reduce

certain key trademark indicators like pendency and the backlog of applications untouched by an examiner, as well as stem the tide of experienced

trademark examiners who leave the agency for the private sector.

• That while the February 2002 PTO business plan represents a first step in

presenting the means for maintaining efficient and timely operations at the

agency, there remains a need to fulfill Congressional and private sector requests for a more substantive 5-year strategic plan.

• That the proper planning for the future must absolutely include a fully funded PTO, one that retains all of the money it raises, whether it is through normal fee-related functions or surcharges to handle special needs.

State of Trademark Operations

Beginning in 1992, the PTO experienced a steady rise in the number of applications for trademark registration. This rise peaked in FY 2000, when the U.S. economy, fueled in large part by a technology boom, had also reached its apex. During

that year, the PTO received an all-time high of 375,438 trademark applications.

But, a year later, as a result of the slowdown in the U.S. economy and the stilled

euphoria of .com companies, trademark filings decreased dramatically. During FY

2001, the PTO received 296,388 trademark applications—a 21% reduction. As the

American economy is only now beginning to recover, the PTO predicts zero percentage growth in the numbers for FY 2002. Some have argued that this connection between the economy and the trademark office, is nothing new. As a recent article

pointed out, this ‘‘parallel path’’ between trademark applications and the economy

has been going on since 1995; that article concluded that ‘‘One could argue that the

[quarterly] rate of trademark filings are the result of general economic performance

as plotted by the NASDAQ listed companies.’’

This slowdown in trademark business has provided an opportunity for the trademark operation to ‘‘catch up’’ on the backlog that had accumulated, creating unacVerDate 11-MAY-2000 12:29 May 22, 2002 Jkt 000000 PO 00000 Frm 00051 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\041102\78675.000 HJUD2 PsN: HJUD2
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ceptable delays in processing trademark applications. Timeliness has improved.

Today, first action pendency is at 2.8 months, down from a record high 7.2 months

in FY1998. The backlog of applications untouched by an examiner has also been reduced to 39,900, a marked improvement from 130,600 at the beginning of FY 2001.

This means that trademark owners do not have to wait as long to receive their federal trademark registration. The trademark registration provides important presumptions and protections to trademark owners and acts as a symbol that puts the

public and potential infringers on notice that the owner of the mark has made a

substantial investment in its product or service.

In addition, the slumping job market caused by the recent economic downturn has

resulted in a slowdown of experienced trademark examiners leaving the agency for

private practice, a temporary solution to a problem that had long plagued the PTO

and its customers who rely on the examiners for quality service. According to PTO

officials, the attrition rate, which was once as high as 14% during periods when the

economy was moving at full steam and filings were high, is now down to almost

nothing. When FY 2002 began, there were 389 examiners at the trademark office.

Today, there are 383. The PTO has not needed to replace those examiners.

Preparing for Tomorrow

The real test for the PTO will be to maintain low trademark pendency and backlog numbers, as well as continue to retain experienced employees, especially during

a period of sustained economic growth. Our collective goal - for the agency, its customers, and the Congress—must be to work towards an efficient trademark operation in a healthy economy. It is during times of prosperity when consumers and

trademark owners alike need the protection afforded by a federal trademark registration.

INTA believes that the trademark office, under the leadership of Director Jim

Rogan and Trademark Commissioner Anne Chasser, shares this vision. As the

PTO’s recently released business plan states, the agency must ‘‘keep the time for

making decisions on applications at acceptable levels’’ and work towards enhancing

quality of examination. We also note that the PTO makes reference at a number

of points in its plan to promoting increased voluntary usage of electronic filing and

processing of applications through automated means. INTA is on record both with

this subcommittee and the PTO in supporting greater usage through voluntary

means of new technologies to improve trademark office operations. We have actively

supported trademark office officials in their education of the trademark bar on the

advancements made with respect to e-filing. Also, at our upcoming annual meeting

here in Washington (May 18–22), which will attract over 6,000 attendees, we have

scheduled a program on how to file trademark applications and other documents

electronically.

The PTO’s business plan is a start to providing for a trademark office that can

maintain high levels of efficiency during times when America has a fruitful economy. But, as we say, it is only a beginning. INTA agrees with the proposal in your

bill (H.R. 2047), Mr. Chairman, for a more detailed strategic plan, one that includes

‘‘milestones and objective and meaningful criteria for evaluating the progress and

successful achievement of the plan.’’ We know that Director Rogan is committed to

producing such a strategic plan, and we are currently working with the PTO to

come up with specific goals and projects for the agency over the next five years.

Below are some examples of specific ideas trademark owners would like to see incorporated into the strategic plan.

Enhanced Electronic Environment

Provide explicit dates, stages and/or milestones for steps that further the goal of

creating an enhanced electronic trademark office operation (beyond the goal of a

preferred 80% e-filing rate), including wider use of e-mail by examiners, incorporating more forms into the electronic system, an up-to-date assignment database,

and a search database provided for public access that is the very same search database currently used by trademark examiners.

Qualified Personnel

Develop a means for increasing total compensation for trademark examiners to

discourage them from leaving the PTO during times when jobs in the private sector

are plentiful. It is when experienced examiners leave that quality of examination

suffers and pendency tends to increase. The same consideration should be given to

increasing the salary of support staff. The PTO should closely analyze its ability to

attract qualified candidates at all levels, including administrative staff, compared to

the relevant private sector market and should implement programs to address significant differences with the market that place the PTO at a competitive disadvantage in hiring and retaining talented personnel.

Training

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Establish a detailed training program for examiners, including regular meetings

among the examining corps that encourage sharing of ideas and best practices and

promotes internal coordination and consistency of examination results.

Quality Assessment

In addition to the prototype internal quality review program that is planned for

FY 2003 and, if successful, scheduled to be made part of the business practice for

FY 2004, we suggest that the following be considered with respect to quality assessment:

1) Creating a trademark benchmark for a quality first office action.

2) Measuring the number of refusals to register trademark applications that

are withdrawn after a request for reconsideration.

3) Measuring the number of refusals to register trademark applications that

are reversed by the Trademark Trial and Appeals Board (TTAB).

4) Developing a template with timeline targets for all steps in the trademark

registration process, rather than focusing only on first action and disposal.

Such a template could provide insight into ‘‘bottlenecks’’ that may emerge.

Structural Review

Develop a plan for reengineering the overall structure of the PTO and for making

recommended changes that result from this examination. For example, one proposal

that was recently discussed by members of the INTA PTO Subcommittee was to

look at the way the assignments branch is currently organized and consider whether

it could more efficiently operate if integrated into patent and trademark examining

operations. There are very likely many other options worth exploring.

Human Resources Evaluation

Conduct an examination of the allocation of human resources within the PTO. In

order to ensure efficient use of resources, the agency should regularly analyze

workflow in both the patent and trademark examining operations to identify areas

of capacity and areas that are creating backlogs. The creation of an ombudsman’s

office could assist in this process. A regular review can facilitate efficient allocation

of personnel and ensure a fair workload for everyone. Because any increase in staff

will need to be tied to demonstrable need, such as increased filings or pendency, the

PTO should regularly survey the entire examination workflow for both patents and

trademarks to identify trends that may point to a need for additional staff.

We look forward to working with the PTO leadership and our colleagues in the

intellectual property community to incorporate these and other ideas into a detailed

5-year strategic plan.

Funding

INTA appreciates that the Administration understands the need for the PTO to

have the financial resources necessary to operate efficiently and provide services in

a timely manner. This is evident by the fact that for FY 2003, the Administration

proposes a 21% increase in allocated funds beyond that which was provided in FY

2002. To help provide for this increase in funding, the Administration requests a

1-year surcharge on trademark and patent fees that will generate $207 million dollars. INTA would consider supporting such a request, provided that all of the money

raised through the surcharge is used to fund the initiatives mentioned above and

meet long term goals related to pendency, quality and e-government. But this is

clearly not the case. Of the $207 million raised through the proposed surcharge, the

PTO will be permitted to keep only $45 million. The remaining $162 million will

be diverted to unnamed projects or agencies. We oppose this $162 million diversion.

The PTO was never intended to be a source of income for the federal government.

The agency’s mission is clear:

• Administer the laws relating to patents and trademarks while ensuring the

creation of valid, prompt, and proper intellectual property rights; and

• Advise the Administration on all domestic and global aspects of intellectual

property.

To accomplish this mission, the PTO is funded just like a private sector business—exclusively through fees paid by its customers. The trademark operation has

been self-sustaining since FY 1983. Congress affirmed the PTO’s status as a private

sector-like business when it adopted the ‘‘American Inventors Protection Act,’’ which

was designed to allow the agency to keep pace with customer demand through independent control of budget allocations and expenditures, personnel decisions and

processes, and procurement. This means that government red tape, which drastically reduces PTO efficiency and operations, was to be reduced to the bare minVerDate 11-MAY-2000 12:29 May 22, 2002 Jkt 000000 PO 00000 Frm 00053 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\041102\78675.000 HJUD2 PsN: HJUD2
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imum. It is this red tape that has often, in the past, led to delays in obtaining space,

equipment and personnel.

Sound business practice suggests that if additional funds are to be raised by the

PTO, whether they be through a formal fee increase or surcharge, that they be entirely set aside as a contingency, for a point in the future when the trademark office,

for example, is faced with increased filings and when the economy is stronger and

trademark examiners must be paid higher wages to stay at the agency. The money

paid to the PTO is NOT taxpayer money. It is money paid exclusively for a service.

If the past teaches us anything, it is that the PTO should have a contingency fund

in place so that when filings rise, there is the capacity to quickly deal with this fact,

prevent delays and provide quality service.

Conclusion

Mr. Chairman, as always, INTA is appreciative of your efforts and those of Ranking Member Berman to ensure that the PTO has the resources it needs to do its

job and serve its customers. We look forward to working with you towards that end.

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PREPARED STATEMENT OF DAVID PEYTON, DIRECTOR, TECHNOLOGY POLICY,

NATIONAL ASSOCIATION OF MANUFACTURERS (NAM)

Dear Mr. Chairman:

The National Association of Manufacturers (NAM) is the nation’s largest and oldest multi-industry trade association. The NAM represents 14,000 member companies (including more than 10,000 small and mid-sized manufacturers) and 350 member associations serving manufacturers and employees in every industrial sector and

all 50 states. Headquartered in Washington, D.C., the NAM has 10 additional offices

across the country. The NAM wishes to submit the following statement for the

record of the Subcommittee’s April 11, 2002 hearing on ‘‘The U.S. Patent and Trademark Office: Operations and the Fiscal Year 2003 Budget.’’

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QUALITY MANAGEMENT AND MEASUREMENTS

The essential situation is that the PTO’s performance has declined markedly over

the past decade. Pendency has risen from 18–19 months to 26 months. Dubious patent issuances have resulted in high costs for targeted defendants and in outside criticism, occasionally severe, combined with generally declining confidence in the agency’s work product. Put plainly, the agency needs a turnaround with respect to its

patent business, on which these comments will concentrate.

Definition and Requirements

While a working definition of patent quality may seem innocuous on its face, it

will have far-reaching consequences if followed to its logical end. A patent of acceptable quality fully meets all the statutory requirements and will withstand challenge

in court. That is, the prior art has been searched rigorously for references; the description is complete; the claims are drafted and circumscribed carefully; and the

prosecution history makes it possible to understand all the decisions that were

reached.

The first consequence is a fundamental requirements statement: For each patent

application, there must be——

• an analysis of the written description and claims;

• an exhaustive search of the prior art;

• a correct application of the law; and

• an accurate record of the prosecution history.

Timeliness and Quality

The NAM emphasizes the necessity of escaping the false choice of timeliness versus quality; compare the just-in-time inventory revolution, which overcame the earlier dilemma of timeliness versus cost control with a new concept of rapid replenishment. New initiatives must improve timeliness and quality simultaneously. At the

hearing, Undersecretary Rogan conveyed seriousness about improving quality in

stating that he held it ultimately as more important than reducing the backlog. At

the same time, a new emphasis on specifying and meeting requirements, and doing

it right the first time—the rudiments of quality management—will yield steady improvements in both timeliness and quality. To speak of trading off one against the

other indicates either a short-run outlook, or else thinking inside an old management paradigm, neither of which will yield the desired results in the long term. The

NAM understands and accepts that there will be no fast solutions to either the massive backlog or the issuance of dubious patents, but one need not to be traded off

against the other.

Electronic-Case Management

Stating firm goals for conversion to electronic-case management on an announced

schedule is indispensable. Stating the goals does not insure meeting them, of course,

but the failure to state them essentially guarantees further unacceptable delay. The

Securities and Exchange Commission had EDGAR running in pilot form as early as

1986. The sources of delay are numerous, but for the PTO to be this far behind is

extremely disappointing. Numerous topics to be addressed include——

• electronic-file management;

• online searching;

• policy on Internet linking for applications and issuances;

• telework (one area where the agency has excelled);

• e-filing policies, prices and targets; and

• final documentation.

The Examining Corps

Upgrading the professionalism of the examining corps also is indispensable. Topics to be addressed include——

• hiring and qualifications;

• in-service training (especially legal);

• salaries and retention;

• flextime and telework;

• union relations;

• justifying the cost of initiatives by the reduced cost of new hires;

88

• learnings from other agencies (for example, the Food and Drug Administration); and

• exit interviews and focus groups.

The NAM notes in particular the hopeless staffing situation created by the strict

statutory limits on pay levels. The situation was already poor before the economic

boom of the 1990s, with law firms in the Silicon Valley leading the way, legal salaries reached previously unimagined levels. Today there may be only one other instance in the entire federal establishment with such a yawning gap between government and private-sector compensation: military doctors, almost all of whom are all

presumed to leave the military after short service. The PTO must get out of the

‘‘Army-doctor syndrome.’’ As it lies beyond the power of the government to make private-sector employment less attractive, it must make government service more attractive. Initiatives like flextime and telework should certainly be promoted to the

maximum, but weak pay cannot be disguised.

By contrast, examiners at the European Patent Office (EPO) in Munich earn well over $100,000, tax-free. In effect, being an EPO patent examiner is like being a

World Bank employee in Washington: having a well-compensated, highly respected

job that is hard to get and that one seldom chooses to leave. The NAM notes with

regret that U.S. corporations often choose, when filing under the Patent Cooperation

Treaty, to have primary searches done at the EPO rather than at the PTO. That

U.S. corporations ‘‘vote with their feet’’ gives evidence of a clear judgment that the

EPO does higher quality, albeit slower, work, which is not surprising, given the

greater seniority of its examining corps.

Staff Management

Managing the PTO professional staff is another major area needing scrutiny. As

we noted last year, the PTO’s initiative in Group 705 (business methods patents),

while not specifically designed for that purpose, stands as a case study or proof of

concept of sharply increasing the amount of examiner time per case, plus detailed

senior review, in sharply reducing dubious issuances. The PTO has proved that this

approach can deliver marked results, making it a clear candidate for quality improvement more broadly. In addition, reducing the size of art groups or the number

of direct reports to overstretched senior examiners is another idea gaining increasing currency.

Management Goals and Policy

Overall, the NAM continues to call for a formal policy of zero defects. As we stated

to the Subcommittee a year ago:

The matter of the overall quality of patents issued, in the business methods

area in particular, begs for order and discipline. Faced with the need to improve

quality themselves, manufacturers start by taking measurements, and the NAM

strongly suggests the same here. Just as the logic of zero defects as a stated

goal has prevailed in industry, we call on the PTO to declare a goal of zero patent issuances later invalidated by prior art. To be sure, attaining perfection in

practice isn’t possible; against about 150,000 issuances a year, some mistakes

are inevitable. A key lesson from industry, however, is that setting such a goal

starts one on the path of what can be attained, which is continuous improvement.

The February 2002 Business Plan on the PTO Web site represents a highly welcome first step, and the NAM looks forward to improvements in successive versions.

Furthermore, quality management should become the central feature of the agency’s

annual report.

The PTO has publicly discussed creation of a quality index or indices. That approach may well have merit, once the baseline measures have been adopted and initiatives promising real payback have been selected. Then a primary PTO goal would

be improvement in the index at least on an annual basis. Conceivably, incentive pay

for senior management could be tied to improvement in the index. An index has the

virtue of comparing the PTO to itself. While benchmarks—that is, comparable measurement—with the only other similar organizations in the world, the European Patent Office and the Japanese Patent Office, would be desirable and may be attainable

in the future, they essentially do not exist today and do not seem to be immediately

forthcoming.

More Reexaminations

There are many more immediate steps that can and should be taken. Reexamination remains underused, and the NAM continues to support H.R. 1866 and 1886 as

passed by the House. Even before final passage of those bills, however, there is

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nothing stopping the director from ordering more reexaminations on his own authority. Faced with demands by computer programmer Bruce Dickens and his attorney

for payments based on a patent for the windowing technique for Y2K remediation

(patent no. 5,806,063) numerous companies contributed prior art to back up the

characterizations of the patent as outlandish by leading Y2K experts. The resulting

Internet-based collection provided former Commissioner Dickinson with ample facts

to order a reexamination himself. However, he was reluctant to do so and it took

considerable persuasion from industry. That should not have been necessary.

A more recent controversy—one of a number—stems from patent no. 6,185,681 in

the field of encryption, which has been criticized sharply by recognized industry experts including Bruce Schneier, Phil Zimmerman, and Matt Blaze. The NAM believes the PTO should do an about-face on director-ordered reexaminations. Instead

of making them rare and hard to get, the PTO should establish an easy-to-find feature on its Web site where expert parties can deposit prior art, and the director

should state publicly his readiness to order a reexamination upon receipt of persuasive evidence. Today, too high a burden rests on outside parties to bear a financial

cost, especially when they have no immediate stake in the dubious new issuance.

This is one step that can and should happen promptly.

Domestic Quality and International Harmonization

The NAM heartily welcomes Undersecretary Rogan’s remarks in at the World Intellectual Property Organization in Geneva on March 26, and notes the critical connection between domestic quality management and international harmonization.

The Paris Convention is like the Eiffel Tower: a famous relic of the 1880s, reflecting

the best techniques of the time. But its country-by-country essential premise leads

to enormous amounts of rework, which, in the quality management view, is wrong

in principle. It is no exaggeration to say that a worldwide workload crisis exists. Mr.

Rogan aptly cited the work of the 1966 President’s Commission on the Patent System, which envisioned ‘‘a universal patent, respected throughout the world.’’ The

need to move in that direction is more urgent than ever. The rework—still almost

all paper-based—is significant cost drag on larger firms and makes it prohibitively

expensive for many smaller firms to export. Indeed, cutting the costs of foreign patent protection—most recently estimated by the Intellectual Property Owners several years ago at almost $500,000 for the largest 50 countries for the lifetime of a patent—is one of the best steps that Congress could take to boost exports from smaller

U.S. companies.

It is here that the parallel between patents and trademarks is most evident. The

NAM again thanks the Subcommittee for its handling of legislation to enable the

United States to ratify the Madrid Convention to provide the same kind of ‘‘one-stop

shopping’’ for trademarks that the Patent Cooperation Treaty already affords in its

domain. As with patents, the useless rework will remain until national governments

sweep it away.

It would appear to be only a matter of time before one of the three major patent

offices establishes a zero-defects policy. It is vastly preferable for the USPTO to be

the leader rather than a follower. Moreover, mutual recognition of search results—

the key step Undersecretary Rogan outlined in Geneva—evidently will depend on

agreed-upon policies and procedures. All the better, then, that the United States undertake a fundamental requirements analysis now. All the better that a

foundational U.S. analysis, if possible, serve as a starting point for negotiations.

Electronic filing must also work internationally. To avoid multiple incompatible

formats, the PTO should continue to work as fast as possible through the Patent

Trilateral with the EPO and the JPO to issue a standard template that will be acceptable in all three offices and, given their dominance, elsewhere in the world as

well. Patent practices must catch up with the pace of global industry.

The detailed quality management analysis and electronic format standardization

can also inform the statutory dimension of harmonization. Like other business parties, the NAM last year indicated to the PTO, with respect to international harmonization, that it believed the time had come for the mutual sweeping away of eccentric

and cumbersome features of national laws, especially as regards European countries

and the United States. Ideally, the electronic exercise can be carried out in the manner that systems integrators call ‘‘transformational outsourcing,’’ that is, clearing

away outmoded features and systems first rather than automating them.

To sum up, the PTO should——

• adopt a publicly stated policy of zero invalid patent issuances;

• establish a measured baseline with announced results;

• set clearly stated goals for continuous improvement; and

• make this effort a major feature of its annual report.

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PTO FUNDING

The NAM remains convinced that the single most evident reason for inadequate

PTO performance is Congress’s decade-long bad habit of treating the agency as a

convenient source of cash. After 10 years, the cumulative diversion or withholding

amounts to about $700 million. This situation continues to distress everyone who

truly cares about the effective functioning of the patent system. In our view, it has

become irrefutable that the continued funding drain has yielded deteriorating performance. Enclosed with the testimony is a series of charts detailing how continued

and rising fee withholding has been the key factor in deteriorating PTO performance, with average patent pendency rising from 18 months to 26 months.

Permitting the PTO to spend all the fees it takes in every year—from a public

policy standpoint, the only defensible outcome—would also lift the agency out of the

dilemma of spending money to hire or to automate that has been forced upon it for

far too long. Like quality versus timeliness, this is a false choice. For the PTO to

add sufficient staff this year is a necessary step. Substantial progress on electronic

filing and quality management are likewise necessary steps. It is not a matter of

one or the other, but all of the above. At the same time that the agency keeps staffing up to adequate levels, full funding would enable automation to proceed as it

should.

To these ends, the NAM supports the $45 million of the Administration’s proposed

surcharge that would go to the PTO to do its work but strongly objects to the remaining $162 million that constitutes, as noted at the hearing, a continuing hidden

tax on inventors. Moreover, the NAM takes vigorous exception to any characterization of the fee diversion as supporting homeland security. Funds will simply go into

general accounts in the Treasury; even if some new account were created, it would

be an artifice, as it would be masking the management of that part of the government that runs on a unitary budget. Moreover, taking money away from the organization dedicated to serving the inventors who desire to go public with their inventions—rather than keeping them secret—can only be viewed as self-defeating from

either an economic or defense standpoint.

THE NAM NOW CALLS FOR A BOLD, DETAILED AUTHORIZATION BILL

Mr. Chairman, the NAM supported your PTO authorization bill, H.R.2047, with

the aims of retaining all fees in the PTO budget and specifically calling for a major

automation program. But after another year with inadequate funding, issuance of

some dubious patents and little management progress, the NAM now believes that

the situation calls for a far broader and more detailed authorization bill that will

set in law the major goals the agency must achieve.

Findings

• PTO performance has deteriorated over past decade, marked by increasing

delays and dubious patent issuances in newer subject areas.

• Issuances of dubious new patents impose high costs on U.S. industry in terms

of time and money for investigation or defense, as well as diversion of research and development resources to invent around them and avoid legal defense costs.

• PTO has been precluded from spending about $700 million in fees it has collected over the past decade. The agency’s inability to spend these funds has

led to shortfalls in staffing and computerization that underlie the increasing

delays and questionable issuances.

• The only sound fundamental basis for fees charged by a federal agency to an

individual party for a particular service is the cost of rendering that service.

• PTO fees do not have an adequate cost basis today. They are not differentiated by difficulty of examination or modality of input; the fees are not directed in their entirety to their stated purpose of patent administration; and

some users bear higher fees in the form of a hidden cross-subsidy to support

lower fees for small entities.

• Discounting fees for small entities to promote patent system use is nonetheless a valid social purpose.

• Subsidies for social purposes should be open and transparent. Subsidies for

some inventors should not come at the expense of other inventors, discouraging them from using the patent system.

• Improved practices and measurements, staffing, and computerization—in particular, electronic-case management—are needed to cut backlog and increase

quality.

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Financial Provisions

• The PTO is authorized to retain and spend all fees on annual basis.

• Fee structure is unified in statute, eliminating all surcharges. No surcharges

are authorized. Annual increases are authorized up to the higher of 1) the

Consumer Price Index; or 2) a moving three-year average of applications

workload increase. (A fee chart needs to be worked out, but users must be

prepared for significant increases.)

• The PTO is directed to offer discounts for filing electronically—to provide an

incentive for applicants to make the changeover—taking into account expected long-term savings by discarding paper.

• The PTO is directed to impose handling fees in rough proportion to costs imposed by the length and complexity of individual filings (to encourage less

lengthy applications where possible, and the attendant costs of having the

lengthiest applications split up by the PTO).

• To pay for small entity subsidies, the PTO is authorized $150 million a year

from appropriated funds. (The amount of discounts would depend on sums actually appropriated.)

Performance Targets

• The PTO is expected to meet the following overall performance targets and

will report to Congress every six months whether it is on target to cut the

patent applications backlog and to eliminate paper case management on the

following timetable:

• By two years from enactment, the PTO will have all-electronic case management in trademarks.

• By three years from enactment, the PTO will have all-electronic case management in patents.

• By six years from enactment, the PTO will——

have reduced average time to first action in patent cases to eight months;

and

have reduced average patent pendency to eighteen months. (The specific

numbers are negotiable, but clear timetables are essential.)

• In addition, the PTO will seek advice from its advisory committee as to which

industry segments have the greatest need for prompt action on applications

and whose needs would not be met by the above schedules. The PTO will report to Congress as to which industry segments they are and formulate a plan

to process their work faster than the overall averages.

Management Measures

• Pursuit of zero defects—that is, the issuance of zero dubious patents—s set

forth as official management policy for the PTO.

• The PTO is directed to consult fully and openly with all interested privatesector vendors offering software and services in support of electronic filing

and to use commonly accepted protocols and formats. Furthermore, the PTO

is to lead discussions in the Patent Trilateral (with the European Patent Office and the Japanese Patent Office) on a harmonized, internationally accepted electronic format.

• The PTO is directed to undertake a major review of patent-quality policies,

practices and procedures. After six months, it is to submit a report to Congress including 1) what collection of quality measures the PTO will use as a

baseline and will track over time; 2) what quality-management methods proven out in private industry the PTO plans to adopt; and 3) what specific steps

will be taken to raise the quality of patent applications, such that they better

take into account all prior art, fully disclose the technology and make precise

and defensible claims.

The discussion at the hearing raised the question of reconstituting the PTO as

a wholly owned government corporation, as some early legislative versions of the

American Inventors Protection Act would have done. While not part of an authorizing bill as such, the NAM welcomes the reintroduction of this concept into the current debate on improving the patent system. The NAM has favored the concept of

managing the agency like Ex-Im Bank, for example, rather than part of a line agency and supports the testimony of the American Intellectual Property Law Association in this regard. The National Academy of Public Administration issued a favorVerDate 11-MAY-2000 12:29 May 22, 2002 Jkt 000000 PO 00000 Frm 00095 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\041102\78675.000 HJUD2 PsN: HJUD2
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able report on the matter in 1989 that remains the basic document. Opposition to

this legislative provision rested on wholly unsubstantiated claims that corporations

would subvert the agency into issuing weak patents through large donations. Just

the same, the logic of the idea remains sound and would better enable the sorts of

quality-management initiatives now under discussion than does today’s line bureaucracy status.

SUMMARY AND CONCLUSIONS

Mr. Chairman, here is the NAM’s vision for the PTO. By the end of the current

Administration, the PTO——

• will have completed the transition to electronic filing and file management for

trademarks and be more than half completed in patents;

• will operate as a true performance-based organization with the same continuous improvement techniques well known in industry; and

• will be poised to leave its inefficient, disjointed office space for modern unified

space at the new location.

If Congress shares that vision, then these implications are clear:

• Leave all the fees at the PTO, especially to ensure that full automation is

achieved before the move. Conversely, it is hard to see how the PTO can

make true progress if Congress continues to treat it as a convenient source

of cash.

• Enact detailed authorizing legislation as outlined above, with regular oversight hearings every six months.

I would be pleased to provide any further information and appreciate your consideration of our views.

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