U.S. GOVERNMENT PRINTING OFFICE

72–983 PS WASHINGTON : 2001

U.S. PATENT AND TRADEMARK OFFICE

OPERATIONS AND FUNDING

HEARING

BEFORE THE

SUBCOMMITTEE ON COURTS, THE INTERNET,

AND INTELLECTUAL PROPERTY

OF THE

COMMITTEE ON THE JUDICIARY

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

June 7, 2001

Serial No. 16

Printed for the use of the Committee on the Judiciary

(

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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

STEVE CHABOT, Ohio

BOB BARR, Georgia

WILLIAM L. JENKINS, Tennessee

ASA HUTCHINSON, Arkansas

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOE SCARBOROUGH, Florida

JOHN N. HOSTETTLER, Indiana

MARK GREEN, Wisconsin

RIC KELLER, Florida

DARRELL E. ISSA, California

MELISSA A. HART, Pennsylvania

JEFF FLAKE, Arizona

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

JULIAN EPSTEIN, Minority Staff Director/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

ASA HURCHINSON, Arkansas

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOE SCARBOROUGH, Florida

JOHN N. HOSTETTLER, Indiana

RIC KELLER, Florida

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

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C O N T E N T S

JUNE 7, 2001

OPENING STATEMENT

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 Berman, a Representative in Congress From the

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

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

WITNESSES

The Honorable Nicholas Godici, Acting Under Secretary of Commerce for

Intellectual Property and Acting Director of the U.S. Patent and Trademark

Office

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

Prepared Statement ............................................................................................. 6

Mr. Ronald Myrick, Chief Intellectual Property Counsel, General Electric

Capital Services, on behalf of Intellectual Property Owners (IPO)

Oral Testimony ..................................................................................................... 10

Prepared Statement ............................................................................................. 11

Mr. Nils Victor Montan, Vice President, Senior Intellectual Property Counsel,

Warner Brothers, on behalf of the International Trademark Association

(INTA)

Oral Testimony ..................................................................................................... 17

Prepared Statement ............................................................................................. 19

Mr. Ronald J. Stern, President, Patent Office Professional Association (POPA)

Oral Testimony ..................................................................................................... 24

Prepared Statement ............................................................................................. 25

APPENDIX

STATEMENTS SUBMITTED FOR THE RECORD

The Honorable Howard Berman, A Representative in Congress From the

State of California: Prepared Statement ............................................................ 41

The Honorable John Conyers, Jr., A Representative in Congress From the

State of Michigan: Prepared Statement ............................................................. 43

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

Prepared Statement ............................................................................................. 44

MATERIAL SUBMITTED FOR THE RECORD

Attrition Types as Percentage of Total Attritions from the Patent and Trademark Office ........................................................................................................... 46

Letter from Intellectual Property Owners Association on USPTO’s Fiscal Year

2002 Corporate Plan dated April 22, 2001 ......................................................... 47

Memorandum on the constitutionality of withholding and diversion of PTO

fees from the Intellectual Property Owners Association .................................. 50

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U.S. PATENT AND TRADEMARK OFFICE

OPERATIONS AND FUNDING

THURSDAY, JUNE 7, 2001

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COURTS, THE INTERNET,

AND INTELLECTUAL PROPERTY,

COMMITTEE ON THE JUDICIARY,

Washington, DC.

The Subcommittee met, pursuant to call, at 2 p.m., in Room

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

Mr. COBLE. Good afternoon, ladies and gentlemen. The Subcommittee will come to order. First of all, I will apologize. It looks

like it will only be Mr. Berman and me today. We are finished with

work on the floor, so I suspect our Members very likely are on their

way to the airport. But Howard, it is good to have you here. We

will do the best we can with the two of us. He said he considered

heading for the airport early.

Today we will review the operations of the Patent and Trademark Office. It pains me, and I am not being dramatic when I say

this, but it pains me that the focus of our hearing, as it has been

in the past, will be the continuing problem of diversion of Patent

and Trademark Office funds from the agency to other government

programs. More specifically, by the end of the present fiscal year

the agency will have lost more than $600 million attributable to diversions, rescissions, and other budgetary sleights-of-hand.

Our witnesses understand how this harms PTO operations and

ultimately how it can harm that sector of our economy that is dependent on the creativity of inventors and trademark owners. 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.

Along these lines, witnesses and the Subcommittee may wish to

critique three legislative responses to the funding problem which

have been introduced in the present Congress.

This is not to say, however, that we are extending a free pass

to the Patent and Trademark Office. All of us in the public sector

must be accountable for our work product. So the Subcommittee

will be interested in evaluating those aspects of agency operations

which must be improved to serve the needs of individuals and businesses which file for patent and trademark protection in Crystal

City.

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In this regard, I am especially concerned about ongoing problems

within the Patent and Trademark Office governing its automation

and computer systems.

I look forward to the testimony of the witnesses here this afternoon, and now I am pleased to recognize the distinguished gentleman from California, the Ranking Member, Mr. Howard Berman.

Mr. BERMAN. Thank you, Mr. Chairman, and thank you for calling this hearing. It is another installment in our annual review of

the PTO and its operations.

In its work examining and granting trademarks, the PTO plays

a critical role in spurring technological innovation and commercial

creativity. This innovation and creativity in turn has been the primary engine behind our information economy. By and large, the

PTO is to be commended for doing excellent work. As with any entity, there is room for improvement at the PTO.

I have been concerned about the quality of some patents being

issued, particularly business method patents. I believe there are a

variety of ways the PTO can address these quality concerns. However, many solutions to quality concerns will remain outside the

PTO’s grasp unless it has sufficient resources to implement those

solutions.

The Bush administration’s budget request for fiscal year 2002

planned to divert 207 million in fiscal year 2002 PTO fees to programs outside the PTO. While revised revenues estimates from the

PTO indicate that the actual diversion may be far less than the 207

million in this coming fiscal year, the Bush budget also proposes

to divert an average of over $180 million in succeeding years.

This, as the Chairman likes to call it, is legalized larceny, far

outstripping anything contemplated by previous administrations. I

think it is appropriate to categorize these fee diversions as a tax

on innovation. This innovation tax takes fees paid by inventors and

business people to secure patents and trademarks and uses them

as interest free loans to fund unrelated programs. Now, when they

are programs I like I am less upset about that. But as a general

principle it is really a questionable activity.

And it is slightly ironic that an administration, pardon my next

sentence, Mr. Chairman, but it is slightly ironic that an administration so intent on cutting taxes and promoting free enterprise

would build on and increase such an enormous tax and innovation.

This innovation tax is leaving the PTO unable and unequipped to

perform its very critical mission. Over the past few years patent

and trademark applications have skyrocketed. At the same time

patent and trademark pendency has lengthened unacceptably.

Ideally the PTO would respond by streamlining the application

process and increasing the number of examiners, but without adequate funding the PTO has been forced to defer needed improvements in their IT infrastructure and withstand record attrition in

their work force. Talented people can go and do go elsewhere when

the government cannot pay competitive salaries. Without sufficiently talented people, average workload goes up. Pendency increases and quality suffers.

I believe Congress should repeal this innovation tax by ensuring

the PTO can use all its fees it receives.

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The Chairman mentioned several of the pieces of legislation.

Representative Boucher and I introduced H. Res. 110 several

months ago to accomplish this very goal. It would create a point

of order against floor consideration of any bill that provides the

PTO with less than full funding. The Chairman, Representative

Conyers and I introduced a bill yesterday which also advances the

goal of legislating full PTO funding, H.R. 2047. That bill authorizes

the PTO to use all the fees it collects in the fiscal year 2002. I believe that H.R. 2047 and H. Res. 110 are symbionic and I will pursue House passage of both.

I want to be clear about the difficulties inherent in any attempt

to legislate full funding. Without significant sustained support from

affected PTO users, the prospects for repeal of the innovation tax

are dim. I applaud all the efforts we have already seen, but coalition letters and trade association lobbying must be coupled with direct appeals from the CEOs, more grass roots involvement and expansion of the organizations involved. The PTO also has a substantial role to play in enabling its supporters to effectively advocate

for the repeal of this innovation tax. The PTO needs to clearly and

specifically outline how it would use all the diverted fee revenues.

While more money will certainly help the PTO fulfill its mission,

additional funds cannot fix all patent quality concerns. There are

a variety of forms, particularly within the examination process,

which would significantly improve confidence in patent quality.

The statement I seek to put in the record would expand on some

of those points, but I wanted to just address one of the reforms included in H.R. 2047. Currently the PTO can accept electronically

filed patent applications but then examines these applications in

hard copy. Such a system not only creates unnecessary administrative costs but also effectively prevents pending applications from

becoming a useful source of prior art. H.R. 2047, the Chairman’s

bill that I am supporting, would require the PTO to establish a system that allows it to electronically process, maintain and search

patent applications. Such a system could allow an examiner of a

business method patent application to scour all pending applications for prior art. As applications currently outnumber business

method patents actually granted, pending applications could become a fruitful source of prior art.

I will yield back the balance of my time, Mr. Chairman, but

thank you again for having the hearing.

Mr. COBLE. Without objection, your entire statement will be

made a part of the record.

Howard, I think your term ‘‘taxing innovation’’ is probably less

severe than ‘‘legalized larceny,’’ but I think both are accurate. I

take no umbrage from my friend about the administration. It is

true. This diversion, as you all know, is a bipartisan attack. I don’t

like the Bush approach, I didn’t like the Clinton approach. And

Howard and I, Mr. Berman and I fought the other administration;

we are going to fight this administration hopefully to eliminate this

diversion. I know you all are getting tired of hearing us talk about

this, but it is a severe problem that needs to be resolved, and we

will continue to talk about it and hopefully resolve it.

The Subcommittee is pleased to have as our first witness the

Honorable Nicholas Godici, who serves as Acting Undersecretary of

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Commerce for Intellectual Property and Acting Director of the

United States Patent and Trademark Office. Mr. Godici has a long

and distinguished career at the PTO, serving in several key management subcommittees, including his tenure as the Assistant

Commissioner for Patents and Trademarks.

Mr. Godici received a Bachelor of Science in mechanical engineering in 1972 from the Pennsylvania State University and

earned a graduate level certificate of advanced public management

from the Maxwell School of Citizenship and Public Affairs from

Syracuse University in 1998.

Our second witness is Nils Montan, Vice President and Senior

Intellectual Property Counsel at Warner Brothers, a division of

Time Warner Entertainment Company, and he is testifying on behalf of the International Trademark Association in his capacity as

the INTA President. Mr. Montan has been a member of the adjunct

faculties of the law schools at the University of Southern California

in Los Angeles and Loyola University. He is also the author of a

recent monograph on trademark counterfeiting published by INTA,

called Trademark Anti-counterfeiting in Asia and the Pacific Rim.

Mr. Montan received his B.A. From Cornell University and his

J.D. From the Washington College of Law at American University

and an L.L.M. From the University of Virginia School of Law.

Our third witness is Ronald E. Myrick, who serves as the President of the Intellectual Property Owners Association, IPO, and is

Chief Intellectual Property Counsel for the General Electric Company. Mr. Myrick holds a juris doctor cum laude from Loyola University of Chicago School of Law. Prior to assuming his present position, he was an attorney in private practice. Mr. Myrick has been

nominated by the United States to the World Trade Organization

Dispute Settlement Roster and has served as a Delegate for IPO

in meetings of the Committee of Experts for the Protocol and the

Patent Harmonization Treaty. He is also a member of the USPTO

Patent Public Advisory Committee. And Mr. Myrick, I want to say

to you and to Mr. Herb Wamsley and others, I want to extend

kudos to you for a very fine Inventor of the Year reception that we

conducted earlier this week in the Cannon Caucus Room. That was

a very fine event, and I thank you all for the work you did to make

that happen.

Our final witness this afternoon in Mr. Ronald J. Stern, who is

President of the Patent Office Professional Association. Mr. Stern

holds a Bachelor’s Degree from the City College of New York and

a law degree from the George Washington University. He has

worked as a primary examiner at the PTO since 1964.

We have written statements from all the witnesses on this panel,

which I ask unanimous consent to submit into the record in their

entirety. I ask that each witness, folks, if you can, confine your remarks as we have previously requested to on or about 5 minutes.

When you see the red light illuminate in your eye, that does not

mean that Mr. Berman and I are about to attack you physically,

but it is a warning that it is about time to wind down if you can

do that within the 5-minute time frame.

Mr. Godici, why don’t we start with you?

5

STATEMENT OF THE HONORABLE NICHOLAS GODICI, ACTING

UNDERSECRETARY OF COMMERCE FOR INTELLECTUAL

PROPERTY AND ACTING DIRECTOR OF THE U.S. PATENT

AND TRADEMARK OFFICE

Mr. GODICI. Thank you, Mr. Chairman. I want to begin by thanking you and Ranking Member Berman and the other Members of

the Subcommittee for your continued strong support of the USPTO

and effective protection of intellectual property in the United

States and internationally.

As the Subcommittee is well aware, the USPTO is experiencing

significant increases in patent and trademark filings that present

important operational challenges to our office. In fact, since 1996,

patent and trademark filings are each up over 50 percent.

To manage this rapidly increasing workload and provide firstrate service to our customers, the USPTO is pioneering a number

of e-government initiatives. In the last year we have implemented

electronic filing of patent applications, expanded electronic filing of

trademark applications, and completed our online Web database to

include every U.S. patent ever issued back to the very first patent

in 1790.

My written testimony highlights the many awards our e-government initiatives have received. Other events of note in the last year

include the issuance of our final ‘‘Utility Examination Guidelines’’ for determining the utility of inventions, a groundbreaking ceremony for our new consolidated headquarters in Alexandria, and

publication of a report in the USPTO’s capacity as co-chair of the

National Intellectual Property Law Enforcement Coordination

Council concerning ways to improve government’s role in IP law

enforcement.

On the international front we continue working with other national industrial property offices to streamline the procedures for

securing protection for patents, trademarks and copyrights. As the

effective protection of intellectual property rights becomes an increasingly focus of worldwide trade the demands for our office’s expertise in this area is growing significantly.

Let me now discuss our patent and trademark operations in

greater detail. In fiscal year 2000 the USPTO received over 291,000

utility patent applications, an increase of 12 percent over the previous year. We granted a record 182,223 patent documents and

hired 375 new patent examiners. Due in part to the strong competition from the private sector, however, we lost 437 of our examiners.

The USPTO is managing to the AIPA’s 14-4-4-4-36 timeliness

standards which provide restoration of a patent term to diligent applicants when certain requirements are not met by the USPTO.

In fiscal year 2000, 81 percent of the applications received a first

Office action within 14 months or sooner.

End-of-year pendency to first office action averaged 13.6 months,

better than what we projected, which was 14.2 months.

Other noteworthy developments included a 30 percent improvement in patent quality in the first half of this fiscal year, based on

our internal quality review program, and a reduction in patent examiner turnover from the 14 percent last year mainly as a result

of approval just in the last week by OPM for a special pay scale

for our patent examiners.

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Mr. Chairman, I want to take the opportunity at this point in

time to stop and thank Ron Stern, the President of our Patent Examiner Union, and the members of his team for working very closely with us to bring about that special pay scale for patent examiners at the USPTO.

On the trademark side we received a record 375,000 trademark

applications last year, a 1-year increase of 27 percent. This rate of

increase has declined significantly this year in tandem with the

economic slowdown and we currently project an 18 percent reduction in filings this year compared to fiscal year 2000. Last year we

registered over 127,000 classes and increased our work force on the

trademark side to 383 trademark attorneys by hiring 74 new attorneys.

Trademarks is aggressively utilizing information technology and

the Internet to better serve its customers, with a goal of all communications with customers being electronic by 2003. The filing of

trademark applications via the Internet, a key part of this initiative, now stands at more than 22 percent of the total applications

filed. Other noteworthy developments in trademarks include a reduction in first action pendency to 5.6 months, its lowest level in

8 months, and a drop in trademark examining attorney attrition

from 13.2 percent at the end of last year to 8.6 percent currently,

and the expanding of our popular work at home program, which

now includes more than 90 of our trademark examining attorneys.

On the budget side, Mr. Chairman, for fiscal year 2002 the President has recommended that we be given the authority to spend

$1.139 billion of the fee revenues that we expect to generate. This

is an increase of $100 million, or 10 percent over the fiscal year

2001 enacted level.

Although the President’s budget assumed that we would collect

$1.346 billion, we have had to revise our fee collection estimates to

reflect the decline in trademark application filings and fewer requests for early publication of patent applications. Our current

2002 fee collection estimate is $1.218 billion. Of that amount, $857

million will be available to us in fiscal year 2002. In addition to

that amount, we will have access to $282 million carried over from

fiscal year 2001, for a total of 1.139 billion.

My written testimony provides details on our fiscal year 2002

funding priorities. In conclusion, Mr. Chairman, the work of the

USPTO is critical to the economic vitality of our Nation. I am confident that the USPTO can continue to lead the world in providing

customer-valued intellectual property rights that spark innovation,

create consumer confidence and promote economic growth. We look

forward to working with you and all the Members of the Subcommittee in doing just that.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Godici follows:]

PREPARED STATEMENT OF NICHOLAS P. GODICI

Mr. Chairman and Members of the Subcommittee:

Thank you for inviting me here today to discuss the operations and funding of

the United States Patent and Trademark Office (USPTO). At the outset, Mr. Chairman, I want to thank you, Ranking Member Berman and the members of the subcommittee for your continued strong support of our office and for effective global

protection of intellectual property.

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As the Subcommittee is well aware, intellectual property is at the forefront of the

news. Indeed, in light of the rapid growth in patent and trademark filings, our agency faces a number of important operational challenges. With sufficient resources, I

am confident that the USPTO can meet these challenges and continue to lead the

world in providing customer-valued intellectual property rights that spark innovation, create consumer confidence, and promote creativity.

The USPTO has experienced significant increases in patent and trademark filings

in recent years. Patent application filings are currently 13 percent above last year’s level; since 1996 they are up over 50 percent. Although trademark filings are currently down 18 percent from this time last year, filings are over 50 percent higher

than in 1996.

The USPTO has undertaken a number of significant initiatives over the last year

to provide our customers with more efficient, high-quality service.

We are a leader in providing e-government services. Within the past year we have

implemented electronic filing of patent applications for all of our customers, expanded electronic filing of trademark applications through our Trademark Electronic Application System (TEAS), and expanded our on-line patent Web database

to include every U.S. patent ever issued—back to the very first patent in 1790. I

am pleased to report that our e-government initiatives have been very well received.

Our Patent Electronic Business Center, which includes our Electronic Filing System, was selected last November as one of the year’s ‘‘Best Feds on the Web’’ by

GovExec.com, the website of Government Executive magazine. ‘‘Patents on the Web’’ was recognized by the Smithsonian ComputerWorld Laureate program as one of the

five best government projects in the world for 2000. TEAS has received several national awards, including its recent recognition as a finalist in the 2001 Quality Cup

Award sponsored by USA TODAY and the Rochester Institute of Technology in New

York. Our website (www.uspto.gov) receives over 30 million visits each month and

was recently named to Entrepreneur Magazine’s Third Annual ‘‘Top 100 Best Sites.’’ USPTO received the E-Gov 2001 ‘‘Trailblazer’’ honorable mention award for its efforts to promote innovative Electronic Government programs.

Let me highlight some other noteworthy accomplishments for the USPTO over the

last year.

In January, after extensive public comment, we issued our final ‘‘Utility Examination Guidelines’’ for determining the utility of inventions. While the guidelines are

applicable to all areas of technology, they are particularly relevant in areas of

emerging technologies, such as gene-patenting. Also, earlier this year, we held a

groundbreaking ceremony for our new consolidated headquarters facility in Alexandria, Virginia, and, as co-chair of the National Intellectual Property Law Enforcement Coordination Council, we provided a report to the President and Congress focusing on areas in which interagency coordination could improve the Government’s performance in IP law enforcement.

Our Patent and Trademark Public Advisory Committees, which include independent inventors, lawyers, corporate executives, small entrepreneurs, and academicians, have met on several occasions since their establishment last summer. Pursuant to the American Inventors Protection Act of 1999 (AIPA), the Committees published an annual report late last year assessing the performance, goals, and policies

of the agency. Also pursuant to the AIPA’s pre-grant publication provisions, the

USPTO on March 15, 2001, published the first patent applications. We expect that

over the next eighteen months the number of published patent applications will increase to a weekly rate in excess of 4,000.

On the international front, the USPTO continued working with other national industrial property offices to streamline the procedures for securing protection for patents, trademarks, and copyrights. For example, nearly a year ago, our work with

the World Intellectual Property Organization (WIPO) resulted in the United States

and 42 other member states signing the Patent Law Treaty. Once the Treaty enters

into force, uniform patent filing requirements and formal procedures among the

Treaty’s member states will help reduce the cost of securing patent protection

abroad. In addition to this achievement, our policy specialists in the Office of Legislative and International Affairs engaged in multilateral and bilateral negotiations

to strengthen IP protection worldwide and provided technical assistance to strengthen international IP enforcement. The USPTO has taken the lead in developing country-specific, interagency enforcement training initiatives for China, Mexico, and

Oman, and sponsored or cosponsored more than a half dozen IP enforcement programs for government officials and private sector interests in Asia, Eastern Europe,

West Africa, and the Americas. As the effective protection of intellectual property

rights becomes an increasing focus of worldwide trade, the demands for our Office’s

expertise in this area are growing significantly.

Let me now discuss our patent and trademark operations in greater detail.

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PATENTS

In fiscal year 2000, the USPTO received 291,653 utility patent (patents for invention) applications, an increase of 12 percent over the previous year. Some of the

largest increases in patent filings are occurring in the areas of business methods

and biotechnology. Last year we granted a record 182,223 patent documents, including 164,490 utility, 16,719 design, 453 plant, 561 reissue patents, and 88 statutory

invention registrations. Utility patent grants in fiscal year 2000 represent a 15 percent increase over the total for fiscal year 1999.

To handle the increase in our workload, the USPTO hired 375 new patent examiners last year. However, we lost 437 examiners due, in part, to the strong competition from the private sector. Although we lost ground in terms of the staff necessary

to process our incoming work, our end- of-year total examining staff was 2,959, up

from 2,212 in fiscal year 1997. Most of the new examiners are assigned in our software, computer, business methods, and biotechnology areas. They have an average

of four years of practical experience in those industries and some fifty percent have

advanced degrees, including a number of Ph.D.s.

As you might expect, the impact of the AIPA on our Patent operations is profound. The AIPA provides stringent processing times as benchmarks. The USPTO

is managing to the ‘‘14–4–4–4–36’’ timeliness standard which provides 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 fiscal year 2000, 81.2 percent of applications received a first Office action within 14 months or sooner. End-of-year pendency to first Office action averaged 13.6

months, better than the projected target of 14.2 months.

Other noteworthy developments in Patents included:

• Our traditional internal measure of Patent Quality, based on the error rate

in a sampling of allowed applications, improved 30 percent from the end of

last fiscal year. A combination of in-process reviews and technical and legal

training efforts has contributed to this improvement.

• USPTO management signed an agreement with the Patent Office Professional

Association (POPA) concerning a special pay request and the removal of

paper-search files. Called the ‘‘Millennium Agreement,’’ it provides that, contingent upon approval of a 10 percent special pay request for patent examiner

and related-positions, POPA agrees to the phased removal of paper-search

files, a work-at-home pilot project, and a customer service element in employees performance plan. This agreement addresses a number of issues that will

help the organization move forward, including enhancing retention and recruitment efforts, moving from a paper-based to electronic-based search system, and helping customer service and quality improvement efforts. The Office of Personnel Management approved the special pay rate just last week.

• Patent examiner turnover improved from 13.8 percent in fiscal year 2000 to

9.0 percent in the first half of fiscal year 2001. A factor likely contributing

to this decrease was the anticipation of the special pay rate approved by the

Office of Personnel Management.

TRADEMARKS

Much like the activity in patents, the trademark side of our operations also experienced significant growth in fiscal year 2000 when we received a record 375,428

trademark application classes, an increase of 27 percent over fiscal year 1999. This

was the second year in a row that we received a 27 percent increase in trademark

application filings. This rate of increase has declined significantly this year in tandem with the economic slowdown, and we currently project an 18 percent reduction

in filings this year compared to fiscal year 2000. We registered 127,794 classes and

increased our workforce to 383 by hiring 74 examining attorneys. As a result, trademark pendency to first Office action has improved over the first half of this fiscal

year.

To ensure that we make our operations as efficient and user-friendly as possible,

Trademarks is utilizing information technology and the Internet to better serve its

customers. By reducing or eliminating the number of processing activities in the

production process, with end-to-end e- processing of trademark applications, we

9

have the greatest potential for performance improvement. Trademarks’ goal is to

have all communications with our customers handled electronically by 2003.

The filing of trademark applications via the Internet—a key part of this initiative—increased 8 percent in the first half of fiscal year 2001 to more than 22 percent of total applications filed. We expect our 100,000th Internet-filed trademark application to be filed shortly.

In fiscal year 2000, Trademarks also opened its first e-commerce law office for the

examination and processing of electronically filed applications for trademark registration. The Trademark e- commerce law office is based on the success of electronic filing of trademark applications and is consistent with the e-Government

strategy to do business electronically. The creation of this e- commerce law office

demonstrated the opportunity for reducing the length of time it takes to register a

mark. As the number of electronically filed applications increases, the USPTO will

convert more law offices to e-commerce offices.

Other noteworthy developments in Trademarks included:

• First action pendency fell to 5.6 months at the end of March, its lowest level

in 8 months. The estimated end-of-year (EOY) pendency to first action will

be 4.8 months.

• The attrition rate among Trademark examining attorneys fell from 13.2 percent at EOY fiscal year 2000 to 8.6 percent in the first half of fiscal year

2001. This drop in attrition is partially attributable to a number of initiatives

implemented in the first half of fiscal year 2001 to enhance employee satisfaction.

• Trademarks embarked on two distinct initiatives to stimulate productivity: (1)

implementation of a semi-annual incentive award of up to $10,000 for increased productivity, and (2) expansion of the Work-at-Home program.

• The Trademark Work-at-Home program, which began with 18 trademark attorneys in March 1997, now includes more than 90 examining attorneys working from home three days a week.

BUDGET

For fiscal year 2002, the President has recommended that we be given authority to spend $1.139 billion of the fee revenues we expect to generate. This is an increase

of $100 million or 10 percent over the fiscal year 2001 enacted level. This level

would support the fiscal year 2001 staff levels which include 2,950 patent examiners

and 393 trademark attorneys, in addition to special pay raises and performance bonuses for these employees.

The fiscal year 2002 President’s budget assumed we would collect $1.346 billion.

Since submitting the budget, we have revised our fee collection estimates to reflect

the decline in trademark application filings and the reduced levels of requests for

early publication of patent applications. Our current 2002 fee collection estimate is

$1.218 billion.

Of the $1.218 billion in revenues we expect to collect next year, $857 million will be available to us in fiscal year 2002. We will seek use of the remainder, $361 million, for fiscal year 2003. In addition to the $857 million, we will have access to $282

million carried forward from fiscal year 2001—for a total of $1.139 billion.

Fiscal year 2002 funding would be used for the following priorities:

• $43.8 million for what we call ‘‘adjustments to base.’’ These include amounts

to cover cost of living pay increases and other inflation costs.

• $32.5 million to provide special pay rates to enable the recruitment and retention of patent professionals. The quality of patent examination will improve

by having a stable and more experienced workforce.

• $17.7 million to fully implement the pre-grant publication provision of the

AIPA.

• $6.2 million to provide a financial incentive for higher workload productivity

in the Trademark business. This performance incentive award is included in

the agreement between the National Treasury Employees Union (NTEU)

chapter 245 and the USPTO which was ratified last December. The addition

of this productivity award program provides Trademark Examiners with the

ability to increase their take-home pay while the USPTO and its customers

benefit from increased productivity and quality.

CONCLUSION

Mr. Chairman, as I mentioned at the beginning of my remarks, the USPTO faces

a number of important operational challenges. We have made good progress toward

10

meeting those challenges, and we look forward to working with you and the Subcommittee, other interested members of Congress and the Administration to ensure

that we have sufficient resources, financial flexibility, and appropriate oversight to

meet those challenges and provide first-rate service to our customers.

Thank you.

Mr. COBLE. Thank you, Mr. Godici.

Mr. Myrick, in a sense of fairness Mr. Godici had about almost

2 minutes over, so we will give you 7 minutes as well and then you

won’t be penalized for that, Mr. Godici.

STATEMENT OF RONALD E. MYRICK, CHIEF INTELLECTUAL

PROPERTY COUNSEL, GENERAL ELECTRIC CAPITAL SERVICES ON BEHALF OF INTELLECTUAL PROPERTY OWNERS

(IPO)

Mr. MYRICK. Thank you, Mr. Chairman. And a very good afternoon to you and to you, Mr. Berman. I appreciate the opportunity

to testify today on behalf of the Intellectual Property Owners Association, known as IPO. The views I am expressing today are those

of IPO and not necessarily those of General Electric, Patent Public

Advisory Committee, or the bar associations with which I am associated.

Speaking for IPO, I am speaking for owners of IP. Our members

include about 100 American corporations that are among the largest patent filers in the United States and worldwide from all major

industries.

I first want to compliment the employees of the PTO for working

diligently to improve the office in very difficult circumstances. But

they can only do so much with the funding that they have.

Mr. Chairman, the PTO is likely to be in a crisis soon if it is not

already there. According to the PTO’s fiscal year 2002 corporate

plan, the pendency time of the average patent application in the

PTO will rise to 38.6 months by 2006. The prospect of American

companies and inventors waiting 38.6 months on average to obtain

a patent, which means 40 to 50 months in many cases, is entirely

unacceptable. Such delay will drive companies and inventors away

from using the patent system and have a commensurate effect

upon innovation in this country.

Timely processing is vitally important for many industries, but

timely processing is only part of the picture. Equally important, if

not more so, any plan for recovery by the PTO must focus on improving the quality of patent and trademark examination. To undertake a program for improving patent quality, we recommend

that the PTO publish the best objective standards of quality it can

articulate after a thorough study of the subject with input from the

public.

The PTO should measure its quality against these standards regularly and publish the set of indicators of quality of patent search,

and examination for each of the seven technology centers.

An improved feedback mechanism should be established to drive

the processes within the patent system, to reach specific goals for

patent quality, which should be reviewed each year by the Subcommittee. In industry we refer to this kind of approach to quality

as Six Sigma, or statistical process control, because it focuses on

controlling the processes that result in patents driving out the root

causes of mistakes and errors from those processes.

11

In addition, the PTO needs more funds for investments and information technology systems, about which Mr. Godici just spoke.

The e-filing systems are receiving much attention at the PTO at

this time. But improvement and expansion are essential for both

patent and trademark registration applications throughout the entire processing mechanism.

We recognize that the Members of this Subcommittee have long

fought for adequate funding for the PTO. We are encouraged that

the officials of the incoming administration; namely, the Secretary

of Commerce, who have been looking into the PTO are also looking

at what the office needs, emphasis on the word ‘‘needs.’’ . The practice of withholding fees paid to the PTO by the patent

and trademark applicants and owners is the primary cause of the

situation in which the PTO now finds itself. According to the President’s budget, by the end of 2002 the amount of, quote, unavailable collections, end quote, will be $871 million. Whatever that means,

unavailable, permanently through rolling artful accounting or unavailable only temporarily is unclear.

The solution to the funding problem is to provide the PTO with

the resources it needs to do its job, even if the PTO needs an

amount greater than that now being collected. The time when an

amount less than fee collections can even be considered is past.

Rather, the discussion now should be retrieving past withheld fees

for use now, not at some unidentified future availability date.

Therefore, we endorse H.R. 2047, introduced this week by Chairman Coble and cosponsored by Mr. Berman and Mr. Conyers,

which authorizes 2002 PTO funding, authorizes special funding for

electronic filing and processing, and requires a 5-year strategic

plan.

As an alternative to asking the appropriations committees each

year to appropriate adequate funds for the PTO, Congress could

enact Chairman Coble’s bill, H.R. 740, or Mr. Berman resolution,

H. Res. 110, to eliminate the authority of the appropriations committees to withhold PTO fees. We support these measures as good

solutions for the future.

In summary, to turn around the current situation, the PTO

needs the hundreds of million in, quote, unavailable collections. If

these fees have not been diverted actually to unrelated government

programs, or used for deficit reduction, but are only being truly

temporarily withheld, they should be used now to address the critical problems facing the PTO.

If they are permanently unavailable, through a rolling accounting artifice or otherwise, they are gone and have been used for

other purposes, that should be made clear.

Thank you for the opportunity to speak to you today.

[The prepared statement of Mr. Myrick follows:]

PREPARED STATEMENT OF RONALD E. MYRICK

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. I am also Chief Intellectual Property Counsel for General Electric Co. in Fairfield, Connecticut; I have

the privilege of serving on the U.S. Patent and Trademark Office’s Patent Public

Advisory Committee ‘‘P-PAC,’’ as First Vice President of the American Intellectual

Property Law Association, and on the Council of the IP Law Section of the American

Bar Association. However, the views I am presenting today are those of IPO and

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not those of my company, the P-PAC or any bar association. Speaking for IPO, I

am speaking for Owners of IP rights.

IPO is an association of U.S.-based owners of patents, trade secrets, trademarks,

and copyrights. 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

nearly $200 million a year in fees to support operations of the PTO.

PATENT AND TRADEMARK OFFICE IN CRISIS

The effectiveness of PTO operations is of great importance to U.S. companies and

inventors. As the members of this committee know, proper functioning of the patent

system also is very important to the economic strength of the country. The patent

system when operating properly encourages invention, innovation and business investment. Effective administration of the Federal Trademark Act by the PTO is

equally important. It encourages business investment and protects consumers.

IPO has testified at many of the annual PTO oversight hearings before this Subcommittee. We always emphasize the need for 1) conducting a high quality professional examination of patent and trademark applications, 2) processing patent and

trademark applications promptly, and 3) streamlining and modernizing PTO operations so as to increase efficiency and provide the best overall service to the public.

These fundamental objectives for the PTO have not changed, but this year the PTO

seems to be in more danger of failing to meet these objectives than at any time in

memory. Unfortunately, the PTO is starving for lack of funding.

We want to compliment the employees of the PTO for working diligently to improve the office and its operations in the current very difficult circumstances. As a

member of the P-PAC for the past year I have personally had the opportunity to

witness the commitment of PTO employees at all levels in the office. But they can

do only so much with the funding they have.

Mr. Chairman, ‘‘crisis’’ is a strong word. We do not want to exaggerate, but the

PTO is likely to be in crisis soon if it is not there already. According to the PTO’s

‘‘Fiscal Year 2002 Corporate Plan,’’ the pendency time of an average patent application in the PTO will rise to 38.6 months by 2006. The prospect of American companies and inventors waiting an average of 38.6 months to obtain a patent is unacceptable. Many patents and many technologies likely will far exceed this average.

Such delay would cause enormous uncertainty about legal rights in new technology

and discourage investments in the inventing, developing and marketing of new

products and services. Delays of this magnitude also will result in automatic extensions of the life of most patents under the American Inventors Protection Act. This

is inconsistent with the Congressional decision that patents should generally expire

20 years after filing.

If this is not enough to justify using the word ‘‘crisis’’, we have learned that the

European Patent Office is considering a cutback in searching and examining patent

applications filed under the Patent Cooperation Treaty that may throw additional

workload to our PTO. Although we do not know the effects on the workload and revenue of the PTO, this could represent an additional threat to the effectiveness of

the U.S. patent system.

IPO believes the time has come for a special PTO recovery program. We have no

doubt that the PTO can meet the goals—high quality patents and trademarks, reasonable pendency time, and implementation of ‘‘e-government programs’’—if funding

is available. If funding continues at recent levels, it cannot. That is a crisis for U.S.

industry and inventors. Our members are very concerned, so much so that two

weeks ago 61 corporations including many IPO members wrote to members of the

Commerce, Justice, State Appropriations subcommittees on this subject. A copy of

that letter is attached.

PROCESSING DELAYS

The estimated patent pendency time of 38.6 months in 2006 is more than double

the long-time goal of disposing of applications within 18 months and nearly a 50

percent increase over the current pendency time of about 26.2 months. Last year

there were 257,000 patent applications awaiting examiner action. By 2006 the PTO

Corporate Plan projects 1,293,000 patent applications will be awaiting examiner action.

Indeed the 2002 PTO Corporate Plan actually presents an optimistic scenario

from one perspective, because it bases its future pendency time projections on the

assumption that after 2002 the PTO will be allowed to spend as much money as

it collects in fees each year through 2006. That is a prospect the PTO has not enVerDate 11-MAY-2000 12:58 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\060701\72983.000 HJUD2 PsN: HJUD2
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joyed since 1991, but such an assumption is inconsistent with a document published

by the Office of Management and Budget in April which assumes withholding an

average of $184 million a year from the PTO through 2006. Thus, the full fee funding assumption underpinning the basis for even this dismal projection on pendency

seems to be questionable without strong Congressional action.

In reality, without a drastic change in the policy for funding the PTO it appears

the future will be even dimmer than shown in the Corporate Plan. In view of past

funding constraints, the PTO has been unable to hire enough patent and trademark

examiners for several years and now its base of experienced examiners is too small

to catch up with its workload for years even if it were given a massive cash infusion

tomorrow. We have then a recipe for a major problem that will take years and reliable, steady, significant funding to fix.

PATENT AND TRADEMARK QUALITY

Processing time is important, but it is only part of the picture. Any plan for recovery by the PTO also must focus also on improving the quality of patent and trademark examination and insuring development of effective electronic systems for filing

and processing of patent and trademark applications, to improve efficiency, reduce

costs and improve public service for the future. The PTO must have the resources

needed to produce high quality patents for all industries. The need for patent quality is discussed most often in connection with emerging areas such as business

method patents, on which this Subcommittee held a hearing on April 4, 2001. Resources are needed to insure high quality business method patents, but resources

are also needed to insure high quality computer software patents, electrical patents,

chemical patents, pharmaceutical patents, biotechnology patents, and brick and

mortar patents.

To undertake a systematic program for improving the quality of patent examination, we recommend the PTO develop and publish the best objective standards of

quality that can be articulated after a thorough study of the subject with input from

the public. The PTO then should measure its quality against these objective standards on a regular basis and publish the results. Such a system of objective quality

standards should be used to drive improvements in patent quality. While the PTO

has published some information on its quality review program, we feel that more

objective standards can be established.

We note that the Subcommittee recently approved legislation to improve patent

reexamination proceedings in the PTO. IPO supports improvements in patent reexamination proceedings to give the public a reasonable opportunity to test the validity of patents without expensive court litigation. However, patent reexamination is

not a substitute for a thorough prior art search and application of patent law standards to every application by PTO examiners before the patent is granted. The PTO

is doing a good job with the resources available, but, again, only so much can be

done with current resources.

INFORMATION TECHNOLOGY

In its Corporate Plan the PTO needs more funds for investments in information

technology systems. The Corporate Plan states:

The solutions for managing a large inventory of pending applications cannot

solely rely on hiring of additional personnel. We must also make critical investments in information technology systems and redesigned processes if

we are to manage future workloads.

Because of the scarcity of funds at the PTO, we believe the PTO has had to forego

information technology investments to focus instead on processing current workloads. Unless the PTO obtains more resources it will be unable to avoid future

delays in investing in electronic systems that could strengthen its ability to handle

its workloads.

The e-filing system for trademarks at the PTO has proven very effective. Indeed,

within less than an hour, GE’s Corporate Trademark Office filed 53 applications

earlier this week. Although the system eliminates a three-month delay from the

time of filing to the time of receiving a mailed filing receipt, there is still room for

increased efficiency as the system does not yet allow for all communications between

the PTO and its trademark customers to be done electronically. Still, its ease of use

is far greater at the moment than the Electronic Filing System (EFS) for patent applications. The patent e-filing system is the focus of substantial attention in the

PTO at this time and its improvement and expansion are vital links in the essential

elimination of paper in the proceedings of the PTO.

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THE IMPACT OF WITHHOLDING PTO USER FEES

The members of this Subcommittee are well aware that Congress and the Executive Branch have been withholding a portion of the user fees paid to the PTO by

patent and trademark applicants and owners each year. The practice of withholding

fees is the primary cause of the situation in which the PTO now finds itself. Withholding began in 1992 with relatively small amounts each year , and has increased

to the point where it has created a funding crisis. According to the President’s budget, the amount of ‘‘unavailable collections’’ will be $871 million by the end of 2002.

Based on the funding recommendation and workload projections in the President’s

budget when it was submitted in April, $207 million would be withheld next year

out of $1.346 billion in fees paid by U.S. companies and inventors for PTO services

in 2002. The amount of withholding has been increasing through a bookkeeping

scheme in which each year a portion of previously withheld money is said to be

made available, but a larger amount of current year collections is withheld. For example, in the President’s 2002 budget, it is proposed that $282 million ‘‘. . . from

fees collected in prior fiscal years shall be available for obligation in fiscal year

2002. . .,’’ and that $489 million of 2002 collections will be ‘‘precluded from obligation.’’ Hence, the net withholding of $207 million.

It is true that as a result of downward revisions in incoming revenue estimates

since the President’s budget was released, the percentage of funds withheld in 2002

will be lower than originally estimated, provided the PTO is given all the funding

recommended in the President’s budget. Nevertheless, the mere reduction in 2002

withholding on a percentage basis does not avoid the fact that the PTO will be in

difficult straits for years to come even if aggressive action is taken now.

IPO members are skeptical that the previously withheld money is actually just

‘‘withheld’’. It is generally believed that the money has been ‘‘diverted’’ to unrelated

government programs or used for deficit reduction and is in fact gone. However, it

can be demonstrated that the PTO needs the withheld money desperately in order

to provide the services that companies and inventors must have. If the withheld

funds are actually merely withheld, it is now time for those funds to be made available to the PTO on a schedule that would permit the PTO to spend the money effectively to form systemic solutions to the impending ‘‘crisis’’. Massive hiring alone is

not the solution. Attention must be paid to retention, training and automation (egovernment). Merely cutting back on the time examiners have to do their examination of applications just to improve pendency is also no solution. PTO examiners

need the tools and the time to do the quality job that the public deserves.

SOLUTIONS TO THE FUNDING PROBLEM

The solution to the funding problem is thus to provide the PTO with the resources

it needs to do its job, even if the PTO needs an amount greater than the fees that

are being paid by PTO users. The time when an amount less than fee collections

can even be considered is past. Rather, the discussion now should be on a program

for retrieving past withheld fees to help solve the problems that past withholdings

have helped create.

We recognize that the members of this Subcommittee have long fought for adequate funding for the PTO. We are encouraged that the officials of the incoming Administration who have been looking into the PTO’s needs also are looking at what

the office NEEDS. That is the only basis upon which a PTO recovery program can

be fleshed out and implemented.

We readily endorse the new bill H.R.———, introduced this week by Chairman

Coble and cosponsored by Mr. Berman and Mr. Conyers, which authorizes 2002

PTO funding, authorizes special funding for electronic filing and processing, and requires a 5- year PTO strategic plan.

H.R.———authorizes appropriations for the PTO in 2002 in an amount equal to

the fees collected in fiscal year 2002 under the patent and trademark laws. Appropriations for 2002 in this amount would be a major step forward for the PTO

H.R.———authorizes $50 million in each fiscal years 2002 and 2003 to develop

an electronic system for the filing and processing of patent and trademark applications. The bill states that the system should:

• Be user friendly; and

• Include the necessary infrastructure -

a. to allow examiners and applicants to send all communications electronically; and

b. to allow the Office to process, search and maintain electronically the contents and history of each application.

15

IPO has long supported PTO adoption of information technology such as electronic

filing. So far the PTO’s patent electronic filing system has not progressed very far.

By authorizing special funding for such an electronic system and specifying the objectives for it, the bill provides important Congressional approval and direction.

H.R.———also requires the PTO to develop a strategic plan that sets forth the

goals and methods by which the PTO during a five year period will:

• Enhance patent and trademark qualities;

• Reduce patent and trademark pendency; and

• 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, including. . .searching, examining, communicating, publishing, and making publicly available, patent and trademark registrations.

The PTO strategic plan is to include milestones and objectives and meaningful criteria for evaluating progress. The bill requires the PTO to develop the strategic plan

in close consultation with the Patent Public Advisory Committee and the Trademark

Public Advisory Committee, and to submit the plan to the House and Senate Judiciary Committees. This guidance on a PTO strategic plan delineates the most important goals and establishes a mechanism for tracking progress involving Congress

and the private sector.

As an alternative to asking the Appropriations Committees each year to appropriate adequate funds for the PTO, Congress could enact Chairman Coble’s bill H.R.

740 or Mr. Berman’s resolution H. Res. 110 to eliminate or limit the authority of

the Appropriations Committees to withhold PTO fees. We support these measures.

The Commerce, Justice and State Appropriations Subcommittees have their problems in allocating scarce funds among competing programs, but they should not

view PTO user fee money as ‘‘discretionary’’ in the same sense as taxpayer money

appropriated from the government’s general fund. 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.

In our statement at last year’s oversight hearing before this Subcommittee, we

raised the question of whether diverted fees constitute a direct tax on personal property in violation of Article I, Section 9 of the Constitution, which prohibits a direct

tax unless it is laid in proportion to the census. We have continued to look into constitutional issues. We now believe that a real diversion of fees also might be a prohibited taking of private property for public use under the 5th Amendment of the

Constitution. These possible constitutional issues are based on the premise that

Congress has taken patent and trademark fees. If fees have been taken, the constitutionality of fee diversion should be further investigated. If the fees have not

been taken, as I have said, then there is an urgent need to use the $871 million

in ‘‘withheld’’ fees to address the critical problems facing the PTO.

Again thank you for the opportunity to speak to the Subcommittee. I will be

pleased to answer any questions.

Attachment: May 22, 2001 letter sent to Congress by 61 companies and 18 associations

16

ATTACHMENT

21ST CENTURY INTELLECTUAL PROPERTY COALITION

1255 TWENTY-THIRD STREET NW, SUITE 200

WASHINGTON, DC 20037

May 22, 2001 Sent to U.S. Senators and Representatives

RE: Retention of User Fees by the Patent and Trademark Office Dear Senator/

Representative: We are 61 companies and 18 associations in strong support of securing adequate funding for the U.S. Patent and Trademark Office (PTO). No other

government agency is more important to the growth of innovation and commercial

activity in our nation than the PTO. The ability of our nation’s small and large businesses to promptly obtain valid patents and trademark registrations helps create

new industries and high-wage jobs. This process is critical to our global competitiveness and technological leadership. The PTO is responsible for granting these important rights. The PTO is entirely supported with the fees paid by patent and trademark applicants—it receives no taxpayer funds. Since 1992, however, Congress has

been withholding an increasing portion of these fees almost every year for use in

other government agencies. Over the last four years Congress has withheld an average of $100 million a year. This year the President’s budget proposes to withhold $207 million and the Administration plans to withhold an average of $184 million

per year through FY 2006. Fee withholding has substantially damaged the PTO’s ability to examine and issue valid and enforceable patents and trademark examinations on a timely basis. The PTO’s own estimates show that pendency of patent applications will rise from 25.0 months in FY 2000 to 38.6 months in FY 2006—a 54%

increase! The processing of trademark registrations will be adversely affected as

well. Without the necessary funding, the PTO cannot (1) maintain—much less enhance—the quality of issued patents and the caliber of the trademark examination

process; (2) improve its services using additional automation efforts; or (3) reduce

overall patent and trademark processing time.

If the PTO cannot function efficiently, the development of new technologies will

suffer and businesses will stagnate. With that in mind, we hope you will support

the necessary resources that the PTO so desperately needs. For more information,

please contact Wayne Paugh at (202) 521-6717.

Sincerely,

Member Companies

3Com Corporation

3M

Accenture

Agilent Technologies

Air Products and Chemicals, Inc.

Alcatel

Amazon.com

Anatomic Research, Inc.

Apple Computer

AT&T Corp.

Avaya Inc.

Aventis Pharmaceuticals, Inc.

BASF Corporation

The B.F. Goodrich Company

BP America Inc.

Caterpillar Inc.

Celanese

Compaq

Corning Incorporated

Deere & Company

The Dow Chemical Company

EDS Corporation

Eastman Chemical Company

Eastman Kodak Company

Eli Lilly and Company

EMC Corporation

Emigre Inc.

Encyclopaedia Britannica, Inc.

Ford Global Technologies

General Electric Co.

GlaxoSmithKline

17

Henkel Corporation

Hewlett-Packard Co.

Honeywell

Illinois Tool Works Inc.

Immunex Corp.

Intel Corporation

International Business Machines Corporation

J.P. Morgan Chase & Co.

Johnson & Johnson

Monsanto Company

Motorola, Inc.

Oracle Corp.

Panasonic / Matsushita Electric Corp. of America

Parker Hannifin Corporation

Pfizer Inc.

Pitney Bowes Inc.

PolyOne Corporation

PPG Industries, Inc.

Procter & Gamble Co.

Reed Elsevier Inc.

Research Triangle Institute

Rockwell International Corporation

Rohm and Haas Company

SilverPlatter Information, Inc.

StorageTek

Tektronix, Inc.

Unisys Corporation

United Technologies Corporation

W.L. Gore & Associates, Inc.

Xerox Corp.

Xilinx, Inc.

Member Associations

Aerospace Industries Association (AIA)

American Chemistry Council

American Electronics Association (AeA)

American Intellectual Property Law Association (AIPLA)

Association for Manufacturing Technology

Biotechnology Industry Organization (BIO)

Business Software Alliance (BSA)

Computing Technology Industry Association (CompTIA)

Electronic Industries Alliance

The Financial Services Roundtable

Information Technology Industry Council (ITI)

Intellectual Property Owners Association (IPO)

International Intellectual Property Institute (IIPI)

International Trademark Association (INTA)

National Association of Manufacturers (NAM)

Pharmaceutical Research and Manufacturers of America (PhRMA)

Semiconductor Industry Association (SIA)

Software & Information Industry Association (SIIA)

Mr. COBLE. Thank you Mr. Myrick.

Mr. Montan.

STATEMENT OF NILS VICTOR MONTAN, VICE PRESIDENT, SENIOR INTELLECTUAL PROPERTY COUNSEL, WARNER BROTHERS ON BEHALF OF INTERNATIONAL TRADEMARK ASSOCIATION (INTA)

Mr. MONTAN. Thank you. Good afternoon, Mr. Chairman. On behalf of the 4,000-plus members of the International Trademark Association I want to thank you and the Subcommittee for the opportunity to assist you in the oversight of the USPTO.

Mr. Chairman, you recognized the important role the PTO plays

in projecting intellectual property when you ushered through ConVerDate 11-MAY-2000 12:58 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060701\72983.000 HJUD2 PsN: HJUD2
18

gress the American Inventors Protection Act, important legislation

designed to allow the PTO to be run more like a private sector

business, able to keep pace with customer demand without the

problems of government red tape. This makes sense since all of

PTO’s funds come from fees, not from taxpayer dollars. The goals

of that landmark legislation are being undermined, however, when

money derived from PTO fees are continually diverted to other government agencies and programs.

For fiscal year 2002, although the actual amount is under some

speculation, it is obviously hundreds of millions of dollars. This annual diversion of PTO dollars is essentially, as Mr. Berman said,

an innovation tax on IP owners and a drain on the agency. It is

an innovation tax that should be stopped.

Now, there are those that will say that this kind of tax is okay

since the PTO will have enough money to get by. Yet the PTO

should have the tools to do more than just get by. After all, this

is the agency that stands at the forefront of an economy driven by

technology, innovation and information. The PTO must have the

resources it needs to support the entrepreneurs and innovators of

this Nation.

After all, private sector business does not have the money taken

away from it when there is still work that needs to be done. Nor

should money be taken away from the PTO when it is trying to

grapple with a record setting backlog of pending trademark applications.

The PTO is developing exciting new technologies to move the

agency away from manual intensive processes that have long burdened the system. These are the initiatives that will enable the

PTO to do more than just get by, but these are the initiatives that

will be stifled if rampant fee diversion is not halted.

Mr. Chairman, you and Ranking Member Mr. Berman have led

the fight to keep the PTO funds at the PTO. We know that fight

has not been easy, but we urge you to stay the course and continue

to work this issue. The INTA pledges its support and its resources

in this regard.

Unfortunately Mr. Chairman, in addition to the withholding of

fees, the PTO also continues to be hampered by governmental processes that the AIPA was supposed to reduce. For example, the PTO

is subject to a recent agencywide Department of Commerce hiring

freeze despite an unprecedented backlog of unregistered trademark

applications, which now stands at over 547,000.

Thankfully that hiring freeze has now been lifted, but our point

is that it never should have been imposed on the PTO in the first

place. The statute is clear, the Commerce Department has jurisdiction over policy, but not over matters concerning personnel. If the

PTO needs the personnel and can pay for them, the PTO should

be able to get them. We ask for your support in making sure that

the PTO is no longer subject to Commerce Department hiring

freezes.

Now, as a result of the continuing diversion of fees and the hiring freeze, the PTO is being forced to do more with less. I think

the agency deserves great praise for coming up with ideas that address this unwelcome reality. For example, as Mr. Godici mentioned, there is the expansion of the work-at-home program, proVerDate 11-MAY-2000 12:58 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060701\72983.000 HJUD2 PsN: HJUD2
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1Testimony of Kimbley L. Muller, President, International Trademark Association, United

States House of Representatives, Committee on the Judiciary, Subcommittee on Courts and Intellectual Property, ‘‘Oversight Hearing on the United States Patent and Trademark Office,’’

March 9, 2000. 2Public Law 106-113 (1999).

viding examiners with more flexible hours. The PTO has also designed an innovative bonus system for examiners, which is reportedly working very well in increasing productivity.

Electronic filing is another way to help improve the examination

process. The INTA supports greater use of the PTO’s e-filing system. The benefits of this system are clear: Use of the e-filing system means less paper and less of a chance, therefore, that paper

will be lost or misplaced, which is still, unfortunately, a common

problem at the PTO.

We believe that more resources need to be provided to the agency

to accomplish this task of finding electronic means to streamline

the PTO process.

Before I wrap up, Mr. Chairman, I want to reiterate INTA’s

great desire to see the Madrid Protocol passed during the 107th

Congress. The implementing legislation has already passed the

House, thanks to you. We must now encourage the Senate to take

action. U.S. trademark owners should be able to join their counterparts in other major industrialized countries in enjoying the benefits of the Madrid system, especially the savings in time and

money. The time has come for the United States to join this system.

Mr. Chairman, this concludes my statement. Again I want to

thank you, Mr. Berman, and the Subcommittee for inviting the

INTA here today. We look forward to being a partner in making

the PTO a better and more efficient customer service agency.

[The prepared statement of Mr. Montan follows:]

PREPARED STATEMENT OF NILS VICTOR MONTAN

INTRODUCTION

Good afternoon, Mr. Chairman. My name is Nils Victor Montan, and I currently

serve as President of the International Trademark Association (‘‘INTA’’). I am employed by INTA member Warner Bros. as Vice President and Senior Intellectual

Property Counsel. As with all INTA officers, board members, and committee members, I serve on a voluntary basis.

INTA is pleased to be here today to participate in this hearing of the Subcommittee on Courts, the Internet and Intellectual Property in connection with its

oversight of the United States Patent and Trademark Office (‘‘PTO’’). In many ways,

my comments serve as a follow-up to those offered to this subcommittee by my predecessor as President of INTA, Kim Muller, when he testified before you at the last

PTO oversight hearing on March 9, 2000. 1 They address such topics as the diversion of PTO funds and the implementation of operational reforms put in place by

the American Inventors Protection Act (‘‘AIPA’’). 2 Additionally, I want to comment

on programs at the PTO that are designed to do more work with fewer resources,

on quality of examination, electronic filing, and the progress of the Madrid Protocol.

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.

20

3 H. Rep. No. 464, 106th Cong., 1st Sess. 113 (1999).

4 ‘‘In carrying out its functions, the United States Patent and Trademark Office shall be subject to the policy direction of the Secretary of Commerce, but otherwise shall retain responsibility for decisions regarding the management and administration of its operations and shall exercise independent control of its budget allocations and expenditures, personnel decisions and

processes, procurements, and other administrative and management functions in accordance

with this title and applicable provisions of law,’’ Section 4711 of S. 1948, the Intellectual Property and Omnibus Communications Reform Act of 1999 (incorporating the AIPA), 106th Congress. Note: S. 1948 was eventually placed into H.R. 3194, the Consolidated Appropriations Act

for FY 2000, Public Law 106–113. 5 By March 30, 2001, average first action pendency was 5.6 months. For final disposition, the

average was 17.4 months (U.S. Patent and Trademark Office, Mid-Year Update: Trademark Operations, April 30, 2001). The accepted benchmarks are 3 months for first action and 13 months

for final disposition. 6See FY 2002 Budget in Brief, Page 106. The president’s proposed budget calls for a PTO

spending cap of $1,139 million. However, the agency is expected to take in $1,346 million in

fee-generated revenue during the fiscal year. 7Federal Register, Consolidated Appropriations Act for FY 2001, December 15, 2000, Page

H12404.

PERSONNEL, THE BACKLOG, AND FUNDING

At the March 2000 oversight hearing, emphasis was placed on the implementation

of the AIPA, which reflected the approach of this subcommittee and the Senate Judiciary Committee in creating a more effective government agency.

A major part of the AIPA were provisions designed to allow the PTO to be run

more like a private sector business, able to keep pace with customer demand

through independent control of budget allocations and expenditures, personnel decisions and processes, and procurement. 3 This means that government red tape,

which had significantly affected PTO efficiency and operations in the past, was to

be reduced to the bare minimum.

Personnel

Unfortunately, Mr. Chairman, the PTO continues to be hampered by governmental processes that the AIPA and this subcommittee’s efforts tried to reduce. For

example, the PTO was subject to a recent agency-wide Department of Commerce

(DOC) hiring freeze despite a record-setting backlog of pending, unregistered trademark applications, which, as of April 2001 stood at 547,101. This figure represents

an increase from previous years. In September 2000, the backlog number was

520,053. In September 1999, it was 444,616.

The letter and spirit of your legislation gave the leadership of the PTO the authority to hire additional personnel on an as-needed basis. 4 Although the hiring

freeze has, for the most part, been lifted, we believe that subjecting the PTO to a

hiring freeze at all was inconsistent with your intent and the language in the AIPA. Nor was it justified in light of the backlog of trademark applications, and the fact

that pendency for trademarks is still above the benchmark 3/13 levels. 5 We hope

that no new hiring freeze will be imposed on the PTO in the future and ask for your

support in this matter.

Funding

We believe that the oversight goals of your subcommittee are also undermined

when money derived from PTO fees and intended for the examination or maintenance of intellectual property is diverted to other government agencies and programs. I am referring, of course, to the now annual diversion of PTO money due

to ‘‘scoring’’ and limited appropriations allocations. For FY 2002, the proposed figure is $207 million. 6 Last fiscal year, the number was $113 million. 7 The administration plans to withhold an average of $184 million per year through FY 2006. When

will this tax on the customers of the PTO end?

A private sector business does not have money taken away when there is still

work that needs to be done, when, as is the case with the PTO, there is a backlog

of unexamined trademark applications. Nor should money be taken away when the

PTO is trying to keep pace with the annual increase in applications through new

technology. INTA has been told that further development of TICRS, a scanning system designed to help keep better track of all documents submitted to the agency

that relate to applications and registrations, may be delayed if funds continue to be

diverted. With TICRS, instead of the labor-intensive, manual process of trying to

track the physical location of hundreds of thousands of documents, an examiner will

have instant, electronic access to all documents relating to a particular application

or registration. Not only does this reduce manpower needs, it helps alleviate the all

too common problem of ‘‘lost’’ files and the subsequent delays this causes. A delay

in funding initiatives such as TICRS ultimately costs more than just time. A startand-stop approach to systems development is highly inefficient, as people familiar

21

8On May 24, 2001, INTA sent a letter to the PTO in opposition to a proposed increase in

the trademark application fee, per class. The proposed increase is based on the Consumer Price

Index and would raise the fee from $325 to $340. 9 United States Patent and Trademark Office, 2000 Customer Satisfaction Report, Page 14

[45% of the respondents were satisfied with refusals made under 2(d) and 41% were satisfied

with refusals made under 2(e)].

with the project are pulled off their work and assigned to other tasks. When funding

is restored, new people become involved, and this disconnect increases costs and affects the quality of the technology being developed.

Mr. Chairman, I know that you, along with the Ranking Member, Mr. Berman,

as well as the leaders of the full Judiciary Committee, Mr. Sensenbrenner and Mr.

Conyers, are as disturbed by the habitual diversion of PTO money as are the customers of the agency who are the ones footing the bill. You have acted above and

beyond the call of duty when it comes to finding a solution to the problem. INTA

thanks you for your endeavors and hopes that you will continue to work with us

to find a way to ensure that all the money raised through PTO fees stays with the

agency.

You will no doubt be advised during the course of this hearing and in days and

weeks to come that the proposed FY 2002 budget for the PTO will allow the agency

to essentially ‘‘get by,’’ ‘‘to do its job,’’ that the money that has been assigned to the

PTO by the president is ‘‘okay,’’ and that there is no cause for alarm. I respectfully

state, however, that the PTO should have the tools to do more than ‘‘just get by’’—

to do better than just marginally keep its head above water. The trademark community’s impression is that this was the intent of the AIPA. Our collective goal should

be to take that intent and make it a reality. Let me also make the obvious point

that there should be no fee increases at the PTO until this diversion problem is

solved once and for all. 8 That would add financial insult to financial injury.

DOING MORE WITH LESS

The PTO is being forced to do more with less, and the agency deserves praise for

coming up with ideas that reflect that unwelcome reality. For example, there is expansion of the work-at-home program. Ninety-one trademark examining attorneys

now work at home, providing the examiners with more flexible hours. Practitioners

working on the west coast are apt to receive phone calls at 4:00 pm Pacific time

from a work-at-home examiner who is taking care of business at 7:00 pm Eastern

time. This is indeed a step in the right direction.

The PTO has also designed a bonus system for examiners, which is reportedly

working very well in increasing productivity, as measured by the number of applications examined. Examiners can work overtime and earn up to $10,000 per year in

bonuses. There are also supplemental bonuses for mentoring new examiners and for

maintaining quality of examination at an outstanding level. PTO estimates that the

new bonus system will result in a 10% increase in production, which is the equivalent of having 41 additional examiners.

We have had some concerns that in the rush to examine more applications and

earn the bonus, examiners may relax their quality standards. Senior PTO personnel

have reassured us that for an examiner to receive a bonus, he or she must maintain

a ‘‘fully successful’’ quality rating and that the supplemental bonus for quality is intended to help keep examination quality at a high level. The agency has indicated

that it is closely monitoring the connection between quality and the bonus program.

QUALITY OF EXAMINATION QUALITY OF EXAMINATION

The quality of substantive examination of applications for registration of trademarks remains a significant issue for the trademark community. Recently, members

of the trademark bar have reported concern with the appropriateness of PTO actions

refusing registration of trademarks based upon determinations by PTO examining

attorneys that the trademark will either be confused with a prior trademark or one

that has already been registered with the PTO, a basis for a refusal of registration

under § 2(d) of the Trademark Act of 1946, or that the mark is ‘‘merely descriptive

or deceptively misdescriptive’’ of the goods to which it is being applied, a basis for

refusal under § 2(e)(1). The 2000 PTO customer satisfaction report, to our knowledge

the most recent one that has been published, confirms that less than half of the respondents to the agency’s customer satisfaction survey were satisfied with refusals

to register made under 2(d) and 2(e)(1). 9

INTA’s PTO Subcommittee has been working with senior PTO officials, including

those at the agency who manage trademark law offices, to try and improve examining attorney performance in the area of 2(d) and 2(e)(1) refusals. We believe that

22

10 United States Patent and Trademark Office, Briefing Book for Trademark Public Advisory

Committee, March 1, 2001, Page 31. 11 USPTO, Briefing Book, Page 31. 12 USPTO, Briefing Book, Page 31. 13 In the president’s proposed FY 2002 budget, there was a projection of 450,000 trademark

applications during the fiscal year. The PTO has revised that number and now predicts that

it will receive approximately 360,000 trademark applications during FY 2002 (United States

Patent and Trademark Office, Fiscal Year 2002 Budget Request).

inappropriate refusals are related, to a certain degree, to a lack of experience on

the part of examining attorneys. Coupled with the lack of attorney experience was

a very substantial increase in new trademark filings, which required the PTO to

move new cases forward more rapidly. We believe unseasoned employees and emphasis upon quick examination, at least in the first instance, has taken its toll on

the quality of examining attorney work product. To remedy this situation, we have

made a number of recommendations, including the following:

1. Placing greater emphasis on consistency (i.e. establishing guidelines for evidentiary support for examiner action based on 2(d) and 2(e)(1) refusals).

2. Management/senior review of final refusals under 2(e)(1).

3. A formal refresher course on 2(d) and 2(e)(1).

4. Gathering and maintenance of data on substantive refusal issues that are

then withdrawn.

5. Encouraging examiner consultation with a manager or senior lawyer in response to applicant request for reconsideration of position.

We hope that the PTO will adopt some or all of these recommendations.

ELECTRONIC FILING

INTA does indeed support greater use of the PTO’s e-filing system. The benefits

are clear. Among them, an applicant for a trademark registration receives his or her

filing receipt within 24 hours. The filing receipt is also free from mistakes by clerical personnel at the PTO, since no additional data entry is required. The filing receipt is identical to the data submitted by the applicant (or his attorney). Additionally, use of the e-filing system means less paper and less of a chance therefore that

the paper will be lost or misplaced, which is still a common problem at the PTO.

The use of e-filing is increasing. In FY 2000, 44,108 or 14.9% of the trademark

applications were filed electronically. 10 Figures for FY 2001 look promising. In the

first quarter alone, 12,800 or 21% of the applications were filed electronically. 11 The

PTO’s goal is to reach 30% by the end of this fiscal year. 12 I believe that trademark

owners and their counsel are becoming more familiar with the system and its benefits. The leadership of the PTO, especially Commissioner for Trademarks Anne

Chasser and Deputy Commissioner for Trademarks Bob Anderson, must be complimented, not only for their efforts in educating the trademark bar, but for their

responsiveness in addressing their customers’ concerns regarding the electronic filing system and its capabilities.

Additionally, we understand that the PTO continues to fine tune the system and

upgrade its capabilities in response to comments made by the trademark bar.

While INTA supports greater use of the PTO’s trademark e-filing system (commonly known as ‘‘TEAS’’), we are not prepared at this stage to endorse a proposal

to make e- filing mandatory. Earlier this year, there was speculation that the agency was planning to propose a rule change that would create a mandatory e-filing

system. Among the reasons offered in support of such a rule were: (1) reduction

paper in light of the increasing number of trademark applications; (2) reduction in

space requirements; (3) lower pendency rate; (4) cost reductions; and (5) preparation

for the implementation of the Madrid Protocol.

As of this date, the proposed rule has not been published for public comment in

the Federal Register. I think this was a wise choice by the agency, since there would

likely have been strong opposition. Perhaps the projected slowdown in the increase

in trademark applications, 13 increased voluntary use of the e-filing system, and

delays in passing the Madrid Protocol were also contributing factors to the decision

by the PTO not to press mandatory e-filing at present.

INTA could not agree more with the PTO’s reasons for wanting to see e-filing put

to greater use by trademark practitioners. As I noted earlier, the benefits are obvious. In some quarters of the trademark bar, however, there are still concerns about

the reliability of the PTO computer systems, especially with regard to transmission

of specimens and stylized marks in electronic format. Moreover, there is concern

that the systems will not be able to handle the volume of e-filing applications under

23

14Technically, as a result of the passage of the Trademark Law Treaty, a signature is not

needed on the application in order to get a filing date. However, it is necessary during the examination stage. In order to file a completed application, some practitioners do obtain the signature

at the time of filing. 15 At present, the U.S. is one of the few countries that still require a signature. 16 H.R. 741. 17S. 407.

mandatory electronic filing. INTA’s PTO Subcommittee has raised these and other

issues with PTO personnel, and my understanding from reviewing the agency’s responses to these concerns is that upgrades have been made to the system and that

it is routinely monitored for performance and capacity. I urge the PTO to make better known to the trademark bar the enhancements that have been made to the efiling system and the steps that the agency is taking to ensure its reliability. Certainly, INTA will assist the PTO in this communications effort.

There are also lingering issues about signatures on an e-filing document. The reports that I have received from some trademark practitioners concern logistical difficulties in getting a client’s signature using the e-system. 14 First, a practitioner has

to go on to the PTO website, fill out the e-form, download it, send it to the client

to sign, and then get it back onto the PTO site for transmission. For some practitioners, it is simply easier to do things the ‘‘old-fashioned’’ way by filling out the

form, faxing it over to the client for a signature, and then sending it to the PTO

via regular or express mail.

We do know that the PTO is looking at ways to simplify the process for obtaining

a signature on e-documents. There are two prototypes in development:

1. Under the first prototype, the applicant will be able to access the application

form directly from a hyperlink included in an e-mail generated upon completion of the form by the trademark practitioner.

2. The second prototype allows the trademark practitioner to complete the eapplication, print out a hard copy and forward it to the applicant for a traditional pen-and-ink signature. The practitioner can then scan the application

once it is returned and affix it to the original e-version of the application.

The complete trademark application may then be validated and filed electronically.

INTA is hopeful that these new innovations will be successful, thereby increasing

the use of the e-filing system.

If in fact the new signature innovations are not successful in eliminating difficulties in electronic filing, the INTA PTO Subcommittee is prepared to examine whether changes to document signature requirements should be considered, including exploring the possibility of eliminating signature requirements. 15 I want to stress that

our subcommittee has not made any recommendation to the INTA Board of Directors concerning signatures. We do not know whether this change is a good idea. The

INTA PTO Subcommittee plans to canvass the association’s membership during the

summer and fall to see if elimination of the signature requirement is possible under

the present statutory and regulatory scheme, and what effect, if any, elimination

of signatures on documents might have on trademark owners. Of course, if INTA

determines a recommendation to eliminate signatures is appropriate, that change

may require legislative action, and INTA will work with this subcommittee in that

regard.

MADRID PROTOCOL

Before concluding my statement, Mr. Chairman, I want to reiterate INTA’s desire

to see the Madrid Protocol passed during the 107th Congress. We know that you

have successfully passed the implementing legislation here in the House 16 and have

been encouraging the Senate to follow suit, as well as pass an ‘‘advice and consent’’

resolution. 17 At present, the Senate implementing legislation is awaiting consideration by the Senate Judiciary Committee and the ‘‘advice and consent’’ resolution

by the Foreign Relations Committee.

INTA thanks you for your efforts, Mr. Chairman, in striving to secure U.S. adherence to the Madrid Protocol and ask that you continue along the same path. There

is no reason why the U.S. should not join other major industrialized countries such

as France, Germany, Italy, Japan, and the United Kingdom in enjoying the benefits

of the Madrid Protocol. The Protocol saves time and money and will permit United

States trademark owners to go to market with their goods and services more quickly

in the 51 countries that are currently members of the Protocol. It should be made

available here in the United States as soon as possible.

24

CONCLUSION

Thank you again, Mr. Chairman, for the opportunity to assist in the subcommittee’s oversight of the PTO. The PTO plays a critical role in promoting, safeguarding,

and maintaining America’s ingenuity and creativity so that the nation can continue

to enjoy a robust economy and be a leader in the global marketplace. INTA looks

forward to working with this subcommittee to ensure that the PTO has the necessary resources and flexibility to do its job.

Mr. COBLE. Thank you, Mr. Montan.

Mr. Stern.

STATEMENT OF RONALD J. STERN, PRESIDENT, PATENT

OFFICE PROFESSIONAL ASSOCIATION (POPA)

Mr. STERN. Thank you, Mr. Coble. We really appreciate the opportunity to present our views today, and we very much appreciate

your support and Mr. Berman’s support for retaining our fees. I

think we are really counting on you to come through on that.

But aside from the fees, the biggest challenge that the USPTO

faces right now is that it needs more examiners, and it needs them

for two reasons: First, there has been a huge increase in workload

and, second, to increase the quality of patents examiners need

more time per case. Based on an average examination time of

roughly 20 hours, the agency is short approximately 1,000 examiners compared to the number needed to handle the 330,000 patent

applications that are expected to be filed this year.

There is a critical need for improvement for the quality of our

searches and for time to handle the increased complexity of applications. The time factors we currently work under were last revised

in 1976. Since that date the average patent application has grown

more complex, searches have grown longer, and the number of

claims per application has increased. In spite of this relentless inflation and the need for more time, the agency continues to pressure employees to use less time. As an inexpensive way of increasing available examining time, we recommend encouraging overtime

by increasing through legislative action the overtime pay rate to a

level equal to the straight time pay rate.

In addition to that, we need more reclassification efforts independent of whether we automate our search system or maintain

our paper files. Filing patent and nonpatent literature, especially

the literature submitted by applicants, need to be classified into

the U.S. classification system and added to our files.

We wish to state this unequivocally; more computers will not

solve our problems. There simply aren’t any computers that can

read about inventions, understand them and make meaningful

comparisons with prior interventions to determine novelty and the

obviousness of any differences. No matter how much money is

spent on automation, the only way to increase the output of the

agency is to hire more examiners.

Funding for automation must come after funding for adequate

staff. Currently the aggregate salary of all the examiners and classifiers that my organization represents in the technology centers is

about $220 million, including the most recent pay raise. On the

other hand, the budget of the Chief Information Officer is $239 million in the current year. The trade-offs between staffing levels and

particular automation projects need to be made public so that there

25

can be an informed discussion of what is most valuable to the country.

We strongly support H.R. 740 and House Resolution 110 so as to

ensure that applicants’ fees are used for their intended purpose,

and we do believe that both of those bills can be enacted together

and are compatible with each other.

However, H.R. 2047 we believe needs some improvement. Funds

should be authorized for automation only after a detailed cost-benefit analysis has been made available for public debate and the

Subcommittee decides that the convenience of computerization outweighs the cost of increased pendency.

I would like to report that there is very good news for labor relations. POPA would like to thank the senior management at the

PTO, including Acting Commissioner Nick Godici and the other

senior members there, for implementing programs which enhance

employee satisfaction. Flexibility in choosing work hours and pay

increases will go a long way to enhance recruitment of employees

and induce current employees to stay with the agency despite attractive salary packages that have been offered by the private sector.

Thanks also go to you, Mr. Chairman and the other Members of

the Subcommittee, for placing employee organizations on the Public

Advisory Committee of the Patent and Trademark Office. We thank

you for giving us this opportunity to present our views.

[The statement of Mr. Stern follows:]

PREPARED STATEMENT OF RONALD J. STERN

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to provide the views of the Patent Office

Professional Association. Our organization is the exclusive bargaining agent for

the approximately 3300 patent professionals at the U.S. Patent and Trademark Office. The vast majority of the employees we represent are engineers, scientists, and

lawyers who work as patent examiners and patent classifiers.

There are three bargaining units at the USPTO. POPA represents more than one

and a half times the number of employees represented by the other two bargaining

units put together. The percentage of organized employees that we represent in the

USPTO is continuously growing.

As everyone is aware, patents play a vital role in our high technology economy.

They serve as a incentive for companies to innovate, and as an engine for efficiency

in all spheres of economic activity. While many people would like to ‘‘work smarter,

not harder’’ to achieve their goals, patents provide the know-how to enable people

to actually ‘‘work smarter’’. Patents are the intellectual gemstones of commerce, recognized by our founding fathers.

The biggest challenge that the USPTO faces right now is that it needs more examiners. It needs them for two reasons. First, there has been a huge increase in

workload. Second, more time needs to be allocated per case so that we can do a better quality job, and especially provide a better search of the prior art. We believe

that the USPTO needs to put the hiring of examiners at the top of its list of priorities and leave it there for about five years.

THE WORKLOAD

To understand the dramatic increase in the USPTO’s workload, consider that in

this year FY 2001 the agency expects approximately 330,000 applications to be filed,

a 21% increase over the 278,268 filed in Fiscal Year 1999. The average amount of

time allocated for examination of an application is roughly 20 hours. If the 330,000

applications the agency expects to have filed this year are multiplied by 20, you will

get the total number of hours necessary for examination. If you then divide the total

by the number of hours the average examiner spends examining per year, usually

1664 hours, you can see that the agency will need about 4000 examiners just to hanVerDate 11-MAY-2000 12:58 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\060701\72983.000 HJUD2 PsN: HJUD2
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1 In FY 2000 there was a net loss of 62 examiners. United States Patent and Trademark Office, Performance and Accountability Report, Fiscal Year 2000, page 27.

dle this year’s filings. Since it has only about 3000 examiners, that means that the

agency is short by approximately 1000 examiners, if it just wants to stay current.

Of course, the agency also has a backlog. At the end of FY 2000, there were approximately 408,000 patent applications either awaiting action or in the process of

being examined. We cringe at the thought of the FY 2001 backlog. All this means

is that we are behind on our workload, and losing ground. We are losing ground

fast.

We wish to state this unequivocally: more computers will not solve these problems. There simply aren’t any computers on this planet that can read about inventions, understand them, and make meaningful comparisons with prior inventions to

determine novelty and the obviousness of any differences. You need a person to actually read these 330,000 patent applications page by page, to research the prior

inventions, to determine whether the invention is clearly expressed in the claims

and has utility, and whether the invention is novel and non- obvious. Computers

cannot do this.

What this means is that no matter how much money is spent on automation, the

only way in which the throughput of the agency can be increased is by hiring more

examiners.

This is an important point with respect to Congressional oversight. Last year Fiscal Year 2000, when record numbers of applications were being filed, the agency allowed examiner staffing levels to actually decline by about 2%. 1 This decline was

due to the fact that the budget for the USPTO passed by the House Appropriations

Committee was so small that the agency stopped hiring because it was afraid that

it might otherwise run short of money. The agency didn’t receive its FY 2001 budget

until December, so it wasn’t clear for many months how much money the agency

would have to spend on new hires. Since then, the agency has been faced with a

short, temporary hiring freeze as part of the transition to a new administration.

Thus, even though the FY 2001 appropriation is approximately 17.5% higher than

the funds available for obligation in FY 2000, hiring has so far only covered losses

due to attrition.

Such disruptions in hiring are almost impossible to overcome because there is a

limit on how many employees can be hired and trained in any one year. Hiring close

to that limit would be necessary every year to just meet workload increases. Consequently, losing almost an entire year is serious. The agency will be feeling the effects of the disruption in hiring for years to come. If Congress provides for the agency to keep all of its fees and does not subject it to the vagaries of the appropriation

process, then the agency will be able to maintain a uniform hiring pattern that will

allow for proper training and an adequate increase in staff.

MORE TIME FOR IMPROVING QUALITY

As I have testified in years past, there is a critical need for improvement in the

quality of our searches and for more time to handle the increased complexity of applications. The agency’s Quality Review statistics continue to show a need for improvement in our ability to find the relevant prior art. More and more reporters and

writers are criticizing the agency for issuing overbroad or otherwise potentially invalid patents. One Internet news provider continues to make a business out of criticizing the quality of the USPTO’s work products, primarily because he believes that

the most relevant prior art is not identified during examination. In addition, USPTO

examiners report much more frequently than in years past that European searches

identify references that are relevant but not found in our own searches.

USPTO examiners, who get about half the time allocated per application compared to EPO examiners, are convinced that there is a dire need to spend more time

per application. Individuals outside the agency are also beginning to recognize the

connection between the time we spend on an application and the quality of examination. As stated in a letter to the Editor of The Wall Street Journal published on

March 21 of this year, ‘‘the probable cause of this situation [the issuance of invalid

patents] is that patent examiners are not given enough time or resources to conduct

adequate searches of the existing technology.’’

The time factors we currently work under were last revised in 1976. Since that

date, patent applications have become significantly more complex on average,

searches have become significantly longer and more time consuming, and the number of claims per application has increased. In spite of this relentless inflation in

the need for more time, the agency continues to pressure employees to work faster.

Quotas, which have not changed for years in spite of this growing complexity, are

27

such that examiners frequently volunteer time to meet them. Supervisors still analogize the work we do to an assembly line for producing good middle of the road

products and admit that they do not expect top of the line work in the time allotted

per case. As some have said in the past, we produce Chevys, not Cadillacs.

The agency recognizes that when there is a need for a better search, it has to give

more time. An example is what has been done in the business methods area. The

agency became acutely aware of serious problems in this area through scathing articles in the press about alleged poor quality patents. This area is not distinguished

on the basis of technological complexity, since it is no more complex than many

other areas. What is different compared to other areas is that business methods do

not have a classified set of patents that comprehensively set forth all the prior advancements in the field. As a consequence, searching must be done in the non-patent literature mostly found in databases located outside the agency. This process is

extremely time consuming. Because the agency has recognized this, it provides on

the order of at least 50% more time per case.

The expanded search program in the business methods area has been successful

and has dramatically lowered allowance rates due to the additional time provided.

While some have credited the lower allowance rates to a ‘‘second pair of eyes’’ procedure, we understand the additional review has only changed decisions in about 6%

of the cases. We do not consider this aspect of the program to be cost effective.

Just as it is necessary in the business methods area to spend significantly more

time to increase the scope of the search beyond classified documents, it will also

take more time in other areas to increase searching beyond the classified art.

In order for us to maintain pendency levels and increase quality, it is essential

that the agency hire more examiners. To hire more examiners, it needs to keep its

fees. The need for more examiners will not be solved with automation or with contracting out. There is no automation technique on the horizon that will save examination time. The automation that has been provided until now, requires extra time,

if anything, to search the additional sources of prior art technology to which it provides access. European patent examiners, who have approximately twice the time

to search as examiners in the United States, use automation extensively for searching. To the best of our knowledge, their searching has not gone faster because of

it.

As an aside, we can report that the European examiners have the same problems

as the examiners in this country and are currently on strike for more pay and for

maintaining the time in which to do their search and examination.

PTO management recognizes that our quality needs improvement, but, due to

funding diversions, has prioritized computerization and other projects over increasing the time allocated to examination. As a consequence, USPTO management has

committed to us that they would join us in trying to get funding for more examination time per case so as to increase the quality of issued patents.

OVERTIME AS A SUBSTITUTE FOR ADDITIONAL HIRES

A cost effective alternative to new hires is the encouragement of overtime. As we

have suggested in past years, overtime can be encouraged by changing the existing

statutory pay caps.

By statute the maximum hourly overtime pay is time and a half of grade 10, step

1. What this means is that our senior people, who produce at a rate approximately

twice that of the junior people, get paid only about 60% of their regular pay when

they are working overtime. Most folks are just not willing to work for a mere 60%

of their normal pay.

Another statute limits total pay including overtime for a biweek to the amount

payable to a GS-15, step 10 employee with no overtime. This cap denies, or limits,

our most experienced primary examiners the opportunity to work paid overtime.

Since these people are the most productive examiners in the agency, providing them

an incentive to put in extra time will have a valuable payoff.

We recommend that you provide a legislative fix for the USPTO. H.R. 1770, which

was introduced in the 106th Congress, and had the blessing of the Office of Personnel Management, had the right technical language to accomplish this. H.R. 1770

would not only have increased the hourly cap, but also would have increased the

biweekly cap. The increases are limited to amounts that are already available to a

few other Federal employees such as air traffic controllers and law enforcement officials. Although the bill did not pass, we think it should be implemented NOW for

the USPTO because we are a production oriented organization in which overtime

is directly linked to the examination of extra applications.

Lifting overtime caps is a win-win situation for both patent applicants—they get

experienced examiners at a bargain rate—and for employees. Even though examVerDate 11-MAY-2000 12:58 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\060701\72983.000 HJUD2 PsN: HJUD2
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iners will be paid at straight time rates, the agency will save money because there

will be no payments for additional employee benefits (retirement, health care and

life insurance), no recruitment expenses, no payments for additional office space, no

payments for additional computer workstations, etc.

OTHER NEEDED QUALITY IMPROVEMENTS

In addition, the agency needs to keep improving its search systems and this also

requires an investment. The agency desperately needs to increase the amount of reclassification in the U.S. classification system, needs foreign art to be classified into

the U.S. system and needs to expand its classified non-patent literature collections.

Throughout much of the ’90s, the agency took the position that automation would

entirely eliminate the need for reclassification. As a result, the agency has not budgeted for reclassification and has permitted the size of the classes and subclasses to

grow. Now that we have areas where the subclasses are too large to properly search,

we have found the agency’s position that reclassification is unnecessary in the electronic age to be far from the truth. Properly classified classes and subclasses are

critical to doing a quality job in an automated search environment.

Without reclassification, subclasses have grown to include thousands of documents, making it difficult or impossible to do a classified search, either in paper or

electronically, in the time allotted. To save search time, examiners are forced to rely

more heavily on text or key word searching. Text searching, i.e., searching the patents using the key words or phrases, is risky because concepts can be described

many different ways using many different sets of words. The examiner will try to

use terms that encompass all or most possible ways of representing a concept, but

when doing so, will frequently end up with a result set that is either so large that

it can’t be reviewed in the time allotted, or one that is so small, that many of the

relevant documents have been missed completely. The ability to combine a search

for certain terms with the subclasses where the concept being searched should be

classified permits the examiner to avoid using overly limiting search terms and

aides the examiner by eliminating many irrelevant documents. We need to fund reclassification of the U.S. classification system.

For three years in a row, we have reported the need to reclassify foreign art into

the U.S. system so that the foreign documents may be located through a classified

search. There is still no system in place to do this. The agency still says that it is

in the process of developing a system to do this.

One idea that has been discussed in the Patents Public Advisory Committee (PPAC), which we strongly support and recommend be adopted, is to allow examiners

to classify documents they receive from applicants as parts of Invention Disclosure

Statements into the U.S. system for inclusion in our search files. What is relevant

for one application is, more likely than not, also relevant to others. This is a good

source of non-patent literature which can be implemented now in paper form easily

and inexpensively. Eventually, references provided in IDS’s could be captured electronically, although this might be more costly. While examiners should make the

determination if a document should be retained and added to the search files, clerical support is required to copy and actually place a document into the search files.

Alternatively, applicants could be asked to submit duplicate copies of documents.

We are disappointed that the agency hasn’t provided the resources to do this yet.

ACCOUNTABILITY

The USPTO had a huge increase in its budget from last year to this year, i.e. FY

2000 to FY 2001. Based upon what is available for obligation, as reported in agency’s FY 2002 Corporate Plan (budget), the 2001 budget is approximately 17.5% higher than the $895 million obligated in FY 2000. We believe that it is appropriate,

as part of your oversight, to look carefully at what we are getting for that money.

Unfortunately, up to this point, the increase has not enabled us to meet our needed

increased staffing levels. If the money is not going to increased staff, what is the

money being spent on? We believe that much of the increase is going into automation.

Although the automation budget grows significantly every year, we are not seeing

huge improvements in this area. As a general matter, automating the internal handling of patent application files is probably going to be a good thing. But, care needs

to be taken so that it is not done in a manner that is not cost effective. It is essential that the agency be able to publish a cost benefit analysis that shows precisely

what the costs of automation are to the agency and what savings are attributable

to each specific automation project.

Currently, the salary cost, including the most recent increase, of all the examiners

and classifiers that POPA represents in the Technology Centers is about $220 milVerDate 11-MAY-2000 12:58 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\060701\72983.000 HJUD2 PsN: HJUD2
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lion. On the other hand, the budget of the Chief Information Officer is $239 million

for the current year. The trade- offs between production workers and automation

programs need to be made public so that there can be an informed discussion of

what is most valuable to the country.

The agency should be held accountable achieving results. When we institute new

programs, a cost benefit analysis should be performed and published so that we understand whether a program is worthwhile. In order to really understand time

available for examination, the USPTO needs to disclose the total time spent on overhead activities and the time that is actually spent on examination, information that

is already very carefully tracked. Conspicuously absent from the agency’s annual report is the number of employees on board by category, and how those employees account for their time. We recommend that the agency publish the statistics on examining time, on all examining related activities, and on overhead and supervisory activities so that the time allotted to examining can be better understood.

LABOR MANAGEMENT RELATIONS

We have lots of good news to report in the area of labor relations and employee

satisfaction. I can assure you that employee morale has increased enormously.

Working conditions have been significantly enhanced. Employees are delighted that

a substantial pay raise has been put into effect. In addition, employees have been

given significant additional flexibility in when they are allowed to do their work.

Employees may now choose their work hours in a band from 5:30 in the morning

to 10:00 in the evening and may choose work on one weekend day per week. Compensatory time programs may be used to shift work from one pay period to another.

This flexibility makes the USPTO a particularly family-friendly environment. A casual dress policy provides a more relaxed atmosphere.

Programs to enhance the automation training for employees have been implemented. More employees are now also able to visit the laboratories and factories of

applicants to get first hand knowledge of new machines and processes, and to meet

inventors. The agency also provides tuition payments for both law and technical

courses.

I would also like to thank the senior management at the USPTO, including Todd

Dickinson, Nick Godici, Esther Kepplinger, and Clarence Crawford for implementing

programs to enhance employee satisfaction and improve labor relations. The policies

put into place in the past year will go a long way to enhance the recruitment of

new employees and induce current employees to stay with the agency in spite of the

very attractive salary packages that have been offered by many in the private sector.

The agency has also agreed to pilot a work at home program one day per week

for our senior patent corps employees. Employees have been requesting inclusion in

such a program for years and it will be a big selling point for recruitment and retention.

I would also like to thank the Subcommittee for placing employee organizations

on the Public Advisory Committees. This gives us a sense that we are a part of the

process of planning for the future, an opportunity to hear the needs of different segments of the patent community and a real opportunity to understand the origin of

policies that affect us very directly.

Mr. COBLE. Thank you, Mr. Stern. Thanks to all the panelists.

The 5-minute rule applies to us as well, so I will be ever diligent

for the red light.

Mr. Godici, let me ask you this first. You mentioned you lost 475

examiners last year. Is that right?

Mr. GODICI. I believe it was 437.

Mr. COBLE. Of that number how many were people who retired

as opposed to seeking other employment?

Mr. GODICI. I don’t have those numbers off the top of my head,

but it is safe to say the significant portion of those 437 were not

through retirement.

Mr. COBLE. I would think not either. But at your convenience I

would like to know that. And do you all—you probably don’t do

this, but do you track them when they leave to find out where they

go? Is there any sort of pattern?

30

Mr. GODICI. We do an exit interview and we collect some data

from those people that leave and their supervisors in terms of finding out why they left and what their rationale or reasoning was as

opposed to where they went. I am not sure we have that data.

Mr. COBLE. You might give that to us also. I would like to know

that.

[The material referred to follows in the Appendix.]

Mr. COBLE. Assuming, Mr. Godici, that money is not an issue,

and it is, but assuming it is not, what would be the things that you

would do to change the PTO operations to better serve patent and

trademark filers?

Mr. GODICI. Mr. Chairman, really it boils down to three areas:

We need to look at and improve quality, and I think Mr. Myrick

had some very good comments with respect to quality. They included looking at the way we train our examiners, looking at the

tools that we make available to our examiners and looking at some

of the process changes that have been suggested by you and Ranking Member Berman, such as improvements in the reexamination

process, and so on, that can help us improve quality.

The second area that we need to focus on is an obvious one, and

that is timeliness, delivering a quality examination in a timely

manner. Obviously one of the ways to implement that goal is to increase our staff through hiring more patent examiners, to look at

efficiency gains, look at the process itself and where we can come

up with gains in efficiency, Mr. Montan talked about a program we

have on the trademark side for a bonus incentive system, to help

us along those lines. And last but not least, with respect to timeliness, one of the most important things is to be able to not only hire

but retain folks that come into the PTO so that they become more

experienced, and more valuable to the organization. We have done

several things, including the pay raise that we just got through

OPM, to help us out there.

Last but not least, and I will move quickly, is e-government.

Moving from a paper based system to an electronic based system

will help us both in timeliness and the quality of the products that

we put out.

Mr. COBLE. Thank you, sir.

Mr. Myrick, if the funding situation does not improve in the near

term and PTO operations continue to suffer as a result, how serious is IPO about suing the government over the diversion issue,

based either on takings or direct tax on property theory?

Mr. MYRICK. Thank you, Mr. Chairman. The IPO board has

taken no decision on any lawsuit at this time. Such a lawsuit is

premature for several reasons at this moment. But we have discussed the constitutionality of the continuing diversion of funds

and have received advice from a highly qualified constitutional lawyer. We are preparing a paper on the subject to discuss with various Members of the Congress, including yourself and Mr. Berman,

and the administration, all of whom we sincerely believe are at

least as concerned as we are about it, the principles of the Constitution.

Moreover, we believe that the new administration and the new

Secretary of Commerce in particular are looking afresh at the

31

needs of the PTO, and we hope that such a new look will make our

constitutional concerns go away.

Mr. COBLE. That is a fair response. I talked to the President, I

have talked to the Secretary of Commerce, and I suspect Mr. Berman has talked to others as well, indicating to them our very serious concern about this. So I am hoping that we will get some response.

Mr. Montan, you noted in your written testimony that more than

half of the trademark respondents to a survey were displeased with

refusals to register based on sections 2(d) and 2(e)(1) of the Trademark Act. Amplify this point, if you will.

Mr. MONTAN. Mr. Chairman, these are the two principal reasons

that trademark applications are rejected. 2(d) is because there is a

registration that is already on the register and considered confusingly similar to the application. 2(e)(1) is a refusal based upon the

grounds of descriptiveness. Normally when you get an office action

back from the PTO there may be some formal defects in the application that can be easily fixed. These are the two most substantive

rejects that you will normally get. And the Patent and Trademark

Office does its own customer survey every year, and these two refusals were identified as being areas where users of the trademark

system; that is, members of INTA and other people who use the

system, feel that there is a certain lack of consistency among the

examiners in giving these refusals for registration.

And again, this may be because there are new examiners that

need to be a little better trained. Again, many of the issues that

were brought up about training and technology might help these

problems.

Mr. COBLE. Thank you, sir. I have two or three more questions,

but my red light is illuminating. Let me yield to Mr. Berman from

California.

Mr. BERMAN. Thank you, Mr. Chairman. And I am sort of intrigued by this constitutional question. Although I am intrigued, I

am not very excited by it. What is the theory that would say that

a diversion of funds here as opposed to the 247 other places we divert funds, we take application fee monies or airport landing fee

monies or highway gas tax monies and use them for other purposes, and are the lawyers that are giving you advice on this issue

the same ones who argue that minimum wage law is an

abridgement of the freedom to contract?

Mr. MYRICK. Mr. Berman, I thank you.

Mr. BERMAN. I am with you on policy, but I am not sure I am

with you on the Constitution issue.

Mr. MYRICK. Let me say this, our board is very seriously considering this issue and has taken advice. The way we like to approach

this, if you don’t object, is we would like to give you a considered

paper that has been approved by our board before we present it in

public. You can imagine why. The theory is the takings clause

issue and a direct tax issue, takings under the fifth amendment,

and the direct tax issue, of course the Federal Government is prohibited from doing direct taxation because of the lack of representation as a direct tax.

We will provide this paper to you within a couple of weeks so if

you can hold the record open and if would you like to put it in the

32

record, that would be fine. But I would not like to prestate or upstage my own board on giving you that full blown recital just now.

If you will bear with us, we will have that paper to you within

2 weeks.

Mr. BERMAN. Yeah. I said this at the last hearing. I mean, I said

I would be interested in looking at it, but since we agree on the

policy I don’t want to spend a lot of time off on the constitutionality. You certainly have a right to sue. My fear is the consequence of that suit if you were successful. I am not quite sure

I understand how you would be successful, but if you were successful would it be simply to lower the fees of your member associations, not to increase the ability of the Patent Office to deal with

problems of pendency delays and inadequate staffing and salaries

and all the other issues?

Mr. MYRICK. May I respond a bit further? Let me just advise the

issue of a lawsuit has not been raised in my testimony or the testimony of IPO. We have raised the issue of constitutionality. What

the appropriate approach is to resolving these issues of constitutionality is something for you to consider, for the administration to

consider and for us, of course. We are not necessarily saying that

any lawsuit is the appropriate vehicle. What my statement said—

very important in saying—is that we believe that you at least as

much as we are concerned about constitutionality of what goes on

inside the Congress, and I think the administration is concerned.

What we are trying to do is to bring forward the argument that

has been presented so persuasively to us that say that there is an

issue here. How far that issue goes with regard to all the other

agencies, we have not looked at because frankly we don’t have the

breadth of exposure to all those other situations. But we certainly

are looking at it in the context of the PTO, and we will present you

a paper that presents it in that context, from which hopefully your

general counsel and so forth can extrapolate as far as those arguments need to be taken.

[The material referred to follows in the Appendix.]

Mr. BERMAN. Thank you.

Mr. Stern, I would like to ask you a question. It is a little bit

off this point, but it does get to the issue of patent quality. Apparently at the present time there is no obligation for a patent applicant to conduct a prior art search. While applicants have to disclose

all relevant prior art of which they are aware, they don’t have any

duty to actually search for relevant prior art.

Do you believe the creation of a duty to search for prior art

would be helpful to examiners and improve the quality of patent

applications?

Mr. STERN. I don’t think that—we have not prepared on this. I

have not run this by my executive——.

Mr. BERMAN. You as an individual.

Mr. STERN. But my own personal opinion on it is there is no need

to place that duty. There have been so many issues about fraud in

the past with respect to the enforcement of patent applications that

creating that kind of a duty will create more of a cloud over patents

than it will be helpful to examiners.

33

Mr. BERMAN. People will not—there will be debates about whether or not they actually undertook the search that we have obligated

them to do.

Mr. STERN. That is a concern. I think what we would like to do

is have the kind of patents that folks can rely upon. We don’t want

to introduce indirectly questions that will be the bases for later litigation. But we of course do want to find all the prior art, and it

is very useful to have applicants who are experts in the field submit that prior art to us. And examiners do look at that. Hopefully,

it will be relevant and will guide the examiner in the search for

further prior art. But it is really basically our responsibility to find

the relevant prior art. That is our role in the system.

Mr. BERMAN. Well, Mr. Chairman, I ignored the old adage you

never ask the question unless you know what the answer is going

to be. Thank you.

Mr. COBLE. I have two or three more questions. Do you have

more questions as well? Let’s go to a second round here. Mr.

Myrick, I did not intend to steer the ship on the rocks into reefs

and shoals about my question about the possible lawsuit, but you

know that was mentioned last year at one of our hearings, and I

think it is an issue that is significant, and that is why I broached

that subject. Let me put this question to all four of you: If you have

had a chance to examine 2047 in some detail, I would like to have

your thoughts about the bill. Let me start, Mr. Godici, with you.

I still like the title Commissioner rather than Undersecretary.

Commissioner has a very vibrant ring to it to me.

Mr. GODICI. Thank you, Mr. Chairman.

Mr. COBLE. Commissioner, in your view do you think that the

section 3 of the bill, the 50 million earmarked for each of the two

fiscal years, do you think that will suffice to enable the office to develop a fully functional electronic filing and processing systems in

the time frame proper?

Mr. GODICI. Actually, Mr. Chairman, we believe that the development of that system on the patent side is actually a 3-year program. We believe we are going to need funding for development in

fiscal years 2002, 2003 and 2004, and with that funding we believe

that we could deliver a system in fiscal year 2004. So as far as a

time frame is concerned we believe we need the 3 years.

Mr. COBLE. As Mr. Berman said, don’t ever ask a question to an

answer you don’t know. I was bitten as well Howard. But I think

3 years is more appropriate.

Mr. Myrick.

Mr. MYRICK. Personally I like 2 years. I don’t know whether the

$50 million is the right number or not. There is no way for us to

estimate that. But I think making an objective to complete such an

approach in 2 years is far more desirable to us.

Mr. COBLE. Mr. Montan, do you have a view on this?

Mr. MONTAN. Again it is very hard for me to say. I would have

to go along with what the Commissioner said.

Mr. COBLE. I have no magic wand about the 50 million either.

Mr. Stern.

Mr. STERN. We are very strong advocates of not buying a pig in

a poke, and you don’t spend money on a system until you know

what you are going to get for your money. And so our recommendaVerDate 11-MAY-2000 12:58 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060701\72983.000 HJUD2 PsN: HJUD2
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tion strongly is that we develop some plans before you authorize

some money. You review the plans and then you decide whether it

ought to be 50 million, 100 million or more or less. And one of the

things that isn’t clear in this bill is whether or not this is on top

of the already huge automation budget that the agency has. If this

is going to raise the level up to almost 300 million in terms of the

amounts of money that the agency spends on automation, the real

question is are you getting good value for your money, because we

examiners are the choke point in the system, unfortunately. We

can’t speed up our examination in any way but to have more people

doing the examination. And if you are concerned about pendency,

the only way to reduce pendency is to have more examiners, not

to have more computers. The additional computers will just slow

down things, not increase speed.

Mr. COBLE. Let me put a two-part question to you, Mr. Stern:

Whether and why PTO needs to overhaul its classification system,

A, and B, how much minimum time should an examiner devote to

a search?

Mr. STERN. Well, those are two very good questions. The classification system is very much in need of redoing. In the past we

used to redo a class due to new developments about once every 10

years. That is not happening anymore. There are some subclasses

that the number of patents is about 4,000. That makes it totally

uneconomic in terms of time to go search. The patent classification

system is the essential tool by which we find the prior art. And if

we let that go, we are not going to do as good a job as we could

if we had the patent classification system.

Mr. COBLE. Mr. Godici, I think in the sense of fairness and clarity, would you care to respond to Mr. Stern?

Mr. GODICI. With respect to classification, sir, two things: Number one, I think that in moving from a paper-based system to an

electronic-based system we have to reexamine exactly what it is in

terms of needs of a classification system. I think they are different

in paper than they are in electronics.

Taking Mr. Stern’s example, we may have a larger subclass than

we had when we had to stand and flip paper documents. But if you

have an electronic tool that will allow you to text-search those documents and cull them down at your desktop you may not need to

actually reduce the count as you did in the paper environment.

Although I do agree with Mr. Stern, keeping our classification

system robust, keeping it up to date, is essential to a quality examination, and I think it is a matter of balancing the resources we

have at the PTO in ways to improve the process at the PTO to deliver the quality of examination that is needed by our applicants.

Mr. COBLE. Thank you, sir. I see that ever recurring red light.

So I recognize Mr. Berman.

Mr. BERMAN. Thank you, Mr. Chairman. Forgetting again that

old adage, you expressed skepticism about imposing a duty to

search. What about a requirement that applicants disclose the extent to which they have searched for prior art? What do you think

about that?

Mr. STERN. Well, again, the problem there is to try to trap the

applicant into doing—making an admission that can later be used

35

in court. We would not be advocates of that. We are advocates,

however, of having applicants who are experts in the field——. Mr. BERMAN. Let me just interrupt. Why do you say that is put

forth to trap patent applicants? Why isn’t it put forth to help the

examiners know the extent to which they need to do some——. Mr. STERN. I think my membership is basically going to decide

where they are going to search based upon their own experience.

That really is our function in the system. It is our responsibility

to find where the prior art is. And while we appreciate the help

that we can get from patent applicants I think that we ultimately

ought to be held responsible for finding the art. If we don’t, we

have not done a good job. Applicants because they are in the field

will have some specialized knowledge. I am sure that a court can

take into account what was found and what information is available at a later time that was not found without having an explicit

duty on the applicant to actually present that art. If——. Mr. BERMAN. I am not talking about now you need to present

that art. I am talking about a duty to indicate what you in fact

searched for and why shouldn’t the court—I mean as you evaluate,

why shouldn’t the court have that information as part of the record

in terms of reviewing the legitimacy of a patent?

Mr. STERN. If that is something that you feel is necessary and

useful for the system, we certainly would not object. I mean, that

I don’t think is the role of the examiners in the system. But I do

think that examiners do take responsibility for finding the prior

art, they appreciate the help that they will get from applicants, but

I don’t think there is a need in the system to make that a responsibility of an applicant and make an issue later on in the enforcement process their integrity in terms of how well the applicant did

a job that would undercut the applicant’s position. I think that is

our really our responsibility, and I think we should have the time

and the resources to do it well so that others can rely upon its objectivity and the fact that it was done completely.

Mr. BERMAN. We should accept that the game is hide the ball

and not put the onus on the applicant to disclose?

Mr. STERN. Well, no, we appreciate anything that the applicant

discloses. But if someone later on can prove that an applicant deliberately withheld information that they knew about, that is a different situation and I think——. Mr. BERMAN. Why, if he doesn’t have an obligation to disclose

what he searched for, if it is bad to deliberately withhold, why

not—if it is wrong to deliberately withhold, then why isn’t it helpful to know what he searched?

Mr. STERN. It may very well be helpful to know what he searched

for, and from an examiner’s point of view there is an expectation

that we will understand that the part that we are working in and

we will know where to search, and I don’t think we have relied on

other patent offices for their search. It is really our responsibility

and I think we accept that responsibility.

Mr. BERMAN. Okay. Mr. Godici, can you tell us how you would

use the 207 million or whatever it now is that the administration

proposes to divert; in other words how many examiners would be

hired, what salary grade, what raises would you think would be

useful for retention purposes, which of the activities in the office

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should those raises be granted, what projects would be completed,

what would be the cost, how much would the backlog be reduced,

in what time frame?

Mr. GODICI. Mr. Berman as I mentioned before, I think it is pretty clear that the USPTO stands on a stool with three legs, in terms

of its goals and initiatives to improve patent quality, to improve

timeliness and to move from paper to automation. Some of the specifics you are talking about with respect to hiring—as I mentioned

in the oral testimony, we have just gotten within the last week a

special pay scale for our patent examiner. This is about 10 percent

above the previous scale.

Mr. BERMAN. What I am getting at, though, is when we go and

we push for this legislation, when the appropriators or their staff

people who enjoy having a source of money to spend that is over

and above, you know, what otherwise might have been allocated,

say these guys can even tell us what the money would go for, in

other words, getting a specific—and that is the purpose of that provision of the bill, getting a plan for how you would utilize that

money to meet those objectives that you have articulated and that

I think we all agree on would be helpful. And I mean, I would suggest actually not, obviously, for now, but as a submission for us so

that we can help you make that case, go through that process of

what if the money wasn’t diverted, what would we do with it, what

kind of credible plan would we have to deal with all the problems

that everybody talks about?

Mr. COBLE. Well, your point, Mr. Berman, is well taken because

when you go to the table with the appropriators, you need to have

hard, convincing evidence. And even oftentimes that doesn’t prevail

but it’s a good point, Howard. Mr. Stern, your comment about the $50 million, well taken. I

want to say to you specifically and to the other panelists generally,

there is nothing permanently fixed in stone about the 50 million,

not unlike—like a lot of legislation started, and that is why we are

talking to you all today, that is why we want to hear from you subsequently. Hopefully, it will be less than that. The way this town

operates that probably won’t be the case, but I am the eternal optimist.But I wanted you to know there is nothing permanent or fixed

about that.

I have got two or three more questions. I hate to keep you all

here, but I want to run by one more time here. Let me ask Mr.

Godici and the Commissioner and Mr. Myrick specifically—and if

other two want to weigh in, that is all right as well. Comment, gentlemen, if you will, on any differences between the U.S. System for

training patent examiners and other national systems, A, and I am

told that other countries place a greater emphasis on training examiners in searching methodology, whereas our system emphasizes

legal education, B.

Do you all think our examiners need to become better versed in

those skills related to searching for prior art? Commissioner, why

don’t we start with you?

Mr. GODICI. Sure. With respect to the USPTO and its training

programs, we have a patent academy where our new patent examiners are both in a classroom and on-the-job-type training that does

deal with legal and procedural issues. But within the last couple

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of years, we have integrated search training, use of electronic

searching tools, and training to how to use those searching tools in

our patent academy.

Just within the last year we have implemented a curriculum for

search training, and examiners have an opportunity to enroll and

sign up for classes specifically devoted to search techniques and

training on the searching tools and can self-select into different levels of training within that curriculum and actually have a bank of

hours that they can use to devote to training on search techniques.

So I think within the last year or two, we have made some strides

in terms of increasing just the type of training you are talking

about.

Mr. COBLE. Mr. Myrick.

Mr. MYRICK. Thank you, Mr. Chairman. It is difficult for me to

judge the differences in the training. I do know that the training

of the EPO amounts to something on the order of 1-1/2 total manyears, staff years, of work in getting an examiner ready to serve

his function as a journeyman examiner.

How that compares to the collective training we provide in the

USPTO, I am not quite sure. But I do know there is a fundamental

difference in the effectiveness of the training, because the examiners at the EPO stay a lot longer. Their tenure is very, very long,

so they not only get this training but they also continue to build

that training, and that tenure mounts up over the years to give us

an effective value out of that training that is substantially higher,

I think, than we get in the significantly rapid turnover of the examining court in the U.S.

This past year we had a big improvement in the turnover. It

went from 13 percent to 9 percent—is that right—and I think a lot

of that was based upon the fact that there was an improvement in

the pay scale in the wings. Whether that will continue now is a

question of great importance.

And one of the other proposals that we will make perhaps in a

subsequent response to a question of yours is to talk about retention as being the major issue that we should focus on for the future

to give real effectiveness to the training that we provide.

Mr. COBLE. Gentlemen——.

Mr. STERN. I can’t resist to put in a couple of words on this.

Training as recently as 1996-1997 was almost nonexistent at the

USPTO. Great strides have been made to add additional training.

I think my membership is appreciative of that. We need lots more

training. And training in the area of such strategy seminars in

which we can discuss this among ourselves without having to show

production for it and work on a particular case would be extremely

useful, and I think the membership would appreciate that. But

again that is an issue of funding, because for every hour that the

Agency says we can be in training, they are not getting a patent

application examined and they are very concerned about that.

Mr. COBLE. Now, Mr. Stern, you say without having to show production.

Mr. STERN. Right.

Mr. COBLE. You don’t mean to say to us that showing production

is not important, do you?

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Mr. STERN. No. Showing production is important, but training is

also important. And the training was shunted aside in past years

so as to make sure that everyone was always examining patent applications.

Mr. COBLE. Mr. Montan, do you want to weigh in on this?

Mr. MONTAN. We are a trademark organization.

Mr. COBLE. All right. Mr. Berman, any other questions for you?

All right, very well.

Mr. BERMAN. This is to Mr. Godici. H.R. 1332 is a bill that I am

sponsoring with Mr. Boucher which allows a party to submit for

the record prior art relevant to pending patent applications that

uses a broad definition of prior art that can be submitted. That includes evidence of knowledge or use or public use or sale.

But the thing I specifically want to ask about, it requires that

prior art submitted by third parties be considered during examination of patent. I have heard a variety of objections to this provision,

not the least of which is the claim that parties can already submit

such information. Can you explain to me the present situation? Are

examiners currently required to consider information submitted by

third parties regarding published applications, including evidence

of knowledge of use, leads for additional prior art, and commentary

on the relevance of submitted prior art?

Mr. GODICI. With respect to the publication of applications and

the submission of prior art by a third party who might see that

published application and then send it to us, we do have in place

a procedure where we will consider prior art documents. We will

not allow a third party to give us an explanation or a legal rationale or a treatise with respect to the applicability of that prior art,

but the examiner will be forwarded that information, that prior art,

and it will be considered by the examiner during the prosecution.

Now, you mentioned some other pieces of evidence such as prior

knowledge or prior sale, I believe. Those types of bars to patentability are not part of the procedure that we have in place now,

and specifically the AIPA, the language in the AIPA was very careful with respect to not setting up some kind of an opposition proceeding during the prosecution of an application. So we have tried

to follow the language of the AIPA as it was written and passed

in ’99 so that we are in full compliance with the intent of the legislation.

Mr. BERMAN. But does that make sense to, in a sense, shield

yourself on published patents applications from information which

would be very useful to the examiner in deciding whether or not

that patent should issue?

Mr. GODICI. We believe that the best quality examination and

the best quality product is done only when the examiner has all of

the pertinent information, pertinent prior art, in front of the examiner. And I believe that makes for the strongest patent document.

Mr. BERMAN. Well, I will try and take from that the conclusion.

Thank you.

Mr. COBLE. This has been a productive oversight hearing. I

thank you all for being here. Mr. Godici, Commissioner, when I

asked you about how many of those lost examiners went through

the retirement route, the reason I did that is it is very frustrating

to me to go to the trouble and the expense of training people and

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getting them operational on the line and then 5 or 6 years later

see them waltz off the ship, go ashore, and go elsewhere.

Mr. BERMAN. Same thing with congressional staff, too.

Mr. COBLE. And the same thing with congressional staff, that is

true. It is very frustrating.

Mr. BERMAN. Especially when they make more money than we

do.

Mr. COBLE. I talked to one today that is going to do that, by the

way. But if you can get that information for us, and Mr. Myrick,

we look forward—if it is convenient for you and if you are comfortable doing it, sharing the report of the prospectus lawsuit.

Mr. STERN. By the way, Mr. Coble, the Agency really has made

it more attractive to be an employee. In the last year, they have

gone a long way to enhance the flexibility of the time in which you

put in your work, and I think that has made it an extremely attractive place to work. And I think you will find that attrition will

not be as significant in the future as it was in the past with the

combination of those flexibilities plus the increased pay.

Mr. COBLE. That is encouraging to hear.

Mr. Myrick.

Mr. MYRICK. Yes, Chairman Coble. I thank you for the opportunity to present that paper and we will present it in the earnest

good faith that we would like to bring to the attention the issue,

rather than come forward with any specific action to be taken.

Rather, we would like to share with you what we learned, and hope

that produces the results that resolves the problem for everyone.

Mr. COBLE. That would be fine.

I almost forgot this. Congressman Gallegly, the gentleman from

California who sits on our Subcommittee but was unable to be

here, asked me if I would put this question to the Commissioner.

So I will read his question: Please detail for the record the PTO’s

current ability to manage, share and protect digital information.

Further, what information technology is presently utilized in the

private sector that enables major corporations to leverage digital

information more effectively? Finally, how have budget constraints

limited the PTO’s ability to acquire this technology?

So can you respond to that, Commissioner?

Mr. GODICI. If by digital information you mean protecting or

keeping secure information that is sent to us—for example, electronic filing of a patent or an electronic filing of a trademark—we

certainly have systems in place that ensure that that digital information that comes into the USPTO is maintained in a database,

is not lost. And on the patent side, we use PKI security for transmitting that information through the Internet to the USPTO.

I am not sure if that is the crux of the question or not.

Mr. COBLE. If you don’t mind, Commissioner, you might ask one

of your staffers to contact the staff.

Mr. GODICI. I will do that.

Mr. COBLE. And then you can iron that out, gentlemen. Anything

further Mr. Berman?

Gentlemen, thank you all for being with us. You have contributed, obviously, very favorably to this hearing. This concludes the

oversight hearing on the operations of the U.S. Patent and TradeVerDate 11-MAY-2000 12:58 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060701\72983.000 HJUD2 PsN: HJUD2
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mark Office, including review of Agency funding. The record will

remain open for 1 week.

Thank you again to the panelists and to those in the audience

who attended. The Subcommittee stands adjourned.

[Whereupon, at 3:15 p.m., the Subcommittee was adjourned.]

(41)

A P P E N D I X

STATEMENTS SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Chairman,

Thank you for calling this hearing—another installment in our annual review of

the PTO and its operations.

As I have done at previous PTO oversight hearings, I want to commence by expressing my support for the PTO. Through its examination and granting of worthy

patents and trademarks, the PTO performs a critical role in spurring technological

innovation and commercial creativity. This innovation and creativity, in turn, has

been the primary engine behind our information economy.

As with any entity, there is room for improvement at the PTO. I am concerned

about the quality of some patents being issued, particularly business method patents. As I will explain more fully, I believe there are a variety of ways the PTO

can address these quality concerns.

First, however, I want to acknowledge that many solutions to quality concerns

will remain outside the PTO’s grasp unless it has sufficient resources to implement

those solutions.

The Bush Administration’s budget request for fiscal year 2002 planned to divert $207 million in FY 2002 PTO fees to programs outside the PTO. Though the past

two Administrations also engaged in similar ‘‘legalized larceny,’’ as the Chairman

likes to call it, the Bush budget proposes to divert almost twice the amount diverted

by any previous administration. While revised revenue estimates from the PTO indicate that the actual diversion may be far less than $207 million in fiscal year 2002,

the Bush budget also proposes to divert an average of over $180 million in succeeding years.

These diversions are cumulative and, in effect, constitute a budgetary ‘‘shell

game’’ played at the expense of the PTO , the country’s inventors, and our economy. For example, while the fiscal year 2002 Bush budget allows the PTO to spend $282

million diverted from fiscal year 2001 fees, it only allows the PTO to spend $857

million of the $1.346 billion in fees it projected would be collected in FY 2002. In

other words, the Bush budget denies the PTO the ability to spend $489 million of

FY 2002 fees in FY 2002—an amount equal to the $282 million in diverted FY 2001 fees plus an additional $207 million in new diversions. To keep up with the shell

game, next year the Bush budget will allow the PTO to expend these $489 million

in ‘‘unused’’ FY 2002 fees, but will divert an equal or larger amount from FY 2003

fees. Depending on actual FY 2002 fees received by the PTO, by the end of next

year, the cumulative diversion could be nearly $900 million!!

While the balance sheets of PTO revenues, budget authorities, and carry-overs are

confusing, one thing is quite clear: the diversions constitute a Tax on Innovation.

This ‘‘Innovation Tax’’ takes fees paid by inventors and businesspeople to secure

patents and trademarks and uses them as an interest-free loan to promote unrelated programs. It is at least slightly ironic that an Administration so intent on cutting taxes and promoting free enterprise would institute such an enormous Tax on

Innovation.

This Innovation Tax is leaving the PTO unable and unequipped to perform its

very critical mission.

As I’m sure we will hear in today’s testimony, the number of patent and trademark applications has skyrocketed over the past few years—up 50% since 1996. Patent pendency—the length of time between when an applicant first turns in her paperwork and when her patent is granted—has increased as well. The average pendency in 1996 was 21 months; now it is 25.5—an increase of over 20%. The recent

strategic plan issued by the Department of Commerce projected that patent

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pendencies would increase to 38 months by 2006. Remarkably, the Department of

Commerce arrived at this 38 month figure using the entirely unrealistic assumption

that the PTO would have access to all of its fees between 2002 and 2006—an as- sumption in direct contradiction with the previously released Bush budget.

Pendency can only be reduced through streamlining the process and increasing

the numbers of examiners. But without adequate funding, the PTO has been forced

to defer improvements in their IT processes, and attrition in their workforce was

the highest in ten years during the last full fiscal year—as a result of low salaries

and a hot economy. Talented people can and do go elsewhere when the government

cannot pay competitive salaries. And without talented people, pendency increases

and quality suffers when workload goes up.

I believe Congress should repeal the Innovation Tax by ensuring that the PTO

can use all the fees it receives. Rep. Boucher and I introduced H. Res. 110 several

months ago to accomplish this very goal. H. Res. 110 creates a point of order against

floor consideration of any bill that provides the PTO with less than full funding.

While points of order are, of course, waivable, H. Res. 110 would provide interested

parties with a Rules Committee forum in which to battle waivers and resulting PTO

fee diversions. Furthermore, H. Res. 110 enjoys the benefit of requiring adoption

only by the House.

H.R 2047, the bill Chairman Coble and I introduced yesterday, also advances the

goal of legislating full PTO funding by authorizing the PTO to use all the fees it

collects in fiscal year 2002. H.R. 2047 establishes a good precedent of authorizing

the PTO to spend all that it collects, and also requires appropriators to justify why

they will appropriate less than the full authorization. I believe that H.R. 2047 and

H. Res. 110 are symbiotic, and I will pursue House passage of both.

I want to be clear about the difficulties inherent in any attempt to legislate full

funding. Without significant, sustained support from affected PTO users, the prospects for repeal of the Innovation Tax are dim. I applaud the 21st Century Intellectual Property Coalition for sending letters asking appropriators to adequately fund

the PTO. I also applaud the National Treasury Employees Union for generating

grass roots pressure on key appropriators to allow the PTO to retain its fees. But,

as I have said before, these efforts will come to naught unless the affected parties

put the same effort into this battle as they do into their highest legislative priorities. Coalition letters and trade association lobbying must be coupled with direct

appeals from CEOs, more grass roots involvement, and an expansion of organizations involved.

The PTO also has a role to play in enabling its supporters to effectively advocate

for repeal of the innovation tax. The PTO needs to clearly and specifically outline

how it would use all the fee revenue to be diverted. H.R. 2047 would generate this

information by requiring the PTO to provide it to Congress.

While more money will certainly help the PTO fulfill its mission, it will not by

itself address all patent quality concerns. I believe that a variety of reforms, particularly within the examination process, would significantly improve confidence in patent quality.

One reform would be effectuated by H.R. 2047, the bill Chairman Coble and I just

introduced. Currently, the PTO can accept electronically filed patent applications,

but then examines these applications in hard copy. Such a system not only creates

unnecessary administrative costs, but also effectively prevents pending applications

from becoming a useful source of prior art. H.R.2047 would require the PTO to establish a system enabling it to electronically process, maintain, and search patent

applications. After creation of such a system, an examiner of a business method patent application could scour for prior art all pending business method patent applications, which currently outnumber business method patents actually granted.

Another needed reform is a requirement that patent applicants disclose their prior

art searches. This idea, which was encapsulated in two bills Rep. Boucher and I introduced, H.R. 1332 and 1333, ensures that patent examiners have the best available information as to likely places to search for prior art. As I understand it, over

half of patent examiners have less than two years of examination experience. In

other words, many have not been on the job long enough to develop refined search

skills or comprehensive knowledge of their art area, much less knowledge of related

art areas, or a grasp of all the literature available. Creation of a duty to disclose

searches would allow inexperienced examiners to benefit from the knowledge and

search skills of more experienced patent agents and attorneys.

Some have criticized the idea of a duty to disclose searches on the basis that the

law does not require prior art searches, so in some cases such a duty will result

in no additional information. To these critics, I have two responses. First, any additional information is better than none. Second, I would be glad to entertain proposals to create a duty to conduct prior art searches.

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In slightly different ways, both H.R. 1332 and 1333 created presumptions of obviousness for mere computer implementations of prior inventions. I continue to believe

such a presumption is a key reform in the examination process. Creation of such

a presumption would give the inexperienced examiner, who may have a software

background or a business background, but not both, needed direction to reject certain unworthy applications that they would otherwise feel constrained to approve.

Last but not least, I believe every step should be taken to ensure that all relevant

prior art is available during the examination process. To this end, I believe mechanisms are needed to allow third parties to present and explain to the PTO prior art

that may be relevant to pending applications. Current law and regulations restrict

the scope of relevant information that third parties can present, as well as restricting the ability of third parties to explain the relevance of that information. H.R.

1332 would expand the ability of third parties to present prior art to the PTO regarding published business method application. This principle could, and perhaps

should, apply to all published applications regardless of art area.

In conclusion, I look forward to hearing our witnesses’ opinions on solutions to the

funding issue and on ways to improve PTO operations. To the extent they can address any of the specific issues I have raised, I would appreciate it.

I yield back the balance of my time.

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN

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 fact

that this year has seen a 13% 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 revenues 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.

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