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63–874 PDF 2011

HOW AN IMPROVED U.S. PATENT AND 

TRADEMARK OFFICE CAN CREATE JOBS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INTELLECTUAL PROPERTY, 

COMPETITION, AND THE INTERNET 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JANUARY 25, 2011 

Serial No. 112–6 

Printed for the use of the Committee on the Judiciary 

( 

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

(II) 

COMMITTEE ON THE JUDICIARY 

LAMAR SMITH, Texas, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM REED, New York 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

DENNIS ROSS, Florida 

SANDY ADAMS, Florida 

BEN QUAYLE, Arizona 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

DEBBIE WASSERMAN SCHULTZ, Florida 

SEAN MCLAUGHLIN, Majority Chief of Staff and General Counsel 

PERRY APELBAUM, Minority Staff Director and Chief Counsel 

SUBCOMMITTEE ON INTELLECTUAL PROPERTY, COMPETITION, AND THE INTERNET

BOB GOODLATTE, Virginia, Chairman 

HOWARD COBLE, North Carolina, Vice-Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM REED, New York 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

SANDY ADAMS, Florida 

BEN QUAYLE, Arizona 

MELVIN L. WATT, North Carolina 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

DEBBIE WASSERMAN SCHULTZ, Florida 

JERROLD NADLER, New York 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

BLAINE MERRITT, Chief Counsel 

STEPHANIE MOORE, Minority Counsel 

(III) 

C O N T E N T S 

JANUARY 25, 2011 

Page 

OPENING STATEMENTS 

The Honorable Bob Goodlatte, a Representative in Congress from the State 

of Virginia, and Chairman, Subcommittee on Intellectual Property, Competition, and the Internet .................................................................................... 1 

The Honorable Melvin L. Watt, a Representative in Congress from the State 

of North Carolina, and Ranking Member, Subcommittee on Intellectual 

Property, Competition, and the Internet ............................................................ 3 

WITNESSES 

The Honorable David J. Kappos, Undersecretary of Commerce for Intellectual 

Property and Director of the United States Patent and Trademark Office, 

United States Patent and Trademark Office 

Oral Testimony ..................................................................................................... 4 

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

Douglas K. Norman, President, Board of Directors, Intellectual Property Owners Association 

Oral Testimony ..................................................................................................... 35 

Prepared Statement ............................................................................................. 38 

Robert J. Shapiro, Chairman and Co-Founder, Sonecon LLC 

Oral Testimony ..................................................................................................... 62 

Prepared Statement ............................................................................................. 65 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of Shayerah Ilias, Analyst in International Trade and 

Finance, Congressional Research Service, submitted by the Honorable Melvin L. Watt, a Representative in Congress from the State of North Carolina, 

and Ranking Member, Subcommittee on Intellectual Property, Competition, 

and the Internet ................................................................................................... 77 

(1) 

HOW AN IMPROVED U.S. PATENT AND 

TRADEMARK OFFICE CAN CREATE JOBS 

TUESDAY, JANUARY 25, 2011 

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

The Subcommittee met, pursuant to call, at 1:33 p.m., in room 

2141, Rayburn House Office Building, the Honorable Bob Goodlatte 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Goodlatte, Coble, Chabot, Issa, Jordan, 

Poe, Chaffetz, Reed, Griffin, Marino, Adams, Quayle, Watt, Conyers, Berman, Chu, Deutch, Wasserman Schultz, Nadler, Lofgren, 

Jackson Lee, and Waters. 

Staff Present: (Majority) Blaine Merritt, Subcommittee Chief 

Counsel; Olivia Lee, Clerk; and Stephanie Moore, Minority Subcommittee Chief Counsel. 

Mr. GOODLATTE. Good afternoon, and welcome to the first hearing of the Subcommittee on Intellectual Property, Competition, and 

the Internet. The Subcommittee will come to order. Before I recognize myself for an opening statement, I want to welcome all the 

Members of the Committee. We have a number of new Members 

in Congress who are on the Committee, but since most of them 

aren’t here today, I will defer on that until perhaps later on in the 

hearing. 

I want to also say how pleased I am and look forward to working 

with our new Ranking Member, Mr. Watt of North Carolina, who 

was elected in Congress the same year I was, and we have worked 

together on a number of different things, but we will be spending 

a lot of time together here in this Congress. 

I’ll now recognize myself for an opening statement. 

In April of 2010, the U.S. Department of Commerce released a 

white paper entitled: Patent reform: Releasing Innovation, Promoting Economic Growth, and Producing High-Paying jobs. The authors concisely document that a well-functioning patent system facilities innovation, a key driver of a pro-growth, pro-job-creating 

agenda. To illustrate this point, I’ve culled three factoids from the 

study. First, technological innovation is linked to three-quarters of 

America’s post-World War II growth rate. Much of this is attributable to capital investment and increased efficiency. 

Second, innovation produces high-paying jobs. Between 1990 and 

2007, the average compensation per employee in innovation-intenVerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6601 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874
2 

sive sectors increased nearly 21⁄2 times the national average. And, 

third, innovative firms rely on patent portfolios to attract venture 

capital. In fact, 76 percent of startup managers indicate that venture capitalists consider patents when making investment decisions. 

But the Commerce study and related sources also note that the 

current U.S. patent system is ‘‘prone to delay and uncertainty as 

well as inconsistent quality.’’ On the front end, this means that private investments in innovation are less likely. On the back end, 

lawsuits that challenge the validity and scope of patents cannot address this quality deficit. Both scenarios stifle economic growth and 

job creation. Conversely, a well functioning and resourced Patent 

and Trademark Office can only lead to greater innovation and 

higher-paying jobs. 

Part of our focus today will examine how the agency is funded, 

or rather, not funded. The PTO derives its operating revenue from 

inventors and trademark owners who pay user fees to the agency. 

These funds are deposited in a PTO appropriations account at the 

Treasury, with the appropriators ultimately deciding how much 

money the agency gets back. Since 1991, it is estimated that more 

than $700 million have been diverted from PTO coffers to other 

Federal initiatives. 

Starting with the Bush administration, we began to see more of 

a commitment to allowing the PTO to keep more of the fees it generates. If I had my preference, the PTO would be able to keep all 

of the fees it collects for PTO operations. While I have worked for 

many years and will continue to work hard to allow PTO to keep 

its fees, the reality is that we are in challenging financial times 

and we have a less than optimal system for funding the PTO at 

present. In this environment, we must continue to ask the question 

of how PTO can continue to enhance quality and reduce pendency 

in the unfortunate event that it is again faced with the less than 

full funding levels. 

Again, while we must continue to work to produce greater efficiencies at PTO, you can be assured that we will continue to work 

with the appropriators to allow the PTO to keep its fees. Any other 

system amounts to an excise tax on our Nation’s inventors. 

But we won’t confine the hearing to money matters alone. In this 

regard, no one can accuse David Kappos of dragging his feet as the 

PTO director. I commend him for his energy and the new initiatives that he’s launched at the agency since assuming the helm. It 

is important to delve into these programs to make sure they are 

needed, and if so, to determine if they work. Above all, we should 

support programs that maximize the agency’s ability to reduce patent pendency, pare the application backlog, and ensure that it 

issues only patents of high legal integrity. 

These issues really define the agency and its ability to serve inventors, trademark holders, and the American people. There are 

more than 700,000 applications awaiting first office actions, and 

average total pendency surpasses 35 months. We need to work with 

PTO to get these numbers down. 

I will conclude by noting that the American economic philosophy 

has evolved somewhat since the 18th century. Adam Smith wrote 

in the Wealth of Nations that a prosperous country is dependent 

3 

upon capital, labor, and mineral resources. Today, knowledge 

moves the world. As the scientist and inventor Rajim Grabera put 

it, trillions of dollars, millions of jobs, and economic and geopolitical power flow from the exploitation of technologies which 

have deep roots in science. 

To illustrate, in 1947, intellectual property comprised less than 

10 percent of all American exports. Today, that figure is well over 

50 percent. We all understand the link between the PTO and the 

protections afforded inventors who drive this information economy. 

The PTO is a world-class agency now, but we must work with the 

Director to make it an even more efficient and productive one. 

I now yield to the gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. Let me start by congratulating Chairman Goodlatte on his selection as Chair of this Subcommittee. I feel very humbled and honored to be the Ranking 

Member, and especially serving with somebody who has a reputation for being knowledgeable in the area and interested in innovation and moving forward in this area. I dare say that we’ll be a lot 

more philosophically aligned than I was with my Ranking Member 

on Financial Services last time, Ron Paul. So I am looking forward 

to that. 

I am also looking forward to serving with people that I know 

have a great, great deal of knowledge on this Subcommittee about 

intellectual property, Howard Berman, Zoe Lofgren in particular on 

our side; Howard Coble; and the Chair on the other side, among 

others. I don’t mean to exclude anybody about their knowledge, but 

I know that there is a long, deep bench of people with a lot of 

knowledge on the Subcommittee, and I am looking forward to 

learning more about the subject matter and being an important 

part in this process. 

I also think it is important to thank the Chairman for convening 

this hearing to look at both the inner workings of the United States 

Patent and Trade Office and on the direct impact the services provided by the Patent and Trade Office have on the national economy 

in general and on job creation in particular. While I have had an 

ongoing interest in and appreciation for the important roles that 

intellectual property and innovation play in our economy, my new 

role as Ranking Member of the Subcommittee will no doubt afford 

me the opportunity to delve much more deeply and intensively into 

the legislative policy choices at play in this important area. 

As a former attorney with mostly a small business practice, I understand the value of innovation and helping to sustain, stimulate, 

and grow a company. However, innovations can only provide a positive impact to the economy if they are actually put into use. If innovations are buried in 

backlogs at the Patent and Trade Office or in the security boxes 

of companies or even in the minds of inventors, they can generate 

no economic value. 

There’s little disagreement that the efficient operation of USPTO 

is vital, to paraphrase the Department of Commerce, to unleash innovation, promote economic growth, and produce high-paying jobs. 

While I am not privy to the President’s State of the Union speech, 

I would be shocked if innovation is not a major component of his 

4 

comments tonight and a major part of what will surely be his 

strong push for economic growth and job creation. 

In this environment of budget cuts, we must make smart and informed choices, and I trust that our witnesses here today will start 

us down that road. I just hope that in the larger push for global 

budget cuts or a balancing of the budgets, my colleagues will stand 

with me against throwing out the baby with the bath water and 

giving this important agency the important resources it needs to 

allow innovation and job creation. 

With that, Mr. Chairman, I yield back the balance of my time. 

Mr. GOODLATTE. I thank the gentleman. And without objection, 

other Members’ opening statements will be made a part of the 

record. Before I introduce our first witness, I would like him to 

stand and be sworn. 

[Witness sworn.] 

Mr. GOODLATTE. We’ll have two panels today. Leading off is the 

Honorable David J. Kappos, the Undersecretary of Commerce for 

Intellectual Property and Director of the United States Patent and 

Trade Office. In this role, he advises the President and Secretary 

of Commerce and the Administration on intellectual property matters. Before joining the PTO, Mr. Kappos led the intellectual property law department at IBM. He has served on the board of directors of the American Intellectual Property Law Association, the Intellectual Property Owners Association, and the International Intellectual Property Society. He has held various other leadership 

positions in intellectual property law associations in Asia and the 

United States and has spoken on intellectual property topics 

around the world. 

Mr. Kappos received his Bachelor of Science degree in electrical 

and computer engineering from the University of California at 

Davis in 1983, and his law degree from UC Berkeley in 1990. Welcome. 

TESTIMONY OF THE HONORABLE DAVID J. KAPPOS, UNDERSECRETARY OF COMMERCE FOR INTELLECTUAL PROPERTY 

AND DIRECTOR OF THE UNITED STATES PATENT AND 

TRADEMARK OFFICE, UNITED STATES PATENT AND TRADEMARK OFFICE 

Mr. KAPPOS. Thank you very much, Chairman Goodlatte, Ranking Member Watt, Members of the Subcommittee, for this opportunity to discuss the state of the USPTO. First, I’d like to applaud 

you for the caption of this oversight hearing. In my view, it is spot 

on. The work that we do at the USPTO creates jobs for Americans—high-paying jobs in innovation-based industries critical to 

our Nation’s prosperity. We create the jobs that can accelerate our 

country’s economic recovery. Our patent and trademark grants give 

American innovators the protection they need to attract investment 

capital, to hire workers, to build companies, and to bring new goods 

and services to the marketplace. 

But, to be successful, the USPTO needs to be well-managed and 

appropriately funded. We’ve implemented a broad array of changes 

during the last year and a half, which have refocused our resources 

on our most important work, including reducing our current patent 

5 

application backlog. But ensuring stable funding for USPTO will 

continue to be critical to our success. 

Mr. Chairman, I am pleased to report that our dedicated employees have made progress in a number of important areas. Our patent operations set all-time records in total agency output, including 

both the number of patents granted and the number of applications 

rejected. As of the end of financial year 2010, we reduced the backlog of utility patent applications to about 708,000, the lowest level 

in several years. We’ve seen sustained and substantial decreases in 

actions for disposal, which are an indication that patent application 

issues are being resolved more efficiently. Importantly, these accomplishments have been made without any sacrifice in quality. In 

fact, our quality metrics have actually risen even while productivity 

has improved. We increased our total number of interview hours, 

the time spent working with patent applicants to understand their 

inventions and to resolve issues a full 40 percent last year, to 

140,000 interview hours, another all-time record for our agency. 

We put a number of market-driven pilots into action, including 

accelerated examination of green tech applications and a project 

called Exchange, as well as our three-track prioritized examination 

process that we expect to move forward with soon. 

Working with our patent examiners’ union, POPA, the USPTO 

has installed a new examination count system. It gives our examiners more time to examine patent applications, increasing quality 

while incentivizing earlier resolution of issues, resulting in improved examination efficiency. We’ve substantially expanded our 

work-sharing arrangements with other major patent offices worldwide to speed the processing of applications filed in multiple jurisdictions. In fact, in FY 2010, we more than doubled the total usage 

of our 

benchmark patent prosecution highway over all previous years 

combined. 

Mr. Chairman, my written statement contains more detailed information on the array of initiatives we’ve got underway, all geared 

toward helping to empower and unleash America’s innovators in 

their capacity to create jobs. While we are aggressively making 

changes at the Office, I want to express the Administration’s support for continuing congressional efforts to enact patent reform legislation. Enactment of a number of the proposals considered in recent years will significantly improve our patent processes, reduce 

litigation uncertainties and costs, and increase the value of patent 

rights for American innovators. 

Finally, ensuring stable funding for USPTO will continue to be 

a critical part of our success. As such, I want to provide a very brief 

overview of our current funding situation. Fee collections at 

USPTO are running very strong as a result of the improving economic outlook, strong patent renewal rates, and our increased production. We’re getting more done and collecting more fees in doing 

so. As you know, to enable these efforts, the President’s FY 2011 

budget proposes that USPTO be permitted to spend all of the fees 

it collects, and proposes a 15 percent surcharge on patent fees. 

Unfortunately, despite our strong fee collection, as a result of the 

current continuing resolution, the USPTO has been forced to implement spending reductions. These include restricting examiner overVerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6601 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874
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time, delaying critical IT projects, and slowing down on hiring. 

Should the continuing resolution be extended beyond March 4, and 

hold the USPTO to the FY 10 funding level, we’ll be forced to halt 

all hiring, all overtime, and all IT improvements. This, unfortunately, would reverse many of the gains we’ve begun to make. 

Mr. Chairman, we wish to work with you and our appropriators 

to ensure that the job-creating, 

deficit-neutral work conducted at the USPTO for the benefit of 

our Nation’s innovators is supported in whatever final spending 

package is enacted for the remainder of 2011. 

Thank you. 

Mr. GOODLATTE. Thank you, Mr. Kappos. 

[The prepared statement of Mr. Kappos follows:] 

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Mr. GOODLATTE. These bells are for votes that are going to take 

place on the floor. I do think we have enough time to get my questions in. So in order to keep things moving, I’ll go ahead and begin 

the questioning, and then we’ll recess, and we will come back and 

continue the questioning after the votes. 

The issuance rate for patents has risen appreciably during your 

tenure, even though examiners can devote more time to reviewing 

under the new count system. What accounts for this swing, and 

what does it say about patent quality? In the late 1990’s and early 

2000’s, critics were complaining about too many patents being 

issued. 

Mr. KAPPOS. Yes, thank you, Chairman Goodlatte, for that question. So at the surface the juxtaposition of giving more time to examination, right, but having more patents come out, even when 

you have few examiners, which is what we were dealing with last 

year, sounds like the classic riddle wrapped within an enigma. It 

is not at all. It’s a matter of basic management. What we’ve done 

is give examiners more time upfront to examine applications while 

giving them all the incentives to reach out to applicants and engage in discussions with applicants, conduct interviews with applicants, and move beyond what was the ships-passing-in-the-night 

problem to instead understand the issues and figure out how to either grant the patent or reject it. 

So this is why I said we not only set a new record in granting 

patents last year, we also set a new all-time world record for the 

USPTO in rejecting applications. I believe that we’re doing an excellent job at our job, which is calling balls and strikes, and it’s 

borne out by our quality data which actually showed that quality 

went up, not surprisingly, when we gave examiners more time, 

starting last year. 

Mr. GOODLATTE. Your predecessor, Mr. Dudas, one of the metrics 

he used in measuring quality was the lower allowance rate, i.e., he 

would argue that the PTO was doing a better job of catching bad 

applications. How do you compare yourself to that? Do you apply 

the same metric, or do you think that a lower approval rate is a 

good measure of the quality of the patents being approved or not? 

Mr. KAPPOS. I don’t apply that metric at all. Frankly, I think 

that is the wrong metric. Our job is to grant those patents that 

should be granted with appropriately scoped claims and to reject 

those that shouldn’t be granted. What I believe, after many years 

of practice in this area, is that most of the patent applications filed 

at the USPTO are filed by dedicated, brilliant, smart, innovative 

Americans, and they’re really not about saying no, you don’t get a 

patent. They’re about finding the appropriate scope for which a 

patent should be granted. I have absolutely no problem with the 

allowance rate going up, so long as our quality remains high, as it 

has. 

Mr. GOODLATTE. Let me go on to the next question. The PTO 

began a 12-month pilot in December 2009, that advances patent 

applications out of turn if they related to green technology. Does 

this suggest that the Administration favors industrial policymaking? Is the PTO trying to pick winners and losers in the business world? And what other forms of technology are favored in this 

way? 

18 

Mr. KAPPOS. Well, I’m not looking to pick winners and losers. 

The purpose of the green tech pilot was to shine a light on an important area very, very broadly defined. It goes all the way across 

from fuel cells and solar technology to reduced power electronics 

and the like. We are about to announce very, very shortly, within 

days, what we will call track 1, which is a new, across-the-board 

acceleration initiative that will capitalize on what we learned from 

green tech and apply it to all areas of technology. Under track 1, 

we’ll be offering to any applicant merely for payment of the fee, to 

get them their First Office Action within 3 months and get them 

a conclusion on their patent application within a year. 

So we’re benefiting from what we learn from experiments like 

green tech and we’re moving to able to go into production mode to 

be enable any applicant at the USPTO merely for payment of a fee 

to get in and out of our agency at a rate that enables them to get 

jobs and put products in the market quickly. 

Mr. GOODLATTE. Does that mean that you will wrap the green 

technology initiative into this other new initiative or are you going 

to have now three tiers? 

Mr. KAPPOS. So that’s a great question. Our ultimate plan is, 

over time, to start folding these other initiatives into what we’re 

calling track 1. We’re creating the infrastructure behind track 1 

within the agency in terms of the implementation machinery so 

that we can fold these other initiatives into it over time and it becomes a consolidating point for what you would call these experiments that we’ve instituted. 

Mr. GOODLATTE. So there will no longer be an industry bias, if 

you will, within the Patent Office, favoring one sector of creativity 

over others. 

Mr. KAPPOS. Over time, although I would leave open the opportunity to do more experiments with small, limited areas. Medical 

products is one that has come up from time to time. There may be 

others over time. 

Mr. GOODLATTE. We have now reached the second bells. And 

under our new protocol, we’re hoping that the management on the 

floor will move those votes along quickly. In that regard, we need 

to get down there and vote ourselves. So the Committee will stand 

in recess and reconvene as soon as the votes are over. 

[recess.] 

Mr. GOODLATTE. It is now my pleasure to recognize the Ranking 

Member, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. Thank you for being here 

with us today and for your service at the Patent Office. I just received, just before I came, Senator Leahy’s introduced version of 

the patent bill. I notice you went out of your way to say that we 

need to get on with doing patent reform. I don’t suppose you’ve had 

an opportunity to look at the bill that he’s introduced and able to 

comment on it, are you? 

Mr. KAPPOS. I’ve had an opportunity to look at it only very briefly so far. 

Mr. WATT. One section of it, section 9, deals with the fee-setting 

priority. I would especially like to have your opinion about that. If 

you haven’t had a chance to look at it in the detail that you need 

19 

to to give us that opinion today, that would be great if you just 

gave us something in writing. 

Mr. KAPPOS. Thank you, Ranking Member Watt. And that is a 

provision that I’ve had an opportunity to look at and it is of quite 

a bit of interest. For the United States Patent and Trademark Office and for the Administration relative to fee-setting authority, we 

strongly support the work being done by Congress, the approach 

taken in the Senate bill, and past efforts in the House, in order to 

enable the USPTO to set our fees. It turns out if there’s anything 

I’ve learned in my year and a half at the agency, it’s that for this 

agency to move at the speed business moves and to be businessrelevant, we must have the ability to adjust our fees in much more 

real-time. And I’ll give you a quick example. 

I mentioned before that we’re getting ready to put our track 1 

examination in place to provide 3-month First Office Action and 12- 

month patent disposition merely upon payment of the fee. Well, as 

we were fleshing that system out, the first thing we wanted to do 

is provide the 50 percent discount that we normally provide for 

small entities. Unfortunately, we cannot do that at the USPTO because that’s a statutory requirement. Only Congress can do that. 

Mr. WATT. So, generally, you support what he’s proposed here, 

working in conjunction with the House to move that along. I may 

be getting ready to tread into some territory here that will get me 

into trouble. We’re not very controversial usually in the Subcommittee. But I was struck that in today’s CQ there’s a story captioned: Conservatives Rally Against Patent Overhaul. I guess my 

bottom line after I read a little excerpt from it is I just kind of like 

to know what you make of this, this whole argument. 

There apparently are some conservative organizations out there 

gathering signatures from some activist groups for a letter to 

House and Senate leaders opposing the legislation, which they cast 

as an attack on the American patent, a property right enshrined 

in the Constitution. That argument could resonate among conservative lawmakers, according to this, particularly Republicans, who 

have pledged to look to the text of the Constitution as a strict limit 

on the power of the Federal Government and dim the prospects for 

overhaul legislation in the Republican House. 

Among the provisions of concern to conservative activists as well 

as some private sector stakeholders are those that would make it 

easier to challenge the validity of granted patents and change the 

U.S. Regime from first to invent to first to file system. 

Now I’m not looking for controversy. Don’t get me wrong. But it’s 

always been my practice to try to deal with things on top of the 

table. And I’m interested in what you make of this whole potential 

attack. What would you make of that as an argument? 

Mr. KAPPOS. Well, thank you for the question. I disagree strongly 

with those conclusions. In my view, the patent reform legislation 

that the House has worked on, that the Senate is working on, 

would increase the value of patents, would increase the certainty 

of the patent system, would support the constitutional mandate for 

a patent system to provide patents for inventors, would provide certainty in the law, would add value across the board to our country 

fully consistent with the Constitution. 

20 

Mr. WATT. I understand we’ve got a hearing coming up next 

week or sometime soon more directed at the patent. So maybe we’ll 

get more into the arguments pro and con there. 

Let me just ask this general question. We’ve got the State of the 

Union address coming up tonight. If you were giving the President 

the words to say about why innovation and patent protection and 

this whole intellectual property protection is critically important to 

job creation and stimulation of the economy, how would you phrase 

it? 

Mr. KAPPOS. Well, I would use any of the examples that I hear 

regularly from places, including California and Texas and New 

York and many States that I travel to, of CEOs of small companies 

that come up to me and say, I recently got a patent from your 

agency. And when I got that patent, I was suddenly able to get my 

next round of venture funding. I was suddenly able to start up 

manufacturing. I was suddenly able to convert an expectancy of 

patent application into an estate, a patent right that enabled me 

to build my business on it and put people to work. And I hear that 

story over and over and over again and that’s what convinces me 

that the USPTO really is the greatest job creator that no one has 

heard of. 

Mr. WATT. Mr. Chairman, I think that does it for the questions 

I want to deal with, and I’ll yield back the balance of my time. 

Mr. GOODLATTE. I thank the gentleman. I am bracketed by North 

Carolinians up here. It’s now my pleasure to recognize the Vice 

Chairman of the Subommittee and previous Chairman of the Intellectual Property Subcommittee, the gentleman from North Carolina, Mr. Coble. 

Mr. COBLE. Thank you, Mr. Chairman. I want to first congratulate you and Mr. Watt upon your elevation to your respective roles 

in leading this very significant Subcommittee. 

Mr. Kappos, good to have you with us, sir. The diverting of fees 

has long plagued the PTO and plagued me. You may have already 

touched on that, but I want to put a question to you with that in 

mind. The United States is participating in the Trans-Pacific Partnership negotiations, which may serve as a template for future 

trade agreements. How can we best use these negotiations to create 

jobs for American workers, especially by maintaining a high level 

of protection for United States intellectual property rights? 

Mr. KAPPOS. Well, that’s a great question. Thank you, Vice 

Chairman Coble. The Trans-Pacific Partnership agreement is an 

important undertaking being lead by USTR. The USPTO is supporting USTR, and we stand with USTR for the proposition that 

the appropriate starting point for the Trans-Pacific Partnership negotiations is the Korea FTA. That’s a great starting point. It is a 

strong intellectual property starting point. And we think that it 

will lead to good places in the TPP. 

Mr. COBLE. This next question may at least indirectly apply to 

the diverting of fees. What are the anticipated consequences if the 

PTO does not receive full funding each year for, let’s say, the next 

5 years? 

Mr. KAPPOS. Okay. Well, the consequences would be between terrible and dire, frankly, depending on how much money, obviously, 

21 

we didn’t receive. The challenge that we have is the USPTO is an 

agency that receives money with 

workload. What’s been happening for the last many years is 

we’ve been spending the money that we receive this year to actually do the work that we received several years ago, which leads 

to a tremendous unfunded mandate. We are currently sitting on 

over 700,000 patent applications that are unexamined. If you add 

up the ones that are in examination, over one million, well over one 

million. If patent applicants and trademark applicants in the U.S. 

stop filing patent applications today, we would have several billion 

dollars of work to do and absolutely no funding with which to do 

it. 

So we have got a tremendous unfunded mandate. Every time 

money is taken away, the unfunded mandate just becomes bigger 

and bigger. If our funding is constrained over the next several 

years, and we’re unable, therefore, to hire the people we need to 

work on the IT improvements that we’re putting in place, or to 

outsource our PCT-related work—which has worked extremely effective with firms right here in northern Virginia—we will see 

those backlogs. Instead of going down like they are now, they will 

skyrocket back up, patent pendency will skyrocket back up, and we 

will have an even larger unfunded mandate to deal with. 

Mr. COBLE. Your words were ‘‘dire’’ and ‘‘terrible,’’ is that what 

you said? 

Mr. KAPPOS. Those are good words. 

Mr. COBLE. Apt words, I think, to this occasion. Thank you for 

being with us. I yield back, Mr. Chairman. 

Mr. GOODLATTE. I thank the gentleman. It is now my pleasure 

to yield to the Ranking Member of the full Committee, the gentleman from Michigan, Mr. Conyers. 

Mr. CONYERS. Thank you so much. I wanted to commend the 

idea of this Committee being made a separate Committee. I think 

it’s a good idea. It was implemented on the Republican side, so I 

think it’s fair to think that the idea came from that side. And so 

I’m happy to be here with Mr. Kappos once again. 

The U.S. Patent and Trademark Office is a user-fee funded agency. Their goal is to keep all user fee dollars that come into the 

agency. But as we’ve researched this, there’s about $800 million 

that has—I hate to use this term ‘‘diverted’’ in the past—but presently, we have $53 million from just last year that has not been 

appropriated. True or false? 

Mr. KAPPOS. True. 

Mr. CONYERS. So would you suggest—well, maybe I should suggest to you what I would like to do about it and you can comment 

on my suggestion. You see, it is my belief that as long as we have 

a 730,000 patent backlog, we are doing a huge disservice to the 

ability to create jobs in our society. There’s been quite a bit of writing on that. And as long as that, at the rate that you’re going— 

and I commend you—our backlog is decreasing as opposed to the 

fact that it was increasing. And, to your credit and your associates, 

we’ve reversed that. But it will still take decades to get out of the 

backlog. 

And so it falls upon me as the senior Member of this Committee 

to recommend that we begin discussing not only how well we’re 

22 

doing now, but how we get rid of the backlog, which, admittedly, 

is a complicated problem. But as long as—we’re still presently not 

giving you all the fees that you should be getting, even now. 

So what’s the remedy, former Chairman Conyers? Well, I’m glad 

you asked that question. It’s to begin to deal with the backlog not 

just from the Patent and Trademark Office’s perspective, but from 

a national perspective. Suppose tonight at eight o’clock, this issue 

becomes discussed. Suppose we all collectively say, from the executive branch to the Congress, this has to be addressed even more 

than just keeping user fee dollars that come to the agency. Would 

that resonate favorably with you when the press approaches you 

after—later on tonight and say, What do you think of that? 

Mr. KAPPOS. Well, thank you for the comment, Representative 

Conyers. First of all, I would say I strongly agree that the issue 

of the patent backlog and the need to take that down and get patents processed at a much faster rate should be viewed as a national 

issue. And I agree that it is disserving job creation. As I mentioned, 

there are innumerable actual stories of American innovators whose 

inventions are held up at our agency and therefore they’re not able 

to secure their patent estate, they’re not able to build their businesses, they’re not able to get their funding, they’re not able to go 

out and hire people and create jobs. And that is, frankly, a tragedy. 

And it is very much, as you say, former Chairman Conyers, 

about money, about the USPTO simply getting to use the fees that 

we are collecting, the fees that are paid into the agency by American innovators for use in doing the things that we’ve demonstrated 

we know how to do to attack the backlog. If we have access to the 

fees that we’re collecting, we can double down on the bets that 

we’ve made. We can take that backlog down to a reasonable level 

by 2015. It’s not that far away. It’s very achievable. We don’t need 

to make any inventions to do it. We just need to keep running our 

plays. But it’s all about getting access to the funding in order to 

do it. 

Mr. CONYERS. Mr. Chairman, could I ask unanimous consent for 

30 additional seconds? 

Mr. GOODLATTE. Without objection. 

Mr. CONYERS. Because our Ranking Member raised this question 

with me. What would be the fate of the Patent and Trademark Office if you had to go back to 2008 budget levels? I mean, that seems 

to me like a huge step backwards. And we’re trying to talk about 

how we take some really drastic steps forward. 

Mr. KAPPOS. Well, thank you for the question. I’ll now use words 

even significantly stronger than I used to answer the question from 

Vice Chairman Coble. If we had to go back to 2008 funding levels, 

it would be a disaster for the USPTO. It would be a disaster in that 

we would have to immediately stop all of the improvements that 

we’re making. But worse yet, it would be an incredible debilitating 

disaster because I would be required to furlough the USPTO employees likely for very significant periods of time. We’d be talking 

about a funding shortfall in excess of $400 million. There is just 

no way to absorb that. 

Mr. CONYERS. Thanks, Chairman Goodlatte. 

23 

Mr. GOODLATTE. I thank the gentleman. You are fortunate we 

won’t ask you how to balance the Federal budget and meet all of 

these obligations. 

We’re operating under new protocols on the Committee which 

recognize Members based upon their time of arrival after the initial 

part. We’ve developed this new protocol but we haven’t perfected 

the science of determining who arrived first. But I believe the gentleman from Utah is to be recognized next. 

Mr. CHAFFETZ. Thank you. Thank you, Mr. Chairman. I appreciate it. Thank you for being here. In the short time we have, I’d 

like to do some math with you in understanding the size and scope 

of the problem that you’re having with your IT infrastructure. My 

understanding is that back in 2001, roughly 21 percent of your 

budget was actually put into IT projects. Now that is down to 

roughly 12 percent. But that Congress had actually appropriated 

an additional $200 million for additional IT infrastructure on top 

of the 12 percent that you’re already spending. 

Now my understanding is you have just less than 10,000 employees, that’s correct? The way I do that math, you spent well over a 

billion dollars. And yet I go back and read your testimony and you 

say basic things like: The current IT infrastructure is outdated, 

limits our efficiency, and costs the agency valuable time and 

money. Then you go on to say, we need to start doing things to replace our collaboration tool suite to support improved video, messaging, presence, and file sharing—something that is very commonplace in the market; provide voice IP throughout the campus and 

to homes of teleworking employees, which is supposed to cut down 

the cost and make our employees more efficient. 

I guess I’m struggling to understand why you’re suddenly going 

to join the 21st century and implement Windows 7, as if that was 

something brand new, having spent a billion-plus dollars and yet 

complaining, as you say in your testimony, ‘‘On the patent side, 

we’re building a new patent examination IT system from end to 

end.’’ 

So the question is: What in the world have you been doing over 

the last 10 years, and why is this such a crisis at this time, having 

spent so much money? 

Mr. KAPPOS. That’s a great question. Thank you very much for 

raising the subject of IT. So now speaking to you as an information 

technology professional, someone who’s an electrical engineer and 

spent 26 years working in the information technology industry, the 

situation at the USPTO has not been good in an entire decade. 

We’re still running on equipment that was installed in the USPTO 

well back into the 20th century, right. There’s no responsible entity, no company that I know of, that would go on that way. 

Mr. CHAFFETZ. But you’re spending between $10,000 and $20,000 

per employee, every single employee. On an annualized basis, 

you’re spending somewhere between $10,000 and $20,000 per person. How do you, after 10 years end, up with such a dismal result? 

Mr. KAPPOS. Right. So it’s a little difficult for me to speak for 

what happened for 81⁄2 of those 10 years when I wasn’t there. As 

you commented though, what I’ve done since I arrived at the agency is apply some IT business discipline, which is when you’re in a 

situation where you’re pouring money, frankly down a rat hole, 

24 

hundreds of millions of dollars a year, into trying to keep moribund 

systems Band-Aided together, if you will, what you do is you stop, 

look, and listen. And that’s exactly what I did. And that’s why I’ve 

taken the IT spin down, because I stopped projects that were underway that I thought were going to be a terrible additional waste 

of money. 

We’re re-vectoring that spin over to an agile development methodology that’s 21st century IT systems that all the great IT folks 

in the world are already using to move to what I believe will be 

an end-to-end patent process that will truly propel our examiners. 

If you went over to the USPTO right now—and I’d love to have 

anyone in the Committee come over there—we’ll show you the prototypes of the system that our examiners are beating on right now 

over at the USPTO and we’ll show you the enormously positive 

feedback and, frankly, functional feedback that we’re getting from 

our examiners, telling us that they appreciate that we stopped, 

looked, and listened; they appreciate that we’re now listening to 

them and that we are taking our IT in a direction that meets their 

needs first and foremost and not wasting more money. 

Mr. CHAFFETZ. And I do appreciate that. Mr. Chairman, I do 

think it’s nothing short of scandalous that here’s an agency that 

needs funds to process patents, and yet they’ve spent 10 to over 20 

percent of their budget on IT, and we find ourselves 10 years later 

thinking that maybe Windows might be a good way to go. So I 

think it is scandalous. I appreciate your approach to this. This is 

not exclusive to the Patent Office. This is something that is pervasively a problem throughout the Federal Government. I think it’s 

an embarrassment. 

And I would appreciate your continued 

follow-up because technology is supposed to make our life better, 

easier, more efficient, more effective; allow the public to see what 

we’re doing. And to alleviate the pains and challenges that we have 

by simply just saying oh, we need to hire more people, and we’re 

spending more than enough money, we need to demand better results. So I appreciate that. I yield back the balance of my time. 

Mr. GOODLATTE. I thank the gentleman, and now yield to the 

gentleman from Texas, Mr. Poe. 

Mr. POE. Thank you, Mr. Chairman. Just buttressing off of what 

my friend from Utah said, maybe the Patent Office ought to use 

some of those patents that they approve so that they can be more 

efficient down the road. I believe we need—I’ll try to keep it simple—more innovation, swifter patents, more jobs, and a whole lot 

less pirates and thieves in our patent system. I’d like to concentrate on the pirates, the thieves, and the bandits, but I’m not 

going to at this time. Later we’ll get to that. 

I’m not sure I’m convinced that this new proposed legislation is 

the answer to some of the concerns that we all share. How do we 

compare to our competitors—Japan, for example—on backlogs of 

patents? 

Mr. KAPPOS. Well, thank you, Representative Poe, for that question. It turns out that I completely agree our backlog is much too 

long. Secretary Locke and I are making that an ongoing signature 

issue. And we’re not going to rest until we get our backlog down 

to acceptable levels and our pendency right where we need it to be. 

25 

That being said, it turns out if you go overseas—if you go to 

Japan, if you go to Europe—you find that pendency levels there are 

actually quite long, and in many cases, longer than in the U.S. 

They have slightly different patent systems, so it can be a little difficult to compare apples to apples. 

But if you normalize away the differences, what you find is the 

pendency levels overseas are quite long also. That doesn’t mean 

they’re optimal. That doesn’t mean we’re going to settle for that approach in the U.S., but they are comparably long overseas. 

Mr. POE. So they have a backlog just like we do, or they take 

about the same amount of time? 

Mr. KAPPOS. They do take in order of magnitude, the same. In 

fact, in Europe, they actually take longer in a lot of cases. 

Mr. POE. A hypothetical—it’s not really a hypothetical. In southeast Texas, I represent a wrecker service, Sammy Mahan is the 

owner; he’s developed a new winch for his wreckers, his trucks. He 

files that with the Patent Office. How long, assuming that he gets 

a patent, will he be able to see the patent? When will he be able 

to receive that in that hypothetical case? 

Mr. KAPPOS. In the current system, if you file today, he’d be seeing—I’m doing this out of memory, obviously—but in an aggregate, 

he’d be seeing a First Office Action somewhere around 24, 25 

months down the road. So let’s say 2 years or so. However, with 

the track 1 initiative that we’re going to be putting out in the Federal Register within days, that same inventor of a winch would be 

able, for just paying a fee, nothing else required, would be able to 

receive first response within 3 months, and receive his patent within a year or less. 

Mr. POE. And how much is the initial fee that he pays for that, 

approximately? 

Mr. KAPPOS. Approximately the initial fee is going to be $4,000. 

And we’d love to be able to discount it for that small entity in 

southeast Texas, but we’re going to need your help in order to do 

that because it requires a legal change. 

Mr. POE. In your own opinion, the fees that inventors pay, do you 

think that it’s about right, too low, too high? Just your opinion. 

Mr. KAPPOS. Well, I think the USPTO actually is a tremendous 

deal for patent filers. We’re less expensive than our overseas counterparts; much less expensive than Europe, much less expensive 

than patent offices in developed countries in Asia. We actually are 

very reasonably priced. Our filing fees for patent applications tend 

to be priced at a cost that are lower than the actual cost of performing the services, right. And that money is made up by backend fees that are charged for renewals or what’s called patent 

maintenance. But in aggregate, if you go across the board, the cost 

to get a patent in the U.S. is actually benchmark low for developed 

countries. 

Mr. POE. And your opinion is what I asked for; do you think it 

ought to be lower, higher, the cost? 

Mr. KAPPOS. I think it ought to be as low as it possibly can be, 

in aggregate, because we want American innovators to seek patent 

protection in our country. We want them to all have an entry point 

to the innovation system. 

26 

Mr. POE. All right. I’ll yield back the balance of my time. Some 

other time we’ll talk about the pirates. 

Mr. GOODLATTE. I thank the gentleman. With apologizes for having overlooked her a few minutes ago, I now yield to the gentlewoman from Texas, Ms. Jackson Lee. 

Ms. JACKSON LEE. Thank you very much, Mr. Chairman. I welcome Mr. Kappos to this hearing. In April of 2010, the U.S. Department of Commerce released a white paper entitled: Patent Reform, 

Unleashing Information, Promoting Economic Growth, and Producing High-Paying Jobs. Tonight, we are hoping that President 

Obama will focus on investment, infrastructure, and for some of us, 

some other issues like protecting Social Security. But you’re not 

here to discuss that. 

With that in mind, and having the privilege of serving on this 

Committee as a Subcommittee some sessions ago, I can’t think of 

a more important office. We understand that the Federal Government is going to initiate a $1 billion fund to generate new pharmaceuticals because the private sector is not keeping up or has found 

some reason not to invent, if you will. So I’d like to go along this 

line of questioning, and I do recognize fully that you were not here 

10 years ago. But patent pendency is important for several reasons. 

First, businesses are unable to enforce their patent rights until a 

patent has issued. 

Second, since the term of a patent begins on the date of application, patent pendency cuts into the length of time an inventor has 

to make use of the exclusive economic right a patent confers. And 

that’s enormously important. And then, third, high pendency rates 

may lead to decreased use of the patent system and instead businesses may choose to keep their new invention secret. I wonder if 

that is allegedly the cause of the issue dealing with pharmaceuticals. But I’d like you to answer the question regarding funding. 

Did the role—or what role do you think the lack of funding 

played in the creation of the current backlog? And this backlog was 

two sessions ago, so I know it’s been a while that we’ve had this 

backlog. I would like for you to also answer what are the consequences of not getting funding for the next 5-year stretch. And 

beyond the technology, since I’ve heard some of my colleagues critique where we are in terms of IT, but what are the other elements 

that we’re going to use to move the patent process along to create 

jobs and to incentivize inventors—small; sometimes those who cannot fund themselves. 

I used to practice law dealing with biotechnology. But what are 

we going to do to continue the excitement, the spirit, the inventiveness of those who don’t have the funding to just hang around? 

Mr. KAPPOS. Thank you, Representative Lee. Those are great 

questions and they go really to the heart of the reason that we’re 

all here today. So, number one, has the funding situation—what 

role has it played in the inability of the USPTO to get on top of 

its workload. Well, it clearly did play a role in years past. Again, 

what I am most able to comment on is in the year and half that 

I’ve been at the agency. And I will tell you that it is the definitive 

issue for us. I think we’ve demonstrated because we’ve started to 

make progress against the backlog, we’ve started to bring both 

27 

what we call first action and final action pendency down. We’ve 

demonstrated we can get on top of the situation at the USPTO. It’s 

like any other management challenge. I come from a business background. I was brought in to manage this place like a business. We 

can run it just like a business. That’s the way we are. We can get 

on top of the backlog if we have adequate funding. All we need is 

access to the fees that the IP community, the people behind me 

here, are paying into the USPTO. We keep running our place, and 

I’ll describe those in a second, and we can in just a few more year’s 

time get on top of the backlog. 

Now what place are those? Of course, hiring is undoubtedly part 

of the question. Patent examination is legal and technical, scientific 

work. It requires brain power. It requires people doing analytical 

and evaluative work. So we’re going to need more people. 

Ms. JACKSON LEE. So you need funding going forward 5 years 

minimally? 

Mr. KAPPOS. Absolutely. 

Ms. JACKSON LEE. Can you just tell me, if you didn’t say before, 

what is the backlog now? Can you calculate, estimate what you 

have? 

Mr. KAPPOS. So we were able to bring the backlog down somewhat. At the end of the last financial year, we had it down to 

708,000. In the next few months, I expect it to go down lower than 

700,000; into the 600,000’s. And if we have adequate funding this 

year, we expect to get it all the way down to about 655,000 or so 

by the end of this financial year. And we’re just going to keep taking it all the way down to its appropriate inventory level, and we 

can get there by 2015 if we have adequate funding. 

Ms. JACKSON LEE. And out of that and out of your experience, 

and I didn’t look at your bio, but let me thank you for bringing 

business to the government, there’s nothing wrong with that, but 

out of that, I know that patents can generate jobs. There are a 

whole measure of what inventions can do for this country. Is that 

your sense of the value of what the Patent Office is all about? 

Mr. KAPPOS. It’s my conviction. I live it every day. As we issue 

patents, American innovators, small businesses, large businesses, 

independents, universities, are able to go out and create jobs. 

There’s absolutely no doubt. There’s no question about it. And 

we’re talking high-paying jobs, we’re talking innovation-intensive 

jobs. There is no doubt that the USPTO is a huge jobs generator. 

Ms. JACKSON LEE. Let me just conclude, Mr. Chairman. Thank 

you for your indulgence and to the Ranking Member. Let me just 

say that America should not be shamed by any suggestion that its 

genius does not exist anymore, that in contrast to friends like 

China that we don’t have the ability to churn this economy with 

the genius, the invention or the opportunity that our universities, 

individual entrepreneurs, and others can engage in. I think it is an 

important question. I’m asking from what you see, from what 

comes across upon the thousands upon thousands that come across 

your desk. 

Mr. KAPPOS. Yes, I would happy to comment. That is something 

I feel very strongly about. The 18 months I’ve been in this job I’ve 

traveled every single corner of the U.S. I talk to people everywhere 

I go. I am 100 percent convinced the American spirit is alive and 

28 

well, every bit like it was in the 1700’s when our forefathers were 

settling this country, that our spirit is still alive and well. The 

issue isn’t America’s ability to invent. The issue is America’s ability 

to connect inventions right with the capital that’s needed and the 

other resources that are needed in order to bring those inventions 

to the marketplace and create jobs, and the USPTO is always the 

first stop in that journey. Right, so we are only one part of the journey but an essential first part of the journey. 

Mr. GOODLATTE. The time of the gentlewoman has expired. 

Ms. JACKSON LEE. I thank the gentleman. I yield back. 

Mr. GOODLATTE. I’m looking at my television screen and seeing 

the gentleman from California, Mr. Issa. So he obviously has got 

some advanced technology that he knows about. I now yield to him. 

Mr. ISSA. Mr. Chairman, it is always good to multi-task here in 

Congress. Mr. Secretary, I haven’t kept track of how many people 

have had your job in the 10 years that I’ve been doing this. I won’t 

forget though that the first time that we had a hearing like this, 

it was about the Bush administration wanting to increase the cost 

of patent applications. In my case, it is over $2 million for the 

claims of just one of my patents. I’m a funny kind of a guy. Even 

though I already had the patent, I looked and said, you know, I 

think $2 million for a patent before it yields anything might be a 

little excessive for the small inventor. 

So I take great pride in saying that during the last decade we 

ended fee diversion. You now—in spite of the appropriators, you 

get 100 percent of the money back to spend and you’ve used all of 

that and more. You have put yourself in a situation in which what 

used to be diverted funds and you lived with less is now undiverted 

and you consume it all. 

And I do appreciate the fact that you’re operating under 2010 

revenue and I didn’t hear the statistics supporting the increase in 

handling; in other words, why you would need more revenues in 

2010. I didn’t see the data showing why earlier you were asking 

for a loan because in fact patent applications were down, but you 

were hoping to get revenue later, and obviously today I didn’t hear 

that some of your catchup came from the fact that your workload 

was also slightly off for a period of time. 

So I would appreciate it if you would provide this Committee, obviously the Chairman, the data supporting each of these for your 

request for a 15 percent tax increase on patent applicants. If in fact 

it is really needed, of course patent applicants would love to pay 

it. But let me just go through a quick line of questioning. 

Do you believe we should give you the authority to dramatically 

narrow the number of people who qualify as small entities? 

Mr. KAPPOS. No, nor would I ask for that. I would go—— 

Mr. ISSA. Why would you continue to want to have me, as, for 

better or worse, the wealthiest Member of Congress, receiving 37 

patents to come back and put another patent application in a few 

months ago and I’m still a small entity—don’t you want to have 

people pay for their patents on a proportional basis to the cost so 

that in fact it is borne based upon the applicant’s actual need for 

evaluation through its granting or denial? 

Mr. KAPPOS. Well, so thank you for the question. If the USPTO 

had fee setting authority, which we don’t have, I would very much 

29 

like to adjust fees so that the agency is compensated for the cost 

to perform its services, and that would include charging higher 

amounts for those patent applications that include lots of claims. 

Mr. ISSA. Excellent, because—well, let’s be careful about the lots 

of claims, because that’s how we got to this $2 million, is that it 

was a punitive proposal under the Bush administration by one of 

your predecessors where they wanted an escalation far beyond the 

cost. They wanted to in fact discourage people who had hundreds 

or thousands of claims from making those claims. 

As somebody who has worked with patent examiners on repeated 

applications, we all know on your side of the desk that the more 

claims, the more redundant, the easier and quicker it is, you actually get an economy of scale, but that wasn’t the proposal 10 years 

ago. So my question to you as a follow up to your answer is, 

shouldn’t you be before us today with a fee adjustment scheme 

which fairly allows you to do what you would do if you had setting 

authority, but comes to the Chairman of this Subcommittee and 

says, we would like to have these kinds of authorities within—the 

fact is we can give you any scheme you come up with. You’re coming here asking for 15 percent across the board, you’re not looking 

at real reforms that adjust the cost of a particular patent or class 

of patent to the payment. I might suggest, today, because it has 

been 10 years of my caring a great deal about this issue, that that’s 

what you should be coming to us. Come to us and show us that. 

Secondly, it has been nearly 10 years of waiting for information 

technology to dramatically reduce the cost of a patent. It doesn’t 

seem to have done that. So this Subcommittee has primary jurisdiction. I think all of the Committees that look at information technology are beginning to wonder how many billions will be spent 

without a real pay-for, and could you respond to that last question? 

Mr. KAPPOS. I’m not sure if you were here when a very similar 

question—— 

Mr. ISSA. I caught part of it, but it didn’t say how much longer 

should we should tolerate this before Congress takes a more direct 

role, finds an outside entity to take over this process if in fact you 

cannot get it done with the leadership of yourself, your predecessor 

and your successor? 

Mr. KAPPOS. I’m confused as to what you’re referring to. 

Mr. ISSA. Much of your efficiency has come from sharing with 

other bodies; in other words, other people are doing more and more 

of the work. I appreciate that. It doesn’t make sense to reinvent the 

wheel. At the same time to say that some other country is not as 

good, this Congress just before I arrived stripped 100 years, 200 

years almost, of patent policy away, the idea that your patent was 

good for 17 years from granting or others based on other patents, 

and we replaced it with an international standard that is robbing 

inventors every day you delay. So although you say you’re doing 

well, although there is an improvement, we also have to realize as 

this economy rebounds in the months or years to come, there will 

be an increase. Much of that increase is coming from foreign nationals. The gentlelady’s left, but the fact is she can celebrate 

American entrepreneurism, but the fact is that more and more of 

your patents are coming from people who are not in this country 

who want to harvest the benefits. But notwithstanding where they 

30 

are coming from, you’re robbing inventors every day. How much 

fees you get is less of my concern than that you get that number 

down. But if you’re going to raise fees, and I know the Chairman’s 

time has expired, I will just close. Why is it you can’t come to us 

with a strategy that doesn’t continue to simply raise fees on all, but 

comes to us with a real cost to fee basis, not a punitive one for too 

many applications, but a real cost of fee because I think the Chairman and all of us would love to hear a proposal that would really 

allow you to recoup your costs without penalizing anybody? Thank 

you, Mr. Chairman, for your indulgence. I yield back. 

Mr. GOODLATTE. I thank the gentleman. Does the gentleman 

briefly care to answer that? 

Mr. KAPPOS. Well, I would respond that that’s exactly what I’m 

here talking about today in the form—as an example of the Track 

1 initiative, which is purely a cost recovery initiative that enables 

patent applicants, large and small, to file an application today, get 

3-month processing and 12-month final disposition, pure cost recovery, no more and no less than that, and on their own elective basis. 

So we’re actually trying to implement exactly the sort of marketbased approaches that you’re calling for. I couldn’t agree with you 

more, Congressman Issa, that those kind of approaches are needed. 

Mr. GOODLATTE. I thank the gentleman. The Chair now recognizes the gentlewoman from California, Ms. Waters. 

Ms. WATERS. Thank you very much, Mr. Chairman. I’m sorry I 

have not been able to be here during this entire hearing, but I have 

reviewed materials and testimony, and I am impressed with the 

quality of improvements that are demonstrated here in this report. 

And I think the goals are commendable and I believe that we all 

wish to speed up the ability to do the registration and to issue the 

patents. And we need to give the support. We need to support as 

much as we possibly can. And whatever technology needs to be employed in order to reduce backlog and to respond effectively is all 

that I’m interested in. I think that most of us share frustration 

with our daily lives about our inability to access information, to access assistance in various walks of life. And so in this area where 

it is so important to job creation and innovation I applaud your efforts and look forward to supporting in every way I can give it. 

Thank you. 

Mr. GOODLATTE. I thank the gentlewoman. It is now my pleasure 

to recognize one of the new Members of the Committee and of the 

Congress, the gentleman from Pennsylvania, Mr. Marino. 

Mr. MARINO. I thank the Chairman. Secretary, it is a pleasure 

to be talking with you today. Thank you for being here. 

Mr. Secretary, how do you measure the performance? Let’s 

switch gears a little bit. How do you measure the performance of 

your staff, of your individuals,specifically those reviewing patent 

requests, and are you able to increase their performance and their 

efficiencies and how? 

Mr. KAPPOS. Okay, thank you very much, Representative Marino. 

That’s a great question. So one of the things that’s wonderful about 

the USPTO, and perhaps to a fault, is we measure everything. I 

have been shocked in the 18 months or so that I’ve been there. This 

agency measures everything. We literally measure every action 

that every employee does. They are all recorded on our computer 

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system, right? So each of our examiners as they pick up an application, as they read it, the time they are spending gets recorded. 

When they are talking to an applicant about an application, we call 

that an interview, it gets recorded. When they are responding to 

an applicant’s amendment of a patent application, all of that gets 

recorded. So we have a tremendous amount of data that shows us 

literally day-by-day, week-by-week, we call them bi-weeks, 2-week 

groupings. All the way through the year we can do comparisons to 

a very minute level. 

And what we are seeing in realtime, and these statistics are recounted in my written statement, is that even as we have given examiners more time for first evaluation of applications, because 

we’ve also given them incentives to engage with the applicant community, they actually are getting applications done in aggregate 

more quickly. So we’ve managed to take the time, the effort that 

it takes—we call them actions per disposal. An action is each time 

an examiner picks up and works with an application. We have 

managed to take actions per disposal all the way down from over 

2.9 to about 2.4, which is miraculous in the sense that it is like liberating a quarter of the agency—it is like increasing the size of 

your agency by 25 percent simply by unleashing people and letting 

them be effective in their work. And I wish that Mr. Issa were here 

to hear more about this, because that’s really the answer to the 

question. What are we doing other than hiring? We are actually investing in our employees’ efficiency and enabling them to take the 

amount of time they spend on each application way, way down. 

Mr. MARINO. Now would you agree with me, one of the reasons 

I believe that I was sent here was because the, my constituents 

and the American people are tired of the spending in government 

and the debt. Now with that aside, I come from a manufacturing 

background. I worked in manufacturing for 12 years on a production line before I went to college and law school. And I’m not comparing a manufacturing line with the cerebral work that has to be 

done on patent, and I say that in all sincerity. But we had to maintain certain production flow, based on the standards, based on the 

profits that we wanted to be generated in the line, and if we 

couldn’t maintain that we were replaced. Do you see any way to 

increase efficiencies, whether that’s through further training or 

equipment or software, because we need to learn to do more in government with less, just like we do in industry and like we do in 

our houses? 

Mr. KAPPOS. Right, so I sort of am from a similar background in 

the sense that I’m not a government guy, right? I was brought in 

from the private sector and I’m bringing in all of what I know from 

my 27 or so years in the private sector. I also came from a manufacturing environment and was an electrical engineer. So I get that 

at the end of the day you have got a product that you’re producing. 

Our product, right, is the examination of patents and trademark 

applications. And you’ve got to try and come up with ways to measure it on an objective basis and you’ve got to think of it as a production line with inputs and byproduct and outputs. And we are 

doing exactly that. 

So as part of the process we have torn apart our entire patent 

application processing pipeline. It is a giant pipeline that has got 

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literally hundreds and hundreds of steps, it is like a complex manufacturing process. I compare it to making a large computer, right, 

and it is very similar actually. We have torn apart the process, we 

are removing steps from the process. We are applying the discipline 

that you think of as 6 sigma or lean 6 sigma, if you’re familiar with 

those terminologies from the manufacturing context, to try and succeed at injecting, manufacturing, production, discipline into the 

USPTO, right? And I believe that our statistics show that we are 

actually making some progress in that regard. 

Mr. MARINO. How is my time, Chairman? 

Mr. GOODLATTE. The time of the gentleman has expired. 

Mr. MARINO. Thank you. Thank you, sir. 

Mr. GOODLATTE. I now recognize the gentlewoman from California, Ms. Lofgren. 

Ms. LOFGREN. Thank you very much. And first let me give you 

my apologies for missing part of this. We had the organizational 

meeting of the House Administration Committee and I had to go 

over for that. As you know, I have a very strong interest in the 

whole patent area. We have discussed in the past the necessary 

steps that might be taken. 

I’m really glad that we have an IP Subcommittee again. I think 

it will help us focus on these issues, and hopefully to take steps on 

a bipartisan basis to support the Office and see improvements that 

I know all of us want made. 

In terms of how to do that, I understand that while I was gone 

you did indicate your agreement that allowance rates is not necessarily the only measure. I mean it doesn’t necessarily measure 

quality. And I think it’s my opinion that bad patents are as big a 

problem as delayed patents. In fact, when you think about what 

happened when patents surged after State Street and some others, 

I mean it has just mucked up the whole system. And I’m wondering if you have in mind some—other than allowance or compliance rate metrics, which are really process oriented—do you have 

metrics in mind that we could look at that really measure quality? 

Mr. KAPPOS. Yes, thank you, Representative Lofgren, that’s another great question and we do. We just got done, we spent the entirety of last financial year engaging with our stakeholder community, including many great companies from the Silicon Valley area, 

and we asked them a set of questions about quality. We held 

roundtables, we put out Federal Register notification, we took dozens and dozens of comments, voluminous amount of information we 

took in. We distilled all of that together, and at the end of the last 

financial year we came out with an entirely new way to measure 

quality, combining objective measurements of quality along with 

subjective measurements of quality. We put that in place at the beginning of this financial year. We just finished baselining it at the 

end of the last quarter, right, and we’re getting ready to now start 

reporting to the IP community, to our Nation’s innovators for the 

first time in history of the USPTO a comprehensive set of quality 

measures. Those include, right, not only, as you said, final compliance rate and in process compliance rate, but also indications of 

the quality of the search that we are conducting, the quality of the 

First Office Action examination that we are conducting and, importantly, surveys of the applicant community of their views of the 

33 

quality of the work that we’re doing and, importantly, surveys of 

our examiners of the quality of the work that we’re doing. 

So I believe that USPTO now has the world’s most comprehensive approach for measuring quality. Is it perfectly qualitative or 

perfectly quantitative? No. But it can’t be in the world of judgments. 

Ms. LOFGREN. I wonder if you could send us over the information 

that you’ve just referred to along with your summary at the end 

of this session so that we could be clued into the progress there. 

You know, I know that you know Mark Lemley at Stanford. He has 

opined that given the amount of time, 16 to 17 hours per examination, in his judgment is impossible to improve quality. I don’t know 

when the last time Lemley did the analysis and came up with that 

hourly amount of time. Is that still accurate? Have we—what’s the 

status of that? 

Mr. KAPPOS. That’s a great question. Mark is, you know, a great 

mind in the IP field. And like probably everyone else in this room, 

I have read Mark’s work for easily a decade. 

Ms. LOFGREN. A long time. 

Mr. KAPPOS. It was in part influenced by his criticism of the 

amount of time that we gave examiners, that one of the very first 

things I did, and now a year ago, when I arrived at the USPTO, 

was to give examiners more time. We went across the board and 

gave every examiner at least an additional hour on every application, and in many cases we are giving more time than that. So I 

heard the message loud and clear. And frankly I believe it was the 

very same month that we started giving examiners more time. I believe it was February of last year, that our then in process quality 

rates shot up a couple of percentage points the very same month. 

And I don’t believe that’s any accident. I think it is simple. You 

give people more time, and they will do better quality work. 

Ms. LOFGREN. I will ask a final question if I may. 

Mr. GOODLATTE. Last question. 

Ms. LOFGREN. It has to do with the satellite offices, which I think 

is a good idea and has the potential to really be important. I understand the first office was in Detroit. And as you know, I think more 

than a quarter of all patents issued in the United States comes 

from Santa Clara County. So I’m wondering when we will look for 

your next satellite office. 

Mr. KAPPOS. So thank you for that question. You know as a native Californian, there is nothing I would like better than to get to 

personally—— 

Ms. LOFGREN. It is 73 degrees in San Jose today. 

Mr. KAPPOS [continuing]. Personally open a satellite office there. 

You know, we are very pleased to have started in Detroit. We 

looked at a whole number of criterion in establishing and in deciding on that office, and including great universities and they have 

those in northern California, and lots of other districts represented 

here. Lots of invention and inventors, they have those in lots of districts represented here. Of course we looked at cost of living and 

that was a place that Detroit really came out really, really well. 

That being said, you could be assured that the Secretary of Commerce has made very clear to me that he wants us doing more experimenting with satellite offices. So we’re already doing prelimiVerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874
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nary research on other possible candidates. We do intend to move 

forward with other candidates and we will probably try some different approaches because these are pilots and we want to learn 

from them. We are very committed to trying more than one pilot. 

I’m sure I will hear from several others in the room about their district. 

Ms. LOFGREN. Thank you, Mr. Chairman, for letting me ask that 

last question. 

Mr. GOODLATTE. I edited my request out of my opening remarks. 

But we’ll now yield to the gentlewoman from Florida, Ms. 

Adams. 

Ms. ADAMS. Thank you, Mr. Chair. And I have sat and listened 

to all the questions and the answers, and I just have a couple extra 

questions. I am concerned about the fact that the cost over the last 

10 years as my colleague brought forward earlier, but the one thing 

I didn’t hear you say, but you said an appropriate inventory level. 

But you didn’t say what the appropriate inventory level would be. 

What would you consider an appropriate inventory level? 

Mr. KAPPOS. Thank you, Representative Adams. Another great 

question. So the way I propose the discussion about manufacturing 

environment, the way I look at inventory, right, is that you have 

to have enough dockets on each examiner’s plate, if you will, or 

enough cases with each examiner that each examiner has an appropriate workflow. We have got about 7,000 or so examiners, 

many different skill sets. We examine everything from nano particles to fishing lures and even, believe it or not, we have people 

wheel-related inventions still. So, you have a nonfungible workforce—you can’t just move employees around infinitely. You have 

got an uneven workload coming in, different quantities of applications in different parts of the agency. What you’ve got to do, is 

you’ve got to match the workload, right, to the examiners, which 

requires continuously moving people around, because we don’t control the workload. 

Okay, so where that leads you is you have got to have an adequate number of dockets on each examiner’s plate depending on the 

time that it takes them to examine—that question was asked already—and the time does vary. Fishing lures takes less time, nano 

technology takes more time. So if you add all that up and sort of 

go through the calculus from my view as a manufacturing person, 

at the end of the day we need somewhere in the neighborhood of 

50 to 70 dockets, 50 to 70 cases sitting on each examiner’s docket 

at any point in time. That’s an appropriate level so that each examiner has good workflow—they’ve got some new cases to do, they’ve 

got some in process cases to do. They’ve got enough work that they 

are not running out of work, but they are also not overwhelmed 

with work. If you multiply that out it comes out to about 325,000 

cases. That’s an appropriate inventory level at any one period of 

time. It produces a nice steady work stream across all examiners, 

no one flushes their cue and runs out of work, no one is too overwhelmed. And that is the level we need to operate the agency. And 

oh, by the way, it is when we hit 325,000 that we also hit optimal 

pendency, which is 10 months to first office action and 20 months 

to final disposition or grant of a patent at the USPTO. 

Ms. ADAMS. Thank you. 

35 

Mr. GOODLATTE. Well, thank you, Mr. Secretary. This has been 

a very thorough and very helpful hearing with you, and we do have 

another panel we are going to move to now. So we will thank you 

and excuse you. And I’m sure we may have some additional questions we want to submit to you in writing. 

Mr. KAPPOS. Okay, thank you very much. 

Mr. GOODLATTE. Thank you for coming today. 

And, gentlemen, you may want to remain standing because we’re 

going to ask each of you to be sworn in. If you would raise your 

right hand. 

[Witnesses sworn.] 

Mr. GOODLATTE. Thank you and please be seated, and welcome. 

Our next witness is Douglas K. Norman, Vice President and General Counsel for Eli Lilly & Company. He earned his BS in microbiology from Indiana University, and his law degree from Indiana 

University Indianapolis. His practice includes many aspects of patent law, including procurement licensing and litigation. He’s a 

member of the board of the Intellectual Property Owners Association, where he currently serves as President. He’s also a member 

of INTERPAT, an association of research-backed pharmaceutical 

companies that work to improve intellectual property laws globally. 

Mr. Norman chairs the National Association of Manufacturers Subcommittee for Intellectual Property and has served in leadership 

positions for other IP organizations. 

Rounding out the panel is Robert Shapiro, who is Chairman and 

Co-Founder of Sonecon LLC, a private firm that provides advice 

and analysis to senior executives and officials of U.S. and foreign 

businesses, governments and nonprofit organizations. He is an 

internationally known economist with expertise in a range of areas, 

including globalization, innovation, financial markets, taxation, and 

public finance. Before establishing Sonecon, Dr. Shapiro was Under 

Secretary of Commerce for Economic Affairs from 1997 to 2001. 

Prior to that appointment, he was Co-Founder and Vice President 

of the Progressive Policy Institute and the Progressive Foundation. 

He has advised Bill Clinton, Bob Kerrey, and President Obama on 

economic issues and served as a fellow of Harvard University, the 

Brookings Institution, and the National Bureau of Economic Research. 

Each of your written statements will be entered into the record 

in its entirety. I ask that you summarize your testimony in 5 minutes or less. And to help you stay within that time there is a timing light on your table. When the light switches from green to yellow, you will have 1 minute to conclude your testimony. When the 

light turns red, it signals that the witness’s 5 minutes have expired. And we will begin with you, Mr. Norman. 

TESTIMONY OF DOUGLAS K. NORMAN, PRESIDENT, BOARD OF 

DIRECTORS, INTELLECTUAL PROPERTY OWNERS ASSOCIATION 

Mr. NORMAN. Thank you, Mr. Chairman and Members of the 

Committee. I appreciate the opportunity to be here today to speak 

in behalf of the Intellectual Property Owners Association. IPO is a 

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dustries and fields of technology who own or are interested in intellectual property rights. 

Effective and affordable intellectual property rights are key to innovation and job creation. Thank you for taking the time to address 

such an important issue in the context of PTO’s operations. We 

congratulate Mr. Kappos on bringing creativity and energy to the 

efforts to improve PTO’s patent operations. 

No one can make all of the needed improvements of course without adequate funding. Since the 1990’s the PTO has collected approximately $800 million in patent and trademark fees from our 

members and other PTO users that it has been unable to spend because of limitations in appropriations acts. The inability to gain access to all of its collected fees has taken a considerable toll on the 

agency. 

We appreciated the bipartisan efforts of the Members of the 

House and Senate Judiciary Committees and the leaders of the appropriations Subcommittees last year to obtain supplemental appropriations for the PTO so that total appropriations would match 

the fees collected. Some success was achieved with the enactment 

of a $129 million supplemental appropriation, but the PTO still collected about $50 million in users fees by the end of the fiscal year 

that it could not spend. 

We also appreciated the efforts last fall to obtain an exception for 

the PTO in continuing resolutions. The case for exceptions to the 

PTO in continuing resolutions and other appropriations legislation 

is simple; the PTO deserves a different treatment because it is 

funded entirely by patent and trademark fees. No general taxpayer 

funds are used. 

The Members of this Subcommittee are well aware that March 

4th, 2011 is the next deadline Congress faces for resolving fiscal 

year 2011 government funding issues, including whether or not to 

provide adequate funding for the PTO. IPO strong supports setting 

appropriations at a level that would allow the PTO to spend all of 

its estimated fee collections, including a buffer in the legislation to 

allow the PTO to spend more than estimated fee collections if actual fee collections exceed the estimates and, finally, imposing 15 

percent surcharge on major patent fees during the remainder of the 

2011 provided the spending limit is raised to guarantee that the 

USPTO can spend the income generated by the surcharge. 

We encourage the Judiciary Committee to work with the Appropriations Committees on these issues as they did last year. IPO 

also continues to strongly support permanent legislation to allow 

the PTO full access to patent and trademark fees collected every 

year. The PTO needs to make long range plans to enable it to hire 

examiners, to invest in information technology, and to make other 

infrastructure improvements. 

Patent timeliness and quality in particular are relevant to job 

creation. The current average time to grant a patent is about twice 

as long as the goals of 18 to 20 months that had long been recommended by IPO and others. Early determination of legal rights 

in technologies is important for patent owners in many industries. 

Early determination is also very important to give notice to competitors in the patent owner’s industry who may be considering investments in the same or similar technology. 

37 

Business people put high value on legal certainty. Delay in 

granting patents inevitably means legal uncertainty, which directly 

stymies investment. The only way to achieve maximum legal certainty at an early date for all patent rights is to hire enough examiners to examine every application reasonably promptly. This requires stable and increased funding for the PTO. 

We would like to mention a few patent reform proposals that directly affect the PTO. We support legislation to establish a new 

post-grant review proceeding. A post-grant review proceeding of appropriate scope can serve as a useful check on the quality of patents after they are granted by the PTO. 

We also support legislative proposals to expand the opportunities 

of third parties to submit prior art information to the PTO before 

patent grant, another quality measure. And for 20 years the IPO 

has supported the conversion of the U.S. patent system to a first 

inventor to file system. First inventor to file will increase legal certainty for patent rights; it will also simplify proceedings in the PTO 

and open the way to further simplification through international 

harmonization of patent law. 

Thank you for the opportunity to appear here today, and I will 

be pleased to answer any questions or supply additional information for the record. 

[The prepared statement of Mr. Norman follows:] 

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Mr. GOODLATTE. Thank you. Mr. Shapiro, welcome. 

TESTIMONY OF ROBERT J. SHAPIRO, CHAIRMAN AND 

CO-FOUNDER, SONECON LLC 

Mr. SHAPIRO. Thank you. I’m honored to be here today to discuss 

the role of the PTO in helping create American jobs. I approach 

this as an economist with some preparation coming from serving as 

Under Secretary of Commerce, but also from running an economic 

advisory firm that advises companies dependent on the intellectual 

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The economic case here really boils down to three propositions. 

First, growth productivity and jobs all depend more than any other 

single factor on our economy’s capacity to innovate. Two, innovation depends on the creation of new intellectual property and, 

three, the creation of new intellectual property depends on the 

soundness and integrity of the patent regime and on its enforcement. 

For a half century economists have documented the pivotal role 

that intellectual property plays in economic growth. We’ve long 

known that the development and adoption of economic innovations 

explains 30 to 40 percent of the gains in productivity and growth 

achieved by the United States over the last century. That is three 

times the impact, for example, of increases in capital investment. 

We also know that since the 1990’s for the first time anywhere U.S. 

businesses have invested more each year in idea-related intangibles—that’s R&D and patents and copyrights and databases and 

software—than they have in all plant, equipment, and other tangible forms of investment. We further know that more than fourfifths of recent gains in productivity can be traced to the development and application of new ideas, especially those related to information technologies. 

The reason that the United States is the world’s dominant producer of economic powerful innovations is that innovations thrive 

in places where commitments to research and development are 

strong, the political and economic environments are stable, barriers 

to starting new businesses are relatively low and, perhaps most important, where intellectual property rights are sound, respected 

and enforced. 

To create an innovation a business has to take investment capital away from uses known to produce substantial returns and use 

it instead in much riskier ways that promise unknown returns at 

some unknown time. The only incentive to do so comes from the 

monopoly privilege granted by patents and copyrights, the only monopoly rights legally provided for in our market-based system, and 

the integrity of those patents and copyrights depends on the quality and the due speed with which the PTO adjudicates the claims 

of innovators that their new ideas meet the criteria for these monopoly rights. 

Innovations and intellectual property embodied in them help create jobs because they play such a critical role in the competitiveness of American companies. In fact, the capacity to develop new 

intellectual property and innovations has become the primary 

grounds for the economic competition between American firms and 

firms in other advanced committees here and across the global 

economy. 

Patent rights drive innovation in other ways as well. Many innovations produce a kind of cascade, where their introduction and 

adoption are followed by additional innovations which build on or 

depend on the initial breakthrough and may have even greater impact on productivity and competitiveness. 

The most common type of cascading in fact involves incremental 

improvements or enhancements of an existing innovation, which 

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nopoly patent rights to innovations but in exchange the patent 

holder must reveal the inner workings of the innovation. They become public knowledge, and these rules actively encourage subsequent innovators to build on an initial breakthrough. 

Advanced economies which promote the conditions for innovation 

have a competitive advantage then, and promoting those conditions 

should be a central priority for national growth and employment 

policy. 

The U.S. is home to a disproportionate share of the world’s companies capable of developing and adopting the powerful innovations 

which drive economic progress. That reflects our strong intellectual 

property protections. 

The sustained development and application of new intellectual 

property also relies on a few other social and political conditions. 

An entrepreneurial culture and low barriers to the formation of 

new businesses play significant roles because young and new businesses are major sources of innovation and more likely than established firms to quickly adopt innovations from others. 

The importance of a strong competitive environment also cannot 

be underestimated. In addition, strong government support for 

basic R&D is critical since the incentives for private firms to undertake basic R&D are notoriously weak. 

Finally, and I’ll close with this, sustained public investments in 

education and training are vital to ensure a sufficient supply of 

workers who can operate new technologies and operate effectively 

in workplaces dense with these innovations. 

Thank you. 

[The prepared statement of Mr. Shapiro follows:] 

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Mr. GOODLATTE. Thank you, Mr. Shapiro. 

Mr. Norman, should the PTO expand the pilot projects for green 

technology and humanitarian inventions? What do you think most 

inventors would say about the need for these programs? 

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ward the policy goals of innovation and expansive use of the innovation. We have, we as patent owners have been in favor of the 

green technology initiative because we presume those would be relatively small pilot programs that would not detract from large 

areas of the Patent Office allowing different types of applications 

to be moved in front of others. And so a small pilot program we 

found to be acceptable. 

We have other concerns with the humanitarian effort because in 

our view it is creating a set of programs within the Patent Office, 

should it be followed, that would detract from the prime mandate 

of the Patent Office to pick up and in a principled manner examine 

and issue patents in the order in which they arrive at the office. 

Most concerning about some of the issues in the humanitarian 

program is the fact that it would allow the creation of artificial 

markets, for vouchers that could be freely traded, and once an entity or an individual inventor or a law firm obtained one of these 

vouchers they could trade it on the open market so that it could 

be purchased at a cost and used by a third party or used by another entity that was not involved in the initial reexamination that 

provided the voucher. 

Mr. GOODLATTE. I’m going to interrupt you because I have got a 

limited amount of time to ask several questions. 

Mr. NORMAN. Certainly. And so we were not in favor of creating 

a new market within the patent system. 

Mr. GOODLATTE. I’ve gotcha. 

Mr. Shapiro, you commented that strong government support for 

basic research and development is critical in the IP context since 

incentives for private firm to undertake basic R&D are weak. Could 

you elaborate on that? 

Mr. SHAPIRO. Certainly. Basic R&D as opposed to later stage research and development has always been considered what economists—what Adam Smith called a market failure. And the reason 

is that businesses make investments when they can capture all the 

returns from that investment. In certain cases it is impossible to 

capture most of the returns because most the returns come from 

spillovers. 

So for example, if you have basic research in genetics, which is 

an area which has received enormous public support through the 

National Institutes of Health, the reason we do that is that those 

breakthroughs lead to many other breakthroughs by innovators 

who are different from the ones who would have funded the initial 

basic research. And so they could say, gee, our investment has led 

to all of these profits by other companies that we can’t capture. We 

want to make investments that will produce, in which we can capture, all those returns. And as a result, at a very basic level, it’s 

basic science we’re talking here, basic physics a basic biology, the 

private sector incentives to make those investments are quite 

weak. And that has always been the basis for government support 

in those areas. 

Mr. GOODLATTE. Thank you. 

Mr. Norman, what’s your beef with programs that prevent an inventor to delay completion of their application? For that matter, 

why would an inventor want to do this and how could this affect 

the U.S. job situation down the road? 

71 

Mr. NORMAN. Sure. Thank you. IPO has not been in favor of programs that would allow for deferred examination because there is 

a flip side to a patent right. When an inventor files a patent application and it is published in 18 months, it allows all competitors 

to see the direction in which the inventor is taking that invention 

or that set of claims and those possibly patentable claims. Soon 

thereafter we would hope to see those patents—those patent applications be granted as issued patents that will have enforceable 

rights. However, if the examination of these patent applications is 

deferred for 30 months or longer and then further deferred because 

of delay within the Patent Office, we can easily be looking at a period of time, perhaps 5, 6, 7, 8 or 10 years, before a competitor, an 

innocent competitor, could really have a true view of whether or 

not a patentable invention claim is going to issue out of the patent 

application. Therefore, competitors do not have the ability to see 

what’s really going to issue out of the Patent Office. And therefore, 

we do not like to see deferred examination, because we like to see 

open, transparent and clarity of patent rights sooner rather than 

later, and we would like to see the Patent Office working to meet 

those goals. Because the more we invest to engineer around patent 

claims that never end up issuing, the more duplicative effort and 

waste we put in our research and development, costing us wasted 

innovation and a loss of jobs. 

Mr. GOODLATTE. Thank you. 

The gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. Mr. Shapiro, you were 

here earlier when I questioned Secretary Kappos and also from my 

opening statement I raised the prospect that the President would 

be this evening making comments about innovation and the importance of innovation and the Patent Office to stimulating the economy and creating jobs. I think you’ve had occasion to at least in 

the past, I don’t know about for this particular speech, advise 

Presidents, possibly including this one, on articulating that important connection between job creation, innovation patents. If you 

were advising him, what would be your advice to him on how you 

articulated that in a 1-minute capsule form? 

Mr. SHAPIRO. Well, you know economists are not very good at 1- 

minute capsules of anything. The fact seems to be that our—the 

American economy has become the—an idea-based economy to a 

greater degree than any other economy in the world. Most of the 

value that is produced in this economy is now derived from ideas, 

and we compete in the world on the basis of our ideas; that is, we 

compete on the basis of quality and innovation. We don’t compete 

on the basis of price. We can’t compete with China on price, and 

we can’t compete with India on price. But we can compete with 

every country in the world in the ability to produce more useful 

and new products and new ways of conducting business that are 

more efficient and more responsive than the firms in any other 

place in the world. And that means we have to invest in the conditions, the things which make that happen. 

Mr. WATT. Such as? 

Mr. SHAPIRO. Such as basic research and development, such as 

an intensely competitive domestic economy. The only thing that 

drives people to change in any economy, to adopt innovations or to 

72 

develop them is competition. So we need to enhance competition, 

and we need to make sure that in an economy in which virtually 

every workplace is now dense with innovative technologies, that everyone has the opportunity to secure the skills to operate effectively in that kind of workplace. 

Mr. WATT. Now, many of the idea-related intangibles, I think you 

referred to them as, that you just talked about and that you talked 

about in your paper are not necessarily all protected by the patent 

process. I assume you’re not making a case for a broader category 

or categorization of what’s patentable or what’s protected intellectually? 

Mr. SHAPIRO. No, I think that there are certain—although the 

Patent Office has patented certain things that would be considered 

business methods and not technologies, just with a kind of slight 

technological trigger. But the point is that again these intangible 

things which in the end resolve down to ideas, whether they are 

new or not, now dominate the U.S. economy. 

Let me give you one very striking set of data. In 1984—— 

Mr. WATT. Very quickly because I want to get Mr. Norman’s advice to the President on the State of the Union in a 1-minute bullet, too. 

Mr. SHAPIRO. In 1984, the book value of the 150 largest U.S. 

companies, that’s what you could sell all their assets, their physical 

assets for on the open market, was equal to 75 percent of their 

market value; that is, large U.S. companies were worth a little 

more than their physical assets. In 2005, the book value of the 150 

largest U.S. Companies was equal to 36 percent of their book value. 

Two-thirds of the value of large U.S. Corporations in this period 

are derived from intangible assets and not from their physical assets. That’s an idea-based economy. 

Mr. WATT. Weigh in on this short articulation of how innovation 

and job creation fits in our economy, Mr. Norman. 

Mr. NORMAN. Our economy. I agree with Mr. Shapiro is a knowledge-based economy, information-based. We can compete with 

every country in the world and we can compete extraordinarily well 

against every country in the world, but we have a competition for 

the best ideas going on and the best ideas can be embodied in a 

patent claim. Obtaining the best patent based upon the innovation 

and the work that you are willing to put into creating innovation 

is what then drives the system that allows us to then commercialize those inventions. 

And I would tell the President do everything he can to sponsor 

innovation because I am doing it. At this moment I am preparing 

to send a son to college to study chemistry. And by golly, one of 

these days I want him to have a U.S. patent. 

Mr. WATT. Now I take it that education then would be a major 

component of this whole pitch also? 

Mr. NORMAN. Yes. 

Mr. WATT. Mr. Chairman, I yield back. I’m over my time. 

Mr. GOODLATTE. I thank the gentleman. I now recognize the gentleman from Pennsylvania, Mr. Marino. 

Mr. MARINO. I thank the Chairman. 

Mr. Norman, do we have the student intellect graduating from 

our universities to outpace other countries? 

73 

Mr. NORMAN. To outpace other countries? I haven’t made a specific study of what we are doing, but it is certainty true that the 

number of science and engineering students both entering college 

and graduating from college has gone down as a percentage basis 

over the last 20 years, whereas in other parts of the world, India 

and China in particular, it has risen dramatically. However, I 

think there is a spectacular quality to the level of American ingenuity that is coming out of our research institutions, and you still 

see the United States be a key leader in key aspects of bioscience 

and material science, certainly in information technology. And 

what we need to do is continue apace to stay ahead, and a fantastic 

way to do that is to make be sure that the innovations are coming 

out of research institutions, both private and public because universities certainly are some of the largest patent holders in the 

United States. We want to see that those continue to rise and patent protection can be used to continue to create other—to foster 

other innovation and create other jobs, both within the academy 

and within industry. 

Mr. MARINO. Thank you. Mr. Shapiro, did I infer correctly when 

you stated that the research and development is performed mostly 

in government because private industry does not want to take the 

risk? 

Mr. SHAPIRO. Let me distinguish between two kinds of research 

and development, between a very basic level of research and development where we’re talking about basic science, as opposed to research and development to make a better electric car battery. 

When the research and development, which is focused on particular 

products and processes and materials in which the commercial usefulness can already be seen or imagined, that all occurs and properly should occur only in the private sector. 

The level of research and development that requires public support is at a much more basic level before the implications of that 

can be imagined, because the research hasn’t come to fruition yet. 

And so for example, research into the particular molecular causes 

of certain illnesses, we don’t know whether that would with have 

an application for a treatment that would have a market. It comes 

before that. And that’s the kind of research which has traditionally 

received public support as opposed to the kind of research and development which is focused on producing a particular product 

where there is an understanding of the commercial potential. 

Mr. MARINO. Do I have time for one more, sir? 

Will we get more bang for our buck if we in the government— 

if the government sought out private industry in specifically related areas to do the expansion of the research and development? 

Mr. SHAPIRO. I personally think that government is not very 

adept at deciding what areas of commercial development should be 

pursued, so that I think the scientists understand the basic science 

better and the businessmen understand the commercial development better. The government’s role is to identify who is—who are— 

what are the appropriate scientific institutions that can carry on 

the basic research and then largely to get out of the way of the research and development of the private sector. 

Mr. MARINO. Thank you, sir. 

Mr. GOODLATTE. The gentlewoman from Florida, Ms. Adams. 

74 

Ms. ADAMS. Thank you, Mr. Chair. Mr. Norman, you were here 

when Mr. Kappos was asked what the appropriate inventory level 

would be. Would you agree with that level? 

Mr. NORMAN. The Patent Office has made a study and published 

it which shows sort of the cross points whereby they need to have 

a specific backlog and how much they need to keep moving to sort 

of keep the machinery of the office moving, and I have no reason 

to dispute that. Absolutely there will by definition be a backlog, because nothing can get processed immediately. The exact size of that 

I’m unsure, but the data that we saw in their report did not seem 

unreasonable. 

Ms. ADAMS. So in that vein if they were to receive more funding, 

as you’re suggesting and as you’re asking, then that would mean 

that they would increase their employees, which would mean that 

they would increase the number of backlog that would be acceptable; is that correct? 

Mr. NORMAN. If they were to increase the number of employees 

it would, we would hope, allow them to more speedily do the examinations and decrease the backlog down to the level where it could 

be maintained at a constant. Our key point is that we very much 

need to see our patent applications coming out of the office, either 

with the final rejection or as a granted patent. We believe the 

sweet spot is somewhere within 18 to 20 months after the initial 

filing date. That would allow us to have the business certainty that 

we believe our corporations and our law firm clients need to be able 

to make a meaningful research investment to get something onto 

the market or at least to get the next round of capital funding for 

a very complex invention that would allow the creation of the jobs 

that would go with the development of a product that may take 10 

years to get to the market. 

Ms. ADAMS. I have no further questions. 

Mr. GOODLATTE. I thank the gentlewoman. I have a couple more 

questions, Mr. Norman. We’ll see if those prompt any other questions from the Committee. 

Do you believe the PTO could implement a post-grant review system as a way to enhance patent quality; and would this overwhelm 

the agency, given its other missions and challenges? 

Mr. NORMAN. I do believe that they could institute a post-grant 

review proceeding. I think that it should be phased in, if possible, 

so it’s not just like turning on a light switch and suddenly they 

have a whole new judicial body full of administrative law judges 

sitting within the Patent Office. So it would take some phase-in. 

But an important thing to remember would be if we move into 

a world where we have post-grant review, we would need to do that 

in conjunction with other changes in the U.S. patent law that allow 

for a more objective oversight of patent applications by the redefinition of prior art by moving the United States to a first-inventorto-file system. That would actually make the underlying patent examination more simple, have greater transparency and greater 

clarity, and we would hope, therefore, would shorten the pendency 

time due to the more simplified sets of rules that go into a reformed patent system. So that would free up, we would hope and 

believe, more resources at the Patent Office to institute a postgrant review proceeding. 

75 

Mr. GOODLATTE. The other question is, do most users of the PTO 

fear search activities carried out by non-U.S. examiners, and is 

harmonization in the area a bad idea? 

Mr. NORMAN. We have been in favor of harmonization of many 

aspects of the patent system. One part of harmonization is the 

workload sharing between some of the offices—the big offices such 

as the United States Patent and Trademark Office, the European 

Patent Office, and the Japan Patent Office. We do have work-sharing arrangements that would allow for search results, for instance, 

to be shared amongst those entities. Because, otherwise, we as end 

users, who more often than not also end up paying for patent applications in the European Patent Office and the Japanese Patent Office. If there’s not a good work-sharing system set down, then we 

end up paying the Japanese Patent Office and the European Patent 

Office for exactly the same prior art search that we’re already getting from the USPTO. And so we pay for all the same results. 

So we are in favor of a work-sharing system. We have no standing resolution at IPO concerning whether or not the USPTO 

searching requirements should be outsourced, if that was the 

source of your question. But harmonization and work sharing 

amongst respectable, developed world patent offices, we have not 

had a problem with, because often we see exactly the same results 

coming out of all three anyway. 

Mr. GOODLATTE. Thank you. Does that prompt any questions by 

the gentleman from North Carolina? 

Mr. WATT. I just was wondering whether there has been research 

that tries to verify the extent of the quality problem with patents 

and whether both of you gentlemen have your own opinion about 

the extent of quality of patents as opposed to quantity. 

Mr. NORMAN. Sure. Quality can always be improved in any—— 

Mr. WATT. First of all, has there been anybody who’s done any 

kind of study on this, on the quality? 

Mr. NORMAN. We have not done a study. 

Mr. WATT. Are either one of you aware of any studies? 

Mr. SHAPIRO. There are studies which try to get at quality kind 

of indirectly in terms of how many patents are later overturned. 

But it’s a very hard thing to quantify. 

Mr. WATT. Okay. I didn’t mean to interrupt. Go ahead on your 

own opinion about your assessment of quality. 

Mr. NORMAN. Sure. Just as Mr. Shapiro stated, some of the studies that are focused on how many patents are overturned only 

count a subset of patents that are commercially important. In 

many instances, those are patents that someone is willing to spend 

millions of dollars to try to overturn. And that is not the full set 

that we ought to be looking at when we gauge how effectively the 

Patent Office is doing its job, because it’s dealing with millions of 

other patents that probably will end up being only licensed or perhaps never commercialized at all. Yet as a patent examiner they 

have the very difficult job of treating every patent that comes 

across their desk as if it were the next blockbuster that’s going to 

break the market. And so that’s a difficult job for them. 

Mr. WATT. Your assessment of quality. 

Mr. NORMAN. My assessment of quality is that it’s improving. 

Mr. WATT. Improving from what to what? 

76 

Mr. NORMAN. Well—— 

Mr. WATT. Thirty to 40 percent; 60 percent to 80 percent; 90 percent to 95 percent good quality patents we’re awarding? 

Mr. NORMAN. I can’t say that I could put a percentage on it, but 

from a qualitative standpoint, what I see now, at least in the field 

of which I mostly practice, in pharmaceutical sciences and biotechnology sciences, the Patent Office has made great strides forward, much because the court system over the past decade has 

turned out a pretty fair amount of bellwether opinions from which 

the Patent Office could take guidance and build training guidelines 

around certain types of patent claims. So that’s much better. 

Mr. WATT. Mr. Shapiro. 

Mr. SHAPIRO. There’s certainly some evidence that a lot of—the 

view of a number of people who have been thinking about this for 

a long time that the quality has varied from time to time; that 

quality is particularly difficult when you’re dealing with new industries, new aspects of science; that the inventors may be quite far 

ahead of—technically—of the examiners. That’s the nature of 

science. 

I think that we underestimate the potential cost of patents which 

are granted without sufficient specification, detail, and novelty; 

that they can actively discourage the development of much more effective innovations in that area; and that that’s the kind of negative with respect to kind of this issue of quality is not often looked 

at but I think it’s quite important. And I think that PTO and the 

economy would benefit from some serious effort to make a systematic evaluation of shifts in the quality of patents and what factors 

contributed. I think that would be quite important. 

Mr. WATT. Mr. Chairman, while I have the mike, I will just ask 

unanimous consent to submit for the record a written statement 

from Shayerah Ilias of the Congressional Research Service. She 

had been a potential witness at the hearing today. We want to get 

her testimony into the record. 

Mr. GOODLATTE. Without objection, we will welcome her testimony into the record. 

[The prepared statement of Ms. Ilias follows:] 

77 


Ilias-1.eps
78 


Ilias-2.eps
79 


Ilias-3.eps
80 


Ilias-4.eps
81 


Ilias-5.eps
82 


Ilias-6.eps
83 


Ilias-7.eps
84 

Mr. GOODLATTE. It looks like we have reached the end of the 

road here and a long way to go tomorrow and thereafter on patent 

reform issues and trying to get the very best we can out of the Patent Office. Gentlemen, you have contributed to that discussion very 

ably, and so we thank you. 


Ilias-8.eps
85 

I have to put a few magic words into the record here. Without 

objection, all Members will have 5 legislative days to submit to the 

Chair additional written questions for the witnesses, which we will 

forward and ask the witnesses to respond as promptly as they can 

so that their answers may be made a part of the record. Without 

objection, all Members will have 5 legislative days to submit any 

additional materials for inclusion in the record. 

With that, again, I thank the witnesses, and declare the hearing 

adjourned. 

[Whereupon, at 4:20 p.m., the Subcommittee was adjourned.] 

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