Intellectual Property: Fees Are Not Always Commensurate With the Costs of Services
Released: 1997-06-09T00:00:00

Letter

Introduction

“America’s thinkers and creators are at the heart of technological-based economic growth—they are the engine that runs the American economic machine.” This statement, from the 1994 strategic plan of the Patent and Trademark Office (PTO), effectively summarizes the importance of advancing, regulating, and administering patents, trademarks, and copyrights—collectively referred to as intellectual property.

The administration has made intellectual property reform a part of its plan to “reinvent” government. The Congress has also recently considered legislation that would affect how intellectual property rights are administered. Some of these proposals would affect the organization and funding of PTO and the Copyright Office. In this regard, the Chairman of the Senate Committee on the Judiciary asked us to review various issues relating to intellectual property fees.

Background

In this country, the federal government is the primary regulator of intellectual property through the grant of patents and the registration of trademarks and copyrights. In this regard—and because federal statutes and regulations provide various economic and procedural benefits concomitant with the grant or registration—these three types of intellectual property are much alike. In other ways, however, they are different. Registering copyrights, for example, takes less time than granting patents or registering trademarks, yet copyrights generally have a much longer life. Trademarks have the shortest original term; however, they can be renewed indefinitely while patents and copyrights cannot. Patents for inventions never brought to market and copyrights for materials never published nevertheless are protected for their entire terms, while a trademark can be lost if it is not used.

Similarly, the roles of the agencies regulating and administering intellectual property differ. Generally, PTO examines patent and trademark applications in great detail to ensure that others have not already applied for a patent on the invention or are not using the trademark in question. The Copyright Office essentially registers any materials that appear to be copyrightable and for which the application is complete. Unlike PTO, the Copyright Office generally does not determine whether some other person has a similar copyright or whether the materials are in the public domain. The differences in the complexities of the procedures followed by the agencies are mirrored by differences in the fees and related expenses.

Patents

A patent is a grant given by a government to an inventor of the right to exclude others for a limited time from making, using, or selling his or her invention. In the United States, the sole granting authority for patents is PTO. The patent process is totally funded through user fees. In fiscal year 1995, PTO issued 114,642 patents.

PTO typically classifies patents as one of four types: • Over 90 percent of all patent applications are for “utility” patents for inventions that are either a process, machine, manufactured article, or composition of matter, or an improvement to one of these. A second type of patent is the “plant” patent—constituting less than 1 percent of all applications—which is granted for asexually propagated plants. Previously, utility and plant patents had a term of 17 years from the date the patents were issued. For those applications filed after June 7, 1995, however, utility and plant patents will have a nonrenewable term of 20 years from the date the earliest application is filed. • The third type of patent is the “design” patent, available for a new, original, and ornamental design for an article of manufacture. In fiscal year 1995, design patent applications accounted for about 6.5 percent of all applications filed. Design patents have a nonrenewable term of 14 years from the date of issuance. • The fourth type of patent is the “reissue” patent, which is granted as a replacement for a patent that was in some way defective. The reissue patent is granted for the unexpired term of the patent it replaced. Reissue patents typically account for less than 1 percent of all applications.

Prior to issuing a patent, PTO examines the application to verify that the patent is indeed new, useful, and non-obvious. In this regard, PTO requires that every patent application include (1) a specification that describes the manner and process of making and using the invention as well as the claim or claims that make the invention patentable; (2) an oath or declaration that the applicant is the original inventor; (3) drawings, where necessary for understanding the nature of the invention; and (4) a filing fee. Additional fees may be necessary during examination, when the patent is issued, and during the term of the patent.

Within PTO, the patent application examination process consists of several progressive phases. An applicant files a patent application with PTO, which reviews the application for accuracy and completeness during a preexamination phase. Following preexamination, the application is assigned, or “docketed,” to an examiner within an examination group that has expertise in a specific field, such as computer systems or biotechnology.

At this point, the examiner begins the process of determining whether the invention is a new and useful process or product that should receive a patent. Usually early in the process, the examiner makes a preliminary decision, or “first action,” which may be followed by contacts with the applicant to resolve questions and/or obtain additional information. If PTO decides to issue a patent, termed an “allowance,” it informs the applicant and, upon the payment of the necessary fees, issues a patent. The application may be abandoned during any of these stages.

The examination process can be lengthy. During fiscal year 1995, for example, the average “patent pendency”—the period from the date an application is filed until the date it is abandoned by the applicant or a patent is issued by PTO—was 19.8 months. While not required, most inventors use the services of an attorney to help prepare the application and to assist them throughout the examination process, according to PTO.

Trademarks

A trademark is a word, name, symbol, or design used to distinguish or identify the goods or services of a particular merchant or manufacturer from those of others. As with patents, the federal authority for registering trademarks in the United States is PTO, and the trademark process is funded through user fees. In fiscal year 1995, PTO issued 65,662 certificates of registration.

Federal registration does not create a trademark because a trademark can only be acquired by actually using it in association with particular goods or services. However, federal registration does offer the registrant substantial procedural advantages should the trademark owner be faced with an infringement. Once registration has been obtained, the trademark must remain in substantially continuous use in order to be preserved. Trademark registrations have a term of 10 years but can be renewed indefinitely for additional 10-year terms.

An applicant seeking to register a trademark must file an application accompanied by a fee, specimens of the trademark as it is actually used, a drawing of the mark, and various statements describing when the mark was first used and the types of goods and services on which it is used. Trademarks are categorized into various classes, such as toys or clothing, and, if registration for more than one class is sought, the applicant must pay an additional fee for each class.

Once filed, the application is examined by an examining attorney within the Trademark Office of PTO. The attorney verifies that the trademark for which registration is sought is not “confusingly similar” to trademarks for other goods or services. If there is no such similarity and there are no other statutory bars to registration, PTO publishes the trademark and gives members of the public the right to oppose registration if they feel it is confusingly similar to another trademark, even if this other trademark is not already registered. If no problems are identified at this stage, the trademark is registered. Even then, however, it can be challenged at some later date if it is not used properly or if a prior user comes forward.

The trademark process can also be lengthy. In fiscal year 1995, for example, PTO reported that the time between the filing of an application and the registration of the trademark averaged 16.4 to 16.7 months. While applicants may use attorneys in the application process, attorney involvement is not as extensive as with patents, according to PTO officials.

Copyrights

A copyright is a type of intellectual property that protects literary and artistic expression as well as the media where these are displayed. Thus, copyrights are available for works such as books, periodicals, speeches, printed and recorded music, plays, computer software, paintings, sculpture, and motion pictures. Copyright registration in the United States is the exclusive province of the Copyright Office in the Library of Congress. In fiscal year 1995, the Copyright Office registered 609,195 copyrights.

As with trademarks, a copyright is not gained through registration but rather when the work itself is created and reduced to some tangible form of expression. It is the expression of an idea that is copyrightable, not the idea itself. Registration does offer advantages, however, because the copyright owner has better evidence regarding the priority of the claim and is entitled to certain statutory benefits and damages upon infringement that would not otherwise be available. A copyright generally lasts for the (1) author’s lifetime plus 50 years for personal works or (2) shorter of 75 years from publication or 100 years from creation for works for hire, anonymous works, or pseudonymous works.

The copyright registration process is simpler than for patents and trademarks. The copyright owner submits an application accompanied by a filing fee and one or two copies of the work, depending on the type. Most applicants, according to Copyright Office officials, do not use an attorney. The examination process is also relatively simple, taking an average of 38 to 83 days in fiscal year 1995 to complete, depending on the type of application. The examiner ensures the application is complete and accurate, that the materials appear to be copyrightable, that the fee is proper, and that the required copies are provided. The Copyright Office does not attempt to verify that others have not already copyrighted the materials or that the materials are in use, have use, or have value.

Objectives, Scope, and Methodology

The Chairman of the Senate Committee on the Judiciary, which is considering various funding and organizational proposals involving PTO and the Copyright Office, requested that we examine several interrelated issues concerning the fees these agencies charge for their services. He asked that we address fees as they relate specifically to patents, trademarks, and copyrights and, where applicable, determine (1) how fees are set for the services provided by PTO and the Copyright Office, (2) the extent to which intellectual property fees are recovering the costs of the services provided, (3) whether different users of the same services pay different fees, (4) whether patent fees encourage or discourage the completeness and accuracy of applications, and (5) the potential effects of increasing copyright fees. We address these issues in chapters on patents, trademarks, and copyrights.

In order to answer these interrelated questions, we determined that we would have to develop data and report on patents, trademarks, and copyrights separately because each has its own laws, application and examination procedures, and fee structure. In this regard, we obtained fee information on patents and trademarks from PTO and copyrights from the Copyright Office. This information included current fee schedules for each form of intellectual property as well as a summary of the fees actually received during fiscal year 1995, the most recent year for which such information was available. To the extent possible, we subdivided the fee receipts by fee type and computed the ratio of each fee type to total fees received.

To determine how fees are set, we reviewed the statutory authority provided to PTO and the Copyright Office as well as the procedures these two agencies had developed for adjusting fees. We reviewed the legislative history for the statutory fees to determine the reasons for and timing of the various changes. We obtained information from the agencies showing the actual process and data used in the most recent fee adjustments considered.

We also obtained certain workload information from PTO and the Copyright Office, showing the number of patents, trademarks, and copyrights issued or registered or for which the applications were abandoned or rejected during fiscal year 1995. This year was used because of the need for consistency with the fee receipt data discussed above and because in most cases it was the year for which the most recent data were available. In addition, we obtained information the agencies had developed showing the impact of fee increases on applications. For copyrights, we also performed a regression analysis to estimate the association between fee increases and changes in the number of applications while controlling for the influences of other factors that may affect application levels.

We discussed the establishment of fees, fee history, the equity and fairness of fees by applicant and type of application, and the potential impact of adjusting fees with officials from PTO, the Copyright Office, and the intellectual property community. Where possible, we obtained comparable fee data for the Japanese Patent Office and the European Patent Office, the two other large patent offices in the world besides PTO.

We provided a draft of this report to the Department of Commerce and the Library of Congress. These agencies provided written comments, which are included in appendices XII and XIII, respectively, along with our responses. In addition, we met with officials of the Library of Congress after receiving their comments.

Additional information on our scope and methodology is included in appendix I.

While the Overall Patent Process Is Self-Sustaining, Individual Fees Are Not Commensurate With Costs of the Services Provided

By design, the patent process is self-sustaining through a system of fees assessed by PTO for its services. Changes to the law in 1990 and 1991 set patent fees at levels that would recover costs overall and authorized PTO to make annual adjustments for inflation. Despite the self-sufficiency of the patent process overall, however, individual fees are not necessarily commensurate with the costs of the services for which they are assessed. Again, this is by design because (1) the largest fees are paid at the back end of the process, while most costs occur at the front end of the process; (2) large and small entities generally are charged different fees for the same service; (3) costs vary by invention type, while fees do not; and (4) delays caused by the applicants generate more costs than fees. Recognizing these anomalies, PTO is studying the need to make the individual fees more nearly commensurate with the costs of the services provided.

The Patent Process Is Designed to Be Self-Sustaining

Understanding the current patent fee structure first requires an explanation of how the role of patent fees has changed over the past 4 decades. Until recently, patent fees were not intended to cover the costs of PTO’s patent process. In 1965, for example, patent and trademark fees were set at a level that recovered 67 percent of PTO’s costs. By 1980, however, inflation had reduced the impact of these fees—which had not been revised in the interim—so that they recovered only 27 percent of PTO’s operating costs.

In 1980, the Congress revised the patent fee structure. Public Law 96-517, enacted December 12, 1980, provided that fees would be set to recover 50 percent of the costs of PTO’s patent process. The law also provided that, like most other industrialized countries, patent fees would be paid not only for application filing and patent issuance but also for the life of most patents through fees known as maintenance fees.

Public Law 97-247, enacted August 27, 1982, further modified the patent fee structure. In addition to raising fees, the law provided that filing, issue, and maintenance fees would be set by statute and could be adjusted every 3 years on the basis of fluctuations in the Consumer Price Index (CPI). The law also provided that large entities would pay statutory fees double the rate of small entities—those entities classified as small businesses by the Small Business Administration (SBA), nonprofit organizations, and individual inventors. The purpose of this reduced fee for small entities was to reduce the impact of fee increases on the inventors most likely to be burdened by higher fees.

Public Law 101-508, enacted November 5, 1990, put PTO on the road to self-sufficiency by increasing statutory patent fees by 69 percent in fiscal year 1991. This increase, known as a “surcharge,” was a replacement for appropriations from the general fund. Subsequently, the surcharge was extended through fiscal year 1998 and modified so that the amounts specified by statute are collected. Unlike regular fees, which are treated as offsetting collections for budget purposes and are fully available to PTO, the surcharge fees were to be treated as offsetting receipts and would be available to PTO only to the extent appropriated back by the Congress.

Public Law 102-204, enacted December 10, 1991, authorized PTO to adjust patent fees annually to account for changes in the CPI. Since fiscal year 1993, PTO has been self-sufficient, receiving no appropriations other than those generated by the surcharges. Actually, PTO has not been allowed to use all the fees it has collected. Through fiscal year 1997, the Congress has withheld $142.8 million of the $729.3 million in surcharge fees collected by PTO.

Individual Patent Fees Are Assessed for Specific Services

PTO collects fees for an assortment of patent services. Fiscal year 1995 fee revenues totaled $577.7 million. While these fees were collected under 139 separate fees for specific services, there were three primary types of fees—application filing, patent issuance, and patent maintenance. Table 2.1 summarizes fiscal year 1995 revenues by primary type of fee, and appendix II provides a detailed comparison of these revenues for the individual fees.

Each applicant pays a filing fee prior to PTO’s examination of the merits of the patent application. There are different filing fees for utility, design, plant, and reissue applications, just as there are different fees for large and small entities. In fiscal year 1995, utility patent applications were dominant, accounting for 89.8 percent of large entities’ filing fees and 85.7 percent of small entities’ filing fees. Overall, large entities paid $134 million, or 4.3 times the filing fees paid by small entities.

Once PTO decides to allow the grant of a patent, the applicant must pay an issue fee in order to receive the patent. As with application fees, issue fees differ by the type of patent as well as by large and small entities. In fiscal year 1995, utility and reissue patents—which are assessed the same issue fees—accounted for 97.6 percent of all large entities’ issue fees and 92.3 percent of all small entities’ issue fees. In total, large entities paid $88.7 million, or 4.3 times the issue fees paid by small entities.

Maintenance fees represent the largest single source of patent fee collections, accounting for more than a third of all patent fees collected during fiscal year 1995. The fees are paid at three stages during the life of the patent—at 3.5, 7.5, and 11.5 years into the patent term—with the fees at each stage being progressively higher. Unlike filing and issue fees, maintenance fees are not assessed on design and plant patents. However, large entities pay maintenance fees at twice the rate of small entities.

Maintenance fees constitute some of the largest individual fees, ranging from $960 to $2,900 for large entities and $480 to $1,450 for small entities during fiscal year 1995. In fiscal year 1995, large entities paid $171.2 million, or 7.6 times the amount paid by small entities.

While filing, issue, and maintenance fees are the three primary types of fees—accounting for 81.5 percent of all patent fees during fiscal year 1995—PTO collects other types of patent fees. These include such fees as those paid by an applicant to file and process an international patent application under the Patent Cooperation Treaty, to appeal a PTO decision, to revive an abandoned application, and to obtain an extension in the time to respond to a request or inquiry by PTO during examination. All these fees are different for large and small entities. Other fees, such as those for filing a petition to the Commissioner, make no distinctions in the amount of the fee by the size of the entity.

As noted previously, PTO now has discretion to raise most fees annually to adjust for inflation. PTO has raised fees each year except one since the surcharge was added in fiscal year 1991. Most of the discussion of fees in this chapter is based on fiscal year 1995 data, since this was the most recent year for which complete statistics on fees and patent examination statistics were available at the time of our review. Appendix III shows the fees in effect during fiscal year 1997.

In commenting on a draft of this report, the Department of Commerce noted that PTO’s revenues from filing fees in fiscal year 1995 actually were a greater proportion of total revenues than is normally the case. This was due to the large number of applications submitted prior to the change in the patent term that became effective on June 8, 1995. In fiscal year 1994 and 1996, filing fees, according to PTO, accounted for 27.5 percent and 23.7 percent, respectively, of total fee revenues, compared with 28.5 percent in fiscal year 1995.

Individual Fees Are Not Commensurate With the Costs of the Services Provided

“The revenues needed to meet the Patent and Trademark Office’s expenditures are, as you know, more than fully offset by fees paid by those who use our services and buy our information products. Our workload consists primarily of patent and trademark applications filed by individuals and businesses in the United States and from other countries. These applicants, both domestic and foreign, pay fees for the services they request. Because they pay fees for those services, they expect and deserve prompt and efficient service, and the Patent and Trademark Office must have the flexibility to deliver that service.”

While the Commissioner’s statement is correct—PTO’s expenditures are recovered through fee revenues—this does not mean that individual fees are set to recover the costs of the specific services provided. Actually, patent fees are structured so that in effect (1) successful applicants pay more than unsuccessful applicants, (2) large entities pay more than small entities, (3) applicants with less complicated applications pay the same as those with more complicated applications, and (4) applicants who create delays in the examination process do not pay fees commensurate with the additional pendency caused by those delays.

Successful and Unsuccessful Applicants

While PTO does not have a cost-accounting system capable of determining the costs associated with individual services, PTO officials advised us that most of the costs of the patent process are attributable to application processing and examination. For fiscal year 1995, for example, they estimated that only 8.6 percent of the costs associated with an individual patent were attributable to the actual issue of the patent and 0.1 percent were attributable to its maintenance. As noted above, however, patent issue fees accounted for 18.9 percent of patent fees collected in fiscal year 1995, while maintenance fees accounted for 33.7 percent.

The dichotomy of front-end costs and back-end revenues causes successful applicants to pay a larger share of costs than unsuccessful applicants because so many applications are abandoned during the examination stage. Of the 186,195 patents issued and applications abandoned during fiscal year 1995, for example, 114,642 patents, or 61.6 percent, were issued and 71,553 applications, or 38.4 percent, were abandoned. Patent pendency—the amount of time PTO spends in examining a patent prior to the patent’s being issued or the application’s being abandoned—averaged 19.8 months, with 21 months for patents issued and 17.9 months for applications abandoned. None of the applications abandoned will pay an issue or maintenance fee because no patent was issued, even though abandoned applications accounted for more than a third of total pendency.

Large and Small Entities

As noted earlier, large entities typically pay twice the fee that small entities pay for the same service. Because of this difference in the fee itself and because large entities submit more applications and receive more patents, large entities pay a much larger share of overall patent costs. In fiscal year 1995, for example, large entities accounted for 81 percent of the $164.9 million in filing fees, 81.1 percent of the $109.4 million in issue fees, 87.9 percent of the $194.7 million in maintenance fees, 83.2 percent of the $48.4 million in response-time extension fees, 86.8 percent of the $6.2 million in appeal fees, 73.4 percent of the $3 million in abandoned application revival fees, and 85.8 percent of the $9.8 million in Patent Cooperation Treaty filing fees.

These differences in fees are mandated by the law. The Congress added the fee-differential provision in 1982 to reduce the effects of fee increases on small businesses, individual inventors, and nonprofit organizations. However, the differences today are much greater, now that PTO has become totally dependent on fees and the fees themselves are larger. In this regard: • PTO officials told us that the size of the entity has no bearing on PTO’s costs. • For patent fee purposes, a small entity is a small business with no more than 500 employees, a nonprofit organization, or an individual inventor. The categorization of a small business as defined by the Congress is taken from the criteria SBA uses to determine whether a business qualifies as a small business for its programs. While this employee-based criteria may be useful for SBA, PTO officials said such a definition has little significance when considering the economic impact of fees on a patent applicant. In today’s high-tech environment, many businesses that are highly capitalized and profitable have 500 or fewer employees. Similarly, some of the more successful applicants are individual inventors or work for small businesses. As one example, PTO officials noted that one of the most prolific U.S. inventors—whose patents have returned him hundreds of millions of dollars—is considered a small entity for patent fee purposes. • Patents are the only form of intellectual property for which the size of an entity has a bearing on the fees assessed. There is no such division of fees for either trademarks or copyrights. • The patent fees themselves are only a portion of the costs of receiving a patent. By definition, a patent represents a new and useful invention or process, and other costs are involved in researching, developing, producing, and marketing these inventions that typically are much greater than would be experienced in obtaining a trademark or copyright registration. In addition, in most cases, attorneys are involved in preparing, filing, and prosecuting the application. While attorneys’ fees vary according to the circumstances, an intellectual property guide published by the Minnesota Small Business Assistance Office in 1992 estimated that attorneys’ fees could range from $7,500 to $18,000 per application. • While patent fees have increased significantly since the surcharges were implemented in fiscal year 1992, inventor organizations generally did not believe they were too high or that they were stifling the inventive process. Furthermore, as shown in appendix IV, U.S. patent fees appear to be among the lowest in the industrialized world.

Application Complexity

Patent applications cover a wide range of inventions, and the more complicated inventions generally require the most examination time. As shown in appendix V, the differences in average pendency can vary significantly among examination groups. For those patents issued and applications abandoned during fiscal year 1995, the average pendency was 19.8 months. Among the 17 individual examination groups, however, pendency ranged from a low of 17.4 months for solar, heat, power and fluid engineering devices to a high of 26.2 months for computer systems.

Among the more specialized groupings within the examination groups, pendency can vary even more. For example, average pendency for the grouping of special receptacles, packages, shoes, and shoemaking was 15.8 months, compared with 29.6 months for the grouping of database and file management systems.

While pendency alone is not the only determinant of costs, PTO officials agreed that the more complicated the invention, the more time and expense are attributable to examination. However, the fee schedule makes few provisions for these differences in examination time. One such provision is that, as shown in appendixes II and III, fees for design and plant applications—which tend to be less complicated—are lower than for utility patent applications. There are no differences in filing fees, however, for different types of inventions within the utility patent category, which accounts for over 90 percent of all patent applications.

Applicant Delays

During PTO’s examination of a patent application, the examiner makes a preliminary decision on the merits of the application as filed. At such time, the examiner may ask the applicant to respond to questions or provide the examiner with information. This process may occur a number of times. In many cases, PTO cannot complete the examination until the applicant has taken some further action. For example, (1) the applicant may have filed an incomplete application that must be corrected before it can be assigned to an examination group, (2) the applicant may need to answer questions raised by the examiner or provide PTO with additional information, or (3) PTO may have to wait for the payment of a fee before it can proceed with the examination process.

In fiscal year 1995, the time taken by applicants to respond to official PTO “office actions” accounted for 3.7 months, or 18.7 percent, of the total average pendency of 19.8 months. This does not include any pendency that was added because PTO had to process the responses.

There are no additional fees for responses made within 3 months of a PTO office action. However, if the respondent wants to extend the response time, he or she must pay extension fees, as shown in appendixes II and III. If no response is received after 7 months—the 3 “grace” months plus the 4 extension months—the application is considered abandoned.

As shown in appendix II, the extension fees received during fiscal year 1995 were $48.4 million, or 8.4 percent of the total patent fees received. As noted above, however, the contribution to pendency by the respondents for all patents issued or applications abandoned during fiscal year 1995 was 18.7 percent. While an exact correlation cannot be made, these differences indicate that respondent fees may not be commensurate with the amount of additional pendency they create.

PTO Is Studying the Need for Changes in Patent Fees

PTO officials believe that anomalies exist in the current patent fee structure and have two initiatives under way to address the issue. Under one of these initiatives, PTO is developing a cost-accounting system that will allow it to determine the unit costs of particular services, something it cannot do under its current accounting system. Under the second initiative—which depends to a large extent on the development of cost centers—PTO will attempt to determine whether there is a need for revisions in the fee structure. At the time of our review, PTO officials said the cost study was expected to be completed in December 1997 and that the fee study would be completed at an undetermined time after the cost study.

In its Audit Inspection Plan for Fiscal Years 1997-98, the Department of Commerce’s Inspector General noted that “PTO has no uniform process to track the costs of operations within its various program areas... does not have the information that would enable it to develop a fee structure that would accurately establish fees to recover the full costs of operations.” In this regard, the Inspector General plans to review PTO’s cost-accounting and fee-restructuring efforts, beginning in the third quarter of fiscal year 1997.

Patent Organizations Generally Are Satisfied With Current Fees

Officials from organizations representing patent owners and attorneys agreed that the current fee system is designed to recover costs in the aggregate rather than on a per-service basis. While they recognized that this is in effect a type of subsidy and creates inequities among applicants, they also said that their constituents were generally satisfied with the current system because they (1) know what to expect, (2) are familiar with the fee structure as now designed, and (3) recognize that there is some logic in creating a fee system in which successful applicants bear a greater proportion of the costs. In addition, fees paid to PTO are a relatively small portion of the overall costs of creating a new product, obtaining a patent, and bringing the product to market.

These officials’ primary dissatisfaction was not in the fee structure itself but in the Congress’s not appropriating all the surcharge fees back to PTO.

They fear that, ultimately, this may keep PTO from being able to manage the patent workload and could lead to higher patent pendency.

The officials from the patent organizations also said that, if the Congress does wish to look at the appropriateness of fees, now is the time. Legislative proposals have been made in both the prior and current sessions of the Congress that would make PTO a wholly-owned government corporation, and questions have been raised concerning how fees would be set and who would set them. The officials believed that these questions should be resolved as a part of the decision on PTO’s organizational status.

Conclusions

In many ways, the current patent fee structure is working well. The patent process within PTO has been self-sufficient since fiscal year 1993 and a mechanism is in place to ensure that fees can be raised annually to account for inflation. Furthermore, the applicants appear to be generally satisfied with the current system.

At the same time, however, individual applicants are not necessarily paying their own way because (1) there appears to be little correlation between the service being provided and the cost of that service to PTO and (2) certain applicants pay more than others for the same services. Applicants who abandon their applications, qualify as small entities, submit more complicated applications, and create delays in the examination process are paying less for the same services than other applicants who receive patents, are considered large entities, have less complicated applications, and create fewer delays.

We recognize that there may be policy reasons for having different applicants pay different fees for essentially the same services. Ultimately, the question is whether the Congress wants a closer alignment between the costs of the patent services being provided by PTO and the fees charged for those particular services. While the current system works from the standpoint of overall revenue, individual applicants do not always get what they pay for or pay for what they get.

In order to match fees more closely with services, it will be necessary to know the actual costs of those services. We believe that PTO is taking the correct approach in developing a cost-accounting system that will identify the costs attributable to specific patent services.

Matters for Consideration by the Congress

In considering proposals affecting PTO’s funding and organizational status, the Congress may wish to consider whether the current patent fee structure needs to be changed so that fees for particular services more nearly reflect the costs of those services. Specifically, the Congress may wish to consider whether (1) the fee differential between large and small entities should be continued, (2) a larger portion of fees should be tied to the examination process itself, (3) larger fees should be paid for those applications that require more examination time, and (4) applicants who create delays in the examination process should pay for the costs of these delays.

Agency Comments and Our Evaluation

In commenting on a draft of this report, the Department of Commerce generally agreed with the information presented but recommended a number of technical and language changes. Several of the Department’s comments concerned our not having included $2.4 million in miscellaneous fees in the statistics on patent fees. We had not included these in the draft report because the source materials indicated such information could not be tied specifically to either patents or trademarks. After reviewing the Department’s comments, we determined that these fees should have been shown as patent fees and we revised the report accordingly.

The Department also noted that the cost-accounting information PTO expects to have by December 1997 will greatly enhance the substantive information available with which to analyze potential changes to the current fee structure. Although it is too early to know the outcome of PTO’s study, we make the point in this report that in order to match fees more closely with services, it will be necessary to determine the actual costs of those services.

Throughout its comments, the Department emphasized the role the Congress has played in creating and developing the existing patent fee structure. We agree and believe that this point is made clear in the report. We also believe that any policy changes regarding patent fees would require congressional action. For this reason, we have included matters for congressional consideration dealing with patent fees.

The complete text of the Department’s comments and our responses to those comments are included in appendix XII.

Trademark Fees Appear to Be Aligned With the Costs of Services

Like the patent process, the trademark process is self-sustaining. However, unlike patents, trademark fees do not vary on the basis of the size of the entity applying, and most fees are paid at the beginning of the process before PTO begins to incur costs. Consequently, while PTO believes some adjustments may be needed, fees in the trademark process appear to be more closely aligned with the costs of services.

The Trademark Process Is Self-Sustaining

The trademark process—accounting for receipts of $68.5 million in fiscal year 1995—now totally depends on fees. However, unlike the patent process—which has been self-sustaining since fiscal year 1993—the trademark process’s self-sufficiency began in fiscal year 1983.

In 1965, trademark processing fees were increased, with the most significant change being an increase in the basic application filing fee from $25 to $35. These fees remained in effect until fiscal year 1983. Public Law 97-247, enacted August 27, 1982, authorized PTO to increase trademark fees, this time to a level intended to recover 100 percent of trademark costs. The increase implemented was substantial, with the basic filing fee raised to $175 per application. The law also provided that trademark fees could be used only to fund trademark operations.

Since fiscal year 1983, trademark processing fees have remained essentially stable, with only some limited changes in the basic filing fee. In October 1986, PTO raised the basic fee to $200 but in April 1989 lowered it back to $175. In December 1991, PTO again raised the basic filing fee to $200, and Public Law 103-179, enacted December 3, 1993, raised it to $245. This fee is still in effect.

PTO now has the authority to raise trademark processing fees and service fees annually within the CPI increase of the previous year. In practice, PTO does not always exercise its authority to adjust fees. Appendix VI shows trademark processing and service fees received during fiscal year 1995, and appendix VII shows the fees in effect in fiscal year 1997. The only fees raised over this period were two service fees, which together accounted for less than 0.5 percent of revenues in fiscal year 1995.

Trademark Fees Appear to Be Commensurate With the Costs of Services

Trademark fees are more streamlined and less complicated than patent fees. In total, there are 19 separate trademark processing fees and 18 separate service fees. Unlike patents, these fees do not differ by the size of the entity applying to register the trademark, no additional fees are levied when the trademark is approved for registration, and no maintenance fees must be paid during the term of the trademark. A renewal fee of $300 per class is paid only if the trademark owner wishes to extend the trademark for additional 10-year terms.

According to PTO officials, trademark fee revenues are tied closely to the trademark examination process. As shown in table 3.1 and appendix VI, the trademark process generated $68.5 million in fee revenues during fiscal year 1995. Of this total, 94.5 percent came from trademark processing fees. More specifically, 71.5 percent of all revenues came from one fee—the basic application filing fee.

As with the patent process, PTO does not have a cost-accounting system capable of determining the costs of particular services. However, PTO officials estimated that about 76 percent of its overall trademark costs were related to the examination process. They also told us that there is not a significant difference in the amount of time spent examining different types of trademarks. In fiscal year 1995, the average time spent in examining all trademark applications prior to registration ranged from 16.4 to 16.7 months.

The situation in which successful patent applicants pay more than unsuccessful applicants does not exist in the trademark process because, as noted above, there are no separate issue or maintenance fees for trademarks. Thus, even though 42,214 trademark applications were abandoned in fiscal year 1995, compared with 75,372 applications that “matured to registration,” all applicants paid the same basic filing fee in advance. Unlike patents, there are no separate fees tied to late responses to PTO requests for additional information. However, PTO officials said that, because of the nature of the application, there are fewer occasions to request additional information during the processing of a trademark application. Unlike patent regulations, trademark regulations do not require acceptance of incomplete applications and, as a result, PTO does not accept and process incomplete trademark applications.

PTO officials believe that fees generally are appropriately allocated to the services provided. They also said, however, that they were aware of some individual areas in which the fees probably were not adequate. For example, they said that the fees for actions such as filing an appeal ($100 per class) were likely to be well below PTO’s costs of handling these actions. As with patents, PTO officials believed that the two studies now under way to develop a new cost-accounting structure and to reassess fees—as discussed in chapter 2—will provide better information on how well specific fees are tied to specific services and what fees may need to be adjusted.

The representatives from the trademark community with whom we discussed fees generally had no problems with the current fee structure. They believed, like PTO, that the costs were adequately tied to the services provided.

Conclusions

Trademark fees are more streamlined than patent fees. There are fewer individual fees, the size of the entity applying has no effect on the fee paid, most fees are tied to the application examination, and most fees are paid in advance of the examination. There are no separate fees for registration or maintenance, and the processing time does not appear to vary significantly by type of application. There also is less reason for PTO to request additional information on problem applications.

For these reasons, we do not believe fees in the trademark process raise the issues we identified in the patent process, in which certain applicants pay more than others for the same services. However, we believe that PTO should continue its efforts to (1) develop a cost-accounting system that will allow it to identify the costs attributable to specific trademark services and (2) reassess the fees paid to determine whether they are commensurate with the costs of the services provided.

Agency Comments and Our Evaluation

In commenting on a draft of this report, the Department of Commerce generally concurred with the information we provided on trademark fees. As suggested by the Department, we added information regarding PTO’s proposed cost-accounting study. The complete text of the Department’s comments and our responses to those comments are included in appendix XII.

Copyright Fees Do Not Recover the Costs of Copyright Services

Unlike the patent and trademark process, the copyright process is not self-sustaining, and copyright fees have been adjusted infrequently since the 1950s. The current fees have been in effect since 1991 and have not been adjusted for inflation as permitted by law. Most applicants pay a one-time fee of $20, or about half the cost the Copyright Office incurs to register a copyright.

Copyright Office officials have supported the need for a fee increase in the past and currently support proposed legislation that would give the Register of Copyrights the discretion to raise fees to reflect the fair cost of registering copyrights and providing services. However, the Register testified against a 1996 proposal to make the Copyright Office self-sustaining through fees within a new, government-owned, intellectual property corporation because she believed fees would increase too much, applications for registration would decrease, and the Library’s collections could suffer as a result. Recently, the Register said that she favors making the copyright process self-sustaining within the Library, joining others—including the Library itself and the Congressional Budget Office—that believe a fee increase would be advantageous.

On a related matter, the Copyright Office is now required to retain unpublished works at no additional cost for the life of the copyright, while most published works are retained for only 5 years. Because these unpublished works are rarely used, the full-term storage represents an unnecessary cost to the government.

Copyright Fees Have Been Adjusted Infrequently

The Congress has taken a different direction with copyright fees than with patent and trademark fees. The copyright process, once self-sustaining, now depends on appropriations to supplement the revenues obtained through fees.

For most of the first half of this century, the copyright process was self-sustaining. The Copyright Act of 1909 required applicants to pay a fee for the registration of a copyright, and from 1909 to 1942, copyright fee receipts exceeded expenditures. Over the next 5 years, however, revenues lagged behind costs.

In 1948, Public Law 501 increased the basic copyright registration fee from $2 to $4. Consequently, fee receipts once again exceeded expenditures in 1949. From 1950 until 1965, however, the ratio of fees to expenditures dropped to 63 percent as costs increased while fees remained at the same level. Under Public Law 89-297 in 1965, the Congress again increased the basic registration fee, this time to $6 per claim. At the time, the Copyright Office estimated that this new fee would result in a recovery of 80 percent of its costs. By 1976, however, inflation had reduced the value of copyright fees, and the Congress, under Public Law 94-553, raised the basic fee to $10, with the increase actually effective in 1978.

Over a decade later, as the value of the basic registration fee again had been eroded by inflation, the Congress increased the fee to $20 under the Copyright Fees and Technical Amendments Act of 1989 (P.L. 101-318, July 3, 1990). This act also authorized the Register of Copyrights to adjust fees for inflation every 5 years, beginning in fiscal year 1995. Fiscal year 1991 was the last year in which the copyright registration fees were raised because the Acting Register of Copyrights did not make an inflation adjustment in fiscal year 1995.

Copyright fees traditionally have had a simpler structure than patent and trademark fees because there are fewer fees and the fees themselves are much smaller. As shown in appendix IX, the basic fee for most purposes is $20. Unlike patent fees, copyright fees do not differ according to the size of the entity submitting the application. In addition, there are no issue fees, no maintenance fees, and no renewal fees except on some older copyrights. In addition to the statutory fees, the Register of Copyrights sets fees by regulation for special services, such as providing optional full-term storage of published materials.

Current Copyright Fees Are Not Sufficient to Recover the Costs of Services

Copyright fees do not cover the costs of copyright services, either in total or by type of service. We found that the (1) gap between total copyright fee revenues and costs exceeds $10 million a year, (2) gap varies widely by type of service, and (3) Copyright Office has not raised fees to cover the effects of inflation. Copyright Office officials said that they have supported the need for a fee increase that would move toward recovering the full costs of copyright registration and services.

Costs Exceed Fees by $10 Million a Year

The Copyright Office obtains funding from three sources: (1) copyright fees, (2) appropriations from the general fund, and (3) cost reimbursements taken from royalties collected and disbursed by its Licensing Division and the Copyright Arbitration Royalty Panel. In fiscal year 1995, the Copyright Office collected $14.6 million in fees, received $10 million in appropriations, and recovered $2.4 million in costs from royalty fees.

As shown in table 4.1, the reliance on appropriations has been relatively constant at the $9 million to $10 million range since 1991, the year in which the most recent fee increase became effective. Appendix IX shows the sources of all copyright fee revenues for fiscal year 1995.

The Gap Between Fees and Costs Varies by Type of Service

The disparity between the fees applicants pay and the costs of the services they receive can be considerable on a per-service basis. This is because some types of copyrights cost more to register than others, while the basic registration fee is a “one-size-fits-all” fee, and because some service fees are set below costs.

Although the basic copyright registration fee is $20, an analysis of costs by the Copyright Office indicates that the average cost of a copyright registration in fiscal year 1995 was $36.53, or about 183 percent of the basic fee. As shown in table 4.2, however, the average cost by type of work varied from a high of $59.60 for a “mask” work—or a work imbedded in a semiconductor chip—to a low of $28.32 for literary serials.

Fees for other services were also far below the costs incurred by the Copyright Office in providing such services during fiscal year 1995. For example: • While the Copyright Office charged a fee of $20 per hour for conducting reference searches of its records, these searches cost an average of $70.02 per hour, or 3.5 times the fee. • The average cost of recording a document was $77.81, or about 3.9 times the $20 fee. • Copyright renewals cost an average of $43.37 each, or more than twice the $20 fee.

Some high-cost services require no separate fee at all. For example, the Copyright Office does not charge an additional fee for requesting additional information from applicants submitting incorrect or incomplete applications, even though these applications require more time to process. As of October 1996, approximately 15 percent of all copyright applications required correspondence with the applicant to complete the registration process. Copyright Office officials estimated the cost of each correspondence at approximately $45.

The Copyright Office Has Not Raised Fees to Account for Inflation

One of the problems associated with statutory fees is that their value tends to be eroded by inflation if several years transpire between fee increases. Thus, the effective fee actually declines during the period. This has been the case with copyright fees, as shown in figure 4.1. Using 1996 dollars as the base and adjusting the nominal fee for the effects of inflation, we found that the “real” fee decreased in value significantly during each period a particular fee was in effect.

As noted above, Public Law 101-318 established a new copyright fee schedule to account for the inflation that had occurred since the fees were last raised in 1978. The act also granted the Register of Copyrights the authority to adjust the fee schedule by regulation every 5 years to account for any inflation as determined by the CPI. The first such adjustment was to be effective in 1995. In March 1994, an internal Copyright Office task force recommended that basic registration fees not be increased, and the Acting Register of Copyrights at the time followed this recommendation. By statute, the next such increase cannot be made until 2000, and, according to Copyright Office officials, any increase at that time would consider only CPI increases since 1995.

According to the report prepared by the task force, the increase in the CPI was 16.53 percent from 1989 to 1993, the most recent 4-year period for which data were available. This would have allowed basic registration fees to increase from $20 to $23.30. The task force estimated that, if fees were raised by the maximum allowable, the additional revenues would be $1 million to $2.1 million in the first year after the fee increase, depending on the extent to which applications decreased. After deducting $493,866 in increased costs that would be incurred by the Copyright Office, the task force estimated that the fee increase would have potentially increased the Copyright Office’s income by $529,590 in the first year of the fee increase. Costs associated with the fee increase would decrease to an estimated $102,869 in the second year and $69,877 in the third year.

In determining the additional costs and other problems of raising fees, the task force cited the expenses and difficulty of publicizing the new fees to copyright registrants; the administrative burden of dealing with claims that arrive with insufficient fees; the necessity of modifying the automated accounting system; the difficulty that Copyright Office staff and applicants would have working with an odd fee, and the expenses associated with drafting, printing, and distributing new applications and circulars reflecting a fee increase. The task force also believed that applications would decline, offsetting to some extent any gains made by raising the fees.

In summary, the task force believed that the additional revenues were not worth the anticipated problems and expenses and recommended against raising the basic registration fee. The task force did recommend that certain service fees, such as those for special handling and full-term storage of published works, be increased. The Acting Register of Copyrights raised fees for special services, but opted against increasing copyright registration fees.

We disagree with the Acting Register’s decision not to raise fees for several reasons. First, most of the costs would have declined after the first year. However, overall fee income would have continued to increase each year, depending on the effect any such increase would have had on applications. Second, the revised fees would have formed the basis for any fee adjustments for inflation in the future.

Third, while there may be administrative costs associated with publicizing fee increases, processing claims accompanied by insufficient remittances, and modifying paperwork and automation systems to reflect fee increases, the task force did not study ways that these costs and difficulties might be mitigated. For example, Copyright Office officials could not explain why they would have to take elaborate measures to publicize the fee increase and to reprint all publications. They said they did not consider as an option simply rejecting any application with an insufficient fee, nor did they consider listing a toll-free number or Internet address on the application where an applicant could obtain information on the appropriate fee, rather than listing the fee itself.

We also do not agree with the task force’s concern that an “odd fee” would be difficult for the applicants or the Copyright Office staff to understand and use. Apparently, the concern is that the $20 fee is easy for applicants to remember and easy for Copyright Office employees to work with to ensure that the proper amounts are paid. However, fees of amounts other than in increments of $5 or $10 are common in commerce and government operations. For example, the applicant must pay postage in dollars and cents on each package he or she submits to the Copyright Office. In addition, millions of taxpayers and Internal Revenue Service employees work with many different rates and fees each year in computing income taxes. Furthermore, assuming that the concerns over odd fees were justified, the Copyright Office could have mitigated the effect by raising its basic registration fee to the even-dollar amount of $23. This increase would have been within the CPI ceiling.

Copyright Office Officials Believe a Fee Increase Is Needed

Copyright Office officials told us that they believe a fee increase is needed and support “the goal of moving toward full cost recovery of fee services.” They noted that this was not the same as saying that all Copyright Office operations should be paid for through fees because they believe there are costs of the Copyright Office—such as public information, rulemaking, development of national and international copyright policy, preparation of reports and studies for the Congress, administration of section 407 mandatory deposit provisions, and the special funding for the International Copyright Institute—that should be supported by appropriations, not fees.

The Register of Copyrights told us that she supports the language in H.R. 672 and S. 506, which would authorize the Register to adjust fees to reflect the fair cost of registering copyrights and providing services. She said that she had supported similar provisions in H.R. 1861, which passed the House of Representatives but not the Senate during the past session of the Congress. The Copyright Technical Amendments Act, H.R. 672, was passed by the House of Representatives on March 18, 1997. The Copyright Clarifications Act of 1997, S. 506, was introduced in the Senate on March 20, 1997.

The Register also said that the Copyright Office plans to initiate a fee study to determine (1) what costs are attributable to the copyright process and (2) what fees would be necessary to recover costs in total and by type of service. As of March 1997, Copyright Office officials were deciding on the scope of the study but had not yet begun the study. The Register said that the study would probably be conducted by outside consultants.

The Copyright Office Has Opposed Becoming Self-Sustaining Outside the Library

In September 1996, the Senate Committee on the Judiciary held a hearing on S. 1961, which, among other things, would have made the Copyright Office self-sustaining through fees within a new, government-owned, intellectual property corporation. The Register of Copyrights testified against this proposal, providing three interrelated reasons for her opposition. First, to cover the increased costs, fees would have to be raised to an unacceptably high level. Second, the increased fees would lead to a decrease in copyright registrations. Third, the decrease in registrations would reduce the number of free works submitted to the Copyright Office for consideration by the Library of Congress for its collections.

While we take no position on S. 1961—which was not passed during the last session of Congress—we disagree with the fee increases and application decreases projected by the Register in her testimony. Our disagreement is based on the Copyright Office’s own study. We also believe that, even if decreases in applications had occurred, they would not have created a harmful shortage of works available for the Library’s collections. Recently, the Register said that she believes the copyright process could be made self-sustaining within the Library by increasing fees to about twice their current level.

Costs Would Not Increase as Projected

In September 1996, the Senate Committee on the Judiciary held a hearing on S. 1961, the Omnibus Patent Act of 1996. This legislative proposal would establish an Intellectual Property Organization (IPO) that comprised essentially the existing PTO and the Copyright Office. This proposal also called for the Copyright Office to become self-sustaining through copyright fees. During the hearing, the current Register of Copyrights testified that the basic copyright registration fee would have to be raised “five-fold” to the $100 range in order for the Copyright Office to be self-sustaining outside the Library of Congress. The Register said that such an increase would place a substantial burden on copyright owners, especially those companies that own hundreds or thousands of works.

We reviewed the analysis the Copyright Office used to support the cost estimates cited in the Senate hearing. We found that, as shown in appendix X, the Copyright Office’s analysis considered 12 scenarios involving the Copyright Office’s organizational status, costs, and projected applications. The fivefold increase in fees presented at the hearing was the worst-case, least-likely scenario studied. According to the Copyright Office’s analysis, the other scenarios would have required raising the basic registration fee from the current $20 to a new fee of $41 to $89 for the first year. Fees would have increased the second year because the Copyright Office estimated that registrations would continue to decrease.

We question many of the costs projected in the worst-case scenario presented by the Copyright Office for several reasons: • The costs in general were based on the Copyright Office’s becoming an independent and self-sustaining agency, while S. 1961—the bill under discussion at the hearings—proposed including it within the IPO, which would also include patent and trademark offices. • Facilities were estimated to cost $5 million. This was based on the Copyright Office’s obtaining new space at a cost of $32 per square foot. It did not consider leaving the Copyright Office in its current space, where the facilities are government-owned and there is no rental cost to the Copyright Office. • The analysis projected a significant decrease in applications, as discussed below, but did not consider that costs might be lower if applications were fewer. • The analysis assumed that the Copyright Office would have to acquire new computer equipment and services rather than continue to use those now shared with the Library of Congress or share such equipment and services with the other offices within the new IPO.

In discussions with Copyright Office officials concerning the analysis, they said that the figures were “loose, educated guesses” and that the scenario used was never intended to be characterized as the most-likely scenario but rather as one example. They acknowledged that expenses would be somewhat lower than shown in their analysis if the Copyright Office were combined with the existing PTO because some costs could be shared. They also acknowledged that fee increases appear to have a greater impact on some types of works than others. They advised against our attempting to use the estimates they developed in projecting the level of fees that would be necessary to make the Copyright Office self-sufficient.

Applications May Not Decrease as Projected

The Copyright Office maintains that fee increases adversely affect applications for copyright registration. However, both the Copyright Office’s and our own analyses indicate that any such decrease in registrations is not likely to be large.

The aforementioned March 1994 report prepared by the Copyright Office task force studying the need for adjusting fees for inflation also said that fee increases are a disincentive to registration. As evidence, the report stated that, when the registration fees were doubled in January 1991, applications decreased 3.3 percent from the 1990 level after they had risen an average of 4.1 percent per year for the 8 years prior to the fee increase.

The Register of Copyrights also raised concerns about the effect of a fee increase on applications during her September 18, 1996, testimony on S. 1961. She said that reorganizing the Copyright Office into a self-sustaining entity outside of the Library of Congress could mark the end of a vital and meaningful registration and deposit system. She reasoned that historical experience has shown that registrations decrease whenever fees are increased. Because the fee increase would likely be the largest such increase on record, the Copyright Office anticipated that many individual copyright owners would choose not to register their works and that businesses would register fewer works. This would result in a diminished and less valuable public database on works of authorship, making it more difficult for users to determine who owns what rights at a particular time. In addition, there would be a decrease in Library-deposit copies of works received through copyright registrations.

In examining the support for the Register of Copyright’s concerns over decreasing registrations, we again looked at the Copyright Office’s preliminary analysis supporting the projected fivefold increase in fees. We found that this scenario was based on estimates that registrations would decrease 30 percent in the first year after the fee increase and an additional 15 percent in the second year.

As with the estimates on cost increases, these estimates of registration decreases are questionable for various reasons. For example, decreases of the magnitude projected have never occurred in the more than 100 years for which the Copyright Office has data. As shown in figure 4.2, it is common for copyright registrations to decrease in the years following a fee increase. However, the decrease has usually been small, and registrations have tended to rebound in subsequent years.

We also question the Copyright Office’s projections because, while they consider only the overall impact on registrations, Copyright Office officials agree that some types of registrations are more likely to be affected than others. Following the 1991 fee increase, for example, applications for registration decreased significantly for some types of works but remained stable for others. Applications for performing arts decreased about 14 percent from fiscal years 1990 to 1992, while applications for visual arts and motion pictures increased by about 1 percent during the same period. In addition, the number of copyright registrations for unpublished works decreased by about 10 percent over the period, while the number of registrations for published works declined by about 3 percent.

The Copyright Office’s projections also do not consider the effect on registrations of changes in internal reporting procedures and other legislative changes that accompanied past fee increases. We found that these other factors can affect the number of applications received and registered. For example, when the registration fee was increased from $6 to $10 in fiscal year 1978, Copyright Office records show about a 27-percent reduction in the number of copyright registrations from the previous year. However, Copyright Office officials told us that they reported only 11 months of registrations for fiscal year 1978 rather than a full 12 months.

Similarly, after the registration fee was increased to $20 on January 1, 1991, the number of applications for copyright registration decreased by about 3 percent in fiscal year 1991 and an additional 5 percent in fiscal year 1992. However, the fee increase was not the only change affecting applications. For example, the Copyright Office initiated group registration for serial issues during mid-1991. In doing so, all issues of a weekly, biweekly or monthly serial published within a 3-month period could be registered on one application at a fee of $10 per issue. According to Copyright Office officials, this reduced the number of serial registrations by an unknown amount. In addition, renewal of copyrights became automatic beginning in 1992. This accounted largely for the substantial and steady drop in renewal registrations beginning that year. While registration applications overall decreased by almost 10 percent from fiscal years 1990 to 1995, applications for these categories decreased by about 34 percent and 39 percent, respectively.

Because there may be other, external issues—such as the onset of a recession in 1991—that could have affected applications beyond changes in copyright fees, we developed a model that allowed us to examine the association between fee changes and the number of applications while controlling for the effects of other factors. As discussed in appendix XI, we found that the association between fee increases and application decreases is likely to be small—about a 0.1-percent decrease in applications for a 1-percent increase in fees. However, a regression model of this type is best at estimating such associations for relatively small changes in explanatory factors. We also found that there may be an even greater correlation between applications and the level of economic activity, as measured by the Gross Domestic Product.

Fee Increases Should Not Affect Library Collections

We also question whether there would be any harmful results to the government even if copyright applications did decrease in reaction to a fee increase. The economic benefits of copyright registration primarily are those that pass to the copyright holder. In fact, the United States is one of the few countries in the world that even has a government agency registering copyrights. The primary advantage of registration in this country is that it provides official evidence of the copyright and provides statutory damages against infringement. Thus, if a person decides not to register a copyright, that person assumes the risk of loss.

According to the testimony of the Register of Copyrights in the Senate hearing on S. 1961, one of the Copyright Office’s primary concerns regarding a decrease in copyright registrations is that such a decrease might limit the works available at no cost for the collections of the Library of Congress. However, because of other provisions in existing legislation, a decline in registrations should have no significant impact. Section 407 of the Copyright Act requires that all material under copyright protection and published in the United States on or after March 1, 1989, be deposited with the Copyright Office within 3 months of publication. These deposits are available to the Library of Congress for its collections or for exchange or transfer to another library. Thus, published documents must be submitted to the Copyright Office and made available for the Library’s collections even if copyright registration is not sought. If documents are not submitted as required by law, the Register of Copyrights can demand that the deposits be made and subject those not complying to fines and penalties.

Although section 407 does not apply to unpublished material, the Library of Congress seldom selects unpublished material for its collections, with the exception of genealogy studies. According to Copyright Office officials, the Library of Congress selected less than 100 of the approximately 254,000 unpublished documents that were registered in fiscal year 1995.

Copyright Office Officials Now Agree That the Copyright Process Could Be Self-Sustaining Within the Library

In March 1997, the Register of Copyrights told us that she supports the concept of making the copyright process self-sustaining within the Library. She said that the fivefold increase in fees cited in the Senate hearing in September 1996 was indeed a worst-case scenario. However, she had presented this scenario because she viewed the proposal being considered at that time as entailing the separation of the Copyright Office from the Library of Congress. She believed that such a move would create uncertainties, such as whether new space would have to be obtained, whether a new computer system would have to be purchased, and how other services the Library and the Copyright Office now provide for each other at no charge would be provided in the future. Thus, the Register believed that it was necessary to show the potential fee increases that might be required under the most costly circumstances.

The Register of Copyrights said that, in retrospect, she recognizes that the costs and fee increases associated with self-sufficiency would be lower than those presented at the September hearing, particularly if the Copyright Office is left in the Library of Congress, as is now being proposed. While the Copyright Office does not have a current estimate on what would be required to make it self-sustaining, the Register said that any fee increase would at a minimum have to replace the approximately $10 million the Copyright Office now receives in appropriations each year. She believed this would probably require fees that are about twice the current level.

In subsequent discussions on a draft of this report, the Register said that she had not intended to say that she believed the Copyright Office itself should be self-sustaining. Rather, she believed that it should charge fees for services that reflect the costs of those services to the Copyright Office. She said that certain costs—such as those of the Copyright Acquisitions Division—were not directly related to the copyright process; thus, they should not be paid for by registrants but are more appropriately covered through appropriations.

The Register also said in our March 1997 discussion that, if the copyright process is to be made self-sustaining though fees, these fees should be commensurate with the services provided. As we have previously noted, the costs of individual services vary widely, while most users of these services pay the same fee. In addition, the Copyright Office and the Library now provide services to each other that are not necessarily related to their primary missions and for which they are not reimbursed. For example, the Library provides numerous computer services to the Copyright Office at no charge, while the Copyright Office obtains works that were requested by the Library for its collections but not available through the copyright registration process, also at no charge. The Register believed that the fee study now being planned by the Copyright Office will address this issue.

Other Studies Support a Fee Increase

Other recent studies of the Copyright Office support the need for a fee increase. In a 1996 report on the results of a management review of the Library of Congress contracted by GAO, Booz-Allen & Hamilton recommended that the Library of Congress focus its efforts on increasing revenues. As one means for doing so, the report recommended that the Library pursue full recovery of copyright costs. The report stated that fully recovering copyright registration costs offers significant opportunities, both in terms of additional revenues and the relative ease of implementation. It further stated that the Copyright Office meets two key criteria for pursuing a fee-based service. First, there are opportunities for significant revenues. Second, the Copyright Office has been subject to full cost recovery in the past, so a precedent has been established. To accomplish full cost recovery, the report recommended that the Copyright Office establish a differentiated fee structure based on the cost of the services provided. According to the study, to achieve full cost recovery, proposed registration fees would range from a low of $10 for group serials to a high of $38 to $420 for mask works.

In October 1996, an internal management report of the Copyright Office prepared by a senior Library of Congress official at the request of the Librarian recommended that the Copyright Office recover relevant fees for services. However, the report also recommended that the Congress continue appropriating funds for activities, such as “service to the Congress,” that are not associated with registration services and that the Library of Congress continue to provide its support to the Copyright Office in exchange for the value of the copyright deposits made available to the Library’s collections. Unlike the Booz-Allen report, the Library of Congress recommended establishing either a single fee for all copyright registrations or a separate fee only for visual arts works based on the costs of these works. If the fee difference for visual arts is less than $5 per registration, however, the report recommended establishing only a single fee. While the Library of Congress’s report concluded that a $35 registration fee would bring fees and costs into balance the first year, it also concluded that a $40 registration fee is desirable to account for the effects of inflation in subsequent years.

Although the Library of Congress’s report recognized that a fee increase may harm the Library’s collections through reduced applications, it stated that any decline in registrations would likely occur primarily in unpublished works and in relatively low-value published works. It acknowledged that the demand provisions of section 407 of the Copyright Act would still apply to published works and that more works might come from that source than from applications for copyright registrations.

Recently, the Congressional Budget Office (CBO) noted that the fee structure of the Copyright Office could be revised to generate more revenue and reduce the need for appropriations. In its March 1997 publication entitled Reducing the Deficit: Spending and Revenue Options, CBO offered the option of requiring the Copyright Office to achieve full cost recovery as a deficit-reduction measure. According to the report, achieving full cost recovery would require that the copyright registration fee be increased to about $35 or $40 per application.

The CBO estimate of what would be required to make the Copyright Office self-sufficient is similar to that advanced by the Register of Copyrights—about double the current level. On the basis of our regression analysis, we believe that the decrease in applications from doubling the fees would be about 10 percent in the year following the fee increase. However, as noted earlier, models such as the one we developed tend not to be as highly predictive at such a high level of increase.

In discussions we had with intellectual property organizations, they either opposed or had no opinion regarding any fee increase for copyrights. None of them provided independent estimates regarding what effect any such increase would have on applications or the ability of copyright holders to benefit from their works.

Eliminating the Requirement to Retain Copies of Unpublished Works Could Reduce Costs

We identified one additional area that, while not essential to a decision to raise fees, nevertheless affects other costs to the government of the copyright process and the ability of fees to recover those costs. This is the requirement in the law to retain copies of unpublished works for the full term of the copyright.

Currently, the law requires that the Copyright Office retain unpublished works for the life of the copyright, which for most works is the author’s life plus 50 years. Copyright Office officials told us that they estimate this term to average 125 years. In contrast, the law requires that published materials that are not selected by the Library of Congress be retained for the longest period considered practicable and desirable by the Register of Copyrights and the Librarian of Congress. The Register and the Librarian have set the period at 5 years for all works except visual arts, which are kept for 10 years. If a copyright owner wants to extend the retention period for a published work to cover storage costs for the full length of the copyright term, the Copyright Office assesses a $270 fee.

As a result of the requirement in the law, millions of unpublished works could be stored for up to 125 years at taxpayer expense, while few published works will be stored longer than 5 years. Copyright Office officials told us that in some cases—as with audio tapes, for example—the copy is usually of no use after a few years because of the natural deterioration of the medium. They also said that they are rarely called upon to extract copies of unpublished works from storage, either by the Library of Congress or by the holder of the copyright.

As a result of the difference in the retention requirements, published works consume far less storage space than unpublished works, even though published works represent the majority of items that are registered by the Copyright Office each year. Approximately 3.3 million unpublished works were placed in storage at either the Landover Storage Facility or the Washington National Records Center between 1978 and the end of fiscal year 1996. In addition to this material, other unpublished works have been microfilmed and are currently stored at the Copyright Office itself. In contrast, as of December 1996, only an estimated 1.8 million published works were in storage at the two facilities, and most of these were still within the statutory 5-year retention period. From fiscal year 1990 through fiscal year 1995, the Copyright Office received only 85 requests for extended storage for published works.

The annual cost of the space utilized by the Copyright Office at its Landover Storage Facility is $230,000 and is paid for by the Library of Congress. The space utilized by the Copyright Office at the Washington National Records Center is owned by the General Services Administration and leased to the National Archives. Although neither the Copyright Office nor the Library of Congress pays for this storage space, it is a cost of the copyright process and a cost to the government. National Archives officials estimated the fiscal year 1996 costs to be $1.56 per cubic foot. Given the number of cubic feet being utilized by the Copyright Office, the fiscal year 1996 cost was approximately $97,000.

Conclusions

Unlike PTO, the Copyright Office is not self-sustaining through fees, and the government provides about $10 million in appropriations each year to cover the costs not recovered by copyright fees or reimbursements from royalties. While the law permits the Copyright Office to raise fees periodically to account for the effects of inflation, it chose not to do so in fiscal year 1995, the last year it had the authority to do so. Thus, most fees remain at the level they were in 1991. Copyright Office officials have supported the need for a fee increase that will match fees to the costs of services more closely and are planning a study to show what type of fee structure may be needed.

In September 1996, the Copyright Office objected to a proposal that it become self-sustaining within a new, government-owned, intellectual property corporation because of fears that the increased costs would lead to a burdensome increase in fees, a dramatic decrease in registrations, and a reduction in free materials available for the Library of Congress’s collections. These concerns are not supported by the Copyright Office’s own study used for the testimony. In March 1997, the Register of Copyrights agreed that the fivefold increase in fees she had projected was a worst-case scenario and was based on the uncertainties the Copyright Office would face if removed from the Library of Congress. She said that the copyright process could become self-sustaining—probably with fees about double those now in effect—under the current organizational structure.

Recently, other organizations—including the Library itself—have recommended fee increases. CBO has included an option for making the Copyright Office self-sustaining in its deficit-reduction package for fiscal year 1998, estimating that fees would need to be raised to a range of $35 to $40.

The requirement in the law that unpublished works be retained for the life of the copyright adds to the costs of the copyright process without providing any measurable benefits to either the copyright holders or the government. We believe that by eliminating this requirement, reducing the retention period, or requiring a fee for extended retention, the additional costs to the government could be reduced or recovered.

Matters for Consideration by the Congress

To promote greater consistency in the government’s approach to assessing intellectual property fees and to eliminate the need for appropriated funds in the copyright process, the Congress may wish to consider requiring that the Copyright Office achieve full cost recovery through fees. The Congress may also wish to consider setting copyright fees that are more closely aligned with the services for which they are assessed. In addition, to reduce the costs of the copyright process, the Congress may wish to consider making the storage requirements for unpublished copyrighted works the same as those for published works.

Recommendation to the Register of Copyrights

To reduce the deterioration of fees by inflation, we recommend that the Register of Copyrights raise fees to account for inflation as provided by law, when given the opportunity to do so.

Agency Comments and Our Evaluation

We provided copies of a draft of this report to the Library of Congress for its review and comment. At the Library’s request, we also met with Library officials to discuss the Library’s written comments further. The comments of the Library and our responses to those comments are included in appendix XIII.

The Library strongly disagreed with our discussion of copyright fees and said that the report was incorrect in stating that the Copyright Office had opposed fee increases, did not acknowledge the role of the Congress in setting copyright fees, and did not sufficiently discuss the impact of fee increases on the Library’s collections. In addition, the Library disagreed with a perceived criticism of the fee increase projections that the Register provided to the Senate Committee on the Judiciary in a September 1996 hearing.

Concerning the Library’s comments regarding the Copyright Office’s position on fee increases, we added information to the report showing that the Copyright Office has supported the need for fee increases in the past, believes a fee increase is needed currently, and supports proposed legislation that would allow the Register to raise fees to cover the costs of copyright registration and services. We continue to believe, however, that the Copyright Office should have adjusted fees for inflation in fiscal year 1995 because the increase would have been cost-effective, and Library officials agree that the Register should make inflation adjustments in the future.

We disagree with the Library’s comments that the role of the Congress in setting fees was not adequately discussed in the draft report. To the contrary, our report shows that the Congress has chosen to continue to recover copyright costs through a combination of fees and appropriations. We point out that the Congress has chosen to make the patent and trademark processes self-sustaining. In keeping with this approach, we state that the Congress may wish to consider whether the Copyright Office should achieve full cost recovery through fees.

We also believe that the report fairly discusses the potential impact of a fee increase on deposits available for the Library’s collections. Because the Library (1) has access to all copyrighted materials submitted for registration, (2) is entitled by law to any other materials under copyright protection published in the United States, and (3) rarely takes any unpublished materials, we continue to believe that the works available should not decline substantially even if copyright registration applications decline.

Finally, we believe that the report accurately portrays the Register’s testimony in the September 1996 hearings. However, we clarified the report to show that the Register’s concern was with the high costs of making the Copyright Office self-supporting within a new, government-owned, intellectual property corporation outside the Library. We continue to believe that the fees projected were too high and were not presented in a proper context. For these reasons, we believe it is necessary to show the Copyright Office’s analyses of these projections in the report.