TABLE OF CONTENTS

FOREWORD................................................................................................................................ iii

ACRONYMS............................................................................................................................... xiii

EXECUTIVE SUMMARY........................................................................................................ xvii

CHAPTER 1: BACKGROUND................................................................................................... 1

USPTO Mission, Strategic Plan, and Organization Structure......................................................... 1

Organization Structure........................................................................................................... 3

Budget, Human Resources and Culture........................................................................................ 4

Strong Organizational Culture................................................................................................ 8

Input From Stakeholders............................................................................................................. 9

Patent System and Work Process.............................................................................................. 11

Changes in Patent Workload Over Time.................................................................................... 12

Information Technology to Support Patent Operations................................................................ 13

Inspector General Examines Management Systems..................................................................... 14

Impact of the Changing External Environment............................................................................. 15

Impact of Federal Court Structure....................................................................................... 16

Changes in What Could be Patented.................................................................................... 17

Themes in External Studies of the Patent System........................................................................ 18

Federal Trade Commission Examines Competition and Innovation........................................ 20

National Academy of Sciences Recommends Reforms......................................................... 22

Continuing Visibility for NAS and FTC Reports................................................................... 22

Scholarly and Media Articles............................................................................................... 23

Legislative Issues....................................................................................................................... 24

Bills Proposed in 2005........................................................................................................ 25

Work With Other Nations and International Organizations.......................................................... 27

Scope and Methodology........................................................................................................... 29

Road Map to the Report........................................................................................................... 31

Pendency and Resources..................................................................................................... 31

Quality................................................................................................................................ 31

Workforce.......................................................................................................................... 31

Human Capital System........................................................................................................ 31

Management Issues............................................................................................................. 32

Structure of the Organization................................................................................................ 32

Other Patent Offices............................................................................................................ 32

Summary Conclusions......................................................................................................... 32

CHAPTER 2: PATENT PENDENCY AND THE POTENTIAL TO REDUCE IT................. 33

Steps in the Patent Prosecution Process..................................................................................... 33

Pendency and Workload........................................................................................................... 35

Variations in Pendency and Workload among TCs............................................................... 36

Increased Complexity in Patent Applications........................................................................ 39

Fee Availability and Its Impact on Staffing Levels and Pendency................................................. 40

Simulating the Impact of Fee Availability on Achieving Pendency Targets.............................. 41

Consistent Hiring is the Key to Reducing Pendency and Maintaining

Desirable Pendency....................................................................................................... 45

Fee Availability in the Context of Federal Budgeting............................................................. 47

Conclusions and Recommendations: Impact of Fee Availability on Staffing

Levels and Production................................................................................................... 48

Pendency and Non-Resource Issues.......................................................................................... 49

Reclassification.................................................................................................................... 49

Continuations...................................................................................................................... 50

Conclusions and Recommendations: Pendency and Non-resource Issues............................. 52

Outsourcing the Search.............................................................................................................. 53

Search and Examination in JPO and EPO............................................................................ 54

USPTO’s Outsourcing Pilot................................................................................................. 56

Views of USPTO, Stakeholders, JPO................................................................................. 57

Conclusions and Recommendations: Outsourcing the Search............................................... 58

CHAPTER 3: INITIATIVES TO IMPROVE PATENT QUALITY........................................ 61

Statutory Criteria for Issuing Patents.......................................................................................... 61

Concerns About Patent Quality.................................................................................................. 62

USPTO’S Quality Data............................................................................................................. 63

21ST Century Strategic Plan Patent Quality Initiatives................................................................ 65

Conclusions and Recommendations on Strategic Plan Quality Initiatives................................ 69

Reviews of primary examiners work/recertifying primary examiners....................................... 70

Second-pair-of-eyes review................................................................................................ 70

Evaluate search quality as part of the reviews....................................................................... 70

Survey practitioners on specific applications......................................................................... 70

Enhance the reviewable record............................................................................................ 71

Certification of searching authorities/outsourcing................................................................... 71

USPTO Proposes A New Post-Grant Review Process.............................................................. 71

Conclusions and Recommendations: Post-Grant Review...................................................... 75

CHAPTER 4: FINDING AND RETAINING THE BEST WORKFORCE............................. 79

Staffing Growth Eroded by Attrition........................................................................................... 79

Reasons for Entry-Level Attrition......................................................................................... 82

USPTO Actions to Improve Hiring and Reduce Attrition...................................................... 82

What Other Organizations Do to Recruit and Retain Top Quality People.............................. 86

Comparisons to EPO and JPO............................................................................................ 87

Conclusions: Staff Growth Eroded by Attrition.................................................................... 88

Recommendations: Staff Growth Eroded by Attrition........................................................... 89

Developing and Managing the Workforce.................................................................................. 90

Staff Development............................................................................................................... 90

Executive Talent.................................................................................................................. 93

Challenges in the Supervisory Ranks.................................................................................... 94

Conclusions: Developing and Managing the Workforce....................................................... 96

Recommendations: Developing and Managing the Workforce.............................................. 97

USPTO Awards System........................................................................................................... 98

Basic Incentive Structure for Patent Examiners..................................................................... 99

Awards............................................................................................................................... 99

Need for Change—Consultants, Task Forces, and IG Reports........................................... 100

Outside Critics.................................................................................................................. 101

Employee Perspective....................................................................................................... 102

Management Perspective................................................................................................... 103

Rewarding Quality............................................................................................................. 104

Rewarding Production and Pendency Reduction................................................................. 104

Group Awards.................................................................................................................. 105

Conclusions: USPTO Awards System............................................................................... 106

Recommendations: USPTO Awards System..................................................................... 107

USPTO Employee Relations.................................................................................................... 107

Employee Performance...................................................................................................... 108

Employee Conduct............................................................................................................ 111

Conclusions: USPTO Employee Relations.......................................................................... 111

Recommendations: USPTO Employee Relations................................................................ 112

CHAPTER 5: The HUMAN CAPITAL PROGRAM............................................................. 115

Flexibilities.............................................................................................................................. 115

Key Practices in Using Flexibilities..................................................................................... 115

Most Effective Flexibilities................................................................................................. 116

Human Capital Assessments and Plans............................................................................... 117

Status of Recommendations in the Strategic Workforce Restructuring Plan.......................... 118

OPM Flexibilities............................................................................................................... 119

Areas Where USPTO Has Used These or Other Flexibilities.............................................. 121

USPTO Labor-Management Relationship................................................................................ 122

Collective Bargaining......................................................................................................... 123

POPA Leadership, Structure, and Focus........................................................................... 124

Conclusions: Managing Today's Human Capital Program................................................... 125

Recommendations: Managing Today’s Human Capital Program......................................... 126

A Human Capital System for Tomorrow.................................................................................. 128

Background on the Federal Civil Service System................................................................ 128

More Flexible Systems within Title 5.................................................................................. 130

Labor-Management Relations Provisions in DOD and DHS Personnel Systems.................. 133

Conclusions and Recommendations: A Human Capital System for Tomorrow.................... 135

CHAPTER 6: VARIED LEVELS OF MANAGEMENT SUCCESS..................................... 139

Goals and Results.................................................................................................................... 140

Conclusions and Recommendations: Goals and Results....................................................... 141

Organizational Culture............................................................................................................. 141

Conclusions and Recommendations: Organizational Culture................................................ 144

Technology Systems and Mission Needs.................................................................................. 146

Organizational Agility............................................................................................................... 148

New Workspace Designed to Meet Multiple Needs................................................................ 149

Need for Strategic Internal Assessment Capability.................................................................... 150

Conclusions and Recommendations: Strategic Internal Assessment Capability.................... 151

Coordinating Management Activities........................................................................................ 152

Potential to Integrate Management..................................................................................... 153

Conclusions and Recommendations: Coordinating Management Activities........................... 154

Stakeholder Communication.................................................................................................... 155

CHAPTER 7: THE GOVERNANCE STRUCTURE.............................................................. 157

USPTO’S Current Organizational Structure............................................................................. 157

The Other PBO................................................................................................................. 159

Corporate Structure in the Federal Government....................................................................... 160

Prior Efforts to Establish USPTO as a Corporation.................................................................. 161

Key Legislative Issues in Establishing USPTO as a Government Corporation............................ 162

Governance and Management............................................................................................ 163

Conclusions and Recommendations: Governance Structure...................................................... 164

Recommendations: Governance Structure............................................................................... 166

CHAPTER 8: WORKING IN AN INTERNATIONAL ENVIRONMENT......................... 169

Trilateral Cooperation as the Working Mechanism................................................................... 169

What the Offices Can Resolve Among Themselves................................................................... 170

Trilateral Web Site............................................................................................................ 170

Trilateral Patent Network.................................................................................................. 170

Shared Search Information................................................................................................ 171

Potential to Accelerate Work Sharing...................................................................................... 174

Classification Harmonization.............................................................................................. 176

Examiner Exchange........................................................................................................... 178

Conclusions: Potential to Accelerate Work Sharing........................................................... 179

Recommendations: Potential to Accelerate Work sharing................................................... 180

Harmonization Issues Requiring Legislative Intervention............................................................ 180

Conclusions: Harmonization Issues Requiring Legislative Intervention.................................. 181

Recommendations: Harmonization..................................................................................... 182

CHAPTER 9: CONCLUDING PANEL OBSERVATIONS.................................................. 183

TABLES AND FIGURES

Table 1-1. Annual New Obligations, FYs 2000-2006 ...................................................................... 5

Figure 1-1. USPTO Organization Chart ........................................................................................... 5

Table 1-2. Patent Staffing Budget Authority and FTE, FYs 2003-2006 ........................................... 6

Table 1-3. USPTO Spending and Budget Requests: Patent Operations , FY 2004-06 ...................... 7

Table 1-4. The Patent Prosecution Process .................................................................................... 11

Figure 1-2. Calendar Year Trends in Patent Applications, Allowances, and First

Actions on the Merits ............................................................................................................... 12

Table 1-5. Principal Recommendations of Panels and Institutions Studying

the Patent System ..................................................................................................................... 21

Figure 1-3. Applications in USPTO, JPO, and EPO, 1995-2004 and Requests for

Examination in JPO, 1995-2004 ............................................................................................... 28

Table 2-1. Status of Utility, Plant, and Reissue (UPR) Applications by Technology Center .............. 37

Table 2-2. FY 2005 Pendency as of April 1, 2005......................................................................... 38

Figure 2-1. Historical and Simulated Impacts of Additional Staffing Resources

on First Action Pendency .......................................................................................................... 43

Figure 2-2. Historical and Simulated Impacts of Additional Staffing Resources

on Examiner Work Years .......................................................................................... 44

Table 2-3. Model’s Estimates of Hires Needed to Achieve First Action Pendency,

Actual Hiring, and Attrition ........................................................................................ 46

Table 2-4. Examiner Productivity by Grade and TC, Examiner Hours per Production Unit............ 46

Table 3-1. USPTO’s Quality Data .............................................................................................. 64

Table 3-2. Patent-related Quality Initiatives in The 21st Century Strategic Plan ............................ 66

Table 3-3. Knowledge, Skills, and Abilities-Related Initiatives in

The 21st Century Strategic Plan ................................................................................. 69

Table 3-4. Comparison of Different Proposals for a Post-Grant Review Process ......................... 73

Figure 4-1. Years of Service for Utility/Design Examiners, Onboard as of 4/30/05 ........................ 80

Figure 4-2. USPTO Patent Attrition Rates,: FY 2000-04 ............................................................. 81

Table 4-1. Recruitment Bonuses for Patent Examiners, FY 1998-2003 ....................................... 84

Figure 4-3. Growth in USPTO Workforce and Employee Relations Actions,

FYs 2000-2005 ...................................................................................................... 109

Figure 7-1. U. S. Patent and Trademark Corporation ................................................................. 168

Table 8-1. EPO and JPO Exchanges ........................................................................................ 178

APPENDICES

APPENDIX A: Panel and Staff.................................................................................................... 187

APPENDIX B: Individuals Interviewed or Contacted.................................................................... 189

APPENDIX C: Selected Bibliography.......................................................................................... 195

APPENDIX D: Simulating Additional Resources........................................................................... 207

APPENDIX E: USPTO User Fees Relative to Other Federal Regulatory User Fees...................... 215

APPENDIX F: Data on Examiner Attrition................................................................................... 225

APPENDIX G: Federal Agency Tailored Recruitment Programs................................................... 231

APPENDIX H: Japan Patent Office and European Patent Office Work Processes and Background Information 233

APPENDIX I: Information on Utilization of Satellite Facilities........................................................ 253

APPENDIX J: EPA's Human Capital Innovation Fund Program.................................................... 255

APPENDIX K: Legal Structure of a Proposed U.S. Patent and Trademark Corporation............... 257

APPENDIX L: Patent Cooperation Treaty................................................................................... 259

APPENDIX M: Harmonization Issues Requiring Legislative Intervention........................................ 261

APPENDIX N: List of Recommendatoins..................................................................................... 267

LIST OF ACRONYMS

ABA American Bar Association

ACEPO Administrative Council of the European Patent Organization

AFGE American Federation of Government Employees

AIPA American Inventors Protection Act

AIPLA American Intellectual Property Law Association

AIPN Advanced Intellectual Property Network

AIPPI International Association for the Protection of Intellectual Property

BEA Budget Enforcement Act

BEST Bringing Examination and Search Together

BPAI Board of Patent Appeals and Interferences

CAFC Court of Appeals for the Federal Circuit

CAO Chief Administrative Officer

CEO Chief Executive Officer

CBI Critical Behavior Interview

CBO Congressional Budget Office

CCC Commodity Credit Corporation

CFO Chief Financial Officer

CHCO Chief Human Capital Officer

CIO Chief Information Officer

CIPA Chartered Institute of Patent Agents

CLE Continuing Legal Education

COBRA Consolidated Omnibus Budget Reconciliation Act

COO Chief Operating Officer

CSRS Civil Service Retirement System

CY Calendar Year

DAC Deputy Associate Commissioner

DG Directorate General

DHS U.S. Department of Homeland Security

DOD U.S. Department of Defense

DOE U.S. Department of Energy

DOJ U.S. Department of Justice

DOL U.S. Department of Labor

DOT U.S. Department of Transportation

EAST Examiner Assisted Search Tool

EESR Extended European Search Report

EIP Environmental Intern Program

EPA Environmental Protection Agency

EPC European Patent Convention

EPI European Patent Institute

EPO European Patent Office

ESOP Employee Stock Ownership Plans

FACA Federal Advisory Communications Act

FAOM First Action on the Merits

FCC Federal Communications Commission

FCRA Federal Credit Reform Act

FDIC Federal Deposit Insurance Corporation

FERC Federal Energy Regulatory Commission

FERS Federal Employees Retirement System

FFB Federal Financing Bank

FFRDC Federally Funded Research and Development Center

FLRA Federal Labor Relations Authority

FPI Federal Prison Industries

FTC Federal Trade Commission

FTE Full-Time Equivalent

FY Fiscal Year

GAO Government Accountability Office

GOCO Government-Owned Contractor Operated

GCCA Government Corporation Control Act

GNMA Government National Mortgage Association

GS General Schedule

GSA General Services Administration

GSE Government-Sponsored Enterprises

HHS U.S. Department of Health and Human Services

HRM Human Resources Management

IFW Image File Wrapper

IFP Increased Flexitime Program

IPI International Patent Institute

IG Inspector General

IPC International Patent Classification

IPCC Industrial Property Cooperation Center

IPO Intellectual Property Owners

ISR International Search Report

IT Information Technology

IP Intellectual Property

IPO Intellectual Property Owners

JIPA Japanese Intellectual Property Association

JPAA Japanese Patent Attorneys’ Association

JPO Japan Patent Office

KSA Knowledge, Skills, Abilities

LES Licensing Executives Society

LDRC Legal Document Review Clerk

LIE Legal Instrument Examiner

MBA Master of Business Administration

MOU Memoranda of Understanding

MPEP Manual of Patent Examination Policy

NAPP National Association of Patent Practitioners

NAS National Academy of Sciences

NASA National Aeronautics and Space Administration

NATO North Atlantic Treaty Organization

NOA Notice of Allowance

NRC Nuclear Regulatory Commission

NSF National Science Foundation

NTEU National Treasury Employees Union

OBRA Omnibus Budget Reconciliation Act

OCC Office of the Comptroller of the Currency

OCP Office of Corporate Planning

OFHEO Office of Federal Housing Enterprise Oversight

OGC Office of General Counsel

OHR Office of Human Resources

OIG Office of Inspector General

OIPE Office of Initial Patent Examination

OMB Office of Management and Budget

OPFM Office of Patent Financial Management

OPM Office of Personnel Management

OPQA Office of Patent Quality and Assurance

PAIR Patent Application Information Retrieval

PAP Performance Appraisal Plan

PBGC Pension Benefit Guaranty Corporation

PBO Performance-based Organization

PCT Patent Cooperation Treaty

PE Patent Examiner

PGO Post Grant Opposition

PLT Patent Law Treaty

POPA Patent Office Professional Association

P-PAC Patent Public Advisory Committee

PPM Patent Production Model

PTDL Patent and Trademark Depository Libraries

PTO Patent and Trademark Office

PTOEA Patent and Trademark Office Efficiency Act

RCE Request for Continuing Examination

RFP Request for Proposal

SCP Standing Committee on the Law of Patents

SFA Student Financial Assistance

SEC Securities and Exchange Commission

SES Senior Executive Service

SL Senior Level

SME Small and Medium Sized Enterprises

SPE Supervisory Patent Examiner

SSA Social Security Administration

TC Technology Center

TLO Technology Licensed Organization

T-PAC Trademark Public Advisory Committee

TWS Trilateral Web Site

ULP Unfair Labor Practice

UPR Utility, Plant, Reissue (Patents)

USC U.S. Code

USPC U.S. Patent Classification

USPS U.S. Postal Service

USPTC U.S. Patent and Trademark Corporation

USPTO U.S. Patent and Trademark Office

USRA U.S. Railway Association

VPN Virtual Private Network

WEST Web-based Examiner Search Tool

WIPO World Intellectual Property Organization

EXECUTIVE SUMMARY

The U.S. Patent and Trademark Office (USPTO) is a complex "knowledge worker" agency and the fulcrum of the U.S. intellectual property system. Its mission—grounded in the U.S. Constitution—is to ensure that the intellectual property system contributes to a strong domestic and global economy, encourages investment in innovation, and fosters an entrepreneurial spirit.

Under the close scrutiny of its stakeholders, academia, its counterparts around the world, Congress, and the courts, USPTO must accommodate a burgeoning interest in securing property rights and changing legal interpretations of patent law. It must also deal with substantial external volatility—particularly the U.S. economy and funding levels. With all of these variables and pressure points, USPTO attempts to balance the tradeoffs between enhancing quality and maximizing production and does so within the context of the federal workplace and its myriad requirements.

With a $1.7 billion proposed fiscal year (FY) 2006 budget, derived from fees for services provided, USPTO needs the flexibility to operate with the incentives and acumen of a private business—with full accountability to Congress and its users. In 1999, to provide USPTO with added management flexibilities to achieve its mission, Congress designated it as one of only two federal “performance-based organizations.” This designation provided additional flexibilities in budgeting, human resources, procurement, and other administrative areas, but not those needed for making long-term business decisions. In 2003, USPTO issued a modified 21^st Century Strategic Plan, which described its vision to create a quality-focused, productive, responsive organization supporting a market-driven intellectual property system. It seeks to transform itself over the next five years guided by three strategic themes—(1) agility, (2) capability, and (3) productivity, with quality embedded in each theme.

To help ensure that USPTO is making progress in implementing its strategic plan and is on the right path to transformation, the Chairman of the House Appropriations Subcommittee on Science, State, Commerce, and Justice asked the National Academy of Public Administration (Academy) to examine USPTO’s organization structure and its work processes. The Academy Panel has reviewed and assessed organizational and human capital structures, the timeliness and quality challenges USPTO faces in processing patent applications, and whether it has the appropriate skills needed within its staff.

CORPORATE STRUCTURE AND CULTURE

As a performance-based organization, USPTO has more flexibility than a traditional federal agency, but it still does not have the flexibility to make long-term business decisions, the borrowing authority to help meet multi-year capital needs, or access to all of its user fee revenues. While organizational form does not guarantee efficient operations, one that does not permit a business-type agency to apply its resources to meet changes in market demand (for USPTO, the changing volume of patent applications) can create inefficiencies and disincentives.

The Panel believes that USPTO’s structure has created such inefficiencies. The demand for patents is closely tied to the U.S. economy and its fluctuations. A corporate structure would enable USPTO to respond more quickly and effectively to workload, yet remain accountable to Congress, the President, and stakeholders.

Accordingly, the Panel recommends that Congress create the U.S. Patent and Trademark Corporation (USPTC) as a wholly owned government corporation under the policy direction of the Secretary of Commerce, with the appropriate authority to borrow, set fees (within parameters Congress would set), and issue its own regulations.

Past Academy reports have tended to recommend a Chief Executive Officer but not a governing board for government corporations. There are no stockholders for a board to represent. Also, some government corporations have not been well-served by large boards. Therefore, the Academy Panel believes an Advisory Board or Advisory Committee would better serve USPTO rather than a formal governing board of directors and believes such an advisory body could provide guidance in terms of stakeholder interests.

A key feature of USPTO’s culture is that its work is far more geared to measurable production than most federal agencies with a highly educated workforce, and the patent workforce is also highly unionized. The consequence is that nearly all aspects of work process and workforce management are negotiated. Given that management and its largest union have been at impasse for decades, proposed reforms may not be accepted with alacrity even if they make sense, because they require negotiation. This is not a healthy organizational culture.

The Panel recommends that USPTO develop strategies to make theirs a more positive, collaborative organizational culture.

These efforts should start with an assessment of the current culture, probably by an external group, and should involve employees and managers. Top management should continually reinforce that USPTO is a good employer; its employees receive excellent benefits and enjoy a very flexible work schedules, and work in state-of-the-art facilities.

It is essential that an organization’s culture support its mission, and a culture cannot be changed overnight. Cultural change has costs, such as time away from production for focus groups or training, consultant fees, purchasing materials and allowing staff time to read them, or producing a video on how the organization plans to institute change. The Panel believes the long-term benefits will far outweigh the costs.

HUMAN CAPITAL MANAGEMENT SYSTEM

With only 45 percent of the workforce having five years or more of service, USPTO lacks adequate numbers of seasoned examiners to meet its mission challenges. The current human capital system will become an increasing liability to USPTO as even larger portions of the federal workforce (the Departments of Homeland Security and Defense) implement their new personnel systems and demonstrate the benefits of human capital agility in the federal framework. Those agencies with more constraints will likely be less competitive in the recruitment marketplace.

The Panel believes that the General Schedule pay system impedes USPTO’s ability to attract and retain employees. With a personnel system tailored to its needs, USPTO could adopt a pay scale or performance-based pay system that could improve recruitment and reduce attrition, thus keeping more experienced employees rather than training them for several years before they leave to oin law firms or other entities as patent attorneys or agents. A performance-based pay system could also expedite the collective bargaining process.

The new DHS personnel system, with a labor-market based pay structure and performance-based pay increases, is in place. While unions have raised issues about the framework for the labor-management relationship, the independent Homeland Security Labor Relations Board provides a valuable vehicle for the quick resolution of all bargaining matters and disputes and ensures continued focus on agency mission. Aspects of this system could be a model for a tailored USPTO personnel system. The Panel believes that if, and only if, USPTO receives congressional authority to develop a more flexible personnel system, it should not be reluctant to pay rates that are substantially above General Schedule levels. It would be far more efficient, for the agency and patent applicants, to retain patent examiners rather than to lose half the number hired within a short period of time, as is the case in most fiscal years.

The Panel therefore recommends that USPTO work with Congress and OPM to develop an impasse resolution system that permits prompt renegotiation of work processes and pay rates.

TIMELINESS AND WORK PROCESSES

High performing organizations constantly struggle with using their limited resources efficiently while at the same time ensuring the delivery of high quality work. USPTO’s strategic plan acknowledges the importance of issuing high-quality patents in a timely manner. It is a substantial challenge particularly due to funding volatility and the backlog of patent applications.

Pendency is the key measure that USPTO uses to assess the timeliness of processing patent applications. First-action pendency is defined as the time (measured in months) from when an applicant files an application and USPTO makes a preliminary decision about whether to issue a patent. Although first-action pendency averages 20.2 months (up from 7.6 months in FY 1993 and 13.6 months in FY 2000), examiners spend only about 20 hours on average reviewing a patent application. First-action pendency includes time an examiner is not reviewing an application—primarily time in the queue. Pendency varies by the subject area of the application. For example, in FY 2004, it was 31.4 months for the communications area, and 15.2 months for the mechanical engineering, manufacturing, and products area.

In part, conditions beyond USPTO’s control—the volatility of the U.S. economy, the concomitant but sometime unexpected increase in applications, and the consequences of not having access to all patent application fees—have created today’s massive backlog of patent applications (more than 830,000, up from 244,646 in 1993). Between FYs 1992-2004, USPTO did not have access to $741 million of the fees it collected, the preponderance of which ($573 million) came from patent fees. This $741 million represents between 6 and 7 percent of the total funding available to USPTO during this period. The inherent nature of the appropriations process prevents some fees from reaching USPTO in unanticipated high-volume years because USPTO’s budget is set months prior to the start of the fiscal year.

Simulations using USPTO’s patent resource model, which the Academy Panel independently evaluated before using, show that if USPTO had been given access to these fees and applied all or most of them to patent staffing, it would have had the ability to consistently hire staff and FAOM pendency could have remained at an average of 11.4 to 12.6 months. USPTO’s FY 2005 appropriation permits access to most of the patent fees collected, as does the President’s FY 2006 budget request.

The Panel believes this recent action to allow fuller access to patent fees is a step in the right direction. To provide more funding certainty, the Panel recommends that Congress take steps to ensure that all fees USPTO collects during future fiscal years are available for its use without fiscal year limitation.

To help USPTO achieve efficiencies in patent processing and possibly reduce pendency, USPTO initiated, at the direction of Congress, a pilot program to test outsourcing the “search” function of the patent prosecution process. The search function involves reviewing patent or non-patent literature for historical references to inventions that are similar to those in a patent application. USPTO estimates that about 20 percent of the total patent prosecution time would be saved if another entity conducted the search. The Panel recognizes that pendency cannot be quickly reduced by hiring new patent examiners. However, it has reservations about outsourcing, in part because the European Patent Office (EPO) previously had the search and examination functions done by different staff members and now has combined these functional responsibilities to achieve greater efficiency. The Japan Patent Office (JPO) began, in the mid-1980s, to outsource some searches because statutes did not permit them to hire more staff. JPO examiners work directly with searchers, most of whom are in a quasi-governmental entity, and the only searches outsourced are those that can be done in patent literature.

Questions remain about whether private search firms will be attracted to this type of work given the conflict-of-interest requirements or whether they can perform work at the same level of quality as USPTO staff. A thorough evaluation of the pilot program will be critical because the results will have an impact on USPTO’s future business vision, which calls for leveraging search results from others—foreign patent offices, the patent applicant, and private contractors. Congress has required such an evaluation.

The Panel recommends, as part of the evaluation of the pilot, that USPTO examine the potential to outsource the search function to a federally funded research and development center that would work exclusively for USPTO.

Such centers—which have more flexible hiring authorities—can secure the skills the agency needs, do not have a proprietary interest in the work, and have little incentive to breach the principles of confidentiality.

Eliminating unnecessary rework offers another opportunity to increase efficiency in patent processing. In 2004, 25 percent of examiners' work could be described as rework. Patent law allows a form of rework known as "continuations," which allow an applicant to request another review of the same invention that was included in a prior application—even if USPTO rejected the patent. Continuations provide an applicant a substantial benefit, because this second review skips the queue and receives the same priority for processing as the original application. This means other applicants wait longer for USPTO to review their applications. There are valid uses for continuations, but there are also indications that some applicants use them to “game the system.” There are varied proposals to limit the use of continuations, either through congressional action or USPTO rule-making.

The Panel recommends that:

USPTO use every means possible to work with stakeholders to provide Congress with the necessary information to assist it in identifying the appropriate number of continuations that should be allowed.

Congress amend patent law by establishing a specific maximum number of continuations that will be allowed for any patent application.

Finally, worksharing (relying on aspects of the examination process that foreign patent offices have completed) also has potential to increase efficiencies in processing patent applications and reducing workload. Currently, USPTO, EPO, and JPO (the Trilateral Offices) annually receive almost 200,000 applications in common (more than half USPTO's annual volume of new filings). To achieve the goal of worksharing, the Trilateral Offices need to better understand each other’s work methods, and each country needs to amend certain provisions of its patent law to accommodate worksharing. The need for greater collaboration is under discussion and, to some extent, is the driving force behind current patent law reform efforts. A 2004 National Academy of Sciences (NAS) report concluded that the United States, Europe, and Japan should further harmonize patent examination procedures and standards to reduce redundancy in the search and examination functions and eventually achieve mutual recognition of results.

The Panel strongly supports harmonization and recommends that USPTO work closely with Congress to provide it with the necessary information to amend patent laws to achieve harmonization.

QUALITY

Patent quality is important because USPTO's decision on a patent application has economic spillover effects to other businesses and, more broadly, to competition and innovation. Thus, it is important for USPTO to conduct quality reviews during application processing and "get it right the first time" to prevent issuance of inappropriate patents, with their attendant litigation costs and adverse technological impacts. For the last 25 years, USPTO has assessed quality by determining whether the claims in a patent clearly meet the statutory criteria. To make this assessment, USPTO reviews between two to three percent of approved applications. The error rate from FYs 2000-2004 varied from a high 6.6 to a low of 4.2 percent. Although the error rate has remained fairly stable, several studies, congressional hearings, and scholarly articles report perceptions that patent quality has declined, particularly in areas of technology in which patents have only recently been granted, such as computer software and business methods. However, these concerns have not been quantified.

To respond to concerns that patent quality has declined, USPTO implemented several initiatives to ensure appropriate patentability determinations and improve the knowledge, skills, and abilities of examiners. The Panel believes many of these are consistent with sound management practices and acknowledges that additional quality reviews affect timeliness of application processing.

The Panel recommends that USPTO monitor the results of these reviews to (1) ensure that their implementation does not result in denying or seriously delaying patents to deserving inventors, and (2) identify the appropriate number of reviews needed to sustain quality without adversely affecting pendency.

In addition to raising concerns about quality, others—the Federal Trade Commission, NAS, and scholarly articles—recommended various regulatory or legislative reforms to improve quality. USPTO’s strategic plan includes one such reform—developing a new post-grant review process—which would reduce the volume of litigation by providing a new administrative opportunity to rule on patent validity. Though many stakeholders agree on the need for a new process, they differ on certain design elements. The Panel reviewed four major proposals for establishing a post-grant review process, including proposed legislation.

The Panel agrees with the provisions of the four proposals for post-grant review that provide for (1) administrative patent judges conducting the process and (2) an appeals option to the Court of Appeals of the Federal Circuit.

The Panel recommends the following with regard to the other elements of a post-grant review process:

· The grounds for a challenge be limited to patentability and not enforceability.

· Discovery be limited to cross examination on matters relevant to the grounds for review.

· Estoppel from further litigation be limited to those issues raised and resolved in the proceeding.

· The patent owner be permitted a single narrowing of any claims, with the addition of dependent claims on good cause shown.

If a post-grant review system is adopted, the Panel recommends that USPTO compile data on the costs and benefits of post-grant review and inter partes reexamination, including the impact on patent quality. These data should help inform Congress about whether both systems should be maintained.

WORKFORCE AVAILABILITY AND SKILLS

USPTO places highly skilled knowledge workers—its patent examiners—in a production environment and measures their performance primarily in quantitative terms. Those who can work in this environment can receive substantial bonus pay, but the production system may be a contributing factor to high attrition rates.

In 10 out of 13 years, from FY 1992-2004, for every ten patent examiners hired, five left; many within the first three years. Because examiners become fully productive only after several years of USPTO work experience, it is essential to retain staff. USPTO does not systematically use exit interviews to determine why examiners leave, but senior USPTO staff attribute high attrition to:

Pay in relation to the Washington, DC cost of living

The lack of a real-world understanding about the job on the part of recent graduates

The difference between the often-isolating and repetitive desk work of USPTO patent examination duties and those of research or bench science, for which many USPTO employees have trained

The up-front career plans of many new employees, who use this USPTO experience as a stepping stone to law school, or, if already a lawyer, to a more lucrative private practice or employment opportunity in intellectual property

The Panel believes that USPTO is on the right track with:

Bringing in new human resources management leadership so that USPTO can apply additional and improved techniques in recruiting and retaining staff

Developing videos and better recruitment literature to more clearly explain the work to potential recruits and requiring personal interviews for all applicants to assess their overall competence and communication skills

Using information gleaned from quality reviews of patent examiner work to help individual examiners improve their work

However, USPTO needs to do more, and the Panel recommends that it:

Systematically determine why patent examiners are likely to leave within their first three years with the office and determine if it can make accommodations to retain them

Develop competitive recruitment programs (a “patent scholars program”) to raise USPTO visibility on campuses and attract more of the best graduates

Use more of the hiring flexibilities now permitted under its status as a performance-based organization and general federal personnel regulations

While USPTO cannot hire its way out of its pendency problems in the short term, unchecked attrition of recent hires is at historical levels and will likely exacerbate the pendency problem and reduce the quality and consistency of patent determinations. An organization that so significantly affects innovation in the U.S. and around the globe needs to have and use the flexibility to deal with these challenges to optimize its performance. The Panel offers several recommendations to help USPTO deal with the problems of staff erosion, improve morale, and enhance the retention of experienced and technology-savvy examiners upon whom the system relies.

CHAPTER 1

BACKGROUND

While innovation has been respected throughout much of history, it is especially valued in a free-enterprise system. An economy that rewards innovation welcomes new ideas and technologies, seeing them as ways to enhance productivity and competitiveness and increase the standard of living.

The nation’s founders believed so strongly in the power of innovation that they provided, in the Constitution itself, an incentive to inventors in the form of patent protection. “Congress shall have power . . . to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”[1]

This chapter provides information on the mission of the U.S. Patent and Trademark Office (USPTO), its strategic plan, and organization structure; the agency’s budget, human resources and organization culture; the patent system and work processes involved in assessing patent applications; and trends in workload over time and the information systems used in patent work.

The chapter next examines some of the common themes in studies of the patent system; aspects of the external environment, such as changes to the federal court structure and what can be patented, and some of the legislative changes; and USPTO’s work with other nations and international organizations.

Finally, the chapter describes why the National Academy of Public Administration (Academy) is doing this work, presents the role of the Academy Panel, and describes the scope and methodology of the work and the contents of the report.

USPTO MISSION, STRATEGIC PLAN, AND ORGANIZATION STRUCTURE

USPTO’s mission is to ensure that the intellectual property (IP) system contributes to a strong global economy, encourages investment in innovation, and fosters entrepreneurial spirit. Its vision is to create a quality-focused, highly productive, responsive organization supporting a market-driven IP system for the 21^st century.[2]

To more fully reflect its mission in work methods, in June 2002, USPTO issued The 21^st Century Strategic Plan and modified it in February 2003 to reflect user community input. Under the plan, the agency would transform itself over the next five years guided by three strategic themes: (1) agility, (2) capability, and (3) productivity. Quality is an overarching theme in all areas. To implement the three themes, USPTO plans to create a more flexible organization with streamlined work processes that will be more responsive to market expectations and the growing volume and complexity of work. To this end, among the actions it plans to take are:

Make a transition to market-driven examination options (intended to permit applicants to have a private sector organization do the search for prior art or permit USPTO to contract with private firms for the same purpose)

Increase flexibility through greater reliance on the private sector or other intellectual property offices

Share search results with other intellectual property offices

Implement an accelerated examination path option

Enhance workforce capabilities by certifying competencies

Make improvements in patent and trademark quality assurance techniques

Make process improvements that contribute to enhanced quality through legislative/rule changes

Expand work-at-home opportunities

Specific goals include:

Reducing patent pendency

Providing, on average, each initial U.S.-filed, non-provisional patent application with a first action on the merits (FAOM) at or before the 18 month publication deadline[3]

Implementing e-government in trademarks by November 2, 2003 (in tandem with implementing the Madrid Protocol[4]), and in patents by October 1, 2004

Expanding bilateral and multilateral agreements to achieve global convergence of patent standards and greater certainty and enforcement of intellectual property rights (which could also permit USPTO to share search results with other countries and reduce the level of USPTO effort needed for some applications)

For each item in the plan, USPTO has mapped what needs to take place to implement the action and has developed a system to track status. While some portions of the plan have been implemented, others were held in abeyance pending possible congressional action on fee modernization. (See later discussion in this chapter.)

Organization Structure

The Patent Office as a distinct bureau dates from 1802 when an official in the Department of State, who became known as “Superintendent of Patents,” was placed in charge of patents. The revision of patent laws, enacted in 1836, reorganized the Patent Office and designated the official in charge as Commissioner of Patents. The Patent Office remained in the Department of State until 1849, when it was transferred to the Department of Interior. In 1925 it was transferred to the Department of Commerce, where it is today. The name of the Patent Office was changed to the Patent and Trademark Office in 1975. In 1982, the position of the Commissioner of Patents and Trademarks was upgraded to that of Assistant Secretary of Commerce.

Prior to 1999 legislation, USPTO was the PTO and was a bureau within the department. The American Inventor’s Protection Act (AIPA)[5] established USPTO as "an agency of the United States within the Department of Commerce" and became effective in March 2000. This was part of USPTO’s conversion to the second federal performance-based organization (PBO).

As a PBO, USPTO has “independent control of its budget allocations and expenditures, personnel decisions and processes, procurements, and other administrative and management functions...”[6] This does not mean USPTO operates outside all traditional federal agency management requirements, but means that USPTO interacts directly with the Office of Management and Budget (OMB), the Office of Personnel Management (OPM), and congressional appropriators. For example, prior to becoming a PBO, USPTO would have submitted its proposed annual budget through the Department of Commerce, which would have interacted with OMB and congressional appropriators on behalf of USPTO. (Chapter 7 discusses USPTO as a PBO.)

Among the organizational changes that took place as a result of the 1999 legislation were:

The formal name of the organization changed from the Patent and Trademark Office to the U.S. Patent and Trademark Office

· The title of Assistant Secretary of Commerce and Commissioner for Patents and Trademarks changed to Under Secretary of Commerce for Intellectual Property and Director of the USPTO.

· The Assistant Commissioner for Patents became the Commissioner for Patents, and the Assistant Commissioner for Trademarks became the Commissioner of Trademarks.

· The patent and trademark operations were separated.

· Two nine-member advisory committees were put in place—one for patents and one for trademarks—to review policies, goals, performance, budget, and fees.

The organization chart (Figure 1-1) shows a relatively flat structure, but what it cannot show is the predominance of the patent function over all others; 76 percent of all staff are in patent work.

Major units under the Commissioner for Patents are deputy commissioners for patent operations, patent examination policy, and patent resources and planning. Most patent staff is in the eight Technology Centers (TCs), which have jurisdiction over specified fields of technology. They are:

· Technology Center 1600—biotechnology and organic fields

· Technology Center 1700—chemical and materials engineering fields

· Technology Center 2100—computer architecture software and information security

· Technology Center 2600—communications

· Technology Center 2800—semiconductors, electrical and optical systems and components

· Technology Center 2900—designs

· Technology Center 3600—transportation, electronic commerce, construction, agriculture, licensing and review

· Technology Center 3700—mechanical engineering, manufacturing and products

There are groups of staff (called art units[7]) under a Technology Center grouping.

BUDGET, HUMAN RESOURCES AND CULTURE

Under the Omnibus Budget Reconciliation Act (OBRA) of 1990, USPTO became a fee-funded agency, but Congress still required that USPTO receive annual appropriations. Table 1-1 shows new obligations for USPTO from Fiscal Year (FY) 2000-2006. It shows that USPTO’s overall budget has increased more between 2004 and 2006 than in the years preceding them.

Table 1-1

Annual New Obligations

FYs 2000-2006

Fiscal Year	New Obligations
2000	$ 895,000,000
2001	1,065,000,000
2002	1,144,000,000
2003	1,191,000,000
2004	1,233,000,000
2005	1,571,000,000
2006	1,703,000,000

Source: Budget of the United States. 2005 is the enacted level and 2006 is the

amount in the President’s budget request.

Figure 1-1

USPTO Organization Chart

** In May 2005, USPTO separated the position of Chief Financial Officer/Chief Administrative Officer into two positions. This is discussed in Chapter 6.

As of September 2004, USPTO employed 6,855 full-time staff, all in the Washington, DC area (largely in northern Virginia). The breakdown by major office is:

Office of the Under Secretary	10
Office of Public Affairs	8
Commissioner for Patents	5,235
Commissioner for Trademarks	542
General Counsel	239
Administrator for External Affairs	42
Chief Information Officer	499
Chief Financial Officer (CFO) and Chief Administrative Officer (CAO)	263
Patent Public Advisory Committee	8
Trademark Public Advisory Committee	9

The FY 2005 enacted budget calls for 7,198 full-time equivalent (FTE) positions for all of USPTO. In addition to federal employees, USPTO uses contractors for a number of functions. The 3,600 contract employees constitute 35 percent of USPTO’s total workforce.[8] Many (about 2,600) support patent work, such as office support services and data capture for electronic processing. About 700 work in the Office of the Chief Information Officer (CIO), providing such things as desktop computer support and systems development and maintenance.

Table 1-2 shows patent staffing budget authority and FTE for FYs 2003-2006. These numbers reflect the FY 2005 funds for USPTO to hire 709[9] new patent examiners.

Table 1-2

Patent Staffing Budget Authority and FTE

FYs 2003-2006

Fiscal Year	Budget Authority	FTE
2003	5,990	5,552
2004	6,060	5,899
2005	6,775	6,396
2006	7,273	6,996

Source: President’s FY 2005 and 2006 Budget Requests for USPTO. Patent positions on this table are for examiners, technical support staff, and administrative and management positions under the Commissioner of Patents.

Table 1-3 shows changes in the amounts allocated within patent operations, which have risen to reflect workload changes and receipt of all patent application fees for FY 2005.

Table 1-3

USPTO Spending and Budget Requests: Patent Operations

FY 2004-06

Patents	FY 2004 Actual	FY 2005 Available	FY 2006 Request
Initial examination (makes sure an application is complete)	29,532	30,837	32,657
Examination (includes search)	549,821	601,246	672,740
Scientific, technical and classification services	32,304	40,958	43,927
Pre-grant publication and patent issuance	78,742	88,514	98,255
Patent appeals and Interferences	14,580	15,163	15,525
Operations (including system maintenance & automation)	51,941	58,262	60,735
Strategic initiatives (direct)	25,211	106,494	106,727
Total Resources for Operations	$782,122	$941,474	$1,030,566
Other contributing resources (cost-share of support functions, space, misc. general expenses)	316,314	454,162	486,248
Total Resources	$1,098,436	$1,395,636	$1,516,814

Source: USPTO FY 2006 President’s Budget Request

The largest proportion of growth between FY 2004 and FY 2005 is in the area of strategic initiatives. These include work on the 21^st Century Strategic Plan goals of improving the quality of patent products and services, optimizing patent processing time, and improving patent e-government. Some of this money will fund contract efforts to get PEs back to their core work. For example, USPTO will rely on commercial entities for classification and competitively source the Patent Cooperation Treaty (PCT[10]) search function. In addition to hiring more examiners, the agency also plans on funding a new competitive compensation package for Supervisory Patent Examiners (SPEs) and managers, expanding patent reviews, completing the establishment of automated Continuing Legal Education (CLE) training courses, and continuing re-certification of all primary examiners on a three-year cycle. In the area of patent e-government, during FYs 2005-2006, USPTO plans to accomplish a major reengineering of the Image File Wrapper (IFW) system components to provide the functionality to capture and process application text data as well as image data and reduce the manual steps required to index and scan application papers.

In Trademarks, USPTO predominantly hires attorneys. Patent examiners, however, typically have backgrounds in biology, chemistry, physics, chemical engineering, electrical engineering, mechanical engineering, computer engineering, or computer science. Often there are myriad skill sets within the same TC. While a number of patent examiners have law degrees, it is not a prerequisite, and a proportion of those who earn law degrees while they are with USPTO leave to become patent attorneys. Similarly, some PEs without legal degrees leave the agency to pursue careers as patent agents.

USPTO had an overall attrition rate of 7 percent between FYs 1992-2004, which is not far above the average federal rate of 6 percent. However, for most fiscal years during this period, for every 10 patent examiners hired, five left. Reasons vary, and include such things as competition (from the public and private sectors) for some of the same high-demand skills, the production-oriented nature of patent examination work, and the fact that USPTO sometimes had to hire large numbers of staff quickly, resulting in some possibly questionable selections. (Chapter 2 looks at this in more depth.)

Strong Organizational Culture

As an organization with a clear mission and distinct functions in support of it (specifically, examining patent and trademark applications), USPTO is in what some agencies would consider the enviable position of being able to communicate to staff what they are supposed to do and why their work is important. Consider the diverse missions of large federal departments, or even the many functions within some of their subagencies. There can be staff in one unit who are not even aware of the purpose of many of the other units.

Virtually all of the USPTO senior staff involved in direct mission work has grown up in the organization, and a number of staff in general management or administrative positions have experience as patent examiners (PE). The clear sense of mission may be one reason that there is a strong “can-do” attitude among the staff. They have seen many changes to the broad environment for patents as a key component of innovation and the related advances in a broad range of technologies and have devised ways to adapt to such changes. On the other hand, the attitude of self assuredness has led USPTO to place staff with no administrative experience in key non-patent administrative positions, apparently believing that if an individual is competent in one important area this will translate to a very different arena.

USPTO has brought in some individuals from other agencies, such as the Chief Financial Officer (CFO), Chief Information Officer (CIO), the Director of Human Resources and Chief Administrative Officer (CAO). The CFO was appointed to this position in 2003 and had previous USPTO administrative experience; the other three positions were filled from outside in 2005, with the CAO being a new position. (It was formerly combined with the CFO.) Bringing in individuals has sometimes worked well; for example, the CFO had broad experience in federal building acquisition and management, and USPTO is in the middle of the largest move of civilian federal employees in U.S. history. Other times, the senior individual has not had enough of a shared perspective to bring issues and people together to address a challenge in the most effective manner.

Three unions represent USPTO employees:

Patent Office Professional Association (POPA)

National Treasury Employees Union (NTEU) chapter 245, representing trademark examining attorneys and interlocutory attorneys at the Trademark Trial and Appeals Board

NTEU Chapter 243, representing non-professional employees (the term used in the NTEU contract) including the technical support staff, computer specialists, and interpreters

It takes considerable time—three to five years, depending on the technology—to become a proficient PE, and a great deal of workplace socialization takes place during that time. It appears that much of the inculcation is provided by one of USPTO’s powerful unions that negotiates not just work environment, but also work procedures.

INPUT FROM STAKEHOLDERS

All aspects of USPTO’s work exist in an environment with intense stakeholder interest and participation in the broad patent community. In 1999, Congress created the Patent Public Advisory Committee (P-PAC) and Trademark Public Advisory Committee (T-PAC)[11] to advise on “policies, goals, performance, budget and user fees of the USPTO with respect to patents and trademarks and advise the USPTO Director on these matters.” Each has nine voting members who represent the diverse communities of USPTO users. Each also has three nonvoting members who represent the three labor organizations that serve USPTO employees. T-PAC and P-PAC meet separately several times each year and, within 60 days after the end of each fiscal year, they each prepare an annual report.

P-PAC has repeatedly stressed that USPTO cannot function as a PBO without more autonomy. “There must be a clear mission and bottom line objectives. To drive the mission of the USPTO, there must be managerial discretion and flexibility, including personnel flexibility that would allow the leaders [of the Office] to strategically allocate resources, including personnel and financial resources, to the critical objectives.” In its FY 2004 annual report, P-PAC commended the administration and Congress for appropriating what is anticipated to be all fees collected in FY 2005, but warned that there is not a permanent mechanism to ensure USPTO receives all applicant fees collected, which P-PAC believes has severely hampered USPTO’s ability to “address the critical problems of patent quality and increasing pendency.” [12]

Outside the formal advisory committee process is a mix of organizations with an interest in patents, and they include:

· grass-roots groups of individual inventors, which are in many cities across the country (such as the Inventors Network of the National Capital Area or the Tennessee Inventors Association)

· organizations that represent individual inventors (such as the National Congress of Inventor Organizations or the National Society of Inventors)

· professional groups that represent patent attorneys (such as the National Association of Patent Practitioners or the Section on Intellectual Property Law of the American Bar Association)

· larger trade groups that represent intellectual property owners (generally firms) or focus on legal issues (such as the Intellectual Property Owners (IPO) or AIPLA

· organizations that are concerned with IP in specific industries or technologies

The organizations geared to individual inventors generally focus on how to get a patent and the myriad of challenges in taking an invention through the patent process. While these groups may be more loosely organized than a Washington, DC trade association, the inventors they represent are vocal in providing input to Congress. For example, a number of individuals interviewed for this Academy project made the point that the U.S. has not previously gone to a first-to-file priority system because “individual inventors oppose it.”[13]

The U.S. patent system places high value on the individual inventor, who has brought to the world electricity, the telephone, laser technology, and a host of other discoveries. In many other nations, industry funds a larger proportion of innovation; in the U.S. approximately 17 percent of patents were granted to individual inventors in calendar year 2003. The number was consistently about 15% in the early to mid-1990s, dropped toward the end of the decade, and jumped to 21.8 percent (a 27 percent increase in one year) in 1999, and has fallen since then. USPTO stopped collecting data in the same format after 2003, so it is no longer possible to note the proportion of individual inventors who receive patents, only the difference between large and small entities (independent inventors, nonprofit institutions, and businesses with 500 or fewer employees).

Most components of the complex relationships with stakeholders tend to be very positive—experienced outside individuals are willing to address USPTO training classes, professional organizations conduct seminars for inventors and members of the patent community (which USPTO staff may attend), and many entities and individuals lobby Congress to encourage it to provide USPTO with all of the fees inventors provide to process and maintain applications. At the same time, many individuals and organizations are ready to criticize USPTO if, for example, they do not like a draft USPTO strategic plan, believe patent quality is declining, or simply don’t like the fact that their patent application was not approved.

Deserved criticism is essential and is generally given constructively and professionally. What differentiates USPTO's stakeholders from those of many other federal organizations is that nearly all of the “players” know one another and speak the technically complex common language of IP law. They work together to present an (almost) unified front. Where external opinions can diverge is between organizations that represent individual inventors and those that represent larger entities.

PATENT SYSTEM AND WORK PROCESS

A patent confers “the right to exclude others from making, using, offering for sale, or selling” the invention in the United States or “importing” the invention into the United States. It is essentially the grant of a property right to the inventor.[14] Once a patent is allowed (the term for granting a patent to an inventor), the patentee must enforce the patent without USPTO’s aid. In exchange for the valuable rights the patent confers, the inventor must provide a complete disclosure of the invention, which promotes additional innovation and discourages duplication of research. Thus, the rights of individual inventors are balanced against the rights of the public.

Generally, the term of a new patent is 20 years. The term begins on the date the patent is granted and ends 20 years from the date the application was filed in the United States. U.S. patents are effective only within the United States and U.S. territories and possessions.

An inventor secures a patent by filing an application that includes a detailed description of the invention, drawings (if applicable), a declaration that the inventor believes he/she is the first and original inventor of the item, and a fee. After USPTO determines that the application is complete, it sends it to the appropriate art unit, where a patent examiner conducts a search of prior art and then determines whether the invention is truly new, not obvious, and useful.

Basic steps in the patent prosecution process (the basic steps in evaluating an invention and determining whether or not to allow a patent) are shown in Table 1-4 and are described in more detail in Chapter 2.

Table 1-4

The Patent Prosecution Process

Search

Examination

Amendments Review*

Post Examination

· Check for signature

· Read application to determine search field

· Review patent literature and search commercial and in-house databases (“prior art”) for historical references to invention.

· Analyze search results

· Compare application’s invention to search results and information the applicant has submitted.

· Prepare FAOM to allow or deny patent

· Submit FAOM to supervisor to review or (if examiner has signatory authority) to support staff to process

· Option: application may be selected for “second-pair-of eyes” or in-process quality review during examination phase

· Review amendments applicant submits

· Conduct additional search and exam if needed

· Prepare subsequent action—final rejection or allowance

* Only if applicant

submits an amendment to a non-final rejection

· Option 1: If application is allowed, it is forwarded to the publication division

· Option 2: If patent applicant is rejected, applicant can submit amendments as many times as she/he likes

· Option 3: Whether patent is allowed or rejected, applicant can submit continuations as many times as she/he likes

Source: Portions adapted from September 2004 report of the Department of Commerce Office of Inspector General.

CHANGES IN PATENT WORKLOAD OVER TIME

Annual patent applications increased from 163,571 to 355,527 (117 percent) between 1990 and 2004. While Figure 1-2 shows this growth, it also shows that the number of FAOMs rose from 150,403 to 288,316 (92 percent), and the gap between applications and FAOMs is widening. It was at its low in 1992 (2,745), rose to 84,311 in FY 2001, then dropped to 50,340 in FY 2003 and rose again to 67,211 in 2004.

As this divergence between applications and FAOMs grows, more time will elapse between application filing to the FAOM—which is one of the two measures of pendency, which can be thought of as time in the queue.[15] The time it takes to issue an FAOM rose from 7.6 months in 1993 to 14.4 months in 2001 to 20.2 months in 2004. It is expected to increase to 21.2 months by 2008. Overall pending applications rose from 223,101 in 1983 to 244,646 in 1993, a relatively small increase. However, total pending applications rose to 837,858 in 2004.[16]

Figure 1-2

Calendar Year Trends in Patent Applications,

Allowances, and First Actions on the Merits

One reason for the gap between applications received and FAOMs issued is that staffing levels for examiners did not keep pace with application growth. For example, examiners increased from 1,681 in 1990 to 2,905 in 2002 (73 percent, at a time that applications rose 79 percent), and from 3,538 to 3,681 from 2002 to 2004 (4 percent, when applications grew 7 percent). While examiner numbers grew in total during this period, there was high attrition and the growth in staff was often not in tandem with application growth. (These issues are discussed in Chapters 2 and 4.)

At this juncture, the recent increase in the number of USPTO staff cannot quickly influence pendency, since new examining staff go through intense classroom and on-the-job training before they can be fully productive. Over time, additional resources will make a difference in FAOM pendency, but in the short term, new examiners require that more experienced staff take time away from production to train them.

As applications have increased, the number of claims accompanying the applications (which describe how the invention differs from prior art) have increased, as has the volume of material submitted with them (information on prior art, which the applicant believes may be relevant to patentability). This increases the complexity of the application and can increase the time it takes to search prior art and examine the application properly.

INFORMATION TECHNOLOGY TO SUPPORT PATENT OPERATIONS

To respond to the growth in work and adapt to advances in information technology, Congress authorized funds[17] for USPTO to create databases to search prior art in patent and non-patent literature, provide information to the public on issued patents and applications, and create an electronic application filing system. USPTO has one of the largest enterprise storage systems for e-government[18] in the nation. However, it has had little success in creating an e-filing system for patents that stakeholders are willing to use; Trademark applicants filed electronically 73 percent of the time in FY 2004, while patent applicants did so only 1.5 percent of the time. Stakeholders say this is because the system is complicated to use and unique to USPTO.

USPTO developed an image-based application processing system (IFW), completed in August 2004, through which contractors scan all applications and then examiners review them on a computer screen rather than paper. This IFW represents a major change in work method and continues to be enhanced.

USPTO’s efforts to develop fully electronic patent prosecution—from applicant filing through issuance—have not been successful. Opinions vary as to why this has happened; representatives of stakeholder organizations believe USPTO developed too complex a system. Even now, when examiners use IFW for electronic review of applications, nearly all communication with applicants is still via paper. While communicating with applicants electronically is part of USPTO’s overall Patent e-Government strategy, it has not progressed sufficiently to begin to work on the electronic communications requirement. The 2004 legislation that set patent and trademark fees reduced filing fees for electronic applications,[19] but USPTO currently scans these into the IFW system rather than process them electronically.

Since November 2004, USPTO has reinvigorated its e-filing initiatives and is more actively working with its stakeholders to create a system that they are willing to use. The agency will internally test an image-based e-filing capability, along with limited text access, in November 2005, and then beta test with its users in December 2005.

Other electronic systems support the patent process and provide information to the public and other patent offices. USPTO’s web site gives access to the Patent Application and Information Retrieval system (Public PAIR), which contains patents, applications published after 18 months, and public provisional applications.[20]

The EAST (Examiner Assisted Search Tool) and WEST (Web-based Examiner Search Tool) search systems permit electronic searching of patent literature. Prior to their development in the early 1990s, patent examiners had to search most prior art by hand, though three of the 15 Technology Centers used another electronic search system. Reference copies of prior patents and some other literature were kept in boxes that were a similar size to shoe boxes, and examiners went through this material for every search—termed “flipping the shoes.” Given the increase in patents over the past decade, if examiners had to search on paper, USPTO would need a massive amount of additional space to store the reference materials.

INSPECTOR GENERAL EXAMINES MANAGEMENT SYSTEMS

The Commerce Inspector General (IG) has conducted several recent studies on patent operations and human resources management (HRM). In 2001, the IG reviewed development of the automated systems patent examiners use to search for prior art (EAST and WEST), which are on the examiners’ desktop computers. The IG report made several recommendations about providing more information to key decision makers, better specifying system requirements, strengthening testing procedures, communicating with end users (in this case, patent examiners) in development, and conducting more training before systems become operational.[21] USPTO generally agreed with the recommendations and began implementing them.

In a June 2004 report, the IG criticized the process used to hire a director of the Office of Human Resources (OHR), and made a number of recommendations designed to correct deficiencies in systemic weaknesses in OHR operations.[22] USPTO suspended its initial search for a director and began to work with the U.S. Office of Personnel Management to recruit and hire a director. The IG also criticized USPTO for not developing its own personnel management policies after it became a PBO, as it was to do under provisions of 1999 Patent and Trademark Office Efficiency Act. USPTO hired an OHR director in February 2005 (after having several directors since the mid-1990s and long periods of interim directors) and is developing its own procedures rather than continuing to rely on those of the Department of Commerce.

The IG report that generated the most discussion during this Academy Panel’s study was completed in September 2004 and said that USPTO should reassess how patent examiner goals, performance appraisal plans, and the related award system are used to stimulate and reward examiner production.[23] The gist of the message was that: examiner production goals have not changed since 1976; 95 percent of art units process applications in less time than allotted goals; goals are not linked to supervisor and USPTO goals; examiners who received outstanding ratings in FYs 2001 and 2002 increased by 6 percent while production goal achievement declined; and overall production award recipients decreased from 72 percent in 1999 to 61 percent in 2003.[24] More details on the report and reactions to it are in Chapter 4.

In response to the September 2004 IG report, the Under Secretary of Commerce for Intellectual Property committed USPTO to reassess the current patent examiner goals, performance appraisal plans, and award system, and their effectiveness in stimulating and rewarding examiner production, as well as their effectiveness in achieving the objectives of the 21st Century Strategic Plan.[25] (This is discussed more in Chapter 4.)

IMPACT OF THE CHANGING EXTERNAL ENVIRONMENT

USPTO’s activities are greatly affected by changes in technology and the health of the U.S. economy, court decisions, and even shifts in college students’ career choices. For example, with the explosion of dot.com companies in the mid to late 1990s, USPTO began receiving patent applications in new fields and had to hire staff in new disciplines. Concurrently, it was hard to recruit in some Information Technology (IT) fields because competition was fierce for recent graduates and highly skilled professionals. Conversely, when the dot.com industry took a nose dive in 1999 and 2000, patent applications in these areas decreased somewhat, and it became much easier for USPTO to hire examiners in related fields.

Impact of Federal Court Structure

One of the key changes in the larger environment was the 1982 creation of the Court of Appeals for the Federal Circuit (CAFC)[26] and the perceived impact that has had on patent litigation and even patent quality. Prior to CAFC, appeals of patent cases that had been litigated in federal district courts went to one of the twelve circuit courts of appeals. The circuit courts varied in how they interpreted the obviousness standard and other factors that could substantially influence a case. Litigators would file cases in certain district courts because they wanted the circuit court for that district to hear an appeal rather than another appeals court.

While some variation among circuits could be accounted for by the technology that was more common in their geographic areas, this could not account for all differences. For example, between 1953 and 1977, patents litigated in the Eighth Circuit (Great Plains states) were seven times less likely to be valid than those in the Tenth Circuit (Rocky Mountains) and four times less likely than those in the Seventh Circuit (IL, IN, and WI).

After Congress created CAFC, patent holders grew far more likely to win appeals. Prior to the CAFC’s 1982 creation, the patent owner lost 75 percent of patent cases litigated. From 1982 to 2000, the CAFC upheld approximately 70 percent of all patents litigated through it.[27]

The proportion of cases upheld is now lower, but some believe this does not reflect a change in the court’s philosophy. In the widely discussed book, Innovation and its Discontents, authors Jaffe and Lerner believe that the increased ability to win in court has encouraged some holders of dubious patents to file cases to enforce them. Even though the CAFC is seen as more pro-patent, these weaker cases are less likely to prevail than some others, so the percentage of cases that patent holders win is likely to go down. The authors believe that patent holders are—in sheer numbers—winning as many or more cases as they did before, even though increasingly marginal patents are being asserted. They conclude that the CAFC did not merely standardize patent practice; it shifted patent practice to be more pro-patent than it had been in the previous decades.[28] Jaffe and Lerner are not alone in this perspective.[29]

National Academy of Sciences

In April 2004, the National Research Council released a study, A Patent System for the 21^st Century, which was prepared by the Board on Science, Technology, and Economic Policy of the National Academy of Sciences (NAS). The Board said that the CAFC has been “a vast improvement over adjudication in the circuit courts of appeals. It reduced forum shopping, focused attention on neglected issues of patent law, produced innovations at the trial court level, and in general yielded greater consistency.”[30] One NAS recommendation, designed to encourage broader exposure to all areas of innovation law, was that the CAFC should encourage submission of more friend-of-the-court briefs, as these tend to raise broader issues and cite a wider range of literature than do the briefs of the parties in the case.[31]

In academic journal articles on the patent system, authors argue that when it became evident that more patents were being upheld, more people and firms filed more applications. Because no controlled evaluations of patent filing behavior exist, this theory would be difficult to prove, but it was mentioned as a trend numerous times in Academy staff interviews. It has also grown more common for inventors to apply for patents that revolve around existing ones, creating what are called patent thickets. A simple example would be one inventor creates a screwdriver with a smooth handle. Another develops one with a textured handle that is easier to grip, and someone else develops a shorter screw driver.

Overall interest in the IP discipline and legal representation has grown—in part because businesses have realized the enormous revenue that can be generated through licensing. The global technology transfer market is estimated to be worth some $100 billion annually. [32] The number of patent lawsuits settled in or disposed by federal district courts doubled between 1988 and 2001, from 1,200 to nearly 2,400. The number of practitioners specializing in intellectual property law and affiliating with ABA IP Law section increased 39 percent between 1996 and 2002, while overall ABA membership grew 6 percent over the same period.[33] The more lawsuits filed (in district court between private sector companies and as appeals to the CAFC) the more time USPTO needs to respond to them, especially within its Office of General Counsel, but also in terms of examiner time when it is one of their decisions that is being contested.

Changes in What Could be Patented

As the appeals system changed, so did questions of what could be patented. For example, in 1980, the Supreme Court ruled that an inventor could patent a living organism (Diamond v. Chakrabarty, 447 U.S. 303).

Much focus has been on patenting computer software, and in 1972, the U.S. Supreme Court ruled that software was not patentable subject matter by equating pure software to a mathematical algorithm. (Gottschalk v. Benson, 409 U.S. 63). The software industry thus protected its IP through copyrights and trade secrets instead of patents. However, courts began to erode this principle, beginning with a 1981 Supreme Court decision (Diamond v. Diehr, 450 U.S. 175). Because the PTO (as it was still called at that time) was not involved in the software industry from its inception and because case law evolved over approximately 15 years, the office had relatively little expertise in this area and an incomplete library of prior art.

Also evolving was patentability of what are termed business method patents.[34] The most well-known patent may be the Amazon one-click patent, though the case which brought business method patents patent legitimacy was State Street Bank and Trust v. Signature Financial Group. In 1998, the CAFC ruled that this software program, used to fix closing prices of mutual funds for reporting purposes, had been deserving of its patent. While business method patents are permitted in the U.S., they are not patentable in Europe, Japan, or Canada, or most other countries.

USPTO must constantly absorb changes in case law and technology, which entails hiring individuals with new skills and continually retraining staff. The newer the technology, the longer it takes to get a patent and the more likely errors will occur, in part because prior art is not readily available in patent literature. Examiners must search journal or trade articles, conference proceedings or other sources that are not necessarily well-indexed for patent search purposes.

THEMES IN EXTERNAL STUDIES OF THE PATENT SYSTEM

Concern about aspects of the patent system have persisted over time. One commentator writing in the Yale Law Journal, outlined the three major defects of the U.S patent system: first, that there is little reliance to be placed on the patent itself; second, that the time which it takes to carry on a suit to enforce any patent rights is great; and third, that the expense of such litigation is enormous.” This was in 1894.[35]

Given the high value the nation places on innovation (and its potential to create wealth), there have been a number of important studies of the patent system. Because of the increase in pendency and of discussions of the quality of some patents issued in the U.S., it is not surprising that these reviews appear to be increasing. Some of their findings are discussed here, and they are noted throughout the report. Table 1-5 compares recommendations in several of the reports. The issues most often discussed are:

Aligning aspects of U.S. patent law with those of other nations, including changing to a first-to-file priority system

Changing the term of U.S. patents to comply with those of other nations (which Congress did)

Creating a better administrative mechanism to protest or oppose an allowed patent

The President’s Commission on the Patent System (1966)[36] provided President Johnson with a series of recommendations to improve patent quality and timeliness and thus ensure that the patent system could keep up with technological advances. Among its recommendations were that the U.S. recognize the importance of public disclosure of new technology and publish patent applications before they are granted, extend patent terms from 17 to 20 years, and streamline patent procedures by moving to a “first-to-file” priority system. To accommodate the small inventor, the Commission suggested permitting a preliminary application that could be filed before an idea had been tested.

Almost 30 years later (1992) the Advisory Commission of Patent Law Reform[37] repeated these three 1966 recommendations and also recommended (though somewhat differently) reform in the opposition process.[38] The report to the Secretary of Commerce also recommended that, “if a successful harmonization treaty is concluded, the U.S. patents and published U.S. applications be applicable as prior art references for novelty as of their earlier effective filing date (foreign priority date), and for both novelty and obviousness as of their U.S. filing date.”[39]

As a result of some of these earlier studies, the U.S. has changed the patent term from 17 years from the date of grant to 20 years from the date of filing in the U.S., and publishes most patent applications at 18 months; they are easily researched on the USPTO web page. (Applicants who will file only in the U.S. can opt not to have their applications published.)

The U.S. retains the first-to-invent standard,[40] and it now permits provisional applications[41] (essentially place-holders for 12 months, while the applicant further develops the invention). The U.S. also has the Hilmer Doctrine,[42] which does not recognize non-U.S. filing dates for prior art purposes, and is again considering ways to reform the protest and opposition proceedings.

Studies, congressional hearings, and scholarly articles about the patent system have accelerated, fueled in large part by the increasing time between filing an application and having it allowed or denied. Inventors and industries are most concerned with the time from filing an application to FAOM. There has been increasing concern about the quality of patents issued in the U.S. and rising interest in sharing the workload among foreign offices, which annually process about 200,000 nearly identical applications.

Federal Trade Commission Examines Competition and Innovation

The Federal Trade Commission's (FTC’s) 2003 report[43] focused on balancing the need for the nation’s economy to be competitive with the rights of patent owners. It drew from a series of hearings that FTC and the Department of Justice held over a 24-day period in 2002. The report concluded that patents and competition contribute to innovation, consumer welfare, and prosperity. However, it also stated that “more patents in more industries and with greater breadth are not always the best ways to maximize consumer welfare. A questionable patent can raise costs and prevent competition and innovation that otherwise would benefit competition.”[44]

Recognizing that the most effective way to challenge a questionable patent is through litigation, which can be expensive and time consuming, FTC recommended that Congress enact legislation to create an administrative procedure to allow post-grant review of and opposition to patents. The report also recommended that Congress specify that challenges to the validity of a patent be based on “preponderance of the evidence” standard rather than the more difficult “clear and convincing evidence” standard.[45] Other recommendations addressed tightening legal standards used to evaluate whether a patent is “obvious,” requiring that all applications be published after 18 months, and providing adequate funding for USPTO. The FTC recommended considering all costs and benefits in extending patent protection to new subject matter and that the standard for willful patent infringement be changed, which would require legislative action.[46]

National Academy of Sciences Recommends Reforms

A 2004 report of the NAS Board on Science, Technology, and Economic Policy recognized that, with the growing importance of technology to the nation’s well-being, patents play an even more prominent role in the economy than in the past. With patents more actively sought and vigorously enforced, the NAS committee proposed a series of recommendations in seven areas.[47]

Some of the NAS recommendations repeat those of the 1966 and 1992 commission reports—the NAS Board advocated first-to-file and endorsed accepting prior art when these applications were first filed in other countries. It also recommended eliminating the “best mode requirement” (35 U.S.C. Section 112)—which is not used by the European Patent Office (EPO) or the Japan Patent Office (JPO) and mandates that an application state the best manner of using the invention as known to the inventor on the date of filing the patent application.[48]

The NAS Board focused more than other reports on the resources USPTO needs to fulfill its mission and steps needed if the U.S., Japanese, and European patent examination systems are to be harmonized. The NAS report said that to improve its performance USPTO needs additional resources to hire and train more examiners and fully implement a robust electronic processing capability.[49] Further, NAS said that USPTO should create a strong multidisciplinary analytical capability to assess management practices and proposed changes, provide an early warning of new technologies being proposed for patenting, and conduct reliable, consistent, reputable quality reviews that address office-wide and individual examiner performance.

The NAS Board identified other differences between U.S., Japanese, and European patent systems that it believes need reconciliation, including application priority (“first-to-invent” versus “first-inventor to-file”), the grace period[50] for filing an application after publication, and the U.S. exception to the rule of publication of patent applications after 18 months. This objective should continue to be pursued on a trilateral or even bilateral basis if multilateral negotiations are not progressing.[51]

Continuing Visibility for NAS and FTC Reports

The FTC, AIPLA, NAS’ Board on Science, Technology, and Economic Policy conducted a series of “Town Meetings on Patent Reform” in the first half of 2005. The hundreds of participants at the four meetings discussed the FTC and NAS reports as well as academic articles (provided at the meetings but well-known to most before then) on post-grant opposition, continuations (discussed in Chapter 3), and patent quality. USPTO participated in all meetings, including providing senior leaders as speakers.

The two reports were also prominent parts of the discussion at a session the American Enterprise Institute held at a conference on “The Patent System and the New Economy” in March 2005, featuring speakers primarily from major corporations that use the patent system. Citing a number of the issues raised in the NAS and FTC reports, they endorsed many aspects of harmonization and the need for a post-grant review system. Speakers saw a number of other opportunities for changes to the current system, and many spoke of the need to reduce litigation.

Scholarly and Media Articles

“Patent reform” has become a prominent topic in magazines[52] and newspaper[53] articles, industry publications,[54] and, as noted, academic publications. It is featured in some 2005 legislative proposals as well. The opinions in articles and on web pages are not uniform. For example, one article suggests that—because relatively few patents are the subject of licensing or litigation—a sparing review would be the optimal level of examination for all patent applications. The implication is that USPTO patent quality does not matter since such issues get resolved through litigation.[55] After reading this, several authors argued that quality matters a great deal in the initial application prosecution because one invalid patent can cause a host of problems.[56] While litigation is the most obvious result of an improperly issued patent, it may also thwart innovation; for example, an overly broad patent may cover a legitimate invention someone else has underway.

Researchers recognize the difficulty USPTO has in deciding how to interpret standards for new technologies—the areas in which USPTO has been subject to most criticism. On one hand, the applicant will press for the most generous interpretation; on the other, the courts are the ultimate arbiters of what is permissible. USPTO must anticipate the outcome of litigation or of a challenge, such as reexamination, and where there is no clear law, make policy, as in the 2001 Utility Examination Guidelines” USPTO issued for genetic sequences. [57]

The media has reported some examples of questionable patents, such as the patent for “one-click” Internet purchasing. That patent describes an online purchasing system that stores a customer’s credit card number and address information so that, when the customer returns to the website for a subsequent purchase, he/she uses a single mouse-click to input billing information. Critics believe this technology to be obvious, and therefore not patentable.

LEGISLATIVE ISSUES

The December 2004 Omnibus Appropriations Act[58] included a new fee structure, effective for two years, and an outsourcing proposal.

The Act:

increases the fees for patent and trademark examinations

creates incentives for applicants to submit shorter patent applications (by charging higher fees if an application has more than 100 sheets of paper)

creates incentives for applicants to reduce the number of claims in a patent application by charging higher fees if there are more than three independent claims or more than 20 combined independent or dependent claims

creates incentives for those who do not want to continue to pursue a patent application to withdraw it (by providing, through regulation, a refund if the patent application is abandoned)

creates incentives for electronic filing by reducing filing fees for some applications by 75 percent

permits individuals to do their own searches and thus get a reduced patent fee if their searches meet conditions the commissioner of patents has set

sets up a process through which the USPTO director can conduct an 18-month pilot program through which commercial entities conduct searches

requires that the USPTO director (the Under Secretary) submit a report on the pilot program to the P-PAC

requires that the P-PAC review and analyze the director’s report on the pilot program and submit a separate P-PAC report, to the director and Congress, that is an independent evaluation of the effect of pilot program search

Through its use of contractors, USPTO has outsourced a number of activities, many of them directly related to the patent process, and will soon outsource at least part of the classification function (through which a reviewer determines the category in which an application falls, and thus the technology center that will handle it), and post-grant publication (through which it publishes all patent applications either when the patent issues or 18 months after the inventor files the application, whichever comes first).

The patent prosecution process (search and examination) has remained with USPTO staff, specifically the patent examiners and their supervisors. The pilot program will, for the first time, separate the search for prior art from the decision as to whether to allow (issue) a patent or reject an application. USPTO issued a request for proposal in late April 2005.[59] It plans to outsource the PCT applications.

Bills Proposed in 2005

The key provision of the 2004 House bill (H.R. 1561) not incorporated in the Omnibus legislation was the provision to permanently eliminate withholding a portion of the patent and trademark fees. It would have done this by establishing in the Department of Treasury a Patent and Trademark Fee Reserve Fund. If USPTO fee collections for a fiscal year exceeded the amount appropriated to the USPTO for that year, fees collected in excess of the appropriated amount were to be deposited in the reserve fund. After the end of each fiscal year, the USPTO director was to make a finding as to whether the fees collected for that fiscal year exceeded the amount appropriated to USPTO, and if the amount collected exceeded the amount appropriated, the director was to refund some of the money to those who paid patent or trademark fees during that fiscal year.[60]

Patent applicants and the stakeholder organizations that represent them have been vocal about fees increasing several times in the past ten years (including in 2004), yet not all fees are provided to USPTO. (This is discussed more in Chapter 2.) The FY 2005 appropriation was designed to provide USPTO with all fee revenue (based on an estimate of anticipated revenue), and in FY 2006, the President proposed a USPTO budget that allows USPTO to have access to all of its fees.

On May 12, 2005, S. 1020[61] was introduced to allow USPTO to collect only the amount of fees that it may spend in that fiscal year. If Congress does not appropriate the full amount of estimated user fee collections for USPTO’s use in a fiscal year, the USPTO director would be required to reduce fees for the remainder of that year to make estimated fee collections equal to the appropriation.

In addition, in April and June 2005 the House and Senate IP subcommittees held hearings on potential patent reform legislation in which participants discussed a committee print that addressed a host of issues. Some suggested changes would better align the U.S. patent system with the systems of other nations; advocates of other reforms believe changes are needed to prevent “gaming the system.” Still others advocate changing varied aspects of patent litigation. As summarized by its sponsors,[62] HR 2795:

provides that the right to a patent will be awarded to the first inventor-to-file for a patent who provides an adequate disclosure for a claimed invention

simplifies the process by which an applicant takes an oath governing the particulars of an invention and the identity of the rightful inventor

deletes the “best mode” requirement from Sec. 112 of the Patent Act, which lists certain “specifications” that an inventor must set forth in an application[63]

codifies the law related to inequitable conduct in connection with patent proceedings before USPTO[64]

clarifies the rights of an inventor to damages for patent infringement[65]

authorizes courts with jurisdiction over patent cases to grant injunctions in accordance with the principles of equity to prevent the violation of patent rights

authorizes USPTO to limit by regulation the circumstances in which patent applicants may file a continuation and still be entitled to the priority date of the parent application[66]

expands the 18-month publication feature to all applications[67]

creates a new post-grant opposition system

allows third-party submission of prior art within six months after the date of publication of the patent application

Later chapters address continuations (Chapter 2) and the proposed post-grant review system (Chapter 3) and some of the reform issues as they relate to patent harmonization (Chapter 8 and Appendix M).

Those who favor first-inventor-to-file believe that the first-to-invent priority system leads to increased litigation and prevents the U.S. from harmonizing its patent system with those of other countries. Harmonization, if achieved, could simplify the process for filing for patent rights across borders. A number of independent inventors have traditionally opposed changing to a first-to-file system because they believe it provides larger firms an advantage as they can more quickly finish research and get the application to USPTO. H.R. 2795 attempts to address one of these concerns by requiring that the law be changed to first-inventor-to-file. The premise is that this would prevent someone from simply stealing another person’s idea and filing an application.

Former USPTO Commissioner Gerald Mossinghoff reviewed the extent to which small entities won patent interference hearings. Such hearings address whether a patent owner was actually the first person to invent the subject of the patent; under a first-to-file system, this would be a moot issue, as the filing date would determine the inventor. Mossinghoff’s research showed that of the 2.5 million patents and 3,000 interference decisions issued between 1983 and 2004, 286 small entities won interference proceedings even though they had been the second to file their patent application; 289 small entities lost, even though they were the first to file. He concludes that the first-to-invent priority system does not particularly advantage or disadvantage small entities.[68]

WORK WITH OTHER NATIONS AND INTERNATIONAL ORGANIZATIONS

USPTO is not alone in growth of applications, as Figure 1-3 shows. Between 1995 and 2004, applications grew by 67 percent in the U.S., 198 percent in EPO, and 14 percent in JPO. However, in Japan (which has more applications than the other

USPTO	1966 Commission on the Patent System	1992 Advisory Committee on Patent Law Reform	2003 Federal Trade Commission	2004 National Academy of Sciences
Fees, resources, and personnel	Budget adequate for first class staffing and equipment	Budget sufficient to achieve 18-month average pendency	Adequate (more) funding	Additional resources needed to hire and train examiners and to fully implement electronic processing; create strong analytical unit
Evaluation	Improved evaluation process and annual quality ratings			Conduct reliable, consistent quality reviews that address all staff performance
Subject matter	Computer programs not patentable	Computer programs patentable	Consider all costs and benefits in extending to new subject matter	System should remain open to new technologies
Priority	First-to-file with preliminary applications	First-to-file with provisional applications		First-inventor-to-file system
Application publication	Publish application	Publish applications	Eliminate exception so all applications are published	Abandon rule of publication after 18 months for applicants not intending to patent abroad.
Prior Art	Recognize foreign art; revise criteria for prior art		Applicant to state relevance of prior art	Remove limitation on non-published prior art and the rule that foreign patents and patent applications may not be recognized as prior art as of their filing dates.
Standards	Applicant to have the burden of persuading USPTO		Tighten non-obviousness standard; second review in selected areas	Strengthen non-obvious standard; another method employed in selected areas; further harmonize patent examination and procedures and standards
Opposition	Ex parte pre-and post-grant	Revise reexamination to encourage third party participation	Post-grant opposition	Open review procedure
Patent Term	20-year term	20-year term