Patent Funding Scam? USPTO Funding is Like a Ponzi Scheme

Several weeks ago I was in attendance at the dedication ceremony at the University of New Hampshire School of Law, celebrating the grand opening of the Franklin Pierce Center for Intellectual Property. I have written about the event several times already — Chief Judge Rader on injustice and discovery, Chief Judge Rader on obviousness and UNH honors Judges Newman and Gajarsa.  In addition to the Judges in attendance at the ceremonies and conference, one panel during the conference had Mary Beth Peters, long-time Registrar of Copyrights, and Jon Dudas, the former Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office.  It was during the Peters-Dudas panel that Director Dudas dropped what many would probably consider a bombshell.  Dudas said that the funding of the USPTO is like a ponzi scheme, and he is 100% correct.

Let’s back up and provide a little context.  Dudas and Peters were there to provide insight into a variety of intellectual property matters from a regulatory perspective.  Both gave brief presentations and then opened the floor for questions.  Inevitably things turned toward USPTO funding and Director Dudas gave an extremely candid response, and one that will hopefully open the eyes of those who seem chronically myopic — namely the elite ruling class in Washington, DC.  So let’s explore whether USPTO funding is like a ponzi scheme, shall we?

Dudas started off discussing USPTO funding by explaining that while he was at the agency, while he was preparing to testify before Congress at one particular moment, he discussed the funding problem with his senior staff.  “Why can’t I just tell them that the PTO funding is like a ponzi-scheme,” Dudas recounted.  He would go on to say that everyone to a person told him “you can’t say that!”  So Dudas settled on saying it this way: “the funding of the USPTO is similar to the way Congress funds Social Security.”  That seemed to please his advisors and apparently didn’t ruffle any feathers on Capitol Hill.  Of course, those on the Hill probably had no idea what Dudas was saying, after all many leaders (including Senate Majority Leader Harry Reid) are in denial with respect to Social Security and actually claim that there isn’t a crisis and those claiming Social Security is going broke are perpetuating a myth because they don’t like government, see the YouTube clip below.

You really just cannot argue with those who are in denial and refuse to recognize the cold, hard facts that affect the economic reality of Social Security and other entitlement programs.  Notwithstanding, for those who are grown-up enough to have an adult conversation, we know that the math doesn’t work out in any way other than Social Security going broke and consuming ever increasing amounts of federal revenue.  Why?  Because Social Security is about as close to a ponzi scheme as most average citizens will ever see.

Social Security is funded by payroll taxes collected by the Federal Government, with money coming in this year being paid out in benefits this year.  Surplus monies collected are taken by the Treasury for spending elsewhere in the government, with Treasury Bonds being issued as a form of IOU.  The value of those bonds held by the Social Security Trust Fund is valued at $2.6 trillion.  That means there is no trust fund whatsoever.  The trust fund has been raided to fund other government operations, with IOUs being provided.

According to the OASDI Trustees Report for 2011:

At the end of 2010, about 54 million people were receiving benefits: 37 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 10 million disabled workers and dependents of disabled workers. During the year, an estimated 157 million people had earnings covered by Social Security and paid payroll taxes. Total expenditures in 2010 were $713 billion. Total income was $781 billion ($664 billion in non-interest income and $117 billion in interest earnings), and assets held in special issue U.S. Treasury securities grew to $2.6 trillion.

The report goes on to explain:

Under the long-range intermediate assumptions, annual cost for the OASDI program is projected to exceed non-interest income in 2011 and remain higher throughout the remainder of the long-range period. The combined OASI and DI Trust Funds are projected to increase through 2022, and then to decline and become exhausted and unable to pay scheduled benefits in full on a timely basis in 2036.

Thus, despite the “head in sand” approach of Senator Reid, there is a huge problem with Social Security.  In fact, according to the Trustees Report, “[t]here were about 2.9 workers for every OASDI beneficiary in 2010.”  The report explains that from 1974 through 2008 the number of workers per beneficiary remained stable and fluctuated only between 3.2 and 3.4.  The report goes on: “This ratio reaches 2.1 by 2035 when the baby-boom generation will have largely retired, with a further gradual decline thereafter due to increasing longevity.”  This has to be alarming to everyone because in 1940 there were 42 workers per beneficiary and in 1950 there were 16 workers per beneficiary.  See Understanding Social Security.  An ever growing base of those drawing payments with an ever decreasing base of those paying in is exactly how ponzi schemes get in trouble and ultimately collapse.

Whether you like Rick Perry, the Texas Governor and Republican Presidential Candidate, he is right to call Social Security a ponzi scheme. As a strategy for winning the White House I don’t like the rhetoric, but those are the facts.  Undoubtedly, there will be some who don’t like the comparison between a ponzi scheme and Social Security, but before you jump to any erroneous conclusions why not take a look at how the Security and Exchange Commission defines the term “ponzi scheme.”  The SEC says:

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

If you don’t think that is exactly what is happening with Social Security you really need to wise up.

All those bonds the Trust Fund are holding are just promises to repay, but everyone knows that someone who is broke cannot repay a debt.  When money out exceeds money in and all the reserves have been blown through Social Security will collapse, just like all ponzi schemes.  Those who have been in the longest obtained great benefits compared to what they paid in, and those who entered late or never entered at all get screwed, having paid a lifetime worth of payroll taxes only to receive nothing.  Clearly, if Social Security were a private sector operation it would be a ponzi scheme and people would go to jail.

Now let’s return to the United States Patent and Trademark Office.  The USPTO is user fee funded.  It collects money for the promise of delivering a service in the future.  Due to the backlog of patent applications today that means you file your patent application and then you likely have to wait between 2 to 3 years for the patent examiner to pick up your file, depending on the technology area most closely associated with your invention.  As of August 2011 the Patents Dashboard shows that the average time to a first office action is 28.2 months.

Every year the USPTO collects more money than Congress allocates to the agency.  Does that sound familiar?  Of course it does, at least if you have been paying attention.  Social Security collects more money each year than it pays out, which will continue right until it ceases, at which point taxpayers will have to begin subsidizing Social Security.

So what happens to the excess money collected by the USPTO?  Just like the excess funds collected by Social Security, funds over and above what has been allocated are turned over to the Treasury for use by the government at large.  In other words, those funds paid for the provision of a service (i.e., examination of an application) are siphoned off by Congress and used for activities wholly unrelated to the operation of the Patent and Trademark Office.  Sound familiar?

What is worse for the Patent and Trademark Office, at least compared with Social Security, is that there has never even been an IOUs given to the agency.  The funds are just taken, and we are approaching $1 billion so siphoned off from the USPTO since 1992.  That doesn’t sound like a lot of money in government terms, but the USPTO budget last year was roughly $2 billion, so that $1 billion siphoned off is a meaningful amount of money and exactly explains why there is an enormous backlog and pendency is so high.  The Patent Office hasn’t had the funds to appropriately hire given the increased demand in a U.S. patent and they haven’t had adequate funds to invest in the agency as a going concern.  Worse is the fact that the USPTO stands to have nearly $800 million siphoned off this year if we continue to fund government through Continuing Resolutions (i.e., $2.7 billion revenue to PTO projected; spending frozen at $1.9 billion as per FY 2009).

In the latest changes to the patent laws, the America Invents Act, Congress seemingly rectified the funding issues for the USPTO, but upon close scrutiny it is just business as usual, although it is now arguably even more like Social Security.  Why?  Because Congress has finally set up a Fund for the Patent and Trademark Office.  After all that Social Security Trust Fund proved to be so well operated and exceptionally useful why not have one for the USPTO?

In the America Invents Act Congress established a Patent and Trademark Fee Reserve Fund. The pertinent part of the law explains, with emphasis added:

If fee collections by the Patent and Trademark Office for a fiscal year exceed the amount appropriated to the Office for that fiscal year, fees collected in excess of the appropriated amount shall be deposited in the Patent and Trademark Fee Reserve Fund. To the extent and in the amounts provided in appropriations Acts, amounts in the Fund shall be made available until expended only for obligation and expenditure by the Office…

So in other words, the USPTO gets to use the funds in the Fee Reserve Fund to the extent that Congress says they can use the funds in other appropriations Acts.  So the USPTO gets to use the funds if Congress says they get to use them, thus nothing has changed.  The only thing that has changed is now there is a dedicated pot of money for Congress.

For crying out loud Congress isn’t even hiding what they are doing!  They didn’t even call the “Patent and Trademark Fee Reserve Fund” a “trust fund.”  No illusions, no promises and most certainly no money held in any kind of “trust” on behalf of the USPTO and those stakeholders who fund the agency and a variety of Congressional pet projects via siphoned monies.

You see, the funding of the USPTO is like a ponzi scheme because those who apply today are paying for the examination of patent application filed nearly 3 years ago.  In order for the Patent and Trademark Office to have the funds to examine patent applications filed today people have to continue filing patent applications in the future, those with patents issued have to continue paying maintenance fees and/or we have to trust that Congress would make up any deficit faced by the Patent and Trademark Office.  Trust Congress?  That is absurd enough, but trust Congress relative to USPTO funding?  That is downright absurd.

Those who have been long time readers know I have been pretty hard on Director Dudas over the years, particularly with respect to the now failed claims and continuations rules and the second pair of eyes rules that caused the Office to nearly grind to a stop.  One thing is undeniably true, however.  During his tenure he Congress allowed the USPTO to keep 100 cents on the dollar.  His record on the fee issue is very strong, and he is undeniably correct to point a finger at the funding nonsense.  It has to stop!

For more of our writings on the America Invents Act please visit our Patent Reform page.

For more of our writings on funding the Patent Office please visit out PTO Funding page.

FOR THE RECORD: Anticipating comment nonsense allow me to say: I do not (and will not) support Rick Perry for President, and I did enjoy my conversation with Director Dudas after his panel.  While I have had substantive disagreements with Dudas he seems like a really nice guy.