Kappos to Congress: Funding Woes to Reverse PTO Progress

Kappos at the Innovation Alliance conference, 1-21-2011.

Yesterday David Kappos, the Under Secretary of Commerce for Intellectual Property and the Director of the United States Patent and Trademark Office, went to Capitol Hill to testify before the House Subcommittee on Intellectual Property, Competition and the Internet, which is a part of the House of Representatives Committee on the Judiciary.

The title of Kappos’ prepared remarks was How an Improved U.S. Patent and Trademark Office Can Create Jobs. For those who are marinated in the goings on at the Patent Office a lot is review with a few tidbits of new information.  Specifically, we learned that the USPTO projects an average first action pendency of 23 months by the end of fiscal 2011, that participating in the First Action Interview Pilot Program more than doubles the likelihood of getting a first action allowance,  that Track 1 rules are imminent with rules for Tracks 2 and 3 to follow and during FY 2010 nearly 6,000 USPTO employees worked from home at least a portion of their work week.  We also heard an ominous and declarative statement from Kappos, who told the House Subcommittee on Intellectual Property that the diversion of fees will cause the patent backlog to rise.

Perhaps the most noteworthy part of Kappos’ remarks related to what the impact would be on the Patent and Trademark Office if another Continuing Resolution is passed and there is no additional legislation dealing with funding the Patent Office.  At least some of the funding difficulties of the USPTO relate to the fact that the Congress did not pass a budget in September 2010 before the end of the fiscal year, instead choosing to continue funding the government through what is called a “Continuing Resolution” or in Washington terms a “CR.”

The CR locks the government budget through early March 2011 to the funding levels of Fiscal Year 2010.  This is catastrophic for the Patent Office because the revenue projections of the USPTO for FY 2010 were made during FY 2009 and were extremely conservative given we were firmly in the grips of the recession.

Filings during FY 2010 were much higher than predicted, and filings continue to be strong.  That means that the USPTO is taking in work, collecting fees that should go toward offsetting the delivery of the services promised, but they are not allowed to keep the funds.  This is due to a true relic in budgeting.

The USPTO is not allowed to keep and use the user fees it collects, but rather is only allowed to keep and use what Congress allows it to keep and use.  Congress did authorize the USPTO to keep all the funds they predicted they would take in, but estimates were low, so the USPTO is taking i more work than predicted, will eventually have to do that work, the work causes strains on the ability of the institution to continue its mission, but the funds in excess go into the general treasury.  A national innovation tax imposed in stealth by Congress.

Kappos hit the key point, that the USPTO is user fee funded and uses absolutely no taxpayer funds.  If it is not allowed to keep and use the funds it collects the positive direction the Patent Office is heading will cease and likely reverse.  Kappos explained:

The USPTO’s budget is fully supported by the fees it collects and uses no taxpayer funds.  Our spending authority under the continuing funding resolutions and the lack of a surcharge assessment through early March, however, represent foregone revenue of approximately $115 million as compared to what was proposed in the President’s FY 2011 Budget request.

As a result of operating under the current Continuing Resolution, the USPTO has been forced to implement several spending restraints.  These include restricting examiner overtime, delaying critical IT projects, and slowing down hiring.  Should the Continuing Resolution be extended for the full year, and hold the USPTO to the prior year funding level, we will have to halt all hiring, overtime, IT improvements, and PCT outsourcing.  As a result, some of the progress we have made to reduce our backlog and pendency would be reversed, and we would expect these key metrics to begin moving in the wrong direction.

While much of the rest of Kappos’ remarks will be review for many, but they do provide an excellent summary of the realities on the ground at the Patent Office.  So on the day that President Obama delivered his State of the Union speech, it could be said that Kappos delivered a State of the USPTO speech to the House Subcommittee on Intellectual Property.

What appears below are excerpts from Kappos’ remarks and are intended to provide a nutshell view of the highlights.

  • “Uncertainty about funding constrained our ability to hire or allow examiners to work overtime on pending applications during the last year.”
  • “In January 2009, the USPTO faced a backlog of more than 764,000 utility patent applications.  By the end of FY 2010, we reduced the backlog of applications to 708,535.  With the ability to hire new examiners and allow experienced examiners full overtime, our goal is to reduce the backlog to approximately 658,000 by the end of FY 2011.  In FY 2010, first action pendency was 25.7 months.  Our projections show that first action pendency will decline to 23 months by the end of FY 2011.”
  • “One of our programs contributing to the increased rate of interviews is the First Action Interview Pilot Program.  The program allows participants to conduct an interview with the examiner after reviewing the results of a prior art search conducted by the examiner.  This program was recently expanded to include additional technical areas, enhance efficiency, and provide more options to participants.  Since inception, 1,164 applicants have availed themselves of the program.  One major indication of the success of the program is the first action allowance rate of 33.6%, compared with an overall first action allowance rate of 15.5%.”
  • “In FY 2010, the USPTO hired 276 patent examiners, of which 98 were IP experienced hires.  In FY 2011, our goal is to recruit a high proportion of experienced IP hires.”
  • “The “Three-Track” program would enable processing within 12 months for those applications deemed by applicants to be their most important applications.  The USPTO  expects to soon issue a notice of proposed rulemaking to implement the prioritized examination track (Track 1) of the program, and plans to move forward with the remainder of the Three-Track program within the next few months.”
  • “As of the end of last year, 5,915 USPTO employees teleworked (83% of eligible positions); 2,739 of these were teleworking 4-5 days per week.”
  • “USPTO announced plans to pilot a satellite office in Detroit, Michigan, in 2011 – the USPTO’s first outside the Washington, DC metro area. We expect the new office to create more than 100 new jobs in its first year and provide a boost to the region’s innovation economy.”
  • “Fee collections at the USPTO remain strong as a result of an improving economic outlook, strong  patent renewal rates (maintenance of existing patents in force), and our increased production.  As you know, to enable our efforts, the President’s FY 2011 Budget Request proposes that the USPTO be permitted to spend all of the fees it collects and proposes a 15 percent surcharge on patent fees.”


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