USPTO diverts funds to Commerce Department as user fee increases are prepared

Last week the Patent Public Advisory Committee (PPAC) held its quarterly public meeting at the United States Patent and Trademark Office (USPTO) in Alexandria, Virginia. In a shocking revelation, Frank Murphy, Acting Chief Financial Officer, explained that the USPTO has been and will continue to make payments to the Department of Commerce under the shared services initiative, which is now known as “enterprise services.”

Not only are these payments to Commerce potentially (or perhaps likely) in violation of the America Invents Act (AIA), but they are being made at a time when the USPTO is suffering revenue shortfalls and is preparing to increase user fees. According to Murphy, the final fees rule will be submitted to the Administration soon, with fee increases likely by September.

The USPTO finds itself caught between the proverbial rock and a hard place. So much of the Office’s funding has historically come from maintenance fees paid by patent owners to continue to enjoy exclusive rights for the entire term of an issued patent. For example, in FY 2011, the USPTO collected $819.3 million in maintenance fees while only collecting $1,035.8 million related to work actually performed for fees collected during FY 2011. But the payment of maintenance fees depends upon patent owners applying for, receiving and then paying to keep the patents they receive.

In recent years, however, thanks in large part to the dismal record for patent owners in inter partes review (IPR) proceedings, an increasingly hostile Supreme Court, and Art Units dominated by America’s largest technology companies where allowance rates are under 5%, less is being obtained in the first place and then maintained even if a patent issues.  It should come as no surprise to anyone that the stakeholder community views many types of patents as harder to acquire and enforce and, therefore, not as valuable or desirable. The USPTO budget is far from secure.*

During the August 20, 2015, Patent Public Advisory Committee (PPAC) meeting, USPTO Director Michelle Lee first announced the shared services initiative. Lee explained this shared services initiative by saying that agencies falling under the Department of Commerce would utilize shared services for human resources, information technology and procurement functions. The fear then, however, was that with the USPTO being funded by user fees it would be required to pay for the IT and other needs of other Commerce agencies using funds that are supposed to be used only for the operation of the USPTO. See AIPLA letter to Secretary Pritzker and Under Secretary Lee. That is precisely what is happening now, only worse.

The new reality today is that the USPTO is paying for shared services that are simply not shared. According to Murphy, the USPTO will not be using the services because the USPTO systems are superior to the shared services being created. The USPTO is still, nonetheless, paying for the creation of these services.

Murphy explained:

“The PTO position has been and remains that we have independent authority over our administrative operations and if it makes sense for us to avail ourselves of those services we would like to do so, but we don’t want to have that as a mandatory because we actually have…  improved our IT services, our HR services our contracting services, so we are already performing at a higher standard than many of the agencies that would benefit from shared services, or enterprise services. That said, we also want the ability to opt-in in the future if we see that the service levels have improved or the cost has come down so we can get the bigger bang for the dollar. With that we have agreed to help with the stand up cost of the enterprise services center so we are paying a pro rata share, a fair share, for the stand up of the enterprise services center, but not for the operational or transactional cost because we are not participating in that.”

Bernie Knight, former USPTO General Counsel and current PPAC member, asked whether he heard Murphy correctly, that the USPTO is essentially going to pursue shared services on a “cafeteria basis which services we want to participate in, but we are still paying a pro rata share of the overall cost to set up the enterprise operation.” According to Murphy, when you built that cafeteria, if you did not participate in the stand up of the facility, then you’d be getting the benefit of what other people spent for free if you were to later enter the cafeteria to purchase something. That may be true, but what is fair or reasonable and what are legal are two different things.

“It just seems to me… that our appropriated fees have to go toward fulfilling the USPTO’s appropriated mission, and you may not buy any of these services if they don’t make any sense,” Knight responded. “So, basically in setting up this enterprise organization we are using user fees to help other Commerce Department bureaus and agencies and I’m not sure from my perspective whether that is a proper use of our appropriated funds.”

Knight would then ask Murphy how much money the USPTO has paid to Commerce. Murphy explained that the USPTO paid the Department of Commerce $6 million in appropriated funds (i.e., user fees) in 2016 and will pay another $13 million in 2017.

“From my perspective there is $20 million of user fees going toward a Commerce Department initiative that may never benefit the patent, copyright and trademark systems,” Knight said. “As an individual member of the PPAC I don’t mind saying that I question the appropriateness of that $20 million payment.”

Knight’s concern almost certainly centers around 35 USC 42(c)(3)(A), which was enacted as part of the AIA and says: “Any fees that are collected under this title, and any surcharges on such fees, may only be used for expenses of the Office relating to the processing of patent applications and for other activities, services, and materials relating to patents and to cover a proportionate share of the administrative costs of the Office.”

If the USPTO will not use shared (or enterprise) services it would seem that these payments from the USPTO to the Commerce Department represent a clear and direct violation of 35 USC 42(c)(3).

That the USPTO is making payments in clear violation of 35 USC 42(c)(3) is rather surprising, but this is being done at a time when the USPTO is saying they absolutely must raise user fees because the agency is out of money is shocking.

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* While it goes beyond the scope of this article, important questions need to be asked about whether raising fees is the appropriate response. The USPTO has taken on an arms dealer mentality and is hardly viewed as an honest broker anymore. From recalcitrant examiners who seem to see their job as harassing applicants (see here and here), to inordinate delays and unnecessary expense and filings, to post grant challenges that are far too easy. The USPTO charges to issue, they charge to take out patents in post grant, and if your post grant challenge is not accepted you get a refund. Anyone with their eyes even half open can easily see why the USPTO budget is in crisis, and raising fees isn’t the solution.