Letters to the 108th Congress

April 9, 2003

The Honorable Lamar S. Smith
Chairman, Subcommittee on Courts, The Internet, and Intellectual Property
Committee on the Judiciary
United States House of Representatives
Washington, DC 20515

The Honorable Howard Berman
Ranking Member
Subcommittee on Courts, the Internet, and Intellectual Property
Committee on the Judiciary
United States House of Representatives
Washington, DC 20515

Dear Chairman Smith and Ranking Member Berman:

I am writing to express views of the American Bar Association and the Association's Section of Intellectual Property Law on H.R. 1561, the "United States Patent and Trademark Fee Modernization Act of 2003," an Administration proposal that you introduced by request on April 2. The views that I express opposing the continued diversion of United States Patent and Trademark Office user fee revenue to fund programs unrelated to the functions of that Office represent views of the Association. The Association's House of Delegates has adopted those views as ABA policy. Views expressed on other issues, including on individual components of the Administration's proposal for the restructuring Office user fees, are those of the Section of Intellectual Property Law. These views have not been submitted to nor approved by the ABA House of Delegates or Board of Governors and should not, therefore, be construed as representing policy of the American Bar Association.

On July 18 of last year, Charles P. Baker, my predecessor as Chair of the IPL Law Section, testified before this Subcommittee on an earlier version of the proposed PTO user fee bill now under consideration. At that time we were unable to support enactment of the bill, due to a number of problems in concept and design, including the fact that it was designed to perpetuate the practice of diversion of PTO user fee revenue to fund unrelated programs. Since that hearing, the PTO and the Administration have made changes in the bill to address concerns that we and others expressed. The Administration, in both word and deed, has also indicated recognition of the deleterious effect of user fee diversion, and willingness to work to end it. We are therefore pleased to announce our support for enactment of the fee bill under consideration, subject to changes designed to eliminate diversion and to bring the bill into conformity with policies your Subcommittee and the Judiciary Committee have long advocated to end diversion. Our views in this regard are explained in more detail below, in the context of an explanation of positive changes that we find to have been made in the bill and in the PTO's 21st Century Strategic Plan.

The June 2002 Bill and Strategic Plan

Our testimony at the July 18 hearing addressed the earlier version of the PTO's fee proposal as well as components of the PTO Strategic Plan that are inextricably tied to the fee proposal. We commended Director Rogan for his commitment to reform PTO operations, and recognized that his proposed package of changes was specifically designed to address congressional mandates to produce long-term strategic planning that deals with deficiencies in pendency and quality and expedites conversion to an end-to-end electronic environment. We found the PTO's proposals for improving patent and trademark processing and examination to be a welcome departure from the "business as usual" approach that has hampered previous PTO planning and reform efforts. Mr. Baker's testimony noted that the draft fee bill embodied concepts for an effective overhaul of the PTO user fee system. We pointed to the draft bill's provisions that would set fees at levels that reflect actual costs to the Office in providing the services involved as one such worthy concept, but also noted that this concept was not reflected in some of the revised fees proposed. We also expressed approval of other initiatives under consideration, including acceleration of movement to electronic processing and proposals for certifying and recertifying all examiners to assure their qualifications.

While we found much to commend in the PTO's proposals for restructuring fees and operations of the Office, we also found many defects that outweighed the positive features. As a result, the ABA and the IP Law Section were unable to support the proposed fee bill. The most fundamental basis for our opposition was that the fee structure contained in the Administration's draft bill specifically provided for collections of fee revenue substantially in excess of the funding that the Administration was contemporaneously proposing for the PTO. In short, the bill provided for the continuation, and arguably the institutionalization, of user fee diversion, with no indication of an intention by the Administration to end the practice anytime in the future. I would like to address our concerns regarding user fee diversion, which is still provided for in the present bill, in light of developments since our last expression of views on July 18. First, however, I will comment on changes in the fee bill and in the 21st Century Strategic Plan that the PTO has made in response to criticism that we and other commentators made at or in relation to that hearing.

User Fee Basic: Cost Recovery, Not Behavior Modification

One of the objectives of the June 2002 draft fee bill was to establish fees for specific services that allowed the Office to recover its cost of providing those services. We supported, and continue to support this concept, recognizing that it will result in increases, in some instances significant ones, in fees imposed. We strongly objected to the PTO proposal to set fees for some services at levels that far exceed the cost of providing the services, for the express purpose of punishing and deterring customer conduct in requesting and utilizing those services. For example, the June 2002 draft bill called for fees for excess independent claims and excess total claims to rise exponentially as more claims are added. In the current fee proposal, the concept of setting fees for behavior modification purposes has been largely abandoned, and individual fees that we found objectionable on this basis have been adjusted sufficiently to satisfy our objections.

No Mandatory Information Disclosure Statements

The PTO has withdrawn its requirement for mandatory Information Disclosure Statements, a move which we recommended, and which we applaud.

A Narrower, Calibrated Approach to Contract Searching

The Office has also withdrawn its proposal that patent applicants be required to obtain and provide search reports. Instead, the PTO intends to contract with private sector commercial search organizations to provide these search reports. We believe that abandonment of applicant-commissioned searches is the right decision, and we continue to believe that best system is one in which the Office conducts both the search and the examination. However, we do not object to the Office moving forward with its proposal to certify and contract with private sector search organizations, so long the movement is done on the basis of study and pilot program implementation, with expansion of the practice occurring only as results justify. We understand this to be the intention of the Office.

"Administrative" Instead of "Statutory" Deferred Examination: Differences With Distinctions?

The proposed fee bill submitted to the Congress in June 2002 was designed to accommodate deferred examination of patent applications. It did so by separating the application fee from a separate examination fee, and permitting the Director unlimited authority to set a deadline for payment of the examination fee. Following widespread opposition in the user community to such unlimited authority of the PTO to defer examination, Director Rogan testified at the July 18 hearing that an 18 month limit would be set on deferred examination.

The IP Law Section finds no public benefit in deferred examination and sees the potential for public harm in its capacity to delay examination and rejection or narrowing of overly broad claims that create uncertainty and reduce investment. In response to concerns of the IP Law Section and others, the PTO has made changes in its proposals for a system of deferred examination of patent applications. The Office indicates that it no longer plans to seek to establish deferred examination by permanent legislation, but will do so by an "administrative alternative" that "achieves most of the benefits of the original legislative proposal." The Office also states that it has abandoned its proposal for separate fees for filing, search, and examination in favor a single fee payable at time of filing, with provision for refund of portions of the search and examination fees under circumstances in which the Office is not required to provide these services.

These changes may be largely differences without distinctions. Under the fee bill before the Subcommittee, three separate fees are still called for. Rather than deferring the payment of the search and examination fees until these services are requested, all three fees would have to be paid at time of application, a change that perhaps forms the basis of the PTO characterization of these three fees as a single fee. The current proposal would give the Director authority to establish a regulatory scheme under which an applicant who abandons an application before examination can obtain a partial refund of the examination and search fees. The system of deferred examination that would be established does not seem to differ substantially from the one called for in the previous proposal. It does not address the substantive concerns that others and we have raised, and may present additional ones. These additional concerns include the unlimited authority that would be given to the Director in establishing time limits on deferral of examination and in setting conditions for and amounts of refunds following abandonment of applications before examination.

The Section of Intellectual Property believes that the fundamental concerns that we expressed earlier regarding deferred examination are not alleviated in the revised plans of the Office. Accordingly, since the PTO is now proposing to implement deferred examination by regulation rather than by statute, we will be communicating our disagreement with this proposal to the Office.

IP Law Section Registers Approval of Revised Plan

On November 22, Mr. Baker and I wrote to OMB Director Mitchell E. Daniels, Jr. to report that, based on changes to the Strategic Plan that Director Rogan made available to us on November 20, the Section of Intellectual Property Law "whole-heartedly endorses the major portions of this revised Plan." We are not aware of any substantive differences in the Strategic Plan that is before you that would cause us to modify the endorsement that we gave the Plan on November 22, and we reaffirm that approval. As we noted in our letter to Director Daniels, we do need to have available to us and to review the numerous program papers that the PTO has prepared in support and explanation of the Strategic Plan and fee bill. Those papers were made available to us on March 28 and are currently being reviewed.

Principles For Fee Setting

During the process of rewriting the PTO fee structure that has been ongoing for the past two years, pricing of individual fees has been guided by two overarching principles. One is that to the extent possible each individual fee should recoup the cost to the Office of provided the service in question. The second is that overall fee structure should produce the amount of revenue determined to be needed for the fiscal year in question.

We agree with both of these principles. We also find that the proposed fee bill before the Subcommittee sufficiently embodies the first of these two principles, and we endorse it in this respect. In determining the bill's fidelity to the second principle, one must look not just to the bill itself and to the revenue it would be expected to raise, but to the "needs" side of the principle as well. In the case of the PTO, a user fee funded agency, the most obvious starting point in determining requisite revenue is a determination of the funding needed to effectively and efficiently operate the Office and provide quality and timely services. The Administration, in its FY2004 budget proposal that was submitted contemporaneously and in tandem with its proposed fee bill, concludes that approximately $1.4 billion will enable the Office to provide its services and to implement its Strategic Plan. At the same time, it is asking Congress to enact a fee bill that will produce $100 million in excess of the Administration's own projection of funding needs. The excess $100 million recommended in the bill is being sought in order to raise revenue to fund programs unrelated to patents and trademarks.

The ABA's Section of Intellectual Property Law supports implementation of the PTO's Strategic Plan. We believe that implementation of the Plan will require additional revenue beyond that available under the fee schedule now in effect, and we support fee increases needed to produce the requisite level of funding for implementation.

The Administration's Fee Bill: A Good Framework For Enactment

Accordingly, we recommend favorable action by the Subcommittee, the Judiciary Committee and the Congress on the Administration's proposed fee bill, after making necessary determinations and any changes in the bill called for by those determinations. Specifically, we recommend that you first determine the appropriate level of funding required to provide the services called for in the Strategic Plan. The Administration estimates this amount to be $1.4 billion for fiscal year 2004. We have no basis on which to disagree with this figure, but your own review may lead to difficult conclusions based on differing analytical criteria, availability of more recent and more accurate information on the projected workload and resource needs of the Office, and other considerations.

Parity of Fee Revenue and Funding

Having determined the appropriate level of funding for the Office, we recommend that you act favorably on a fee bill designed to produce that amount of revenue in FY 2004, the first year for which the new fee schedule would apply. We believe that the bill prepared by the PTO and approved by the Administration provides an appropriate framework for a final bill. It has been carefully and extensively reviewed, commented upon, and improved, and it has widespread support in the PTO customer community, including the support of our organization. Another advantage of using the Administration's bill as the framework for a final bill is found in the ability of the Office to use the bill and its computer models to quickly adjust individual fees to produce the required changes in overall revenue targeted for the new fee structure. The Office has demonstrated this capability in the last several months of discussion and negotiations with customer groups, and has generously made that capability available to us.

The bill that we recommend differs from that proposed by the Administration in only one respect. While the Administration proposal is specifically designed to generate revenue in excess of funding for the Office--$100 million in FY 2004--our proposal is specifically designed to produce parity of revenue and funding.

The Administration is to be commended for the serious attention that it has given recently to the problems created by diversion of PTO user fee revenue. Secretary of Commerce Don Evans and OMB Deputy Director Nancy Dorn have met with leaders of organizations representing the PTO customer community for serious discussions in pursuit of finding an end to this practice. Regrettably, the Administration did not propose a FY 2004 budget that would end diversion. However, it has more recently, in testimony of Secretary Evans on that budget proposal, for the first time recognized a need and intention to end the practice. In testimony last month before both the House and Senate Appropriations Committees, Secretary Evans stated "the Department is working to end the practice of using USPTO revenues for unrelated programs," and acknowledged that doing so "will enable the agency to increase the quality of patents and trademarks issued."

We believe that the recent acknowledgement within the Administration of the harmful effects of PTO user fee diversion and the need to end the practice provides a powerful additional reason for a case that was already strong. The decision to continue or end the practice is one for which the Executive has an important role, but that role is one of advising, not deciding. The decision lies with Congress. Ordinarily that congressional decision begins with and is largely decided within the appropriations committees. However, the need to act on user fee legislation that will determine the amount of revenue available to fund the Office presents a unique opportunity and obligation for the authorizing committees to play a major role in determining if and when diversion is to end. The Administration now seems to be saying that it is no longer a matter of if, but when. We strongly urge you to answer that question "Now."

Your Subcommittee and the Judiciary Committee have an unbroken record of opposition to user fee diversion and pursuit of legislative solutions to end the practice. Approval of a bill to revise user fees to levels designed to raise revenue in excess of intended appropriations would be a sharp departure from this consistent course. You faced a similar situation at the time of the expiration of patent user fee surcharge enacted in the Omnibus Budget Reconciliation Act. At that time the Clinton Administration recommended an increase of statutory patent user fees in amounts required to replace the revenue lost by the expiration of the OBRA surcharge. However, that proposed fee increase was accompanied by a budget request that called for annual diversion of $50 million from PTO user fee revenue. Faced with a situation that is closely paralleled by the current fee and funding proposals of the Executive, your Subcommittee fashioned fee legislation that was later enacted. That solution was to approve the Administration's request for fee increases, but only to the extent that the Administration indicated that those addition funds were needed and would be made available for PTO funding. We recommend that you lead the Congress on a similar course of action in the present circumstances.

Sincerely,

Mark T. Banner
Chair
Section of Intellectual Property Law

cc: Honorable F. James Sensenbrenner
Honorable John Conyers
Robert D. Evans
Lillian B. Gaskin
IPL Section Officers

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