The United States Patent and Trademark Office (USPTO) was granted fee setting and adjusting authority with respect to patent fees in the Leahy-Smith America Invents Act (AIA), which was signed into law on September 16, 2011. The fee setting (or adjusting) process is not a simple process. As you might expect, there are numerous hoops the agency was required to jump through before making the fees final. Those hoops have been jumped through and the final rules on patent fees will publish in the Federal Register on Friday, January 18, 2013.
Most of this final rules package on fees will go into effect 60 days later, with some portions not becoming effective until January 1, 2014. For example, in response to public comment, small and micro entity fee reductions for international application transmittal, filing, processing and search fees will be effective January 1, 2014 to permit adequate time for operational changes associated with international systems and forms.
One major step in the fee setting process was the publication of proposed fee rules in September 2012. In response to public comments received after those proposed rules were published the USPTO modified some of its revenue and performance targets in the final rule, allowing the agency to reduce certain fees.
The USPTO says that “this rule will provide sufficient revenue for two significant USPTO goals: (1) implement a sustainable funding model for operations; and (2) optimize patent timeliness and quality.” Of course, there will be many that will not be happy with the new fee structure, as is the case any time prices go up. Nevertheless, the AIA required USPTO to set patent fees to recover the expected cost of the patent operation. This means the USPTO must leave a zero net cost to general taxpayers. The USPTO does point out in the Notice that cost recovery is not interpreted as requiring each item of work to be charged out at a level to recover 100% of the cost of doing that particular work. The Notice explains:
The Office projects the aggregate revenue generated from the patent fees will recover the prospective aggregate cost of its patent operations. However, each individual fee is not necessarily set equal to the estimated cost of performing the activities related to the fee.
Thus, cost recovery as it is associated with the fees is from an aggregate perspective.
The Need for Addition Revenue
With additional burdens to offset (think expanded PTAB jurisdiction, for example) and an appeals and application backlog that is finally trending in the right direction but still unacceptably high, the amount of money needed to run the USPTO operation is not insignificant. Well, in government terms the $2.5 billion annual budget is rather insignificant, but that is a historic high-water mark in terms of the USPTO. Here is what the Federal Register Notice has to say about the estimated revenue and spending:
The fees in this final rule will provide the USPTO with sufficient aggregate revenue to recover the aggregate cost to operate the Office while improving the patent system. During FY 2013, patent operations will cost $2.479 billion after accounting for an offset to spending from other income of $23 million and a withdrawal from the operating reserve of $28 million. The final fee schedule should generate $2.479 billion in aggregate revenue to offset these costs. Once the Office transitions to the fee levels set forth in this final rule, it estimates an additional $11.5 billion in aggregate revenue will be generated from FY 2014 through FY 2017 to recover the total aggregate cost over the same time period – $11.1 billion in operating costs and $0.4 billion in a three-month operating reserve.
But will the increased fees really allow for a decrease in the patent backlog? The Notice straightforwardly says: “To reduce the backlog and decrease patent application pendency, the USPTO must examine significantly more patent applications than it receives each year for the next several years.” That statement is, of course, obvious to everyone in the industry. But will increased revenue result in more applications reviewed and a decrease of the backlog?The USPTO thinks so and has gone on record officially to predict acceptable average total pendency by FY 2017. The Notice says:
This final rule will result in an average first action patent application pendency of 10 months in FY 2016, an average total pendency of 20 months in FY 2017, and a reduced patent application backlog and inventory of approximately 335,000 patent applications by FY 2016.
The Office says that with this increased revenue they will “hire additional patent examiners, improve the patent business IT capability and infrastructure, and implement other programs to optimize the timeliness of patent examination.” The Office also sees the increased patent revenues leading to greater patent quality. I suppose that could happen, but I’m more interested personally in a reduction in the backlog, particularly the appeals backlog. If there is a disagreement between an applicant and an examiner that shouldn’t take 8+ years to resolve by going to appeal. With examiners getting to final resolution quicker and a meaningful decrease in the backlog at the PTAB, decisions should be forthcoming in a technically relevant timeframe for applicants. This could (and should) make it more attractive to seek patents and certainly more attractive to continue to resolution once prosecution has started. At least that is my hope.
RCEs and Appeals
But any discussion of the backlog has to take a look at RCEs, which are either the bane of your existence as an applicant/practitioner, or a useful way to fix up an application quickly to get it to issue after an examination has concluded. Your view of RCEs is almost completely dependent upon how the patent examiners you work with most often engage. If they are participating and seeking to give quality examination then RCEs are a useful tool. If they don’t take things very seriously until after the filing of at least one RCE then your view of RCEs is likely to be akin to your view of extortion, which is to say not very high. Regardless of your view, here is what the Notice says:
[T]he Office is setting multipart and staged fees for RCEs, appeals, and contested cases. The Office breaks the RCE fee into two parts. The fee for a first RCE is set more than 30 percent below cost to facilitate access to the service and in recognition that most applicants using RCEs only require one per application. The fee for a second and subsequent RCE is set only slightly below cost as an option for those who require multiple RCEs. Likewise, the staging of appeal fees allows applicants to pay less in situations when an application under appeal is either allowed or reopened rather than being forwarded to the Patent Trial and Appeal Board (PTAB).
This last part about appeals fees costing less will encourage applicants to jump off the appeal track and back into prosecution. That is going to create a large cry from at least some critics. There has always been a perception that some examiners simply do not take things very seriously unless and until they feel like the applicant is going over their head and about to expose their rejections on appeal. So there has been great criticism of the “mediation program” whereby cases can be removed from the appeal track and prosecution reopened when it seems clear that the examiner’s rejections will not stand up to scrutiny. I am a fan of getting things right as quickly as possible, but over time I have become conflicted. When you factor in all those cases that initially pursue down the appeal path the reversal rate is 75%. See The Real Rate of Patent Application Success on Appeal. If the PTAB backlog wasn’t so enormous and the time to wait not so great then it would be easier to simply refuse to negotiate with the recalcitrant examiner who now sees that their rejections will be exposed, but how do you advise a client to do that given the wait? Given the incentive of lower fees by jumping out of line at the PTAB? Look for this to be debated over and over again. Something needs to be done to push down the 75% reversal rate and I’m not sure there is anything here that will incentivize the behavior that is likely to be needed in order to do that. Of course, I hope I’m wrong.
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Small Entity & Micro Entity Fees
As previously proposed, and required by the AIA, the USPTO with these final rules has implemented the small entity and micro entity discount. Section 10(b) of the AIA required the Office to reduce by 50 percent the fees for small entities that are set or adjusted under section 10(a) for filing, searching, examining, issuing, appealing, and maintaining patent applications and patents. Section 10(b) of the Act requires the Office to reduce by 75 percent the fees for micro entities that are set or adjusted under Section 10(a) for filing, searching, examining, issuing, appealing, and maintaining patent applications and patents. In a separate rulemaking, pursuant to 35 U.S.C. 123, the Office implemented the micro entity provisions of the AIA. See 77 FR 75019 (Dec. 19, 2012).
Currently, the small entity discount is only available for statutory fees provided under 35 U.S.C. 41(a), (b), and (d)(1). Section 10(b) extends the discount to some patent fees not contained in 35 U.S.C. 41(a), (b), and (d)(1). Thus, in this final rule, the Office applies the discount to a number of fees that currently do not receive the small entity discount. There is only one fee for which a small entity discount is currently offered that is ineligible for a small entity discount under the final fee schedule: the fee for a statutory disclaimer under 37 CFR 1.20(d). This fee is currently $160 for a large entity and $80 for a small entity. In this final rule, this fee is $160 for all entities (i.e., large, small, and micro) because this particular fee does not fall under one of the six categories of patent fees set forth in section 10(b).
Additionally, the new contested case proceedings created under the Act (inter partes review, post-grant review, covered business method patent review, and derivation proceedings) are trial services, not appeals. As such, the fees for these services do not fall under any of the six categories under section 10(b), and therefore are not eligible for discounts.
So what does this mean for particular fees? There is so much detail and analysis within the Notice that it will be impossible to unpack it all in one article summarizing the totality of the rules package. Nevertheless, a few things did catch my attention. It will be more expensive to file a utility patent application, except for micro-entity applicants (see Utility Filing Fees Table), but it will be less to pay the issue fee once you get a Notice of Allowance (see Issue Fee Table). It will cost 29% more to file the first RCE for large and small entities (see First RCE Fees Table), and 83% more for subsequent RCE filings for large and small entities (see Subsequent RCE Fees Table). The ex parte reexaminations fees are much lower, down 32% and 66% respectively for large and small entities (see Reexam Fees Table), but are still much higher compared to where they were prior to them being raised over 600% recently. Of course, cutting ex parte reexamination fees means the overall cost is still roughly 250% higher for small entities and 500% higher for large entities than this time last year.
The Patent Office is certainly to be congratulated for doing a thorough job with respect to setting fees. Not everyone will be happy, in fact most probably will be unhappy. No one likes higher fees, but I believe we need to pay for the government we have. We can, however, expect the government we have to function properly. Team Kappos has made great strides in the right direction and has turned the corner on the major problems facing the Office. There is still a long way to go. Throwing money at a problem is not always a good solution, but the need for additional work requires more people and that has to come from somewhere. At least the USPTO now gets to keep the fees it collects, at least until Congress decides otherwise.
There is much more to be analyzed and written, but things could have been worse. It seems that some of the truly ridiculously high fees have been reduced significantly, which is good. What remains, however, gives everyone something to complain about. I hear micro-entity status is great but hardly anyone qualifies for it, which is a complaint we are sure to hear more of but that beef is largely with Congress because of the definition in the law. Nevertheless, I wonder after going through this process whether the USPTO would rather give back the fee setting authority. The USPTO can’t exclusively point to Congress for the fees, although Congress laid the framework. But everyone will have an opinion about whether the USPTO did the right thing. I also have questions about maintenance fees, which went up, and which continue to subsidize the patent system to an extraordinary degree (see Maintenance Fee Table). But the issue of maintenance fees is a complicated one, so look for an additional article just on maintenance fees soon.
Notwithstanding all of the above, my prediction is that if the backlog decreases as projected there will be grumbling but not revolt. If significant gains are not made on both the application and appeal backlogs there will be great unhappiness within the stakeholder community. If the backlog trends higher then there may be a “pick up the pitch-forks” moment as the industry descends upon Capitol Hill in search of answers. Time will tell, but I remain cautiously optimistic.