In the popular press there have been a number of stories over the last week or so regarding how the US is losing its edge in innovation as indicated by the drop in patent filings between fiscal year 2008 and fiscal year 2009.  The headlines have been sensational at times, claiming that the recession is affecting US innovation.  While such headlines no doubt grab attention, they largely mischaracterize what is really happening, which is unfortunate because in today’s sound-bite news culture such headlines could well sway the hearts and minds of the public, and more importantly sway those in Washington, DC who may otherwise be able to help.  The truth is that fiscal year 2009 saw more patent applications filed than any other year in the history of the United States, save only one year — fiscal 2008.  So while many will no doubt want to blame the dip in filings on the recession, doing so misses the larger picture and obfuscates the real problem, which has little to do with the recession and everything to do with what became an enormously dysfunctional US Patent Office during President Bush’s second term.

Last night the United States Senate passed a bill that authorizes the United States Patent and Trademark Office to shift funds between different USPTO accounts in order to avoid the Patent Office having to furlough or terminate patent examiners.  Under the Senate bill the USPTO would be able to shift funds from the Trademark side of the building, which is in the green, to the Patent side of the building, which is substantially in the red.  As I have been explaining for many months, the Patent Office budget is in shambles, and is only getting worse.  The Patent Office has seen a sharp drop in patent revenues in the last six months, and while there are many who will blame the economy, the truth is that budget problems would have been experienced even without an economic downturn, although the PTO budget has turned into a nightmare because the economic downturn has certainly had an impact, and not a helpful impact at that.  The truth, however, is that the Patent Office obtains an overwhelming amount of its funding from patent maintenance fees (I have been told it approaches 70% of Patent revenue) and with the patent allowance rate declining for years thanks to second pair of eyes review, the Patent Office has had the unfortunate circumstance of having to use double the resources to fuel two separate reviews of all applications, while at the same time cutting off future maintenance fee payments because patents were not issuing.

In 2006, Peter Orszag, the current head of the Office of Management and Budget, observed in an article he co-authored for the Brookings Institution:

Because the U.S. is at the frontier of modern technological and scientific advances, sustaining economic growth depends substantially on our ability to advance that frontier.

Orszag is, of course, correct. Unfortunately, without meaningful and near immediate reform at the Patent Office little can be expected to be accomplished that will chart the course for the growth necessary to bring us out of this economic morass. If we are going to have any hope of pulling out of this economic nose dive as we have after so many recessions of the past, the Patent Office must develop new and better work-flow management techniques, and patent applicants must be treated equally and fairly. A patent system that grants speedy action within a few months to some, and which denies action for up to 10 years to others, is not only unconstitutional, but appears to be unprincipled to the point where we must hit the reset button.  This will, of course, require additional resources and a new, bold approach that is modeled after the private sector.

Monday I wrote about how the United States Patent Office is holding innovation hostage, and is treating applicants unfairly, at least insofar as some applicants seem to have their cases advance quickly and other applicants seem to wait for many years without any action whatsoever. I have gone on record saying that I believe the Patent Office is taking important steps, but the mountain that must be climbed might as well be as high and inhospitable as Mount Everest. When companies and individuals cannot obtain patents, despite the law being stacked to encourage innovation , the issuance of patents and even presumes that an inventor is entitled to a patent, this causes innovation to come to a halt because funding is effectively cut off and deals are put on hold. It seems self evident that when examiners take cases out of order they prevent other applications from percolating to the top of the pile.  Indeed, there seems to be little rhyme or reason with respect to the order some patent examiners take up patent applications, and this is problem one to be addressed moving forward if we are going to be able to do anything about the acute lack of innovation within the US Economy.

Yesterday I posted an article titled Innovation Held Hostage by the Patent Office.  In the article I detailed some troubling things I have learned regarding what appears to be best explained by patent examiners taking cases out of order.  The Patent Office is a first-in-first-out (FIFO) system, or at least it is supposed to be.  A couple patent attorneys have reported to me that they have received First Office Actions on the Merits anywhere from 4 to 6 months after filing, and one attorney pointed me to a business method patent application filed by Lehman Brothers on November 26, 2006, which issued as a patent less than 7 months later on June 5, 2007.  All of this is extremely troubling, and one person who commented suggested that the reason this was happening was because money was changing hands.  I do not believe that to be the case.

The June 15, 2009, edition of Business Week has an interesting article about innovation by Michael Mandel, which concludes that during the last decade US innovation has failed to deliver on the hyped promises, and this failure of innovation may have contributed to the economic woes we are now experiencing. Indeed, this article is interesting for many reasons. First, how is it possible that an article that questions American innovation could never once mention the crisis facing the Patent Office? Second, it is not accurate to say that the failure of US innovation “may have contributed,” the failure of innovation definitely contributed to the economic mess we face now because there has been no sustained technological growth that lead to an expansion of jobs. Third, the primary reason innovation has not come through for us is because the Patent Office has for years held innovation hostage, refused patents, extraordinarily delayed even making a decision on patent applications, and this lead to the evaporation of venture funding for many US companies, and prevented many other companies from being able to interest those with capital because no exclusive rights had been obtained, or could be predicted in any relevant time frame.

Admittedly, the selection of an Undersecretary of Commerce for Intellectual Property, a post that also carries the title of Director of the United States Patent and Trademark Office, is not as important in the greater scheme of things as many of the other posts President Obama has had to fill.  Having said that, given the unique and real challenges facing the U.S. patent system, it would be nice to eventually have a leader in place.  While those within the Patent Office are starting initiatives that will likely help in the long run, the major issues facing the USPTO are not likely to be resolved until there is new leadership.  My hope is that a new leader will be able to explain to Congress that more funding is needed, and maybe even explain that patent reform should take actually attempt to help the patent system, and the Patent Office in particular.  But with the announcement of Supreme Court nominee Sonia Sotomayor, does anyone think it is realistic to anticipate a nominee for PTO Director to happen before Sotomayor’s confirmation hearings?  Add to this the fact that North Korea announced that the Korean War is back on, Vice President Cheney and President Obama are jousting over how to handle terrorists, no one wanting Gitmo prisoners in the U.S., Cap and Trade working its way through Congress and Iran perpetually wanting to erase Israel from the map.  With all these issues occupying the President and Congress is there any real expectation that a PTO Director will be named anytime soon?

Even before President Obama announces his selection for Undersecretary of Commerce for Intellectual Property, a post known by those in the industry as the Director of the Patent Office, senior level management Officials inside the Patent Office are beginning to take real and concrete steps to address the enormous backlog of cases that was allowed to build under the stewardship of James Rogan and Jon Dudas, the last two political appointees to hold the Position of Director of the PTO.  Acting Commissioner for Patents Peggy Focarino has told me that examiners will begin holding interviews with applications and their representatives earlier in the application process so as to identify allowable matter so that patents can actually issue.  This alone is good news because it suggests that the Patent Office understands that the allowance rate is too low.  One has to assume this is being done with the approval of the White House, particularly given that Obama Chief of Staff Rahm Emmanuel informed all agencies to stand down on initiatives and rules until political appointments were made, unless of course the initiatives and rules were essential.