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.
As you can see from the chart below, which was created by the USPTO itself, in about 2004 the patent allowance rate started to drop at an alarming rate.
In 2005, the Patent Office decided that the second pair of eyes review was going so well in the business method field that it would be applied across the board to all applications. This meant that starting in 2005 all patent applications that were deemed allowable had to be reviewed twice. It is no wonder that the backlog got out of control because the Patent Office was forcing itself to do twice the work on every allowable application, which not surprisingly resulted in fewer applications becoming patents. It is also not surprising that maintenance fees would suffer. In order to keep a patent current for the full term it is allowed to exist under the law, patent owners must make three separate payments to the Patent Office. These maintenance fee payments are due at 3.5, 7.5 and 11.5 years after a patent issues. So we the Patent Office is starting to feel significant downward pressure in maintenance fee collections, and this problem is only going to get worse for at least the next decade. So even without an economic downturn, through mismanagement the Patent Office has created its own budget problems, which were easy to predict, which I and others did predict, and which for some reason seem to have come as a surprise to the Patent Office. Go figure!
The only way to rationalize the blind eye turned by the Patent Office is because like so many they believed the economy would only go up and up, and there would be no bubble. Just like a ponzi scheme can exist for a while in a strong and growing economy, this PTO head in the sand mentality could have gone on for at least a while longer had the economy continued to be strong. As we certainly all know, that isn’t the case and now the Patent Office is in severe trouble!
The magnitude of the problems faced by the USPTO are overwhelming. While those who rail against patents complain that patents last for too long, they are simply misinformed and flat out wrong. The overwhelming majority of patents do not enjoy the full term that the law allows because maintenance fees are not paid. Every week the Patent Office announces hundreds, or even thousands, of patents that fall into the public domain because of failure to make maintenance fee payments. Only those patents that are the most commercially relevant are the ones that last the full term, and those are the exact innovations we ought to be encouraging, not complaining about. If the patent system is suppose to foster innovation is it ridiculous to complain about patents lasting the full term, because few do and those are the inventions that foster innovation and benefit society most. But I digress.
Below is a portion of the patent fees table available through USPTO.gov. This shows how much maintenance fees cost at the various intervals.
The first column represents the full fee, and the second column represents the fee that must be paid by “small entities,” which are individuals, non-profits, universities and companies with 500 or fewer employees.
Maintenance fees add up quickly, and in the natural course of business even during a strong economy there are choices made by all patent owners with respect to whether it makes sense to keep a patent current or allow it to fall into the public domain. Most will pay the first maintenance fee, but from there forward the decision is much more difficult when the invention covered in the patent is not living up to expectations. Add to this the belt-tightening that goes on during a recession and this is why the Patent Office is in such dire straights at the moment.
A furlough or reduction in force would be very bad for the patent system, especially in light of the patent application backlog, which was created in significant part due to the resource intensive two reviews the Patent Office mandated for every allowable patent application. Thankfully the Senate has taken important first steps to correcting problems at the Patent Office. The bill passed last night would allow the Patent side of the Office to temporarily borrow funds from the Trademark side of the Office, which currently enjoys a $60 million surplus. This is not the first time that such an intra-Office borrowing has occurred within the walls of the USPTO. In both 1999 and 2005 the Trademark side of the building borrowed from the Patent side. Unfortunately, existing laws prevent the Patent side of the building from ever borrowing from the Trademark coffers. This bill would suspend this restriction to the extent necessary to allow PTO to avoid furloughing or terminating patent examiners. All funds would have to be paid back to by September 30, 2011, and the borrowing authority itself will terminate on June 30, 2010.
Hopefully this bill will speed its way through Congress and immediately get signed by President Obama. This is crisis time for the Patent Office and this is likely only going to be the first time Congress and the President will need to step in. My hope is that eventually our leaders will see the wisdom of funding the Patent Office to a point where it can actually fulfill its Constitutional mandate. More examiners will be needed, those present will need to be retained, work-flow will need to improve and patents will need to start being granted. Without a cohesive plan innovation will not be the solution to getting us out of this recession, and that would all but certainly mean a recession that is unnecessarily prolonged.