Jump-Start the U.S. Economy by Letting the Patent Office Keep its Own User Fees

By Marla Grossman, a partner at American Continental Group.

The Obama Administration’s emphasis on stimulating the U.S. economy and creating U.S. jobs, as well as the increasing recognition from Congress that a strong patent system is critical to an innovation-friendly government, has made it more important than ever for Congress to pass a permanent legislative solution to the damaging practice of taxing innovation by diverting user fees away from the U.S. Patent and Trademark Office (USPTO). Such a solution is part of the patent reform bill recently passed in the Senate, S.23, and is also part of the patent reform bill introduced by the House last week, H.R. 1249.

The USPTO is the federal agency that processes patent and trademark applications, disseminates patent and trademark information, and administers the laws relating to patents and trademarks.

Since 1990, the USPTO has been entirely funded through the payment of patent and trademark application and user fees; before 1990, taxpayers supported the operations of the USPTO. However, with the passage of the Omnibus Reconciliation Act of 1990 (OBRA), taxpayer support was eliminated. OBRA imposed a significant fee increase on America’s inventors in order to replace the taxpayer support the USPTO was, until that point, receiving. The fees paid by users of the patent and trademark systems are referred to as “USPTO user fees.” The revenues generated by this fee are collected by the USPTO and then transferred into a general Treasury account. The USPTO is required to request that the Congressional Appropriations Committees allow the agency to use the revenues in the account.

This bilateral fee transfer process — where the USPTO user fees are deposited into the Treasury and the agency is then funded by annual congressional appropriations — has provided the opportunity for Congress to divert user fees away from the USPTO and toward federal governmental programs and operations that are entirely unrelated to the agency. USPTO fee diversion has exceeded $800 million since 1992. According to the USPTO, the agency is currently collecting over $1 million a day that it is not authorized to use.

Diversion of USPTO user fees is a problem for practical, as well as philosophical reasons. The goal of our patent and trademark protection system is to advance protection of significant innovation in an efficient and timely manner. An efficient patent and trademark system creates greater incentives for innovators by reducing the cost of obtaining the key legal protections necessary for the inventor to make investments in innovation that are worthwhile to the inventor. However, according to several studies by the USPTO, numerous stakeholders, and congressional witnesses, fee diversion has made the U.S. patent system less efficient and more costly by contributing to the growing number of unexamined patent applications (“backlog”) and the significant time it takes to have a patent application examined (“pendency”).

In January 2011 testimony before Congress, USPTO Director David Kappos stated that the backlog of unexamined applications at the end of FY 2010 was approximately 708,500.

The USPTO has also explained that the uncertainty of the annual funding process and the recurring possibility of fee diversion severely restrict its ability to effectively plan for long-term personnel and technology needs, as well as implement procedures that decrease the likelihood of the issuance of poor quality patents.

In 2004, industry stakeholders generally agreed that they would pay more in user fees if Congress would pass legislation to permanently end fee diversion. Congress did, indeed, enact a fee increase in the 2005 Consolidated Appropriations Act, but did not act to permanently remedy the fee diversion problem. Once again, USPTO stakeholders have agreed to a 15 percent increase in USPTO user fees – if those fees are used by the agency and not diverted for other purposes.

One could reasonably argue that, by supporting the implementation of, and increases in, user fees to fund the operations of the USPTO, stakeholders have proven their willingness to use their own resources to finance intellectual property protections. Such an arrangement represents a desirable public-private partnership model, by effectively addressing matters of equal significance to the business community and to our nation: innovation, growth and competitiveness. It is thus important that these fees be used for the purposes intended, both to achieve the goals of innovation, growth and competiveness, as well as to encourage future beneficial public-private partnership models.

The diversion of USPTO user fees also presents a philosophical problem that undermines the pro-technology and pro-innovation rhetoric of our policy makers. Promoting innovation has been an important component of President Obama’s economic plan. The President has emphasized that ongoing economic recovery and the nation’s prosperity in the future will depend largely on the nation’s ability to innovate.Imposing an extra cost on innovators, however, which is not then used to advance the purpose of innovation, is taxing—not promoting—innovation.

A permanent solution to end USPTO user fee diversion, such as those incorporated in the Senate and House patent reform bills, would cease the injustice of USPTO stakeholders paying to support federal programs entirely unrelated to the original purpose of the user fee, curtail the wasteful cycle of such stakeholders having to annually lobby the Administration and Congress to stop this inherent tax on innovation, allow the USPTO to engage in the type of long-term planning that will help improve patent quality and shorten patent pendency, and, most importantly, in terms of the public’s interest, help promote the innovation that is so critical to our nation’s future economic well-being.

USPTO fee diversion must stop to ensure that the USPTO can engage in the stable, long-term planning necessary for the issuance of timely, high quality patents. The best legislative solutions will necessitate congressional appropriators to prioritize U.S. innovation, jobs and the economy over “inside the Beltway” politics.  But good policies often come with painful politics. If Congress can handle the short-term pain, the nation will likely be rewarded with a more efficient USPTO and long-term national prosperity.  The Senate has demonstrated that it is up to the task when it passed S.23 by a margin of 95-5.  Now it is time for the House to step up to the plate.