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	<title> - HOW AN IMPROVED U.S. PATENT AND TRADEMARK OFFICE CAN CREATE JOBS</title>
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	[House Hearing, 112 Congress]
	[From the U.S. Government Publishing Office]



	HOW AN IMPROVED U.S. PATENT AND TRADEMARK OFFICE CAN CREATE JOBS

	=======================================================================

	HEARING

	BEFORE THE

	SUBCOMMITTEE ON
	INTELLECTUAL PROPERTY,
	COMPETITION, AND THE INTERNET

	OF THE

	COMMITTEE ON THE JUDICIARY
	HOUSE OF REPRESENTATIVES

	ONE HUNDRED TWELFTH CONGRESS

	FIRST SESSION

	__________

	JANUARY 25, 2011

	__________

	Serial No. 112-6

	__________

	Printed for the use of the Committee on the Judiciary


	Available via the World Wide Web: http://judiciary.house.gov



	U.S. GOVERNMENT PRINTING OFFICE
	63-874 WASHINGTON : 2011
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	COMMITTEE ON THE JUDICIARY

	LAMAR SMITH, Texas, Chairman
	F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
	Wisconsin HOWARD L. BERMAN, California
	HOWARD COBLE, North Carolina JERROLD NADLER, New York
	ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
	BOB GOODLATTE, Virginia Virginia
	DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
	STEVE CHABOT, Ohio ZOE LOFGREN, California
	DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
	MIKE PENCE, Indiana MAXINE WATERS, California
	J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
	STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
	TRENT FRANKS, Arizona Georgia
	LOUIE GOHMERT, Texas PEDRO PIERLUISI, Puerto Rico
	JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
	TED POE, Texas JUDY CHU, California
	JASON CHAFFETZ, Utah TED DEUTCH, Florida
	TOM REED, New York LINDA T. SANCHEZ, California
	TIM GRIFFIN, Arkansas DEBBIE WASSERMAN SCHULTZ, Florida
	TOM MARINO, Pennsylvania
	TREY GOWDY, South Carolina
	DENNIS ROSS, Florida
	SANDY ADAMS, Florida
	BEN QUAYLE, Arizona

	Sean McLaughlin, Majority Chief of Staff and General Counsel
	Perry Apelbaum, Minority Staff Director and Chief Counsel
	------

	Subcommittee on Intellectual Property, Competition, and the Internet

	BOB GOODLATTE, Virginia, Chairman

	HOWARD COBLE, North Carolina, Vice-Chairman

	F. JAMES SENSENBRENNER, Jr., MELVIN L. WATT, North Carolina
	Wisconsin JOHN CONYERS, Jr., Michigan
	STEVE CHABOT, Ohio HOWARD L. BERMAN, California
	DARRELL E. ISSA, California JUDY CHU, California
	MIKE PENCE, Indiana TED DEUTCH, Florida
	JIM JORDAN, Ohio LINDA T. SANCHEZ, California
	TED POE, Texas DEBBIE WASSERMAN SCHULTZ, Florida
	JASON CHAFFETZ, Utah JERROLD NADLER, New York
	TOM REED, New York ZOE LOFGREN, California
	TIM GRIFFIN, Arkansas SHEILA JACKSON LEE, Texas
	TOM MARINO, Pennsylvania MAXINE WATERS, California
	SANDY ADAMS, Florida
	BEN QUAYLE, Arizona

	Blaine Merritt, Chief Counsel

	Stephanie Moore, Minority Counsel


	C O N T E N T S

	----------

	JANUARY 25, 2011

	Page

	OPENING STATEMENTS

	The Honorable Bob Goodlatte, a Representative in Congress from
	the State of Virginia, and Chairman, Subcommittee on
	Intellectual Property, Competition, and the Internet........... 1
	The Honorable Melvin L. Watt, a Representative in Congress from
	the State of North Carolina, and Ranking Member, Subcommittee
	on Intellectual Property, Competition, and the Internet........ 3

	WITNESSES

	The Honorable David J. Kappos, Undersecretary of Commerce for
	Intellectual Property and Director of the United States Patent
	and Trademark Office, United States Patent and Trademark Office
	Oral Testimony................................................. 4
	Prepared Statement............................................. 7
	Douglas K. Norman, President, Board of Directors, Intellectual
	Property Owners Association
	Oral Testimony................................................. 35
	Prepared Statement............................................. 38
	Robert J. Shapiro, Chairman and Co-Founder, Sonecon LLC
	Oral Testimony................................................. 62
	Prepared Statement............................................. 65

	LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

	Prepared Statement of Shayerah Ilias, Analyst in International
	Trade and Finance, Congressional Research Service, submitted by
	the Honorable Melvin L. Watt, a Representative in Congress from
	the State of North Carolina, and Ranking Member, Subcommittee
	on Intellectual Property, Competition, and the Internet........ 77


	HOW AN IMPROVED U.S. PATENT AND TRADEMARK OFFICE CAN CREATE JOBS

	----------


	TUESDAY, JANUARY 25, 2011

	House of Representatives,
	Subcommittee on Intellectual Property,
	Competition, and the Internet,
	Committee on the Judiciary,
	Washington, DC.

	The Subcommittee met, pursuant to call, at 1:33 p.m., in
	room 2141, Rayburn House Office Building, the Honorable Bob
	Goodlatte (Chairman of the Subcommittee) presiding.
	Present: Representatives Goodlatte, Coble, Chabot, Issa,
	Jordan, Poe, Chaffetz, Reed, Griffin, Marino, Adams, Quayle,
	Watt, Conyers, Berman, Chu, Deutch, Wasserman Schultz, Nadler,
	Lofgren, Jackson Lee, and Waters.
	Staff Present: (Majority) Blaine Merritt, Subcommittee
	Chief Counsel; Olivia Lee, Clerk; and Stephanie Moore, Minority
	Subcommittee Chief Counsel.
	Mr. Goodlatte. Good afternoon, and welcome to the first
	hearing of the Subcommittee on Intellectual Property,
	Competition, and the Internet. The Subcommittee will come to
	order. Before I recognize myself for an opening statement, I
	want to welcome all the Members of the Committee. We have a
	number of new Members in Congress who are on the Committee, but
	since most of them aren't here today, I will defer on that
	until perhaps later on in the hearing.
	I want to also say how pleased I am and look forward to
	working with our new Ranking Member, Mr. Watt of North
	Carolina, who was elected in Congress the same year I was, and
	we have worked together on a number of different things, but we
	will be spending a lot of time together here in this Congress.
	I'll now recognize myself for an opening statement.
	In April of 2010, the U.S. Department of Commerce released
	a white paper entitled: Patent reform: Releasing Innovation,
	Promoting Economic Growth, and Producing High-Paying jobs. The
	authors concisely document that a well-functioning patent
	system facilities innovation, a key driver of a pro-growth,
	pro-job-creating agenda. To illustrate this point, I've culled
	three factoids from the study. First, technological innovation
	is linked to three-quarters of America's post-World War II
	growth rate. Much of this is attributable to capital investment
	and increased efficiency.
	Second, innovation produces high-paying jobs. Between 1990
	and 2007, the average compensation per employee in innovation-
	intensive sectors increased nearly 2\1/2\ times the national
	average. And, third, innovative firms rely on patent portfolios
	to attract venture capital. In fact, 76 percent of startup
	managers indicate that venture capitalists consider patents
	when making investment decisions.
	But the Commerce study and related sources also note that
	the current U.S. patent system is ``prone to delay and
	uncertainty as well as inconsistent quality.'' On the front
	end, this means that private investments in innovation are less
	likely. On the back end, lawsuits that challenge the validity
	and scope of patents cannot address this quality deficit. Both
	scenarios stifle economic growth and job creation. Conversely,
	a well functioning and resourced Patent and Trademark Office
	can only lead to greater innovation and higher-paying jobs.
	Part of our focus today will examine how the agency is
	funded, or rather, not funded. The PTO derives its operating
	revenue from inventors and trademark owners who pay user fees
	to the agency. These funds are deposited in a PTO
	appropriations account at the Treasury, with the appropriators
	ultimately deciding how much money the agency gets back. Since
	1991, it is estimated that more than $700 million have been
	diverted from PTO coffers to other Federal initiatives.
	Starting with the Bush administration, we began to see more
	of a commitment to allowing the PTO to keep more of the fees it
	generates. If I had my preference, the PTO would be able to
	keep all of the fees it collects for PTO operations. While I
	have worked for many years and will continue to work hard to
	allow PTO to keep its fees, the reality is that we are in
	challenging financial times and we have a less than optimal
	system for funding the PTO at present. In this environment, we
	must continue to ask the question of how PTO can continue to
	enhance quality and reduce pendency in the unfortunate event
	that it is again faced with the less than full funding levels.
	Again, while we must continue to work to produce greater
	efficiencies at PTO, you can be assured that we will continue
	to work with the appropriators to allow the PTO to keep its
	fees. Any other system amounts to an excise tax on our Nation's
	inventors.
	But we won't confine the hearing to money matters alone. In
	this regard, no one can accuse David Kappos of dragging his
	feet as the PTO director. I commend him for his energy and the
	new initiatives that he's launched at the agency since assuming
	the helm. It is important to delve into these programs to make
	sure they are needed, and if so, to determine if they work.
	Above all, we should support programs that maximize the
	agency's ability to reduce patent pendency, pare the
	application backlog, and ensure that it issues only patents of
	high legal integrity.
	These issues really define the agency and its ability to
	serve inventors, trademark holders, and the American people.
	There are more than 700,000 applications awaiting first office
	actions, and average total pendency surpasses 35 months. We
	need to work with PTO to get these numbers down.
	I will conclude by noting that the American economic
	philosophy has evolved somewhat since the 18th century. Adam
	Smith wrote in the Wealth of Nations that a prosperous country
	is dependent upon capital, labor, and mineral resources. Today,
	knowledge moves the world. As the scientist and inventor Rajim
	Grabera put it, trillions of dollars, millions of jobs, and
	economic and geopolitical power flow from the exploitation of
	technologies which have deep roots in science.
	To illustrate, in 1947, intellectual property comprised
	less than 10 percent of all American exports. Today, that
	figure is well over 50 percent. We all understand the link
	between the PTO and the protections afforded inventors who
	drive this information economy. The PTO is a world-class agency
	now, but we must work with the Director to make it an even more
	efficient and productive one.
	I now yield to the gentleman from North Carolina, Mr. Watt.
	Mr. Watt. Thank you, Mr. Chairman. Let me start by
	congratulating Chairman Goodlatte on his selection as Chair of
	this Subcommittee. I feel very humbled and honored to be the
	Ranking Member, and especially serving with somebody who has a
	reputation for being knowledgeable in the area and interested
	in innovation and moving forward in this area. I dare say that
	we'll be a lot more philosophically aligned than I was with my
	Ranking Member on Financial Services last time, Ron Paul. So I
	am looking forward to that.
	I am also looking forward to serving with people that I
	know have a great, great deal of knowledge on this Subcommittee
	about intellectual property, Howard Berman, Zoe Lofgren in
	particular on our side; Howard Coble; and the Chair on the
	other side, among others. I don't mean to exclude anybody about
	their knowledge, but I know that there is a long, deep bench of
	people with a lot of knowledge on the Subcommittee, and I am
	looking forward to learning more about the subject matter and
	being an important part in this process.
	I also think it is important to thank the Chairman for
	convening this hearing to look at both the inner workings of
	the United States Patent and Trade Office and on the direct
	impact the services provided by the Patent and Trade Office
	have on the national economy in general and on job creation in
	particular. While I have had an ongoing interest in and
	appreciation for the important roles that intellectual property
	and innovation play in our economy, my new role as Ranking
	Member of the Subcommittee will no doubt afford me the
	opportunity to delve much more deeply and intensively into the
	legislative policy choices at play in this important area.
	As a former attorney with mostly a small business practice,
	I understand the value of innovation and helping to sustain,
	stimulate, and grow a company. However, innovations can only
	provide a positive impact to the economy if they are actually
	put into use. If innovations are buried in
	backlogs at the Patent and Trade Office or in the security
	boxes of companies or even in the minds of inventors, they can
	generate no economic value.
	There's little disagreement that the efficient operation of
	USPTO is vital, to paraphrase the Department of Commerce, to
	unleash innovation, promote economic growth, and produce high-
	paying jobs. While I am not privy to the President's State of
	the Union speech, I would be shocked if innovation is not a
	major component of his comments tonight and a major part of
	what will surely be his strong push for economic growth and job
	creation.
	In this environment of budget cuts, we must make smart and
	informed choices, and I trust that our witnesses here today
	will start us down that road. I just hope that in the larger
	push for global budget cuts or a balancing of the budgets, my
	colleagues will stand with me against throwing out the baby
	with the bath water and giving this important agency the
	important resources it needs to allow innovation and job
	creation.
	With that, Mr. Chairman, I yield back the balance of my
	time.
	Mr. Goodlatte. I thank the gentleman. And without
	objection, other Members' opening statements will be made a
	part of the record. Before I introduce our first witness, I
	would like him to stand and be sworn.
	[Witness sworn.]
	Mr. Goodlatte. We'll have two panels today. Leading off is
	the Honorable David J. Kappos, the Undersecretary of Commerce
	for Intellectual Property and Director of the United States
	Patent and Trade Office. In this role, he advises the President
	and Secretary of Commerce and the Administration on
	intellectual property matters. Before joining the PTO, Mr.
	Kappos led the intellectual property law department at IBM. He
	has served on the board of directors of the American
	Intellectual Property Law Association, the Intellectual
	Property Owners Association, and the International Intellectual
	Property Society. He has held various other leadership
	positions in intellectual property law associations in Asia and
	the United States and has spoken on intellectual property
	topics around the world.
	Mr. Kappos received his Bachelor of Science degree in
	electrical and computer engineering from the University of
	California at Davis in 1983, and his law degree from UC
	Berkeley in 1990. Welcome.

	TESTIMONY OF THE HONORABLE DAVID J. KAPPOS, UNDERSECRETARY OF
	COMMERCE FOR INTELLECTUAL PROPERTY AND DIRECTOR OF THE UNITED
	STATES PATENT AND TRADEMARK OFFICE, UNITED STATES PATENT AND
	TRADEMARK OFFICE

	Mr. Kappos. Thank you very much, Chairman Goodlatte,
	Ranking Member Watt, Members of the Subcommittee, for this
	opportunity to discuss the state of the USPTO. First, I'd like
	to applaud you for the caption of this oversight hearing. In my
	view, it is spot on. The work that we do at the USPTO creates
	jobs for Americans--high-paying jobs in innovation-based
	industries critical to our Nation's prosperity. We create the
	jobs that can accelerate our country's economic recovery. Our
	patent and trademark grants give American innovators the
	protection they need to attract investment capital, to hire
	workers, to build companies, and to bring new goods and
	services to the marketplace.
	But, to be successful, the USPTO needs to be well-managed
	and appropriately funded. We've implemented a broad array of
	changes during the last year and a half, which have refocused
	our resources on our most important work, including reducing
	our current patent application backlog. But ensuring stable
	funding for USPTO will continue to be critical to our success.
	Mr. Chairman, I am pleased to report that our dedicated
	employees have made progress in a number of important areas.
	Our patent operations set all-time records in total agency
	output, including both the number of patents granted and the
	number of applications rejected. As of the end of financial
	year 2010, we reduced the backlog of utility patent
	applications to about 708,000, the lowest level in several
	years. We've seen sustained and substantial decreases in
	actions for disposal, which are an indication that patent
	application issues are being resolved more efficiently.
	Importantly, these accomplishments have been made without any
	sacrifice in quality. In fact, our quality metrics have
	actually risen even while productivity has improved. We
	increased our total number of interview hours, the time spent
	working with patent applicants to understand their inventions
	and to resolve issues a full 40 percent last year, to 140,000
	interview hours, another all-time record for our agency.
	We put a number of market-driven pilots into action,
	including accelerated examination of green tech applications
	and a project called Exchange, as well as our three-track
	prioritized examination process that we expect to move forward
	with soon.
	Working with our patent examiners' union, POPA, the USPTO
	has installed a new examination count system. It gives our
	examiners more time to examine patent applications, increasing
	quality while incentivizing earlier resolution of issues,
	resulting in improved examination efficiency. We've
	substantially expanded our work-sharing arrangements with other
	major patent offices worldwide to speed the processing of
	applications filed in multiple jurisdictions. In fact, in FY
	2010, we more than doubled the total usage of our
	benchmark patent prosecution highway over all previous
	years combined.
	Mr. Chairman, my written statement contains more detailed
	information on the array of initiatives we've got underway, all
	geared toward helping to empower and unleash America's
	innovators in their capacity to create jobs. While we are
	aggressively making changes at the Office, I want to express
	the Administration's support for continuing congressional
	efforts to enact patent reform legislation. Enactment of a
	number of the proposals considered in recent years will
	significantly improve our patent processes, reduce litigation
	uncertainties and costs, and increase the value of patent
	rights for American innovators.
	Finally, ensuring stable funding for USPTO will continue to
	be a critical part of our success. As such, I want to provide a
	very brief overview of our current funding situation. Fee
	collections at USPTO are running very strong as a result of the
	improving economic outlook, strong patent renewal rates, and
	our increased production. We're getting more done and
	collecting more fees in doing so. As you know, to enable these
	efforts, the President's FY 2011 budget proposes that USPTO be
	permitted to spend all of the fees it collects, and proposes a
	15 percent surcharge on patent fees.
	Unfortunately, despite our strong fee collection, as a
	result of the current continuing resolution, the USPTO has been
	forced to implement spending reductions. These include
	restricting examiner overtime, delaying critical IT projects,
	and slowing down on hiring. Should the continuing resolution be
	extended beyond March 4, and hold the USPTO to the FY 10
	funding level, we'll be forced to halt all hiring, all
	overtime, and all IT improvements. This, unfortunately, would
	reverse many of the gains we've begun to make.
	Mr. Chairman, we wish to work with you and our
	appropriators to ensure that the job-creating,
	deficit-neutral work conducted at the USPTO for the benefit
	of our Nation's innovators is supported in whatever final
	spending package is enacted for the remainder of 2011.
	Thank you.
	Mr. Goodlatte. Thank you, Mr. Kappos.
	[The prepared statement of Mr. Kappos follows:]

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	__________
	Mr. Goodlatte. These bells are for votes that are going to
	take place on the floor. I do think we have enough time to get
	my questions in. So in order to keep things moving, I'll go
	ahead and begin the questioning, and then we'll recess, and we
	will come back and continue the questioning after the votes.
	The issuance rate for patents has risen appreciably during
	your tenure, even though examiners can devote more time to
	reviewing under the new count system. What accounts for this
	swing, and what does it say about patent quality? In the late
	1990's and early 2000's, critics were complaining about too
	many patents being issued.
	Mr. Kappos. Yes, thank you, Chairman Goodlatte, for that
	question. So at the surface the juxtaposition of giving more
	time to examination, right, but having more patents come out,
	even when you have few examiners, which is what we were dealing
	with last year, sounds like the classic riddle wrapped within
	an enigma. It is not at all. It's a matter of basic management.
	What we've done is give examiners more time upfront to examine
	applications while giving them all the incentives to reach out
	to applicants and engage in discussions with applicants,
	conduct interviews with applicants, and move beyond what was
	the ships-passing-in-the-night problem to instead understand
	the issues and figure out how to either grant the patent or
	reject it.
	So this is why I said we not only set a new record in
	granting patents last year, we also set a new all-time world
	record for the USPTO in rejecting applications. I believe that
	we're doing an excellent job at our job, which is calling balls
	and strikes, and it's borne out by our quality data which
	actually showed that quality went up, not surprisingly, when we
	gave examiners more time, starting last year.
	Mr. Goodlatte. Your predecessor, Mr. Dudas, one of the
	metrics he used in measuring quality was the lower allowance
	rate, i.e., he would argue that the PTO was doing a better job
	of catching bad applications. How do you compare yourself to
	that? Do you apply the same metric, or do you think that a
	lower approval rate is a good measure of the quality of the
	patents being approved or not?
	Mr. Kappos. I don't apply that metric at all. Frankly, I
	think that is the wrong metric. Our job is to grant those
	patents that should be granted with appropriately scoped claims
	and to reject those that shouldn't be granted. What I believe,
	after many years of practice in this area, is that most of the
	patent applications filed at the USPTO are filed by dedicated,
	brilliant, smart, innovative Americans, and they're really not
	about saying no, you don't get a patent. They're about finding
	the appropriate scope for which a patent should be granted. I
	have absolutely no problem with the allowance rate going up, so
	long as our quality remains high, as it has.
	Mr. Goodlatte. Let me go on to the next question. The PTO
	began a 12-month pilot in December 2009, that advances patent
	applications out of turn if they related to green technology.
	Does this suggest that the Administration favors industrial
	policymaking? Is the PTO trying to pick winners and losers in
	the business world? And what other forms of technology are
	favored in this way?
	Mr. Kappos. Well, I'm not looking to pick winners and
	losers. The purpose of the green tech pilot was to shine a
	light on an important area very, very broadly defined. It goes
	all the way across from fuel cells and solar technology to
	reduced power electronics and the like. We are about to
	announce very, very shortly, within days, what we will call
	track 1, which is a new, across-the-board acceleration
	initiative that will capitalize on what we learned from green
	tech and apply it to all areas of technology. Under track 1,
	we'll be offering to any applicant merely for payment of the
	fee, to get them their First Office Action within 3 months and
	get them a conclusion on their patent application within a
	year.
	So we're benefiting from what we learn from experiments
	like green tech and we're moving to able to go into production
	mode to be enable any applicant at the USPTO merely for payment
	of a fee to get in and out of our agency at a rate that enables
	them to get jobs and put products in the market quickly.
	Mr. Goodlatte. Does that mean that you will wrap the green
	technology initiative into this other new initiative or are you
	going to have now three tiers?
	Mr. Kappos. So that's a great question. Our ultimate plan
	is, over time, to start folding these other initiatives into
	what we're calling track 1. We're creating the infrastructure
	behind track 1 within the agency in terms of the implementation
	machinery so that we can fold these other initiatives into it
	over time and it becomes a consolidating point for what you
	would call these experiments that we've instituted.
	Mr. Goodlatte. So there will no longer be an industry bias,
	if you will, within the Patent Office, favoring one sector of
	creativity over others.
	Mr. Kappos. Over time, although I would leave open the
	opportunity to do more experiments with small, limited areas.
	Medical products is one that has come up from time to time.
	There may be others over time.
	Mr. Goodlatte. We have now reached the second bells. And
	under our new protocol, we're hoping that the management on the
	floor will move those votes along quickly. In that regard, we
	need to get down there and vote ourselves. So the Committee
	will stand in recess and reconvene as soon as the votes are
	over.
	[recess.]
	Mr. Goodlatte. It is now my pleasure to recognize the
	Ranking Member, Mr. Watt.
	Mr. Watt. Thank you, Mr. Chairman. Thank you for being here
	with us today and for your service at the Patent Office. I just
	received, just before I came, Senator Leahy's introduced
	version of the patent bill. I notice you went out of your way
	to say that we need to get on with doing patent reform. I don't
	suppose you've had an opportunity to look at the bill that he's
	introduced and able to comment on it, are you?
	Mr. Kappos. I've had an opportunity to look at it only very
	briefly so far.
	Mr. Watt. One section of it, section 9, deals with the fee-
	setting priority. I would especially like to have your opinion
	about that. If you haven't had a chance to look at it in the
	detail that you need to to give us that opinion today, that
	would be great if you just gave us something in writing.
	Mr. Kappos. Thank you, Ranking Member Watt. And that is a
	provision that I've had an opportunity to look at and it is of
	quite a bit of interest. For the United States Patent and
	Trademark Office and for the Administration relative to fee-
	setting authority, we strongly support the work being done by
	Congress, the approach taken in the Senate bill, and past
	efforts in the House, in order to enable the USPTO to set our
	fees. It turns out if there's anything I've learned in my year
	and a half at the agency, it's that for this agency to move at
	the speed business moves and to be business-relevant, we must
	have the ability to adjust our fees in much more real-time. And
	I'll give you a quick example.
	I mentioned before that we're getting ready to put our
	track 1 examination in place to provide 3-month First Office
	Action and 12-month patent disposition merely upon payment of
	the fee. Well, as we were fleshing that system out, the first
	thing we wanted to do is provide the 50 percent discount that
	we normally provide for small entities. Unfortunately, we
	cannot do that at the USPTO because that's a statutory
	requirement. Only Congress can do that.
	Mr. Watt. So, generally, you support what he's proposed
	here, working in conjunction with the House to move that along.
	I may be getting ready to tread into some territory here that
	will get me into trouble. We're not very controversial usually
	in the Subcommittee. But I was struck that in today's CQ
	there's a story captioned: Conservatives Rally Against Patent
	Overhaul. I guess my bottom line after I read a little excerpt
	from it is I just kind of like to know what you make of this,
	this whole argument.
	There apparently are some conservative organizations out
	there gathering signatures from some activist groups for a
	letter to House and Senate leaders opposing the legislation,
	which they cast as an attack on the American patent, a property
	right enshrined in the Constitution. That argument could
	resonate among conservative lawmakers, according to this,
	particularly Republicans, who have pledged to look to the text
	of the Constitution as a strict limit on the power of the
	Federal Government and dim the prospects for overhaul
	legislation in the Republican House.
	Among the provisions of concern to conservative activists
	as well as some private sector stakeholders are those that
	would make it easier to challenge the validity of granted
	patents and change the U.S. Regime from first to invent to
	first to file system.
	Now I'm not looking for controversy. Don't get me wrong.
	But it's always been my practice to try to deal with things on
	top of the table. And I'm interested in what you make of this
	whole potential attack. What would you make of that as an
	argument?
	Mr. Kappos. Well, thank you for the question. I disagree
	strongly with those conclusions. In my view, the patent reform
	legislation that the House has worked on, that the Senate is
	working on, would increase the value of patents, would increase
	the certainty of the patent system, would support the
	constitutional mandate for a patent system to provide patents
	for inventors, would provide certainty in the law, would add
	value across the board to our country fully consistent with the
	Constitution.
	Mr. Watt. I understand we've got a hearing coming up next
	week or sometime soon more directed at the patent. So maybe
	we'll get more into the arguments pro and con there.
	Let me just ask this general question. We've got the State
	of the Union address coming up tonight. If you were giving the
	President the words to say about why innovation and patent
	protection and this whole intellectual property protection is
	critically important to job creation and stimulation of the
	economy, how would you phrase it?
	Mr. Kappos. Well, I would use any of the examples that I
	hear regularly from places, including California and Texas and
	New York and many States that I travel to, of CEOs of small
	companies that come up to me and say, I recently got a patent
	from your agency. And when I got that patent, I was suddenly
	able to get my next round of venture funding. I was suddenly
	able to start up manufacturing. I was suddenly able to convert
	an expectancy of patent application into an estate, a patent
	right that enabled me to build my business on it and put people
	to work. And I hear that story over and over and over again and
	that's what convinces me that the USPTO really is the greatest
	job creator that no one has heard of.
	Mr. Watt. Mr. Chairman, I think that does it for the
	questions I want to deal with, and I'll yield back the balance
	of my time.
	Mr. Goodlatte. I thank the gentleman. I am bracketed by
	North Carolinians up here. It's now my pleasure to recognize
	the Vice Chairman of the Subommittee and previous Chairman of
	the Intellectual Property Subcommittee, the gentleman from
	North Carolina, Mr. Coble.
	Mr. Coble. Thank you, Mr. Chairman. I want to first
	congratulate you and Mr. Watt upon your elevation to your
	respective roles in leading this very significant Subcommittee.
	Mr. Kappos, good to have you with us, sir. The diverting of
	fees has long plagued the PTO and plagued me. You may have
	already touched on that, but I want to put a question to you
	with that in mind. The United States is participating in the
	Trans-Pacific Partnership negotiations, which may serve as a
	template for future trade agreements. How can we best use these
	negotiations to create jobs for American workers, especially by
	maintaining a high level of protection for United States
	intellectual property rights?
	Mr. Kappos. Well, that's a great question. Thank you, Vice
	Chairman Coble. The Trans-Pacific Partnership agreement is an
	important undertaking being lead by USTR. The USPTO is
	supporting USTR, and we stand with USTR for the proposition
	that the appropriate starting point for the Trans-Pacific
	Partnership negotiations is the Korea FTA. That's a great
	starting point. It is a strong intellectual property starting
	point. And we think that it will lead to good places in the
	TPP.
	Mr. Coble. This next question may at least indirectly apply
	to the diverting of fees. What are the anticipated consequences
	if the PTO does not receive full funding each year for, let's
	say, the next 5 years?
	Mr. Kappos. Okay. Well, the consequences would be between
	terrible and dire, frankly, depending on how much money,
	obviously, we didn't receive. The challenge that we have is the
	USPTO is an agency that receives money with
	workload. What's been happening for the last many years is
	we've been spending the money that we receive this year to
	actually do the work that we received several years ago, which
	leads to a tremendous unfunded mandate. We are currently
	sitting on over 700,000 patent applications that are
	unexamined. If you add up the ones that are in examination,
	over one million, well over one million. If patent applicants
	and trademark applicants in the U.S. stop filing patent
	applications today, we would have several billion dollars of
	work to do and absolutely no funding with which to do it.
	So we have got a tremendous unfunded mandate. Every time
	money is taken away, the unfunded mandate just becomes bigger
	and bigger. If our funding is constrained over the next several
	years, and we're unable, therefore, to hire the people we need
	to work on the IT improvements that we're putting in place, or
	to outsource our PCT-related work--which has worked extremely
	effective with firms right here in northern Virginia--we will
	see those backlogs. Instead of going down like they are now,
	they will skyrocket back up, patent pendency will skyrocket
	back up, and we will have an even larger unfunded mandate to
	deal with.
	Mr. Coble. Your words were ``dire'' and ``terrible,'' is
	that what you said?
	Mr. Kappos. Those are good words.
	Mr. Coble. Apt words, I think, to this occasion. Thank you
	for being with us. I yield back, Mr. Chairman.
	Mr. Goodlatte. I thank the gentleman. It is now my pleasure
	to yield to the Ranking Member of the full Committee, the
	gentleman from Michigan, Mr. Conyers.
	Mr. Conyers. Thank you so much. I wanted to commend the
	idea of this Committee being made a separate Committee. I think
	it's a good idea. It was implemented on the Republican side, so
	I think it's fair to think that the idea came from that side.
	And so I'm happy to be here with Mr. Kappos once again.
	The U.S. Patent and Trademark Office is a user-fee funded
	agency. Their goal is to keep all user fee dollars that come
	into the agency. But as we've researched this, there's about
	$800 million that has--I hate to use this term ``diverted'' in
	the past--but presently, we have $53 million from just last
	year that has not been appropriated. True or false?
	Mr. Kappos. True.
	Mr. Conyers. So would you suggest--well, maybe I should
	suggest to you what I would like to do about it and you can
	comment on my suggestion. You see, it is my belief that as long
	as we have a 730,000 patent backlog, we are doing a huge
	disservice to the ability to create jobs in our society.
	There's been quite a bit of writing on that. And as long as
	that, at the rate that you're going--and I commend you--our
	backlog is decreasing as opposed to the fact that it was
	increasing. And, to your credit and your associates, we've
	reversed that. But it will still take decades to get out of the
	backlog.
	And so it falls upon me as the senior Member of this
	Committee to recommend that we begin discussing not only how
	well we're doing now, but how we get rid of the backlog, which,
	admittedly, is a complicated problem. But as long as--we're
	still presently not giving you all the fees that you should be
	getting, even now.
	So what's the remedy, former Chairman Conyers? Well, I'm
	glad you asked that question. It's to begin to deal with the
	backlog not just from the Patent and Trademark Office's
	perspective, but from a national perspective. Suppose tonight
	at eight o'clock, this issue becomes discussed. Suppose we all
	collectively say, from the executive branch to the Congress,
	this has to be addressed even more than just keeping user fee
	dollars that come to the agency. Would that resonate favorably
	with you when the press approaches you after--later on tonight
	and say, What do you think of that?
	Mr. Kappos. Well, thank you for the comment, Representative
	Conyers. First of all, I would say I strongly agree that the
	issue of the patent backlog and the need to take that down and
	get patents processed at a much faster rate should be viewed as
	a national issue. And I agree that it is disserving job
	creation. As I mentioned, there are innumerable actual stories
	of American innovators whose inventions are held up at our
	agency and therefore they're not able to secure their patent
	estate, they're not able to build their businesses, they're not
	able to get their funding, they're not able to go out and hire
	people and create jobs. And that is, frankly, a tragedy.
	And it is very much, as you say, former Chairman Conyers,
	about money, about the USPTO simply getting to use the fees
	that we are collecting, the fees that are paid into the agency
	by American innovators for use in doing the things that we've
	demonstrated we know how to do to attack the backlog. If we
	have access to the fees that we're collecting, we can double
	down on the bets that we've made. We can take that backlog down
	to a reasonable level by 2015. It's not that far away. It's
	very achievable. We don't need to make any inventions to do it.
	We just need to keep running our plays. But it's all about
	getting access to the funding in order to do it.
	Mr. Conyers. Mr. Chairman, could I ask unanimous consent
	for 30 additional seconds?
	Mr. Goodlatte. Without objection.
	Mr. Conyers. Because our Ranking Member raised this
	question with me. What would be the fate of the Patent and
	Trademark Office if you had to go back to 2008 budget levels? I
	mean, that seems to me like a huge step backwards. And we're
	trying to talk about how we take some really drastic steps
	forward.
	Mr. Kappos. Well, thank you for the question. I'll now use
	words even significantly stronger than I used to answer the
	question from Vice Chairman Coble. If we had to go back to 2008
	funding levels, it would be a disaster for the USPTO. It would
	be a disaster in that we would have to immediately stop all of
	the improvements that we're making. But worse yet, it would be
	an incredible debilitating disaster because I would be required
	to furlough the USPTO employees likely for very significant
	periods of time. We'd be talking about a funding shortfall in
	excess of $400 million. There is just no way to absorb that.
	Mr. Conyers. Thanks, Chairman Goodlatte.
	Mr. Goodlatte. I thank the gentleman. You are fortunate we
	won't ask you how to balance the Federal budget and meet all of
	these obligations.
	We're operating under new protocols on the Committee which
	recognize Members based upon their time of arrival after the
	initial part. We've developed this new protocol but we haven't
	perfected the science of determining who arrived first. But I
	believe the gentleman from Utah is to be recognized next.
	Mr. Chaffetz. Thank you. Thank you, Mr. Chairman. I
	appreciate it. Thank you for being here. In the short time we
	have, I'd like to do some math with you in understanding the
	size and scope of the problem that you're having with your IT
	infrastructure. My understanding is that back in 2001, roughly
	21 percent of your budget was actually put into IT projects.
	Now that is down to roughly 12 percent. But that Congress had
	actually appropriated an additional $200 million for additional
	IT infrastructure on top of the 12 percent that you're already
	spending.
	Now my understanding is you have just less than 10,000
	employees, that's correct? The way I do that math, you spent
	well over a billion dollars. And yet I go back and read your
	testimony and you say basic things like: The current IT
	infrastructure is outdated, limits our efficiency, and costs
	the agency valuable time and money. Then you go on to say, we
	need to start doing things to replace our collaboration tool
	suite to support improved video, messaging, presence, and file
	sharing--something that is very commonplace in the market;
	provide voice IP throughout the campus and to homes of
	teleworking employees, which is supposed to cut down the cost
	and make our employees more efficient.
	I guess I'm struggling to understand why you're suddenly
	going to join the 21st century and implement Windows 7, as if
	that was something brand new, having spent a billion-plus
	dollars and yet complaining, as you say in your testimony, ``On
	the patent side, we're building a new patent examination IT
	system from end to end.''
	So the question is: What in the world have you been doing
	over the last 10 years, and why is this such a crisis at this
	time, having spent so much money?
	Mr. Kappos. That's a great question. Thank you very much
	for raising the subject of IT. So now speaking to you as an
	information technology professional, someone who's an
	electrical engineer and spent 26 years working in the
	information technology industry, the situation at the USPTO has
	not been good in an entire decade. We're still running on
	equipment that was installed in the USPTO well back into the
	20th century, right. There's no responsible entity, no company
	that I know of, that would go on that way.
	Mr. Chaffetz. But you're spending between $10,000 and
	$20,000 per employee, every single employee. On an annualized
	basis, you're spending somewhere between $10,000 and $20,000
	per person. How do you, after 10 years end, up with such a
	dismal result?
	Mr. Kappos. Right. So it's a little difficult for me to
	speak for what happened for 8\1/2\ of those 10 years when I
	wasn't there. As you commented though, what I've done since I
	arrived at the agency is apply some IT business discipline,
	which is when you're in a situation where you're pouring money,
	frankly down a rat hole, hundreds of millions of dollars a
	year, into trying to keep moribund systems Band-Aided together,
	if you will, what you do is you stop, look, and listen. And
	that's exactly what I did. And that's why I've taken the IT
	spin down, because I stopped projects that were underway that I
	thought were going to be a terrible additional waste of money.
	We're re-vectoring that spin over to an agile development
	methodology that's 21st century IT systems that all the great
	IT folks in the world are already using to move to what I
	believe will be an end-to-end patent process that will truly
	propel our examiners.
	If you went over to the USPTO right now--and I'd love to
	have anyone in the Committee come over there--we'll show you
	the prototypes of the system that our examiners are beating on
	right now over at the USPTO and we'll show you the enormously
	positive feedback and, frankly, functional feedback that we're
	getting from our examiners, telling us that they appreciate
	that we stopped, looked, and listened; they appreciate that
	we're now listening to them and that we are taking our IT in a
	direction that meets their needs first and foremost and not
	wasting more money.
	Mr. Chaffetz. And I do appreciate that. Mr. Chairman, I do
	think it's nothing short of scandalous that here's an agency
	that needs funds to process patents, and yet they've spent 10
	to over 20 percent of their budget on IT, and we find ourselves
	10 years later thinking that maybe Windows might be a good way
	to go. So I think it is scandalous. I appreciate your approach
	to this. This is not exclusive to the Patent Office. This is
	something that is pervasively a problem throughout the Federal
	Government. I think it's an embarrassment.
	And I would appreciate your continued
	follow-up because technology is supposed to make our life
	better, easier, more efficient, more effective; allow the
	public to see what we're doing. And to alleviate the pains and
	challenges that we have by simply just saying oh, we need to
	hire more people, and we're spending more than enough money, we
	need to demand better results. So I appreciate that. I yield
	back the balance of my time.
	Mr. Goodlatte. I thank the gentleman, and now yield to the
	gentleman from Texas, Mr. Poe.
	Mr. Poe. Thank you, Mr. Chairman. Just buttressing off of
	what my friend from Utah said, maybe the Patent Office ought to
	use some of those patents that they approve so that they can be
	more efficient down the road. I believe we need--I'll try to
	keep it simple--more innovation, swifter patents, more jobs,
	and a whole lot less pirates and thieves in our patent system.
	I'd like to concentrate on the pirates, the thieves, and the
	bandits, but I'm not going to at this time. Later we'll get to
	that.
	I'm not sure I'm convinced that this new proposed
	legislation is the answer to some of the concerns that we all
	share. How do we compare to our competitors--Japan, for
	example--on backlogs of patents?
	Mr. Kappos. Well, thank you, Representative Poe, for that
	question. It turns out that I completely agree our backlog is
	much too long. Secretary Locke and I are making that an ongoing
	signature issue. And we're not going to rest until we get our
	backlog down to acceptable levels and our pendency right where
	we need it to be.
	That being said, it turns out if you go overseas--if you go
	to Japan, if you go to Europe--you find that pendency levels
	there are actually quite long, and in many cases, longer than
	in the U.S. They have slightly different patent systems, so it
	can be a little difficult to compare apples to apples.
	But if you normalize away the differences, what you find is
	the pendency levels overseas are quite long also. That doesn't
	mean they're optimal. That doesn't mean we're going to settle
	for that approach in the U.S., but they are comparably long
	overseas.
	Mr. Poe. So they have a backlog just like we do, or they
	take about the same amount of time?
	Mr. Kappos. They do take in order of magnitude, the same.
	In fact, in Europe, they actually take longer in a lot of
	cases.
	Mr. Poe. A hypothetical--it's not really a hypothetical. In
	southeast Texas, I represent a wrecker service, Sammy Mahan is
	the owner; he's developed a new winch for his wreckers, his
	trucks. He files that with the Patent Office. How long,
	assuming that he gets a patent, will he be able to see the
	patent? When will he be able to receive that in that
	hypothetical case?
	Mr. Kappos. In the current system, if you file today, he'd
	be seeing--I'm doing this out of memory, obviously--but in an
	aggregate, he'd be seeing a First Office Action somewhere
	around 24, 25 months down the road. So let's say 2 years or so.
	However, with the track 1 initiative that we're going to be
	putting out in the Federal Register within days, that same
	inventor of a winch would be able, for just paying a fee,
	nothing else required, would be able to receive first response
	within 3 months, and receive his patent within a year or less.
	Mr. Poe. And how much is the initial fee that he pays for
	that, approximately?
	Mr. Kappos. Approximately the initial fee is going to be
	$4,000. And we'd love to be able to discount it for that small
	entity in southeast Texas, but we're going to need your help in
	order to do that because it requires a legal change.
	Mr. Poe. In your own opinion, the fees that inventors pay,
	do you think that it's about right, too low, too high? Just
	your opinion.
	Mr. Kappos. Well, I think the USPTO actually is a
	tremendous deal for patent filers. We're less expensive than
	our overseas counterparts; much less expensive than Europe,
	much less expensive than patent offices in developed countries
	in Asia. We actually are very reasonably priced. Our filing
	fees for patent applications tend to be priced at a cost that
	are lower than the actual cost of performing the services,
	right. And that money is made up by back-end fees that are
	charged for renewals or what's called patent maintenance. But
	in aggregate, if you go across the board, the cost to get a
	patent in the U.S. is actually benchmark low for developed
	countries.
	Mr. Poe. And your opinion is what I asked for; do you think
	it ought to be lower, higher, the cost?
	Mr. Kappos. I think it ought to be as low as it possibly
	can be, in aggregate, because we want American innovators to
	seek patent protection in our country. We want them to all have
	an entry point to the innovation system.
	Mr. Poe. All right. I'll yield back the balance of my time.
	Some other time we'll talk about the pirates.
	Mr. Goodlatte. I thank the gentleman. With apologizes for
	having overlooked her a few minutes ago, I now yield to the
	gentlewoman from Texas, Ms. Jackson Lee.
	Ms. Jackson Lee. Thank you very much, Mr. Chairman. I
	welcome Mr. Kappos to this hearing. In April of 2010, the U.S.
	Department of Commerce released a white paper entitled: Patent
	Reform, Unleashing Information, Promoting Economic Growth, and
	Producing High-Paying Jobs. Tonight, we are hoping that
	President Obama will focus on investment, infrastructure, and
	for some of us, some other issues like protecting Social
	Security. But you're not here to discuss that.
	With that in mind, and having the privilege of serving on
	this Committee as a Subcommittee some sessions ago, I can't
	think of a more important office. We understand that the
	Federal Government is going to initiate a $1 billion fund to
	generate new pharmaceuticals because the private sector is not
	keeping up or has found some reason not to invent, if you will.
	So I'd like to go along this line of questioning, and I do
	recognize fully that you were not here 10 years ago. But patent
	pendency is important for several reasons. First, businesses
	are unable to enforce their patent rights until a patent has
	issued.
	Second, since the term of a patent begins on the date of
	application, patent pendency cuts into the length of time an
	inventor has to make use of the exclusive economic right a
	patent confers. And that's enormously important. And then,
	third, high pendency rates may lead to decreased use of the
	patent system and instead businesses may choose to keep their
	new invention secret. I wonder if that is allegedly the cause
	of the issue dealing with pharmaceuticals. But I'd like you to
	answer the question regarding funding.
	Did the role--or what role do you think the lack of funding
	played in the creation of the current backlog? And this backlog
	was two sessions ago, so I know it's been a while that we've
	had this backlog. I would like for you to also answer what are
	the consequences of not getting funding for the next 5-year
	stretch. And beyond the technology, since I've heard some of my
	colleagues critique where we are in terms of IT, but what are
	the other elements that we're going to use to move the patent
	process along to create jobs and to incentivize inventors--
	small; sometimes those who cannot fund themselves.
	I used to practice law dealing with biotechnology. But what
	are we going to do to continue the excitement, the spirit, the
	inventiveness of those who don't have the funding to just hang
	around?
	Mr. Kappos. Thank you, Representative Lee. Those are great
	questions and they go really to the heart of the reason that
	we're all here today. So, number one, has the funding
	situation--what role has it played in the inability of the
	USPTO to get on top of its workload. Well, it clearly did play
	a role in years past. Again, what I am most able to comment on
	is in the year and half that I've been at the agency. And I
	will tell you that it is the definitive issue for us. I think
	we've demonstrated because we've started to make progress
	against the backlog, we've started to bring both what we call
	first action and final action pendency down. We've demonstrated
	we can get on top of the situation at the USPTO. It's like any
	other management challenge. I come from a business background.
	I was brought in to manage this place like a business. We can
	run it just like a business. That's the way we are. We can get
	on top of the backlog if we have adequate funding. All we need
	is access to the fees that the IP community, the people behind
	me here, are paying into the USPTO. We keep running our place,
	and I'll describe those in a second, and we can in just a few
	more year's time get on top of the backlog.
	Now what place are those? Of course, hiring is undoubtedly
	part of the question. Patent examination is legal and
	technical, scientific work. It requires brain power. It
	requires people doing analytical and evaluative work. So we're
	going to need more people.
	Ms. Jackson Lee. So you need funding going forward 5 years
	minimally?
	Mr. Kappos. Absolutely.
	Ms. Jackson Lee. Can you just tell me, if you didn't say
	before, what is the backlog now? Can you calculate, estimate
	what you have?
	Mr. Kappos. So we were able to bring the backlog down
	somewhat. At the end of the last financial year, we had it down
	to 708,000. In the next few months, I expect it to go down
	lower than 700,000; into the 600,000's. And if we have adequate
	funding this year, we expect to get it all the way down to
	about 655,000 or so by the end of this financial year. And
	we're just going to keep taking it all the way down to its
	appropriate inventory level, and we can get there by 2015 if we
	have adequate funding.
	Ms. Jackson Lee. And out of that and out of your
	experience, and I didn't look at your bio, but let me thank you
	for bringing business to the government, there's nothing wrong
	with that, but out of that, I know that patents can generate
	jobs. There are a whole measure of what inventions can do for
	this country. Is that your sense of the value of what the
	Patent Office is all about?
	Mr. Kappos. It's my conviction. I live it every day. As we
	issue patents, American innovators, small businesses, large
	businesses, independents, universities, are able to go out and
	create jobs. There's absolutely no doubt. There's no question
	about it. And we're talking high-paying jobs, we're talking
	innovation-intensive jobs. There is no doubt that the USPTO is
	a huge jobs generator.
	Ms. Jackson Lee. Let me just conclude, Mr. Chairman. Thank
	you for your indulgence and to the Ranking Member. Let me just
	say that America should not be shamed by any suggestion that
	its genius does not exist anymore, that in contrast to friends
	like China that we don't have the ability to churn this economy
	with the genius, the invention or the opportunity that our
	universities, individual entrepreneurs, and others can engage
	in. I think it is an important question. I'm asking from what
	you see, from what comes across upon the thousands upon
	thousands that come across your desk.
	Mr. Kappos. Yes, I would happy to comment. That is
	something I feel very strongly about. The 18 months I've been
	in this job I've traveled every single corner of the U.S. I
	talk to people everywhere I go. I am 100 percent convinced the
	American spirit is alive and well, every bit like it was in the
	1700's when our forefathers were settling this country, that
	our spirit is still alive and well. The issue isn't America's
	ability to invent. The issue is America's ability to connect
	inventions right with the capital that's needed and the other
	resources that are needed in order to bring those inventions to
	the marketplace and create jobs, and the USPTO is always the
	first stop in that journey. Right, so we are only one part of
	the journey but an essential first part of the journey.
	Mr. Goodlatte. The time of the gentlewoman has expired.
	Ms. Jackson Lee. I thank the gentleman. I yield back.
	Mr. Goodlatte. I'm looking at my television screen and
	seeing the gentleman from California, Mr. Issa. So he obviously
	has got some advanced technology that he knows about. I now
	yield to him.
	Mr. Issa. Mr. Chairman, it is always good to multi-task
	here in Congress. Mr. Secretary, I haven't kept track of how
	many people have had your job in the 10 years that I've been
	doing this. I won't forget though that the first time that we
	had a hearing like this, it was about the Bush administration
	wanting to increase the cost of patent applications. In my
	case, it is over $2 million for the claims of just one of my
	patents. I'm a funny kind of a guy. Even though I already had
	the patent, I looked and said, you know, I think $2 million for
	a patent before it yields anything might be a little excessive
	for the small inventor.
	So I take great pride in saying that during the last decade
	we ended fee diversion. You now--in spite of the appropriators,
	you get 100 percent of the money back to spend and you've used
	all of that and more. You have put yourself in a situation in
	which what used to be diverted funds and you lived with less is
	now undiverted and you consume it all.
	And I do appreciate the fact that you're operating under
	2010 revenue and I didn't hear the statistics supporting the
	increase in handling; in other words, why you would need more
	revenues in 2010. I didn't see the data showing why earlier you
	were asking for a loan because in fact patent applications were
	down, but you were hoping to get revenue later, and obviously
	today I didn't hear that some of your catchup came from the
	fact that your workload was also slightly off for a period of
	time.
	So I would appreciate it if you would provide this
	Committee, obviously the Chairman, the data supporting each of
	these for your request for a 15 percent tax increase on patent
	applicants. If in fact it is really needed, of course patent
	applicants would love to pay it. But let me just go through a
	quick line of questioning.
	Do you believe we should give you the authority to
	dramatically narrow the number of people who qualify as small
	entities?
	Mr. Kappos. No, nor would I ask for that. I would go----
	Mr. Issa. Why would you continue to want to have me, as,
	for better or worse, the wealthiest Member of Congress,
	receiving 37 patents to come back and put another patent
	application in a few months ago and I'm still a small entity--
	don't you want to have people pay for their patents on a
	proportional basis to the cost so that in fact it is borne
	based upon the applicant's actual need for evaluation through
	its granting or denial?
	Mr. Kappos. Well, so thank you for the question. If the
	USPTO had fee setting authority, which we don't have, I would
	very much like to adjust fees so that the agency is compensated
	for the cost to perform its services, and that would include
	charging higher amounts for those patent applications that
	include lots of claims.
	Mr. Issa. Excellent, because--well, let's be careful about
	the lots of claims, because that's how we got to this $2
	million, is that it was a punitive proposal under the Bush
	administration by one of your predecessors where they wanted an
	escalation far beyond the cost. They wanted to in fact
	discourage people who had hundreds or thousands of claims from
	making those claims.
	As somebody who has worked with patent examiners on
	repeated applications, we all know on your side of the desk
	that the more claims, the more redundant, the easier and
	quicker it is, you actually get an economy of scale, but that
	wasn't the proposal 10 years ago. So my question to you as a
	follow up to your answer is, shouldn't you be before us today
	with a fee adjustment scheme which fairly allows you to do what
	you would do if you had setting authority, but comes to the
	Chairman of this Subcommittee and says, we would like to have
	these kinds of authorities within--the fact is we can give you
	any scheme you come up with. You're coming here asking for 15
	percent across the board, you're not looking at real reforms
	that adjust the cost of a particular patent or class of patent
	to the payment. I might suggest, today, because it has been 10
	years of my caring a great deal about this issue, that that's
	what you should be coming to us. Come to us and show us that.
	Secondly, it has been nearly 10 years of waiting for
	information technology to dramatically reduce the cost of a
	patent. It doesn't seem to have done that. So this Subcommittee
	has primary jurisdiction. I think all of the Committees that
	look at information technology are beginning to wonder how many
	billions will be spent without a real pay-for, and could you
	respond to that last question?
	Mr. Kappos. I'm not sure if you were here when a very
	similar question----
	Mr. Issa. I caught part of it, but it didn't say how much
	longer should we should tolerate this before Congress takes a
	more direct role, finds an outside entity to take over this
	process if in fact you cannot get it done with the leadership
	of yourself, your predecessor and your successor?
	Mr. Kappos. I'm confused as to what you're referring to.
	Mr. Issa. Much of your efficiency has come from sharing
	with other bodies; in other words, other people are doing more
	and more of the work. I appreciate that. It doesn't make sense
	to reinvent the wheel. At the same time to say that some other
	country is not as good, this Congress just before I arrived
	stripped 100 years, 200 years almost, of patent policy away,
	the idea that your patent was good for 17 years from granting
	or others based on other patents, and we replaced it with an
	international standard that is robbing inventors every day you
	delay. So although you say you're doing well, although there is
	an improvement, we also have to realize as this economy
	rebounds in the months or years to come, there will be an
	increase. Much of that increase is coming from foreign
	nationals. The gentlelady's left, but the fact is she can
	celebrate American entrepreneurism, but the fact is that more
	and more of your patents are coming from people who are not in
	this country who want to harvest the benefits. But
	notwithstanding where they are coming from, you're robbing
	inventors every day. How much fees you get is less of my
	concern than that you get that number down. But if you're going
	to raise fees, and I know the Chairman's time has expired, I
	will just close. Why is it you can't come to us with a strategy
	that doesn't continue to simply raise fees on all, but comes to
	us with a real cost to fee basis, not a punitive one for too
	many applications, but a real cost of fee because I think the
	Chairman and all of us would love to hear a proposal that would
	really allow you to recoup your costs without penalizing
	anybody? Thank you, Mr. Chairman, for your indulgence. I yield
	back.
	Mr. Goodlatte. I thank the gentleman. Does the gentleman
	briefly care to answer that?
	Mr. Kappos. Well, I would respond that that's exactly what
	I'm here talking about today in the form--as an example of the
	Track 1 initiative, which is purely a cost recovery initiative
	that enables patent applicants, large and small, to file an
	application today, get 3-month processing and 12-month final
	disposition, pure cost recovery, no more and no less than that,
	and on their own elective basis. So we're actually trying to
	implement exactly the sort of market-based approaches that
	you're calling for. I couldn't agree with you more, Congressman
	Issa, that those kind of approaches are needed.
	Mr. Goodlatte. I thank the gentleman. The Chair now
	recognizes the gentlewoman from California, Ms. Waters.
	Ms. Waters. Thank you very much, Mr. Chairman. I'm sorry I
	have not been able to be here during this entire hearing, but I
	have reviewed materials and testimony, and I am impressed with
	the quality of improvements that are demonstrated here in this
	report. And I think the goals are commendable and I believe
	that we all wish to speed up the ability to do the registration
	and to issue the patents. And we need to give the support. We
	need to support as much as we possibly can. And whatever
	technology needs to be employed in order to reduce backlog and
	to respond effectively is all that I'm interested in. I think
	that most of us share frustration with our daily lives about
	our inability to access information, to access assistance in
	various walks of life. And so in this area where it is so
	important to job creation and innovation I applaud your efforts
	and look forward to supporting in every way I can give it.
	Thank you.
	Mr. Goodlatte. I thank the gentlewoman. It is now my
	pleasure to recognize one of the new Members of the Committee
	and of the Congress, the gentleman from Pennsylvania, Mr.
	Marino.
	Mr. Marino. I thank the Chairman. Secretary, it is a
	pleasure to be talking with you today. Thank you for being
	here.
	Mr. Secretary, how do you measure the performance? Let's
	switch gears a little bit. How do you measure the performance
	of your staff, of your individuals,specifically those reviewing
	patent requests, and are you able to increase their performance
	and their efficiencies and how?
	Mr. Kappos. Okay, thank you very much, Representative
	Marino. That's a great question. So one of the things that's
	wonderful about the USPTO, and perhaps to a fault, is we
	measure everything. I have been shocked in the 18 months or so
	that I've been there. This agency measures everything. We
	literally measure every action that every employee does. They
	are all recorded on our computer system, right? So each of our
	examiners as they pick up an application, as they read it, the
	time they are spending gets recorded. When they are talking to
	an applicant about an application, we call that an interview,
	it gets recorded. When they are responding to an applicant's
	amendment of a patent application, all of that gets recorded.
	So we have a tremendous amount of data that shows us literally
	day-by-day, week-by-week, we call them bi-weeks, 2-week
	groupings. All the way through the year we can do comparisons
	to a very minute level.
	And what we are seeing in realtime, and these statistics
	are recounted in my written statement, is that even as we have
	given examiners more time for first evaluation of applications,
	because we've also given them incentives to engage with the
	applicant community, they actually are getting applications
	done in aggregate more quickly. So we've managed to take the
	time, the effort that it takes--we call them actions per
	disposal. An action is each time an examiner picks up and works
	with an application. We have managed to take actions per
	disposal all the way down from over 2.9 to about 2.4, which is
	miraculous in the sense that it is like liberating a quarter of
	the agency--it is like increasing the size of your agency by 25
	percent simply by unleashing people and letting them be
	effective in their work. And I wish that Mr. Issa were here to
	hear more about this, because that's really the answer to the
	question. What are we doing other than hiring? We are actually
	investing in our employees' efficiency and enabling them to
	take the amount of time they spend on each application way, way
	down.
	Mr. Marino. Now would you agree with me, one of the reasons
	I believe that I was sent here was because the, my constituents
	and the American people are tired of the spending in government
	and the debt. Now with that aside, I come from a manufacturing
	background. I worked in manufacturing for 12 years on a
	production line before I went to college and law school. And
	I'm not comparing a manufacturing line with the cerebral work
	that has to be done on patent, and I say that in all sincerity.
	But we had to maintain certain production flow, based on the
	standards, based on the profits that we wanted to be generated
	in the line, and if we couldn't maintain that we were replaced.
	Do you see any way to increase efficiencies, whether that's
	through further training or equipment or software, because we
	need to learn to do more in government with less, just like we
	do in industry and like we do in our houses?
	Mr. Kappos. Right, so I sort of am from a similar
	background in the sense that I'm not a government guy, right? I
	was brought in from the private sector and I'm bringing in all
	of what I know from my 27 or so years in the private sector. I
	also came from a manufacturing environment and was an
	electrical engineer. So I get that at the end of the day you
	have got a product that you're producing. Our product, right,
	is the examination of patents and trademark applications. And
	you've got to try and come up with ways to measure it on an
	objective basis and you've got to think of it as a production
	line with inputs and byproduct and outputs. And we are doing
	exactly that.
	So as part of the process we have torn apart our entire
	patent application processing pipeline. It is a giant pipeline
	that has got literally hundreds and hundreds of steps, it is
	like a complex manufacturing process. I compare it to making a
	large computer, right, and it is very similar actually. We have
	torn apart the process, we are removing steps from the process.
	We are applying the discipline that you think of as 6 sigma or
	lean 6 sigma, if you're familiar with those terminologies from
	the manufacturing context, to try and succeed at injecting,
	manufacturing, production, discipline into the USPTO, right?
	And I believe that our statistics show that we are actually
	making some progress in that regard.
	Mr. Marino. How is my time, Chairman?
	Mr. Goodlatte. The time of the gentleman has expired.
	Mr. Marino. Thank you. Thank you, sir.
	Mr. Goodlatte. I now recognize the gentlewoman from
	California, Ms. Lofgren.
	Ms. Lofgren. Thank you very much. And first let me give you
	my apologies for missing part of this. We had the
	organizational meeting of the House Administration Committee
	and I had to go over for that. As you know, I have a very
	strong interest in the whole patent area. We have discussed in
	the past the necessary steps that might be taken.
	I'm really glad that we have an IP Subcommittee again. I
	think it will help us focus on these issues, and hopefully to
	take steps on a bipartisan basis to support the Office and see
	improvements that I know all of us want made.
	In terms of how to do that, I understand that while I was
	gone you did indicate your agreement that allowance rates is
	not necessarily the only measure. I mean it doesn't necessarily
	measure quality. And I think it's my opinion that bad patents
	are as big a problem as delayed patents. In fact, when you
	think about what happened when patents surged after State
	Street and some others, I mean it has just mucked up the whole
	system. And I'm wondering if you have in mind some--other than
	allowance or compliance rate metrics, which are really process
	oriented--do you have metrics in mind that we could look at
	that really measure quality?
	Mr. Kappos. Yes, thank you, Representative Lofgren, that's
	another great question and we do. We just got done, we spent
	the entirety of last financial year engaging with our
	stakeholder community, including many great companies from the
	Silicon Valley area, and we asked them a set of questions about
	quality. We held roundtables, we put out Federal Register
	notification, we took dozens and dozens of comments, voluminous
	amount of information we took in. We distilled all of that
	together, and at the end of the last financial year we came out
	with an entirely new way to measure quality, combining
	objective measurements of quality along with subjective
	measurements of quality. We put that in place at the beginning
	of this financial year. We just finished baselining it at the
	end of the last quarter, right, and we're getting ready to now
	start reporting to the IP community, to our Nation's innovators
	for the first time in history of the USPTO a comprehensive set
	of quality measures. Those include, right, not only, as you
	said, final compliance rate and in process compliance rate, but
	also indications of the quality of the search that we are
	conducting, the quality of the First Office Action examination
	that we are conducting and, importantly, surveys of the
	applicant community of their views of the quality of the work
	that we're doing and, importantly, surveys of our examiners of
	the quality of the work that we're doing.
	So I believe that USPTO now has the world's most
	comprehensive approach for measuring quality. Is it perfectly
	qualitative or perfectly quantitative? No. But it can't be in
	the world of judgments.
	Ms. Lofgren. I wonder if you could send us over the
	information that you've just referred to along with your
	summary at the end of this session so that we could be clued
	into the progress there. You know, I know that you know Mark
	Lemley at Stanford. He has opined that given the amount of
	time, 16 to 17 hours per examination, in his judgment is
	impossible to improve quality. I don't know when the last time
	Lemley did the analysis and came up with that hourly amount of
	time. Is that still accurate? Have we--what's the status of
	that?
	Mr. Kappos. That's a great question. Mark is, you know, a
	great mind in the IP field. And like probably everyone else in
	this room, I have read Mark's work for easily a decade.
	Ms. Lofgren. A long time.
	Mr. Kappos. It was in part influenced by his criticism of
	the amount of time that we gave examiners, that one of the very
	first things I did, and now a year ago, when I arrived at the
	USPTO, was to give examiners more time. We went across the
	board and gave every examiner at least an additional hour on
	every application, and in many cases we are giving more time
	than that. So I heard the message loud and clear. And frankly I
	believe it was the very same month that we started giving
	examiners more time. I believe it was February of last year,
	that our then in process quality rates shot up a couple of
	percentage points the very same month. And I don't believe
	that's any accident. I think it is simple. You give people more
	time, and they will do better quality work.
	Ms. Lofgren. I will ask a final question if I may.
	Mr. Goodlatte. Last question.
	Ms. Lofgren. It has to do with the satellite offices, which
	I think is a good idea and has the potential to really be
	important. I understand the first office was in Detroit. And as
	you know, I think more than a quarter of all patents issued in
	the United States comes from Santa Clara County. So I'm
	wondering when we will look for your next satellite office.
	Mr. Kappos. So thank you for that question. You know as a
	native Californian, there is nothing I would like better than
	to get to personally----
	Ms. Lofgren. It is 73 degrees in San Jose today.
	Mr. Kappos [continuing]. Personally open a satellite office
	there. You know, we are very pleased to have started in
	Detroit. We looked at a whole number of criterion in
	establishing and in deciding on that office, and including
	great universities and they have those in northern California,
	and lots of other districts represented here. Lots of invention
	and inventors, they have those in lots of districts represented
	here. Of course we looked at cost of living and that was a
	place that Detroit really came out really, really well.
	That being said, you could be assured that the Secretary of
	Commerce has made very clear to me that he wants us doing more
	experimenting with satellite offices. So we're already doing
	preliminary research on other possible candidates. We do intend
	to move forward with other candidates and we will probably try
	some different approaches because these are pilots and we want
	to learn from them. We are very committed to trying more than
	one pilot. I'm sure I will hear from several others in the room
	about their district.
	Ms. Lofgren. Thank you, Mr. Chairman, for letting me ask
	that last question.
	Mr. Goodlatte. I edited my request out of my opening
	remarks.
	But we'll now yield to the gentlewoman from Florida, Ms.
	Adams.
	Ms. Adams. Thank you, Mr. Chair. And I have sat and
	listened to all the questions and the answers, and I just have
	a couple extra questions. I am concerned about the fact that
	the cost over the last 10 years as my colleague brought forward
	earlier, but the one thing I didn't hear you say, but you said
	an appropriate inventory level. But you didn't say what the
	appropriate inventory level would be. What would you consider
	an appropriate inventory level?
	Mr. Kappos. Thank you, Representative Adams. Another great
	question. So the way I propose the discussion about
	manufacturing environment, the way I look at inventory, right,
	is that you have to have enough dockets on each examiner's
	plate, if you will, or enough cases with each examiner that
	each examiner has an appropriate workflow. We have got about
	7,000 or so examiners, many different skill sets. We examine
	everything from nano particles to fishing lures and even,
	believe it or not, we have people wheel-related inventions
	still. So, you have a nonfungible workforce--you can't just
	move employees around infinitely. You have got an uneven
	workload coming in, different quantities of applications in
	different parts of the agency. What you've got to do, is you've
	got to match the workload, right, to the examiners, which
	requires continuously moving people around, because we don't
	control the workload.
	Okay, so where that leads you is you have got to have an
	adequate number of dockets on each examiner's plate depending
	on the time that it takes them to examine--that question was
	asked already--and the time does vary. Fishing lures takes less
	time, nano technology takes more time. So if you add all that
	up and sort of go through the calculus from my view as a
	manufacturing person, at the end of the day we need somewhere
	in the neighborhood of 50 to 70 dockets, 50 to 70 cases sitting
	on each examiner's docket at any point in time. That's an
	appropriate level so that each examiner has good workflow--
	they've got some new cases to do, they've got some in process
	cases to do. They've got enough work that they are not running
	out of work, but they are also not overwhelmed with work. If
	you multiply that out it comes out to about 325,000 cases.
	That's an appropriate inventory level at any one period of
	time. It produces a nice steady work stream across all
	examiners, no one flushes their cue and runs out of work, no
	one is too overwhelmed. And that is the level we need to
	operate the agency. And oh, by the way, it is when we hit
	325,000 that we also hit optimal pendency, which is 10 months
	to first office action and 20 months to final disposition or
	grant of a patent at the USPTO.
	Ms. Adams. Thank you.
	Mr. Goodlatte. Well, thank you, Mr. Secretary. This has
	been a very thorough and very helpful hearing with you, and we
	do have another panel we are going to move to now. So we will
	thank you and excuse you. And I'm sure we may have some
	additional questions we want to submit to you in writing.
	Mr. Kappos. Okay, thank you very much.
	Mr. Goodlatte. Thank you for coming today.
	And, gentlemen, you may want to remain standing because
	we're going to ask each of you to be sworn in. If you would
	raise your right hand.
	[Witnesses sworn.]
	Mr. Goodlatte. Thank you and please be seated, and welcome.
	Our next witness is Douglas K. Norman, Vice President and
	General Counsel for Eli Lilly & Company. He earned his BS in
	microbiology from Indiana University, and his law degree from
	Indiana University Indianapolis. His practice includes many
	aspects of patent law, including procurement licensing and
	litigation. He's a member of the board of the Intellectual
	Property Owners Association, where he currently serves as
	President. He's also a member of INTERPAT, an association of
	research-backed pharmaceutical companies that work to improve
	intellectual property laws globally. Mr. Norman chairs the
	National Association of Manufacturers Subcommittee for
	Intellectual Property and has served in leadership positions
	for other IP organizations.
	Rounding out the panel is Robert Shapiro, who is Chairman
	and Co-Founder of Sonecon LLC, a private firm that provides
	advice and analysis to senior executives and officials of U.S.
	and foreign businesses, governments and nonprofit
	organizations. He is an internationally known economist with
	expertise in a range of areas, including globalization,
	innovation, financial markets, taxation, and public finance.
	Before establishing Sonecon, Dr. Shapiro was Under Secretary of
	Commerce for Economic Affairs from 1997 to 2001. Prior to that
	appointment, he was Co-Founder and Vice President of the
	Progressive Policy Institute and the Progressive Foundation. He
	has advised Bill Clinton, Bob Kerrey, and President Obama on
	economic issues and served as a fellow of Harvard University,
	the Brookings Institution, and the National Bureau of Economic
	Research.
	Each of your written statements will be entered into the
	record in its entirety. I ask that you summarize your testimony
	in 5 minutes or less. And to help you stay within that time
	there is a timing light on your table. When the light switches
	from green to yellow, you will have 1 minute to conclude your
	testimony. When the light turns red, it signals that the
	witness's 5 minutes have expired. And we will begin with you,
	Mr. Norman.

	TESTIMONY OF DOUGLAS K. NORMAN, PRESIDENT, BOARD OF DIRECTORS,
	INTELLECTUAL PROPERTY OWNERS ASSOCIATION

	Mr. Norman. Thank you, Mr. Chairman and Members of the
	Committee. I appreciate the opportunity to be here today to
	speak in behalf of the Intellectual Property Owners
	Association. IPO is a trade association representing companies
	and individuals in all industries and fields of technology who
	own or are interested in intellectual property rights.
	Effective and affordable intellectual property rights are
	key to innovation and job creation. Thank you for taking the
	time to address such an important issue in the context of PTO's
	operations. We congratulate Mr. Kappos on bringing creativity
	and energy to the efforts to improve PTO's patent operations.
	No one can make all of the needed improvements of course
	without adequate funding. Since the 1990's the PTO has
	collected approximately $800 million in patent and trademark
	fees from our members and other PTO users that it has been
	unable to spend because of limitations in appropriations acts.
	The inability to gain access to all of its collected fees has
	taken a considerable toll on the agency.
	We appreciated the bipartisan efforts of the Members of the
	House and Senate Judiciary Committees and the leaders of the
	appropriations Subcommittees last year to obtain supplemental
	appropriations for the PTO so that total appropriations would
	match the fees collected. Some success was achieved with the
	enactment of a $129 million supplemental appropriation, but the
	PTO still collected about $50 million in users fees by the end
	of the fiscal year that it could not spend.
	We also appreciated the efforts last fall to obtain an
	exception for the PTO in continuing resolutions. The case for
	exceptions to the PTO in continuing resolutions and other
	appropriations legislation is simple; the PTO deserves a
	different treatment because it is funded entirely by patent and
	trademark fees. No general taxpayer funds are used.
	The Members of this Subcommittee are well aware that March
	4th, 2011 is the next deadline Congress faces for resolving
	fiscal year 2011 government funding issues, including whether
	or not to provide adequate funding for the PTO. IPO strong
	supports setting appropriations at a level that would allow the
	PTO to spend all of its estimated fee collections, including a
	buffer in the legislation to allow the PTO to spend more than
	estimated fee collections if actual fee collections exceed the
	estimates and, finally, imposing 15 percent surcharge on major
	patent fees during the remainder of the 2011 provided the
	spending limit is raised to guarantee that the USPTO can spend
	the income generated by the surcharge.
	We encourage the Judiciary Committee to work with the
	Appropriations Committees on these issues as they did last
	year. IPO also continues to strongly support permanent
	legislation to allow the PTO full access to patent and
	trademark fees collected every year. The PTO needs to make long
	range plans to enable it to hire examiners, to invest in
	information technology, and to make other infrastructure
	improvements.
	Patent timeliness and quality in particular are relevant to
	job creation. The current average time to grant a patent is
	about twice as long as the goals of 18 to 20 months that had
	long been recommended by IPO and others. Early determination of
	legal rights in technologies is important for patent owners in
	many industries. Early determination is also very important to
	give notice to competitors in the patent owner's industry who
	may be considering investments in the same or similar
	technology.
	Business people put high value on legal certainty. Delay in
	granting patents inevitably means legal uncertainty, which
	directly stymies investment. The only way to achieve maximum
	legal certainty at an early date for all patent rights is to
	hire enough examiners to examine every application reasonably
	promptly. This requires stable and increased funding for the
	PTO.
	We would like to mention a few patent reform proposals that
	directly affect the PTO. We support legislation to establish a
	new post-grant review proceeding. A post-grant review
	proceeding of appropriate scope can serve as a useful check on
	the quality of patents after they are granted by the PTO.
	We also support legislative proposals to expand the
	opportunities of third parties to submit prior art information
	to the PTO before patent grant, another quality measure. And
	for 20 years the IPO has supported the conversion of the U.S.
	patent system to a first inventor to file system. First
	inventor to file will increase legal certainty for patent
	rights; it will also simplify proceedings in the PTO and open
	the way to further simplification through international
	harmonization of patent law.
	Thank you for the opportunity to appear here today, and I
	will be pleased to answer any questions or supply additional
	information for the record.
	[The prepared statement of Mr. Norman follows:]

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	__________

	Mr. Goodlatte. Thank you. Mr. Shapiro, welcome.

	TESTIMONY OF ROBERT J. SHAPIRO, CHAIRMAN AND
	CO-FOUNDER, SONECON LLC

	Mr. Shapiro. Thank you. I'm honored to be here today to
	discuss the role of the PTO in helping create American jobs. I
	approach this as an economist with some preparation coming from
	serving as Under Secretary of Commerce, but also from running
	an economic advisory firm that advises companies dependent on
	the intellectual property protected by the patents issued by
	the PTO.
	The economic case here really boils down to three
	propositions. First, growth productivity and jobs all depend
	more than any other single factor on our economy's capacity to
	innovate. Two, innovation depends on the creation of new
	intellectual property and, three, the creation of new
	intellectual property depends on the soundness and integrity of
	the patent regime and on its enforcement.
	For a half century economists have documented the pivotal
	role that intellectual property plays in economic growth. We've
	long known that the development and adoption of economic
	innovations explains 30 to 40 percent of the gains in
	productivity and growth achieved by the United States over the
	last century. That is three times the impact, for example, of
	increases in capital investment. We also know that since the
	1990's for the first time anywhere U.S. businesses have
	invested more each year in idea-related intangibles--that's R&D
	and patents and copyrights and databases and software--than
	they have in all plant, equipment, and other tangible forms of
	investment. We further know that more than four-fifths of
	recent gains in productivity can be traced to the development
	and application of new ideas, especially those related to
	information technologies.
	The reason that the United States is the world's dominant
	producer of economic powerful innovations is that innovations
	thrive in places where commitments to research and development
	are strong, the political and economic environments are stable,
	barriers to starting new businesses are relatively low and,
	perhaps most important, where intellectual property rights are
	sound, respected and enforced.
	To create an innovation a business has to take investment
	capital away from uses known to produce substantial returns and
	use it instead in much riskier ways that promise unknown
	returns at some unknown time. The only incentive to do so comes
	from the monopoly privilege granted by patents and copyrights,
	the only monopoly rights legally provided for in our market-
	based system, and the integrity of those patents and copyrights
	depends on the quality and the due speed with which the PTO
	adjudicates the claims of innovators that their new ideas meet
	the criteria for these monopoly rights.
	Innovations and intellectual property embodied in them help
	create jobs because they play such a critical role in the
	competitiveness of American companies. In fact, the capacity to
	develop new intellectual property and innovations has become
	the primary grounds for the economic competition between
	American firms and firms in other advanced committees here and
	across the global economy.
	Patent rights drive innovation in other ways as well. Many
	innovations produce a kind of cascade, where their introduction
	and adoption are followed by additional innovations which build
	on or depend on the initial breakthrough and may have even
	greater impact on productivity and competitiveness.
	The most common type of cascading in fact involves
	incremental improvements or enhancements of an existing
	innovation, which extends its usefulness to more industries or
	new activities. These cascades depend on the patent regime. We
	grant time limited monopoly patent rights to innovations but in
	exchange the patent holder must reveal the inner workings of
	the innovation. They become public knowledge, and these rules
	actively encourage subsequent innovators to build on an initial
	breakthrough.
	Advanced economies which promote the conditions for
	innovation have a competitive advantage then, and promoting
	those conditions should be a central priority for national
	growth and employment policy.
	The U.S. is home to a disproportionate share of the world's
	companies capable of developing and adopting the powerful
	innovations which drive economic progress. That reflects our
	strong intellectual property protections.
	The sustained development and application of new
	intellectual property also relies on a few other social and
	political conditions. An entrepreneurial culture and low
	barriers to the formation of new businesses play significant
	roles because young and new businesses are major sources of
	innovation and more likely than established firms to quickly
	adopt innovations from others.
	The importance of a strong competitive environment also
	cannot be underestimated. In addition, strong government
	support for basic R&D is critical since the incentives for
	private firms to undertake basic R&D are notoriously weak.
	Finally, and I'll close with this, sustained public
	investments in education and training are vital to ensure a
	sufficient supply of workers who can operate new technologies
	and operate effectively in workplaces dense with these
	innovations.
	Thank you.
	[The prepared statement of Mr. Shapiro follows:]

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	__________

	Mr. Goodlatte. Thank you, Mr. Shapiro.
	Mr. Norman, should the PTO expand the pilot projects for
	green technology and humanitarian inventions? What do you think
	most inventors would say about the need for these programs?
	Mr. Norman. A few points to be made concerning these PTO
	initiatives. First of all, they are noble efforts to do--to
	take action toward the policy goals of innovation and expansive
	use of the innovation. We have, we as patent owners have been
	in favor of the green technology initiative because we presume
	those would be relatively small pilot programs that would not
	detract from large areas of the Patent Office allowing
	different types of applications to be moved in front of others.
	And so a small pilot program we found to be acceptable.
	We have other concerns with the humanitarian effort because
	in our view it is creating a set of programs within the Patent
	Office, should it be followed, that would detract from the
	prime mandate of the Patent Office to pick up and in a
	principled manner examine and issue patents in the order in
	which they arrive at the office.
	Most concerning about some of the issues in the
	humanitarian program is the fact that it would allow the
	creation of artificial markets, for vouchers that could be
	freely traded, and once an entity or an individual inventor or
	a law firm obtained one of these vouchers they could trade it
	on the open market so that it could be purchased at a cost and
	used by a third party or used by another entity that was not
	involved in the initial reexamination that provided the
	voucher.
	Mr. Goodlatte. I'm going to interrupt you because I have
	got a limited amount of time to ask several questions.
	Mr. Norman. Certainly. And so we were not in favor of
	creating a new market within the patent system.
	Mr. Goodlatte. I've gotcha.
	Mr. Shapiro, you commented that strong government support
	for basic research and development is critical in the IP
	context since incentives for private firm to undertake basic
	R&D are weak. Could you elaborate on that?
	Mr. Shapiro. Certainly. Basic R&D as opposed to later stage
	research and development has always been considered what
	economists--what Adam Smith called a market failure. And the
	reason is that businesses make investments when they can
	capture all the returns from that investment. In certain cases
	it is impossible to capture most of the returns because most
	the returns come from spillovers.
	So for example, if you have basic research in genetics,
	which is an area which has received enormous public support
	through the National Institutes of Health, the reason we do
	that is that those breakthroughs lead to many other
	breakthroughs by innovators who are different from the ones who
	would have funded the initial basic research. And so they could
	say, gee, our investment has led to all of these profits by
	other companies that we can't capture. We want to make
	investments that will produce, in which we can capture, all
	those returns. And as a result, at a very basic level, it's
	basic science we're talking here, basic physics a basic
	biology, the private sector incentives to make those
	investments are quite weak. And that has always been the basis
	for government support in those areas.
	Mr. Goodlatte. Thank you.
	Mr. Norman, what's your beef with programs that prevent an
	inventor to delay completion of their application? For that
	matter, why would an inventor want to do this and how could
	this affect the U.S. job situation down the road?
	Mr. Norman. Sure. Thank you. IPO has not been in favor of
	programs that would allow for deferred examination because
	there is a flip side to a patent right. When an inventor files
	a patent application and it is published in 18 months, it
	allows all competitors to see the direction in which the
	inventor is taking that invention or that set of claims and
	those possibly patentable claims. Soon thereafter we would hope
	to see those patents--those patent applications be granted as
	issued patents that will have enforceable rights. However, if
	the examination of these patent applications is deferred for 30
	months or longer and then further deferred because of delay
	within the Patent Office, we can easily be looking at a period
	of time, perhaps 5, 6, 7, 8 or 10 years, before a competitor,
	an innocent competitor, could really have a true view of
	whether or not a patentable invention claim is going to issue
	out of the patent application. Therefore, competitors do not
	have the ability to see what's really going to issue out of the
	Patent Office. And therefore, we do not like to see deferred
	examination, because we like to see open, transparent and
	clarity of patent rights sooner rather than later, and we would
	like to see the Patent Office working to meet those goals.
	Because the more we invest to engineer around patent claims
	that never end up issuing, the more duplicative effort and
	waste we put in our research and development, costing us wasted
	innovation and a loss of jobs.
	Mr. Goodlatte. Thank you.
	The gentleman from North Carolina, Mr. Watt.
	Mr. Watt. Thank you, Mr. Chairman. Mr. Shapiro, you were
	here earlier when I questioned Secretary Kappos and also from
	my opening statement I raised the prospect that the President
	would be this evening making comments about innovation and the
	importance of innovation and the Patent Office to stimulating
	the economy and creating jobs. I think you've had occasion to
	at least in the past, I don't know about for this particular
	speech, advise Presidents, possibly including this one, on
	articulating that important connection between job creation,
	innovation patents. If you were advising him, what would be
	your advice to him on how you articulated that in a 1-minute
	capsule form?
	Mr. Shapiro. Well, you know economists are not very good at
	1-minute capsules of anything. The fact seems to be that our--
	the American economy has become the--an idea-based economy to a
	greater degree than any other economy in the world. Most of the
	value that is produced in this economy is now derived from
	ideas, and we compete in the world on the basis of our ideas;
	that is, we compete on the basis of quality and innovation. We
	don't compete on the basis of price. We can't compete with
	China on price, and we can't compete with India on price. But
	we can compete with every country in the world in the ability
	to produce more useful and new products and new ways of
	conducting business that are more efficient and more responsive
	than the firms in any other place in the world. And that means
	we have to invest in the conditions, the things which make that
	happen.
	Mr. Watt. Such as?
	Mr. Shapiro. Such as basic research and development, such
	as an intensely competitive domestic economy. The only thing
	that drives people to change in any economy, to adopt
	innovations or to develop them is competition. So we need to
	enhance competition, and we need to make sure that in an
	economy in which virtually every workplace is now dense with
	innovative technologies, that everyone has the opportunity to
	secure the skills to operate effectively in that kind of
	workplace.
	Mr. Watt. Now, many of the idea-related intangibles, I
	think you referred to them as, that you just talked about and
	that you talked about in your paper are not necessarily all
	protected by the patent process. I assume you're not making a
	case for a broader category or categorization of what's
	patentable or what's protected intellectually?
	Mr. Shapiro. No, I think that there are certain--although
	the Patent Office has patented certain things that would be
	considered business methods and not technologies, just with a
	kind of slight technological trigger. But the point is that
	again these intangible things which in the end resolve down to
	ideas, whether they are new or not, now dominate the U.S.
	economy.
	Let me give you one very striking set of data. In 1984----
	Mr. Watt. Very quickly because I want to get Mr. Norman's
	advice to the President on the State of the Union in a 1-minute
	bullet, too.
	Mr. Shapiro. In 1984, the book value of the 150 largest
	U.S. companies, that's what you could sell all their assets,
	their physical assets for on the open market, was equal to 75
	percent of their market value; that is, large U.S. companies
	were worth a little more than their physical assets. In 2005,
	the book value of the 150 largest U.S. Companies was equal to
	36 percent of their book value. Two-thirds of the value of
	large U.S. Corporations in this period are derived from
	intangible assets and not from their physical assets. That's an
	idea-based economy.
	Mr. Watt. Weigh in on this short articulation of how
	innovation and job creation fits in our economy, Mr. Norman.
	Mr. Norman. Our economy. I agree with Mr. Shapiro is a
	knowledge-based economy, information-based. We can compete with
	every country in the world and we can compete extraordinarily
	well against every country in the world, but we have a
	competition for the best ideas going on and the best ideas can
	be embodied in a patent claim. Obtaining the best patent based
	upon the innovation and the work that you are willing to put
	into creating innovation is what then drives the system that
	allows us to then commercialize those inventions.
	And I would tell the President do everything he can to
	sponsor innovation because I am doing it. At this moment I am
	preparing to send a son to college to study chemistry. And by
	golly, one of these days I want him to have a U.S. patent.
	Mr. Watt. Now I take it that education then would be a
	major component of this whole pitch also?
	Mr. Norman. Yes.
	Mr. Watt. Mr. Chairman, I yield back. I'm over my time.
	Mr. Goodlatte. I thank the gentleman. I now recognize the
	gentleman from Pennsylvania, Mr. Marino.
	Mr. Marino. I thank the Chairman.
	Mr. Norman, do we have the student intellect graduating
	from our universities to outpace other countries?
	Mr. Norman. To outpace other countries? I haven't made a
	specific study of what we are doing, but it is certainty true
	that the number of science and engineering students both
	entering college and graduating from college has gone down as a
	percentage basis over the last 20 years, whereas in other parts
	of the world, India and China in particular, it has risen
	dramatically. However, I think there is a spectacular quality
	to the level of American ingenuity that is coming out of our
	research institutions, and you still see the United States be a
	key leader in key aspects of bioscience and material science,
	certainly in information technology. And what we need to do is
	continue apace to stay ahead, and a fantastic way to do that is
	to make be sure that the innovations are coming out of research
	institutions, both private and public because universities
	certainly are some of the largest patent holders in the United
	States. We want to see that those continue to rise and patent
	protection can be used to continue to create other--to foster
	other innovation and create other jobs, both within the academy
	and within industry.
	Mr. Marino. Thank you. Mr. Shapiro, did I infer correctly
	when you stated that the research and development is performed
	mostly in government because private industry does not want to
	take the risk?
	Mr. Shapiro. Let me distinguish between two kinds of
	research and development, between a very basic level of
	research and development where we're talking about basic
	science, as opposed to research and development to make a
	better electric car battery. When the research and development,
	which is focused on particular products and processes and
	materials in which the commercial usefulness can already be
	seen or imagined, that all occurs and properly should occur
	only in the private sector.
	The level of research and development that requires public
	support is at a much more basic level before the implications
	of that can be imagined, because the research hasn't come to
	fruition yet. And so for example, research into the particular
	molecular causes of certain illnesses, we don't know whether
	that would with have an application for a treatment that would
	have a market. It comes before that. And that's the kind of
	research which has traditionally received public support as
	opposed to the kind of research and development which is
	focused on producing a particular product where there is an
	understanding of the commercial potential.
	Mr. Marino. Do I have time for one more, sir?
	Will we get more bang for our buck if we in the
	government--if the government sought out private industry in
	specifically related areas to do the expansion of the research
	and development?
	Mr. Shapiro. I personally think that government is not very
	adept at deciding what areas of commercial development should
	be pursued, so that I think the scientists understand the basic
	science better and the businessmen understand the commercial
	development better. The government's role is to identify who
	is--who are--what are the appropriate scientific institutions
	that can carry on the basic research and then largely to get
	out of the way of the research and development of the private
	sector.
	Mr. Marino. Thank you, sir.
	Mr. Goodlatte. The gentlewoman from Florida, Ms. Adams.
	Ms. Adams. Thank you, Mr. Chair. Mr. Norman, you were here
	when Mr. Kappos was asked what the appropriate inventory level
	would be. Would you agree with that level?
	Mr. Norman. The Patent Office has made a study and
	published it which shows sort of the cross points whereby they
	need to have a specific backlog and how much they need to keep
	moving to sort of keep the machinery of the office moving, and
	I have no reason to dispute that. Absolutely there will by
	definition be a backlog, because nothing can get processed
	immediately. The exact size of that I'm unsure, but the data
	that we saw in their report did not seem unreasonable.
	Ms. Adams. So in that vein if they were to receive more
	funding, as you're suggesting and as you're asking, then that
	would mean that they would increase their employees, which
	would mean that they would increase the number of backlog that
	would be acceptable; is that correct?
	Mr. Norman. If they were to increase the number of
	employees it would, we would hope, allow them to more speedily
	do the examinations and decrease the backlog down to the level
	where it could be maintained at a constant. Our key point is
	that we very much need to see our patent applications coming
	out of the office, either with the final rejection or as a
	granted patent. We believe the sweet spot is somewhere within
	18 to 20 months after the initial filing date. That would allow
	us to have the business certainty that we believe our
	corporations and our law firm clients need to be able to make a
	meaningful research investment to get something onto the market
	or at least to get the next round of capital funding for a very
	complex invention that would allow the creation of the jobs
	that would go with the development of a product that may take
	10 years to get to the market.
	Ms. Adams. I have no further questions.
	Mr. Goodlatte. I thank the gentlewoman. I have a couple
	more questions, Mr. Norman. We'll see if those prompt any other
	questions from the Committee.
	Do you believe the PTO could implement a post-grant review
	system as a way to enhance patent quality; and would this
	overwhelm the agency, given its other missions and challenges?
	Mr. Norman. I do believe that they could institute a post-
	grant review proceeding. I think that it should be phased in,
	if possible, so it's not just like turning on a light switch
	and suddenly they have a whole new judicial body full of
	administrative law judges sitting within the Patent Office. So
	it would take some phase-in.
	But an important thing to remember would be if we move into
	a world where we have post-grant review, we would need to do
	that in conjunction with other changes in the U.S. patent law
	that allow for a more objective oversight of patent
	applications by the redefinition of prior art by moving the
	United States to a first-inventor-to-file system. That would
	actually make the underlying patent examination more simple,
	have greater transparency and greater clarity, and we would
	hope, therefore, would shorten the pendency time due to the
	more simplified sets of rules that go into a reformed patent
	system. So that would free up, we would hope and believe, more
	resources at the Patent Office to institute a post-grant review
	proceeding.
	Mr. Goodlatte. The other question is, do most users of the
	PTO fear search activities carried out by non-U.S. examiners,
	and is harmonization in the area a bad idea?
	Mr. Norman. We have been in favor of harmonization of many
	aspects of the patent system. One part of harmonization is the
	workload sharing between some of the offices--the big offices
	such as the United States Patent and Trademark Office, the
	European Patent Office, and the Japan Patent Office. We do have
	work-sharing arrangements that would allow for search results,
	for instance, to be shared amongst those entities. Because,
	otherwise, we as end users, who more often than not also end up
	paying for patent applications in the European Patent Office
	and the Japanese Patent Office. If there's not a good work-
	sharing system set down, then we end up paying the Japanese
	Patent Office and the European Patent Office for exactly the
	same prior art search that we're already getting from the
	USPTO. And so we pay for all the same results.
	So we are in favor of a work-sharing system. We have no
	standing resolution at IPO concerning whether or not the USPTO
	searching requirements should be outsourced, if that was the
	source of your question. But harmonization and work sharing
	amongst respectable, developed world patent offices, we have
	not had a problem with, because often we see exactly the same
	results coming out of all three anyway.
	Mr. Goodlatte. Thank you. Does that prompt any questions by
	the gentleman from North Carolina?
	Mr. Watt. I just was wondering whether there has been
	research that tries to verify the extent of the quality problem
	with patents and whether both of you gentlemen have your own
	opinion about the extent of quality of patents as opposed to
	quantity.
	Mr. Norman. Sure. Quality can always be improved in any----
	Mr. Watt. First of all, has there been anybody who's done
	any kind of study on this, on the quality?
	Mr. Norman. We have not done a study.
	Mr. Watt. Are either one of you aware of any studies?
	Mr. Shapiro. There are studies which try to get at quality
	kind of indirectly in terms of how many patents are later
	overturned. But it's a very hard thing to quantify.
	Mr. Watt. Okay. I didn't mean to interrupt. Go ahead on
	your own opinion about your assessment of quality.
	Mr. Norman. Sure. Just as Mr. Shapiro stated, some of the
	studies that are focused on how many patents are overturned
	only count a subset of patents that are commercially important.
	In many instances, those are patents that someone is willing to
	spend millions of dollars to try to overturn. And that is not
	the full set that we ought to be looking at when we gauge how
	effectively the Patent Office is doing its job, because it's
	dealing with millions of other patents that probably will end
	up being only licensed or perhaps never commercialized at all.
	Yet as a patent examiner they have the very difficult job of
	treating every patent that comes across their desk as if it
	were the next blockbuster that's going to break the market. And
	so that's a difficult job for them.
	Mr. Watt. Your assessment of quality.
	Mr. Norman. My assessment of quality is that it's
	improving.
	Mr. Watt. Improving from what to what?
	Mr. Norman. Well----
	Mr. Watt. Thirty to 40 percent; 60 percent to 80 percent;
	90 percent to 95 percent good quality patents we're awarding?
	Mr. Norman. I can't say that I could put a percentage on
	it, but from a qualitative standpoint, what I see now, at least
	in the field of which I mostly practice, in pharmaceutical
	sciences and biotechnology sciences, the Patent Office has made
	great strides forward, much because the court system over the
	past decade has turned out a pretty fair amount of bellwether
	opinions from which the Patent Office could take guidance and
	build training guidelines around certain types of patent
	claims. So that's much better.
	Mr. Watt. Mr. Shapiro.
	Mr. Shapiro. There's certainly some evidence that a lot
	of--the view of a number of people who have been thinking about
	this for a long time that the quality has varied from time to
	time; that quality is particularly difficult when you're
	dealing with new industries, new aspects of science; that the
	inventors may be quite far ahead of--technically--of the
	examiners. That's the nature of science.
	I think that we underestimate the potential cost of patents
	which are granted without sufficient specification, detail, and
	novelty; that they can actively discourage the development of
	much more effective innovations in that area; and that that's
	the kind of negative with respect to kind of this issue of
	quality is not often looked at but I think it's quite
	important. And I think that PTO and the economy would benefit
	from some serious effort to make a systematic evaluation of
	shifts in the quality of patents and what factors contributed.
	I think that would be quite important.
	Mr. Watt. Mr. Chairman, while I have the mike, I will just
	ask unanimous consent to submit for the record a written
	statement from Shayerah Ilias of the Congressional Research
	Service. She had been a potential witness at the hearing today.
	We want to get her testimony into the record.
	Mr. Goodlatte. Without objection, we will welcome her
	testimony into the record.
	[The prepared statement of Ms. Ilias follows:]

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	__________

	Mr. Goodlatte. It looks like we have reached the end of the
	road here and a long way to go tomorrow and thereafter on
	patent reform issues and trying to get the very best we can out
	of the Patent Office. Gentlemen, you have contributed to that
	discussion very ably, and so we thank you.
	I have to put a few magic words into the record here.
	Without objection, all Members will have 5 legislative days to
	submit to the Chair additional written questions for the
	witnesses, which we will forward and ask the witnesses to
	respond as promptly as they can so that their answers may be
	made a part of the record. Without objection, all Members will
	have 5 legislative days to submit any additional materials for
	inclusion in the record.
	With that, again, I thank the witnesses, and declare the
	hearing adjourned.
	[Whereupon, at 4:20 p.m., the Subcommittee was adjourned.]

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