The Quest For Managerial Control at the USPTO - Is Fee Regulation the Answer?

Despite numerous efforts to improve the U.S. patenting process, the PTO is largely seen as a struggling agency that continues to sink deeper into a managerial hole. Congress explicitly gave the PTO rulemaking authority under section 2(b)(2) of the Patent Act, but, as recently demonstrated in the Tafas v. Dudas case, the PTO's ability to regulate conduct is somewhat limited.

So what can the PTO do to get itself on track? Professor Arti Rai from Duke University School of Law recently published an article titled "Growing Pains in the Administrative State: The Patent Office's Troubled Quest for Managerial Control" where she examines many of the PTO's existing problems, as well as some potential solutions.

One area Rai identifies as problematic is the fee-based system at the PTO, which is skewed so that patentees, in effect, subsidize unsuccessful applicants:

Specific numbers from recent years illustrate the magnitude of the cross-subsidy. The PTO estimates that in fiscal years 2005 to 2008, the average examination cost per patent has ranged between $3773 and $3961.49. By contrast, the initial filing fee, which is supposed to cover filing, search, and examination, is $1090. Issuance fees are seventy-four percent higher ($1480), and maintenance fees (due at 3.5, 7.5, and 11.5 years) are $1020, $2320, and $3580, respectively.

Not only do applicants who secure and maintain patents dramatically subsidize those whose patents are denied, but the current fee structure also sets up an obvious financial incentive for the PTO to grant patents. The skewed incentive structure may be based on a policy judgment that patent applications, even those that ultimately end up being nonmeritorious, should be encouraged.

Interestingly, Rai points out that this policy may be causing much of the PTO's backlog and quality problems. Instead, Rai argues, a patent system that may be susceptible to denials of ostensibly patentable inventions may be better in the long run:

[The skewed incentive structure] could be based on the supposition that false positives, in the form of patent applications that are improperly granted, are better than false negatives, in the form of patents that are not applied for in the first instance. But the case for such a policy judgment has not been made. Meanwhile, the skewed structure creates additional patent applications that add to backlog. Additionally, in contexts where quality concerns counsel in favor of granting a relatively small percentage of applications, the structure creates the potential for significant revenue shortfalls.

To address the shortfalls, fees would need to be adjusted. And one of the areas commonly suggested for fee adjustment is the technology sector dominated by information and communications technology (ICT) firms. Since many of these firms file patent applications en masse, fee adjustments would be made to essentially "tax" (i.e., charge a slightly increased fee) application filings that exceed a certain amount in a given year. While the idea appears attractive on its surface, Rai correctly points out that companies could circumvent the tax by creating shell companies and other mechanisms. Also, it appears that ICT firms are prepared to tolerate quite a lot when it comes to government fees; according to Rai, "an intellectual property attorney at one of these large ICT firms recently argued that a filing fee as high as $50,000 (applicable, he would suggest, only to large firms) might be necessary to curb filing significantly."

The paper goes further to address issues such as limits on authority over PTO fees, examiner incentives, prior art searching and inequitable conduct reform. Of course, professor Rai touches on the PTO's effort to curb continuations as well (she was one of the contributors to the "Law Professors Amici Curiae" Supporting Appellants in Tafas).

In the end, professor Rai suggests that one way to quickly enact reform in the PTO is to liberalize the PTO's fee-setting abilities to allow it to regulate applicant behavior:

The key step Congress must take involves giving the PTO significantly greater authority over fee setting. At a minimum, this fee-setting authority should include the authority to recoup expenses incurred on behalf of the applicant.

As a supplement to the authority to recoup expenses, Congress could also consider granting the PTO some authority to use fees to regulate applicant behavior. To protect against the possibility of the PTO using this authority recklessly (and against nondelegation concerns), Congress could set out guidelines and criteria for the PTO. Congress could also provide that this grant of authority be reviewed periodically to determine whether it should be renewed.

Read/download a copy of "Growing Pains in the Administrative State: The Patent Office's Troubled Quest for Managerial Control" (link)

For the first time, the PTO will soon have in-house professional economic assistance to help it make decisions about substantive examination criteria. As one of its final moves, the Bush administration spearheaded the establishment of an Office of the Chief Economist within the PTO Director’s Office. To see the job announcement, click here