[author Kevin E. Noonan]

In what was an object of great controversy, the Leahy-Smith America Invents Act grants the Director of the U.S. Patent and Trademark Office the authority to "set or adjust by rule any fee established, authorized, or charged under title 35, United States Code, or the Trademark Act of 1946 (15 U.S.C. 1051 et seq.), for any services performed by or materials furnished by, the Office" (Sec. 10(a)(1)).  This authority is limited by many other provisions of the bill, including oversight by the Patent Public Advisory Committee (Sec. 10(d)), publication in the Federal Register for public comment (Sec. 10(e)), and is subject to being overruled by Congress (Sec. 10(f)).  The most immediate check on the Director's authority is set forth in paragraph (2) of Section 10(a), whereby the Director can set or adjust fees "only to recover the aggregate estimated costs to the Office for processing, activities, services, and materials relating to patents (in the case of patent fees) and trademarks (in the case of trademark fees), including administrative costs of the Office with respect to such patent or trademark fees (as the case may be)."

The Director has taken this requirement seriously, as evidenced by the detailed appendices provided with his proposal to adjust fees submitted to the PPAC last month (see "USPTO Proposes Fee Changes").

The "USPTO Funding Model" analogizes the Office to a business, insofar as the shareholders (i.e., the public) requests products and services "according to established performance metrics."  "Aggregate costs . . . are funded from the aggregate revenue."  The Office provides context:  "[a]pplication rates increase each year," but the fees collected defray "less than one half the cost [for] prosecut[ing] the application[s]."  Office operations are "subsidized" by issue fee and patent maintenance fees; this reality complicates the budgeting process because of variability between revenue generating activities (allowance and patent maintenance) and revenue consuming activities (application examination).  The Office provides a chart depicting certain of these relationships:

This relationship was modified by the AIA, according to the Office:

The Office then sets out the goals fee setting intends to accomplish:

• Accelerate the Office's progress in reducing the backlog of unexamined patent applications and reducing patent application pendency to bring more quality products to market within the timeframes demanded by patent applicants and owners and the public;

• Realign the fee structure to add processing options during patent application prosecution; and

• Put the Office on a path to financial sustainability.

These goals were motivated by objectives, including:  1) promoting the strategy for American innovation ("promoting competitive markets that spur productive entrepreneurship," "foster innovation that will lead to technologies of the future," and "encourage high-growth and innovation-based small business entrepreneurship"); 2) aligning fees with the "full cost" of products and services provided by the Office (from historical information and in view of the Office's "strategic objectives"); 3) setting fees "to facilitate the effective administration of the patent and trademark systems," including, perhaps ominously, "encouraging the prompt conclusion of application prosecution"; and 4) offering application processing options (including various "processing choices" for applicants).  The Office used a number of analytical tools in making its fee setting decisions, including (in addition to budget formulations and economic analyses) the historical costs to the Office, the objectives of strategic planning, production workloads, and legal and policy analysis, and then proposed an iterative fee setting methodology using feedback from actual experience to "readjust" fees as needed.  These individual components were split out in separate appendices.

The Office provides one example of how it estimates the financial "risks" using this approach:

• If: Application filings grow at a rate faster than planned, and maintenance fees (which subsidize search and exam fees) do not; or If: Maintenance fee collections are realized at a rate lower than planned;

• Then: The USPTO will realize a financial risk that may impact the Office's ability to continue working off the application backlog and/or maintain steady‐state operations.

• A sufficiently funded operating reserve will mitigate this risk until the fee structure can be recalibrated using AIA Section 10 fee setting guidelines.

The Appendices are chock full of interesting information, such as the balance between regulatory (20%) and statutory (80%) fees in the total revenue collected by the Office, despite the fact that of the 242 fees charged by the Office, 41% were regulatory fees.  Also included are the Office's plans for reducing the patent application backlog:

Patent Pendency and Backlog Reduction

• By the end of FY 2013, the USPTO expects to spend $1.7 billion with about 10,400 personnel on board for patent examining activities.

• This includes hiring 1,500 new patent examiners during FY 2013.  With this hiring, the USPTO will have hired more than 3,800 patent examiners since FY 2011 to expand examination capacity sufficient to reduce the application backlog and maintain pendency thereafter.

• The additional revenue generated with the proposed fee structure will enable the USPTO to continue paying for this increased examination capacity in the out years.

• Increased production units and reduced patent pendency and application backlog are the most significant benefits realized from generating and using these additional resources.  The chart on the following page outlines the annual improvements to reach a 10.1 months average first action pendency in FY 2015, an 18.3 months average total pendency by FY 2016, and reducing the patent application backlog in half by FY 2015.

The proposed fee structure also depends on the projected number of application fees, publication fees, maintenance fees, and "other" fees to be collected:

And the Office provides its rationale for why certain fees are increased (or not); for example:

(where the changes in extension of time fees and RCE fees are expressly intended to "facilitate and efficient and prompt conclusion of application processing").

Finally, the Office provides "other resources," including the FY2010 – FY2015 Strategic Plan; the President's FY 2013 Budget, and the Administration's Strategy for American Innovation.

What is remarkable, commendable, and noteworthy about these efforts by the Office is the apparent level of transparency into how the Office is proposing to exercise its new authority.  The patenting public cannot effectively comment on whether the proposed fees are appropriate without this kind of information, and while this might be expected to be self-evident, it is contrary to the conventional bureaucratic reflex to reveal an agency's thinking to this extent.  For this, Office personnel should be commended, while at the same time its assumptions and proposals should be critically examined and feedback fulsomely provided.  But at least we have the tools to do so, and kudos to the Office for providing them.

For additional information regarding this topic, please see:

• "USPTO Proposes Fees Changes," March 1, 2012
• "USPTO News Briefs," February 20, 2012
• "PPAC to Hold Public Hearings on Proposed Fee Schedule," February 1, 2012