[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
               UNITED STATES PATENT AND TRADEMARK OFFICE

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

                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 5, 2010

                               __________

                           Serial No. 111-135

                               __________

         Printed for the use of the Committee on the Judiciary


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



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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
MAXINE WATERS, California            DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts   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 ROONEY, Florida
LUIS V. GUTIERREZ, Illinois          GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DANIEL MAFFEI, New York
JARED POLIS, Colorado

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


                            C O N T E N T S

                              ----------                              

                              MAY 5, 2010

                                                                   Page

                           OPENING STATEMENTS

The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Chairman, Committee on the 
  Judiciary......................................................     1
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ranking Member, Committee on the Judiciary.     3
The Honorable Zoe Lofgren, a Representative in Congress from the 
  State of California, and Member, Committee on the Judiciary....     4
The Honorable F. James Sensenbrenner, Jr., a Representative in 
  Congress from the State of Wisconsin, and Member, Committee on 
  the Judiciary..................................................     5
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Georgia, and Member, Committee on 
  the Judiciary..................................................     6
The Honorable Adam B. Schiff, a Representative in Congress from 
  the State of California, and Member, Committee on the Judiciary     8

                               WITNESSES

The Honorable David J. Kappos, Under Secretary of Commerce for 
  Intellectual Property and Director of the United States Patent 
  and Trademark Office
  Oral Testimony.................................................     8
  Prepared Statement.............................................    11
Mr. Robert D. Budens, President, Patent Office Professional 
  Association
  Oral Testimony.................................................    25
  Prepared Statement.............................................    27
Mr. Damon C. Matteo, Chair, Patent Public Advisory Committee, 
  Vice President and Chief IP Officer, Palo Alto Research Center
  Oral Testimony.................................................    40
  Prepared Statement.............................................    42
Mr. James H. Johnson, Board Member, Trademark Public Advisory 
  Committee, Southerland Asbill & Brennan, LLP
  Oral Testimony.................................................    49
  Prepared Statement.............................................    51


               UNITED STATES PATENT AND TRADEMARK OFFICE

                              ----------                              


                         WEDNESDAY, MAY 5, 2010

                          House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:36 a.m., in 
room 2141, Rayburn House Office Building, the Honorable John 
Conyers, Jr. (Chairman of the Committee) presiding.
    Present: Representatives Conyers, Watt, Lofgren, Johnson, 
Quigley, Schiff, Maffei, Smith, Sensenbrenner, Lungren, Issa, 
King, Franks, Jordan, and Poe.
    Staff present: (Majority) Perry Apelbaum, Staff Director 
and Chief Counsel; Christal Sheppard, Counsel; (Minority) Sean 
McLaughlin, Chief of Staff and General Counsel; and Allison 
Halatei, Counsel.
    Mr. Conyers. Good morning. The Committee will come to 
order. We always welcome everyone for coming to this hearing 
today, an oversight hearing on United States Patent and 
Treatment Office. And our objective this morning is to review 
the operations and plans of Patent and Trademark Office under 
the leadership of Director David Kappos.
    There are several questions that I think will dominate our 
discussion today. How is the office performing with respect to 
the patent examination backlog, and what plans are in place to 
reduce the backlog going forward? What steps has the office 
taken and will take to ensure that the United States patents 
are and remain at the highest quality possible? What are the 
funding needs of the office, and how can these needs be best 
met and realistically met?
    Now, the patent and trademark protection is increasingly 
important to the U.S. economy. Our studies indicate that 
intellectual property accounts for as much as 60 percent of the 
total United States exports and generates millions of high-
paying jobs.
    So without a doubt, the role of the Patent and Trademark 
Office is critical to the success of us coming out of the 
downturn in the economy that we are now experiencing. It is 
also critical to that success that the office filter out bad 
patents and trademarks, while strengthening deserving patents.
    So funding, of course, is the key to improving quality and 
bringing down the backlog. The heart of the matter is that the 
lack of adequate and dependable funding for the agency has 
prevented us reducing the backlog, maintaining the high quality 
of patents approved, and being more generally overall 
effective.
    And so, to me, the Patent and Trademark Office needs 
reliable and sustainable funding, which means that fee setting 
authority--is important and that there needs to be an end to 
the fee diversion that has plagued us across the years.
    Our Chairman emeritus, Jim Sensenbrenner, knows about this 
first hand. Even his predecessor, Henry Hyde, worked with us in 
a bipartisan way on this Committee, to try to remove the 
roadblocks. Currently, Lamar Smith, Zoe Lofgren, and Howard 
Berman have all played major roles in trying to grapple with 
this problem.
    So the question is, how do we do it? And what might we do? 
Patent and Trademark expects to make between $146 million and 
$232 million in fees. Some would say this is great, but the 
problem here is that, while the agency runs on user fees, it 
relies on congressional appropriations to get the fees back. 
And so far, the Congress hasn't taken any action to ensure that 
Patent and Trademark receives those unanticipated new fees.
    Without action, these fees are likely to be diverted as 
they always have been. And so, to ensure that this organization 
has access to this funding, I intend--that the number of us on 
the Committee work directly with the Appropriations Committee 
and its Chair, the Honorable David Obey, to try to correct this 
problem that has been going on for so long.
    Now, to address the longer-term funding challenges, there 
has been increasing discussion about giving the patent and 
trade office fee-making authority, as was posed in the 
President's 2011 budget. While the current fee structure was 
meant to encourage the filing of patent applications, the fact 
that fees are back-loaded means the agency may not even have 
enough money to cover examination costs, and the backlog builds 
up, and the months turn into years, and I think I will hear 
from our witnesses today what that means in the real world.
    In the past, appropriation bills allowed the trade of--
patent and trademark to use up to $100 million above their 
appropriation if the agency collected more fees than it planned 
on. I would like to make sure that they have such a buffer 
against diversion in the next budget coming up.
    And a number of us plan to bring this directly to the 
attention of our friend, Chairman David Obey.
    Now, the other issue is reducing patient pendency, how long 
it takes, and going along with it, increasing quality. I 
understand that Undersecretary Kappos and Deputy Director 
Sharon Barner's efforts at increasing quality of patents and in 
reducing patent pendency is regarded as their number-one 
objective.
    However, it seems impossible that you are going to, within 
10 months, support your goals of 10 months to first action and 
20 months to total patent pendency. I think you folks are 
great, but I don't think you are miracle workers.
    I have talked to those who say that if everything goes 
well, it often takes as long as 51 months. And so I doubt that 
efficiencies can cut patent pendency by half, unless we do 
something far more drastic. And so, I support the examiner 
count system, giving patent professionals more time to do 
quality examination. By giving them more time, we will actually 
make pendency longer, as well.
    So we need to discuss this, how your hiring experienced 
examiners is going, and how will it reduce the backlog, and I 
think improvements to the system is a big goal, and it is a 
necessity should not be delayed.
    I salute your goals, and we want to help you get there with 
them. And so I thank you very much, and I would like now to 
listen to Lamar Smith, who has worked with us carefully on this 
matter over the years.
    Mr. Smith. Thank you, Mr. Chairman.
    Mr. Chairman, as part of the Judiciary Committee's 
oversight responsibilities, we are here to examine the 
operations of the United States Patent and Trademark Office, or 
PTO.
    Director David Kappos' job is difficult, but he is working 
hard to reform and modernize the agency. The importance of PTO 
to inventors, trademark-holders, and the American economy is 
widely acknowledged.
    Our hearing this morning complements other efforts to pass 
meaningful patent reform in the 111th Congress. We are working 
hard with the Senate to develop necessary changes to their bill 
that will improve patent quality and discourage frivolous 
lawsuits. I am hopeful about that outcome.
    That said, the PTO is one of the most important agencies of 
the Federal Government, but it is not often regarded as such. 
Its work affects the productivity and economic growth of our 
Nation, as well as the standard of living for all Americans.
    For over 200 years, the PTO has been responsible for 
issuing U.S. patents and trademarks. The PTO also advises the 
secretary of commerce and the President on patent, trademark, 
and copyright protection, as well as trade-related aspects of 
intellectual property.
    In recent years, Congress worked with the Bush 
administration to provide full funding for PTO operations. 
Following this trend, the Obama Administration recommends that 
we authorize PTO to collect and spend more than $2.3 billion in 
the upcoming fiscal year, subject to appropriations.
    Observers estimate that more than $700 million have been 
diverted from PTO coffers since 1991, funds that could have 
been put to good use by the agency.
    Like you, Mr. Chairman, I support ending this fee 
diversion. And I support the Committee's efforts to provide the 
agency with more control over its fee schedule and related 
funding.
    This doesn't mean we won't exercise necessary oversight as 
appropriate, but PTO will solve more of its problems if it is 
able to respond more nimbly to its financial needs as they 
arise. This change, coupled with our ongoing push to end fee 
diversion, will position PTO as a first-tier 21st-century 
agency.
    But if Congress does provide PTO with 100 percent funding, 
the agency will have a greater responsibility to explain any of 
its shortcomings and correct them.
    Specifically, the Committee and PTO must explore the patent 
application backlog, the state of the agency's I.T. 
infrastructure, hiring and retention of patent examiners, the 
relationships between management and examiners, and the amount 
of time examiners require to process patents.
    Mr. Chairman, I would like to conclude by recounting an 
event that illustrates the importance of the PTO. This involves 
Dr. William Thornton, architect of the Capitol, who was 
appointed by Thomas Jefferson as the first superintendent of 
the agency.
    During the War of 1812, British redcoats marched on 
Washington to burn the city. Thornton realized they would 
eventually get to the Blodgett Hotel, which housed hundreds of 
patent models. Hurrying to the scene, he argued to the 
commanding British officer that burning the hotel and all of 
its contents would serve no purpose.
    In an impassioned speech, Thornton said the models were 
useful to all mankind, not just to Americans. Anyone who burned 
them would be condemned by future generations, as were the 
Turks who burned the Library at Alexandria.
    Thornton proved convincing, and the Blodgett Hotel was 
spared; in fact, it was the only government building not 
damaged during the attack. Disappointingly, Thornton's reward 
was a congressional order to vacate the premises. Since the 
Capitol building had been burned, Congress needed a new meeting 
place, and the Blodgett was the most suitable venue.
    Nearly 200 years later, the PTO is no less valuable. 
Everyone here understands the importance of the patent system 
to our knowledge-based economy.
    Mr. Chairman, I look forward to working with the Committee 
and Director Kappos to make the PTO even stronger and more 
productive and responsive to the needs of the inventor 
community and our country so we can enhance our international 
competitiveness and strengthen our economy.
    Thank you, Mr. Chairman. Yield back.
    Mr. Conyers. Thanks, Lamar, for that little-known piece of 
American history.
    Mr. Smith. History lesson.
    Mr. Conyers. I would like to invite Mel Watt to make any 
welcoming or opening remarks that he may share.
    Mr. Watt. Mr. Chairman, I appreciate the offer. I am happy 
to welcome the witnesses, but don't have an opening statement, 
so I will pass and await the wonderful wisdom of our panelists.
    Mr. Conyers. Before I recognize Chairman Emeritus 
Sensenbrenner, let me yield to Zoe Lofgren of California.
    Ms. Lofgren. Well, thank you, Mr. Chairman. And thank you 
for having this hearing. I think it is a very important one.
    As we all know, we have worked on reform of patent law for 
many years, going back to H.R. 400 in 1995. And these things 
can get contentious, and I think at this point we have 
contention once again. And, therefore, it is especially 
important that we are having this hearing to focus on what we 
can agree on, how we can help the office in its pendency 
problem.
    You know, although the parties are often sharply divided 
here in Congress, this is one of those items where we have had 
marvelous bipartisan communication and effort. It has really 
been very rewarding to work across the aisle as a team on these 
issues that are so important to our country, so I am very 
interested in hearing from the witnesses about the idea of 
allowing the office to set its own fees, even on a temporary 
basis. Let's see how it works, as well as, you know, not having 
enough money, but also having some certainty as to what you are 
going to have to use and how that would work to bring down the 
pendency.
    I wanted to raise another issue, as well, that I think 
might have usefulness in the office. I understand that there is 
a question or reform, the possibility of field offices that 
would help in recruiting and also might help in terms of 
telecommuting as work stations, and I was recently--actually 
yesterday--in Silicon Valley at home, and I was told that 49 
percent of all the patents issued in the United States come 
from Silicon Valley. So that might be a good place for a pilot.
    I know that the representative from the professional 
association will want to make sure that the amenities are good 
enough. That is exactly the role he should play, but let me 
tell you that starting at an average of 75 degree temperature 
in the summer and 65 in the winter, it only gets better from 
that, so I think members would be happy with the amenities in 
the valley, and I am hopeful that I can work with both the 
association and the management as we pursue that.
    It is absolutely essential that we do something on pendency 
and quality. Our patent examiners are overwhelmed with volume. 
And that has to affect their productivity. It is just there is 
no other way around it.
    So this is very important. I think we will be able to work 
together collaboratively to come up with solutions.
    And, Mr. Chairman, I want to commend you for holding this 
hearing and yield back.
    Mr. Conyers. Did I hear in your comments an invitation to 
Silicon Valley?
    Ms. Lofgren. Sure. We should review the potential satellite 
site sometime maybe in August or January, either one.
    Mr. Conyers. Thank you.
    I now turn to the former Chairman of this Committee, Jim 
Sensenbrenner, whose experience in this subject is as deep and 
wide as anybody on the Committee, and thank him for all the 
work he has done on the--over the years on the subject matter.
    Mr. Sensenbrenner. Well, thank you very much for the 
compliment, Mr. Chairman. And let me return it by saying that 
this is an issue that we all agree on.
    The enemy is not in the Committee. The enemy is in the 
Appropriations Committee and over on the other side of the 
Capitol.
    I spent about 2\1/2\ years during my chairmanship to try to 
convince the appropriators that what they were doing was really 
hurting American productivity. And I wasn't able to do that by 
myself, and I had to enlist the then-leadership of the House of 
Representatives to do that, and we were able to prevent a fee 
diversion from fiscal years 2005 to fiscal year 2009.
    However, fiscal 2010 is another story. And we may have a 
fee diversion of as much as $116 million. And this is 
completely unacceptable, because as the economy gets better, we 
are going to have more patent applications go in and take the 
money away to process those applications promptly, it's 
certainly a step backwards.
    I want to make two points. You know, one is, is that I 
don't have a problem having the patent office set its own fees, 
but the quid pro quo on that has to be able to prevent the 
appropriators from diverting the fees, because if the fees go 
up and the patent office can't use those fees, then we are 
full-speed reverse, rather than reverse a step at a time.
    The other thing that I think is most important is that, 
with a fee diversion, the patent office can't do what it needs 
to do in order to reduce the backlog and improve the quality. 
And this Committee is hamstrung in being able to do proper 
oversight over the patent office to make sure that the 
taxpayers' money is being spent properly.
    Now, if the additional money from fees isn't being used by 
the patent office, then it can't be spent either properly or 
improperly, and we are stuck in catch-22.
    So what I would like to say is, we are in this together. 
You need the additional money to be able to cut the backlog. 
You need the additional money in order to provide the improved 
quality that is necessary so that a patent is less likely to be 
attacked, should there be litigation on infringement.
    And, you know, in my opinion, we need to have, you know, a 
much better attitude nationally, not just here on Capitol Hill, 
on the importance of patents in terms of preserving our 
lifestyle, because our lifestyle is dependent upon increased 
productivity.
    So, Mr. Kappos, we are from the government, and we are hear 
to help, so tell us how.
    Mr. Conyers. Thank you, Jim.
    Judge Hank Johnson?
    Mr. Johnson of Georgia. Thank you, Mr. Chairman. I want to 
thank you for holding this very important hearing.
    And for some time now, the USPTO has struggled with 
timeliness and quality in reviewing patent applications. 
Currently, there are over 750,000 patents representing 
inventions and innovations which is stuck in line at the USPTO, 
and this number is growing.
    We have to fix the pendency problem, and I salute Director 
Kappos for setting an aggressive goal of reducing pendency by 
half. At the same time, the USPTO has struggled with getting 
quality right, first by issuing patents on so-called inventions 
that should never have been granted, and more recently by 
significantly cutting back on the number of patent applications 
that are approved.
    Both these problems--timeliness and quality--has a direct 
impact on jobs, innovation, and the economy. This is not an 
esoteric discussion, ladies and gentlemen. This is about 
getting new drugs, new technologies, and new innovations out 
into the world.
    What if there was an invention just sitting on the shelf at 
the USPTO that could have been used to prevent or ameliorate or 
clean up oil spills, such as the one that we are suffering from 
down in the Gulf of Mexico?
    Another problem underlying the entire system is the 
agency's information technology infrastructure. Lack of 
adequate funding for the last several years has put the 
agency's I.T. in a precarious position. Its aging systems are 
crashing and are not meeting the needs of examiners.
    This is impacting the agency's ability to deal with the 
backlog and quality problems. Since Director Kappos has taken 
the helm at USPTO, the agency has announced several new 
initiatives to address the backlog, patent quality, and the 
I.T. infrastructure challenges. I commend him for that effort.
    I look forward to hearing about the USPTO's new programs, 
particularly efforts to get to patentability decisions early in 
the examination process, changes to how examiners are rewarded, 
and greater use of international partnerships that share patent 
examination burdens.
    I am also interested in hearing about the relationship 
between these initiatives and the USPTO's funding situation. In 
particular, the USPTO makes the case that the current fee 
structure is not capable of meeting the USPTO's needs. That 
office needs flexibility, in my opinion, to adjust its fees and 
expenditures according to circumstances that arise.
    The current economic slump and rebound is a perfect 
example. In fiscal year 2009, the office fell behind its fee 
collection due to the economic downturn, and Congress had to 
step in to protect examiner jobs. In fiscal year 2010, filings 
rebounded, and revenues have outpaced the USPTO's projections, 
so Congress will have to step in yet again if the USPTO is to 
have access to all the funds it collects.
    Fee-setting authority would no doubt give the USPTO more 
flexibility, which I support, but I also want to be sure any 
additional fees go to worthwhile purposes. I hope Director 
Kappos can explain how the agency plans to use any additional 
fees collected and how the money spent will address the 
backlog, patent quality, and I.T. infrastructure.
    I also want to remind everyone that Article I, Section 8 of 
the Constitution of the United States states that Congress 
shall have power to promote the progress of science and useful 
arts by securing for limiting times to authors and inventors 
the exclusive right to their respective writings and 
discoveries. I tell you, those founding fathers were on top of 
things, and I wonder how they would look at us at this time 
with the state of our USPTO being challenges as it is today.
    So I thank you, and I look forward to all of the witnesses' 
testimony. Thank you.
    Mr. Conyers. Dan Lungren is a senior Member of the 
Judiciary Committee, and we yield to him this time.
    Mr. Lungren. Thank you very much, Mr. Chairman.
    I am here to listen to our guests. And after hearing both 
the Chairman and the Ranking Member, I think the issues that I 
am concerned about have been fully articulated, and I await 
their hearing.
    Mr. Conyers. Steve King, do you want to greet the witnesses 
or make any opening comments?
    Mr. King. Mr. Chairman, I would greet the witnesses and 
thank you very much. And I pass on my opening comment and yield 
back the balance of my time temporarily. Thank you, Mr. 
Chairman.
    Mr. Conyers. Well, that rarely happens around here. Thank 
you, sir.
    Trent Franks, good morning.
    Mr. Franks. Mr. Chairman, I am just glad to be here.
    Mr. Conyers. Okay.
    Mr. Quigley?
    Mr. Quigley. Mr. Chairman, I am always just glad to be 
here. I am anxious to listen to our witnesses.
    Mr. Conyers. Well, I am glad you didn't say that you were 
glad to be here and hope to be back, but we are always glad to 
have you here, as well.
    Adam Schiff, could I yield to you at this time?
    Mr. Schiff. Thank you, Mr. Chairman. I just wanted to 
mention that I think the most important part of the patent 
reform legislation in either house, frankly, will be whatever 
we can include to deal with the backlog at the Patent Office 
and make sure the Patent Office has the fees and revenues 
necessary to eliminate that backlog for all intents and 
purposes. I think we need to develop a 5-year plan to get that 
done.
    We are working on some proposals to help try to structure 
that and encourage that, that we hope will be part of any 
legislative effort, and I look forward to hearing what you all 
have to say today.
    Thank you, Mr. Chairman.
    Mr. Conyers. Thank you.
    We welcome our witnesses, James Johnson, Damon Matteo, 
Robert Budens, and first witness, David Kappos, undersecretary 
of commerce for intellectual property and director of the 
United States Patent and Trademark Office.
    We will put your distinguished bio in the record. And you 
were not responsible for IBM pulling out of this agreement, 
although you have worked with them in the past. But we welcome 
you here and know of what you have been doing with this new 
responsibility that is yours.
    We met--a few of us met, Lofgren and myself and--met with 
the secretary of commerce and yourself about matters relating 
to this office, particularly the patent bill that seems to be 
stalled somewhere between the House and the Senate. But we 
appreciate what you are doing, and we invite you to make your 
statement before the Committee now.
    Welcome.

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

    Mr. Kappos. Well, good morning, Mr. Chairman. And I will 
start by saying, I am very glad to be here, and I do hope to be 
back.
    To Chairman Conyers, Ranking Member Smith, Members of the 
Committee, thank you for the opportunity to appear here before 
you today and to discuss the United States Patent and Trademark 
Office's operations and our various new programs and 
initiatives.
    As you know, the USPTO currently faces a number of 
significant challenges and difficult budgetary environment. We 
have made process improvements, and we have made progress in 
recent months to address a number of these challenges, which I 
have detailed in my written testimony. Reducing patent pendency 
and improving patent quality are our top challenges, and 
America's competitive advantage in the innovation economy 
depends in very large measure on our ability to meet these 
challenges.
    Mr. Chairman, innovation is a principal driver of the U.S. 
economy. It is an engine of economic growth, and it is a 
creator of jobs. Promoting innovation, stimulating economic 
growth, creating high-paying jobs are key priorities of the 
Obama administration and of the USPTO. We are proud of the role 
that the USPTO plays in serving America's innovators and 
providing the intellectual property protection they need to 
secure investment capital and to bring their products and 
services to the marketplace.
    Yet today, we face a huge backlog of patent applications, 
long pendency rates, and an outdated I.T. infrastructure. Our 
ability to effectively address these challenges is limited by 
our current budgetary constraints, and we propose significant 
changes to our 2011 budget and our budget process.
    We have developed our fiscal year 2011 budget based on the 
resources needed to achieve our goals. The good news is that we 
have begun to see a rebound in user fee collections in recent 
months, a trend that reflects both an upward-bound economy and 
success we have had in increasing production at the United 
States Patent and Trademark Office.
    We currently project that the USPTO will collect between 
$146 million and $232 million more than its appropriation for 
fiscal year 2010. Without access to these additional fee 
collections in fiscal year 2010, we will be unable to achieve 
our goal of reducing first-action pendency to 10 months until 
2014, and our goal of 20-month total pendency is now unlikely 
to be achieved until 2015.
    While our funding constraints are very real, our new 
leadership team has developed and implemented a broad array of 
initiatives to improve the speed, efficiency and quality of 
patent processing and improved the overall operations of the 
office. We have taken steps to improve the examination process 
by encouraging more interaction between examiners, applicants 
earlier in the process.
    We have made the USPTO an employer of choice by offering 
workplace benefits, including telework opportunities, provided 
enhanced training of examiners and supervisors to ensure 
consistency in examination, promoted work-sharing efforts with 
foreign patent offices to better manage our common workloads, 
and developed customer-friendly initiatives, including our 
ombudsman program, project exchange, and our green tech pilot.
    These initiatives and positive results we have seen to date 
are described in more detail in my written statement.
    Mr. Chairman, progress toward our strategic goals is 
dependent on a number of important elements. Among them are 
providing the agency with authority to set appropriate fees, 
authorizing an interim fee adjustment on patent fees, and 
creating an operating reserve to ensure adequate reserves to 
address multi-year budget plans.
    As you know, Mr. Chairman, pending patent reform 
legislation contains a number of provisions that will improve 
USPTO operations and the patent system in general. Over the 
last four Congresses, the House and the Senate have weighed 
possible reforms to the patent system. In that time, many of 
the difficult legal issues related to the intellectual property 
system have been addressed by the courts.
    I personally witnessed the House lead much of the 
discussion around the proposals being considered now in Senate 
515 as far back as the year 2000. The USPTO and the 
Administration support your efforts and those of your 
colleagues in the Senate to enact a fair and balanced bill this 
Congress, and we will continue to support your efforts going 
forward.
    We appreciate your continued support of the USPTO, and we 
look forward to working closely with you and the Members of 
this Committee to meet the challenges before us. Thank you.
    [The prepared statement of Mr. Kappos follows:]

          Prepared Statement of the Honorable David J. Kappos






























                               __________
    Mr. Conyers. Thank you for starting us off.
    We now turn to Mr. Robert Budens, who is U.S. Patent and 
Trademark Office, Department of Commerce for many years, going 
back to 1990. He has had a lot to do with the Patent Office 
Professional Association, has been on the executive committee. 
This is the employee organization.
    And we know that you have some issues that you are hoping 
will be fairly addressed and resolved in the pending 
legislation. We welcome you here today, sir.

           TESTIMONY OF ROBERT D. BUDENS, PRESIDENT, 
             PATENT OFFICE PROFESSIONAL ASSOCIATION

    Mr. Budens. Thank you, sir.
    Chairman Conyers, Ranking Member Smith, Members of the 
Committee, POPA represents more than 6,200 patent professionals 
at the USPTO, including more than 6,000 patent examiners who 
determine patentability.
    When I addressed the Oversight Subcommittee in February 
2008, the relationship between the USPTO and its examiners was 
particularly strained. Attrition was high; morale was low; and 
the agency and POPA were in the midst of a contentious 
negotiation over a new collective bargaining agreement.
    Today, I believe POPA and the USPTO are in the midst of a 
revolutionary and, I hope, long-lasting change in our 
relationship. Under the leadership of Mr. Kappos, the parties 
have agreed to solve problems through less adversarial and more 
collaborative and interest-based methods.
    Since August 2009, the USPTO and POPA have had a joint task 
force in place, led by Deputy Commissioner for Patents Peggy 
Focarino and myself, that has addressed several issues 
regarding time for examination. Among other things, these count 
system initiatives provided for the first increase in time 
since 1976, time for examiner-initiated interviews, realignment 
of examiner work credit to better reflect when work is done, 
and an improved awards system.
    In recent months, POPA and USPTO have addressed many other 
issues, including telework, patent applications on green 
technologies, and expansion of the first action interview 
pilot. These and other changes we have worked on together have 
led to a decrease in attrition and a new level of morale that 
is noticeable within the examining corps. Allowance rates are 
starting to go up, while the backlog of applications has gone 
down.
    Nevertheless, a number of issues remain of concern to POPA. 
While the count system initiatives have provided some 
additional time for examiners, more work needs to be done to 
address the question of whether examiners in each particular 
technology have sufficient time to do a quality job.
    To address this issue, the agency and POPA have been 
working together with an outside contractor to do a more in-
depth study of examination time. POPA has no doubt that the 
study will show that further increases in time are needed to 
provide quality work. Obviously, increases in examining time 
will necessarily require hiring more examiners if the USPTO is 
to meet the pendency goals of Secretary Locke.
    Recently, there has been increasing interest in work-
sharing between the world's patent offices as a means of 
increasing efficiency. Examiners, however, already use search 
results performed in other countries, so there is no room for 
efficiency gains by this approach. To truly increase efficiency 
and reduce pendency, a work-sharing program must reduce the 
number of issues and examiner needs to address, and it must do 
so early in prosecution.
    POPA believes that work-sharing must be done as soon as an 
applicant becomes aware of prior art and/or relevant rejections 
from a first patent office. At that point, the applicant should 
amend or cancel claims or otherwise constructively address the 
prior art and rejections from the first patent office in 
accordance with the laws of the other patent offices in which 
the applicant has filed a similar application. Thus, the issues 
facing examiners in those other offices will be reduced, and 
there will be a real increase in efficiency.
    Several issues concerning patent reform continue to concern 
POPA. We are dismayed that the 1-year grace period for 
inventors and the requirement for examination to be performed 
by U.S. examiners have both been lost in the proposals 
developed by the Senate. We encourage this Committee to ensure 
that these provisions are included in any final patent reform 
legislation.
    POPA continues to have serious concerns with the proposed 
post-grant review process. We believe this process will siphon 
considerable resources away from initial examination while 
providing little benefit to the intellectual property 
community. Post-grant review will not decrease the cost of 
owning a patent; it will only serve to provide one more 
expensive and time-consuming process that a party may use to 
protract litigation.
    With respect to the budget, POPA recognizes that the agency 
needs agility in adjusting its fees in responding to changing 
economic conditions. Therefore, POPA supports the creation of a 
reserve fund that will allow carryover of unused fee income 
from year to year and limited fee-setting authority for the 
agency.
    POPA does not, however, support giving the agency the 
authority to create new fees or eliminate existing fees with 
respect to basic filing, search and examination activities. We 
believe that the authority to create such new fees or terminate 
existing fees should remain in the hands of Congress.
    In addition, the agency's access to its fees should not be 
obtained at the expense of the oversight responsibilities of 
Congress. Our experience is that congressional oversight has 
been very valuable.
    Finally, since the future of patent reform legislation 
remains in question, we encourage the Committee to consider a 
standalone bill to address the agency's long-term funding and 
fee-setting authority.
    Thank you for this opportunity to present our views.
    [The prepared statement of Mr. Budens follows:]

                 Prepared Statement of Robert D. Budens



























                               __________

    Mr. Conyers. Thank you very much.
    We are going to carefully review some of the points that 
you have emphasized in your presentation. We are grateful that 
you are here today.
    Our third witness is Mr. Damon Matteo of the Patent Public 
Advisory Committee. I am going to put his biography in the 
record. He has won more awards in intellectual property than 
anybody I know of and also speaks frequently, writes 
frequently, and has a very extensive management background in 
intellectual property matters.
    And we welcome you warmly to the Committee today.

  TESTIMONY OF DAMON C. MATTEO, CHAIR, PATENT PUBLIC ADVISORY 
   COMMITTEE, VICE PRESIDENT AND CHIEF IP OFFICER, PALO ALTO 
                        RESEARCH CENTER

    Mr. Matteo. Thank you. Good morning, Chairman Conyers, 
Ranking Member Smith, Members of the Committee.
    It is my great pleasure to be here on behalf of the Patent 
Public Advisory Committee of the United States Patent and 
Trademark Office, more commonly known as PPAC. Again, my name 
is Damon Matteo. I am the chairman of PPAC.
    I am particularly grateful for the opportunity, because 
this testimony comes at a pivotal time, one of transitions in 
the world economy, the innovation ecosystems, the intellectual 
property landscape, and certainly at the USPTO itself. And now 
perhaps more than ever, we find all of these factors linked and 
essential in achieving economic success.
    Yet a key link in that chain, the USPTO, is laboring under 
infrastructure and funding challenges that threaten its 
progress on many important initiatives, challenges----
    Mr. Conyers. Pull your mic up a little closer, please.
    Mr. Matteo. Oh, certainly. Is that better? Great.
    But challenges inevitably create opportunity, and ours is 
to ensure and enhance the U.S. patent system's ability to 
support U.S. innovation, job creation, and economic success. In 
order to keep the USPTO the premiere intellectual property 
office in the world, PPAC believes a series of high-level 
issues need to be addressed and recommends focused efforts and 
measured objectives for pendency and backlog reduction.
    As a first step, we understand the USPTO is targeting 10-
month pendency to first action on the merits, 20 months total 
pendency, and also to shrinking the backlog which currently 
stands at over 700,000 patent applications.
    With regard to patent quality, improving the patent process 
and the product itself, attendant information search and work 
processes is key in providing greater certainty around the 
timing, scope and validity of patents. And in support of these 
initiatives, I will echo perhaps Mr. Conyers' notions about the 
budget, recognizing both the residual impact of the recent 
economic downturn and constraints imposed by limited financial 
vehicles at its disposal.
    PPAC supports the prudent application of several novel 
mechanisms to help and enhance and support the USPTO's 
operations. The first is to give the USPTO time to limit its 
administrative fee-setting authority to better accommodate 
funding needs and also to better align costs and incentives 
with fees.
    PPAC suggests setting the bounds of this fee-setting 
authority, its duration, measurement against agreed metrics for 
success, the scope of the fees, for example, as a percentage 
increase, and with possible oversight by Congress and/or PPAC.
    PPAC also supports legislation to permanently end fee 
diversion and/or earmarks which sideline USPTO revenues that 
should be directed at its operations, in particular now when 
the PTO is facing such difficult financial situations.
    In addition, PPAC encourages the USPTO to expand its 
modeling of revenue and operational scenarios with an emphasis 
on identifying priorities, as well as contingency planning, to 
support and inform optimal strategy developments and tactical 
execution. PPAC also supports allowing the USPTO to employ more 
flexible financial tools such as establishing operating 
reserves.
    Infrastructure: Extended periods of inadequate funding have 
left much of the USPTO's I.T. infrastructure aging, unstable 
and barely able to meet the tasks at hand. PPAC sees investment 
and provision of attendant incremental funding in these I.T. 
infrastructure as on the critical path to success for the USPTO 
realizing many of its key objectives.
    PPAC also enthusiastically supports the USPTO's recent 
efforts to totally revisit in a fundamental fashion its I.T. 
infrastructure. Process, a common thread that binds many of the 
USPTO's other initiatives, enhanced process understanding and 
optimization will figure prominently in the USPTO's ability to 
realize benefits from many other initiatives and to expanding 
the work exemplified by the count system, work share, among 
others.
    Organizational and hiring: At the core of any organization 
or its people, culture, and work practices, PPAC encourages the 
USPTO to continue its outstanding working in hiring, retention, 
training, to explore new ways to embrace a truly nationwide 
workforce and to foster a culture that inspires and rewards 
performance and initiative.
    PPAC supports and applauds the broader trajectory of the 
USPTO, but also encourages vigilance to ensure that visibly 
articulated goals, such as pendency reduction, are not 
accomplished at the expense of other PTO objectives or its 
resources.
    The USPTO clearly faces many significant challenges, but it 
is also poised to make significant progress against many of 
them. In our short time together, I have done my best to 
articulate the challenges, opportunities and requisites for 
success from a PPAC perspective.
    PPAC stands ready to work with the USPTO, with Congress in 
support of the U.S. patent system, the innovation economy. And 
in closing, on behalf of myself and the PPAC, I would like 
again to express my appreciation for this opportunity to speak 
with you about these important issues relating to the United 
States Patent Office.
    Many thanks.
    [The prepared statement of Mr. Matteo follows:]

                 Prepared Statement of Damon C. Matteo















                               __________

    Mr. Conyers. Attorney James Johnson manages the 
international enforcement of the trademark and copyrights of 
many of the most famous and valuable brands. And this includes 
filing oppositions and lawsuits to protect valuable 
intellectual property rights. He also focuses on unfair 
competition and domain name disputes.
    And so we are happy to have you here as our final witness, 
sir.

 TESTIMONY OF JAMES H. JOHNSON, BOARD MEMBER, TRADEMARK PUBLIC 
     ADVISORY COMMITTEE, SOUTHERLAND ASBILL & BRENNAN, LLP

    Mr. Johnson. Good morning, Mr. Chairman and Members of the 
Committee.
    My name is Jim Johnson. I am with the Atlanta office of 
Sutherland Asbill & Brennan. I am here today representing the 
Trademark Public Advisory Committee.
    My entire professional life has been committed to 
trademarks. I started out working in the trademark office as an 
examiner, then as trademark counsel for Kellogg's, then Coca-
Cola, and now with Sutherland Asbill & Brennan.
    I want to thank you for this opportunity to speak with the 
Committee and to share the concerns of the trademark community 
with the trademark office operations. As you, Mr. Chairman, 
correctly noted at the beginning of this hearing, the 
intellectual property protects and promotes the economic engine 
that this--that runs this country, and the founding fathers 
recognized the importance of intellectual property from the 
very beginning.
    Our job is to, therefore, protect and nurture this system 
so that it can continue to protect and nurture this great 
economic country.
    I want to talk about the breach of the fence. As you know, 
there is a law that prevents the use of trademark dollars for 
patent matters. Recently, due to the economic crisis, the 
patent office got the authorization to borrow up to $70 million 
until June 30, 2010, to use for patent matters.
    The director has assured us that, based on current 
projections, such borrowing won't be necessary, but our plea to 
you and plea to the Committee from the TPAC is: Keep the fence 
intact now and forever.
    We have had ample discussions on the issue of fee 
diversions. And we agree and we are pleased to note that the 
Committee supports the view that fee diversion is very bad for 
the patent and trademark system.
    A couple other issues I would like to bring to your 
attention. One is the unauthorized practice of trademark law 
before the office. We are hearing anecdotal reports from 
examiners and from other PTO officials that there are parties 
that are representing others before the trademark office when 
they are not authorized to do so. In other words, they are not 
lawyers.
    We are in process of assessing how big this situation is, 
and we will address it when we figure that out. But potentially 
the problem is that parties who don't know how to handle 
applications and things for parties are going to take 
unnecessary resources from the office. And as Abraham Lincoln 
said, when you represent yourself--even a lawyer who represents 
himself will have a fool for a client.
    We also want to take this opportunity to issue kudos to the 
trademark operation and the director. The trademark office has 
performed in an outstanding manner in a very difficult economic 
environment. They have created a surplus even when filings were 
down.
    We also applaud the director's decision to maintain 
pendency at 2\1/2\ months to 3\1/2\ months from the filing of 
the application.
    To put matters in perspective, when I was an examiner back 
when there were 13 colonies, it often took a year from the time 
an application was filed to when an examiner first looked at 
it. So to be at 2\1/2\ months is a tremendous accomplishment. I 
don't want to suggest that the office got better once I left, 
but those are the facts.
    We also would like to note that the trademark manual of 
examining procedure--it is the manual in which the examiners 
and the outside public relies--needs to be updated more often 
and continually, so for the obvious reason that you need a good 
resource material review.
    We have also heard talk about the funding for the new 
computer system, and that has to occur in that--and everyone 
seems to be in agreement on that issue.
    The Trademark Trial and Appeal Board is also working well, 
and the only issues we note there is, their manual of examining 
procedure needs to be updated continually, and we understand 
that they are working toward that.
    The chairman of the Trademark Trial and Appeal Board needs 
to be finally appointed. We have had acting chairmen since 
October of last year. And we need a better structure there, so 
to whatever you can do to promote that or make that happen, 
that would be good.
    And finally--and we would note that TPAC needs to be 
restructured. And we have outlined in detail the--in written 
materials what has to happen, but what we have now is the terms 
aren't aligned properly, so you have gaps in membership.
    And the chairman of the TPAC comes from outside of the 
Committee, so he has a large transition period. He also doesn't 
need to be chairman for 3 years, because the job of chairman is 
tremendously demanding, so we need to have a more appropriate 
succession plan.
    So thank you again for this opportunity to speak to the 
Committee. We are very pleased with trademark operations, Lynne 
Beresford and her management staff, Debbie Cohn and Sharon 
Marsh, have done a tremendous job, and under the leadership of 
Director Kappos, so we are very happy, we are very proud, and 
we just need a few things to work on.
    Thank you again.
    [The prepared statement of Mr. Johnson follows:]

                 Prepared Statement of James H. Johnson











                               __________

    Mr. Conyers. Thank you all for opening us up to some of the 
nuance that goes on.
    Mr. Kappos, can you make Attorney Johnson feel more 
comfortable about all these people practicing without a license 
before you? Have you heard about that before?
    Mr. Kappos. Yes, I have, Chairman Conyers. Thank you for 
that question. And as Mr. Johnson pointed out, we are looking 
into that now. The issue was first raised, in fact, by 
trademark office examiners, and so we are working with the TPAC 
to look into that issue now and do the fact-finding that we 
need in order to determine what actions need to be taken.
    Mr. Conyers. Mr. Budens, I notice nobody else mentioned 
much about the concerns that you listed. I think there were 
five or six of them maybe. Is there any friendly advice you 
want to share with your other three witnesses this morning 
while we are all in the room together?
    Mr. Budens. Other than they should always listen to POPA, 
because, you know, we are in the trenches right there, I think 
some of our concerns are unique to the association, because we 
are internal to the agency, we are dealing with the day-to-day 
work of the agency.
    But I think some of our concerns also look to the outside. 
Now, I don't--for example, our concerns with the post-grant 
review process proposed in the patent reform legislation. I 
have a rather simplistic view of it, Mr. Chairman. I don't have 
the business acumen of my colleagues here on the panel.
    But it seems in the 20 years that I have been looking at 
patent examination and, you know, patents working their way 
through the system, it seems that, no matter what happens, if a 
patent--we issue about 150,000-plus patents a year. Only a 
handful of them ever get into litigation and get real serious.
    But it seems to me, you know, patents that are important go 
through the process. If one party somewhere determines that 
there is some serious money at stake here, that patent is going 
to make its way into the courts and through the litigation 
process one way or the other.
    And what I see as that, when there is serious money at 
stake, the losing party isn't going to stop, you know, because 
the patent office said no in a re-exam or says no in a post-
grant opposition. They are going to go onto the next level of 
the appeal process and continue on.
    So my view of post-grant opposition right now, my concerns 
with it, is that it will simply interject another level or step 
of litigation that will prolong the uncertainty, the period of 
uncertainty of that patent, and will increase the expense of 
the patent holder of maintaining that patent.
    And I think ultimately in the long term I am concerned that 
that will weaken the system and, you know, perhaps make our 
innovators think of other possibilities or other directions to 
protect their intellectual property. That is a serious concern 
that I think we have.
    I am also concerned that it will--there has been some talk 
about being able to accomplish this in, you know, a 1-year 
period. I have not seen us actually accomplish too many things 
in a 1-year period before, so I am a little concerned that that 
will happen. And if it does happen, I am worried that it will 
come at the expense of initial examination.
    And I am a firm believer that the job we do is important, 
and we really need to be doing the job right the first time, 
when an examiner picks up the case and do a quality 
examination, and put the strength in the patent, you know, up 
front, and that, I believe, will in the long term, you know, 
diminish litigation and create a stronger patent system.
    Mr. Conyers. Mr. Matteo, do you think standalone 
legislation may be our final resort, if we can't really reach 
agreement? And do you have any hopes or fears about such 
legislation?
    Mr. Matteo. I am sorry, Chairman Conyers. Do you mean with 
respect to post-grant opposition?
    Mr. Conyers. No, I mean with respect--if we can't work out 
a patent bill, that we just write a single bill continuing the 
patent office and giving them the power and the money and the 
authority that they need to keep going on.
    Mr. Matteo. Extension of status quo, in other words? I 
think my initial reaction to that is, once you take the 
pressure off, you are much less likely to get an end result 
that I think we are all hoping to achieve on a number of 
fronts, fee diversion, for example. So I would--while it may be 
an expedient solution, I suspect that having done so would 
probably, again, relieve the pressure and keep us from 
ultimately getting where we want to go.
    Ms. Lofgren. Would the gentlemen yield? I want to make sure 
I understand. I didn't understand your comment that it would 
take the pressure off on fee diversion, because the idea is to 
end fee diversion, was what the Chairman is proposing. Did I 
understand your comment?
    Mr. Matteo. No, I actually I believe I must have 
misunderstood the question.
    Ms. Lofgren. I see.
    Mr. Matteo. I wasn't aware that it was relevant to fee 
diversion. If the question is, in the absence of being able to 
pass the patent bill in aggregate, would a standalone bill vis-
a-vis fee diversion be something palatable? Then the answer is 
an unequivocal yes.
    Ms. Lofgren. Thank you.
    Mr. Matteo. Sorry if I misunderstood the question.
    Mr. Conyers. David Kappos, what say you?
    Mr. Kappos. Well, thank you, Mr. Chairman. So, relative to 
keeping the bill together versus taking a fee setting and other 
issues, I think that we have a heritage opportunity here on the 
part of the intellectual property system overall to pass 
legislation that is generations in the making and that is badly 
needed.
    And I think we should take advantage of that opportunity 
and press on and get comprehensive patent reform done that 
includes all of the changes needed for the PTO, including fee-
setting authority and the others, but also all the other 
important changes that will move the U.S. patent system back to 
the gold standard of patent systems and will advantage U.S. 
innovators for many, many years, and hopefully generations to 
come.
    So I applaud the work that the House has done, the 
leadership the House has taken in getting the bill to where it 
is now. And the Administration would like to continue to 
support the House and the Senate in moving this legislation to 
completion, comprehensive patent reform legislation.
    Mr. Conyers. But we are in this period of intransigence. We 
are intransigent now. We seem to be stuck. Someone asked me 
where we are since we met with you and the secretary. And I 
said, quite frankly, I don't know.
    But at least you come to the table optimistic. That is a 
good sign. Well, I will match my optimism with your optimism, 
we still are stuck. I don't know what is the holdup.
    Ms. Lofgren. Would the gentleman yield? And I appreciate 
our colleagues on the other side of the aisle for indulging me, 
but are you saying, Mr. Kappos, that if our diligent efforts to 
do a comprehensive bill falls short--and I have been working on 
this since 1995, along with the Chairman--that no thanks to the 
fee-setting increase? You would rather not have that and the 
end of diversion?
    Mr. Kappos. Yes, my view is that we can get this 
legislation done.
    Ms. Lofgren. Yes, but if you are wrong--you are not a 
legislator. Mr. Conyers has been here a number of decades that 
I have learned to respect and admire his legislative savvy. You 
are saying no thanks to fee authority?
    Mr. Kappos. I would like to continue to work with this 
Committee and with both houses of Congress to get complete, 
comprehensive----
    Ms. Lofgren. No, we got that. And if that fails, you don't 
want the ability to set fees? Is that what you are saying?
    Mr. Kappos. I truly think it would be preliminary for me to 
make a comment on that now.
    Ms. Lofgren. I think that is stunningly disappointing that 
you would rather not have the money, but certainly the advocacy 
groups, the patent holders, and the technology sector feels 
quite differently.
    Mr. Conyers. Well, you tried, Lofgren. [Laughter.]
    We will now--let's see if Trent Franks can do any better.
    Mr. Franks. Now the Chairman is being optimistic.
    I think all of us understand that one of the great elements 
of America is this idea of free enterprise and someone 
launching out to do something that they think can not only 
serve their fellow human beings, but also serve themselves and 
their families. And I want you to know, as it happens, I am a 
patent-holder, and so I understand that dream.
    And I believe that there is a tremendous advantage to our 
system in that, if there is anything that seems to be the 
product, the outcome of our system, it is this word 
``innovation.'' And I think it is almost impossible to 
overemphasize the importance of innovation.
    I mean, it is--in every area of human endeavor, it seems 
like innovation is a really big deal. And so I--like all of 
you--want to do everything that we can to maintain and protect 
that process.
    And it seems like one of the great challenges, Director 
Kappos--and this is not a criticism, it is just an 
observation--is that it takes--the time that a person has to 
spend gaining the patent, through the process application and 
then, of course, the pending application, is one of the big 
challenges. It is one of the big backlogs.
    And I would think that, in a sense, that could spell an 
equation where government is standing in the way of innovation, 
and that is, you know, a significant impact on our economy and 
our jobs and a great deal of things. That seems to me, you 
know, that could be or should be one of our number-one 
priorities, is to get rid of the backlog.
    But there is a concern I have about patent legislation 
pending in the House. It is H.R. 1260. It seems to me like it 
could worsen that issue rather than improve it. It could make 
the process more complex and more cumbersome.
    In fact, the Manufacturing Alliance for Patent Policy 
released a study by Dr. Scott Shane of Case Western University. 
And Dr. Shane found that the House patent bill, according--you 
know, this is his opinion, his conclusions--would result in a 
reduction in U.S. patent value of around $85 billion.
    Now, again, we will have to see how time underscores his 
conclusion. He also concluded that a reduction in the value of 
U.S. public companies by as much as $225 billion, a reduction 
in R&D of up to $66 billion, and as many as--nearly 300,000 
manufacturing jobs would be put at risk.
    Now, I guess my question to you, Director Kappos, how do 
you respond to these findings? What are your conclusions? And 
what specific problems do you have with the House version of 
the patent reform, as it is at this moment?
    Mr. Kappos. Okay, well, thank you for that question, 
Congressman Franks. So I recall having seen that study; it has 
been months, though. So I will give you general responses.
    My view, I completely agree that the backlog is a major, if 
not the major problem that faces the agency. And every one of 
those 700,000-plus applications that is sitting in our agency 
is potentially tens, hundreds or even thousands, probably, in 
some cases of jobs that aren't being created, products and 
services that aren't going on the marketplace.
    And so fixing the backlog, if you will, addressing the 
backlog is clearly job one. I believe that if we can take the 
backlog from where it is--over 700,000 applications--to its 
optimal level, which is somewhere a little bit over 300,000 
applications, which produces a steady workflow through the 
agency--we will unleash many new innovations into the U.S. 
economy.
    We will improve the U.S. trade balance, because there are 
so many innovations that come from Americans. We will help put 
Americans to work. We will help make Americans more healthy. We 
will help save American lives. There is all upside in it.
    I see absolutely no risk of doing damage to our economy. In 
fact, we will do enormous net benefit to our economy.
    Mr. Franks. Well, thank you.
    Mr. Chairman, I will just ask one more question, and I will 
yield back here. The post-grant review system envisioned in 
H.R. 1260 is very different than the current vision in the 
Senate compromise bill, S. 515. In fact, as I understand it, 
the differences are so profound that some former opponents of 
the patent reform bill have now been able to embrace S. 515, 
since it seems to largely satisfy at least their primary 
concerns.
    So, Director Kappos, I will direct a question to you again. 
Do you recognize these differences? Can you give us a little 
analysis of some of those differences? And do you prefer the 
version now being put forward by Senators Leahy and Sessions 
over the one that is before the House?
    Mr. Kappos. Okay. Well, thank you very much for that 
question about post-grant.
    So, yes, there are some differences between Senate 515 and 
the House version of the legislation. The differences come in 
several places, including the threshold that it takes to get 
into post-grant challenge, the level of later estoppel that is 
given, once a post-grant challenge is completed, some of the 
time limits that are involved. There are a number of 
differences.
    The USPTO in its technical advisory capacity is trying to 
support your team here on--the staff on the Judiciary Committee 
to work with their counterparts in the Senate in order to 
bridge those gaps and make the compromises that are needed in 
order to address the issues of parts of the innovation 
community that still need to be accounted for.
    Mr. Franks. Well, thank you, Mr. Chairman.
    I guess, Mr. Chairman, I would just suggest that this 
process, this patent process that is essentially wedded to one 
of the most unique essences of America, I think, is vitally 
important to our society, and I don't ever want to diminish the 
incalculable complexity of the job that Director Kappos has to 
deal with.
    And I am hoping that there will be an effort to pull 
everyone together on this thing, because while I have 
emphasized the need and the importance of protecting the 
integrity and the value of patents because of all the reasons I 
have just stated, I have to believe that there is somehow a way 
for industry to come together on this one. And it is vital that 
we do, rather than just try to cram a square peg in a round 
hole, as it were.
    And so I guess that would be my thought on it. I understand 
Mr. Issa has come into the room. It seems he and I are the only 
two people in the Congress that have patents. He has around 30; 
I have only 2. But mine are a lot, lot better than his. 
[Laughter.]
    And so I just wanted to go ahead and leave that on the 
record and yield back.
    Mr. Conyers. Well, that is a modest statement if I ever 
heard one.
    Magistrate Hank Johnson?
    Ms. Lofgren. Mr. Chairman?
    Mr. Conyers. Wait, excuse me. Zoe Lofgren, excuse me.
    Ms. Lofgren. I appreciate being recognized, Mr. Chairman. I 
do have to run off and chair the California Democratic 
delegation meeting.
    But before I do, I just want to explore two quick items. 
One has to do with the possibility of satellite offices and how 
that might help. And we had an office that really--it was a 
virtual office, and it is not really what I think we have in 
mind on this.
    And I understand that the professional association--
disabuse me if I am wrong--wants to be reassured as to 
amenities and workspace and the like for patent examiners. And 
I think that is legit.
    But I am wondering if, as we move forward, it would be 
possible to invite the professional association or key people 
out to San Jose to take a look at my district, and I think you 
will love what you see. I mean, people love living in San Jose. 
You know, it is the weather, it is the technology, it is 
everything. And I think that we could reassure you tremendously 
if as we move forward we were able to do that kind of trip.
    So is it fair to ask you in public whether you would be 
willing to do it?
    Mr. Budens. I have no problems with that, Congresswoman 
Lofgren. I actually suspect that the concerns of whether people 
would want to go to a satellite office in San Jose are probably 
limited.
    I think we would have very limited getting people to 
volunteer to go back west of the Mississippi, including 
possibly myself. I am from west of the Mississippi.
    Ms. Lofgren. I would welcome a new constituent.
    Mr. Budens. And so I don't think that is--I actually 
honestly don't think that is as big a concern. I think more of 
a concern to us would be, you know, from an association point 
of view, are they going to have similar office space, similar 
computer space, amenities and stuff?
    And is distance going to affect our I.T. infrastructure 
and, frankly, how do we--some of our major concerns are going 
to be representational. How do we represent somebody foreign? 
Not foreign, but away from--foreign to Washington.
    Ms. Lofgren. Some in the valley might say that is good, 
but----
    Mr. Budens. We haven't had to do that before, so for us, it 
is a growing pain.
    Ms. Lofgren. Right.
    Mr. Budens. I intend to actually--I have intentions of 
consulting with some of our other labor leaders in Commerce who 
have, you know, nationwide situations, to get some of the fees 
for that. But I think your concern is actually probably not 
nearly as grave as it needs to be. I think we will probably 
have little problem finding people willing to go--you know, 
move back out west.
    Ms. Lofgren. Thank you very much. And that is good to know. 
And we will keep in touch on that.
    The second question--and I will throw it out to whoever 
wants to answer--obviously, you know, we have been trying to do 
legislative fixes to various elements of patent law. And as we 
have, the courts have moved ahead, I mean, with the eBay case.
    I mean, you know, we were told it would be the end of the 
world if we did anything with injunctive relief, and the world 
did not end. You know, it is fascinating.
    We have the Bilski case coming up, and we don't know what 
the court is going to decide, but, you know, you listen to the 
arguments, you have some ideas. And, of course, they could 
surprise us. It is going to be soon.
    It is possible--or is it possible, I guess is the 
question--that Bilski will be clear enough that will make 
adjudication of patent applications simpler and relieve the 
burden going forward on the office. Who wants to answer that, 
or no one?
    Mr. Kappos?
    Mr. Kappos. Thank you, Congresswoman Lofgren. So without 
speculating about the Supreme Court's decision in the Bilski 
case, I think it is quite possible that it could be very 
helpful to clarifying standards to--for the first time in many 
years--providing direction to the USPTO and to the entire 
Federal court system underneath the Supreme Court that will 
enable us to put new, strong, clear guidelines in place for our 
examiners to do a really solid job of examining patent 
applications relative to statutory subject matter and the 
courts to give us guidance and to take a lot of tension out of 
what has developed into stated law that has become difficult to 
navigate over time.
    Ms. Lofgren. Right.
    Well, Mr. Chairman, I am going to yield back because of my 
other obligation, but I want to thank you again for this 
excellent hearing, and I look forward to working with you, 
trying to get resources into the office, and I am sure that 
will be a bipartisan effort.
    Mr. Conyers. Darrell Issa, top patent-holder in the 
Congress, is recognized.
    Mr. Issa. Thank you, Mr. Chairman.
    And what would make the gentlelady from San Jose presume 
that San Diego wouldn't work equally hard and prevail? After 
all, we do have beach volleyball, better fresh air, stunning 
views, and a lower cost of living, and, of course, Telecom 
Gulch is in San Diego. So do what you want. We are united on 
movement west. But after west, it could be southwest.
    And may the gentlelady give my regards to our colleagues.
    Now, onto less serious matters, look, getting a West Coast 
opportunity for us to get the best and the brightest to help 
with our side of the problem, to me, is essential. If you are 
in telecom, if you are in some of the new health sciences, or 
if you are in, if you will, just high tech in general--now that 
the gentlelady has left, I could say Silicon Valley; I just 
couldn't say it with her in the room--it is very clear that it 
is awful hard to get people to move back, particularly if they 
are in a senior status, if they end up commuting, and I see 
them on the aircraft coming back, working the week in 
Washington and heading back, or telecommuting.
    But either way, it is less than it would be if we could 
have an office. And I think certainly for professionals, if 
this is a choice between being forced to work out of one's home 
only or be in Washington, that doesn't really give them the 
opportunity to work in a collaborative fashion.
    And this Committee has held numerous hearings on the idea 
of telework. And I would say to Mr. Budens, you already have a 
problem of people who are seldom in Washington that you oversee 
their well-being, and they do come on our video screens and 
show us that they are in their flip-flops, and they seem quite 
comfortable with their basements. So we think we can do that.
    I have a couple of questions that are only sort of 
tangentially on task for today, but, Mr. Kappos, we don't get 
you very often, so I am going to take full advantage.
    For three--really, into the fourth Congress, I have been 
trying to get patent pilot, as we call it, the patent reform 
education act, if you will, through. It has left the House 
repeatedly. It died in the Senate with no opposition.
    It finally found opposition, which apparently it costs 
money to have judges and clerks be better at prosecuting 
patents, even though it is only a few million dollars.
    I want to approach one thing for the PTO. If the training 
element of providing judges who decide to specialize or who, in 
fact, simply are going to be facing cases, if their ability to 
get up to speed on patents, both old law and hopefully new law, 
if within our fee setting of your fees we were able to set a 
fee and earmark it, that you were able to collect against 
either new patents or re-exams or all of your other renewals, 
would that be acceptable to you?
    And I ask this because, as you know, I have been out to 
your facility. I realize you have foreign dignitaries coming 
through all the time for various trainings that--and I found it 
incongruous that we train people from outside the country, but 
not our own judges to any great extent. Would that be something 
that you would be interested if the funds were provided?
    Mr. Kappos. Well, thank you for that question, Congressman 
Issa. And I will answer it in just a second.
    I would start by saying, as a California native who was in 
both San Diego and the Bay Area, as well as Los Angeles----
    Mr. Issa. You know the desirability of San Diego.
    Mr. Kappos. That is right. As recently as last week, I 
could tell you that all three of those areas would be wonderful 
places to have West Coast operations for the PTO, not the least 
of which is my home area of the Los Angeles area, in addition 
to the two that have already been mentioned.
    Now, relative to the question----
    Mr. Issa. Oh, do you have a particular part of Los Angeles? 
We don't want to just say ``Los Angeles,'' because that lets 
you get a pass on too much. Are we talking about the valley? 
Are we talking about Simi Valley?
    Mr. Kappos. We are talking about Orange County.
    Mr. Issa. Orange County, okay. You know, that is a whole 
different group. You have now alienated all the Los Angeles 
downtown. [Laughter.]
    Please.
    Mr. Kappos. So relative to training judges, the USPTO would 
be very supportive of taking a role in training judges. As you 
point out, we have a wonderful facility, truly state-of-the-
art. We do train a lot of overseas judges, as well as patent 
office officials. We think we can play a valuable role.
    We do not think that it is extraordinarily expensive. You 
know, the space is already there, and it is already completely 
outfitted. And without talking about details or dollars, from a 
principle base level, I would have no issue with working out a 
mechanism for funding that kind of training.
    I think it is absolutely the right thing to do for our 
country. It is absolutely the right thing to do for our Federal 
judges, magistrates, and all others who are involved in the 
intellectual property system.
    Mr. Issa. Excellent. The second one is one near and dear to 
my heart, which is this new problem we have of false marking. 
As you know, coming out of what is yet not a final decision, 
but a three-judge panel of the Fed circuit, we have a broad 
decision that essentially everyone has standing to claim that a 
patent is either false marketing because it doesn't apply to 
the product it is on, or that it has expired and thus 
deceptive, and hundreds and hundreds of cases have been brought 
strictly on that one part.
    I think there is approaching 100 just in the Chairman's 
area of Michigan. You have a specialist in your area, Mr. 
Chairman.
    Those cases, obviously, have a cost. Hundreds of cases have 
a cost to the court. And yet we have an oddity, and I would 
like you to comment on it. That is that the ``revenue that 
might be received by the Federal Government as a portion of 
these false marketing claims is calculated as a loss if we 
eliminate those cases,'' even though it is not yet a final 
decision, but the cost to the court for having hundreds of 
cases is not counted.
    Can you reconcile how we would bring that, just knowing 
what patent cases are like in the courts? And I know it is 
outside your jurisdiction a little bit, but maybe you can 
understand what I can't understand, why there is a PAYGO 
problem there.
    Mr. Kappos. Well, thanks for that question, Congressman. I 
would be happy to comment on it, both from my role advising the 
Administration, but also, you know, generally knowing how the 
industry works.
    But, first of all, there is a cottage industry that has 
rapidly developed around false marking suits. The last I knew, 
there were well over 100 filed, all in, of course, Federal 
district courts, to my knowledge, anyway.
    And the cost related to those in terms of the 
administration of justice on the court system is going to be 
high. You are talking about, you know, Federal lawsuits.
    The cost to the litigants on both sides, both especially 
the parties who are being sued on this, you know, sort of 
brand-new area of the law, frankly, windfall area of the law 
could be expected to be very high. It costs at least in the 
hundreds of thousands of dollars, if not into the millions of 
dollars, to defend patent-related suits. And given the possible 
damages, I would expect that those who are sued would have to 
mount pretty significant defenses.
    And the other thing that to me is very speculative right 
now is the availability of awards, because there has been very 
little jurisprudence developed in this area, essentially one 
case that sort of caused this cottage industry to form.
    So, unfortunately, I can't reconcile, you know, how there 
could be a PAYGO kind of a problem right now. I think there is 
tremendous speculation occurring in the area of false marking.
    Mr. Issa. Well, the CBO has scored that there could be $4 
million to $12 million of revenue to the Federal Government, 
could be kind of a guess, but they defend that, as well they 
should, that they were asked to guess, they guessed.
    A hundred cases defended--let's say 50 of them defended 
vigorously. What would you guess that is to the court, not the 
litigants, but to the court? Would it be more than $4 million 
to $12 million on balance?
    Mr. Kappos. Well, you know, we are both guessing now a bit, 
but my guess is that it would be somewhere certainly in that 
range, and that doesn't even count the cost on the side of 
defending the litigation, that is, you know, deadweight drag.
    Mr. Issa. Okay, so we will assume that our guess on the 
other side is as good as the CBO's guess.
    Lastly, I would like you to comment on the real question. I 
heard earlier the request for fee setting capability. And in 
the long run, I actually think that we should transition to 
that.
    But what if this Committee had the legislation and the 
inclination to allow you to build a true line of credit not 
from excesses achieved that were unanticipated, but against 
revenues that are historically inevitable based on your 
renewals and other fees?
    Is there any reason that you could find that that wouldn't 
be the most logical? Since we lose money on the applicant, and 
we make money down the road, wouldn't that be the more 
logical--just I am leading you--but wouldn't that be the more 
logical thing for us to do, is to allow you to essentially have 
a line of credit against revenue that is historically 
predictable?
    Mr. Kappos. Okay, so thank you for that question, and it 
really goes to having financial tools available for the USPTO 
to run its operations in a more businesslike and sustainable 
fashion. And while we haven't asked for a line of credit, it 
certainly would be something that we would be happy to work 
with----
    Mr. Issa. Right, and I use the line of credit. In 
government, it is not truly that, but it is fee anticipation, I 
think is the term I have been told to you.
    Mr. Kappos. Right. So what we have requested is the ability 
to form a reserve, because one thing we don't have a problem 
with at the USPTO right now is collecting revenues. We are 
actually, as I point out, collecting much more than we have the 
authorization, the appropriation to use this year.
    And so if we could have access to those collections, one of 
the things that we would be doing is forming a reserve, which 
is sort of the flipside of a line of credit----
    Mr. Issa. Select and retain.
    Mr. Kappos. Right, to be able to use money that we are 
collecting this year in the future and build up a buffer so 
that we can operate the USPTO in a more business-like fashion.
    Mr. Issa. Okay. I want to thank you for that answer, 
because, Mr. Chairman, I do believe that in the years that we 
have worked together on eliminating fee diversion, we really 
haven't done the second part, which is the fee retention of the 
fee anticipation.
    And I do believe that, around the appropriators, it is 
within our jurisdiction to do those two, recognizing that they 
may still feel that to use it requires them--but to use it 
versus to have it seem to be two different things. And if we 
can make sure that they have it, then I suspect that the 
appropriates will always allow them to use it for good cause.
    And I thank the Chairman. Mr. Chairman, I yield back.
    Mr. Conyers. Thank you, Darrell.
    Magistrate Hank Johnson?
    Mr. Johnson of Georgia. Thank you, Mr. Chairman.
    Mr. Kappos, I am concerned about fees, pendency, quality, 
all of those kinds of issues, and I am also concerned about 
diversity in the workplace.
    I wanted to--and before I do that, I will say that Mr. 
Johnson and I--if anyone was concerned or alarmed in any way--
we are not related. He is much smarter and good-looking than I, 
but it is good to have you here, sir.
    And I am glad to know that you were a former patent 
examiner, as well. I did not know that.
    Mr. Johnson. Trademark examiner.
    Mr. Johnson of Georgia. Hmm?
    Mr. Johnson. Trademark examiner. I was on the trademark 
side of the aisle.
    Mr. Johnson of Georgia. Oh, okay. You are on the trademark 
side, okay. Kind of right there in the mix, but let me ask Mr. 
Kappos, I understand that, as part of your recruitment program, 
you have been reaching out to historically Black colleges and 
universities. And I certainly want to applaud you for that.
    Can you specifically describe those efforts? And in 
particular, how does the agency reach out to Black colleges and 
universities or colleges that are designated as Hispanic-
serving institutions?
    And also, there still remains some work to be done to 
increase diversity among top-level staff and management in 
USPTO. What percentage of your GS-13, 14s and 15s, and SCCs--
SCSs, I am sorry--are minorities?
    Mr. Kappos. Okay, well, thanks, Congressman Johnson. That 
is a great question and something that I feel very, very 
passionately about, and I will try and answer as many facets as 
I can.
    Obviously, the statistics we will need to supply after the 
hearing. I don't have those at my fingertips in terms of GS-
12s,-13s, et cetera.
    So we take diversity extremely seriously at the USPTO in 
all of its forms. We are, indeed, trying to recruit new 
examiners, and we are trying to do that with an eye toward 
diversity.
    One way to get to universities that have a high proportion 
of diverse students is simply to go there and speak there, 
which I have personally done and personally spent time with 
students trying to encourage them to come and apply for 
opportunities at the USPTO.
    Relative to the leadership corps, I agree with you that the 
leadership corps of the USPTO can be more diverse and needs to 
be more diverse. And the way you get a leadership corps to be 
more diverse is pipeline. You have to go into the people who 
are being considered for promotion and being developed into the 
leadership corps, and that is exactly what we are doing at the 
USPTO, to try and develop a more diverse pipeline for future 
promotion into leadership at the PTO.
    The last thing I would mention is that we actually have a 
terrific--in general, the agency has got a terrific track 
record, including being officially recognized by--as one of the 
best agencies in the Federal Government relative to diversity 
and actually inaugurating as many as five new affinity groups 
during fiscal year 2010.
    So just, you know, in the time that Deputy Director Barner 
and I have been at the USPTO, we have made very definitive 
steps to move diversity to center stage at the USPTO.
    Mr. Johnson of Georgia. Thank you, Director Kappos.
    In the recent past, there have been some patent examiners 
who have alleged that there was racial bias by their 
supervisors in performance evaluations. And, of course, that is 
crucial to this pipeline effort, which I definitely understand 
is the way to go with creating more diversity in the workplace.
    What are the procedures that the USPTO uses to address such 
allegations? And has the USPTO ever identified instances of 
racial bias?
    Mr. Kappos. Okay, well, thank you for that question. Like 
other Federal agencies, we have an office of civil rights at 
the USPTO that we charge with investigating issues regarding 
racial bias and the like.
    We are in the process of recommending or coming into 
Congress with some recommended reorganizational initiatives 
that will include making sure that that office of civil rights 
gains attention at the very top of the USPTO management, and 
meaning myself and Deputy Director Barner personally taking 
charge of that office, to ensure that any allegations are 
handled and are investigated in the most careful and 
appropriate manner.
    So we take diversity, as I said, very, very seriously. We 
take allegations of bias of any sort, especially race-based 
bias, extremely seriously. And we are actually literally in the 
process of coming into Congress with recommendations to make 
moves that will strengthen our ability to deal with those 
matters.
    Mr. Johnson of Georgia. And as I understand it, you are 
going to be looking at hiring about 1,000 patent examiners 
over--each year for over a 3-year period. And that creates 
opportunities--significant opportunities to correct any 
imbalances that may exist with respect to diversity, and that 
includes African-Americans, Latinos, women. It includes Asians 
and what have you.
    And so I look forward to seeing the results of your 
initiatives, which I applaud you for.
    Mr.--is it ``Budens'' or ``Budens''?
    Mr. Budens. ``Budens.''
    Mr. Johnson of Georgia. ``Budens.'' Okay, Mr. Budens, what 
support services does POPA provide employees who feel that they 
have been discriminated against?
    Mr. Budens. I thank you.
    Mr. Johnson of Georgia. And after that, I want you to 
explain to me how patent examiners are rewarded or 
incentivized--and I guess I would want to hear from both of you 
all on that. And also if you could elaborate on your concerns 
about the transfer of fee-setting power to the agency as 
opposed to Congress retaining that authority and whether or not 
perhaps a sunset provision and any relinquishment of our fee-
setting authority to the agency would make you fee more 
comfortable.
    Mr. Budens. Okay, thank you. That is a handful there.
    On the first question----
    Mr. Johnson of Georgia. I just didn't want to bog us down 
too far on the workplace diversity, which, of course, is very 
important, but there have been some other issues raised, well.
    Mr. Budens. On your first issue, POPA is the exclusive 
representative under the Federal labor management statute of 
patent professionals at the USPTO, both the examiners, and we 
also have other professionals--we have some librarians, 
accountants, et cetera.
    As the exclusive representative, we have the statutory 
responsibility of representing all, you know, members of our 
bargaining unit, regardless of race, creed, color, sexual 
orientation, et cetera. That is in our Constitution, and it is 
also required by law.
    So when someone, you know, gets in trouble with management 
or whatever, they have the right and the opportunity to come to 
POPA, and we will, you know, look into their case, and we will 
represent them before management, if we have looked at their 
case and believe that they have a justifiable grievance before 
the agency.
    We have a negotiated grievance procedure that covers most 
aspects of an employee's work life. And we use that fairly 
aggressively. I am happy to say that over the course of the 
last year or so that we are working together much better.
    And, in fact, I am happy to say that in the last year, we 
have not had to run--take a single case to arbitration against 
the agency. And I commend Director Kappos for the fact that we 
are working much better together in resolving employee issues 
and coming to resolution to those.
    But we will handle employee issues, anything that is 
covered by the fair labor, you know--not the fair labor side, 
the Federal labor management statute and our grievance 
procedure, we take a very serious look at, and we represent a 
lot of employees. They have to come to us, you know, for us to 
be aware of what their issues are, but most of them do, and we 
try and fix the problems wherever we can.
    Mr. Johnson of Georgia. Now, on that point, if you could 
provide me with some numbers in terms of complaints of racial 
discrimination and over, say, the last 3 or 4 years, 3 to 5 
years, and how those were resolved, I would greatly appreciate 
it.
    Mr. Budens. I will see what I can do. We generally don't 
keep track of those numbers. And our numbers, I would point 
out, are not--would not necessarily be reflective of problems 
at the agency, because the only ones we are going to see are 
the people who come to us.
    A lot more people go out the door of the agency than will 
necessarily come to POPA. Many people, if they get--you know, 
if they get into a conflict with the agency, either choose to 
just resign and leave the office or go their route.
    So while I will see what we can do about getting--you know, 
looking back at, you know, the cases we have handled over the 
last several years on our grievance side, I would caution you 
that there are anecdotal and, you know, may not necessarily 
accurately reflect the overall situation at the agency.
    Okay, I think your second question--let's see. You had a 
question--oh, you want to know about the awards. We have had an 
award structure in place for a number of years that basically 
was directed at production of the examiners and only awarded 
examiners at three distinct increments, 110 percent, 120 
percent, and 130 percent production above their requirements of 
their performance appraisal plan.
    Recently, as part of these count system initiatives, we 
have put in more granularity to that award system and put in 
awards at 105 percent and 115 percent and 125 percent and 135 
percent, as a means of trying to put, you know, awards within 
the range of more people. Prior to this change, if somebody, 
you know, was doing 113 percent, 114 percent, they had no 
motivation to try and get to 120 percent if they didn't feel 
like they could do it, so they could drop back to 110 percent.
    Now we have--by increasing the granularity of the award 
structure, we are hoping to see more examiners who are at that 
level, for example, go for the 115 percent award, even though 
they might not be able to make 120 percent. And, therefore--and 
by doing so, we are hoping to bring a large number of 
examiners, you know, maybe a little smaller way.
    But if we are doing it with a large number of examiners, 
the productivity of the examining corps is going to go up. And 
I am hoping you will see that in a reduction of the backlog.
    Your third question was on the----
    Mr. Johnson of Georgia. Does that have anything to do with 
quality of the reviews?
    Mr. Budens. There is a quality element in the existing 
structure right now, where if you--you have to maintain either 
commendable or fully successful performance in all the other 
elements of the performance appraisal plan, which includes 
quality elements and work flow.
    So there is a quality built in. We do not have at this time 
an actual quality award for quality performance as opposed to 
the productivity award. Happy to consider doing that, you know, 
as soon as David and I can have a chance to sit down and talk.
    The problem we have had in the past with a quality award is 
determining how you measure the quality. One of the concerns we 
have is that we need to have an objective standard, you know, 
for employees, as objective as quality can be, and that is not 
very objective, unfortunately, but to figure out, as objective 
a standard as we can come up with, so that we don't have a 
situation where, you know, a particular supervisor, you know, 
likes examiner Kappos and will make sure they have good quality 
and give them award, and they don't like, you know, examiner 
Matteo and, you know, don't give them awards.
    So that has really been one of the problems in trying to 
create an award system, just based on quality.
    Your third question goes to our concerns about fees. We are 
all in favor of the agency getting a reserve fund, as Mr. 
Kappos mentioned, and we think that is a great idea, and we 
should have--you know, we hope you all will find a way to 
institute it and allow us when we have carryover money to put 
it in a rainy day fund.
    The concerns we have with the fee-setting authority 
actually evolves from something basically totally separate, and 
that was--some of you will painfully remember the adventures 
where you had with the rules-making packages for claims and 
continuations.
    And the concern really arises out of what I think was a 
total refusal to listen to the comments of the public when we 
went through that rulemaking procedure. That rulemaking 
procedure gained an incredible--you know, had the largest 
negative response from--in comments I think of any rulemaking 
package in the history of the PTO.
    And so what our concern is, is if the agency was willing 
to--you know, and I am not looking at this current 
Administration, but if an Administration is in place that would 
be willing to just look at the rulemaking and just listen to 
the comments and then ignore them completely, I get real 
concerned when that turns into some serious money in reference 
to raising fees and stuff.
    So while I believe that the--I want the agency to have fee-
setting authority, I want to make sure Congress keeps its 
fingers in determining what fees are created. Once you all have 
decided that there should be a fee created for a particular, 
you know, aspect, statutory process like examination search or 
filing fees, excess claims, stuff like that, then I think the 
agency--you know, would like the agency to have fee-setting 
authority. But I am leery of having it have fee-creation 
authority.
    Another problem we saw was in 2005 with the initial 
attempts to outsource searching. They tried to do that with 
creating the fee structure that we currently have. We found 
that, and thanks to the hard work of, at that time, the 
Subcommittee on Courts, the Internet and, you know, 
Intellectual Property, we kind of got that circumvented a 
little bit, but that is another major concern we have.
    We do want the agency to keep all of its fees and have 
access to it. That we agree totally with. How we do that, I am 
not exactly sure. I don't see an easy answer to it.
    We don't want to see the Congress--you know, the ability to 
oversee the agency's actions lost in the process of trying to 
solve the fee diversion problem, but I don't--I wish I had an 
easy answer, you know, to suggest.
    I think one of the issues is, is there a way to get us out 
from under the scoring process? You know, because I think that 
is a big headache, but I don't even begin to claim to be an 
expert on the scoring process. It boggles my brain.
    Mr. Johnson of Georgia. Thank you.
    Mr. Kappos, anything you want to say about it? And either 
Mr. Matteo or Mr. Johnson, if you choose to weigh in on any of 
the issues that I have raised or that have been discussed? With 
the Chairman's consent, I would like for you to.
    Mr. Kappos. Well, thank you, Congressman Johnson. I would 
just add to what Mr. Budens has said, that I believe our 
examiners are also highly incented by the ability to 
contribute, the ability to know that they are doing something 
important, and to have the time they need in order to do a good 
job, to do a high-quality job in examining patent applications.
    And in that regard, I will read a very brief quote from an 
e-mail that I received no less recently than last night from an 
examiner. I get literally hundreds of e-mails from USPTO 
examiners, and this particular person--who, by the way, I don't 
know and have never met--says, ``I am supremely grateful for 
the work you have done through the revamping of the count 
system and now through the production goal study.''
    Mr. Budens mentioned both of those.
    ``The quarter more I get for new cases and the quarter for 
finals have made the difference between sink or swim. The 2 
more hours we received has also been extremely helpful in 
writing quality office actions.''
    So this is a person who is writing an e-mail, not to talk 
about salary or awards or bonuses or any of that stuff, but to 
talk about doing a good job. It is really, really important, 
right? It is a key driver to morale. It is a key driver to 
retention. It is a key driver to job satisfaction. It is a key 
driver to everything that makes an effective workforce. It is a 
key driver to leadership, right? And that is what I am here to 
bring.
    And it is enabling people to know that they are 
contributing that I think is a major, major incentive to USPTO 
examiners.
    Mr. Johnson of Georgia. Thank you all.
    Mr. Conyers. We now recognize our Ranking Member, who has 
returned, Lamar Smith.
    Mr. Smith. Thank you, Mr. Chairman.
    Director Kappos, I have a couple of questions to direct to 
you. And I was gone for a few minutes, and if you answered 
these questions, let me know or give me a truncated answer, one 
or the other.
    The first question is, in regard to PTO having fee-making 
authority, if you did have fee-making authority, what fees 
would you consider increasing? And by how much?
    A corollary of that is--one proposal has been made that 
there be a 15 percent surcharge, 15 percent increase across the 
board. If you were to do that or increase the other fees that 
you might mention now, would that succeed in reducing the 
backlog in months from, say, 35, 37 to the 20-months goal that 
you have set for 2014?
    Mr. Kappos. Right, well, thank you for those questions, 
Ranking Member Smith.
    So a number of components to how we think that the fees 
would need to be adjusted, one is short term, and that is the 
15 percent surcharge. And we gave consideration--before making 
that recommendation, we gave consideration to whether it might 
be better to recommend an interim or short-term adjustment of 
different levels to different fees, and we decided in the end 
that it was probably better to make a simple adjustment to all 
fees of 15 percent that would enable us to collect money that 
we need in order to get going immediately on reducing the 
backlog, so----
    Mr. Smith. My questions were a little bit more specific 
than that. As far as what fees, how much, and would they reduce 
the backlog and achieve your goal?
    Mr. Kappos. Right, okay. So that is the second part of the 
answer, right? Finish with the 15 percent surcharge for short 
term. Longer term----
    Mr. Smith. Okay, how long is short term?
    Mr. Kappos. Short term is between a year and 18 months, and 
the reason for that is that, even if we had fee-setting 
authority today, we have to go through a comment process, 
notice and comment rulemaking, et cetera, et cetera. It takes 
at least a year to get that done, okay? So that is why a 15 
percent surcharge short term.
    Mr. Smith. Okay.
    Mr. Kappos. Long term--now, your question, how would we 
change fees? There are some fees at the USPTO that are just a 
small fraction of the cost to actually do the work.
    Re-examination fees, right, as an example, in that part of 
the office, fees related to appeals, also. Those fees are a 
tiny, tiny fraction--those fees run into the--in most cases, in 
to the few thousands of dollars. And the actual cost to perform 
the work is in the tens of thousands of dollars. So those fees, 
I believe, would need to be raised substantially.
    Other fees we would raise potentially not at all, including 
some of the fees related to publications, where we want to 
incent parties to publish or permit the USPTO to publish----
    Mr. Smith. You anticipate that those fees that you propose 
raising would allow you to reduce the backlog to the 20-month 
goal within 3 or 4 years?
    Mr. Kappos. Yes, they will be extremely helpful for us to 
get there.
    Mr. Smith. Okay, great. My next question goes to something 
you mentioned briefly in your prepared remarks, and that is the 
perception survey results from individuals who are teleworking. 
I have never heard of a perception survey before. It doesn't 
sound to me like it is particularly credible. When you ask 
individuals if they enjoy working from their home, you can 
probably guess the response that you are going to get.
    My question is this. Are there any metrics available 
showing whether or not those individuals who telework from 
their homes or elsewhere actually approve as many patents as 
those who don't telework? Is there any kind of an evaluation 
that has been made showing whether those individuals are as 
productive or possibly more productive or less productive than 
individuals who don't telework?
    Mr. Kappos. Okay, well, thank you for that question, 
Ranking Member Smith.
    The answer is, there are some factual indications, and I 
will tell you about them. I have give you a couple of examples.
    One is that we track statistics regarding sick leave. And 
statistically----
    Mr. Smith. I am not interested in that. I am interested in 
metrics that would show whether those individuals are more 
productive or less productive. I would expect them--because as 
I understand it, you are not offered the opportunity to 
telework until you have worked for USPTO for at least 2 years, 
so these individuals will have more experience than the more 
junior members. I would expect them to be more productive.
    And I am just looking for any kind of a study or evaluation 
that has been done showing and comparing work productivity with 
those who telework or at least the days they telework compared 
to those who don't.
    Mr. Kappos. Okay. Well, I guess I am a little confused. 
People who are sick aren't working at all, right? So we----
    Mr. Smith. And I know--yes, my question, again--and maybe 
your answer is there is no such study, and if so, we can 
discuss whether or not there should be. But individual metrics 
that would have been evaluated comparing the productivity of 
those who telework versus those who don't telework, a part of 
that might well be more days taken for sick leave versus not.
    But I am still looking for the overused word ``bottom 
line,'' as far as productivity goes. One way to measure that, 
it seems to me, would be by the number of patents that are 
approved. I don't know if that is a legitimate metric or not, 
but that strikes me as possibly being one. But have any studies 
or evaluations been conducted getting at that answer?
    Mr. Kappos. Right, okay. So, yes, the kind of study I think 
that you are looking for would probably be measuring things 
like balance disposals. And we are actually working on that now 
to take us--a very cold statistical look at, as you say, 
allowance or balance disposals for employees who are on 
telework versus those who aren't.
    Mr. Smith. But that is a study that you have initiated or 
that is about to begin?
    Mr. Kappos. It is about to begin, yes, yes. We are just 
starting on it.
    Mr. Smith. Okay, when would you think that that would be 
completed?
    Mr. Kappos. I would say a few months, speaking generally.
    Mr. Smith. A few months, all right. And I would be 
interested in the results when you get them in.
    Mr. Kappos. Sure.
    Mr. Smith. I would also like to discuss with you, before 
you commence that study, if you are interested in discussing 
the methodology and questions and some of the metrics that 
might be used.
    Mr. Kappos. Sure, we would be happy to do that.
    Mr. Smith. If that is something that we can discuss 
sometime after this hearing, I would appreciate that.
    Mr. Kappos. Okay, sure.
    Mr. Smith. Thank you, Director Kappos.
    Thank you, Mr. Chairman.
    Mr. Conyers. You are welcome.
    Hank Johnson wanted to add one more question to our 
discussion today.
    Mr. Johnson of Georgia. Yes, thank you, Mr. Chairman.
    Mr. Budens, at page 10 of your testimony, first paragraph, 
it says, ``The proposed manager's amendment to S. 515 does not 
contain a provision to maintain the 1-year grace period for 
inventors filing in the U.S.''
    Is that a fact that the manager's amendment in the Senate 
leaves that provision out?
    Mr. Budens. It is my understanding, unless I missed it 
somewhere, you know, in the 100-and-some pages of that bill, I 
thought they had moved away from it as they moved toward the 
first to file process, and they were looking at more of a 
situation where--if I understand the process correctly--where a 
particular inventor, his prior art or her prior art references 
could not be used against them by the examiner.
    However, if somebody else published something in that same 
1-year period that was along the same--was related or 
disclosed--their invention, you know, through--because they 
went to a scientific conference or something, that that could 
be used as prior art against them, whereas I think right now 
the situation is under 102(a) that the publications would not 
be able to be used against the inventor, so that basically the 
inventors would have that 1-year period.
    And the reason we are concerned about it is because we 
think, you know, particularly in the academic communities and 
stuff, there is a--you know, in America, we have kind of a 
publish-or-perish mentality for people in the academic 
communities, and we want to make sure that they can go to 
scientific, you know, conferences and disclose their 
discoveries and start working--you know, get the information 
out to people or go to different technical meetings, you know, 
or publish their papers in the science or technical journals 
and not be--find themselves having, you know, in a situation 
where they suddenly have a body of prior art out against them, 
you know, within that 1-year period.
    If I have missed it somewhere in the manager's amendment, I 
will happily stand corrected. But it was a concern that----
    Mr. Johnson of Georgia. If you would, just simply get back 
with my office and let us know. If you would clarify that 
statement in your testimony, I would greatly appreciate it.
    Mr. Budens. We will.
    Mr. Johnson of Georgia. Thank you.
    And thank you, Mr. Chairman.
    Mr. Conyers. You are more than welcome.
    My thanks to all of the witnesses. This has been a very 
informative hearing. I am going to go through the transcript 
with my three staffers back here, and then I am going to take 
the liberty with the Members that participated on the 
Committee, invite you for just an informal discussion about 
some of the issues that have been raised.
    And your time and comments have been very valuable. And 
with that, the hearing is adjourned.
    [Whereupon, at 12:41 p.m., the Committee was adjourned.]

                                 
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