    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

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

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                             INTELLECTUAL PROPERTY,
                         COMPETITION, AND THE INTERNET

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                                JANUARY 25, 2011

                                   __________

                                Serial No. 112-6

                                   __________

             Printed for the use of the Committee on the Judiciary

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

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                           COMMITTEE ON THE JUDICIARY

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

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

      Subcommittee on Intellectual Property, Competition, and the Internet

                       BOB GOODLATTE, Virginia, Chairman

                  HOWARD COBLE, North Carolina, Vice-Chairman

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

                         Blaine Merritt, Chief Counsel

                       Stephanie Moore, Minority Counsel

                                C O N T E N T S

                                  ----------

                                JANUARY 25, 2011

                                                                       Page

                               OPENING STATEMENTS

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

                                   WITNESSES

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

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

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

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

                                  ----------

                           TUESDAY, JANUARY 25, 2011

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

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

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

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

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

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

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

                                    APPENDIX

                                   __________

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

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

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

                                   __________

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

                                   __________

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