[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.]

                                 
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