[Senate Hearing 112-558]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-558

 OVERSIGHT OF THE U.S. PATENT AND TRADEMARK OFFICE: IMPLEMENTATION OF 
  THE LEAHY-SMITH AMERICA INVENTS ACT AND INTERNATIONAL HARMONIZATION 
                                EFFORTS

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 20, 2012

                               __________

                          Serial No. J-112-81

                               __________

         Printed for the use of the Committee on the Judiciary












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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin                 CHUCK GRASSLEY, Iowa
DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
CHUCK SCHUMER, New York              JON KYL, Arizona
DICK DURBIN, Illinois                JEFF SESSIONS, Alabama
SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
AMY KLOBUCHAR, Minnesota             JOHN CORNYN, Texas
AL FRANKEN, Minnesota                MICHAEL S. LEE, Utah
CHRISTOPHER A. COONS, Delaware       TOM COBURN, Oklahoma
RICHARD BLUMENTHAL, Connecticut
            Bruce A. Cohen, Chief Counsel and Staff Director
        Kolan Davis, Republican Chief Counsel and Staff Director





















                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa......     3
    prepared statement...........................................    48
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     1
    prepared statement...........................................    59

                               WITNESSES

Kappos, David J., Under Secretary of Commerce for Intellectual 
  Property, and Director, U.S. Patent and Trademark Office, 
  Washington, DC.................................................     4

                         QUESTIONS AND ANSWERS

Responses of David J. Kappos to questions submitted by Senators 
  Leahy, Klobuchar, Blumenthal, Grassley, Hatch, Cornyn, Lee and 
  Coburn.........................................................    23

                       SUBMISSIONS FOR THE RECORD

Kappos, David J., Under Secretary of Commerce for Intellectual 
  Property, and Director, U.S. Patent and Trademark Office, 
  Washington, DC, prepared statement.............................    52

 
 OVERSIGHT OF THE U.S. PATENT AND TRADEMARK OFFICE: IMPLEMENTATION OF 
  THE LEAHY-SMITH AMERICA INVENTS ACT AND INTERNATIONAL HARMONIZATION 
                                EFFORTS

                              ----------                              


                        WEDNESDAY, JUNE 20, 2012

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:07 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Patrick J. 
Leahy, Chairman of the Committee, presiding.
    Present: Senators Leahy, Feinstein, Whitehouse, Klobuchar, 
Coons, Grassley, Hatch, Lee, and Coburn.

OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM 
                      THE STATE OF VERMONT

    Chairman Leahy. Mr. Kappos, if you could take a seat there, 
I will explain what we are doing. Normally, I am one that likes 
to take pictures. I am more interested in taking them than 
being in them, but this is one where Mr. Kappos and I both were 
at the signing of the Leahy-Smith America Invents Act, and you 
can see both of us and, of course, the President. And I am 
standing there because I am trying to take a picture of the 
President's hand signing the bill. Over the years, I have been 
able to get pictures of Presidents Ford, Carter, Reagan, both 
Bushes, Clinton, and Obama, pictures of their hands, because no 
other photographer stands behind the President when he is 
signing a bill. But this particular picture, Mr. Kappos, as I 
mentioned to you, has special significance to me because it was 
taken by my son-in-law, who is one of the President's 
photographers, and we just wanted you to have it.
    Nine months ago, the U.S. Congress did something that has 
become all too rare. It sent to the President bipartisan 
legislation that is going to unleash American innovation to 
create jobs and improve our economy. The Leahy-Smith America 
Invents Act, signed by the President last September, was the 
product of more than 6 years of hearings and markups, and I 
thank all the Senators on both sides of the aisle that came to 
all those hearings and markups. And we had countless hours of 
meetings and negotiations, Republicans and Democrats, Senate 
and House, sitting down together and working on legislation the 
way we used to, the old-fashioned way.
    The patent reform process was bipartisan and bicameral 
effort right from the outset. Every member of this Committee 
made important contributions to the legislation. Director 
Kappos' leadership was also invaluable to this process. I had 
known him before from his days in the corporate world. He did 
not need a tutorial to know what was necessary. And Ambassador 
Locke, who was Secretary of Commerce when the Senate first 
passed the America Invents Act in March, I think of all the 
number of times that Gary Locke sat in long meetings with all 
of us, Republicans and Democrats, to work this out.
    But the Act creates a more effective, efficient, and 
streamlined patent system that will get the highest-quality 
patents to issue from the PTO as quickly as possible. It 
required major structural changes to the system of granting and 
enforcing patents, and that will take the PTO time and work to 
implement.
    But it has begun. So far, the PTO has initiated more than 
10 different rulemakings and hired more than 800 examiners and 
40 administrative patent judges. It has conducted seven road 
shows across the country to explain and receive feedback on 
proposed rules, and I appreciate this transparent manner where 
not just people in Washington but people in other parts of the 
country can have their input.
    I am pleased that even before the Act is fully implemented 
the PTO has focused on reducing the backlog of patent 
applications. Over the last 2 years, the backlog has been 
reduced roughly 12 percent, and I want these numbers to 
continue to improve.
    But speed is only one part of the equation. The patents 
that are issued need to be of high quality, because if they are 
not, instead of being an incentive to inventions, they are 
going to impede innovation. We have in the Leahy-Smith bill 
important quality controls.
    We also need to do more to protect American investors in 
overseas markets. We should encourage other nations to adopt a 
grace period similar to in our law.
    We can make it easier for American inventors to seek patent 
protection abroad by implementing the Patent Law Treaty and the 
Geneva Act Treaty on design patents. Those have been supported 
by both the Bush and the Obama administrations, so I hope, 
following the bipartisan example of President Bush and 
President Obama, that we can implement legislation in the same 
bipartisan and bicameral manner as we did on patent reform.
    So I think this is an efficient and effective patent 
system, and this was one that had not been updated for half a 
century. This will unleash American innovation and improve the 
American economy.
    So we have done our part in Congress, and I look forward to 
hearing from the Director about the steps the administration is 
taking to ensure the Leahy-Smith America Invents Act fulfills 
its potential as I believe we are creating the first truly 21st 
century patent system.
    I will put my full statement in the record.
    [The prepared statement of Chairman Leahy appears as a 
submission for the record.]
    Chairman Leahy. Senator Grassley.

STATEMENT OF HON. CHUCK GRASSLEY, A U.S. SENATOR FROM THE STATE 
                            OF IOWA

    Senator Grassley. I will likewise put a full statement in 
the record and refer to a couple points.
    First of all, Senators Leahy and Hatch and Members of the 
House who were involved in this, you need to be complimented 
for having the most comprehensive reform of patent law since 
the 1836 patent law. It is a product of 6 years. The America 
Invents Act makes the U.S. patent system more efficient and 
streamlined. It will eliminate or at least cut down on 
frivolous lawsuits. Transparency is very important. Patent 
quality is very important. That will be enhanced. These reforms 
contained in this law have helped the Patent Office to cut down 
on its backlog and process patent applications more 
expeditiously.
    The law contained a number of provisions that required the 
Patent Office to promulgate rules and regulations, so holding 
this hearing is very important on our constitutional 
responsibility of oversight to make sure that regulations 
follow congressional intent.
    We also want to determine whether the legislation has 
produced any discrepancies, difficulties, or unintended 
consequences that have been revealed during this 
implementation. So I believe it is appropriate to ask whether 
technical, clarifying, or other changes to the legislation are 
warranted. If so, I expect to work with my colleagues in a 
transparent and open manner to improve the America Invents 
process, and hopefully nobody will try to use technical or 
clarifying language to get something done that they could not 
get done during the 6 years that this process was being 
negotiated.
    And also to point out, last, that in 2007 the Patent Law 
Treaty and the Geneva Act of the Hague Agreement concerning the 
International Registration of Industrial Designs, these were 
ratified by the Senate. The Senate now needs to pass 
implementing legislation, and I look forward to hearing more 
about these treaties and how they can help American patent 
holders.
    That is only a part of my statement, so I will put the 
whole thing in the record.
    [The prepared statement of Senator Grassley appears as a 
submission for the record.]
    Chairman Leahy. Thank you very much, and thank you for your 
help on this.
    David Kappos is the Under Secretary of Commerce for 
Intellectual Property and Director of the United States Patent 
and Trademark Office, and he was invaluable to me and others in 
providing counsel and guidance as we worked to pass the Leahy-
Smith America Invents Act.
    Before he joined USPTO in 2009, he was vice president and 
assistant general counsel for intellectual property at IBM; 
bachelor's from the University of California, Davis; law degree 
from the University of California at Berkeley; but, more 
importantly, somebody who not only understands this, but has a 
commitment to make the Patent Office work.
    Director, it is all over to you. Go ahead.

STATEMENT OF THE HONORABLE DAVID J. KAPPOS, UNDER SECRETARY OF 
 COMMERCE FOR INTELLECTUAL PROPERTY, AND DIRECTOR, U.S. PATENT 
             AND TRADEMARK OFFICE, WASHINGTON, D.C.

    Mr. Kappos. Well, Chairman Leahy, thank you very much; 
Ranking Member Grassley, Members of the Committee. Thank you 
for this opportunity to discuss the USPTO's ongoing efforts to 
implement the Leahy-Smith America Invents Act and our pathway 
to international patent law harmonization.
    Mr. Chairman, you and your colleagues deserve special 
praise for making patent reform a reality. Our Nation's 
innovators and our economy are truly the beneficiaries of your 
hard work. Thank you, thank you, thank you.
    Mr. Chairman, I am pleased to report that our AIA 
implementation efforts are indeed proceeding apace. We have 
implemented seven provisions of the AIA--all within the 
timeframes set by the Act. We have published proposed rules for 
nine additional provisions, and we are on schedule to implement 
all of them on time this summer.
    While our stakeholders have expressed differing views on 
some of our proposals, all of them have commented quite 
favorably on the transparency of our implementation process and 
the extent of our public outreach. Our AIA implementation team 
continues to review hundreds of comments received from 
individuals, IP organizations, IP practitioners, innovators, 
government entities, and academic institutions. And our 
ultimate goal, of course, is to produce rules consistent with 
the language and intent of the AIA that will best serve the 
needs of America's entire innovation community.
    We will issue the final rules on or before August 16th of 
this year. The rules will then become effective on September 
16, 2012, to give us a window of a month or more to educate our 
personnel and the public regarding the final rules in advance 
of their implementation.
    Now, in early February of this year, we published initial 
proposed fees, as authorized by the AIA, for our patent 
services, and we received substantial feedback and 
recommendations from the public on them. We will also be 
receiving a report from our Patent Public Advisory Committee on 
the proposed fee structure before we issue a final rule late 
this year or early next year.
    Mr. Chairman, we should note that our stakeholders are 
indeed already benefiting from the AIA. We launched the 
prioritized examination program, known as Track One, that 
provides for patent application processing in less than 12 
months and offers small businesses a substantial discount. 
Since its inception, we have received more than 4,000 Track One 
applications, and we have completed first examination on more 
than 2,300, an average of about 90 days, which is exactly what 
we had intended to implement.
    Needless to say, Mr. Chairman, our Satellite Office Program 
has drawn quite a bit of interest. We will open our first 
satellite office in Detroit, Michigan, next month. With respect 
to additional offices, we are in the process of reviewing and 
analyzing more than 600 comments and suggestions we received in 
response to our Federal Register notice. We expect to announce 
the locations of additional offices this summer.
    Mr. Chairman, this is an exciting time in the patent world. 
With the passage of the AIA and Europe's consideration of a 
unitary patent, we are positioned to make real progress toward 
the establishment of a more effective international patent 
system overall. Adoption of the AIA has enabled the USPTO to 
promote a new vision of an intellectual property world in which 
national and regional patent systems are coordinated to create 
an optimal environment for technologically innovative companies 
and individuals globally.
    The AIA provides an opportunity to restart long-stalled 
discussions with our foreign counterparts toward substantive 
harmonization that will help U.S. businesses succeed in the 
global business environment. And a critical part of these 
discussions is adoption by other countries of a modern grace 
period. A grace period has been adopted in many patent systems 
throughout the world, and it is recognized as a global best 
practice. We look forward to continuing these discussions with 
our overseas counterparties.
    It is clear that policies supporting high-quality 
intellectual property and a high-quality IP system are making a 
difference in our Nation's economic recovery. The recent IP 
jobs report ``Industries in Focus'' shows that America's core 
strength continues to lie in our ability to innovate. Sensible 
Government policies encouraging that spirit of innovation can 
demonstrably contribute to job creation and economic well-
being.
    So, Mr. Chairman, we look forward to working with you to 
ensure that the innovation-advancing, job-creating, deficit-
neutral work conducted by the USPTO continues to best serve 
America's innovators, and we appreciate your continued support 
for the employees and operations of the USPTO.
    [The prepared statement of Mr. Kappos appears as a 
submission for the record.]
    Chairman Leahy. Well, thank you very much, Director.
    One of the things that I might mention, we had a grace 
period we included in the transition to a first inventor to 
file system. I have been told that has been essential to 
researchers at universities, independent vendors seeking 
venture financing. You said that you are working with other 
countries to see if they will provide similar protections.
    How are we coming with these other countries and trying to 
get that kind of grace period?
    Mr. Kappos. I think it is fair to say that we are making 
pretty solid progress. As a result of the recent free trade 
agreement between the U.S. and Korea, Korea now has a great 
grace period. Japan has a good grace period. We have got to 
work on a little bit of timing with them still. Other 
countries, including Canada, Australia, have excellent grace 
periods. We are working with folks over in Europe, the European 
Union and the major countries over there, in the direction to 
moving toward a grace period also. And I think it is fair to 
say that across the board people are receptive because they 
understand that a grace period is pro-innovation, it is pro-
tech transfer, it is pro-opportunity.
    Chairman Leahy. In the European Union, they are probably a 
bit distracted these days on other matters, but keep on with 
them.
    What are the biggest obstacles remaining as part of the 
implementation of the new law?
    Mr. Kappos. Well, relative to implementation of the law 
overall, I actually do not see major obstacles. It is an 
excellent piece of legislation. We have got the tools to 
implement it. Financial resources are always a concern, 
understandably, but we have gotten great support from Congress. 
Our fee collections are running right about where we expected 
them to. Our expenses are right about where we expected. And we 
have got all the resources we need at this point to implement.
    Chairman Leahy. I mean it as a compliment and not as a 
pejorative when I talk about a roadshow, but have those worked 
out pretty well in your mind?
    Mr. Kappos. Yes. So we ran seven roadshows all over the 
country--east coast, west coast, a number of places in between. 
I thought they were excellent, and the reason is because they 
gave an opportunity for people who do not often interact with 
the USPTO to get in a room and spend an entire day with our 
leadership team and understand the legislation, understand our 
implementation and tell us how we can improve it. So we touched 
over 1,300 people all over the country. We got tremendously 
positive feedback. We got great comments and suggestions, all 
the way from Sunnyvale to Boston and everywhere in between, so 
much so that we are going to run a second set of roadshows----
    Chairman Leahy. Mentioning that, there is one State that 
has the most number of patents per capita of any State in the 
country.
    Senator Feinstein. Where are you going with that?
    Chairman Leahy. I thought maybe we could go alphabetically, 
starting with Vermont.
    [Laughter.]
    Chairman Leahy. I am sorry. Go ahead.
    Mr. Kappos. Well, we will run a second set of roadshows 
late this summer and early into the fall when the final rules 
are out to touch, again, a many people as possible.
    Chairman Leahy. Fall is a beautiful time in Vermont.
    [Laughter.]
    Chairman Leahy. I am concerned that standard essential 
patents are becoming the new front of the tech patent wars. 
Senator Kohl and I wrote to the administration expressing our 
concern that preventing the use of these patents by going to 
the International Trade Commission after promising to license 
them on reasonable terms could have anticompetitive effects. I 
think the Federal Trade Commission and I know other Members of 
Congress have expressed similar concerns.
    Are there times, in your view, when enforcing these types 
of patents might harm consumers?
    Mr. Kappos. Yes, I think that the situation is definitely 
cause for careful study at this point. So standard essential 
patents implicate a number of very important intellectual 
property and also competition issues. You are talking about 
situations where a number of competitors are agreeing to use 
the same technology. Once that occurs, they go off and they 
make commitments to manufacturing equipment and processes, and 
they put networks in place. There is a tremendous lock-in 
effect that creates extremely high value for the technology 
that is in the end implemented.
    When competitors get together and make pledges of fair, 
reasonable, nondiscriminatory licensing, so-called FRAND 
pledges, in the context of standard setting, those pledges need 
to be kept, and what they mean is that licenses will be 
offered. If later folks who have offered their patents under 
FRAND terms then are able to get exclusion orders or 
injunctions, you can certainly have some tremendously negative 
side effects.
    On the other hand, though, I think there is also a fair 
point to be made that a FRAND commitment does not stand for 
licensing under any terms and conditions, and you cannot wind 
up in a situation where FRAND means no opportunity to enforce a 
patent because what that will create is a situation where 
nobody will have any incentive to take a license. So finding 
the right balance is really the challenge.
    Chairman Leahy. Well, and I agree with you. You explored 
the poles on that, and I agree with you on both of them. But we 
have got to find a way--not so much bring both sides together, 
but find a way through this. And I do not begin to 
underestimate the difficulty of threading that needle, but 
please keep us posted on this, will you? Thank you.
    Just one last thing. You mentioned the Patent Law Treaty 
and the Geneva Act and the Hague as treaties since ratified, 
but they require implementing legislation to be effective. I 
assume you feel those are going to be pretty effective, pretty 
helpful to this country if we get the implementing legislation 
through?
    Mr. Kappos. Yes, I do, Chairman Leahy. Both of those 
treaties are pro-innovation. In the case of the Patent Law 
Treaty, you are talking about a straightforward instrument that 
will cut costs for U.S. patent filers and patent filers 
globally, streamline the system, reduce redundancies, you know, 
a very light lift. In the case of the Hague Act, you are 
talking about design innovation, which has become a major, 
major issue lately. Look at the corpus of innovation that Steve 
Jobs created which showed us all that there is tremendous 
action at the intersection between design and utility 
innovation. And the Hague Act is all about providing a 
streamlined single instrument that will enable American design 
creators to get global protections. Both of those treaties are 
pro-American innovation, pro-global innovation, pro-jobs, pro-
opportunity, very light lifts, and I would love to see 
implementing legislation.
    Chairman Leahy. Thank you. I will submit my other questions 
for the record, especially one on the Patents for Humanity 
Program.
    Chairman Leahy. Senator Grassley.
    Senator Grassley. Director, I hope you will recall that I 
was instrumental in getting a provision dealing with tax 
strategy patents included in this Act so that all taxpayers 
would have equal access to strategy in complying with tax law. 
These patents encumber the ability of taxpayers and advisers to 
use the tax law freely, interfering with the voluntary tax 
compliance system and undermining the fairness. Tax patents 
provide windfalls to lawyers and patent attorneys by granting 
them exclusive rights to use tax loopholes, which could provide 
some businesses with unfair advantages. Some taxpayers could 
face fees simply for complying with the Tax Code. Because tax 
strategy patents are unlikely to be novel given the public 
nature of the Tax Code, we included a provision in the law that 
expressly provided that a strategy for reducing, avoiding, or 
deferring tax liability cannot be considered a new or non-
obvious idea and, therefore, a patent on tax strategy cannot be 
obtained.
    So I am interested in hearing whether the tax patent 
provisions included in the law are working out as Congress 
intended. Specifically, is the Patent Office continuing to 
receive patent applications involving tax strategy? And, 
second, what procedures have been put in place to screen for 
tax strategies and ensure that the law's provisions are 
complied with?
    Mr. Kappos. Well, right, thank you, Senator Grassley, for 
the question, and we are indeed intent on accurately and 
faithfully implementing that provision. It is an important part 
of the law.
    A couple of comments. Number one, it is a little early to 
tell because patent applications that we have received since 
the law went into effect have been small numbers, but we 
received only small numbers ahead of that. We are talking like 
in the neighborhood of 20 applications. Very, very small 
numbers. We will examine them rigorously based on the 
strictures in the law. So I think the law will be very helpful 
for its intended purpose, but given the timelines of these 
things when they get received and when they get examined, it is 
too early for me to give you statistics on results yet.
    The other thing I will say is that Section 18 of the AIA, 
the covered business method review provision, is also going to 
be extremely helpful, and with great guidance from Congress, we 
have written rules that will ensure that tax strategy patents 
will in, if not all cases, the very large majority of them be 
applicable for Section 18. So that will give us an opportunity 
at the request of third parties to take a close second look at 
those patents. Section 18 will be helpful also.
    The other thing I would say is that I have initiated on my 
own signature Director-ordered re-examinations of two 
particular tax strategy patents that I felt strongly had 
serious validity problems with them. Both of them have been re-
examined in the USPTO. Both have been rejected. One has been 
finally rejected and is on appeal. The other one is under 
rejection, no claims deemed allowable in them.
    So I think the guidance from Congress has been extremely 
valuable to us. We are applying it as much as we can already, 
and there will be more to come.
    Senator Grassley. Would you be able to be consulting with 
the IRS if you need guidance on tax law?
    Mr. Kappos. We certainly will. And, in fact, the basis that 
we have used for the Director-ordered re-exams that we have 
done so far have been highly based on IRS regulations and 
information. So their work is indeed seminal to our handling 
these cases.
    Senator Grassley. My next question involves some oversight 
work I have been doing, and if you feel that you can answer it 
in writing better than answering orally, I would give you that 
option. Since you are before the Judiciary Committee now, I 
want to take the opportunity to ask about my oversight 
inquiries of the Patent Office expenditure relative to 
international conferences. Preliminarily, I want to make clear 
that I understand it is important for the United States to do 
international outreach and training with respect to protection 
of intellectual property rights, but we also need to know that 
we do it in a smart way using taxpayers' money.
    Last September, I wrote to you regarding the U.S. Patent 
Office's sponsorship of a 2-day intellectual property 
conference in Tokyo. It is my understanding that $180,000 was 
spent for four high-level Patent Office staff members, 
including yourself and six judges, and two staffers of the 
Federal Circuit Court of Appeals. However, in the meeting I had 
with Chief Judge Rader, he told me that Japan no longer has 
significant intellectual property problems that are prevalent 
elsewhere around the world. I asked the Patent Office and the 
Federal Circuit Court of Appeals for specific documentation 
about the amount of funding spent for this and other 
international conferences. The Patent Office response provided 
vague justification for the expenditures and no actual 
documentation.
    So I still want to receive the documents that are requested 
in the September 2011 letter. I hope you would commit to 
providing me with the conference and travel expense documents 
that I requested. And I would like to have you explain why the 
Patent Office spent over $180,000 for a conference in a country 
that has already addressed its significant intellectual 
property problems. Why was it necessary to send so many people, 
by my count at least 12 individuals, to that conference? The 
response that I received stated that the Patent Office would be 
sponsoring an intellectual property conference in China this 
year. I would like to know the status of that trip and who is 
scheduled to attend and how much is going to be spent for the 
sponsorship and travel expenses.
    Again, the message I am trying to send to you is that in 
this day of extremely limited resources, we all should be 
looking for focus on our efforts where they need to be most, 
and we should be trying to find as many ways as possible to 
save money.
    Mr. Kappos. Well, thank you for that question, Senator 
Grassley, and I would start by saying I could not agree more 
strongly with you that in this age--in fact, in any age but 
especially this one--we need to be extremely judicious about 
the way we spend money, especially travel money, because trips 
can get expensive. And that is why, in specific, for the 
conference in Japan, to my memory we took three people on that 
trip: myself; the solicitor of the USPTO, who is my senior-most 
litigators; and one staff person to help staff the trip.
    I have ensured that USPTO pays only for coach class travel 
for all travel that I do and all other USPTO employees. So our 
travel is extremely cost-effective, even for extremely long 
trips like a trip to Japan.
    That conference, in my view, was enormously important and 
was very successful. We were able to get together hundreds of 
Japanese practitioners with their judiciary. Indeed, they have 
got a great intellectual property system, respect the law 
there. They are leaders in Asia, and by holding that conference 
like we did, with a small U.S. Government footprint but helping 
to bring together all the folks over in Japan and, in fact, 
throughout Asia, we were able to get a first huge gathering of 
Japanese judiciary with their practitioners, leaders from other 
countries including the U.S. and other parts of Asia, and have 
what I thought was an extremely valuable discussion about the 
intellectual property system, the importance of patent, 
trademark, copyright, trade secret enforcement all over Asia.
    We did indeed, Senator Grassley--you correctly asked about 
the follow-on conference in China. We help that conference just 
a few weeks ago in Beijing. I attended that, again, along with 
just a few other USPTO people, again, if my memory serves, 
exactly two other folks: our solicitor and a staff person. It 
was an enormous and successful conference. About 1,200 people 
attended, including several hundred Chinese judges, members of 
their Supreme People's Court who hear their intellectual 
property-related cases, and it gave us a huge opportunity to 
talk all at the same time in person and through the media in 
China to literally hundreds and hundreds of people who we need 
to help get on board with understanding and championing a 
strong intellectual property rights system.
    So in my job, as our administration's leader in 
intellectual property policy development and promulgation, I 
feel these were extremely valuable trips, lightly staffed by 
the USPTO; and while we are not going to go doing these all 
over the world, I think they clearly are the right things in 
the right places in order to help move the rule of law and 
respect for intellectual property forward.
    Senator Grassley. Will you give me the documents I 
requested, please?
    Thank you, Mr. Chairman.
    Chairman Leahy. Thank you.
    I commend you on flying coach. All of us around this table, 
when we fly overseas on Government business, usually fly either 
business class, first class, or on a Government airplane. So 
before we get too concerned about your flights, we want to make 
sure that we are not throwing stones at a glass house.
    Senator Feinstein.
    Senator Feinstein. Thank you very much.
    Welcome, Mr. Kappos. I wanted to talk to you a little bit 
about the length of time it takes to get a patent and 
recognizing that you now have funds to hire because you can now 
increase filing fees, which I think is a very positive 
development. The figure is that the average patent pendency has 
essentially doubled over the last 20 years, from 18.2 months in 
1991 to a high of 35.3 months in Fiscal Year 2010.
    Now, I am very pleased to see that this has begun to 
decline for the first time in 8 years to 33.7 months in Fiscal 
Year 2011. This is the latest figure my staff could get.
    I can tell you that in discussions with Silicon Valley CEOs 
like Apple, this is their number one concern: the length of 
time it takes to obtain a patent.
    Here is my question. I see your hiring numbers on this 
chart. I see how many applications come in, and I see really 
out of that how few right at this time are on board, how few 
have been made offers. The question comes. Are you setting a 
goal for a patent? Let us take for me it is a high-tech patent. 
How long can a company like Apple or Google expect for patent 
processing?
    Mr. Kappos. OK. Well, Senator Feinstein, thank you very 
much for the question. As someone who came from the tech 
industry, in fact, from Silicon Valley, I am extremely attuned 
to the need for rapid processing by the tech sector. We do have 
very explicit, very clear goals in this regard. We believe, 
based on input we have gotten from all sectors of the U.S. 
innovation economy that the optimal processing time for a 
patent application is indeed 18 months to completion, on 
average, and that you get to 18 months, on average, to 
completion by getting a first office action, a first 
substantive response in about 10 months. And that is why we 
have set targets of 10 months to first action and 20 months to 
final action which ensures that with a little bit of some cases 
coming out early, the early cases will come out at 18 months, 
the later cases will come out at about 22 months or so, and we 
will not be pre-publishing patent applications before 18 months 
but we will get them done very close to 18 months.
    So the answer to your question is our target is first 
action in 10 months, final action on an average of 20 months, 
which, you know, gets you between 18 and 22 months, and we will 
reach those targets by 2015 and 2016, and we are well on our 
way to getting there.
    Senator Feinstein. The biotech industry has given me a 
question to ask you, and that is, patent examiners keeping up 
to date on new developments. You mentioned your very successful 
roadshows. I wonder if you could not do something like that 
with respect to new technology to keep examiners up to date.
    Now, this came from a big biotech company, and that was 
their concern. What would your reaction to that be?
    Mr. Kappos. Well, that is a very valid concern. Biotech as 
an example operates, you know, at the very, very leading edge 
of technological development, and it is challenging to keep 
examiners, and we have got great examiners. In the biotech 
area, we have got examiners who in general have Ph.D.s, very 
highly educated, very capable, but keeping up on the latest 
technology is a challenge. So we are doing two things to work 
on that, and there is a third thing that I would like to start 
doing in the future.
    The first that we are doing is we have instituted a very 
vibrant patent examiner technical training program where we 
invite companies from all over the country--and it includes 
tech and bio companies from California--to come to USPTO, 
either in person or virtually, by teleconference or 
videoconference, and give lectures to our applicable examiners. 
They can be short or long. They can be 15 minutes or 2 hours. 
We have had tremendous success with that. The numbers are 
ramping up rapidly. Many thousands of hours of training a year 
we are getting from that program. It is working extraordinarily 
well. The examiners love it, and the companies that come in 
rave about how great it is to get to spend time with our 
examiners.
    The second thing we are doing is we have reinstituted a 
program that we had in past years of sending examiners out on 
short, low-cost trips to actually spend a day or two with 
various companies, and it includes companies in California 
right there in the Valley. I know we have touched companies 
that are ones that I am sure you are hearing from and sending 
examiners to spend a day or two with them to understand their 
processes, to really absorb the leading edge technology that 
they are working on. So that is the second thing we are doing.
    Of course, that becomes a financial issue because of the 
money involved, so we are gradually ramping that up. We are 
trying to be very, very cognizant of the travel cost, apropos 
of the previous question, but we will continue investing in 
that because, as you say, it is very, very valuable to get 
examiners out.
    The third thing that I would like to start doing and hope 
to be able to institute in 2013 is to resume the USPTO 
supporting our examiners in receiving technical training post-
graduation. So we have got examiners who are in the agency who 
want to take a graduate course in biotech at some school, 
hopefully here in the area, in some cost-effective way. I would 
like us to be willing to at least partially, if not wholly, pay 
the tuition expenses and help our examiners to continue to 
develop their technical education even after they are on board.
    Senator Feinstein. Could I just make one other comment? I 
appreciate this. This is on software patents. It is my 
understanding that studies, statistics, and companies show that 
the patent system drains resources from high-tech industries. 
Software and Internet patents are litigated about 8 times more 
often than other patents, and much of this litigation is 
brought by the so-called patent trolls, yet a quarter of all 
patents issued are software patents.
    Are you undertaking any initiatives in the Patent Office to 
address this?
    Mr. Kappos. Yes, absolutely. It is clearly a concern, and 
we are doing several things. First of all, the AIA is going to 
have and is starting to have an enormously positive impact. So 
the AIA put in place Section 18, the covered business method 
section, which touches on software patents because many 
business methods are claimed as being implemented in software. 
So that provision and our implementing rules will enable us to 
provide a venue to take a second look at many of these business 
method patents that have software concepts in them.
    Second, inter partes review, post-grant opposition are all 
about providing a fast, clear, inexpensive route to take a 
second look at patents that we have granted, and I expect it 
will be extremely helpful in the software area. Now, those 
provisions, of course, go into place in September, so we have 
got a few months we will be starting to work on them.
    The other thing that we have already done is put in place 
for the first time new guidelines that we put in place a little 
over a year ago that were especially directed to the software 
field to have our examiners spend more effort and be more 
precise in our examination of patent applications for the 
clarity of their disclosure, which is a key problem in the 
software area. We had a lot of that set of guidelines--they are 
called 112 guidelines. A lot of them were directed to issues 
that come up with software patents. We have baselined, we have 
done the statistics on changes that have occurred in the 
agency, and, indeed, our examiners have put out increasing 
effort and increasing objections and rejections in the areas 
that you are concerned about. So we clearly are making 
progress. We will be doing more there.
    Chairman Leahy. We are going to go to Senator Hatch, then 
Senator Klobuchar, Senator Coburn, Senator Coons, Senator Lee, 
Senator Franken, and Senator Whitehouse. I have just been 
advised we are going to have a vote at 11:30. I have tried to 
be as flexible possible in giving extra time, but we are going 
to have to keep it as close as we can because we will not come 
back after we leave for the vote.
    Senator Hatch.
    Senator Hatch. Well, thank you, Mr. Chairman.
    I just want to tell you that I am pleased with your 
service. I think you are doing a very fine job, and I have very 
little to criticize you with. But let me just say this. I 
continue to follow closely how the USPTO plans to implement the 
supplemental examination provisions of the America Invents Act. 
By establishing the new process, USPTO would be asked to 
reconsider or correct information believed to be irrelevant to 
the patent, as I understand it.
    As you know, the law enables patent holders to request a 
supplemental examination of a patent if information arrives 
after the initial examination. The goal, when crafting this 
provision, was to provide the patent owner the ability to take 
action to remedy any potential deficiencies, thus enhancing the 
quality and accuracy of the patent examination record.
    However, since the USPTO published its proposed rules to 
implement the supplemental examination provisions, I have heard 
some concerns that the proceeding would be very expensive, if 
not cumbersome, to use. How do you respond to concerns that the 
cost for filing a supplemental examination is steep and will 
discourage patent owners from utilizing this procedure?
    Mr. Kappos. Thanks for the question, Senator Hatch, and 
that is indeed something that we are concerned. We want the 
cost to be set at a level at which these processes are 
affordable.
    We have taken a lot of input on both the cost and, I will 
say, the procedural difficulty issue that you raise, and we are 
indeed looking for ways to simplify the procedures. We are 
working on that right now. And we are looking for ways to 
moderate the cost. So messages received in both cases, and we 
are working on making improvements in both regards.
    The one other thing I will say is that we are prepared to 
make further improvements as we go forward. We will all get 
some experience with these procedures once we put them in place 
soon, and we are very amenable to then learning and further 
simplifying as we learn what works.
    Senator Hatch. Well, thank you. Would you mind commenting 
on the opportunity patent owners now have with the supplemental 
examination to improve the quality of their patents? It seems 
one would think the costs associated with strengthening one's 
patent may very well be worth the moneys that are invested up 
front.
    Mr. Kappos. Well, yes, I think that is clearly right, and 
so the way we are trying to implement supplemental examination, 
we will charge a more moderate fee up front for those patents 
that just require the kind of clarification, Senator Hatch, 
that you are pointing to and then reserve for further work in 
re-examination as called for by the statute those cases that 
require really substantial additional work.
    Senator Hatch. OK. During consideration of the America 
Invents Act, I joined 47 of my colleagues in supporting Senator 
Coburn's amendment in which user fees would go directly into a 
revolving fund for the USPTO, separate from annual 
appropriations. Even though the Coburn amendment failed, we 
were assured that the House compromise language, which created 
a reserve fund for fees collected, would be more than enough to 
provide the USPTO with the resources it needs to fulfill its 
mission.
    Now, recognizing that the reserve fund is tied to the 
appropriations process, how does the continuing resolution 
affect your operations? And do you believe that the House 
agreement applies to continuing resolutions as well as 
appropriations bills?
    Mr. Kappos. Well, the reserve fund is indeed a much less 
robust solution than the amendment that Dr. Coburn offered, and 
thank you for raising the issue, Senator Hatch.
    What I would say is so far, so good relative to funding. We 
have not yet used the reserve fund because we have not had 
money yet to put into it. It is just going to be coming into 
effect next year.
    During a continuing resolution period like we may be 
entering this fall, we will be subject to the appropriations 
process and the issues with CRs like we always have. In the 
past, they have been challenging. However, we have been able to 
plan for what could be a continuing resolution this fall that I 
believe will enable the agency to continue our operations 
seamlessly through the CR. And if the reserve fund works out 
the way that it looks like it will, I believe it will be 
helpful to us also in future periods because it will be a 
corpus that we can then tap into during those periods.
    Senator Hatch. Well, thank you. My time has expired. I do 
have a few more questions, so I will submit them in writing.
    Senator Hatch. Thank you so much. We appreciate the work 
you are doing. I think you are really, really accomplishing 
quite a bit down there. I appreciate it.
    Mr. Kappos. Thank you, Senator Hatch.
    Chairman Leahy. Senator Klobuchar.
    Senator Klobuchar. Thank you very much. Thank you, Director 
Kappos. Thanks for your good work in this area. This was an 
incredibly complex bill and something that I worked hard on, as 
did many members of this Committee, truly a bipartisan effort 
to get this done.
    As you can imagine, our State, the State of Minnesota, has 
a great history of innovation. We have given the world 
everything from the Post-it Note to Scotch tape, water skis, 
pop-up toaster, and rollerblades, just to name a few. I do not 
know if you knew that, but it is true. And what we know is that 
one of the keys to innovation and economic growth is making 
sure a country's inventors that work for small businesses or 
even in their own garages can get patents for their inventions. 
And the America Invents Act directed the PTO to work with 
intellectual property lawyers to create pro bono programs that 
assist individual investors and small businesses with applying 
for patents. I used to be at a law firm. I know how expensive 
patent lawyers can be, and that is one of the ideas here, is to 
try to get smaller inventors an easier way in.
    I am pleased to see that you are collaborating with Legal 
Corps, which is a Minnesota nonprofit that connects IP lawyers 
with inventors to provide that kind of pro bono assistance and 
are taking the program to cities across America.
    Can you provide an update on how that is working?
    Mr. Kappos. Right. Well, Senator Klobuchar, thank you very 
much for the question. Indeed, the congressionally mandated pro 
bono initiative has gotten off to an extremely good start. We 
started the first chapter, as you mentioned, in the Twin Cities 
in Minnesota. It has been extremely effective. In fact, I just 
received an e-mail this morning indicating that the very first 
patent has now issued, so we have reached yet another 
milestone.
    Inventors from the Minnesota area, that whole area of the 
Upper Midwest around the Twin Cities, are receiving legal 
advice and getting help preparing patent applications. The 
program is going extraordinarily well. We started the second 
chapter in the Denver, Colorado, area. We have got five more 
that we are working on. We will have as many as 13 additional 
up and running next year that are well in the pipeline, and we 
intend to have complete coverage for the U.S. by 2014.
    So the program is going along extraordinarily well. The 
push from Congress in the AIA was exactly what we needed, and 
we are really making good use of it.
    Senator Klobuchar. Then also the America Invents Act 
included reduced fees for small businesses and micro entities. 
Do you think that will be a help to increase the number of 
patents filed by small businesses and individuals?
    Mr. Kappos. Well, I think clearly. Now, the micro entity 
fees have not yet gone into effect. They are subject to the new 
rulemaking in AIA, so I put out the draft rules on those. They 
are in the clearance process right now, or if they have not 
already emerged from it. So we will be implementing the micro 
entity fees. But relative to small entities, another fact that 
I should mention is that the Track One Initiative enabling 
applicants to get very fast patent protection by paying a few, 
has been used in very high proportions by small entities. In 
fact, I think about a third of the usage of that program is by 
small entities, so that to me really stands for the proposition 
that small entities need patents quickly, that fee discounts 
work for them, and that they will go out and create opportunity 
by getting through the patent system promptly.
    Senator Klobuchar. One of the key provisions in the America 
Invents Act is moving from a first to invent to a first 
inventor to file system, as you are aware. Can you describe the 
preparations that are underway to make sure that the PTO is 
ready for this important switch in March 2013.
    Mr. Kappos. Yes, there is a lot going on in that regard. We 
are in the process of preparing the draft rules or what is 
called the Notice of Proposed Rulemaking that will go out and 
begin getting comments. We plan to hold a roundtable, a special 
roundtable on just that provision in order to get input, 
especially from small entities and independent inventors. And 
we will go through the whole rulemaking process, make sure that 
we put out rules that are simple and that help especially the 
small inventor community to understand the change and to 
implement it effectively.
    Senator Klobuchar. Well, very good, and I will have some 
additional questions for the record.
    Senator Klobuchar. I want to thank you for your work and 
again stress how important this is to our country and 
especially my State, where at 3M we actually have the same 
number of patents as we do employees. So, literally, we can say 
that every employee invented something. All right?
    Mr. Kappos. Thank you, Senator Klobuchar.
    Senator Klobuchar. Thank you very much.
    Chairman Leahy. Thank you.
    Senator Coburn.
    Senator Coburn. Thank you, Mr. Chairman.
    Director Kappos, thanks for being here. Thanks for the 
great job that you and your group are doing. One of the things 
I would hope you would consider no matter who wins this next 
election is staying on in your position. I will lobby for you 
no matter who the President is. I think the continuity is 
important for this office, and it is very important for our 
country and our economic growth.
    I want to go back a little bit to your fees. First of all, 
talking about--we saw this big runup in filings prior to the 
end of September in anticipation of the new fees. And it looks 
like from Fiscal Year 2011 about $210 million was diverted from 
the Patent Office. Have you seen any of that money come back?
    Mr. Kappos. Yes, that is a great issue, Dr. Coburn. Indeed, 
there were a lot of fees paid at the very end of the financial 
year just in advance of the fee change, and it was very 
unfortunate. That money was diverted, has gone away, and it has 
not come back in the sense of somehow being, you know----
    Senator Coburn. Redirected to the----
    Mr. Kappos. Redirected. It has not.
    However, our filings have rebounded, and fee collections 
have rebounded, and so we have been able to accommodate the 
loss of that revenue.
    Senator Coburn. Just so the American people know, the fees 
for the Patent Office are meant to be directed for the 
processing and granting of patents. And, unfortunately, now 
over $1 billion of applicant fees have never been given to the 
Patent Office, and, consequently, our frequency or our ability 
to respond to patent applications is much slower than what it 
would have been had that $1 billion actually been directed to 
where individuals pay for it.
    One other question on fees, if I might. In your setting of 
fees, is your goal to cover the costs associated with those 
fees? Or are you using fee setting to try to direct some policy 
or make some direction? Could you comment on that?
    Mr. Kappos. Yes. Mostly we are setting the fees to recover 
the costs of performing the services. However, not across the 
board. So as an example, we are still fly subsidizing the cost 
of patent application filing and basic processing. We are not 
proposing to charge anywhere near the cost of examination in 
the fees that we charge for initial filings. So, obviously, you 
have to make that up somewhere else in the process. We are 
proposing to make it up largely through the renewal fees or 
what is called the maintenance fees and through some of the 
other surcharges like surcharges for late filing of documents 
and for extensions of time. So mostly we are trying to charge 
what the cost is, but with some modifications here and there.
    Senator Coburn. Let me go to one other area. It is my 
understanding you have been working with certain Members of 
Congress in terms of technical corrections to the America 
Invents Act, and I just want to be on record that I am fine 
with technical corrections, but things greater than technical 
corrections deserve a full and comprehensive hearing where all 
stakeholders have an opportunity to have input.
    Could you discuss with us the areas other than true 
technicalities that you are working on with Members of 
Congress?
    Mr. Kappos. Sure. So, you know, we are in the role of 
technical adviser in these kinds of things. There are a number 
of pure technicals, kind of clerical mistakes that we would 
like to correct. There are some issues beyond those. We talked 
about a couple of them already, you know, the PLT and the Hague 
Agreement.
    There are also discussions that have gone on about one of 
the estoppel provisions as an example. There are discussions 
about prior user rights. There are discussions about a 
provision in Section 102, the basic definition of ``prior art'' 
that some folks want to modify. So there have been discussions 
about a number of things that I would readily agree are beyond 
technicals.
    Senator Coburn. Well, I just want to be on the record that 
I am fine with a pure technical correction bill, but anything 
that significantly changes the estoppel provisions in the bill 
we passed needs to have the full consideration of all the 
stakeholders and all the members of this Committee before we 
would do that.
    Mr. Chairman, I yield back.
    Chairman Leahy. Thank you very much, Dr. Coburn.
    Senator Coons.
    Senator Coons. Thank you, Chairman Leahy, and thank you, 
Director Kappos, for the very strong leadership you have 
provided to the Patent and Trademark Office. As someone who was 
in-house counsel to a materials-based science company that 
critically relied on its intellectual property, I heard for 
years bitter complaints about fee diversion, concerns about 
pendency, quality of examiners, and I think there is very 
broadly shared amongst members of this panel and the 
communities that we represent enthusiasm for your leadership 
and the direction you have taken.
    I was encouraged by your testimony previously to Senator 
Feinstein about a goal to reduce pendency to 18 months. I was 
pleased to hear how you are doing with Track One and with its 
early implementation and the balance that you are striking with 
lower fees for those who are small or early-stage inventors.
    I am interested in how you retain, train, motivate, and pay 
qualified examiners because the absence of a sufficient number 
of qualified examiners is an absolutely critical barrier to 
your success. Now that we have made, I think, significant 
progress toward dealing with fee diversion, do you feel that 
the fees you are able to set are likely to be necessary for you 
in order to be able to pay examiners appropriately? And what 
are the barriers to your being able to pay examiners 
sufficiently that you can retain and train the most qualified 
folks possible?
    Mr. Kappos. Right, yes, that is a great question.
    Chairman Leahy. And before you answer it, just a 
housekeeping thing. I have to be at another matter. It is not 
that I am disinterested by any means. Senator Franken will take 
the gavel in my absence.
    Mr. Kappos. Yes, so retention is incredibly important in 
any enterprise. As a leader, I am always extremely concerned 
and committed to the view that if we cannot retain our work 
force, we cannot succeed. So it is fundamental to success.
    I am happy to report that our retention is actually quite 
strong these days. Our attrition rate is about 3.2 percent, 
which is very functional, very appropriate commercial grade. No 
problem right now.
    We are helped by the Detroit satellite office where we have 
had tremendous success, having very qualified judges and new 
experienced examiners. So the satellite office program I think 
is going to be very helpful because it gets us access to a new 
demographic that we just do not have in the Washington, D.C., 
area.
    Senator Coons. I presume it also gets you access to a lower 
cost of living since you are more competitive.
    Mr. Kappos. Absolutely, yes.
    Senator Coons. There are many other places that would serve 
as excellent locations for field offices, Minneapolis probably 
top of the list, and you are announcing two more.
    Senator Franken. Why, thank you.
    Senator Coons. Recognizing that two Minnesotans sit to my 
right, which has a certain amount of wisdom, I hope, and that 
Delaware is close enough, frankly, that a field office in 
Delaware is probably not on the top of your list. You will 
announce two more field offices in July, I believe.
    Mr. Kappos. We hope this summer.
    Senator Coons. Do you have the authority you need to 
explore further initiatives? You are allowing some of your more 
senior examiners to work from home through a hoteling program. 
If you find some success in these field offices, which I am 
confident you will, is that something you have the authority 
and ability to move more aggressively to expand rapidly?
    Mr. Kappos. Yes. Thanks, Senator Coons. For the most part, 
yes, we actually do have the authorities that we need. Our 
telework program has been extraordinarily successful. It 
enables examiners to live and work from literally every State 
in the continental U.S. It has been a great program. We will 
continue with that. The satellite office program, we have got 
all the authorities we need there.
    The one area that we are a little bit challenged is on the 
salary cap for our highest qualified primary examiners. 
Unfortunately, they get cut off by the salary cap that we have 
for our workers and then literally have to stop working. And so 
we have done statistical work that shows that if we had 
statutory permission to relax that somewhat, even temporarily 
for short-term small amounts, the value of the work that those 
examiners do is extremely productive. It is much more cost-
effective than hiring the like number of new people we would 
need.
    Senator Coons. Well, given how long it takes for you to 
break in and develop the proficiency of examiners, that makes 
great sense to me.
    My last question would be: Given that PTO is a 
predominantly user fee-funded agency at this point, I have done 
some outreach in the intellectual property community in my home 
State. I want to commend you for how much outreach you have 
been doing with the roadshows, how open you have been to user 
community input. I have had more than one lawyer who represents 
a firm or individual who leads a company that relies critically 
on your office's services say if the fees are not being 
diverted, they would pay significantly more than the current 
fees. They would pay whatever it took in order to get the 
pendency down and the quality of the examiners up.
    Do you think that is a widely held view? And do you think 
you could raise the fees significantly and get the pendency 
down below 18 months and the quality of the examiners up?
    Mr. Kappos. Yes, I think it is a widely held view. I am 
cognizant that there are limits on everything, and that as we 
are getting the office in better shape and reducing pendency--
in fact, the total backlog just dropped to 627,000, which is a 
new low point in many years. So we are continuing to whittle 
away and make progress. What I am finding is that the amount of 
money that we need and, therefore, the amount we need to 
increase the fees is by no means astronomical, is by no means 
mind-boggling. And so we will raise the fees as we need to. We 
are getting great support on that. But I do not think we need 
to do anything that anyone would consider outlandish.
    So apropos some of the other questions, what we are trying 
to do now is tune our fee changes so that they are good policy, 
we are incenting use of these processes, and we are not either 
undercollecting or overcollecting.
    Senator Coons. Well, as you move through the final 
rulemaking processes, I just want to close by urging you to be 
bold, striking a fair balance, that it respects small inventors 
and making sure that they have access to a fair and appropriate 
process as we work through technical amendments. But I am just 
grateful for your leadership and excited to see what the AIA is 
going to bring for our economy and for our country in the year 
ahead, and I look forward to working with you closely on this.
    Mr. Kappos. Thank you very much, Senator Coons.
    Senator Coons. Thank you.
    Senator Franken. [Presiding.] Senator Lee.
    Senator Lee. Thank you very much for joining us, Director 
Kappos. A number of individuals and organizations, including 
some Members of Congress, the FTC, and industry groups, have 
expressed some concern to the International Trade Commission 
regarding the use of exclusion orders in cases involving 
standard essential patents. As you know from your work at the 
PTO as well as time prior to that that you spent in the private 
sector, the adoption of these internationally recognized 
standards has contributed quite significantly to competition, 
and in so doing has really contributed substantially to 
innovation and to consumer choice in the marketplace, 
particularly within the tech industry.
    The standard-setting process that occurs relies for its 
existence and for its success on a commitment from companies 
that are contributing technology to license their standard 
essential patents to all the parties that happen to be 
implementing this agreed-upon standard and to do so on a reason 
and non-discriminatory basis, on RAND terms, as they say.
    Yesterday, I along with several of my colleagues sent a 
letter to the ITC expressing some concern about the 
implications of granting an exclusion order in a case involving 
standard essential patents. Are you concerned at all about any 
negative consequences that might flow from an ITC exclusion 
order in cases like these, any implications they might have on 
consumers, on innovation, and on the standard-setting process 
as a whole?
    Mr. Kappos. Yes, well, thanks, Senator Lee. I am. Senator 
Leahy asked a similar question earlier, and I share the 
concern. I think that the standard setting is extremely 
important in many industries, especially the tech industry. The 
network effects that result from standards are hugely 
beneficial, but can also be very dangerous if patents then that 
are pledged under FRAND terms are later enforced for exclusion 
orders or injunctions. And I think that the holdup power that a 
patent gains over whatever standard is chosen can actually be 
quite dangerous and debilitating to an industry if it is 
misused.
    Now, by the same token, we need to come up with a solution 
here that acknowledges that FRAND does not and really has never 
stood for licensing under any terms and conditions, and what we 
need to send is the right messages to both sides of the 
equation, both the patent holders who want to enforce and the 
folks engaging in standard setting who would otherwise perhaps 
say, well, why should we bother taking a license at all when 
the worst thing that can happen is we will get sued and after 
litigation we will just pay whatever we were going to pay for 
the license.
    Senator Lee. Right.
    Mr. Kappos. So finding that balance is what is really key 
here.
    Senator Lee. Right. And I guess that is significant because 
the ITC does not really--there is no process, as I understand 
it, whereby you can get the International Trade Commission to 
do anything other than issue an exclusion order. Is that right?
    Mr. Kappos. That is correct. That is the only tool they 
have.
    Senator Lee. You cannot get the ITC to decide what a 
reasonable non-discriminatory royalty for patent infringement 
might be. How does this contrast with the remedies that might 
be available in a Federal district court?
    Mr. Kappos. Well, of course, district courts have the full 
range of remedies available. Damages, injunctions--everything 
is available to them.
    Senator Lee. And would you agree with the overall 
assessment that some have made that allowing an order like this 
in this context could start to unravel this process or at least 
unravel the incentives that lead people into this process of 
negotiating these standard essential patents?
    Mr. Kappos. Yes, I think I would accept that it could. This 
is why letters like the one you sent are helpful, in my view, 
to guiding everyone to reach the right balance.
    Senator Lee. OK. Mr. Chairman, I see my time is about to 
expire. I yield my time back. Thank you.
    Senator Franken. Thank you, Senator Lee.
    Under Secretary Kappos, I want to thank you for coming here 
to talk about the progress in implementing the Leahy-Smith 
America Invents Act. You have done a commendable job rolling 
out these reforms, and while there is a long way to go, you 
have put a noticeable dent into the staggering application 
backlog.
    I would also like to thank you for mentioning the Minnesota 
pilot Pro Bono Inventor Assistance Program and congratulate 
them as well on securing their first patent for a small 
inventor just this week--or last week, I guess. I care a lot 
about small business and inventors, and I think we should be 
doing as much as possible to make sure that the guy inventing 
the next cool gadget in his or her garage has reasonable access 
to the patent system.
    I would also like to thank Senator Coons for pitching the 
Twin Cities for the next satellite office. As you may remember, 
I have written you a letter suggesting the very same thing, and 
I believe so has Senator Klobuchar. And so it probably will not 
surprise you that I am not going to pass up this opportunity to 
make a pitch to you in person.
    Minnesota, as you know, is home to some of the most 
innovative companies and research institutes in the world, like 
the Mayo Clinic and 3M and Medtronic. Minnesota is ranked among 
the top ten patent filers for the past 3 years, and the number 
of patents obtained by Minnesotans grew by 32 percent from 2008 
to 2011.
    My State is also fourth in the Nation in the percentage of 
population with college or advanced degrees, and more than 35 
percent of those degrees are in science, engineering, or 
technology.
    Is this impressing you?
    [Laughter.]
    Senator Franken. Well, there is more. Minnesota is also 
ranked third for patent-intensive employment in the country, 
and there is really no place in the country that can boost the 
same level of affordability, which I think Senator Coons 
referenced. And my goodness, he is not from Minnesota. He is 
from Delaware. And so it is not just me saying it, is what I am 
saying.
    Are you getting this?
    Mr. Kappos. Yes, I have got it.
    [Laughter.]
    Senator Franken. OK. I love Minnesota, but that is not the 
reason that you should locate your office there. It is because 
it makes a lot of good sense. And, again, retention will be 
important.
    Let me ask you a question that is not a shameless pitch for 
Minnesota. I have been asked about this from Minnesota 
companies. The administrative review process that was created 
in the America Invents Act was designed to reduce the expense 
and time associated with filing a lawsuit in Federal court. In 
fact, it is supposed to serve as a substitute, but I am hearing 
from a number of prominent Minnesota companies that your 
proposed standard for reviewing patent applications in 
administrative proceedings and the broadest reasonable 
interpretation standard is much broader than standards used by 
courts and the International Trade Commission.
    This seems a bit odd, especially since it can place a 
higher burden on patent holders to defend themselves in 
administrative proceedings. Why are these two standards not 
harmonized?
    Mr. Kappos. OK. Well, a couple of reasons. One, the 
broadest reasonable interpretation standard is the standard 
called for by the AIA, so I believe that the correct reading of 
the legislation is that Congress has directed us to evaluate 
for patentability, not for validity, and an evaluation for 
patentability is an evaluation that applies the broadest 
reasonable interpretation standard. So we are implementing the 
legislation. That is sort of reason number one.
    Reason number two is the USPTO has applied the broadest 
reasonable interpretation standard literally for decades. For 
all the time we have been running post-grant processes, we have 
uniformly used this one single standard, and it comes from good 
policy actually. The policy reasoning is that when you are in 
front of the PTO, you have the opportunity by statute to amend 
your claims, and these new post-grant processes continue to 
give patent holders the right to amend their claims. And in 
that context, it is the mission of the USPTO to look out for 
the public's best interest to apply the claims using their 
broadest reasonable interpretation so that the claims can be 
viewed clearly in the future, giving the applicant then an 
opportunity to narrow or add precision to their claims as they 
need to, generating patents that are as clear and defensible as 
possible.
    So I think Congress really has got the policy right on this 
one, and we are implementing the law, and we are using a policy 
that I think on balance is the right approach.
    Senator Franken. Thank you. My time has expired, and I know 
Senator Grassley wants to say something, so I will pass it off 
to him, but not before I make a pitch for your next satellite 
office being in the Twin Cities.
    Senator Grassley.
    Senator Grassley. I would say you answered my last question 
very lengthily, and I appreciate that, and I do not find fault 
with the answer you gave. But do not forget I did ask you were 
you going to supply the documents that we requested in our 
letter of last September.
    Mr. Kappos. And, Senator Grassley, I will certainly go back 
and look at the request and make sure that we do everything we 
can to supply answers to your questions.
    Senator Grassley. Well, thank you. It is very necessary 
that we have the cooperation in order to do our job of 
constitutional oversight.
    Thank you.
    Senator Franken. Thank you, Senator.
    Well, we thank you again for testifying, Under Secretary, 
and we will keep the record of the hearing open for other 
questions for a week.
    The hearing is adjourned.
    [Whereupon, at 11:23 a.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]


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