HOW AN IMPROVED U.S. PATENT AND TRADEMARK OFFICE CAN CREATE JOBS HEARING BEFORETHE SUBCOMMITTEE ON INTELLECTUAL PROPERTY, COMPETITION, AND THE INTERNET OFTHE 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 U.S. GOVERNMENT PRINTING OFFICE 63–874 PDF WASHINGTON : 2011 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874 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, Virginia BOB GOODLATTE, Virginia MELVIN L. WATT, North Carolina DANIEL E. LUNGREN, California ZOE LOFGREN, California STEVE CHABOT, Ohio SHEILA JACKSON LEE, Texas DARRELL E. ISSA, California MAXINE WATERS, California MIKE PENCE, Indiana STEVE COHEN, Tennessee J. RANDY FORBES, Virginia HENRY C. ‘‘HANK’’ JOHNSON, JR., STEVE KING, Iowa Georgia TRENT FRANKS, Arizona PEDRO PIERLUISI, Puerto Rico LOUIE GOHMERT, Texas MIKE QUIGLEY, Illinois JIM JORDAN, Ohio JUDY CHU, California TED POE, Texas TED DEUTCH, Florida JASON CHAFFETZ, Utah LINDA T. SA´NCHEZ, California TOM REED, New York DEBBIE WASSERMAN SCHULTZ, Florida TIM GRIFFIN, Arkansas 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. SA´NCHEZ, 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 (II) VerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 0486 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874 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, Com- petition, 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 Own- ers 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 Mel- vin L. Watt, a Representative in Congress from the State of North Carolina, and Ranking Member, Subcommittee on Intellectual Property, Competition, and the Internet ................................................................................................... 77 (III) VerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874 VerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874 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, Con- yers, 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 Sub- committee Chief Counsel. Mr. GOODLATTE. Good afternoon, and welcome to the first hear- ing of the Subcommittee on Intellectual Property, Competition, and the Internet. The Subcommittee will come to order. Before I recog- nize 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, Pro- moting Economic Growth, and Producing High-Paying jobs. The au- thors concisely document that a well-functioning patent system fa- cilities 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 attrib- utable to capital investment and increased efficiency. Second, innovation produces high-paying jobs. Between 1990 and 2007, the average compensation per employee in innovation-inten- (1) VerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6601 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874 2 sive sectors increased nearly 21⁄2 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 ven- ture capitalists consider patents when making investment deci- sions. 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 pri- vate investments in innovation are less likely. On the back end, lawsuits that challenge the validity and scope of patents cannot ad- dress 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 gen- erates. 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 effi- ciencies 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 initia- tives 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 pat- ent 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 in- ventors, 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 VerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6601 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874 3 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 geo- political 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 congratu- lating Chairman Goodlatte on his selection as Chair of this Sub- committee. I feel very humbled and honored to be the Ranking Member, and especially serving with somebody who has a reputa- tion for being knowledgeable in the area and interested in innova- tion 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 pro- vided 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 un- derstand the value of innovation and helping to sustain, stimulate, and grow a company. However, innovations can only provide a posi- tive impact to the economy if they are actually put into use. If in- novations 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 in- novation, 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 VerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6601 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874 4 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 in- formed 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 mat- ters. Before joining the PTO, Mr. Kappos led the intellectual prop- erty law department at IBM. He has served on the board of direc- tors of the American Intellectual Property Law Association, the In- tellectual Property Owners Association, and the International In- tellectual 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. Wel- come. TESTIMONY OF THE HONORABLE DAVID J. KAPPOS, UNDER- SECRETARY OF COMMERCE FOR INTELLECTUAL PROPERTY AND DIRECTOR OF THE UNITED STATES PATENT AND TRADEMARK OFFICE, UNITED STATES PATENT AND TRADE- MARK OFFICE Mr. KAPPOS. Thank you very much, Chairman Goodlatte, Rank- ing Member Watt, Members of the Subcommittee, for this oppor- tunity 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 Ameri- cans—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 VerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6601 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874 5 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 employ- ees have made progress in a number of important areas. Our pat- ent 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 back- log 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 ac- complishments 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 exam- iners more time to examine patent applications, increasing quality while incentivizing earlier resolution of issues, resulting in im- proved examination efficiency. We’ve substantially expanded our work-sharing arrangements with other major patent offices world- wide to speed the processing of applications filed in multiple juris- dictions. 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 in- formation 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 sup- port for continuing congressional efforts to enact patent reform leg- islation. Enactment of a number of the proposals considered in re- cent 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 eco- nomic outlook, strong patent renewal rates, and our increased pro- duction. 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 imple- ment spending reductions. These include restricting examiner over- VerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6601 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874 6 time, 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, unfortu- nately, 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:] VerDate Aug 31 2005 10:33 Mar 31, 2011 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 H:\WORK\IP\012511\63874.000 HJUD1 PsN: 63874