Google Inc. (GOOG:US) and 3M (MMM:US) Co. are among the top patent-holding companies that agreed two years ago to pay higher fees if Congress let the U.S. Patent and Trademark Office use the funds to address a work backlog and improve application scrutiny.
Congress instead held back as much as $148 million in fees due to automatic federal spending cuts under a process known as sequestration -- and the companies are crying foul.
“We were willing to pay those and thought it was an investment that needed to be made in the patent office,” said Kevin Rhodes, chief intellectual property counsel for 3M, the St. Paul, Minnesota-based maker of Scotch tape, Ace bandages and boat wax. “All we asked in return was that all the fees be used to pay for the services we paid for.”
The patent office, with a $2.9 billion fiscal 2013 budget funded by user fees, has had to scale back plans to update its computer system, stop most hiring and delay moving into new permanent regional offices in Dallas, Denver and Silicon Valley.
Companies paying 15 percent higher fees have been lobbying the White House and Congress, saying the patent office should be immune from the forced U.S. cuts because it isn’t tax-supported. Withholding patent office funding, they say, could stifle innovation by lengthening the average 18-month wait for completion of an application’s first review and imperiling a new post-grant reappraisal process, causing more disputes to end up in court.
Congress passed legislation in 2011 that changed how patent applications were handled from the moment they entered the Alexandria, Virginia-based agency and added new review processes for patents already issued.
At the center was a provision allowing the patent office to set its own rates and have greater control over its money. The goal was to end Congress’s diversion of about $1 billion in patent fees into the general treasury because a 1990 law required the agency to support itself. The rate increases were intended to help the office, known as the PTO, get back on track.
“Unless the PTO is given access to the fees it’s collecting and released from the constraints it’s under, it will be hard-pressed to do anything,” said David Kappos, the formr patent office director, now a lawyer with Cravath, Swaine & Moore LLP in New York. “I am very concerned about its ability to successfully implement everything that’s already on the plate.”
President Barack Obama and members of Congress are seeking to limit certain litigation practices of firms that buy up patents and then accuse large numbers of companies of infringement.
Many of those patents are the types that companies such as Mountain View, California-based Google say were wrongly issued by a patent office overwhelmed during and after the dot-com boom of the late 1990s.
New procedures were created in the legislation to review patents already issued, which meant hiring 60 administrative law judges for the year ending Sept. 30. Only 18 have been hired so far, with another 16 in the pipeline, said Todd Elmer, the patent office’s chief communications officer.
“Quality starts by staffing and resourcing the patent office,” said Horacio Gutierrez, deputy general counsel of Microsoft Corp. (MSFT:US), based in Redmond, Washington.
Microsoft, which typically ranks in the top 10 recipients of U.S. patents each year, pays “tens of millions more each year” in higher patent fees, he said. Without the fixes to the patent system, that amounts to “a tax increase that is not going to result in the improvement of patent quality.”
The patent office has delayed attempts to reduce a backlog of applications, allow better examination and update its computer system -- spending money only when hardware breaks.
Elmer said the agency is projecting a bigger backlog of applications awaiting first review, currently at 590,000 from a peak of 721,000 in December 2010.
The agency’s computer system, once described by its chief information officer as “beyond horrific,” was to be upgraded in order to automate some procedural steps.
Examiners are limited in the number of hours they can spend on each application so much of their time is wasted doing what a computer could handle.
“What we’re putting into examination time up front is pretty small when you consider the power of the patent when it is issued,” said Suzanne Michel, Google’s senior patent counsel. “Doing a better job upfront is better for innovation as a whole.”
While a new patent office in Detroit just had its one-year anniversary, satellite facilities in Dallas, Denver and Silicon Valley provided for in the 2011 legislation will have to remain in temporary spaces. That means plans to hire more workers also will be delayed.
Representative Mike Honda, a Democrat whose district includes Silicon Valley, has proposed not subjecting the patent office to sequestration.
The White House Office of Management and Budget, though, already determined that the patent office is subject to the cuts. In addition, Republican Frank Wolf of Virginia, who heads the House Appropriations’ Commerce, Justice, Science and Related Agencies subcommittee, on July 10 said the patent office has adequate funding and “there is no excuse” for not opening the permanent offices.
“A regional patent office actually drums up more business and potentially more revenue,” said Emily Lam, who oversees advocacy for the Silicon Valley Leadership Group, a San Jose, California-based trade organization that spent more than three years lobbying for a regional patent office office. “Policy-wise it doesn’t make any sense whatsoever. It doesn’t save us any money by being put under the sequester.”
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