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The Congress has the responsibility to enact the patent and trademark laws and ensure that those laws are properly administered and that their purposes are being met. The PTO has the responsibility to properly administer those laws. Patent and trademark attorneys, the direct users of PTO services, and their clients, the owners of patents and trademarks, are in the best position to know if Congress and the PTO should change or adjust course.

Patent and trademark owners and their attorneys have a compelling interest in upgrading PTO performance. As a user group, they are in the best position to define what they need from the PTO and whether they are receiving it. PTO management is obviously in the best position of assessing the problems involved with producing products and delivering services. Yet patent and trademark owners and their attorneys have never had an opportunity to participate in formulating PTO policies which determine the quality of the products and services they receive. Truly effective and efficient administration of the patent and trademark laws can only be devised by persons who thoroughly understand the patent and trademark laws, how the PTO operates, and how patents and trademarks are used in commerce. A cooperative and complimentary relationship between PTO management and representatives of the private sector user community will maximize bringing expertise to bear on the formulation of PTO management goals and priorities.

Formulation of the PTO budget is a task which would especially benefit from private sector judgment. Users are required to fund the entire PTO operation through fees. Users could therefore be expected to diligently pursue a cost effective operation. This would be balanced by the primary goal of users which is to increase the quality of issued patents and trademark registrations.

Other major PTO policy initiatives should likewise be the subject of private-sector input. The advice of a private sector committee should be required in advance, before any major policy decisions are made by the PTO affecting matters other than substantive patent and trademark law interpretation (e.g., examination standards or interpretative guidelines). The mandatory advice would cover -- besides the PTO budget -- fee levels and proposed changes in fees, funding priorities within the PTO, the institution of new programs and services by the PTO, new policy directions relating to automation, and the like.

Whether or not the PTO were to be reorganized as a government corporation, a private sector board could be instituted along the lines of the 1966 President's Commission recommendation XXVI. The form of the institutionalized private sector role would take the form of a statutory advisory committee, a board of directors (if the government corporation model is followed), or some equivalent mechanism.

Its members should be appointed by the President, or perhaps, nominated by the President and confirmed by the U.S. Senate. The number of members should be sufficient to include PTO users' representatives as well as members with relevant management expertise. The terms of the members should be at least three years, and the terms should be staggered to ensure continuity.

If the private sector role is a permanent advisory committee, it is absolutely essential that the committee have a sufficient permanent staff to respond to its needs. The individual members of the committee cannot be expected to personally devote sufficient time to thoroughly master the details and data of all PTO operations. For the committee to be effective, it must have the ability to function with the measure of independence from the PTO management that its own staff support will provide.

The President's Commission recommended a broad scope of responsibility for the advisory committee. The responsibility of the private sector representatives in this circumstance should be more narrowly focused on the operation of the PTO and the statutes which directly affect the operation of the PTO.

Recommendation Three: BORROWING AUTHORITY

An essential part of any reform of PTO financing under a user-funded regime lies in the ability of the PTO, as a government corporation or otherwise, to borrow money for the purpose of spreading out the short-term impact of capital spending on user fees. Estimates have been made that in FY 1991 25% or more of the PTO budget is for automation related capital expenditures and building space rent. The dollar levels of capital spending are likely to increase rather than decrease over the next five years. Even over the long term, capital expenditures will regularly occur.

There are a variety of compelling reasons why the PTO should borrow money sufficient to construct a building designed to meet its operational needs. First, the fact that the PTO is located in seventeen buildings, with files stored in other remote sites, must have a negative impact on operational efficiency. It is also a fact that the buildings which house the patent examiners and public search room are only capable of supporting the Automated Patent System equipment to a finite degree because of inadequate electrical and cooling capabilities. Therefore, instead of having the ability to deploy the system with maximum efficiency, the PTO must "work around" the inferior capabilities of the facilities.

Second, the PTO paid $30 million in FY 1991 for office space. In FY 1992 rent may increase to $41.5 million, and estimates run to $47.7 million in FY 1993. The European Patent Office and Japanese Patent Office occupy their own custom designed buildings. The EPO is currently constructing two additional buildings. The JPO has recently moved into a new building, which among other things, is specially designed to accommodate its officewide computer systems. The cost of the new JPO building was reportedly $300 million. This

high cost will be substantially exceeded by the amount the USPTO will pay its landlords during the near term.

Third, the sharp unexpected fee increases strengthen the perception in the user community that the PTO cannot properly manage itself. Users fully understand that they lack any meaningful input to the PTO budget or the PTO goals it is designed to achieve. They also understand that PTO spending is dramatically increasing, but see no meaningful improvement in the quality of issued patents or the services they receive. Commissioner Manbeck recently testified before a congressional committee that the PTO must now operate as a "business" in that it can only spend what users pay. But it is clear to all that the PTO does not operate like a business. Therefore, fee levels are likely to focus and intensify user frustration with the lack of PTO accountability to them. If patent application filings drop significantly, especially by individuals who currently file 34% of all U.S. origin applications, the conclusion will be that PTO fiscal mismanagement is frustrating the purposes of the patent law.

As a final matter, the PTO cannot borrow money without guaranteeing its payment from future user fee income. The ideal source for such a guarantee would be against the assets of a fund that would be required by law to receive all proceeds from user fees. The separate fund could be managed -- and fees could be adjusted -- to permit servicing of debt and funding of current, non-capital PTO needs in a manner which would have minimal impact on PTO filing fees.

Moreover, the concept of providing a separate fund that would guarantee debt incurred for PTO capital needs could be implemented whether or not the PTO were to become a government corporation. As an example, the Congress could create a borrowing entity with a charter limited to the acquisition and holding of capital assets to be used for the benefit of the PTO. Such a limited authority could operate without interfering with the policy and operational aspects of the administration of the patent system.


An analysis of whether or not the Patent and Trademark Office should be established as a government corporation is really an issue of whether the current performance of the PTO sufficiently fulfills its public purposes or not. If the conclusion is that PTO performance is satisfactory, although it could be improved, and the costs associated with the current operation are acceptable, changing the PTO to a government corporation is not needed. On the other hand, if the conclusion is that significant improvement in the ability of the PTO to produce higher quality products and services in a more cost efficient manner is needed, the only feasible mechanism to achieve that is to establish the PTO as a government corporation. The latter conclusion is that of the AIPLA.

The assembly of available data suggests that conservative changes in PTO operations are unlikely to achieve cost-effective, quality examining operations. One fact seems invariable and inevitable based upon the history of PTO reform efforts: Without a fundamental change, the PTO will perform its mission in the future as it has in the past. In the context of a completely user-funded PTO, such a prospect cannot be reconciled with the public interest or the future success of the American patent system.

If for any reason the establishment of the PTO as a government corporation is delayed or deferred, then certain elements of the government corporation could be implemented immediately. One element most certainly would be the private-sector advisory committee. No reason exists for not creating such a board immediately to serve as oversight for the existing PTO operations. Similarly, while the government corporation would inherently hold its revenues for its own account and would by statute be given authority to borrow and hold assets in its own right, these results could be accomplished immediately through a borrowing entity as proposed above.





Washington, D.C

The committees met, pursuant to notice, at 10:08 a.m., in room 3302, Dirksen Senate Office Building, Hon. Birch Bayh, presiding. Present: Senators Bayh and Danforth (cochairmen of the hearing).

Also present: Steven Breyer, chief counsel, John Minor, counsel, Judiciary Committee; Kevin O. Faley, chief counsel to Senator Bayh; Joseph P. Allen, professional staff member for Senator Bayh; Christopher Brewster, counsel to Senator Danforth; Eric Hultman, counsel to Senator Thurmond; Ellen Miller, professional staff member for Senator Ribicoff.


Senator BAYH. Today the Committees on Governmental Affairs and the Judiciary begin their first day of hearings on S. 2079, the Independent Patent and Trademark Office Act. I introduced this legislation on December 5, 1979, along with my colleagues Senators Danforth and Nelson to remove the Patent and Trademark Office from within the Commerce Department and establish it as an independent agency. The bill also creates a 6-year term of office for the Commissioner of Patents and Trademarks. The Independent Patent and Trademark Office Act will not be creating any new bureaucratic entity, but will help the Patent and Trademark Office to function more efficiently than is now possible.

There has been a great deal of discussion and concern recently about what has gone wrong with our patent and trademark system. I have been told by independent inventors, small business owners, and the largest corporations in America that the present confusion in the patent and trademark system is a heavy millstone around their necks as they attempt to deliver new products to the American public. The patent system was originated to protect the interests of inventors in exchange for the disclosure to the public of new discoveries. Our Government is becoming unable to uphold its end of this bargain. When there is increasing doubt about the worth of a U.S. patent, when it takes longer and longer to get a patent or trademark issued, when it is learned that from 2 percent to 28 percent of the patents are missing from every subclass in the Patent Office files-and that one of these missing patents can be used in court to challenge the validity of an issued patent-and

Appendix I

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