Joff Wild

An article published on CNN under the misleading title of "Recession's latest victim: U.S. innovation" (note to CNN: patents do not equal innovation) reveals that for the first time since 1996 there has been a year on year decrease in the number of patent applicaiotns filed at the US Patent and Trademark Office. The piece coincides with the recent release of the office's annual report. For those with a stake in the financial health of the USPTO, as well as in its ability to issue quality patents in a timely manner, the two read back to back are pretty depressing.

On top of the 2.3% decrease in patent filings, the annual report states - on page 49 - that maintenance fees, "the largest source of earned revenue by fee type", were down nearly 3% in financial year 2009. "As they are recognized immediately as earned revenue," the report states, "any fluctuations in the rates of renewal have a significant impact on the total earned revenue of the USPTO". It does, however, go on to say that as the US economy improves, renewal rates are expected to rebound.

It will come as no surprise to anyone that the USPTO is struggling in the face of the financial set-backs it has had to deal with. But those who are used to sunny reports from a generally optimistic office will find the downbeat tone of much of the latest one quite shocking. On page 45, for instance, you will find these paragraphs:

The USPTO’s response to the decline in fee revenues was to implement almost $200 million in budget reductions and cost-savings measures: stopping all overtime, including patent production and fee-generating work; curtailing most non-bargaining unit performance awards; significantly reducing mission-related travel; suspending patent examiner hiring, except for offers made as of February 2009; suspending all hiring but for the most critical positions in other areas; suspending training except where mandatory to sustain critical job qualifications; reducing or eliminating all non-essential, non-trademark, IT business system improvement projects; reducing the funds applied to critical IT infrastructure projects; and reducing the level of services provided by non-IT contracts. The USPTO’s efforts have positioned the Agency to operate within the reduced fee collection levels into FY 2010.

We are certain that the USPTO can not sustain operations in this manner over an extended period of time without a significant operational impact on the patent and trademark systems and putting into question the USPTO’s ability to address its mission at any acceptable level. For example, not replacing patent examiners as they leave the USPTO and eliminating overtime directly impacts our ability to reduce the backlog of existing patent applications. While this measure saves money in the short term, it also reduces revenue earned in the current year and has revenue impact for the future. In addition, delays in upgrades to our IT infrastructure will degrade the USPTO’s ability to sustain core functions. The USPTO expects significant challenges in FY 2010 and beyond without an interim or longer term strategy for stable and reliable funding.

In his introduction to the report, meanwhile, USPTO Director David Kappos states: 

In 2009, the Agency began to lay the groundwork for new measures to address our biggest challenge--dramatically reducing the time it takes to process patent applications. Secretary of Commerce, Gary Locke, has directed the USPTO to reduce first action pendency to 10 months and overall pendency to 20 months. Shortening pendency time is imperative to improve predictability and clarity in the patent system.

Our technological infrastructure has been neglected, threatening the ability of the USPTO to drive future growth. We need to implement a robust information technology system capable of supporting all of the USPTO’s operations on a continual basis, and capable of facilitating full electronic patent and trademark processing.

Quite how this is achievable given the budgetary problems the office is currently operating under is open to question. Certainly Kappos faces a major management task even to begin making headway - although it does seem that he at least believes a long-term decline in the quality of US patents being issued has been halted, if not yet reversed.

I suppose the hope is that as the economy improves more applicants will start to file more applications. Although this will add to the backlog in the short term, it will bring extra cash into the office's coffers and so allow for investments to be made in areas such as examiner recruitment and IT. Throw in an increase in maintenance payments and things could improve relatively quickly.

The worry, though, is that it may not happen. It could be for example, that the recession has taught companies that strategically they do not need to file as many applications as they thought they did; or that compiling rights just to impress shareholders and commentators with big numbers is actually a waste of good money. In this way, rather than being a reaction to the recession that will be reversed when things pick up,  the current decline could herald the beginning of a cultural shift. I wonder if we should see the words of Joe FitzGerald, the general counsel of Symatec quoted in the CNN article, in this light: "The overall company reduced spending, and patent filings are a very controllable expense. We might have filed four patents, but we filed three and made sure they were strategically significant." Mike Dillon of Sun Microsystems was talking similar language even before the recession, as this blog reported, and what he was saying sounds all the more compelling today:

On average, it costs more than $20,000 to obtain a US patent and this figure grows significantly when you file around the world. Also, this amount does not include annual annuities required to keep a patent in effect. Being selective in what you patent can result in significant savings. However, the bigger reason for the change is that our focus has shifted from quantity to quality ... We apply a significant amount of scrutiny to determine whether something is truly innovative before we submit it to the PTO. For us, it doesn't make sense to patent everything. Rather, our focus is on patents that represent significant technological innovation.

If such an idea were to catch on more widely, to increase its revenues significantly, the USPTO would either have to rely on foreign applicants, such as the Chinese, to boost application totals (this is bound to happen to an extent in any case), or they are going to have to increase fees - probably quite significantly. Kappos has already talked about a temporary rise of 15% to tide the office through its current troubles. I would not be surprised if that became permanent and also led to a number of other offices around the world doing something similar. As things stand, it is difficult to see a decent alternative to this, despite the howls of outrage it is bound to cause.