Michael D. Frakes and Melissa F. Wasserman
Commentators have noted two key concerns with the patent system in recent years—the quality of patents that the Patent and Trademark Office (PTO or Agency) issues and the crippling backlog of applications facing the PTO. We believe that these two concerns are not independent of each other but instead that the latter may be contributing to the former.
To understand this claim, it is important to acknowledge that the presence of a substantial backlog signifies that the PTO is facing difficulty marshalling enough resources to cover the costs of those applications awaiting review. In an effort to minimize its backlog, the Agency may seek either to increase its revenue or to curb the filings of applications. We believe that there are two ways in which the PTO may act upon this incentive to reduce its backlog to the detriment of patent quality.
The first way stems from the fee structure of the Agency. Since 1991, the Agency has garnered the vast majority of its budget from three types of fees: (1) filings, search, and examination fees (collectively, examination fees); (2) issuance fees; and (3) maintenance fees. Congress, and more recently the PTO, has set examination fees substantially below the actual cost incurred by the PTO to review applications. As a result, the Agency is heavily reliant upon fees it collects only when it grants patents to subsidize the examination process. As such, to the extent that the PTO finds itself inclined to look for an additional source of revenue in order to reduce its backlog, the Agency may be tempted to elevate its grant rate, providing the potential for greater post-allowance fees. Were the PTO to act upon this incentive, it might lead to the issue of lower quality patents.
In a study published in Vanderbilt Law Review, we find evidence suggesting that the Agency’s historical fee structure biases the PTO towards granting patents. Moreover, our results suggest that the Agency may only act upon this incentive during periods in which it does not have enough fee income to review the applications waiting review. Thus, our analysis supports the contention that the backlog of patent applications may be creating an incentive for a resource-constrained Agency to allow patents of marginal quality.
The second way in which a backlog of applications may lead the PTO to issue low quality patents stems from the existence of repeat filings (i.e., continuations and Requests for Continued Examination). The inability of the Agency to finally reject a patent application could potentially overwhelm the existing examination infrastructure. A PTO that seeks to decrease (or slow the growth of) its backlog could potentially decrease the number of applications awaiting review by elevating its grant rate. That is, by allowing patents earlier on in the examination process, the Agency could take away the incentive of applicant to file repeat applications altogether.
In a second paper published in Stanford Law Review, we find evidence suggesting that the PTO has acted on this incentive. More specifically, we find evidence that the PTO is over granting patents during times in which the Agency lacks sufficient resources to meet its expected demand of examination. Similar to our study in Vanderbilt Law Review, we emphasize that it is only when the Agency lacks sufficient resources to review awaiting patent applications that we find any evidence of the PTO biasing its grant rate upwards.
Our findings in these studies suggest several avenues of reform. First, we believe that budgetary constraints facing the Agency need to be more carefully considered during the fee-setting process. The optimal fee schedule should consider not only the incentives and social welfare of the public but also the Agency’s need for financial sustainability and the financial incentives of the PTO. Second, by modifying the Agency’s historical fee structure, Congress and the PTO may be able to improve the Agency’s financial stability that likely contributed to crippling backlog in the first place. In this light, we encourage the PTO to consider raising examination fees in an effort to better align exam fees with exam costs and to decrease the Agency’s reliance on post-allowance fees. This may create better stability by ensuring that fee revenues increase lock step with any unexpected growth in examination demand of the Agency. At a minimum we encourage the PTO to raise the filing fees for repeat filings to cover the costs incurred by the Agency to review these applications.
We acknowledge that the America Invents Act may force the Agency to lower renewal fees should it wish to raise examination fees, an outcome that could be undesirable to the extent that renewal fees serve an important public function. In order to retain this valuable function of renewal fees while ensuring better financial stability at the PTO, we encourage Congress and the PTO to no longer include renewal fees as a financing tool for the Agency. Instead, we recommend that renewal fees paid by grantees be diverted to a special fund that cannot be spent by the Agency itself. In order to offset the harms to certain applicants—e.g., small entities—that may arise from higher examination fees, the proceeds deposited in this special fund could be used to subsidize the examination fee costs for small and micro-inventors.
Reducing Patent Application Backlog to Improve Patent Quality
Michael D. Frakes 1 and Melissa F. Wasserman 2
Commentators have noted two key concerns with the patent system in recent years—the quality of patents that the Patent and Trademark Office (PTO or Agency) issues and the crippling backlog of applications facing the PTO. We believe that these two concerns are not independent of each other but instead that the latter may be contributing to the former.
To understand this claim, it is important to acknowledge that the presence of a substantial backlog signifies that the PTO is facing difficulty marshalling enough resources to cover the costs of those applications awaiting review. In an effort to minimize its backlog, the Agency may seek either to increase its revenue or to curb the filings of applications. We believe that there are two ways in which the PTO may act upon this incentive to reduce its backlog to the detriment of patent quality.
The first way stems from the fee structure of the Agency. Since 1991, the Agency has garnered the vast majority of its budget from three types of fees: (1) filings, search, and examination fees (collectively, examination fees); (2) issuance fees; and (3) maintenance fees. Congress, and more recently the PTO, has set examination fees substantially below the actual cost incurred by the PTO to review applications. As a result, the Agency is heavily reliant upon fees it collects only when it grants patents to subsidize the examination process. As such, to the extent that the PTO finds itself inclined to look for an additional source of revenue in order to reduce its backlog, the Agency may be tempted to elevate its grant rate, providing the potential for greater post-allowance fees. Were the PTO to act upon this incentive, it might lead to the issue of lower quality patents.
In a study published in Vanderbilt Law Review, we find evidence suggesting that the Agency’s historical fee structure biases the PTO towards granting patents. 3 Moreover, our results suggest that the Agency may only act upon this incentive during periods in which it does not have enough fee income to review the applications waiting review. Thus, our analysis supports the contention that the backlog of patent applications may be creating an incentive for a resource-constrained Agency to allow patents of marginal quality.
The second way in which a backlog of applications may lead the PTO to issue low quality patents stems from the existence of repeat filings (i.e., continuations and Requests for Continued Examination). The inability of the Agency to finally reject a patent application could potentially overwhelm the existing examination infrastructure. A PTO that seeks to decrease (or slow the growth of) its backlog could potentially decrease the number of applications awaiting review by elevating its grant rate. That is, by allowing patents earlier on in the examination process, the Agency could take away the incentive of applicant to file repeat applications altogether.
In a second paper published in Stanford Law Review, we find evidence suggesting that the PTO has acted on this incentive. 4 More specifically, we find evidence that the PTO is over granting patents during times in which the Agency lacks sufficient resources to meet its expected demand of examination. Similar to our study in Vanderbilt Law Review, we emphasize that it is only when the Agency lacks sufficient resources to review awaiting patent applications that we find any evidence of the PTO biasing its grant rate upwards.
Our findings in these studies suggest several avenues of reform. First, we believe that budgetary constraints facing the Agency need to be more carefully considered during the fee-setting process. The optimal fee schedule should consider not only the incentives and social welfare of the public but also the Agency’s need for financial sustainability and the financial incentives of the PTO. Second, by modifying the Agency’s historical fee structure, Congress and the PTO may be able to improve the Agency’s financial stability that likely contributed to crippling backlog in the first place. In this light, we encourage the PTO to consider raising examination fees in an effort to better align exam fees with exam costs and to decrease the Agency’s reliance on post-allowance fees. This may create better stability by ensuring that fee revenues increase lock step with any unexpected growth in examination demand of the Agency. At a minimum we encourage the PTO to raise the filing fees for repeat filings to cover the costs incurred by the Agency to review these applications.
We acknowledge that the America Invents Act may force the Agency to lower renewal fees should it wish to raise examination fees, an outcome that could be undesirable to the extent that renewal fees serve an important public function. In order to retain this valuable function of renewal fees while ensuring better financial stability at the PTO, we encourage Congress and the PTO to no longer include renewal fees as a financing tool for the Agency. Instead, we recommend that renewal fees paid by grantees be diverted to a special fund that cannot be spent by the Agency itself. In order to offset the harms to certain applicants—e.g., small entities—that may arise from higher examination fees, the proceeds deposited in this special fund could be used to subsidize the examination fee costs for small and micro-inventors.
Comments on Pillar 1, Proposal 2: Preventing the Potential Perils Associated with Automated Pre-Examination Search
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