Jon W. Dudas

Acting Under Secretary of Commerce for Intellectual Property
and
Deputy Director of the United States Patent and Trademark Office

before the

Subcommittee on Commerce, Justice, State and the Judiciary Committee on Appropriations
U.S. House of Representatives

March 18, 2004

Introduction

Chairman Wolf, Ranking Member Serrano, and Members of the Subcommittee: Thank you for inviting me to appear before you to discuss the United States Patent and Trademark Office's (USPTO) operations and budget. I greatly appreciate this opportunity to discuss the challenges and opportunities facing the USPTO, and I want to commend you for your leadership and support of the H.R. 1561, the USPTO Fee Modernization Act, which recently passed the House on an overwhelming, bipartisan vote.

Mr. Chairman, to quote Dickens, the state of the USPTO can accurately be described as the "best of times" and the "worst of times." First, the bad news. Quite simply, due to the record growth that began in the 1990s and continues today, the USPTO is facing a record workload crisis. The rate of growth of patent applications has slowed, but we continue to get record numbers of applications every year. Unless bold new actions are taken, progress on our quality enhancement and electronic government initiatives will be in jeopardy, the backlog of unexamined patent applications will skyrocket, and average patent pendency will dramatically increase. As this Subcommittee stated last year, "there is broad agreement that the patent process is in dire need of reform." (House Report 108-221).

The good news is that H.R. 1561 offers us a way out of this dilemma. As I will detail shortly, the additional resources provided in the fee bill will enable the USPTO to implement our comprehensive 5-year Strategic Plan for fundamentally reforming and streamlining our operations. We also believe these are the "best of times" because this body and this Subcommittee has offered a great deal of support as we work to tackle these challenges. In that regard, I am particularly grateful for the long-standing support you have personally provided the men and women of the USPTO, many of whom live in your district in Northern Virginia. Your leadership on ensuring sufficient funding for our Office, promoting telecommuting, and assisting in our move to our new headquarters in Alexandria have been enormously helpful.

The USPTO recognizes the tough decisions that you and the Subcommittee members must make every year in the appropriations process. Especially in light of the budgetary restrictions on domestic spending, we commend you for providing generous increases in our budget in the last few years - increases that far outpaced those provided to most other federal agencies. I can assure you that the management of the USPTO is committed to ensuring that those monies are well spent. We want to continue to work in partnership with this subcommittee, so that we benefit the men and women who work at the agency as well as the technology community who are our customers. To that end, let me provide you with a quick update on our telecommuting programs and our relocation to Alexandria.

The USPTO is very proud of the progress we have made so far on expanding work@home programs to our employees. In fact, we are considered a leader in work@home among Federal agencies in the Washington, D.C. metropolitan area. The USPTO's telecommuting efforts have been recognized and benchmarked by the General Services Administration and the Partnership for Public Service. Our Trademark work@home program received the Metropolitan Council of Governments' 2001 Commuter Connections Employer Recognition Telework Award. Currently more than 40% of our Trademark examination workforce -- or 110 examiners -- telecommute, and we plan to expand that to more than 150 examiners later this year. Doing so not only benefits our employees and helps reduce regional traffic congestion, it also saves us money in terms of reduced needs for office space. On the Patent side of our operation, nearly 800 patent examiners and 220 other employees are currently participating in our work@home program. We look forward to continuing to work with you to maximize telecommuting opportunities for USPTO employees.

With respect to our move, I am pleased to report that already more than one-quarter of our workforce has successfully transitioned to our new consolidated headquarters in Alexandria. The five linked buildings that make up USPTO's new facility contain approximately two million square feet of office and related space. Full occupancy of the new headquarters will be completed by mid-2005. This consolidation from 18 different buildings spread out over a mile and a half in Crystal City is a critical step to achieving and maintaining an agency that is quality focused, highly productive, and responsive to the needs of its customers. Our new campus is designed to facilitate optimum performance from the state-of-the-art technology we will use for full electronic processing of patent and trademark applications. Modern buildings and equipment and employee- friendly services, including a childcare center and a fitness center, will help us attract and retain a highly skilled workforce. Moreover, the General Accounting Office has concluded that the consolidation will likely save us more than $98 million in present value dollars over the initial 20-year lease term.

Overview of USPTO Operations

In the last several years, intellectual property (IP) assets have become an increasingly essential ingredient of economic vitality. Where once raw materials and other tangible goods were the main drivers of the economy, today economic success depends more and more on intangible, information-based assets, such as the creativity of employees and the knowledge gained from research. As a result, intellectual property- based industries, such as biotechnology and motion pictures, now represent the largest single sector of the U.S. economy. In fact, IP industries export more American value to the world than the automobile, automobile parts, agricultural, and aircraft industries combined.

As the clearinghouse for U.S. intellectual property rights, the USPTO serves as an important catalyst for U.S. economic growth. Through the granting of patents and the registration of trademarks, the USPTO promotes the vitality of businesses and entrepreneurs, paving the way for investment capital and research and development. We are proud of our 200 year-old legacy of helping America become a technological and economic giant.

The growing importance of intellectual property in recent years has directly impacted the USPTO. Patent applications have more than doubled since 1992. In the last five years alone, biotechnology-related patent filings increased 46 percent and pharmaceutical and chemical-related filings climbed 42 percent. As a result, we issued more patents last year (173,000) than we did in the first forty years of our Office's history. Worldwide at our offices and our counterparts in Europe, Japan and other national IP offices 12 million patents are pending in the examination pipeline.

In addition to the sheer volume of these applications, the technical complexity of patent applications is increasing rapidly. One hundred years ago more than one-third of our patent filings were bicycle-related. Today, we routinely examine patent applications in areas such as nanotechnology, bio-informatics, and combinatorial chemistry. Some of these patent applications come in on CD-roms that are literally the equivalent of millions of pages of paper.

The results of these trends pose significant challenges for the future of the Office. The volume and technical complexity of patent applications has increased beyond the capacity of the resources available for examination, resulting in a backlog of applications awaiting examination. In short, we are burdened by an increasingly complex and massive workload. Patent pendency (the amount of time a patent application is pending before a patent is issued) now averages over two years. In more complex technologies such as computers, average pendency stands at more than three years. Without fundamental changes in the way USPTO operates, average pendency in these areas will likely double to six to eight years by 2008. Moreover, the backlog of applications awaiting a first review by an examiner will grow from the current level of approximately 475,000 to over 1,000,000.

To put these numbers into historical perspective, back in 1981 when the U.S. patent system was faced with a workload crunch, U.S. News & World Report published an article on the situation entitled "Patent System a Drag on Innovation." At that time, average patent pendency was 22 months and the backlog of unexamined cases was 190,000. Today, as the numbers above show, the workload crisis is far worse.

The escalating processing delays for patents and trademarks, and the resulting impact on patent and trademark quality, pose a grave threat to American businesses and entrepreneurs. The USPTO is a catalyst for job creation. It is important for the Subcommittee to understand that without the fee bill, more than 140,000 patents will not issue over the next five years. One can easily appreciate the impact on the economy and job growth, especially on small business, of that quantity of patents or capital being injected into the stream of commerce.

Thus, the nature of technology and the nature of the marketplace make these processing delays unacceptable - and unsustainable. If intellectual property protection is to continue to serve as a catalyst for technological innovation and economic growth, the USPTO must fundamentally break with the status quo. If we are to issue quality patents and register quality trademarks in a timely manner, we must fundamentally reform the way we do business. Fortunately, Mr. Chairman, thanks to the leadership you and many of your colleagues in the House have shown, we have a way out of this dilemma.

21st Century Strategic Plan / H.R. 1561

A few years ago this Subcommittee and your counterpart in the Senate made clear that you had great concerns about the ability of the USPTO to manage our growing workload. Back in FY 2002, USPTO management was told that it had not been "sufficiently innovative" and that the Office failed to provide "a thorough business plan that demonstrates how resources will be used and what results will obtain." These critiques were also echoed by the Administration and our stakeholders in the private sector.

I am proud to say that we did not bury our heads in the sand and ignore these criticisms. Rather, we heeded the calls of Congress and our customers to develop a new operational paradigm for the agency. Thanks to the work initiated by former Under Secretary Jim Rogan, we developed a comprehensive five-year blueprint for reforming and streamlining our operations. Our 21st Century Strategic Plan is a detailed plan for fundamentally transforming the agency into a more productive, quality-oriented, market-driven organization.

This plan enjoys the support of nearly one hundred of America's largest companies and USPTO's primary user groups, including the Information Technology Industry Council, the National Association of Manufacturers (NAM), the Biotechnology Industry Organization (BIO), the American Chamber of Commerce, the Intellectual Property Owners Association, the American Intellectual Property Law Association (AIPLA), and the Intellectual Property Law Section of the American Bar Association (ABA IPL).

The 21st Century Strategic Plan envisions patent and trademark operations of the future that innovators and enterprises can depend upon to remain competitive around the world. It is built on the premise that American innovators need to obtain enforceable intellectual property rights here and abroad as seamlessly and affordably as possible, and it emphasizes the need for the USPTO to collaborate with other intellectual property organizations in automation, global patent classification, and mutual exploitation of search results. These objectives directly support the President's Management Agenda, including making the government citizen-centered and results-oriented.

The Strategic Plan's key features will enhance the quality of patent and trademark examination, increase efficiency by transitioning from paper to e-government processing, and control patent and trademark pendency. It will allow us to also expand our bilateral and multilateral efforts to strengthen IP rights globally. Under the Plan, we will be able to hire 2,900 new patent examiners.

While we continue to enhance operational efficiencies by leveraging improvements in automation and electronic processing, the core examination function must be done manually by skilled employees. Ultimately, in order to tackle our application backlog, we simply must have more examiners to keep pace with increased filings. Hiring additional examiners has the added benefit of helping stimulate the local economy, and it has a multiplier effect on the national economy by providing better IP protection services to businesses and entrepreneurs. This, in turn, serves as a catalyst of economic growth.

Implementation of the majority of the Strategic Plan's thirty-seven initiatives is contingent upon adoption of changes in our fee system. That is why last year the Administration proposed as part of the USPTO's FY 2004 budget a modest increase in patent fees. These fee changes, which are contained in H.R. 1561, the United States Patent and Trademark Office Fee Modernization Act of 2003, permit revisions in USPTO business practices that are necessary for the healthy functioning of the U.S. intellectual property system during the coming century. They raise the funds for essential technology and other investments that will modernize USPTO operations. The proposed fee changes will also benefit USPTO's user community by allowing applicants to evaluate the commercial value of their inventions and recover the cost of search and examination as the situation warrants.

Mr. Chairman, we are encouraged by the strong bipartisan vote on March 3, 2004, in favor of H.R. 1561. We are especially grateful for your leadership in reaching an agreement with our authorizers on the House Judiciary Committee that will ensure sufficient long-term funding for the Office while also maintaining needed oversight by this Subcommittee. We look forward to working with the Senate on this legislation. Adoption of the fee bill - and a long-term commitment to the funding prerequisites of the 21st Century Strategic Plan -- is essential to the USPTO's success in the future.

I do not want to leave the impression that the USPTO is sitting idly by waiting for adoption of H.R. 1561. While securing the fee bill's additional resources and adoption of the President's FY 2005 budget request is vital, we are doing our best within existing budgetary limitations to implement portions of the 21st Century Strategic Plan. For example, we are moving forward on some key quality initiatives in order to raise the confidence of the business and financial sectors in the reliability of the patents we issue.

The USPTO is committed to hiring high quality people who will make the best patent and trademark examiners. We are committed to certifying their knowledge and competencies throughout their careers. Furthermore, we are committed to focusing on quality in all aspects of the examination of patent and trademark applications. To that end, we are undertaking the more than one dozen quality initiatives, including expanding our successful "second pair of eyes" quality review that was originally piloted on a limited basis for business method patents. If additional resources are provided to the USPTO through the fee structure in H.R. 1561, we will be able to make even further progress on these and other initiatives to enhance the quality of patent and trademark examination. This will greatly benefit U.S. businesses and IP rights holders by limiting the need for costly litigation in the courts.

International Efforts

Before I close, Mr. Chairman, I would like to comment on another aspect of USPTO's activities that is vitally important to America's innovators and entrepreneurs. I know it is also a topic of great concern to you and this Subcommittee as well: intellectual property piracy and counterfeiting.

The downside to the increasing value of IP assets that I spoke about earlier is that the economic benefits of capitalizing on intellectual property rights have captured the attention of pirates, organized crime and terrorists. As a result, pirated and counterfeit goods are abundant in many areas. For example, approximately 40 percent of software programs are pirated globally. According to the International Intellectual Property Alliance, this copyright piracy resulted in a loss of $9.2 billion to the U.S. economy in 2002. Worldwide, IP piracy cost the software industry $13 billion in lost revenue.

The global criminal nature of IP piracy is all too real. During a House International Relations Committee hearing last summer, the Secretary General of Interpol testified that IP crime "is becoming the preferred method of funding for a number of terrorist groups." A customs expert with the European Commission recently stated that al-Qaeda and Hezbollah are among organizations believed to be using counterfeit goods to launder money and fund their activities.

Given these threats to U.S. economic interests and our national security, the USPTO and our colleagues in the Department of Commerce are working hard to curb IP crime and strengthen IP enforcement in every corner of the globe. Indeed, Secretary Evans has been a champion on this issue and has made it a top priority for the entire Department. We need to make sure that American IP owners have sufficient legal tools to fight piracy, and we need to ensure that other governments have the will - and the resources - needed to attack IP theft. Through our Offices of Enforcement and International Relations, the USPTO works with foreign governments to enact effective IP protection laws. We review foreign laws for compliance with international enforcement obligations and provide technical assistance on creating adequate and effective enforcement mechanisms. As co-chair of the National Intellectual Property Law Enforcement Coordination Council, we also coordinate high-level discussions among agencies involved in domestic and international IP enforcement.

As you know all too well, Mr. Chairman, one of the areas of greatest concern with respect to IP piracy is Asia, particularly China. Despite China's membership in the World Trade Organization (WTO) and its requirement to comply with the WTO's 1994 TRIPs Agreement, the lack of effective IP enforcement in China is a major problem for U.S. business interests, costing billions of dollars in lost revenue and tens of thousands of U.S. jobs. For example, China accounts for 44 percent of the dollar loss due to piracy in the Asia/Pacific region. IP enforcement problems are pervasive with piracy and counterfeiting being the most serious and widespread. These problems run the gamut from rampant piracy of movies and business software to counterfeiting of consumer goods, electrical equipment, automotive parts and pharmaceuticals.

While few statistics exist on U.S. job losses attributable to IP piracy and counterfeiting in China, the Business Software Alliance estimates that software piracy in China, where software piracy rates exceed 90 percent, cost the industry $2.4 billion in 2002, not counting losses due to Internet piracy, for which data are not yet available. For every $1 billion generated by software exports, 22,000 new jobs are created in the U.S. The auto industry loses $12 billion a year due to counterfeit automotive parts production, of which China is a leading source.

Under the direction of Secretary Evans, the USPTO has been working extensively to reduce piracy and counterfeit activity in China. For the past two summers we have stationed an IP enforcement attorney - who is fluent in Mandarin -- in our embassy in Beijing to help with IP enforcement issues in the region. Working with industry groups such as the Business Software Alliance, we held enforcement conferences in Beijing, Shanghai, Guangzhou, Wuhan, and Chengdu that addressed end-user piracy and Internet piracy issues. Working with the DOC's Technology Administration, we provided technical assistance to software development parks in Dalian and Shenzhen on IP rights protection. We also held meetings with local copyright enforcement officials in a number of Chinese cities and have worked with China's Supreme People's Court to encourage greater transparency in its regulation-like "judicial interpretations." The USPTO intends to detail an IP enforcement attorney to China soon for an extended period to provide in-country support for this initiative and to further our government's efforts to combat piracy and counterfeiting.

Last fall, Secretary Evans led a mission to China and highlighted China's lack of IPR enforcement. The Secretary met with high-ranking Chinese officials and reiterated a continuing concern; that effective IPR protection requires that criminal penalties for stolen intellectual property theft and fines are large enough to be a deterrent rather than a business expense. Secretary Evans believes in the strong enforcement of our trade laws and is taking new and proactive measures to strengthen the enforcement and compliance of our trade agreements. He has tasked Commerce agencies, such as PTO and the new Office of Investigations and Compliance under Commerce's International Trade Administration, to coordinate their efforts to vigorously pursue allegations of IPR violations wherever they occur, especially in China.

As a follow up to the Secretary's October 2003 trip, two weeks ago I led a delegation to China for consultations with senior officials at China's patent and trademark and other intellectual property agencies. Our delegation also met with U.S. companies facing intellectual property issues in China. A primary focus of this trip was to further the Administration's goals of improving the intellectual property environment for U.S. companies doing business in China and, specifically, of addressing widespread counterfeiting and piracy. This trip also was intended to pave the way for next month's meeting of the Joint Commission on Commerce and Trade (JCCT) on trade issues with China, as well as other Department of Commerce IPR initiatives in China.

While our visits were well-received and we were pleased to note a continuing and increasing awareness among Chinese officials of the importance of IP protection and enforcement, we have not yet seen significant progress on most of the key issues we have been urging China to act on for some time. These issues include enhanced criminal enforcement, protecting copyrights over the Internet, and stopping the export of counterfeit goods. For example, we have yet to see even a plan for China's IPR "task force", notwithstanding a stated commitment to solving intellectual property rights problems "step-by-step" at a U.S. Embassy "roundtable" in November 2004.

During meetings with industry, representatives reported that in some cases piracy and counterfeiting matters have gotten worse. U.S. government statistics show a worsening situation as well. For example, U.S. Customs reported that in mid-2003 China accounted for 70 percent of the domestic value for all seizures of infringing goods; this is a steady increase from 16 percent in 1999. Many industries also have come to suspect that the Chinese government, by restricting market access, is providing free reign for counterfeiters, pirates and criminals to exploit the void created by the lack of legitimate products. Given these trends, we hope to make significant progress improving China's IPR regime in next month's meeting of the Joint Commission on Commerce and Trade.

Conclusion

As I have detailed, this is a time of great challenge - and opportunity -- for Commerce and the USPTO. We face what is arguably the greatest workload and operational crisis our agency has ever confronted in its more than two hundred years of existence.

I do not think it is an exaggeration to say that a great deal is at stake. While it's easy to take America's technological prowess and high standard of living for granted, the innovations and discoveries that serve as the foundation of our successes are not a given. There must be financial incentives in place for innovators and businesses to create and market their discoveries. To ensure those incentives, we must have an efficient, cost-effective patent and trademark system that is adapted for the 21st century.

Mr. Chairman, the Administration commends you for your consistent leadership and support of the USPTO and intellectual property issues. We look forward to continuing to work with you and the Subcommittee to ensure that the United States maintains its standing as the world's premier technological incubator.

Thank you very much.

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