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March 23, 2009

Going Bankrupt?

A patent is a piece of intellectual property, a mortgage granted by the patent bank, the USPTO. The patent bank has failed, owing to managerial ineptitude. Will mismanagement hurtle it towards fiscal dilemma and further alienation of its mortgage holders, or will it turn the corner, back to a more historical norm?

Over the past few decades, the PTO has allowed 60% to 70% of the applications filed. Then Jon Dudas, a political creature, became Director in 2002. Responding to corporate pressure, Dudas caved over carping about so-called "junk" patents, and the allowance rate plummeted. The agency clamped down beyond all reason in denying patent grants. Though Dudas has left the building, that continues.

Attrition was terrible. Though they tried, Dudas's crew couldn't hire and retain enough examiners, because the work environment was so poor. Pendency burgeoned.

To counter the pendency spiral, Dudas adopted a strategy of offloading examiner work by foisting it on applicants. In came rules to limit continuations (78), limit RCEs (114), and limit claims unless the applicant thoroughly self-examines the patent application, including an extensive search of the prior art (75 and 265).

Applicants fought back. And won. Then lost. The district court ruled the rules substantial, beyond the scope of PTO purview. But the appeals court late last week, 2-1, rather insanely relegated the rules as merely procedural, and remanded back to district court for further analysis. The Office has announced "[t]he Final Rules will not be implemented at this time."

The turmoil is taking its toll, as is the economic downturn. The Office has projected a 5% increase in applications for 2009, but applications are down, 2%-%5, depending on whose numbers you believe.

The PTO has stopped hiring examiners. Rumor has it that the Office will close its training center, the Patent Academy, by the end of the year.

The trend is ominous. The patent office largely (70%) finances itself, not with application fees, but maintenance fees, which are due at 3.5, 7.5, and 11.5 years, ascending in cost as the patent ages. For individual inventors, the maintenance fees are presently $490 (3.5), $1,240 (7.5) and $2,055 (11.5). For "large entities," i.e., most companies, the fees are $980, $2,480 and $4,110 respectively. Many patent holders abandon their patents over the maintenance fees, especially 11.5-year fee, the patent having yielded nothing for its costs.

There are a lot of 'ifs' in play. The biggest 'if' is as it always has been: management. More thrashing could mean trashing this country's self-protection of innovation. The consequences of that could be felt for decades, in innumerable opportunities lost.

Posted by Patent Hawk at March 23, 2009 7:45 PM | The Patent Office

Comments

Of note it was just announced today that the patent law school program has been suspended (PTO pays for law school for examiners). Also canceled is the technology schooling (Masters in an engineering degree).

Posted by: Anon at March 23, 2009 8:48 PM

What we don't know is how it would be looking now, without the miserable reign of Wicked King Jon. I suspect the following three factors would have brought the PTO to its knees, regardless who was on the throne. When you have:

1. Ridiculously high awards of damages for infringing claims of "dubious" (shall we politely say) validity;

2. A Statute that is responsible for huge legal uncertainty, whether a claim is or is not valid and enforceable; and

3. Courts incapable of handing down decisions that reduce the level of legal uncertainty;

the conditions are in place to breed:

i) an enormous backlog

ii) distress within the PTO, and

iii) inability to retain Examiners of above average talent.

The new king (except for a honeymoon period, of course)won't do any better, unless Congress and the courts in the meantime mitigate the underlying problems.

Posted by: MaxDrei at March 24, 2009 12:19 AM

Some PTO budget history (and a slightly different allowance rate graph from the PTO) is here:

http://www.nipra.org/budget.htm

Posted by: Na at March 24, 2009 12:44 AM

Max,
Please enlighten me - how do high damages for infringement cause:
i) an enormous backlog
ii) distress within the PTO, and
iii) inability to retain Examiners of above average talent.

What is the connection????

I would think that the distress within the PTO and the inability to retain Examiners is more related to (i) the count system, (ii) the fact that Washington DC has some of the highest cost of living in the USA, and (iii) hostile management.

You (and the Silicon Valley IT behemoths) want to link these issues to high damages.

Is there something that you know that I am missing???

PS If the law is changed to severely reduce damages, then maintenance fees are going to plummet - noone is going to pay $$ to maintain devalued patents. This would exacerbate the budget crisis at the USPTO, and would pressure the USPTO management to degrade the working conditions of the Examiners.

LAST COMMENT ABOUT DAMAGES - Max, on MANY threads I have noted that noone will buy a license without the threat of an injunction or an 'inflated' damage settlement - infringers will prefer to 'roll the dice' if the worst outcome is to pay what the license would have cost anyhow. YOU HAVE NEVER ANSWERED THIS COMMENT.

Posted by: anonymousAgent at March 24, 2009 3:48 AM

"The litigation remains pending. The Final Rules will not be implemented at this time." from the link to http://www.uspto.gov/web/offices/pac/dapp/opla/presentation/clmcontfinalrule.html

Patent Hawk, at first glance I presumed that you were indicating that the Office was not pursuing the Final Rules, rather it appears that since litigation has not ended, the Final Rules are not yet in effect (but will be enacted in their fullest measure and at the earliest opportunity).

Posted by: breadcrumbs at March 24, 2009 3:56 AM

Hawk, don't forget issue fees, which are about the same as the first maintenance fee (I think - it has been a while since I've seen an allowance ): ).

Posted by: johng at March 24, 2009 3:59 AM

"the miserable reign of Wicked King Jon"

Max,

Love the title you gave Dudas. May be we should put together a "spoof" video about Adventures in the USPTO based on Robin Hood with Doll as the Sheriff of Nottingham, and with the patent applicants/patent agents/patent attorneys taking the role of the oppressed citizens and Robin's Merry Men with Q. Todd Dickinson in the role of Robin Hood. What do you think?

Posted by: EG at March 24, 2009 4:56 AM

Max

where have you been, dude ?

Courts have already destroyed nearly all incentives for small entities to file for patent protection (in high-tech at least), and Congress is about to finish the job

As far as I am concerned they can all go to hell

Trade secrets rule !!!

Posted by: angry dude at March 24, 2009 7:25 AM

"YOU HAVE NEVER ANSWERED THIS COMMENT."

I'm pretty sure he never answered you because the only answer is obvious: "So what?"

Posted by: 6000 at March 24, 2009 8:05 AM

Na,

Thanks for the NIPRA link. Another interesting data point or three.

Incentives always matter.

Posted by: anon at March 24, 2009 8:45 AM

6000,

So what? Wow, that's an unbelievable amount of ignorance.

Here's some help. Suppose you invent something, but you don't work for BigCorp, Inc. So instead of assigning your rights, you own them. You might also be a small R&D shop or university.

Now, suppose the value of a license to BigCorp., Inc. is $X. For $X+1(cost plus lost profits), they can use an alternate inferior technology.

With the threat of an injunction, they would take a license at a price up to an including $X, more or less.

We're ignoring probability of detecting infringement because it is present in both scenarios (cancels out).

Without the threat of an injunction, they do a different calculation. With no threat of injunction, they look at the probability of losing at court, the court's probable valuation of the patent using the Ga. factors (suppose answer = $X, same as actual value), and the costs born by both sides in litigation (the costs born by the inventor in litigation devalue the license, the costs born by the infringer increase the value).

Because the probability of losing in court is > 0% (e.g., there's always a 20% chance that a jury will go the "wrong" way), that drops the value of the license by at least 20%. Sure you can appeal, but that's more money and more delay. Because the inventor must fund the litigation, that drops the value of the license even more, especially if the inventor is not filthy rich or is not a patent lawyer at a plaintiff's firm. At best, a broke inventor he'll pay a 30% contingency fee on victory only -- which drops the amount the license is worth to the inventor another 30%.

Right there -- with a perfectly valid patent, you've dropped the negotiated license value to $1/2X.

Now add in the time value of money. You know, a $1000 cash in your hands today is worth $X payment in the future. Suppose the cost of capital/opportunity is just 10%. Assuming the case winds its way through the courts in 5-7 years, the value of the license just dropped by almost half again.

Now we're down to 25% of the original value of the license. If I'm an infringer, my opening offer might be 10% of the real value of the license, and I won't go higher than 25%. If small inventor asks for more, I show the inventor the math and say "so sue me."

Posted by: anon at March 24, 2009 9:02 AM

'
I show the inventor the math and say "so sue me."
'

THAT is 'patent fairness.'

Posted by: anonymousAgent at March 24, 2009 9:18 AM

"Now we're down to 25% of the original value of the license. If I'm an infringer, my opening offer might be 10% of the real value of the license, and I won't go higher than 25%. If small inventor asks for more, I show the inventor the math and say "so sue me.""

So maybe the actual value of that perfectly valid patent claim against that party was $1/4X instead of $X.

If you have a point then please be getting to it soon.

If your only point is: "I like to QQ about reality" then spare me, please.

I'd like to add that I find your manner of dealing with the law, making things punitive that should in no way be punitive, offensive. It is the same nonsense that bloats speeding tickets and other mundane ridiculousness that should be a pittance to outrageous levels, where you have a 250$ fine and lose your registration until you pay it. Speeding, be honest, 65$ is more than enough to make people aware that they were speeding and shouldn't have been, and pays for the cost of the officer, and there is no possible justification for taking away their registration "privelages" in this context. Oh, but why is it that these laws are on the books? Because they didn't sufficiently "punish" richer people who could, if they chose, speed with practical impunity. R i d i c u l o u s. By the same token, your justification for the higher damages smacks of the same flawed bs.

I should also add that I haven't had a speeding ticket in many many years. I should also add that I wish we could get some decent representation up in my state capital.

Posted by: 6000 at March 24, 2009 9:50 AM

@ anonymousAgent:

I can't speak for Max, but I understood his comment to refer to the formation and actions of groups of Large Entities, like the Coalition of "Patent Fairness." So the fear of large damage awards from small inventors and those who buy the patents of small inventors and sue in their stead (sometimes called "patent trolls"), has motivated corporations to join together and complain to the PTO, lobby for patent reform, and otherwise put a lot of pressure on government (Courts, Congress, and the PTO) to destroy the incentive for people to innovate by ruining the patent system. Does that answer your question?

Posted by: broje at March 24, 2009 10:13 AM

to6K

Here we go again...

Didn't I tell you to resist the urge of typing nonsense on your little keyboard ?

As far as patent licensing is concerned, forget about 25% or even 1% for that matter

The initial offer is almost always 0, zero, zilch, take a hike

On a perfectly valid patent

this offer can dramatically improve as the court case moves along

Just watch the movie "Flash of Genious"
it's all in there

it's a dog-eat-dog world by corporate design

Gotta love it, dude

Posted by: angry dude at March 24, 2009 11:12 AM

"So maybe the actual value of that perfectly valid patent claim against that party was $1/4X instead of $X."

OK, so I offer 1/16X.

What's your point?

Posted by: anon at March 24, 2009 12:58 PM

"I'd like to add that I find your manner of dealing with the law, making things punitive that should in no way be punitive, offensive."

It isn't my way of dealing with the law, it is the reality of how business is practiced...and the only reason for patents is business.

As was so well put, it is "patent fairness."

Now go back and QQ to yourself about how the world ought to be according to 6k.

Posted by: anon at March 24, 2009 1:04 PM

"What's your point? "

That you haven't made any point in the first place. I'll take this as a concession that you had no point to make other than qq about RL.

"It isn't my way of dealing with the law, it is the reality of how business is practiced"

Um, your way of dealing with the law is to make it such that we enhance damages to give people an artificial edge in negotiations. Yet, you can't even say why this is entirely appropriate. That is because it isn't entirely appropriate. It inflated damages is just an artificial construct made for bogus reasons to favor one party over the other for no good reason. Now that congress is wising up to this you're sad. Whatev.

As to how the world should be, don't worry, when I end up winning the gov seat because everyone else is for dmb sht that the public doesn't want I'll be rofling you up some MAO.

Posted by: 6000 at March 24, 2009 2:21 PM

Sigh.... There goes the neighborhood. Was nice while it lasted....

Posted by: Defector at March 24, 2009 2:48 PM

An anonymous above wonders why high damages causes distress in the PTO. It is because those high damages make it worthwhile getting a patent issued, even on dud claims. So, for Applicants, no price (including loss of civility) is too much to pay, to get the claims through to issue. In a properly functioning patent system, the owner of a valid claim is prima facie entitled to injunctive relief. Validity must be decided on a preponderance of evidence. Any other standard distorts the balance between inventors and the public. In a properly functioning court system, the bringer of ill-founded claims, who does the Defendant the civil wrong of costing him millions of dollars of defence legal fees, should compensate the Defendant for his losses. It is that threat which will restore civility to dialogue between prosecutor and Examiner. The Examiner becomes a valuable sparring partner, for getting the claims in shape to resist post-issue attacks on validity. Put those measures in place and you won't need damages at extortionary levels. Two wrongs don't make a right.

Posted by: MaxDrei at March 26, 2009 12:15 AM

Max,
Well there IS no guaranteed injunction in the US.
Also, patent litigation is very unpredictable, with standards constantly changing and judges saying that simple facts are a "matter of law."
Given this, the proposed (and thankfully frozen, for now) damages reform, when grafted onto the current defective system, would have made patents completely and utterly worthless.

Tying to piecemeal add EPO reforms to the USPTO system would create major problems.

Posted by: anonymousAgent at April 5, 2009 2:46 AM