oversight

Patent and Trademark Office: New User Fee Design Presents Opportunities to Build on Transparency and Communication Success

Published by the Government Accountability Office on 2012-04-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States Government Accountability Office
Washington, DC 20548



           April 25, 2012


           The Honorable Frank R. Wolf
           Chairman
           Subcommittee on Commerce, Justice,
            Science, and Related Agencies
           Committee on Appropriations
           House of Representatives

           Subject: Patent and Trademark Office: New User Fee Design Presents Opportunities to
           Build on Transparency and Communication Success

           Dear Mr. Chairman:

           This report formally transmits the briefing we gave on January 23, 2012 on the U.S. Patent
           and Trademark Office’s (USPTO) user fee design (see enc. I), as well as subsequent
           comments from USPTO (see enc. III). Some updates were made to this briefing after it was
           initially delivered to USPTO officials. This letter presents a summary overview; the slides
           present our work and findings more completely.


           The Leahy-Smith America Invents Act (AIA), enacted in September 2011, significantly
           broadened USPTO’s authority to design and set its user fees. 1 Our objective was to analyze
           how aspects of USPTO’s proposed user fee design may address challenges facing USPTO
           and stakeholders. We began this work under the authority of the Comptroller General in the
           context of questions raised over time by USPTO’s appropriations and authorizing
           committees on the USPTO reauthorization debate, including how USPTO’s fee design
           affected both its operations and oversight. Subsequently, you expressed interest in our
           analysis and asked that this work be addressed to you.


           We focused on patent fees and processes, and excluded trademark fees and processes,
           because patent fees represent almost all of USPTO fee collections. Given the authority to
           set or adjust patent fees newly granted to USPTO in the AIA, we assessed how USPTO
           fees are set, used, and reviewed using our Federal User Fees: A Design Guide. 2 We
           reported on issues related to USPTO fee collections in a previous report. 3 For more
           information on our objectives, scope, and methodology, see enclosure II. In addition to this
           briefing, USPTO officials requested and received information from us on effective
           stakeholder communication in October 2011.


           1
             Pub. L. No. 112-29.
           2
             See GAO, Federal User Fees: A Design Guide, GAO-08-386SP (Washington, D.C.: May 29, 2008).
           3
             See GAO, Budget Issues: Electronic Processing of Non-IRS Collections Has Increased but Better
           Understanding of Cost Structure Is Needed, GAO-10-11 (Washington, D.C.: Nov. 20, 2009).


           1                                                       GAO-12-514R Patent and Trademark Office
In summary, to successfully manage AIA implementation, USPTO must consider a number
of trade-offs as it sets and uses its over 340 fees, as well as maintain an effective fee review
process. USPTO officials have stated that the agency’s limited fee-setting authority prior to
the AIA and uncertainty about the extent to which its collections would be available
contributed to a number of the agency’s operational challenges, such as the current backlog
of over 640,000 patent applications and patent application processing time of over 30
months. They said fees that generated over 80 percent of USPTO’s revenues were set in
statute, limiting the agency’s ability to ensure that total collections kept pace with total costs
as its workload has grown. USPTO can only use its fee collections to the extent that
Congress makes them available. In the past, Congress has in some years made available
less than the total amount collected; there has been significant debate about the status and
use of these fees collected in excess of amounts appropriated.


The AIA made changes to USPTO’s fee design, including granting the agency the ability to
set fee rates and changing how any excess collections would be treated. Prior to enactment
of the AIA, fees collected were deposited into USPTO’s account and were available to the
extent appropriated. The AIA created a second account; USPTO collections in excess of
appropriations are to be deposited into the new Patent and Trademark Fee Reserve Fund.
As before, these excess collections are available to USPTO only to the extent appropriated
by Congress. However, we believe the establishment of this special account increases
transparency for the use of these funds because any amounts appropriated, transferred, or
rescinded from the fund would be clearly visible.


By law, USPTO patent fees must cover patent costs in the aggregate, but USPTO is not
required by law to align individual fees and activity costs on a fee-by-fee basis; we found
that individual USPTO fees and costs are not aligned in many cases. We have previously
reported that while less precise alignment between fees and costs may result in some
inequity or inefficiency, there may be policy and administrative reasons for this choice such
as, for example, holding patent filing fees lower than costs in order to encourage innovation.
USPTO reported that, not unlike the situation faced by other federal agencies that depend
on fee revenue, uncertainty about (1) the extent to which requests for services and related
collections match estimates and (2) the level of collections that would be available to the
agency annually complicates its ability to execute annual and multi-year plans. To smooth
the impact of economic downturns on operations and to help mitigate funding uncertainty,
since fiscal year 2010 USPTO has been reserving a portion of the amount Congress makes
available annually through appropriations as a designated operating reserve that could be
carried over for use in future years, as USPTO is generally appropriated no-year funds.
USPTO is drafting an operating reserve policy on the management of this reserve. This
practice is consistent with our previous reporting that an operating reserve is important for
fee-funded programs to match fee collections to average program costs over time and
because program costs do not necessarily decline with a drop in fee collections. However, it
will be important that the policy governing the use of this reserve ensures alignment with
agency goals. USPTO has a robust fee review process in place and stakeholder
communication regarding AIA-related fee adjustments is under way. However, USPTO has
not included some information—such as an accounting of program costs and assumptions
used to project future program costs—in some past examples of communications with
stakeholders and Congress. We have previously reported that tools for oversight are
enhanced if the agency clearly reports its methods for setting the fee, including such cost
information. While stakeholder groups we spoke with were generally satisfied with USPTO’s

2                                                  GAO-12-514R Patent and Trademark Office
communication approach, some interviewees were not certain that this success would be
maintained when agency leadership changes. USPTO’s challenge will be to establish
guidance and protocols to help ensure consistency over time and through subsequent
leadership transitions. In our briefing, we make a number of recommendations to strengthen
transparency and communication during the implementation of the AIA reforms, including
finalizing a policy for USPTO’s operating reserve; providing program costs, fee-setting
methods, and the rationale for policy choices in communications with Congress and
stakeholders; and establishing protocols for communication with stakeholders.


We provided a draft of this product for comment to the Secretary of Commerce. We received
written comments from the Department of Commerce (Commerce) which are summarized
below, and reprinted in enclosure III. USPTO provided technical comments that we
incorporated as appropriate. We also provided portions of the report to nonfederal
stakeholders for their review and made technical corrections as appropriate.


In its comments, Commerce concurred with our recommendations and provided target
completion dates for each recommendation. Commerce stated that USPTO is in the process
of finalizing the operating reserve policy. In addition, Commerce stated that Commerce and
USPTO “published a high-level overview of the accounting of both historical and prospective
program costs, fee-setting methodology, and rationale in the information provided to the
public in support of the initial fee proposal on February 7, 2012” and will provide additional
details in these areas in the notice of proposed rulemaking.


                                  ____________________


We are sending copies of this report to the Secretary of Commerce, the Under Secretary of
Commerce for Intellectual Property and Director of the U.S. Patent and Trademark Office
and interested Congressional committees. In addition, the report is available at no charge on
the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me at (202) 512-
6806 or irvings@gao.gov. Contact points for our Offices of Congressional Relations and
Public Affairs may be found on the last page of this report. GAO staff who made key
contributions to this report are listed in enclosure IV.

Sincerely yours,




Susan J. Irving
Director for Federal Budget Analysis
Strategic Issues


Enclosures – 4




3                                                GAO-12-514R Patent and Trademark Office
Enclosure I: Briefing Slides




                            U.S. Patent and
                           Trademark Office


                                    User Fee Review




    For more information, contact Susan J. Irving on (202) 512-6806 or irvings@gao.gov.      Page 1




           4                                              GAO-12-514R Patent and Trademark Office
Objectives, Scope, and Methodology

• In order to evaluate the U.S. Patent and Trademark Office’s (USPTO) user fee
  design in a way that timely informs USPTO’s implementation of its new fee-
  setting authority, we analyzed how aspects of USPTO’s proposed user fee
  design may address challenges facing USPTO and its stakeholders.
• To do this, we reviewed documentation from USPTO and interviewed cognizant
  officials from USPTO and the Department of Commerce’s Office of the
  Inspector General. We also interviewed five groups that represent USPTO
  stakeholders (in this briefing we refer to these associations as stakeholder
  groups):
    • Patent Public Advisory Committee (PPAC),
    • Intellectual Property Owners Association (IPO),
    • American Intellectual Property Law Association,
    • National Association of Manufacturers, and
    • Association of American Universities (AAU).


                                                                              Page 2




      5                                    GAO-12-514R Patent and Trademark Office
Objectives, Scope, and Methodology
(cont’d)
•      This review focuses on patent fees and processes, excluding trademark fees and
       processes, because fees for patent-related processes represent almost all of USPTO
       fee collections. For these fees, we assessed how USPTO fees are set, used, and
       reviewed. We reported on issues related to USPTO fee collections in GAO-10-11.1

•      We conducted this performance audit from June 2011 to April 2012 in accordance with
       generally accepted government auditing standards. Those standards require that we
       plan and perform the audit to obtain sufficient, appropriate evidence to provide a
       reasonable basis for our findings and conclusions based on our audit objectives. We
       believe that the evidence obtained provides a reasonable basis for our findings and
       conclusions based on our audit objectives.




1See GAO, Budget Issues: Electronic Processing of Non-IRS Collections Has Increased but Better Understanding of Cost Structure
                                                                                                                                 Page 3
Is Needed, GAO-10-11 (Washington, D.C.: Nov. 20, 2009).




           6                                                                    GAO-12-514R Patent and Trademark Office
Results in Brief

•      We provided portions of this briefing to USPTO officials in January 2012, in the early
       stages of its fee-setting process. In addition to this briefing, in October 2011 USPTO
       officials requested and received information from us on effective stakeholder
       communication. During the course of the engagement, USPTO officials also stated that
       they were familiar with our Federal User Fees: A Design Guide.2
•      The America Invents Act (AIA), enacted in September 2011, made changes to USPTO’s
       user fee design. To successfully manage implementation of the fee-related aspects of
       the AIA, USPTO must consider a number of trade-offs as it sets and uses fees. In
       addition, as USPTO employs a number of new flexibilities, it becomes increasingly
       important that it maintain an effective fee review process.
•      USPTO patent fees must cover patent costs in aggregate, but USPTO is not required by
       law to align its more than 340 patent and trademark fees with costs on a fee-by-fee
       basis. In many cases individual USPTO fees are not closely aligned with activity costs.
       We have previously reported that while less precise alignment between fees and costs
       may result in some inequity or inefficiency, there may be policy and administrative
       reasons for making this choice. For example, USPTO has set patent filing fees lower
       than costs in order to encourage innovation.
2See   GAO, Federal User Fees: A Design Guide, GAO-08-386SP (Washington, D.C.: May 29, 2008).                   Page 4




             7                                                                 GAO-12-514R Patent and Trademark Office
Results in Brief (cont’d)

•   USPTO reported that, not unlike the situation faced by other federal agencies that
    depend on fee revenue, uncertainty about (1) the extent to which requests for services
    and related collections match estimates and (2) the level of collections that would be
    available each year complicates its ability to execute annual and multi-year plans. To
    mitigate these uncertainties, since fiscal year 2010 USPTO has been reserving a portion
    of the amount Congress makes available annually through appropriations as a
    designated operating reserve, which could be carried over for use in future years, as
    USPTO is generally appropriated no-year funds. We have previously reported that an
    operating reserve is important for fee-funded programs to match fee collections to
    average program costs over time and because program costs do not necessarily decline
    with a drop in fee collections.




                                                                                      Page 5




        8                                         GAO-12-514R Patent and Trademark Office
Results in Brief (cont’d)

•   USPTO has a robust fee review process in place and stakeholder communication
    regarding AIA-related fee adjustments is under way.
     • The agency submits biennial fee reviews, publishes fee and forecasting information
        in its annual budget submission and performs internal analysis of fees and related
        activity costs.
     • USPTO has not included some information—such as an accounting of program
        costs and assumptions used to project future program costs—in some
        communications with stakeholders and Congress.
     • We have previously reported that tools for oversight are enhanced if the agency
        clearly reports its methods for setting the fee, including an accounting of program
        costs and the assumptions it uses to project future program costs.
•   USPTO is conducting outreach to stakeholders on upcoming fee changes. While
    stakeholder groups we spoke with were generally satisfied with USPTO’s
    communication approach, some interviewees were not certain that this success would
    continue when agency leadership changes.




                                                                                       Page 6




        9                                          GAO-12-514R Patent and Trademark Office
Background: USPTO Funding Model

•   Fully fee funded since 1990
•   Over 340 patent and trademark fees of different types
•   Patent fees generate approximately 90 percent of revenues; trademark fees generate
    the remaining 10 percent
•   Fees are collected for USPTO products and services at different points in the patent
    process
            Filing     Publication           Search and exam           Issue       Maintenance




        Application filings          Responses during          Fees after          Maintaining
        (filing, search,             prosecution               examination         exclusive rights
        examination, excess          (extension of time,       (issue and          (maintenance
        claims, size fees)           appeal fees)              publication fees)   fees)

       Source: USPTO

•   By law, patent fee collections are required to cover patent costs in the aggregate, and
    trademark fees cover trademark costs in aggregate; however, fees are not required to
    align with costs on a fee-by-fee basis.


                                                                                                         Page 7




       10                                                             GAO-12-514R Patent and Trademark Office
Background: Fee Design Prior to the Leahy-
Smith America Invents Act
•   USPTO officials stated that prior to the passage of the AIA, limited fee-setting authority
    and uncertainty about the extent to which its collections would be available contributed
    to USPTO’s challenges. Specifically, they said the following:
      • Fees that generated over 80 percent of USPTO’s revenues were set in statute,
         limiting the agency’s ability to adjust fees and therefore more closely match costs to
         collections each year. Fees generating the remaining revenue could be set through
         the regulatory process.
      • USPTO can only use collections to the extent that Congress makes them available.
         In some years, collections have exceeded both USPTO’s estimates and the
         amount made available by Congress. In other years, collections have been less
         than the amount made available. In years when USPTO has collected more than
         the appropriated amounts, these excess amounts remained unavailable to USPTO.
         At the same time, USPTO’s workload has grown.
      • Uncertainty about future access complicated multi-year planning.
      • These factors significantly impaired USPTO’s ability both to hire examiners to keep
         up with USPTO’s workload and to invest in needed information technology systems
         to modernize USPTO. There is a backlog of over 640,000 patent applications, and
         patent application processing time is running over 30 months.

                                                                                         Page 8




        11                                           GAO-12-514R Patent and Trademark Office
Background: Leahy-Smith America Invents Act
(P.L. 112-29, Enacted September 16, 2011)


The AIA:
• Granted USPTO authority to set all of its fee rates through regulation;3
• Requires the relevant public advisory committee—that is, PPAC or the Trademark
  Public Advisory Committee—to to hold a public hearing within 30 days of receiving a
  new fee proposal from USPTO;
• Established a temporary 15 percent surcharge on USPTO’s current fees that will remain
  in effect until fees are set for the first time under USPTO’s new authority;
• Created a special account called the Patent and Trademark Fee Reserve Fund. Any
  USPTO collections in excess of the amounts annually appropriated by Congress are
  deposited into this account. As before, these excess collections are available to USPTO
  to the extent appropriated by Congress. However, we believe this special account
  increases transparency about the use of these funds because any amounts
  appropriated, transferred, or rescinded from the fund would be clearly visible – an issue
  about which there has been significant debate in the past.
• Required USPTO to establish significantly reduced fee rates for micro entities.4

3However,   the statutory framework continues to impose other requirements related to fees, for example, maintenance fees must be paid
at particular points in time.
4Microentities are defined as small entities that are not named as an inventor on more than four previous applications and had a gross
income less than three times the median household income in the preceding calendar year.
                                                                                                                                         Page 9




            12                                                                      GAO-12-514R Patent and Trademark Office
Background: Key Factors to Consider When
Designing User Fees
•       In 2008, we published a design guide with criteria and key questions to consider when
        designing user fees.5 Examples include:

         1. Setting fees: How will program costs be determined and assigned?

         2. Collecting fees: At what point should the fees be collected? What mechanisms are
            available to ensure payment/compliance?


         3. Using fees: Is agency access to fees subject to Congressional appropriation? To
            what extent is agency access to fee collections limited?

         4. Reviewing fees: How frequently will fees be reviewed and updated? What
            information is included in the review? What role do stakeholders play in fee
            reviews?

•       USPTO officials stated that they were familiar with our User Fee Design Guide.
5For   a complete list of criteria, see GAO-08-386SP.                                      Page 10




              13                                        GAO-12-514R Patent and Trademark Office
USPTO Must Consider Design Trade-offs When
Setting, Using, and Reviewing Its Fees

• Through the AIA, Congress granted USPTO the ability to set all of its fee rates
  and created a new account structure for fees collected in excess of amounts
  appropriated.

• However, as we will discuss, to successfully manage the AIA implementation,
  USPTO must consider a number of design trade-offs as it determines the rates
  at which to set its fees and the manner in which fee collections will be used.

• In addition, as USPTO employs its new flexibilities, it will become increasingly
  important that it continues to build on and improve an already-robust fee review
  process to ensure that total collections and costs remain aligned over time.




                                                                               Page 11




      14                                     GAO-12-514R Patent and Trademark Office
Setting Fees: Aligning Fees with Costs

•   USPTO collects historical program cost information at the activity level using an activity
    based information cost-accounting system.
•   Current fees are set at what the agency described as reasonable rates to encourage
    innovation. As part of this strategy, fee rates for activities at the beginning of the patent
    process are lower than actual historical costs to encourage people to file patent
    applications. To bridge the resulting cost-collections gap, USPTO charges fees that are
    higher than the costs of activities that occur later in the patent process. As such, fees
    charged later in the patent process subsidize the costs of activities that occur earlier in
    the patent process.
•   We found that as of fiscal year 2010, the majority of USPTO’s individual patent fees and
    costs for which we had data were misaligned by more than 50 percent.
•   In February 2012, USPTO proposed some targeted adjustments to fees where the gap
    between cost and current fee rate is greatest.




                                                                                           Page 12




        15                                            GAO-12-514R Patent and Trademark Office
Setting Fees: Aligning Fees with Costs
(cont’d.)
• We previously reported that aligning fees closely with activity costs promotes
  equity and economic efficiency.6
   • Disconnect between fees and costs
           • can lead to overuse of more expensive services, because fee
             payers do not bear the full cost of the service, and
           • results in some fee payers subsidizing others.
   • However, there may be policy or administrative reasons for less precise
      alignment.

• Some stakeholder groups we interviewed report mixed opinions on setting fee
  rates that are not precisely aligned with costs, especially in light of USPTO’s
  new fee setting authority.




6GAO-08-386SP.
                                                                               Page 13




         16                                    GAO-12-514R Patent and Trademark Office
Setting Fees: Charging Some Users Less than
Their Full Cost
• The AIA requires USPTO to establish significantly reduced fee rates for small
  and micro entities.
• We have previously reported that charging some users less than their full cost
  to promote certain policy goals may provide one kind of equity while raising
  other equity and efficiency concerns.7
    • Charging users less than their full cost can promote equity by factoring in
       the filer’s ability to pay.
    • However, the practice also
            • creates cross-subsidies and
            • can increase administrative costs because the agency must track
               eligibility and application of the reduced rates.
• Some stakeholder groups’ opinions on this practice parallel the constituencies
  they represent. Specifically:
    • IPO is concerned about the 75 percent micro entity discount, because it
       results in larger entities subsidizing smaller entities and
    • AAU strongly supports the micro entity discount.
7GAO-08-386SP.
                                                                              Page 14




         17                                   GAO-12-514R Patent and Trademark Office
Setting Fees: Fee Adjustments

•      The AIA established the potential for future fee adjustments by granting USPTO fee-
       setting authority. We have reported that substantial changes in fees could have
       unintended consequences.
        • For example, significant fee increases can result in an anticipatory surge in
           applications that could exacerbate workload issues8 and encourage applicants to
           seek patents elsewhere. USPTO recently experienced a version of this. Specifically,
            • As previously mentioned, the AIA established a 15 percent surcharge that went
               into effect just prior to the beginning of fiscal year 2012.
            • As users anticipated the impending surcharge, USPTO received a spike in
               payments near the end of fiscal year 2011, resulting in $130 million in fees
               collected in excess of appropriations.
        • We have also reported that transitional measures—such as phasing in increases—
           can help mitigate these consequences.9 However, this may affect operations by
           delaying expected revenue.
        • In addition, we have reported that, moving forward, more frequent fee reviews can
           result in smaller fee increases.


8Forone example, see GAO, Federal User Fees: Additional Analyses and Timely Reviews Could Improve Immigration and
Naturalization User Fee Design and USCIS Operations, GAO-09-180 (Washington, D.C., Jan. 23, 2009).                  Page 15
9GAO-08-386SP.




           18                                                                GAO-12-514R Patent and Trademark Office
Using Fees: Access to Collections

•   Annual fee collections vary from year to year and are available to USPTO only to the
    extent appropriated by Congress. USPTO reports that, not unlike the situation faced by
    other federal agencies that depend on fee revenue, uncertainty about (1) the extent to
    which requests for services and related collections match estimates and (2) the level of
    collections that would be available each year complicates its ability to execute annual
    and multi-year plans.
     • To smooth the impact of economic downturns on operations and help address
        funding uncertainty, since fiscal year 2010 USPTO has been reserving a portion of
        the amount Congress makes available annually through appropriations as a
        designated operating reserve that could be carried over for use in future years, as
        USPTO is generally appropriated no-year funds.
     • As of March 2012, USPTO has published information on the management of its
        operating reserve, including rationale, purpose, expected level of reserves, and
        reporting. The agency is drafting a final operating reserve policy.
•   We have previously reported that a reserve is important for fee-funded programs to
    match fee collections to average program costs over time and because program costs
    do not necessarily decline if fee collections drop.10


10GAO-08-386SP.
                                                                                       Page 16




          19                                         GAO-12-514R Patent and Trademark Office
Using Fees: Access to Collections
(cont’d.)
•   In some years, Congress has made available to USPTO the full amount or more than
    USPTO expected to collect; in other years Congress has made less available.
     • USPTO has in some years collected more than it estimated; in other years, it
        collected less. Since 2000, USPTO estimated that it would collect $19.8 billion and
        has actually collected $18.8 billion.11
     • USPTO reports that cumulatively over $1 billion in fees collected since 1991 remain
        unavailable to USPTO without additional Congressional action.12
     • This long-standing issue, including the status and use of these excess collections,
        was central to the patent reform debate. As previously mentioned, any USPTO
        collections in excess of appropriations are to be deposited into the newly established
        Patent and Trademark Fee Reserve Fund. Because any appropriation, transfer or
        rescission from the fund would be clearly visible, we believe the Fund increases
        transparency for these monies.



11USPTO    reports that fee estimates during this time period included three years of legislative assumptions that did not materialize as expected and
significantly affected estimated fee collections.
12USPTO reports that this amount includes unavailable fees of $790.1 million and unavailable special receipt funds under the Omnibus Budget

Reconciliation Act of 1990 of $233.5 million.

                                                                                                                                             Page 17




           20                                                                        GAO-12-514R Patent and Trademark Office
Using Fees: Access to Collections
(cont’d.)
     •   The newly established Patent and Trademark Fee Reserve Fund does not ensure
         USPTO’s access to these funds because Congress must act to make the funds
         available.
          • Providing freer access to an agency’s fee collections can increase agency
            flexibility but may increase the need/desire for an oversight structure.13 Congress
            could increase accountability for and oversight of fee collections in various ways.
            For example, it could require more detailed spending plans, hold hearings on
            progress toward expected results, limit the availability or use of the collections in
            annual appropriation acts, limit the amount of funds an agency is permitted to
            carry over from year to year, or take a combination of these actions.
          • All of the stakeholder groups we interviewed cited fee access as a key concern.
     •   Two of the stakeholder groups we spoke with stated that members of the user
         community had expressed a willingness to pay more for better and faster service if
         USPTO were guaranteed access to all of its collections.




13GAO-08-386SP.                                                                           Page 18




          21                                           GAO-12-514R Patent and Trademark Office
Reviewing Fees: Oversight

•   USPTO has a robust fee review process:
     • USPTO submits biennial fee reviews to the Department of Commerce that list fees,
       fee rates, review dates, total collections and the number of transactions per fee.
     • USPTO publishes fees, actual collections, collection estimates, collection estimate
       assumptions, and a discussion of workload estimates in its annual budget
       submission.
     • USPTO reports that it internally performs fee analysis that compares fees to
       historical program costs on a regular basis.
     • In a June 18, 2008 notice of proposed rulemaking for fiscal year 2009, USPTO
       proposed changes to three fees. The proposal included information on average
       program costs for the activity in question.
         • However, USPTO did not include projected costs or how the costs were
           calculated; rather, information on how costs were calculated was included in
           the Final Rule.
         • USPTO stated that it followed the fee-setting guidance in GAO’s Federal User
           Fees: A Design Guide when developing its cost methodology and included
           projected costs when it published various notices of proposed rulemaking in
           early 2012.

                                                                                    Page 19




        22                                        GAO-12-514R Patent and Trademark Office
Reviewing Fees: Criteria

•   We have previously reported the following:14
         • Agencies should review fees regularly to provide transparency and ensure that
            fees remain aligned with program costs.
         • The risk of agencies that set their own fees artificially inflating their costs may be
            reduced—and tools for Congressional and stakeholder oversight enhanced—if
            an agency clearly reports its methods for setting the fee, including an
            accounting of program costs and the assumptions it uses to project future
            program costs and fee collections.
         • When an agency has authority to adjust a fee through the regulatory process, it
            should make substantive information about recent and projected program costs
            and fee collections available to the public through notices in the Federal
            Register.
•   Other sources of fee review guidance:
         • The Chief Financial Officers Act of 1990 and Office of Management and Budget
            Circular A-25




14GAO-08-386SP.
                                                                                          Page 20




          23                                           GAO-12-514R Patent and Trademark Office
Reviewing Fees: Stakeholder
Communication
•   Stakeholder communication regarding the AIA-related fee adjustments is under way.
    Stakeholder input on the AIA-related changes has been solicited via e-mail and postal
    mail.
•   Prior to the AIA, USPTO used Federal Register notices to solicit feedback on regulatory
    fee changes.
•   When forecasting fee collections, USPTO discusses current and future environment
    assumptions with stakeholders, other nations’ intellectual property offices, intellectual
    property organizations and bulk payment firms.
•   The AIA states that USPTO must solicit stakeholder input when setting fees through the
    regulatory process via
           • public hearings and
           • Federal Register notices.
•   USPTO advertised two public fee-setting hearings and seven AIA “road show” events
    nationwide to review patent operations and process changes in February and March
    2012.



                                                                                       Page 21




        24                                          GAO-12-514R Patent and Trademark Office
Reviewing Fees: Stakeholder
Communication (cont’d.)
•   All stakeholder groups we spoke with were generally satisfied with communication with
    USPTO and expressed confidence in USPTO’s current leadership. However,
      • some interviewees reported less successful communication under previous
          leadership and expressed concern that current success could diminish when
          agency leadership changes.
•   Stakeholder groups we interviewed noted that USPTO uses a combination of the
    following to communicate with stakeholders:
      • Webinars
      • Meetings
      • Newsletters
      • Website information
      • E-mail
•   PPAC members expressed an interest in receiving more written information and data at
    an earlier date prior to meetings with USPTO to better prepare for the meetings, as well
    as more detailed cost information as USPTO’s new fee-setting authority is exercised.



                                                                                       Page 22




        25                                          GAO-12-514R Patent and Trademark Office
Reviewing Fees: Stakeholder
Communication (cont’d.)
•   During the course of our review, USPTO officials requested examples of our previous
    work on successful fee reviews. We provided this information in October 2011 in order
    to inform USPTO’s development of its stakeholder communication approach for fees set
    under the AIA.
•   We have previously reported the following:
      • Effectively communicating with stakeholders involves sharing relevant analysis and
          information as well as providing opportunities for stakeholder input.15
      • Stakeholder collaboration was most successful in cases where substantive, two-
          way communication had taken place between the agency and stakeholders.16
      • Reliance on the Federal Register is insufficient for obtaining input, especially for
          nonfederal stakeholders.17
      • Agencies and nonfederal parties suggested making greater use of diverse
          communication technologies and venues to promote public participation.18
15GAO-08-386SP.
16See GAO, Federal User Fees: Substantive Reviews Needed to Align Port-Related Fees with the Programs They Support, GAO-08-321
(Washington, D.C.: Feb. 22, 2008), and Federal User Fees: Key Aspects of International Air Passenger Inspection Fees Should Be Addressed
Regardless of Whether Fees Are Consolidated, GAO-07-1131 (Washington, D.C.: Sept. 24, 2007).
17See GAO, Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews, GAO-07-791

(Washington, D.C.: July 16, 2007).
18GAO-07-791.


                                                                                                                                    Page 23




           26                                                                   GAO-12-514R Patent and Trademark Office
Conclusions

•   Through the AIA, Congress has provided USPTO the opportunity to consider and
    address many aspects of its funding model previously noted as challenges.
•   Now that USPTO has new flexibilities in designing its fees, it must consider a number of
    trade-offs to successfully design and implement its fee structure, including
      • who pays how much,
      • who subsidizes whom,
      • whether costs are recovered at the aggregate or activity level and how these
         choices incentivize/decentivize the use of various USPTO services, and
      • whether the expected results align with USPTO’s goals.
•   USPTO has taken steps to manage funding uncertainty by setting aside in an operating
    reserve a portion of the amount Congress appropriates to it; USPTO’s challenge is to
    develop controls and policies to ensure its use aligns with agency goals and its balances
    are sufficient to meet possible emergency needs.
•   USPTO has a strong stakeholder communication base on which to build in order to
    ensure transparency, encourage two-way communication, and promote acceptance of
    proposed changes, regardless of leadership changes.


                                                                                      Page 24




       27                                          GAO-12-514R Patent and Trademark Office
Recommendations for Executive Action

•   To strengthen transparency and communication during the implementation of the AIA
    reforms, we recommend that the Secretary of Commerce direct the Under Secretary of
    Commerce for Intellectual Property and Director of the U.S. Patent and Trademark
    Office to take the following actions:
      (1) Finalize an operating reserve policy, including the expected level of reserves, to
          smooth the impact of economic downturns on operations and to ensure its use
          aligns with agency goals.
      (2) Build on current communication success to provide stakeholders opportunities for
          substantive, two-way communication when seeking input on the AIA fee-setting
          process. Moving forward, this should include
           • providing an accounting of program costs and the assumptions used to project
              future program costs in biennial fee reviews and
           • clearly communicating its fee-setting methods and rationale for policy choices
              to provide Congress with sufficient information for oversight and transparency
              for stakeholders and the public.
      (3) Establish guidance and protocols for communication with PPAC and other
          stakeholders about the fee process in order to help ensure consistency over time
          and through subsequent leadership transitions.

                                                                                       Page 25




        28                                          GAO-12-514R Patent and Trademark Office
GAO on the Web
Website: http://www.gao.gov/

Contact
Chuck Young, Managing Director, Public Affairs, youngc1@gao.gov
(202) 512-4800, U.S. Government Accountability Office
441 G Street NW, Room 7149, Washington, D.C. 20548

Copyright
This is a work of the U.S. government and is not subject to copyright
protection in the United States. The published product may be reproduced
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because this work may contain copyrighted images or other material,
permission from the copyright holder may be necessary if you wish to
reproduce this material separately.


                                                                          Page 26




 29                                     GAO-12-514R Patent and Trademark Office
Enclosure II: Objectives, Scope, and Methodology


We performed our work under the authority of the Comptroller General in the context of
questions raised over time about how fee design affected both operations and oversight of
the U.S. Patent and Trademark Office (USPTO) and to inform USPTO’s implementation of
the fee-setting authority granted by the Leahy-Smith America Invents Act (AIA). Our
objective was to analyze how aspects of USPTO’s proposed user fee design may address
challenges facing USPTO and stakeholders. This review focuses on patent fees and
processes, excluding trademark fees and processes, because patent fees represent almost
all of USPTO fee collections. We assessed how USPTO fees are set, used, and reviewed
using criteria outlined in our Federal User Fees: A Design Guide. 1 We reported on issues
related to USPTO fee collections in a previous report. 2
To do this, we reviewed documentation from USPTO and the Department of Commerce’s
Office of the Inspector General. We reviewed relevant statutes and guidance governing
USPTO patent fee processes. We also attended a Patent Public Advisory Committee
(PPAC) public hearing intended to inform users about fee changes during AIA
implementation. We interviewed cognizant officials from USPTO, the Department of
Commerce’s Office of the Inspector General, as well as five of USPTO’s internal and
external stakeholder groups: PPAC, the Intellectual Property Owners Association, the
American Intellectual Property Law Association, the National Association of Manufacturers,
and the Association of American Universities. Stakeholder groups were identified either by
USPTO or our team as relevant stakeholder groups for USPTO. The list of stakeholder
groups selected was then limited to those with headquarters near Washington, D.C. We
selected these organizations in order to provide variation in organization type, member type,
and industry type.
We conducted this performance audit from June 2011 to April 2012 in accordance with
generally accepted government auditing standards. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives. We believe that the
evidence obtained provides a reasonable basis for our findings and conclusions based on
our audit objectives.




1
    GAO-08-386SP.
2
    GAO-10-11.

30                                              GAO-12-514R Patent and Trademark Office
Enclosure III: Comments from the Department of Commerce




31                                       GAO-12-514R Patent and Trademark Office
32   GAO-12-514R Patent and Trademark Office
33   GAO-12-514R Patent and Trademark Office
Enclosure IV: GAO Contact and Staff Acknowledgments
GAO Contact         Susan J. Irving, (202) 512-6806 or irvings@gao.gov


Staff           In addition to the contact named above, Jackie Nowicki,
Acknowledgments Assistant Director, and Elizabeth Hosler, Senior Analyst-in-Charge,
                managed all aspects of this assignment. Vida Awumey, Hayley
                Landes, Felicia Lopez, Julia Matta, and Elizabeth Wood made key
                contributions to this report.




(450934)


34                                           GAO-12-514R Patent and Trademark Office
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United States. The published product may be reproduced and distributed in its entirety
without further permission from GAO. However, because this work may contain
copyrighted images or other material, permission from the copyright holder may be
necessary if you wish to reproduce this material separately.
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