Michael Frakes & Melissa Wasserman – Does Agency Funding Affect Decision Making?: An Empirical Assessment of the PTO’s Granting Patterns

Does the Patent and Trademark Office's (PTO’s) budgetary structure influence the rate at which patents are granted? In Does Agency Funding Affect Decision Making?: An Empirical Assessment of the PTO’s Granting Patterns, 66 Vanderbilt Law Review (forthcoming 2013), Professors Melissa Wasserman and Michael Frakes analyze more than two decades of patent grant rates to identify how factors like entity size and technology affect an applicant’s ability to receive a patent. The results of this study suggest that financial incentives, and not just the merits of the invention, may be, in part, driving patentability decisions.

The Article lays the premise for its argument by first establishing the fee structure of the PTO. Historically, the PTO was funded by the taxpayer. But in 1991, the funding of the PTO was changed so that user fees would comprise close to 100% of the Agency’s budget. During this time, Congress retained fee setting authority and required the PTO to receive Congressional approval to spend the collected fees. Since 2004, the PTO’s budget has been determined by its anticipated revenue stream; leading to budget surplus in some years and deficits in others. Yet, as vital as these fees are to the operation of the PTO, many fees don’t match up with their associated expenses.

The Authors highlight that examination fees make up 30% of the PTO’s budget. In 2011, it cost the PTO $3,600 to examine a patent; however, the large entity examination fee was only $1,090. This cost discrepancy is further exasperated if an applicant qualifies as a small entity, as their examination fees are reduced by 50%. Therefore, the PTO becomes reliant on maintenance fees to make up the cost difference. Maintenance fees are required to be paid every 3½, 7½ and 11½ years in order to maintain the patent’s protection. Again, these fees are reduced if the payer is a small entity. The Authors argue this dependence on back-end fees may incentivize the PTO to grant more patents than it normally would allow.

Next, the Authors address several factors that are likely to influence an application’s grant rate. As previously discussed, entity size plays a large role in the fees collected by the PTO. A PTO that is responsive to this fee differential can instruct examiners to grant more patents filed by large entities relative to patents filed by small entities. Additionally, the PTO is likely to be cognizant of the likelihood a given technology will pay a maintenance fee. A PTO that is responsive to the profitability implications of varying renewal rates may then instruct examiners to grant more patents in certain technology classifications relative to others.

So what results did the study show? It appears that the PTO is not universally seeking to expand its revenues in response to the incentives created by its user-fee funded structure. Rather, it may tend to use its granting practices as a revenue-generating tool only when necessary to sustain itself. The data shows that, following the adoption of a fully-user fee funded system, the PTO granted patents at an incrementally higher rate to patents within high-maintenance-rate categories relative to those within lower-maintenance-rate categories. Importantly, the data shows that this behavior is increased when the PTO is in need of more funds. With respect to entity size, the data supports the view that, after the 1991 fee reform, large entities have a 9% higher grant rate than small entities. Like renewal rates, it appears that the PTO distorts its behavior so as to increase grant rates to large entities when it is financially constrained.

This study undoubtedly will provide important insights for the PTO, as the America Invents Act has recently granted the Agency with fee setting authority. On February 7, 2012, the PTO released its proposed fee changes. The Office proposed a 47.2% increase in examination fees (combined filing, search, and examination fees). Similarly, the PTO suggested a 46.9% rise in maintenance fees (assuming all three renewal fees are paid). While these proposed changes would appear to do little to alleviate the problems exposed by the Authors, the PTO has also proposed raising fees associated with patent rejections, reexaminations, and inter partes reviews. The PTO has proposed significant increases for filing requests for continued examination (83% increase), appeals (142% increase), ex parte reexamination (600% increase), and inter partes review. These changes would make the fees commensurate with the costs of the services. It will be interesting to see the impact these proposed fees have on future grant rates and whether the PTO will tweak their fees over time to react to budgetary biases.

Posted by Bryan Parrish (bparrish@smu.edu), a registered patent agent, research assistant to Sarah Tran, and a 2014 Juris Doctor candidate at SMU Dedman School of Law.