Medical Device Link.

Originally Published MX March/April 2004

INDUSTRY ASSOCIATIONS

Legislation to restructure funding for the patent office will help ensure adequate review and protection of medtech intellectual properties.

Benjamin H. Wallfisch

The U.S. Patent and Trademark Office (PTO) serves a critical role for medtech companies. A healthy and predictable patent review system is essential for the medical device industry. Innovators need to be able to protect their inventions, and patent and trademark reviews must be thorough and timely.

Benjamin H. Wallfisch is policy director of the Medical Device Manufacturers Association (MDMA; Washington, DC). MDMA has joined with other organizations in the 21st Century Intellectual Property Coalition to encourage Congress to address the issue of patent fee diversion.

Unfortunately, the PTO is increasingly unable to fulfill this mission. Inadequate resources and understaffing have led to an increase in application review times and a decrease in the quality of review decisions. To its credit, however, the PTO has prepared a plan to reverse this trend. The Bush administration, Congress, and industry all support the plan. But the plan cannot be implemented unless a fundamental flaw in the PTO's funding structure is eliminated.

As it stands now, not all the fees collected by the PTO remain with the agency. In a practice known as fee diversion, Congress directs a significant portion of those fees toward other purposes. Unless this practice is halted, the PTO's plan for improvement cannot be implemented.

Fixing the PTO

Though it should take the PTO no more than 18 months to review and rule on a patent, the current average review time is 26 months. If nothing is done, says the PTO, this will increase to more than 40 months by 2008. In the same time frame, the number of unexamined patent applications will more than double. More than 140,000 patents that should have been issued in that period will remain in limbo.

To address these concerns, the PTO submitted to Congress its 21st Century Strategic Plan in June 2002 and released a revised version in February 2003 (see sidebar, page 23). The PTO also presented legislation to increase and restructure the user fees paid by patent and trademark applicants.

To improve the quality of reviews, the plan would improve training and certification of examiners and expand "second-pair-of-eyes" review for selected technologies. The plan would also allow the PTO to competitively outsource the agency's search function, freeing up examiners' time for the office's core function—determining patentability. In addition, to speed reviews, the plan would allow the PTO to hire as many as 3000 more patent examiners over the next five years.

The proposal would replace the current single-track examination process with a multiple-track system. The various tracks would be distinguished by the nature of the patent search involved and whether the PTO or a commercial service conducts the search. The fees for each track would vary according to the amount of work required of the PTO.

In addition, the PTO would restructure the initial filing fee. Under the current system, the applicant pays a single, nonrefundable filing fee. Under the proposed system, a somewhat higher combined fee would be charged for filing, search, and examination. If the applicant were to withdraw the application before the search or examination has begun, the PTO would refund the portion charged for the search or examination.

Finally, to further streamline the agency's operations, the strategic plan would quickly implement electronic patent applications, moving toward a near paper-free system and thereby improving productivity and reducing costs to the PTO.

The House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property has held several hearings over the past two years to examine the PTO and consider ways to improve it. After five months of collaboration between the PTO and affected industries, the plan was revised and improved to the satisfaction of both industry and the government. This revised plan is supported by the Bush administration and the Office of Management and Budget. Despite broad agreement, the strategic plan has yet to become a reality. Why? The reason is simple: fee diversion.

Understanding Fee Diversion

In contrast to FDA, for which user fees are a supplement, the PTO is funded entirely by fees. Each year, however, a significant portion of those fees is diverted away from the PTO to unrelated government programs. While the PTO struggles to implement needed reforms, this appropriations loophole regularly bleeds it of needed funding. Since 1992, $650 million in user fees paid to the PTO have been diverted to other government programs.

The House and Senate appropriations committees have the authority to define a budget line-item for the PTO each year. By appropriating a figure less than what user fees are expected to bring in, fee revenue above that figure is diverted into the general treasury, funding other, unrelated government programs. This has occurred in each of the last 12 budget cycles.

The agency claims it cannot act on its plan without additional funding. For this reason, the PTO submitted a legislative proposal that included user fee increases of between 15 and 25%. On the whole, industry supports these increases. But the proposal raises the puzzling question of why the agency does not have access to all of the fees it is already paid. If the PTO so desperately needs additional funds, why does Congress persist in diverting its fees?

Industry groups are loath to support any fee increases without an end to fee diversion. They fear that even more funds will be diverted and the PTO will still be unable to improve its operations.

The Bush administration seems to be moving toward ending fee diversion. President Bush's budget for fiscal 2004 proposed to cut the level of fee diversion in half. In fact, estimated diversion in FY04 is at its lowest level since fee diversion began 12 years ago.

In the face of heavy criticism, commerce department officials have also worked to end fee diversion and ensure that the PTO fosters economic growth and technological development. Commerce secretary Don Evans has called for an end to fee diversion. The former director of the PTO, James Rogan, has also been a vocal opponent of fee diversion.

The Need for Legislation

Although the rate of diversion has recently decreased, the practice continues. So long as it does, applicants have no assurance that their fees will be used for the intended purpose. Since congressional appropriations committees are extremely reluctant to cede budgetary authority over the PTO, only legislation can solve this problem.

Last year, as in the past, there were significant legislative efforts to end the practice of fee diversion. The U.S. Patent and Trademark Fee Modernization Act of 2003 (H.R. 1561) was introduced by Representative Lamar Smith (R–TX) and approved by the House Judiciary Committee in July. An identical companion bill (S. 1760) was introduced in the Senate by Senator Norm Coleman (R–MN) in October. The legislation would implement a 15 to 25% increase in PTO user fees. More important, it would end fee diversion. User fee revenues would be made available exclusively to the PTO, thus moving the agency "off budget." By increasing fees and ensuring that the agency has full access to the funds it collects, the legislation would give PTO the additional funds it requires to fulfill its strategic plan.

The 21st Century Intellectual Property Coalition is a diverse group that has spent years working to oppose user fee diversion. It supports the legislation and has lobbied to build support in Congress. To date, 91 companies and 28 associations in the coalition have weighed in against fee diversion. As a result, the congressional IP caucus circulated a "Dear Colleague" letter opposing fee diversion, signed by a bipartisan list of 21 legislators. Another letter, signed by 16 members of the congressional High-Tech Working Group, has also been circulated.

Although H.R. 1561 and S. 1760 did not make it to the legislative finish line in 2003, the industry coalition hopes that fee diversion will be a priority for Congress in 2004. Congressional leadership has indicated an interest in the issue, and it could be one of the first topics addressed in 2004.

Impact

Device companies already face a long regulatory road to bring new products to market. Slow patent reviews are yet another barrier to getting improved treatments to the patients who need them. In addition, small companies with limited funding sources might not be able to survive lengthy patent review times. Patent pendency should be no more than 18 months—it now takes on average more than two years.

Clearly, it is in the interest of the medical device industry to maintain pressure on Congress to put an end to fee diversion. Customers of the PTO concerned about fee diversion should contact their members of Congress soon and tell them to support H.R. 1561 or S. 1760. Ending this practice would bring much-needed improvement to the country's intellectual property system.

Copyright ©2004 MX