By: Edward G. Tutle, President/Consultant TUTLE INTERNATIONAL Technology Marketing 2601 Seabreeze Ct., Orlando, Florida 32805 USA
Maintenance fees, and the foreign patent office annuities, are taxes for no useful service to patent owners! These taxes are coercively effective in revenue production but are counter-productive to the purpose for which a government grants patents, which was to encourage competitiveness and innovation. These taxes were not constitutionally mandated, but when, in the pursuit of revenue, these taxes were created were not to be a principal source of income for patent offices. Original purposes were not easily quantified but revenue needs were, and now direct tax revenue acquisition means seem to be the primary purpose of government agencies. This trend must be reversed and a number of factors will be presented to show the deleterious effects of this tax. Further we can show the tax is not needed as it can be replaced by a revenue neutral fee for services schedule, which is less costly to all patent owners, allows restoration of a full patent term (as opposed to the present rent-a-patent under a term lease scheme), and is a means to enable foreign owners of US patents to also not pay maintenance, if by reciprocity US owners of foreign patents receive like treatment. Our objective is to cause constructive legislative change by enlightened legislators with concerned constituents.
REALITIES AND PREDATORS
People who deal with patents may not know some of these factors which negate the value of this form of intellectual property. Consider that maintenance:
* Provides no constructive benefit to patent owners unless you buy that it is necessary to enable operations at the patent office.
* Administration is costly for the patent office(s) and for patent owners. (About $1 million/yr-USPTO)
* Is a means for double taxation if the patent owner is
Is coercive as payment is required to keep the patent in force, or it will be prematurely expired by the Government without compensation to the owner for the investment made in obtaining the grant.
* Is coercive as it forces owners to bet against later patent term commercialization success by not paying the tax, because expense cannot be justified at a particular time.
* Is an expense to US taxpayers when patents of the Government are prematurely expired because budget managers will not authorize payments on yet to be exploited inventions. (A 1993 USPTO study found only 21% of US Govt. patents survived second stage maintenance, as opposed to 54% of foreign govt. owned US patents. )
* Is a tax the US Government assess on itself, at the large entity rate, and ignores the investment made in obtaining the patent and, when prematurely expired, the patent can't be licensed. The government employee inventors thus are denied potential royalties, and these properties become unprotectable thereby reducing interest in the related technologies for commercial exploitation.
* Requires those licensing Government owned patents to answer in candor, whether the technology is covered by unexpired patents. A study based on GAO data in 1991 showed of 11075 patents issued to the Government entities, and subject to maintenance, only 661 were licensed. Based on practice, patents which are not licensed by the first maintenance stage are allowed to expire. This suggests that less than 10% of Government owned patents are still in force. This means that 90% of taxpayer investment has been abandoned. Average investment in industrial quality patents is about $50K therefore about $500 million of taxpayer investment was abandoned in the name of economy. People have been brought up on charges for less!
By now reason would rule if it were not for the Predators, who find profit in prolonging ignorance of realities. Consider that:
a) Attorneys who litigate for infringers do not want to have "adversely held" patents in force, and find that maintenance taxes will aid in "clearing away the dead wood", or read that as "patents we don't own".
b) If patents would be allowed to full term infringers would have to ask for licenses which might be expensive or not attainable. The Government helps in this process by the means of the maintenance tax which many law firms support, and have influence at the patent office. Not all firms agree that it is in the best interest of all their clients and believe eliminating the maintenance tax would increase patent filings, particularly by small entities.
c) There are legal and maintenance service firms who do good business in servicing owner-client needs, and are not inclined to give up this source of revenue. A greater good is not up for consideration.
d) Predators many times recognize the value of certain issued patents they would infringe, but if there is no current economic or market imperative, they will not show interest in offered licenses. Many times owners are forced to abandon their investment because of lack a market interest or funds to develop the inventions. Predators have found that forced a bandonment provides windfalls and saves their clients money in licensing fees and royalties. This practice does not encourage the early exploitation of inventions for the public good, which could be possible if licensing was encouraged, by eliminating premature patent expiration windfalls.
e) In *FY'95 about 30,000 issued US patents prematurely expired because of the maintenance tax. The US issued about 103,000 patents in that period, with a significant loss of owner investment. Predators have a fertile field to harvest. The Government abandons patents having investment value much greater than the income generated from licenses because of there now truncated patent portfolio. The Government freely transfers technology without compensation, by these abandonments, which is counter to the intent of the Technology Reinvestment Program. We can remind everyone that Government inventor-employees do not receive royalties when their inventions can't be licensed, if the related patent has been expired. So much for invention incentive programs. (*FY - fiscal year ending each Sept. 30)
A CONTRARIAN'S CAMPAIGN
The author is a small entity inventor who has a patent for a robotics machine which requires expensive further development in a new field of use. As such it has potential and those skilled in the art admit it could be successful, when and if a working prototype is built. We are now past the 1st and 2nd stages of maintenance and will be faced with a large payment to the Government. This is an expense not needed when one is yet to derive revenue from the invention. This situation is common to Government laboratories who have patented "late blooming" inventions and are pressured to abandon their investment.
About four years ago this author learned of a plan to "corporatize" the patent office and introduce a seven stage maintenance scheme. The proponent was a large entity intellectual property association. Upon researching the matter this author found the proposed maintenance scheme would bring in much less revenue to the USPTO than was earned under the existing fee structure. Further the "PatCorp" would borrow up to $2 billion to fund the new quasi-government corporation. Even with the latest fees debt service would require significant fee increases, which could really price patents out of reach for all but the most well endowed. The seven stage scheme was not realistic as it would encourage premature expirations because it would bring the total maintenance fees/patent to $17K and $35K, if paid to the full term.
The "corporatization" matter is again before Congress in the spring of '96 and many are concerned that this will not result in benefits to small entities. Previous campaigns extolled the virtues of corporatization and of low costs for "users" of the patent office. This disingenuous approach was exposed when people discovered the impact of the seven stage maintenance tax. What other evils dwell in the hearts of the proponents? Now however, it is a good time to bring attention to a plan which will end patent maintenance for the collective benefit of all "users".
Analysis and experience, by the USPTO, shows considerable attrition of patents in-force as the fees are increased. This results in significant loss of operating revenue to the patent office.
This author has legally obtained USPTO income details for the last five years and using this data has derived a revenue neutral means to eliminate maintenance fees. By so doing we can actually reduce the cost of patent ownership and gain other benefits for all US patent owners.
*WARNING*: The plan to end maintenance will increase only filing and issue fees for utility patents...but *CAUTION* is advised before leaping to negative conclusions. The plan is to add a surcharge to the existing fee structure to cover the income received by way of maintenance fees. "Users" must realize that the USPTO will use all revenue received and will not give up income. Analysis of income statements showed significant decline in payments for the 2nd and 3rd stages, which results in lost income and is the cause for the 30,000 premature expirations annually. However, about 85% of issued patents are maintained through the first stage. An algorithmic approximation was derived to offset maintenance which preserved the large/small entity differential and placed 1/2 of the annual surcharge amount on all filings and issues in the given year. This roughly amounts to slightly more than the first stage fee paid by most owners but occurs in two half payments. This provides revenue for actual services when performed, and not by outyear income. This also reduces the ownership cost while providing the same revenue to the USPTO. The Commissioner's office knows of this plan by details provided by the author after each annual analysis of their income statements.
Some numbers will justify and illustrate how the plan works. Please note that the average cost to process a patent to issue in 1992 was $2200. In recent years:
USPTO YIELD/PATENT ISSUED---FY'94-----FY'95 Without maintenance income............ $2152.......$2534 With maintenance income..................$3579.......$4402
Actual cost data for FY'95 is not available but the workload increased by approximately 5% for about 4% more issues in'95 compare to '92. We can assume the average cost increased over the period, by 8 % or about $2400, suggesting that cost is almost met without the maintenance tax, if the cost accounting methodology remains the same. *NOTE* that all calculations were made only for utility patents since maintenance is assessed only for these patents. All other preissue fee income did not apply because only filing and issue fees, when paid, are constants to the patent process. Also it should be known that filing, issue, and maintenance fees alone account for 81% of all patent income (which does not include trademark workload). In FY'95 total USPTO income came out to $646,186,613 of which $68,486,794 were exclusively trademark related. This shows that the USPTO could be a Fortune 500 list enterprise!
Some individuals and organizations are against any increase in fees, for reasons of self interest, ignorance, or combination thereof. It has taken some time to analyze the real cost of maintenance and to develop an argument against those opposing any fee increases, however beneficial the outcome. So it is important to look at some numbers...
Fees/Entity '91 '92 '94 '95 File Sm $315 $345 $355 $365 Lg 630 690 710 730 Issue Sm 525 565 585 605 Lg 1050 1130 1170 1210 1st Ma. Sm 415 450 465 480 Lg 830 900 903 960 2nd Ma.Sm 835 905 935 965 Lg 1670 1810 1870 1930 3rd Ma.Sm 1250* 1365* 1410 1450 Lg 2500* 2730* 2820 2900
* 3rd stage maintenance income became significant after FY'93. By '95 the distribution of 140717 patents for which the tax was paid expressed as a percentage of patents maintained and income was:
Stage 1st 2nd 3rd Small entity (of 31480) 62% 29% 8.6% " " (of Maint $) 42 40 17 Large entity (of 109237) 52 32 14.7 " " (of Maint $) 32 40 27
(There is a minor relationship change each year which can be ignored in future fee adjustments.)
FY'95 Maintenance tax yielded $192,916,307 and entity distributed:
Small $22,216,073 Large $170,700,324
NOTE: The Maintenance income is the largest income producer of the USPTO, followed by Filings and Issues, all other income contributing much less. It should be known that income is not proportional to the number of patents issued in a given year. The yield/patent issued calculation was based on:
FY'94 FY'95 Patents issued 104283 103225 Maintenance fees $148,748,491 $192,916,307 Maint.+Patent fees $373,213,285 $454,436,130
By way of example let us look at the Government fee cost of patent ownership for 1995, ignoring the miscellaneous fees which can be imposed randomly during the patent process:
By entity Small Large Filing+Issue $970 $1940 Cumulative cost : When 1st Maint. paid 1450 2900 ------------------------------------------------------------------# When 2nd Maint. paid 2415 4830 When 3rd Maint. paid 3865 7730
These are the investment/patent 12 years from issue!
If we are to introduce the Maintenance Replacing Surcharge (MRS) the cost including present fees:
Filing+Issue w/MRS $1570 $3766 -----------------------------------------------------------------# "Tutle plan" savings: 2295 3964 (When compared to highest cumulative cost by entity)
#----It should be noted that the actual cost under the Tutle plan would be slightly more than the present cumulative cost at first stage (above) but considerably less than this cumulative 2nd stage cost. Since 80+% of patents are paid through the first stage this is not a real investment burden on most patent owners!
PLEASE NOTE! The above figures are subject to change as fees are adjusted and the number of filings and issues change in any given year. The fee history is known and can be predicted as it is based on some pricing scheme such as the Consumer Pricing Index (CPI). It is possible to annually anticipate the MRS based on the previous FY data with reasonable accuracy but not with hindsight precision, which is not required as a practical matter.
One may notice an anomaly in the surcharge formula for large entities where the MRS is more than the sacred 2x the small entity fee. The rationale is to provide reduced small entity fees approximating the normal fee (2x) differentials, income loss recovery from the large entities who will pay their full MRS plus an income loss offset premium. It must be noted that 1/2 the respective surcharges are applied to the stated filing and issue fees in any given FY. While this is not rigorously correct for cost recovery it is close enough for fee setting in any given year.
This plan was evolved when we found that annual filings are about twice the number of issues, and each was a paid-up transaction T. If we make the annual maintenance M, the annual surcharge S, is M/T. The actual MRS for small entities is S/2 and large entities MRS pay S+S/2(Tsm), where Tsm is the sum of small entity filing and issue transactions in a given year. For FY'95, M/T=$542 and the large entity premium was $121, with each entity paying 1/2 of their MRS on each filing and issue fee in that year. Based on earlier exercises the surcharge for '93, based on '92 data, was $340 (which did not have 3rd stage income as a factor). We can almost set M/T at $542 for the next year or two, added to the normally escalating schedule of filing and issue fees and reasonably set the MRS, without material income gain or loss to the USPTO. Do not try this at home because the PTO has the data for closer annual fee setting.
The above exercises were carried out over recent years and we can conclude that ending maintenance is feasible without actually reducing USPTO income.
In the process of maintenance elimination we also do away with the hidden administrative costs to all patent owners which alone is a significant benefit. We can also plan that our patents will remain if force for the normal term as was envisioned by our founding fathers, before the tax engineers held sway.
As we were able to repeal prohibition of alcoholic beverages, we can repeal maintenance. However this exercise allowed us to learn it is possible to reduce taxes and still meet expenses with something left over! But now let us consider that between 45-50% of the patents issued in the US are owned by foreign entities. These entities would also be treated to maintenance free patent terms, which then allows us to consider that US owners of foreign patents are assessed onerous escalating "annuities". In the spirit of reciprocity we can grant foreign owners maintenance free US patents if US owners are given equal treatment. IF NOT, we will assess these owners the same fees we are charged in their countries, by means of new legislation. The existing $1 million/yr. USPTO administration of the maintenance program can be utilized to assess foreign owners of US patent the same annuities as they charge in their countries, or we will prematurely expire their US patents. This equitable extraterritorial activity will be resisted by some as a interference in the affairs of other countries. This author has been assured by patent attorneys in other countries that the elimination of annuities would foster renewed emphasis on patents in their countries. This may "encourage" other governments to rethink their patent taxing policies, based on the American experience. Of course we must learn to resist the influence of patent predators described earlier, and who also exist in foreign lands.
The following is taken from our proposals of 1992 and still can be the basis of legislation for constructive change of US patent practices:
1) Eliminate all patent maintenance fees for US persons owning utility patents. This would also apply to foreign co-owners.
2) Non-US owners of US utility patents will be assessed a maintenance fee equal to that assessed against US owners of equivalent patents in their country, with the frequency of payment equal to that practiced in such countries.
3) Rescind 37 CFI 1.20 and replace with regulations covering selective maintenance of patents of non-US owners of US patents.
4) Enabling legislation shall allow the USPTO to continue the index determined escalation of fees and to introduce a Maintenance Replacing Surcharge (MRS) to recover the maintenance fee income totals using the method demonstrated for FY'95 and as projected by algorithmic methods, using actual previous year data, and applied to small and large entities (with a small entity offset premium paid by large entities to preserve the nominal small entity fee concession in force for many years).
5) To enable owners of prematurely expired US utility patents to restore their patents for the normal term, upon payment of a current reissue fee, with the proviso that such restored patents will be licensed, at royalty rates and conditions found in license agreements contemporaneously in force for similar technologies, expediently and equitably negotiated and to be royalty free for the licensee from the date of premature expiration to the date of reissue, and the patent owner will not stop use of the newly restored patent(s) while licenses, or cross licenses, are under negotiation.
This author has expressed concerns about attempts to "corporatize" the USPTO since 1992 as stated before. If corporatized there would be a shifting of expenses with no assurance that the cost of operations will not increase. The new debt obligations must be met with an increase of fees for services rendered. If fees are increased the slow increase in applications will be reversed with resultant revenue loss. The "patent office users" market is finite and reasonably predictable and would not appear to cover any significant operations cost increases over those experienced in the present structure. As this author is driving for reduced or stabilized costs which will allow elimination of maintenance fees, a plan to corporatize is considered to not be in the best interest of patent office users or of Patent Office Professionals.
Earlier proposals to corporatize would cause to USPTO to lose sovereign immunity. If so it could be sued for damages to others. Since this author saw that maintenance fees caused a taking by the government by imposed lost investment to patent owners, an analogy to racketeer influenced schemes of protection was realized. Consider that as a patent owner I am like a small shopkeeper who has received a license to run a business, and after a time I am visited by a mob bag man. He contributes nothing to my business but will allow me to stay in business if I periodically pay him, or he will throw a brick through my window or worse. The PTO's brick through my window is the effective loss of my investment in obtaining a patent, and allowing the looting of my now unprotected technology. Perhaps we can find application of the RICO law in this instance and sue the "PatCorp", in a class action and end certain "corrupt" practices. Would it not be ironic if the Government were able to sue for lost taxpayer investment in prematurely expired US owned patents. This is not far fetched as the US Government taxes itself when it pays maintenance fees!
It is now time for patent owners to unite in lobbying congress to make user cost reducing changes in the USPTO by eliminating maintenance and rethinking the establishment of a corporatized USPTO. 30.  USPTO report-"Payment of Maintenance Fees to Maintain Patent Rights In Force-Patents Granted 1981to1989", May 1993.
Copyright ( I996 E.G. Tutle [96EGT034 (1-5)]...... Permission is granted to make copies for non-commercial use of the above work, providing this statement and copyright notice is also shown. E.G. Tutle may be reached at : firstname.lastname@example.org or at 407/423 8016 (Ph), or 407/422 8821 (Fx) in Orlando
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