Plato’s observation “necessity is the mother of invention” has played a key role in the success of our capitalistic system. The country’s founders, concerned about economic development and security, recognized that basic human endeavor by drafting a Constitutional provision authorizing Congress to “promote the progress of science and the useful arts, by securing for limited times to authors and inventors the exclusive rights to their respective writings and discoveries.”

Since 1790, patents have provided its owners exclusive rights for a limited time. Throughout U.S. history, economic prosperity has been fueled by patents, creating jobs and sometimes whole industries. Patents issued to Chester Carlson, Ted Hoff, and Steve Jobs and Steve Wozniak, inventors of the photocopier, microprocessor and personal computer, respectively, are examples. Success stories encourage the investment community to continue to invest in new ideas. Venture capital investment  increased last year to $21.8 billion, playing an important role in creating millions of U.S. jobs and helping maintain the U.S. as a leader in technology innovation. Existing companies may invest in new business opportunities. But critical to most of these investments is a sound intellectual property position to protect those investments, since intellectual property rights can provide barriers to market entry.

By necessity therefore, it is important that investors and companies be able to properly assess intellectual property rights prior to their investment. Such assessment is easier if the U.S. Patent and Trademark Office has reviewed any relevant patent applications. Without such review, investors and companies cannot know of the ultimate disposition of the intellectual property rights. As a result the investor takes risks, and the companies seeking investment may need to concede lower valuations than might otherwise be appropriate, while those companies pursuing new business opportunities must assess the risk of greater competition in the absence of protection.

So, it is critical that the USPTO function properly to fulfill its role in helping determine what intellectual property rights, if any, will be accorded to inventors.  And timing can be everything.  With an average pendency of almost 3 years, there are over 1.2 million patent applications now pending, and over 700,000 awaiting initial review. The backlog and pendency period is a central issue for the USPTO Director, when he goes before Congress every year to discuss and request money for the agency’s budget, currently slightly more than $2 billion. However, the USPTO is fiscally unique, since it can offset its costs because of its authority to set its own fees for the services it provides to patent applicants. And the USPTO receives enough revenue to generate a surplus – so there should be enough profit to make the necessary changes to help reduce the backlog, right?

Unfortunately, that is not the case.

In fact, the Patent and Trademark Office has no control over the revenue it earns. And what Congress gives, it can take away.

In its Strategic Plan 2010-2015, the USPTO makes clear that a strategic goal is to optimize patent quality and timeliness. This requires both an increase in examination  capacity achieved by increasing strategic hiring and creating better working conditions to decrease attrition, and improved efficiency achieved by streamlining the examination process and providing better tools and IT infrastructure. But all of this requires money. And any efforts for the USPTO to improve the timeliness of the patent process must take a back seat to budgetary pressures.

On April 29, 2011, the USPTO issued a press release establishing a hiring freeze and a limit on training for the rest of this year, suspending overtime and postponing planned capital investments in the PTO IT infrastructure, the planned opening of a satellite office in Detroit, and a program for prioritizing applications, all as a result of the recent passage of the FY 2011 budget which included an authorization to withhold from $85 million to $100 million from the agency. No doubt this inadequate funding will continue in FY 2012.

The battle over funding in the face of Congress’ appropriation of USPTO surpluses has been going on for many years, and was even challenged in court – but to no avail. Estimates are that over $800 million in surplus has been withheld from the agency since 1992. What is needed is Congressional approval through legislation to allow the PTO to keep its surplus revenue so that it has the means to achieve its strategic goals.

Senate Bill S23 addressing patent reform, recently passed by the Senate, contains a provision that would allow the USPTO to adjust its fees in order to recover its estimated costs. However, there is nothing in the bill that allows the PTO to hold onto any surplus. Nor is there anything in the corresponding bill currently before the House. It is difficult to see how the provisions of the proposed legislation will in any significant way address the delay issues, and for that matter encourage innovation.

Judge Paul R. Michel (Ret), former Chief Judge of the Court of Appeals for the Federal Circuit, recently testified before the House stating:

“In my opinion, the most important question relating to the patent reform and economic recovery is how to rev up this engine of innovation. The answer requires determining the causes of its decline. I conclude that in a single word, the primary cause is DELAY, especially the long delays in obtaining patents on new technology. … The most important step for Congress is to provide the PTO with the resources it needs to examine patent applications expeditiously and carefully.”

“…my principal recommendation is this: above all, fix the PTO funding problem.”

I couldn’t agree more.

Judith L. Toffenetti is a partner in the Washington office of McDermott Will & Emery. She focuses her practice on life sciences and biotechnology, with particular emphasis on patent prosecution, licensing and strategic client counseling.