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Daily Rules, Proposed Rules, and Notices of the Federal Government

DEPARTMENT OF COMMERCE

United States Patent and Trademark Office

37 CFR Parts 1, 41, and 42

[Docket No. PTO-C-2011-0008]

RIN 0651-AC54

Setting and Adjusting Patent Fees

AGENCY: United States Patent and Trademark Office, Department of Commerce.
ACTION: Notice of proposed rulemaking.
SUMMARY: The United States Patent and Trademark Office (Office or USPTO) proposes to set or adjust patent fees as authorized by the Leahy-Smith America Invents Act (Act or AIA). The proposed fees will provide the Office with a sufficient amount of aggregate revenue to recover its aggregate cost of patent operations, while helping the Office implement a sustainable funding model, reduce the current patent application backlog, decrease patent pendency, improve patent quality, and upgrade the Office's patent business information technology (IT) capability and infrastructure. The Office also proposes to reduce fees for micro entities under section 10(b) of the Act (75 percent discount). The proposed fees also will further key policy considerations. For example, the proposal includes multipart and staged fees for requests for continued examination and appeals, both of which aim toincrease patent prosecution options for applicants.
DATES: The Office solicits comments from the public on this proposed rulemaking. Written comments must be received on or before November 5, 2012 to ensure consideration.
ADDRESSES: Although comments may be submitted by postal mail, the Office prefers to receive comments by electronic mail message over the Internet, which allows the Office to more easily share comments with the public. Electronic comments are preferred to be submitted in plain text, but also may be submitted in ADOBE(r) portable document format or MICROSOFT WORD(r) format. Comments not submitted electronically should be submitted on paper in a format that facilitates convenient digital scanning into ADOBE(r) portable document format.

The comments will be available for public inspection via the Office's Internet Web site (http://www.uspto.gov). Because comments will be made available for public inspection, information that the submitter does not desire to make public, such as an address or phone number, should not be included in the comments.

FOR FURTHER INFORMATION CONTACT: Michelle Picard, Office of the Chief Financial Officer, by telephone at (571) 272-6354; or Dianne Buie, Office of Planning and Budget, by telephone at (571) 272-6301.
SUPPLEMENTARY INFORMATION: I. Executive Summary A. Purpose of This Action

The Office proposes these rules under section 10 of the Act (section 10), which authorizes the Director of the USPTO to set or adjust by rule any patent fee established, authorized, or charged under Title 35, United States Code (U.S.C.) for any services performed by, or materials furnished by, the Office. Section 10 prescribes that fees may be set or adjusted only to recover the aggregate estimated costs to the Office for processing, activities, services, and materials relating to patents, including administrative costs to the Office with respect to such patent operations. Section 10 authority includes flexibility to set individual fees in a way that furthers key policy considerations, while taking into account the cost of the respective services. Section 10 also establishes certain procedural requirements for setting or adjusting fee regulations, such as public hearings and input from the Patent Public Advisory Committee and oversight by Congress.

The fee schedule proposed under section 10 in this rulemaking will recover the aggregate estimated costs of the Office while achieving strategic and operational goals, such as implementing a sustainable funding model, reducing the current patent application backlog, decreasing patent pendency, improving patent quality, and upgrading the patent IT business capability and infrastructure.

The United States economy depends on high quality and timely patents to protect new ideas and investments for business and job growth. The Office estimates that the additional aggregate revenue derived from the proposed fee schedule will enable a decrease in total patent pendency by 12 months for the five-year planning horizon (FY 2013-FY 2017), thus permitting a patentee to obtain a patent sooner than he or she would have under the status quo fee schedule. The additional revenue from the proposed fee schedule will also recover the aggregate cost of building a three-month patent operating reserve by FY 2017, thereby continuing to build a sustainable funding model that will aid the Office in maintaining shorter pendency and a smaller backlog.

The proposed rule will also advance key policy considerations, while taking into account the cost of individual services. For example, the proposal includes multipart and staged fees for requests for continued examination and appeals, both of which aim to increase patent prosecution options for applicants. Also, this rule would include a new 75 percent fee reduction for micro entities, and expand the availability of the 50 percent fee reduction for small entities as required under section 10, providing small entities a discount on more than 25 patent fees that do not currently qualify for a small entity discount. All in all, as a result of these proposed adjustments to patent fees, for all applicants the routine fees to obtain a patent (i.e.,filing, search, examination, publication, and issue fees) will decrease by at least 22 percent relative to the current fee schedule.

B. Parallel Rulemaking

January and February 2012 Proposed Rules.In January and February 2012, the Office proposed rules setting fees for the new patent-related services authorized by the Act using its rulemaking authority under 35 U.S.C. 41(d). The Office proposed those rules under section 41(d) because fees for the new patent-related services must be in place one year from the AIA's enactment (September 16, 2012) and because the Office would not finish with its section 10 rulemaking by that date.

Unlike section 10 of the Act, section 41(d) of title 35 of the U.S.C. requires the Office to set fees for processing, services, or materials relating to patents at amounts to recover the estimated average cost to the Office of the particular processing, activity, service, or material per action (as opposed to the aggregate cost of all processing,activities, services and material). 35 U.S.C. 41(d)(2). On January 5, 2012 (77 FR 448), the Office proposed fees for filing third party submissions; on January 25, 2012 (77 FR 3666), the Office proposed fees forex partereexaminations and supplemental examinations; on February 9, 2012 (77 FR 6879), the Office proposed fees forinter partesreviews, post-grant reviews, covered business method reviews, and derivation proceedings. Collectively, these rules are referred to herein as the “January and February 2012 Proposed Rules.”

The fees proposed in the January and February 2012 Proposed Rules are set to recover the Office's costs per action under section 41(d), as opposed to the Office's aggregate costs for all patent-related activities under section 10. The Office intends to finalize fees proposed in the January and February 2012 Proposed Rules within the coming months to meet its implementation obligations under the Act to institute certain new services. However, the Office anticipates that the fees in those final rules will only be needed on a temporary basis, from September 16, 2012, until this rulemaking becomes final. The instant notice of proposed rulemaking (NPRM) does not reopen the comment period for the January and February 2012 Proposed Rules. Rather, this NPRM establishes a different comment period for setting and adjusting fees under section 10. In sum, this parallel rulemaking is necessary so that the Office can comply with both the Act's one-year deadline for instituting certain new services, and commence the lengthier process under section 10 for setting or adjusting fees for all of the Office's patent processing, activities, services, and material. The Office provides additional information about the AIA implementation effort, including how the components of the AIA relate to one another, on its Web site,http://www.uspto.gov/aia_implementation/index.jsp.

Proposed CPI Rule.Similarly, in a separate rulemaking, the USPTO proposed to adjust certain patent fee amounts to reflect fluctuations in the Consumer Price Index (CPI) under 35 U.S.C. 41(f).See77 FR 8331 (May 14, 2012). This increase in fees is necessary for the USPTO to reach its strategic goals within the time frame outlined in the USPTO FY 2013 President's Budget (Budget). The fee increase in the CPI rulemaking is planned as a bridge to provide resources until the instant section 10 rulemaking (this NPRM) becomes final (at which time the anticipated section 10 fees would supersede the fees in the CPI rulemaking). The proposed rule for the CPI adjustment sets forth particular fees to be adjusted and describes how the adjustment will be calculated based on the fluctuation in the CPI over the twelve months preceding the issuance of the final CPI rule. The aggregate revenue estimates presented in this section 10 proposed rule reflect an estimate of a CPI increase of 1.9 percent, which was the figure included in the Budget and the initial patent fee proposal delivered to the Patent Public Advisory Committee on February 7, 2012. The hypothetical fee rates based on this estimated CPI and used to estimate the aggregate revenue are included in the documents titledUSPTO Section 10 Fee Setting—Aggregate Revenue Estimatesathttp://www.uspto.gov/aia_implementation/fees.jsp#heading-1.The USPTO aggregate revenue estimate will be updated in the section 10 final rule to reflect the actual CPI rates included in the CPI final rule. The individual fee amounts proposed in this rule are not dependent on the final CPI fee rates and may be considered independent of the CPI increase. Except as otherwise noted, the current fees (baseline or status quo) included herein for comparative purposes include the January and February 2012 Proposed Rule fee amounts (as adjusted by the final rule) but not estimated CPI fee amounts.

The parallel rulemakings discussed in this section work in concert to meet the requirements of the AIA and secure the financial resources necessary to advance the Office's goals.

C. Summary of Provisions Impacted by This Action

The Office proposes to set or adjust 352 patent fees—94 apply to large entities (any reference herein to “large entity” includes all entities other than small or micro entities), 94 to small entities, 93 to micro entities, and 71 are not entity-specific. Of the 94 large entity fees, 66 are being adjusted, 19 are set at existing fee amounts, and 9 are newly proposed in this rule. Of the 94 small entity fees, 80 are being adjusted, 5 are set at existing fee amounts, and 9 are newly proposed in this rule. There are 93 new micro entity fees being set at a reduction of 75 percent from the large entity fee amounts. Of the 71 fees that are not entity-specific, 6 are either being adjusted or set as new fees in this rule and 65 are set at existing fee amounts.

In all, the routine fees to obtain a patent (i.e., filing, search, examination, publication, and issue fees) will decrease by 22 percent under this NPRM relative to the current fee schedule. Also, despite increases in some fees, applicants who meet the new micro entity definition will pay less than the amount paid for small entity fees under the current fee schedule for 88 percent of the fees eligible for a discount under section 10(b). Additional information describing the adjustments is included inPart V: Individual Fee Rationalesection of Supplementary Information in this rulemaking.

D. Summary of Costs and Benefits of This Action

The Office prepared a Regulatory Impact Analysis (RIA) to analyze the costs and benefits of this NPRM over a five-year period. This analysis includes a comparison of the proposed fee schedule to the current fee schedule (baseline) (which is defined to include the January and February 2012 Proposed Rules fee amounts, as adjusted by the final rules) and to three other alternatives described in the RIA. The Office considered both monetized and qualitative costs and benefits. Monetized costs and benefits have effects that the Office can express in dollar values. Qualitative costs and benefits have effects that are difficult to express in either dollar or numerical values. The complete RIA is available for review athttp://www.uspto.gov/aia_implementation/fees.jsp#heading-1.

The RIA concluded that the proposed patent fee schedule has the largest net benefit. The incremental net monetized benefit to patent applicants, patent holders, other patent stakeholders, and society of the proposed fee schedule is nearly seven billion dollars (assuming a 7 percent discount rate) for the five-year period. The most significant incremental benefit is the increase in the average value of a patent that stems from a decrease in patent application pendency (the time it takes to have a patent application examined). The Office estimates that total patent application pendency will decrease by 12 months during the time period of this analysis, thereby permitting a patentee to obtain a patent sooner than he or she would have under the Baseline (status quo fee schedule). The proposed fee schedule also has qualitative benefits including fee schedule design benefits and a decrease in uncertainty of patent rights, as discussed below.SeeTable 1.

Table 1—Proposed Patent Fee Schedule Costs and Benefits, Cumulative FY 2013-FY 2017 Total Monetized Costs and Benefits—3% Discount Rate (dollars in millions) Benefits: Increase in private patent value from a decrease in pendency $6,921 Costs: Cost of patent operations ($765) Lost patent value from a decrease in patent applications ($166) Net Benefit $5,990 Monetized Costs and Benefits—7% Discount Rate (dollars in millions) Benefits: Increase in private patent value from a decrease in pendency $7,694 Costs: Cost of patent operations ($682) Lost patent value from a decrease in patent applications ($135) Net Benefit (Cost) $6,877 Qualitative Costs and Benefits Costs: No qualitative costs n/a Benefit: Fee Schedule Design Benefits (Significant, Moderate, Not Significant) Moderate Decreased Uncertainty Effect (Significant, Moderate, Not Significant) Significant

To estimate the monetized benefits of the proposed fee schedule, the Office considered how the value of a patent would increase under the proposed fee schedule. When patent application pendency decreases, a patentee holds the exclusive right to the invention sooner, which would increase the private value of that patent. Because the outcomes of this proposed rule would decrease patent pendency by 12 months during the time period of the analysis, the Office expects the private patent value will increase, relative to the baseline. This benefit helps to speed the commercialization of new technologies and the jobs they can create.SeeTable 1.

The Office also estimated the incremental increase in the costs of its patent operations to determine the monetized costs of the proposed fee schedule. The most significant incremental costs of patent operations are (1) the increased patent examination capacity to work on the large backlog of patent applications in inventory, thus reducing patent application pendency; and (2) building a three-month patent operating reserve by FY 2017 to support a sustainable funding model.SeeTable 1.

In addition, the Office expects that this proposed rule will result in a short-term reduction in patent applications filed due to the new pricing. The Office estimates that 1.3 percent fewer applications than the number estimated to be filed in the absence of a fee increase will be filed during FY 2013. The Office further estimates that 2.7 percent fewer patent applications will be filed during FY 2014 and 4.0 percent fewer patent applications beginning in FY 2015 as patent filers adjust to the new fees, specifically the increase in the total filing, search, and examination fees for most applicants. However, the Office estimates that patent application filings will return to the same growth rate anticipated in the absence of a fee increase beginning in FY 2016. Overall, the demand for patent application services is generally inelastic and the number of patent applications filed will continue to grow year-over-year. An estimate of the monetized cost to patent applicants, other patent stakeholders, and society associated with this reduction in patent applications filed was also subtracted from the benefit of the increased patent value when estimating the overall net benefit of the proposed fee schedule.SeeTable 1.

When considering the qualitative benefits of the proposed fee schedule, the Office assessed the impact of the rule on two factors: fee schedule design and decreasing uncertainty. First, the design of the proposed fee schedule offers benefits relating to the three policy factors considered for setting individual fees as described inPart IIIof this NPRM, namelyfostering innovation, facilitating the effective administration of the patent system;andoffering patent prosecution options to applicants.By maintaining the current fee setting philosophy of keeping front-end fees below the cost of application processing and recovering revenue from back-end fees, the proposed fee schedule continues tofoster innovationand ease access to the patent system. The fee schedule design continues to offer incentives and disincentives to engage in certain activities thatfacilitate the effective administration of the patent systemand help reduce the amount of time it takes to have a patent application examined. For example, application size fees, extensions of time fees, and excess claims fees remain in place to facilitate the prompt conclusion of prosecution of an application. The proposal includes multipart and staged fees for requests for continued examination and appeals, both of which aim toincrease patent prosecution options for applicants.Second, by decreasing pendency, this action provides the applicant and other potential innovators with greater certainty through clearly defined and an unambiguous scope of patent rights. This increase in certainty and clarity in patent rights has an overall positive impact on the freedom to innovate and the market for technology.

The RIA found that the proposed fee schedule generates the largest net benefit based on the analysis of the costs and benefits of: (a) the proposed fee schedule; (b) the no-action alternative (baseline); and (c) the three other alternatives. Additional details describing the costs and benefits is available in the RIA athttp://www.uspto.gov/aia_implementation/fees.jsp#heading-1.

II. Legal Framework A. Leahy-Smith America Invents Act—Section 10

The Leahy-Smith America Invents Act was enacted into law on September 16, 2011.SeePublic Law 112-29, 125 Stat. 284. Section 10(a) of the Act authorizes the Director of the Office to set or adjust by rule any patent fee established, authorized, or charged under Title 35, U.S.C. for any services performed by, or materials furnished by, the Office. Fees under 35 U.S.C. may be set or adjusted only to recover the aggregate estimated cost to the Office for processing, activities, services, and materials related to patents, including administrative costs to the Office with respect to such patent operations.See125 Stat. at 316. Provided that the fees in the aggregate achieve overall aggregate cost recovery, the Director may set individual fees under section 10 at, below, or above their respective cost. Section 10(e) of the Act requires the Director to publish the final fee rule in theFederal Registerand the Official Gazette of the Patent and Trademark Office at least 45 days before the final fees become effective. Section 10(i) terminates the Director's authority to set or adjust any fee under section 10(a) upon the expiration of the seven-year period that began on September 16, 2011.

B. Small Entity Fee Reduction

Section 10(b) of the AIA requires the Office to reduce by 50 percent the fees for small entities that are set or adjusted under section 10(a) for filing, searching, examining, issuing, appealing, and maintaining patent applications and patents.

C. Micro Entity Fee Reduction

Section 10(g) of the AIA amends Chapter 11 of Title 35, U.S.C. to add section 123 concerning micro entities. The Act provides that the Office must reduce by 75 percent the fees for micro entities for filing, searching, examining, issuing, appealing, and maintaining patent applications and patents. The implementing procedures for the provisions of 35 U.S.C. 123 are proposed in a separate rulemaking.See77 FR 31806 (May 30, 2012).

D. Patent Public Advisory Committee Role

The Secretary of Commerce established the Patent Public Advisory Committee (PPAC) under the American Inventors Protection Act of 1999. 35 U.S.C. 5. The PPAC advises the Under Secretary of Commerce for Intellectual Property and Director of the USPTO on the management, policies, goals, performance, budget, and user fees of patent operations.

When adopting fees under section 10 of the Act, the Director must provide the PPAC with the proposed fees at least 45 days prior to publishing the proposed fees in theFederal Register. The PPAC then has at least 30 days within which to deliberate, consider, and comment on the proposal, as well as hold public hearing(s) on the proposed fees. The PPAC must make a written report available to the public of the comments, advice, and recommendations of the committee regarding the proposed fees before the Office issues any final fees. The Office will consider and analyze any comments, advice, or recommendations received from the PPAC before finally setting or adjusting fees.

Consistent with this framework, on February 7, 2012, the Director notified the PPAC of the Office's intent to set or adjust patent fees and submitted a preliminary patent fee proposal with supporting materials. The preliminary patent fee proposal and associated materials are available athttp://www.uspto.gov/about/advisory/ppac/. The PPAC held two public hearings: one in Alexandria, Virginia, on February 15, 2012; and another in Sunnyvale, California, on February 23, 2012. Transcripts of these hearings and comments submitted to the PPAC in writing are available for review athttp://www.uspto.gov/about/advisory/ppac/. The PPAC is considering public comments from these hearings and will make available to the public a written report setting forth in detail the comments, advice, and recommendations of the committee regarding the preliminary proposed fees. The PPAC is scheduled to release its report no later than August 2012. The Office will consider and analyze any comments, advice, or recommendations received from the PPAC before publishing a final rule.

III. Rulemaking Goals and Strategies

Consistent with the Office's goals and obligations under the AIA, the overall strategy of this rulemaking is to ensure the fee schedule generates sufficient revenue to recover aggregate costs. Another strategy is to set individual fees to further key policy considerations while taking into account the cost of the particular service. As to the strategy of balancing aggregate revenue and aggregate cost, this rule will provide sufficient revenue to implement two significant USPTO goals: (1) Implement a sustainable funding model for operations; and (2) optimize patent timeliness and quality. As to the strategy of setting individual fees to further key policy considerations, the policy factors contemplated are: (1)Fostering innovation;(2)facilitating effective administration of the patent system;and (3)offering patent prosecution options to applicants.

These fee schedule goals and strategies are consistent with strategic goals and objectives detailed in the USPTO 2010-2015 Strategic Plan (Strategic Plan) that is available athttp://www.uspto.gov/about/stratplan/USPTO_2010-2015_Strategic_Plan.pdf, as amended by Appendix #1 of the Budget, available athttp://www.uspto.gov/about/stratplan/budget/fy13pbr.pdf) (collectively referred to herein as “Strategic Goals”). The Strategic Plan defines the USPTO's missions and long-term goals and presents the actions the Office will take to realize those goals. The significant actions the Office describes in the Strategic Plan that are specific to the goals of this rulemaking are implementing a sustainable funding model, reducing the patent application backlog and pendency, and improving patent quality and IT.

Likewise, the fee schedule goals and strategies also support theStrategy for American Innovation—an Administration initiative first released in September 2009 and updated in February 2011 that is available athttp://www.whitehouse.gov/innovation/strategy. TheStrategy for American Innovationrecognizes innovation as the foundation of American economic growth and national competitiveness. Economic growth in advanced economies like the United States' is driven by creating new and better ways of producing goods and services, a process that triggers new and productive investments, which is the cornerstone of economic growth. Achieving theStrategy for American Innovationdepends, in part, on the USPTO's success in reducing the patent application backlog (the number of applications awaiting examiner action) and pendency (the time it takes to have a patent application examined)—both of which stall the delivery of innovative goods and services to market and impede economic growth and the creation of high-paying jobs. This rule positions the USPTO to reduce the backlog and pendency.

A. Ensure the Overall Fee Schedule Generates Sufficient Revenue to Recover Aggregate Cost

The first fee setting strategy is to ensure that the fee schedule generates sufficient multi-year aggregate revenue to recover the aggregate cost to maintainUSPTO operations and accomplish USPTO strategic goals. Two overriding principles, found in the Strategic Plan, motivate the Office here: (1) Operating within a more sustainable funding model than in the past to avoid disruptions caused by fluctuations in the economy; and (2) accomplishing strategic goals, including the imperatives of reducing the patent application backlog and pendency. Each principle is discussed in greater detail below.

1. Implement a Sustainable Funding Model for Operations

As explained in the Strategic Plan, the Office's objective of implementing a sustainable funding model for operations will facilitate USPTO's long-term operational and financial planning and enable the Office to adapt to changes in the economy and in operational workload.

Since 1982, patent fees that generate most of the patent revenue (e.g., filing, search, examination, issue, and maintenance fees) have been set by statute, and the Office could adjust these fees only to reflect changes in the CPI for All Urban Consumers, as determined by the Secretary of Labor. Because these fees were set by statute, the USPTO could not realign or adjust them to quickly and effectively respond to market demand or changes in processing costs other than for the CPI. Over the years, these constraints led to funding variations and shortfalls. Section 10 of the AIA changed this fee adjustment model and authorizes the USPTO to set or adjust patent fees within the regulatory process so that the Office will be better able to respond to its rapidly growing workload.

The Budget delineates the annual plans and prospective aggregate costs to execute the initiatives in the Strategic Plan. One of these costs is the creation of a three-month patent operating reserve to allow effective management of the U.S. patent system and responsiveness to changes in the economy, unanticipated production workload, and revenue changes, while maintaining operations and effectuating long-term strategies. The Office evaluated the optimal size of the operating reserve by examining specific risk factors. There are two main factors that create a risk of volatility in patent operations—spending levels and revenue streams. After reviewing other organizations' operating reserves, the Office found that a fully fee-funded organization such as the USPTO should maintain a minimum of a three-month operating reserve. The fees proposed here will gradually build the three-month operating reserve. The USPTO will assess the patent operating reserve balance against its target balance annually and, at least every two years, will evaluate whether the target balance continues to be sufficient to provide the stability in funding needed by the Office. If the proposed fee structure is implemented, then the USPTO anticipates that the three-month patent operating reserve would be achieved in FY 2017.

The proposed fees will provide the USPTO with sufficient aggregate revenue to recover the aggregate cost to operate the Office while improving the patent system. During FY 2013, patent operations will cost $2.604 billion (including an offset to spending from other income of $18 million and a deposit in the operating reserve of $73 million). The proposed fee schedule should generate $2.604 billion in aggregate revenue to offset these costs. Once the Office transitions to the proposed fee levels, it estimates an additional $11.8 billion in aggregate revenue will be generated from FY 2014 through FY 2017 to recover the total aggregate cost over the same time period—$11.2 billion in operating costs and $0.6 billion in a three-month operating reserve. (SeeTable 3 inPart IV,Step 2 of this NPRM.)

Under the new fee structure, as in the past, the Office will continue to regularly review its operating budgets and long-range plans to ensure the USPTO uses patent fees prudently.

2. Optimize Patent Quality and Timeliness

The Office developed the strategic goal of optimizing patent quality and timeliness in response to intellectual property (IP) community feedback, theStrategy for American Innovation,and in recognition that a sound, efficient, and effective IP system is essential for technological innovation and for patent holders to reap the benefits of patent protection.

Over the past several years, a steady increase in incoming patent applications and insufficient patent examiner hiring due to multi-year funding shortfalls has led to a large patent application backlog (the number of applications awaiting examiner action) and a long patent application pendency (the time it takes to have a patent application examined). Reducing pendency increases the private value of a patent because the more quickly a patent is granted, the more quickly the holder can commercialize the innovation. Shorter pendency also allows for earlier disclosure of the scope of the patent, which reduces uncertainty for the patentee, potential competitors, and additional innovators regarding patent rights and the validity of the patentees' claims.

To reduce the backlog and pendency, the USPTO must examine significantly more patent applications than it receives each year for the next several years. Bringing the applications in the backlog down to a manageable level, while at the same time keeping pace with the new patent applications expected to be filed each year, will require that the Office collect more aggregate revenue than it estimates that it will collect at existing fee rates. The Office needs this additional revenue to hire additional patent examiners, improve the patent business IT capability and infrastructure, and implement other programs to optimize the timeliness of patent examination. This proposed rulemaking will result in an average first action patent pendency of 10 months in FY 2015, an average total pendency of 20 months in FY 2016, and a reduced patent application backlog and inventory of approximately 350,000 patent applications by FY 2015. This would be a significant improvement over the 22.6 months and 34.1 months for average first action patent pendency and average total pendency, respectively, as of March 2012. Under this proposed rule, the patent application backlog is also expected to decrease significantly from the 644,775 applications in inventory as of March 2012.

In addition to timeliness of patent protection, the quality of application review is critical to ensure the value of an issued patent. Quality issuance of patents provides certainty in the market and allows businesses and innovators to make informed and timely decisions on product and service development. Under the proposed action, the Office will continue to improve patent quality through comprehensive training for new and experienced examiners, an expanded and enhanced ombudsmen program to help resolve questions about applications, improved hiring processes, and guidelines for examiners to address clarity issues in patent applications—all actions intended to place quality at the top of USPTO's priorities. The Office will continue to encourage interviews to help clarify allowable subject matter early in the examination process, and to encourage interviews later in prosecution to resolve outstanding issues. The Office will also continue to reengineer the examination process, and to monitor and measure examination using a comprehensive set of metrics that analyze the quality of the entire process.

In addition to direct improvements to patent quality and timeliness, the USPTO's development and implementation of the patent end-to-end processing system using the revenue generated from the proposed fee structure will also improve the efficiency of the patent system. The IT architecture and systems in place currently are obsolete and difficult to maintain, leaving the USPTO highly vulnerable to disruptions in patent operations. Additionally, the current IT systems require patent employees and external stakeholders to perform labor-intensive business processes manually, decreasing the efficiency of the patent system. This proposed rule provides the Office with sufficient revenue to modernize its IT systems so that the majority of applications are submitted, handled, and prosecuted electronically. Improved automation will benefit both the Office and innovation community.

B. Set Individual Fees to Further Key Policy Considerations, While Taking Into Account the Costs of the Particular Service

The second fee setting strategy is to set individual fees to further key policy considerations, while taking into account the cost of the associated service or activity. The proposed fee schedule recovers the aggregate cost to the Office, while also considering the individual cost of each service provided. This includes consideration that some applicants may use particular services in a much more costly manner than other applicants (e.g., patent applications cost more to process when more claims are filed). The proposed fee schedule considers three key policy factors: (1)Fostering innovation;(2)facilitating effective administration of the patent system;and (3)offering patent prosecution options to applicants.The Office is focusing on these policy factors because each promotes particular aspects of the U.S. patent system.Fostering innovationis an important policy factor to ensure that access to the U.S. patent system is without significant barriers to entry and innovation is incentivized by granting inventors certain short-term exclusive rights to stimulate additional inventive activity.Facilitating effective administration of the patent systemis important to influence efficient patent prosecution, resulting in compact prosecution and reduction in the time it takes to obtain a patent. In addition, the Office recognizes that patent prosecution is not a one-size-fits-all process and therefore, where feasible, the Office endeavors to fulfill its third policy factor ofoffering patent prosecution options to applicants.Each of these policy factors is discussed in greater detail below.

1. Fostering Innovation

To encourage innovators to take advantage of patent protection, the Office proposes to set basic “front-end” fees (e.g., filing, search, and examination) below the actual cost of carrying out these activities. Likewise, consistent with the requirements in the Act, the Office proposes providing fee reductions for small and micro entity innovators to facilitate access to the patent system. Setting front-end and small and micro entity fees below cost requires, however, that other fees be set above cost. To that end, the Office proposes to set basic “back-end” fees (e.g., issue and maintenance) in excess of costs to recoup revenue not collected by front-end and small and micro entity fees. Charging higher back-end fees also fosters innovation and benefits the overall patent system when patent owners more closely assess the expected value of an existing patent over its life, and determine whether to pay maintenance fees to keep the patent in force. Expiration of a patent makes the subject matter of the patent available in the public domain for subsequent commercialization. Determining the appropriate balance between front-end and back-end fees is a critical component of aligning the Office's costs and revenues.

2. Facilitating Effective Administration of the Patent System

The proposed fee structure helps facilitate effective administration of the patent system by encouraging applicants or patent holders to engage in certain activities that facilitate an effective patent system. In particular, setting fees at the particular levels proposed here will: (1) Encourage the submission of applications or other actions that enable examiners to provide prompt, quality interim and final decisions; (2) encourage the prompt conclusion of prosecution of an application, which results in pendency reduction, faster dissemination of information, and certainty in patented inventions; and (3) help recover the additional costs imposed by some applicants' more intensive use of certain services that strain the patent system.

3. Offering Patent Prosecution Options to Applicants

The proposed fee schedule also provides applicants with flexible and cost-effective options for seeking patent protection. For example, in September 2011, the Office implemented prioritized examination for utility and plant applications, as specified in provisions of section 11(h) of the Act, to offer applicants the choice of a fast track examination for an additional fee. (SeeChanges To Implement the Prioritized Examination Track (Track I) of the Enhanced Examination Timing Control Procedures, 76 FR 6369 (Feb. 4, 2011)). In this proposed rule, the Office proposes multipart and staged fees for requests for continued examination (RCE) and appeals. The Office proposes to set the RCE fee in two parts. The first RCE fee would be set below cost to facilitate access to the service and in recognition that most applicants using RCEs only require one per application. The fee for the second and subsequent requests would be set at cost recovery as an option for those who require multiple RCEs. Likewise, the staging of appeal fees allows applicants to pay less in situations when an application is either allowed or reopened before being forwarded to the Board of Patent Appeals and Interferences (BPAI) (to become the Patent Trial and Appeal Board (PTAB) on September 16, 2012). Thispatent prosecution optionallows applicants to make critical decisions at multiple points in the patent prosecution process.

Summary of Rationale and Purpose of the Proposed Rulemaking

The patent fee schedule proposed here will produce aggregate revenues to recover the aggregate costs of the USPTO, including for its management of strategic goals, objectives, and initiatives in FY 2013 and beyond. Using the two Strategic Plan goals (implementing a sustainable funding model for operations and optimizing patent quality and timeliness) as a foundation, the proposed rule would provide sufficient aggregate revenue to recover the aggregate cost of patent operations, including implementing a sustainable funding model, reducing the current patent application backlog, decreasing patent pendency, improving patent quality, and upgrading the patent business IT capability and infrastructure. Additionally, in this rule, the Office considers each individual fee by evaluating its historical cost and considering the policy factors offostering innovation, facilitating the effective administration of the patent system,andoffering patent prosecution options to applicants.

IV. Fee Setting Methodology

There are three primary steps involved in developing the proposed fees:

Step 1: Determine the prospective aggregate costs of patent operations over the five-year period, including the cost of implementing new initiatives to achieve strategic goals and objectives.

Step 2: Calculate the prospective revenue streams derived from the individual fee amounts (from Step 3) that will collectively recover the prospective aggregate cost over the five-year period.

Step 3: Set or adjust individual fee amounts to collectively (through executing Step 2) recover projected aggregate cost over the five-year period, while furthering key policy considerations.

These three steps are iterative and interrelated. Following is a description of how the USPTO carries out these three steps.

Step 1: Determine Prospective Aggregate Costs

Calculating aggregate costs is accomplished primarily through the routine USPTO budget formulation process. The Budget is a five-year plan (that the Office prepares annually) for carrying out base programs and implementing the strategic goals and objectives. The first activity performed to determine prospective aggregate cost is to project the level of demand for patent products and services. Demand for products and services depends on many factors, including domestic and global economic activity. The USPTO also takes into account overseas patenting activities, policies and legislation, and known process efficiencies. Because examination costs are 70 percent of the total patent operating cost, a primary production workload driver is the number of patent application filings (i.e., incoming work to the Office). The Office looks at indicators such as the expected growth in Real Gross Domestic Product (RGDP), the leading indicator to incoming patent applications, to estimate prospective workload. RGDP is reported by the Bureau of Economic Analysis (www.bea.gov), and is forecasted each February by the Office of Management and Budget (OMB) (www.omb.gov) in the Economic and Budget Analyses section of the Analytical Perspectives, and each January by the Congressional Budget Office (CBO) (www.cbo.gov) in the Budget and Economic Outlook. A description of the Office's methodology for using RGDP can be found at pages 36 and 37 of the Budget. The expected change in the required production workload must then be compared to the current examination production capacity to determine any required staffing and operating cost (e.g., salaries, workload processing contracts, and printing) adjustments. The Office uses a patent pendency model that estimates patent production output based on actual historical data and input assumptions, such as incoming patent applications and overtime hours. An overview of the model, including a description of inputs, outputs, key data relationships, and a simulation tool is available athttp://www.uspto.gov/patents/stats/patent_pend_model.jsp.

The second activity is to calculate the aggregate costs to execute the requirements. In developing its Budget, the Office first looks at the cost of status quo operations (the base requirements). The base requirements are adjusted for anticipated pay raises and inflationary increases for the periods FY 2013-FY 2017 (detailed calculations and assumptions for this adjustment to base are available in Exhibit 8 and Exhibit 9 of the Budget). The Office then estimates the prospective cost for expected changes in production workload and new initiatives over the same period of time (refer to “Program Changes by Sub-Activity” sections of the Budget). The Office reduces cost estimates for completed initiatives and known cost savings expected over the same five-year horizon (seepage 9 of the Budget). Finally, the Office estimates its three-month target operating reserve level based on this aggregate cost calculation for year to determine if operating reserve adjustments are necessary.

The Budget identifies that during FY 2013, patent operations will cost $2.549 billion (seepage 31 of the Budget), including $1.733 billion for patent examination activities; $362 million for IT systems, support, and infrastructure contributing to patent operations; $61 million for activities related to patent appeals and the new AIAinter partesdispute actions; $30 million for activities related to IP protection, policy, and enforcement; and $363 million for general support costs necessary for patent operations (e.g., rent, utilities, legal, financial, human resources, and other administrative services). In addition, the Office estimates collecting $18 million in other income associated with reimbursable agreements (offsets to spending) and depositing $73 million during FY 2013 toward the cost of building the patent operating reserve to sustain operations. The operating reserve estimate in this NPRM is different than the estimate included in the Budget. The estimate included in the Budget is consistent with the estimate included in the initial proposal to PPAC on February 7, 2012, and has been reduced in this NPRM in response to public feedback provided to the PPAC. A detailed description of the operating requirements and related aggregate cost is located in the Budget. Table 2 below provides key underlying production workload projections and assumptions from the Budget used to calculate aggregate cost. Table 3 presents the total budgetary requirements (prospective aggregate cost) for FY 2013 through FY 2017.

Table 2—Patent Production Workload Projections—FY 2013-FY 2017 Utility, plant, and reissue (UPR) FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Applications* 565,300 599,200 632,200 666,900 700,300 Growth Rate** 6.0% 6.0% 5.5% 5.5% 5.0% Production Units 620,600 671,900 694,200 645,200 656,200 End of Year Backlog 529,100 421,600 329,500 328,400 358,000 Examination Capacity** 8,700 8,600 8,300 8,300 8,200 Performance Measures (UPR) Avg. First Action Pendency (Months) 16.9 15.9 10.1 9.4 9.4 Avg. Total Pendency (Months) 30.1 24.6 22.9 18.3 18.1 * In this table, the patent application filing data includes requests for continued examination (RCEs). ** In this table, demand for patent examination services, which is used to calculate aggregate cost in the FY 2013 President's Budget, is not adjusted for price elasticity. Table 3—Estimated Annual Aggregate Costs and Proposed Fee Schedule Aggregate Revenues (Dollars in millions) FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Aggregate Cost Estimate Planned Operating Requirements $2,549 $2,702 $2,809 $2,846 $2,945 Less Other Income* (18) (18) (18) (18) (18) Net Operating Requirements 2,531 2,684 2,791 2,828 2,927 Planned Deposit in Operating Reserve 73 200 143 125 95 Total Aggregate Cost Estimate 2,604 2,884 2,934 2,953 3,022 Aggregate Revenue Estimate** 2,604 2,884 2,934 2,953 3,022 Cumulative Operating Reserve Balance Target Operating Reserve 637 676 702 712 736 Operating Reserve Ending Balance $121 194 394 537 662 757 Over/(Under) Target Balance (443) (282) (165) (50) 21 * The Office collects other income associated with reimbursable agreements (offsets to spending) and recoveries of funds obligated in prior years in the amount of approximately $18 million each year. ** The proposed fee schedule will generate less revenue compared to the FY 2013 President's Budget in an effort to slow the growth of the operating reserve over the next five years. Step 2: Calculate Prospective Aggregate Revenue

As described in “Step 1,”the USPTO's FY 2013 requirements-based budget includes the aggregate prospective cost of planned production, new initiatives, and an operating reserve required for the Office to realize its strategic goals and objectives for the next five years. The aggregate prospective cost becomes the target aggregate revenue level that the new fee schedule must generate in a given year and over the five-year planning horizon. To calculate the aggregate revenue estimates, the Office first analyzes relevant factors and indicators to calculate or determine prospective fee workload (e.g., number of applications and requests for services and products), growth, and resulting fee workload volumes (quantities) for the five-year planning horizon. Economic activity is an important consideration when developing workload and revenue forecasts for the USPTO's products and services because economic conditions affect patenting activity, as most recently exhibited in the recession of 2009 when incoming workloads and renewal rates declined.

The Office considers economic activity when developing fee workloads and aggregate revenue forecasts for its products and services. Major economic indicators include the overall condition of the U.S. and global economies, spending on research and development activities, and investments that lead to the commercialization of new products and services. The most relevant economic indicator that the Office uses is the RGDP, which is the broadest measure of economic activity and is anticipated to grow approximately three percent for FY 2013 based on OMB and CBO estimates.

These indicators correlate with patent application filings, which are a key driver of patent fees. Economic indicators also provide insight into market conditions and the management of IP portfolios, which influence application processing requests and post-issuance decisions to maintain patent protection. When developing fee workload forecasts, the Office considers other influential factors including overseas activity, policies and legislation, process efficiencies, and anticipated applicant behavior.

Anticipated applicant behavior in response to fee changes is measured using an economic principle known as elasticity, which for the purpose of this action means how sensitive applicants and patentees are to fee amounts or price changes. If elasticity is low enough (i.e., demand isinelastic), when fees increase, patent activities will decrease only slightly in response thereto, and overall revenues will still increase. Conversely, if elasticity is high enough (i.e., demand iselastic), when fees increase, patenting activities will decrease significantly enough in response thereto such that overall revenues will decrease. When developing fee forecasts, the Office accounts for how applicant behavior will change at different fee amounts projected for the various patent services. Additional detail about the Office's elasticity estimates is available in “USPTO Section 10 Fee Setting—Description of Elasticity Estimates,”athttp://www.uspto.gov/aia_implementation/fees.jsp.Some of the information on which the Office based its elasticity estimates are copyrighted materials and are available for inspection at the USPTO.

Micro Entity Applicants

The introduction of a new class of applicants, called micro entities, requires a change to aggregate revenue estimations, and the Office has refined its workload and fee collection estimates to include this new applicant class.See35 U.S.C. 123;seealso Changes to Implement Micro Entity Status for Paying Patent Fees, 77 FR 31806 (May 30, 2012) . 35 U.S.C. 123, which sets forth how an applicant can claim the micro entity discount, provides two bases under which an applicant may establish micro entity status.

First, section 123(a) provides that the term “micro entity” means an applicant who makes a certification that the applicant: (1) Qualifies as a small entity as defined in 37 CFR 1.27; (2) has not been named as an inventor on more than four previously filed patent applications, other than applications filed in another country, provisional applications under 35 U.S.C. 111(b), or international applications for which the basic national fee under 35 U.S.C. 41(a) was not paid; (3) did not, in the calendar year preceding the calendar year in which the applicable fee is being paid, have a gross income exceeding three times the median household income for that preceding calendar year; and (4) has not assigned, granted, or conveyed, and is not under an obligation by contract or law to assign, grant, or convey, a license or other ownership interest in the application concerned to an entity that had a gross income exceeding the income limit described in (3).

Second, 35 U.S.C. 123(d) provides that a micro entity shall also include an applicant who certifies that: (1) The applicant's employer, from which the applicant obtains the majority of theapplicant's income, is an institution of higher education as defined in section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001(a)); or (2) the applicant has assigned, granted, conveyed, or is under an obligation by contract or law, to assign, grant, or convey, a license or other ownership interest in the particular applications to such an institution of higher education.

The Office estimates that when micro entity discounts on patent fees are available, 31 percent of small entity applications will be micro entity applications, under the criteria set forth in section 123(a) and (d). In making this estimate, the Office considered several factors, including historical data on patents granted. The Office began with patent grant data, because the best available biographic data on applicant type (e.g., independent inventor and domestic universities) comes from patent grant data in the Office's database.

The Office first estimated the number of individuals who were granted patents in FY 2011. There were 221,350 utility patents granted in FY 2011 as reported in theFY 2011 USPTO Performance and Accountability Report(PAR). ThePARis available for review athttp://www.uspto.gov/about/stratplan/ar/2011/index.jsp.The Office's Patent Technology Monitoring Team (PTMT) provides data showing the split between domestic and foreign patent grants. (It should be noted that PTMT's data is based on the calendar year not the fiscal year.) PTMT's data is available athttp://www.uspto.gov/web/offices/ac/ido/oeip/taf/all_tech.htm#PartA1_1b.From this data, the Office found that 5.0 percent of utility patents granted in FY 2011 were granted to individuals in the U.S. and 1.9 percent were granted to individuals from other countries, where the individuals were not listed in the USPTO database as associated with a company. These individuals would likely meet the criteria under section 123(a)(1) (small entity status). Using this information, the Office estimates that individuals in the U.S. received 11,068 utility patents (221,350 times 5.0 percent) in FY 2011, and that individuals from other countries received 4,206 utility patents (221,350 times 1.9 percent). In total, the Office estimates that 15,274 (11,068 plus 4,206) patents were granted to individuals in FY 2011.

Concerning the application threshold in 35 U.S.C. 123(a)(2), the Office's Patent Application Locating and Monitoring (PALM) database reports that 62 percent of both foreign and domestic small entity applicants filed fewer than 5 applications in FY 2009. As stated above, an estimated 15,274 patent grants were to individuals both domestic (11,068) and foreign (4,206). Using this information, the Office estimates that 6,862 (11,068 times 62 percent) patents will be granted to domestic applicants who meet the thresholds for micro entity status set forth in sections 123(a)(1) and 123(a)(2), while 2,608 (4,206 times 62 percent) patents will be granted to foreign applicants who meet the same thresholds.

Concerning the income threshold in 35 U.S.C. 123(a)(3), the median household income for calendar year (CY) 2010 (the year most recently reported by the Bureau of the Census) was $49,445.See Income, Poverty, and Health Insurance Coverage in the United States: 2010,at 5 and 33 (Table A-1) (Sept. 2011)available at http://www.census.gov/prod/2011pubs/p60-239.pdf.(The Office will indicate conspicuously on its Web site the median household income reported by the Bureau of the Census and the income level that is three times the median household income for the calendar year most recently reported.) Thus, the income level specified in 35 U.S.C. 1.29(a)(3) and (a)(4) (three times the median household income) is $148,335.

The Internal Revenue Service (IRS) records show that in 2009 about 97 percent of individuals (as proxied by the total number of IRS form filings) reported adjusted gross income of less than $200,000, and about 87 percent of individuals reported adjusted gross income of less than $100,000.SeeTable 1.1 at:http://www.irs.gov/