We’re all familiar with the so-called cash crunch that the Patent and Trademark Office faced during fiscal 2009. Patent-based revenue was hit from several angles during the year, resulting in a dramatic reduction in the fees that support operations. A drop in the number of new applications meant applicants were paying fewer filing fees, and the historically low allowance rate translated to fewer issue fees being paid.

Acting Director John Doll reported the lower filing rate in March…and indicated that the Office had stopped hiring Patent Examiners as a result.

The impact of the shortfall didn’t stop at a hiring freeze, though. The Office warned of furloughs and lowered bonuses, reportedly eliminating some. A source has even indicated that the Office adjusted air conditioning schedules in an attempt to save money.

At the end of the summer, the situation appeared so grim that the Office went to Congress and asked permission to move a$60-70M surplus from the trademark side over to the patent side (yes, an act of Congress is needed).  Congress acted swiftly, and President Obama signed the transfer into law on August 7, 2009.

The urgency of the situation seemed to pass, and operations continued at new ‘adjusted’ levels.

Then, shortly after closing the books on fiscal year 2009, the Office issued its 2009 Performance and Accountability Report. In it, the Office notes that actual fee collections for 2009 totaled $1.874B. As a result, the Office was left with a final appropriation level of $1.874B despite having an approved budget of $2.010B.

So there’s the shortfall. The crunch.

In these circumstances, I would have expected the Office to have spent every penny available to it, making difficult choices along the way. I’m not entirely sure that this happened, though. The following table, reproduced from page 45 of the Report, seems to indicate that $118M was left on the table.

I don’t see that management specifically addressed these monies in the Report, and do not know the status of these funds. I suspect they may be lost to fee diversion – a very odd result considering the overall budget shortfall –  since they were not spent during the year in which they were collected. The status indicator “Unobligated Balance, Available” might suggest that the Office will have access to these funds in 2010…but it’s not entirely clear.

FY2009 was certainly full of challenges and I think it’s a bit much to expect the Office to have incurred expenses that neatly matched fee collections, particularly considering the drastic cost-cutting measures that had to be implemented in the final months of the year.  That said, missing it “by that much” would be acceptable. Missing the mark by $118M, though, isn’t.

In the surprise final rule that gave birth to the new (and terribly-named) Practitioner Maintenance Fee, the Patent and Trademark Office promised us that the fees it collects through the new rule won’t be diverted for other purposes:

Comment 2: A large number of comments, citing past history, raised concern that annual practitioner maintenance fee payments would be diverted, and therefore opposed the annual practitioner maintenance fee on the basis that the fees would not be used to operate the roster maintenance process, including the disciplinary system.

Response: The USPTO has operated with full access to fee collections for the past four years. Annual practitioner maintenance fees collected under section 11.8(d) will be used to support maintenance of the roster of registered attorneys and agents, including the disciplinary system.

That’s reassuring, considering the extent to which PTO funds have been diverted to other causes in the past ($422.5 million diverted since 1992).  But is it a promise the Office can rightfully make?

Clearly it isn’t.  Sure the Office currently has full access to the fees it collects.  But, that could be a temporary situation.  Congress has never provided a permanent end to fee diversion (the current fix is the latest temporary fix), and something tells me Congress will be looking for new sources of cash in the coming months.

And the Office knows this.  Indeed, it wasn’t that long ago that the Department of Justice, with Associate Counsel from the Patent and Trademark Office sitting alongside, argued in Figuerora v. United States that Congress could divert all patent fees to other, non-patent purposes if it chose to do so.  Judge Newman’s direct question on this point during oral argument, and government counsel’s response, is illustrative:

Judge Newman – “Is the government’s position that…Congress could appropriate the entire [patent fee] income…and allow the backlog to continue to increase in the patent office if, in fact, [that's] what Congress decided to do?”

Government counsel: “Yes, your Honor. It’s our position that Congress’ legislation is not limited by the preamble’s promotion language on which the Appellant relies.”

The promise that Practitioner Maintenance Fee monies will be used to support OED activities is, simply put, one that the Office cannot make.  It might be true next year, and the year after, but fee diversion will always remain a possibility until Congress implements a permanent fix.

The FY2005 budget proposed by the Bush administration apparently allocates all user fees collected by the PTO to the PTO. The end of fee diversion will provide the PTO with much-needed funds for various quality-improvement efforts, including hiring and training of Examiners, continuation of the electronification of processes and records, and the move to new facilities.

Keep in mind that the funds at issue are not tax dollars paid by the general public, but tax dollars paid by the innovators of the world via filing and other PTO fees.

The PTO notes that the proposed budget assumes approval of the currently proposed PTO fee schedule.

See the PTO press release here.