D. The Provision for a System of Deferred Examination

Clearly, a deferred examination system reduces the burden upon the agency because, under such a system, many applications will never require full Patent Office examination. As a result, the examiners will be placed in a position to make a proper and thorough evaluation of the lesser number of applications which must be fully considered.

A vital part of the apposite provisions, moreover, permits "any party, or any other person" to make a request for an examination of any deferred application. The reason for this provision was well expressed in Section 9 of the Report of the President's Commission, i.e., that "3. By requesting examination, a potential infringer or other interested party could receive a relatively prompt determination of the invention's patentability" (p. 21). When this opportunity is coupled with the concurrently afforded opportunity to intervene and participate in the patentability proceeding, any member of the public will have a chance, under S. 1321, to obtain a prompt and inexpensive disposition of potential infringement liability.

E. Maintenance Fees

Maintenance fees are a common characteristic of most European patent systems, and are long overdue as a part of the United States patent system. Patent applicants are a favored class who secure private monopolies from an agency only partially supported by fees which the applicants pay. Patent owners enjoy favorable income tax provisions having virtually no counterpart for other property owners in the Internal Revenue Code. Thus, for example, Section 1235 of the Internal Revenue Code permits a patent owner to purportedly transfer "title" to a patent or patent application, collect "payments" in the nature of a running royalty for the transfer determined annually and spaced throughout the life of the patent-and yet treat the entirety of this periodic income as a capital gain.

It is common knowledge that the royalty income from United States patent licenses amounts to tens of millions of dollars annually. There is simply no reason why the beneficiaries of this income should not pay maintenance fees sufficient at least to render self-supporting the administrative agency which spawns the monopolies by which the royalties are secured.

In addition, setting the maintenance fees at a high level benefits the public by encouraging relinquishment of patent rights to free public enjoyment at an early date well in advance of the statutory expiration date.

STATEMENT OF EDWARD S. IRONS, LAWYER, WASHINGTON, D.C.

Mr. IRONS. Mr. Chairman, we find-I find the bill S. 1321 to be unique and to be refreshingly different. It is, I think, the first patent reform legislation which has been introduced into the Congress in recent history which approaches the problem from the point of view of the public and seeks to correct the situation by procedural and by substantive law which is consistent with the constitutional standard for patentable inventions which underlies the patent system.

The problem to which I have made reference is the basic and fundamental problem that three-fourths or more of all patents which are issued are invalid, and those are only the ones that are litigated. If they were all litigated, I think the percentage would be much

more.

There is a striking contrast to the approach which is adopted in S. 1321, which is to somehow, in fact, reform the system so that it serves its constitutional and public purpose. There is a striking contrast with that salutory objective to be found in legislation such as S. 643 of the last session of Congress and other legislation which reflects the basic view of the organized patent bar and of patent

owners.

We have a problem, Mr. Chairman. The problem is that too many patents are invalid. There are two ways, basically, in which a solution to this problem can be approached. One of them is to change the procedures and the substantive philosophy in the Patent Office in the way the Supreme Court has repeatedly admonished to get the Patent Office product to a quality level such that it will pass the

muster.

The other way-and this is what is in the text of S. 643 and, I am sure, its counterparts that will be introduced by the APLA and others the other way is to attempt by legislative fiat to lower the standard of at least statutorily-patentable subject matter so that virtually anything that you file the application on matures into a private monopoly.

This is, then, the issue. Are we going to make the Patent Office conform to the Constitution, or are we going to try to legislatively permit the Patent Office to ignore it, perhaps leaving it up to the courts once more to say, no, you cannot do that?

Behind this is perhaps an even more fundamental question. That is, whether the public interest really is at the heart of the patent system, or whether it is not, whether there is a different interestthe different interest being the one espoused by S. 643 and, I am sure, the APLA bill. It is, bluntly, whether the patent system should be some form of a public subsidy for corporate or private research. This is the issue that is before this committee and the Congress in these bills.

Every objection that you have heard to the specific provisions which this hearing is concerned with is in the direction of denigration of the quality of the patent product and not of improving it. S. 643—I have not seen the bill the APLA is putting in, but I do not have any reason to think it would be any different, because of the philosophy of the people who wrote it-these are not reform bills at all in the sense of a constructive, meaningful reform designed to really improve the quality of the Patent Office product.

These are bills that say, well, we know we have a problem. Let's give some kind of lip service to change, but let's maintain the status quo. And while we are maintaining the status quo, let's do some other things which we have wanted to do for a long time, among these being, for example, amending section 103 to make more things patentable, permitting the filing of applications not by inventors but by assignees, and a host of other things that I will not enumerate now. Consistent with the procedures which were outlined, I am going to restrict my comments specifically to the five items in the bill which are before us this morning. I want to start out by observing that there are two, I think-at least two-common contentions which crosscut the opposition to meaningful reform. They cut across probably all five of these issues, and I am going to make a brief comment as to both of them.

The first one is this question of secrecy. What is going on in the Patent Office at the present time is the secret ex parte proceedings that result in private monopoly. No one has a right to be heard until the patent is issued. This practice, this secret, ex parte solicitation of patents, is at the heart of why so many patents are invalid. There is

not any other system in our government which will make an award to anyone against the public interest on a secret proceeding.

What is the reason why you are told that patent applications should be maintained in secret? The reason why is-and it has never been expressed literally-the reason, the underlying reason is that there is supposed to be some kind of a right which inheres in the owner of a patent application to make an election. He is supposed to have a right to elect, even at public expense, in prosecuting a patent application to carry it up clear through the administrative process and then make a decision as to whether or not he can still keep his secret or whether it has to be made available to the public.

Certainly, this may be nice for the patent applicants, because they can preserve what they call trade secrets in this fashion. But it is antithetical not only to the public interest generally but to the fundamental premise on which the patent law rests, which is that unpatentable ideas should be freely circulated.

But the problem is more difficult than that. The consequence of the fact that the Patent Office does not publish patent applications is twofold. First, the examiners themselves may not use these unpublished patent applications as prior art. The result is that the prior art criteria against which the question of patentable invention is to be judged, a large part of it is suppressed in the Patent Office and never used. It is also suppressed from the public.

You have heard this morning some kind of a backhanded justification for this. It is said that none of these patent applications that are not published and are abandoned disclose anything worthwhile anyway. If this is true, why is there this great campaign to keep them secret; if there is nothing in them that has any practical value at all, there is no reason why they should not be available, and should not be used by the Patent Office and the public as a part of the prior art to assure that only valid patents are issued. There is no legal or logical justification for this secrecy concept.

It has its foundations in certain elements of State law which define trade secrets. But we all know, and we are constantly reminded, Federal patent policy is supreme. And I think it reaches an absurdity when the Patent Office disables itself to do its job by imposing rules of secrecy which disqualify prior art.

There certainly is no reason why the applicant, having the benefit of a publicly financed examination, should not have his application published at once.

This brings me to the next point. There has been some concession to adversary proceedings. It is said these adversary proceedings should not be indulged until after the patent application is through the examination process and is published. The real reason behind this. I think, is not the one that was expressed, but it is, again, the secrecy problem.

I have spent many years at the patent bar. I have some limited amount of experience in practice before the Patent Office. The Patent Office is no different than any other judicial or quasi-judicial body. Once it has made up its mind that something is patentable and has indicated its intention to grant a patent on it, the net consequenceand there are practical occasions when you can do this, such as in interferences going to the Patent Office and saying, here is some prior

art and please change your mind and hold this claim unpatentablethe net consequence of this usually is that the prior art is made of record. The claim is still allowed and the presumption of the validity under section 282 is increased, and we have just one more patent for the courts to struggle with.

If there is going to be any practical, meaningful, useful adversary proceeding it must be under circumstances such that the public and the public counsel of the Patent Office can participate in this proceeding from the outset, not after the situation has been crystallized and you have to convince the office to change its mind.

This, in turn, is related to the Office of Public Counsel itself. I think that there may be some kind of a time limit on the practical need for this thing this thing being the Public Counsel or this type of administration. It may also be related to whether or not the Patent Office is an independent agency. But, so long as it is within the Department of Commerce, and bearing in mind that for 135 years more or less, whe have had an ex parte secret proceeding with its own ingrown problems, and bearing in mind that the present Solicitor of the Patent Office must, at all costs, defend the Patent Office position, right or wrong, and is necessarily committed to the propriety of the secret ex parte proceedings, it seems to me perfectly clear that the only way in which we can bring in a breath of fresh air and openness and a real determination to be sure that the product of the Patent Office meets the constitutional standard is, at least for a time, to get a new officer, a new lawyer, in fact, a public counsel just like. Mr. Chairman, your bill proposes.

I think this is vital. I think that all of these proposals that have been on the agenda today are vital. I think this is a particularly important one.

If the Patent Office is removed from the Department of Commerce and is created as an independent agency, then the Solicitor may well have the degree of independence that is consistent with doing the job, which I do not think he does now.

As Mr. Schuyler said, the Department of Commerce never brought pressure on him, as I understood it and the record will show, to do anything in connection with a certain, specific application. I am quite sure this is true. I do not have any implications to the contrary. It is also true, and it is common knowledge, that, philosophically, the concepts of what should be the standard of invention and the concept of what should be prior art-these are matters upon which the Department of Commerce itself thinks-and it is common knowledge that these are matters-these policy matters are things that the Department of Commerce seeks to impress its views upon the Patent Office with respect to. I do not think there is any reasonable argument about it.

And the Department of Commerce, quite legitimately, is the voice of business in the administration. I think the Patent Office has to be taken out of this influence and established as its own independent agency, where it can do its job for the public, which is the only constitutional justification for its existence.

I want to touch just in passing on the question of deferred examination, because I think that some of the things that I have already stated deal with it. But the problem which-the objections have been

made here this morning on several occasions to defer real examination is this came up in countries where there was a backlog, and we do not have a backlog any more.

Why do we not have a backlog?

The reason why we do not have a backlog is, the Patent Office is turning out hordes of invalid patents without due consideration to their legitimacy. It is more interested in quantity than it is in quality. That is how the backlog was reduced.

In the 1971 annual report of the Commissioner of Patents, he speaks with pride. It says that. "New records were again established." They were, indeed. There were more disposals in the Patent Office-I guess there was a new record in 1971-than there were before, and there are more invalid patents than there were before. And there is burden on the public and the courts as a consequence of it.

I have spent a great deal of my time in the Federal courts litigating patents. Everybody outside of the patent system, lawyers in other branches of the profession, Federal judges, economists everyone who looks at this system as it is presently constituted is absolutely aghast at the way it is organized and run.

It is time, Mr. Chairman, for a real reform. I do not think S. 1321 is necessarily perfect, but philosophically, it is directionally right. The five things that are on the agenda today are all necessary things. The argument about maintenance fees, I think, is patently specious. In truth, patent applicants are not paying anywhere near what they ought to be paying for the monopolies and the services that they are getting out of the Patent Office. They collect millions of dollars of royalties. They want to have an examination which admittedly is to their benefit, but they still want to keep the unsuccessful applications secret. They have a tax break that no one else has anything close to in section 1235 of the Internal Revenue Act, which permits them to purportedly sell a patent and collect the income from it over the whole term of the patent and treat it as a capital gain.

These patent applicants and patent owners are a very favored group of people, and it certainly is not unreasonable to expect them to pay the cost of those aspects of the administrative process which result in the patents which they impress upon the public to collect millions of dollars of royalties annually.

Mr. Brennan read Mr. Schuyler two statements out of my prepared statement. One of them had to do with the fact that the office of Commissioner of Patents was a political plum. The answer was in the context of how much Mr. Schuyler lost in his service as commissioner for a few years.

It is common knowledge in the context of other than pure dollars and cents income, first, that the office of Commissioner of Patents is a political office. It changes with the administration. It is also common knowledge that many patent lawyers aspire to it and want it.

I do not want to get into personalities or any implications of that kind. But the fact is that these patent lawyers leave their law firms. They go, become Commissioner of Patents for a few years. They go back to law firms. There must be some advantage to it, or they would not volunteer for it. It is also an undisputed fact that the office is a political office.