The Patent Tsunami

Agency still struggling to handle flood of tech filings

Punch Networks first filed for its patent in November 1997, and the Seattle companys management team believed the U.S. Patent and Trademark Office was close to ruling on its application when this Interactive Week reporter called early this month.

The reporter mentioned he had seen something about one of the companys patents on the USPTO Web site. Punch, a developer of file sharing software and services, was granted a patent that covers a system for automatic peer-to-peer information distribution.

"Whoa!" exclaimed David Campbell, the companys chairman and senior vice president of corporate development. "That means [the patent has] been issued . . . You just let us know that our patent was granted. We have been sitting on our hands since January."

Campbell mentioned something about breaking out the champagne, and then he questioned the odd way in which he learned about the conclusion of his three-and-a-half-year odyssey with the federal agency.

"This is a very good example of how the various things the patent office does are slowed down by the process" of grant examination, Campbell said. "It would be great if they had some funding to modernize the process."

As the technological ferment in the U.S. grew wildly effervescent at the end of the 1990s, the number of patent applications relating to the networked world exploded. But the USPTO didnt have the staff or budget to meet the challenge. As a result, experts say, patents that shouldnt have been granted were given USPTO approval, and patents that should have sailed through spent too much time lingering on the desks of overworked examiners.

Industry advocates who champion the USPTO say it needs more examiners schooled in the process of granting "business method" patents, which in the context of the Internet are granted to companies for innovations such as Internet purchasing methodologies. The agency also needs more in-depth training for its examiners, observers say.

Hiring and training examiners wouldnt be a problem if the USPTO could keep all of the money it collects from patent applications. Because of the fees, the USPTO does not depend on a dime of taxpayer money.

However, Congress and past White House administrations have made a habit of peeling off dollars collected by the USPTO and dispersing them elsewhere in the labyrinthine federal budget. The perennial raiding of the USPTO budget has sapped the agencys ability to deal with the quickly spreading thicket of patents that grew — and continue to sprout — from the fertile soil of the New Economy, experts charge.

Now, the high-tech industry is pressing hard to persuade lawmakers that the money the USPTO collects through patent applications should all be funneled back into agency and not poured back into the overall federal budget.

"Those people are pushed to the limit every day. They are just overburdened, and that is one of the reasons we have come out so strongly to say this situation has to be remedied," says Robert Cresanti, vice president and general counsel at the Information Technology Association of America, a leading industry trade group. "At this point, there is substantial need for the USPTO to keep those funds to remain a functioning, relevant part of the United States government."

At issue for the technology community are business method patents. These kinds of patents are not new, but they constituted a backwater within the USPTO — until Internet entrepreneurs began firing off patent applications for their online businesses as fast as they were filing for IPOs and tearing through venture capital money.

As the popularity of business method patents rose, so did their notoriety. In 1999, sued in U.S. District Court in Seattle, charging that Bn.coms ordering function, called Express Lane, infringed on Amazons "1-Click" patent. The court sided with Amazon.

Protests over the 1-Click patent surged. Free software apostles such as Richard Stallman decried the USPTOs granting of the 1-Click patent and related business method patents as antithetical to software development, arguing that software designers should have free rein to invent and play with code. The USPTO countered that business method patents were not arbitrary and without merit, and began beefing up its staff of business experts.

Explosive Growth

In 1999, the business method division of the agency handled 2,400 applications, says John Love, director of the USPTO Technology Center. In 2000, that number more than tripled, to 7,800. This year, the increase is not as dramatic, but its still up by an aggressive 50 percent. Love projects that the division will handle 12,000 to 15,000 applications by years end.

Currently, the USPTOs business method area employs about 80 examiners, many of whom transferred from other areas within the agency. Four years ago, Love says, fewer than 10 examiners focused explicitly on business method patents. Love wants to hire another 20 examiners by October. "The fact is, in all the electronic areas, because of the increase in filing rates, we have a need to hire more electrical engineers to keep up with the backlog, but were competing with private industry and its hard to keep up," he says.

The dot-com meltdown has helped. Loves division has hired several people who were laid off from Internet companies. He also managed to get 10 examiners with masters degrees in business administration on staff, which is important because an understanding of business is key when deciding whether a patent application is indeed unique.

Business method patents are unlike other patents. In many fields, such as medicine, innovations are built on the shoulders of years of meticulously documented scientific advances. But much business method analysis doesnt enjoy that kind of institutional buttressing.

"Often in information technology, someone comes up with an idea, tries it six different ways and finally it works, but its written on the back of a napkin," ITAAs Cresanti says. Trying to determine "prior art" — evidence that a patent is either obvious or not new — in business method patents has become a major project for the USPTO. The USPTO has released a formal request to companies for input on the business method patenting process, in particular seeking feedback about what sources examiners should use to judge whether an application is patent-worthy.

Patents are vital to the technology sector, experts say, because they protect innovations and help reward innovators. "How does one small company get an advantage over another small company? They get a patent," says Keith Kupferschmid, intellectual property counsel at the Software & Information Industry Association. "Getting these is the one way they can increase their value, which is why you saw a great increase in the number of patents being filed."

Getting examiners up to speed on business methods and hiring new examiners costs money. President George W. Bushs fiscal year 2002 budget calls for siphoning $207 million from the estimated $1.35 billion the USPTO will generate this year.

"We understand the process, and how we fit into the overall scheme of things in terms of building a federal budget," says Nick Godici, the USPTOs interim director.

The fate of the budget is in Congress hands. Lawmakers can choose to stick with Bushs budget, they can aim for stripping more money from the agency, or they can let the USPTO keep more of what it generates.

Punchs Campbell still has about six patent applications pending. He says that he wishes the examiners were more "tech savvy," but adds that they are "very thorough." Like the Washington, D.C., lobbyists who are getting exercised about the USPTO budget, Campbell thinks the agency needs a cash boost — fast.

"From our side of the aisle," he says, "they seem to be antiquated."