Does Agency Funding Affect Decisionmaking?: An Empirical Assessment of the PTO’s Granting Patterns

The Failed Promise of User Fees: Empirical Evidence from the U.S. Patent and Trademark Office

“…We find evidence consistent with the above predictions and suggesting that upon the occurrence of a negative financial shock to the PTO's financial health, the PTO begins to extend preferential examination‐queuing treatment to those technologies that cost the Agency the least to examine. These results supplement Frakes and Wasserman (), which had found an increase in the grant rates of high‐fee‐generating patent types and technologies (relative to their low‐fee‐generating counterparts) in response to the same financial shocks. Moreover, in the present analysis, we find that the PTO's initial inclination to target low‐cost examination prioritization over inflationary granting practices as a mechanism to deal with binding budget constraints appears to reverse course—that is, the PTO becomes more heavily reliant on overgranting as the relevant mechanism—upon the shift in congressional fee‐diversion practices in 2004.…”

“…Furthermore, balancing its desire to increase application throughput with the disutility it places on deviating from its otherwise optimal grant rate, we predict that the Agency may limit the degree of any such deviation by targeting these distortionary overgranting proclivities on patent types that generate the highest fees for the Agency—that is, large‐entity applicants (which pay double the fees relative to small entities) and applicants within technologies that consistently renew their patents at higher rates. Frakes and Wasserman () present evidence consistent with such predictions. We replicate these findings, in part, below.…”

“…Instead, Congress routinely utilized a portion of the PTO's fees to fund other government operations, a practice referred to as “fee diversion.” The PTO's ability to retain its fee income, however, has varied over time. Consider first the period between 1991 and 2003, an era that we refer to as “strong fee diversion” because the Agency's spending authority was effectively set below its anticipated fee collections (Frakes & Wasserman ). By effectively capping the PTO's fee income in this manner, Congress likely blunted the PTO's incentives to increase its grant rates in response to budgetary pressures because the Agency was less likely to retain the fruits of such efforts.…”

“…That is, a PTO facing a binding budget constraint may issue a patent on an application that it would have declined to grant when it was financially unconstrained. We explored this initial possibility in greater depth in our previous research (Frakes & Wasserman ). Drawing on the fact that certain types of patents are associated with higher fees relative to other types, this prior research predicts, and empirically supports, that a financially‐constrained PTO will target its inflationary granting proclivities on those technologies/applicant types that tend to garner higher postallowance fees.…”

Strengthening Innovation in the United States

“…Moreover, under-pricing the front-end fees provides patent offices with an incentive to grant patents, since they receive nothing for applications denied, and the repercussions of wrongly issued patents are experienced only indirectly at some future time. This is especially likely in times of chronic budget shortfalls (Frakes and Wasserman, forthcoming 2013). While the United States is not alone in subsidizing applications and examination, patent quality is generally considered to be more problematic for the USPTO than the EPO and the Japanese Patent Office, the other two "trilateral" offices (European Patent Office (2011); Quillen and Webster (2006); de SaintGeorges and Van Pottelsberghe (2011)).…”