Patent Maintenance Fees

By Dennis Crouch

I have written before that about 50% of patents expire prematurely because the patent owners choose to not pay the maintenance fees. In many ways this is a good thing in that it clears-the-deck of patents whose owners may know of their worthlessness but that still require analysis and consideration by anyone conducting a freedom-to-operate search. And, by the time that maintenance fees are due (especially the 2nd or 3rd stage fees), the patentee should have a good sense of the market value of particular patent rights and can thus make an informed decision about whether or not to pay the fees due. Professor Rochelle Dreyfus wrote about this briefly in her 2006 article titled Pathological Patenting. Dreyfus wrote that “application fees should be low enough to attract patenting by all inventors and maintenance fees should be high enough to encourage abandonment of noncommercial patents.” Rochelle Dreyfus, Pathological Patenting: The PTO as Cause or Cure, 104 Mich. L. Rev. 1559 (2006).

A major percentage of USPTO revenue is generated through these maintenance fee payments. Since those payments require no additional USPTO work beyond the fee processing, the several hundred million dollars in maintenance fee payments can be used to subsidize the examination of more recently filed patent applications. In 2008 and 2009, the USPTO saw a major drop in maintenance fee payments that can be correlated with the economic downturn. The payments have risen again and are hovering around the all-time highs. The USPTO is in the midst of a major revision of its fee structure based upon its newfound authority and responsibility under the America Invents Act (AIA). As part of those changes, the USPTO has suggested an increase in the maintenance fee payments, including a 55% increase in amount charged for the 3rd stage maintenance fee. In a recent whitepaper on fees, the USPTO Director’s official advisory committee (PPAC) agreed with an increase in maintenance fees but suggested that the 3rd stage fee increase could negatively impact USPTO revenue.

The maintenance fees set forth in the NPRM are reasonable since by this point in the process, patentees should have a better sense of the value of their Intellectual Property (IP), although the PPAC still questions the increase proposed for the third stage maintenance fee. Given the percentage of patentees who currently pay for this stage, the concern is that revenues will decrease more than projected when fewer patentees elect 3rd stage maintenance. As the USPTO has noted, the AIA Fee Setting authority does not contemplate a once-and-done approach, but careful (at least yearly) review of fees and the observed behaviors of both applicants and Office personnel in response to the fees. PPAC encourages such continual review, especially with respect to things like responses to the 3rd Maintenance Fee and potential future course-corrections.

The chart below provides a time series of maintenance fee payments grouped according to fee payment deadline. Maintenance fees are due at three points following patent issuance: 3 ½ years; 7 ½ years; and 11 ½ years and the current fees are $1,130, $2,850, and 4,730 respectively (with 50% discounts for small-entities). In each case, the patentee is given an additional six-months to pay the maintenance fee (with a late-penalty surcharge). Thus, the USPTO does not officially record the patent as expired until the 4 year; 8 year; or 12 year mark respectively. It is those expiry deadlines that are represented in the chart below. Even after expiry, the USPTO generously allows expired patents to be revived. Those revivals are taken into account in the chart.

The chart shows three different series. The top series represents the percentage of patents where the first fee was paid. The middle series represents the percentage of patents where the second fee was paid. Obviously, in order to be eligible to pay the second fee, the patentee must have also paid the first fee. The lower series represents the percentage of patents where the third fee was paid.

From the chart, we can see that the percentage of payments for the second and third fee have fully recovered from the 2008-09 downturn and are at their highest points in the past decade. Payment for the first maintenance fee payment is still slightly below the pre-downturn rate. I expect another drop once the USPTO implements the new fee structure in early 2012. The chart above is important for USPTO revenue, but it doesn’t tell the whole story since the number of issued patents has been rising over the past 12 years, as we move forward USPTO revenue may increase even if fee payment percentages decrease.

Patent Expiry: An important element of any freedom to operate search involves the question of whether or not particular patents have expired and thus freely available in the public domain for subsequent commercialization. Unfortunately, our current patent information system does a very poor job of linking patent expiration to search results. In addition, the USPTO’s loose revival allowances (that make it easy to revive abandoned patents) mean that the data could not currently be relied on even if available. We still have some work to do.

20 thoughts on “Patent Maintenance Fees

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  2. Also keep in mind the low allowance rate of patents during the Dudas era, resulted in fewer patents on which to pay maintenance fees and that has had an impact on the cash flow at the USPTO.

  3. I wonder about the constitutionality of the proposed maintenance fees, and in particular the fact that the amount is set by an adminstrative agency, and not Congress. The amount cannot be considered a cost-recovery fee, and may supplement the general fund. Also, patentees of previosuly issued patents will now be subject to fees intended to subsidize current applicants.

  4. The problem is that with prohibitive maintenance fees, the patent owners have to review every patent at each interval instead of just automatically renewing everything.

    That’s a good thing, isn’t it? Patentees should know what patents they have. If they’re already practicing all their brilliant ideas, it shouldn’t be a problem – renew everything.

    If they’re not going to practice or license the patent, they might as well let it go so the public can be clear on their intention. If it’s more efficient for them to pay the fee than to perform the review, then they can pay the fee and call it a win. I have a feeling most companies would rather spend time than money.

    Much like taxes, this will reduce revenue, not increase it.

    You’re underestimating the amount of revenue elasticity here. They could charge a hundred million dollars for each fee, and they would still get enough revenue to stay in business, because enough patents out there are worth paying that much to keep. It’s simply a question of how to distribute the cost, and it’s probably fairer and better for the economy to let people hold on to patents that are “only” worth less than a million dollars or so.

    And sophisticated entities will probably just put more consideration into whether to file up front.

    No, they won’t. Higher maintenance fees means lower examination fees, so much more filing. It’ll be the better part of a decade before the first maintenance fee comes due, and by then it’s a business decision based on the commercial value of the patent that would have been nearly impossible to assess at the time of filing.

    Did your patent turn into a huge success? Pay the fee with a smile. Did it not? You just saved some money.

  5. The loss-follower is premised on the idea that most people recognize patents are a good thing.

    The drum-beat that patents are “bad” has a consequence here.

  6. The problem is that with prohibitive maintenance fees, the patent owners have to review every patent at each interval instead of just automatically renewing everything.

    Much like taxes, this will reduce revenue, not increase it. And sophisticated entities will probably just put more consideration into whether to file up front.

    Further, you’re going to incur tons of unreimbursed examination costs for new applications encouraged by low fees in the face of falling maintenance fee revenue. Bean counters probably see a problem with this (i.e., bankruptcy).

  7. anon said “Maintenance fees obtained from ex-US patent owners are significant, thus making the funding of the Patent Office susceptible to swings in regional economic conditions in the world.” – Interesting. This seems to assume that the rest of the world is more volatile than the US.

    In fact renewal fees are valuable in limiting swings in income, because the world economy tends to be less volatile than any one part of it. And I suspect that the flexibility and responsiveness of the US economy to economic conditions, in fact makes it more volatile than other regions of the world.

    In Europe at least, economic blips tend to affect number of filings to a greater extent than renewal fees. If funded solely by filing fees, income would be as volatile as the economy at large, particularly as a patent application is largely a leap of faith.

    In contrast the value of a patent is much clearer by the time you get to paying later renewal fees, and so people are less willing to file a patent whose value is uncertain, than maintain a patent whose value is known.

    To confirm that the US too behaves in this manner, just compare the minor ripple in the graphs above with the significant drop in filing numbers shown at link to patentlyo.com.
    See also link to uspto.gov which shows that in 2009 renewal fees dropped by 2.7% but filing fees dropped by 4.6%. [By the way some accounts are presented to conceal rather than reveal – the USPTO is not the only patent office that seems to adopt this style].

    Accordingly, it seems to me that renewal fees act as a useful damper to financial swings and act in fact as a virtual “reserve” for the patent offices.

    What of course is the most amusing aspect of US renewal fees is their distribution as 4-yearly chunks. Most other countries have annual fees which make year to year budgeting much easier. Does anyone know why the unique 3 ½ years; 7 ½ years; and 11 ½ years system was adopted? Was it simply to make life difficult for docketing?

  8. Hi Dennis

    I dont’ think the two are mutually exclusive; right now if a patent goes abandoned, no one retains any enforcement rights, and the asset is lost. Once it is gone, there is only a limited window to revive, and one has to prove that it was unintentional. This is not easy when there is usually a conscious express approval to let the asset lapse.

    For that class of assets, the government could specify that they pass on to the government to monetize as it saw fit. Of course the government could outsource the monetization function as well if it wanted.

    OTOH there would also be a useful market in assets that are likely/intended to be abandoned, but have not reached that state yet, and thus can still be easily alienated. That is where I think there is a greater private market opportunity – locating those assets ahead of their abandonment.

  9. What you term “pony-up” I term “clydesdale-up”, and the “horse” over time keeps getting larger and larger.

    Please feel free to correct me if I am mistaken, but it is my understanding that maintenance fees currently comprise somewhere in the neighborhood of about 30% of USPTO revenues, which revenues are added to all other revenues received by all functional groups within the USPTO and then turned over in aggregate to the General Fund. From this “aggregate collection” Congress funds the operation of the USPTO as an entity, and not each functional area within the USPTO.

    If my understanding is correct, then at least some portion of the maintenance fee revenues form the basis for funding allocated to the USPTO to cover all of its operations. To me this means that not only are patentees funding the patent unit of the USPTO, but also its trademark unit.

  10. I agree that the skyrocketing costs do create disenfranchisement problems. But, that said, I don’t really think that the 12-years maintenance fee is likely to cause any disenfranchisement. At that point, folks are already well into the system and the only question is whether the patent holder wants to pony-up an additional sum to keep their patent in force for another 2-5 years.

  11. What you call a “subsidy” I call a “direct tax” paid to the coffers of the US Treasury (i.e., the General Fund), which under my view may involve a constitutional issue relating to apportionment.

    Dennis, I have been involved with the patent system since the late 70’s. When I began my practice the system was actually affordable to virtually every applicant. Since then I have seen nothing but skyrocketing costs that left unchecked will continue to disenfranchise persons of otherwise limited financial means.

  12. Thanks Anon – Your macro-impact idea is the same point that my wife made last night when we were discussing the chart and I think it is quite astute. Clearly the 2008-2009 drop is a macro-impact. However, if you line up the patents according to issue date, it also becomes apparent that there are micro-impacts as well that are apparently due to qualities of the patents issued at that time.

  13. Pro Se: At this point the maintenance fees provide a large subsidy for filing fees. The patentees are going to pay either way and the question is whether they should it all up front (at the application stage) or can they pay part of it at the back-end.

  14. The heavy reliance of the Patent Office on revenue from maintenance fees and its lack of linking to work needed to be performed by the Office is an issue that will repeatedly occur with economic swings. Maintenance fees obtained from ex-US patent owners are significant, thus making the funding of the Patent Office susceptible to swings in regional economic conditions in the world. Other self-funded patent offices operate using the conventional business practice of having reserves or lines of credit to address temporary ebbs in unlinked revenue. We have to be realistic that politicians don’t walk the talk of having government be more like business. The consequence is that the Office will have to either adjust fees based upon an instantaneous point in the economic cycle or adjust the level of services. I wholeheartedly agree that the maintenance fee system provides a valuable benefit to society and the fees should be sufficiently significant to effect that purpose, but those funds are, and will continue to be, an 800 pound gorilla affecting Office performance and fee levels.

  15. One thing that I can take away from the graph of data as presented is some identification of external effects that affect patent maintenance fee payments regardless of worth of any particular individual patent content.

    Any external event that affects all patents across the board indicates such macroscopic effects. This is seen in the rise and fall of the three graphs at the same time (such same-time effects obviously affect different groups of patents). Intrinsic effects – those based on actual content, are more likely to be seen by time shifting the red and green data sets so that the percentage data approximately tracks the same set of patents.

    The fact that the three bands have a high correlation to time and a far lower correlation to any shift for actual content shows that the maintenance of patents is highly elastic. If “worth” of patents were a driver, one would expect the fall in percentage at the blue line to track to a fall in percentage in the red line four years later (rather than a rise as is seen).

    The post also highlights a very good point of what drives the Office in setting these fees. Should the fees be seen as supplementing costs (which in essence is the only viable excuse for charging so much for so little actual work), or should they be seen as a way to force people to give up their property (or at least the limited amount of time promised at the beginning of the process)? Contrary to the philosophy of Professor Dreyfus, patents have never been a guarantee of making money. If you want that, then an entirely different system of driving innovation should be devised, one that pays patentees directly and then turns and fully makes the patent items public domain.

  16. Maintenance fees were enacted back in the 80’s when certain people at the PTO and elsewhere noticed that they were being used in Europe. Such fees were seen by them to be a perfect cash cow requiring zero work on the part of the PTO staff.

    I was opposed to them then, and nothing that has transpired since then has given me any cause to change my mind.

    In my view they continue to be a grossly unfair assessment serving no purpose other than sticking it financially to patentees.

  17. Some time back I think it was a fellow at Patent Calls who suggested that the government should have a program by which they take possession back of patent assets if maintenance fees lapse and then auction them off to third parties to raise revenue. The original owner would retain the benefit of a non-exclusive license so that they could not be sued at least going forward.

    It seems like a win-win situation since the government would get revenue for assets that would otherwise go to waste, at little risk to the original owner.

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