The Time is Right to Locate a Regional Patent Examining Office in Hawaii

The U.S. Patent and Trademark Office is the Federal agency responsible for granting U.S. patents and registering U.S. trademarks. It advises the President, the Secretary of Commerce, and U.S. Government agencies on intellectual property (IP) policy, protection and enforcement; and promotes stronger and more effective IP protection around the world.

The USPTO’s annual budget of about $2 billion is supported by fee revenues generated from patent and trademark examining operations. Since 1992 Congress had been diverting agency fees of up to $100 million per year for deficit reduction in the general budget, a practice which has been curtailed in recent years. As a result of this fee diversion, and due to missteps in its decade-long modernization efforts, USPTO operations have become mired in increasing disarray. Examination and issuance of patents have been pushed back from a target pendency of 18 months from filing to over 36 months and longer. There are over 1,000,000 patent applications on the docket awaiting examination, and with over 450,000 applications being filed annually and expected to grow by 8% per year, the delays in pendency are widening.

The USPTO faces ever more serious challenges ahead. The increasing number and technical complexity of patent applications, coupled with the many challenges of hiring, training and retaining patent examiners, continues to confront the USPTO. Examination based on “prior art” resources has not kept pace with the explosion of bibliographic and references sources becoming available in multi-languages throughout the world. With understaffed and overworked examiners struggling to stay abreast of the growing avalanche of pending cases, confidence in the quality of issuing patents has steadily eroded. The Office’s current level of 9,500 employees (of which 6,000 are examiners) needs to be expanded significantly to catch up with its growing backlog of patent cases.

As stated in its Strategic Plan for 2007-2012 operations, the USPTO has as its primary strategic goal the optimization of quality and timeliness in its patent examination operations. It has identified the following key strategies to achieving this goal:

1. Enhance recruitment to hire 1,200 new patent examiners a year to 2012 and beyond, including examiners with technical degrees in emerging technology areas.
2. Expand telecommuting and explore establishing regional USPTO offices.
3. Expand its Training Academy to enhance the training of new examiners.
4. Explore partnerships with universities to offer IP courses to science and engineering students, and develop internship programs to train students in IP matters to create a ready pool of potential examiner candidates.
5. Adopt steps for retention of examiners with special skills, and experienced retirement-eligible managers and examiners (versus the current 95% turnover of examiners within 4 years).
6. Provide assistance to industry and research communities to develop additional databases for examiners to access potential prior art for examinations.

In May 2007, at the invitation of Governor Lingle, USPTO officials attended an international conference with the commissioners of the other major patent offices (Europe, Japan, Korea, China, and Australia) in Honolulu, and while here held a discussion with Hawaii officials and members of industry and the patent bar to explore the possibility of helping to meet the Patent Office’s strategic goals by opening a regional patent examining office in Hawaii. At the meeting, the following advantages of locating such an operation in Hawaii were noted:

1. Hawaii has a large, ethnically diverse pool of U.S. citizen science and engineering graduates and pool of expat graduates seeking employment in Hawaii estimated to total at least 1,600 per year.
2. The USPTO’s federal pay scale (with COLA and hiring and retention bonuses) is 30% higher and more compared to the average pay levels for Hawaii’s tech jobs.
3. Due to the higher pay and their desire to work in Hawaii, the retention rate for Hawaii hirees for patent examining positions at a Hawaii regional office is expected to be very high.
4. Hawaii’s universities and research centers excel in emerging science areas of increasing importance, such as biotechnology, agricultural technology, ocean and earth sciences, telemetry, communications, dual use defense technologies, and renewable energy.
5. Hawaii is an ideal venue for a far-west presence of USPTO operations, and for Asia-Pacific conferences on international patent and intellectual property policies.

A Hawaii regional patent examining office might start with an initial hiring of 50 – 100 new patent examiners to be trained by senior supervisory examiner trainers relocated or rotated here from the USPTO, staffing up to a corps of perhaps 500 examiners or more in 5 years. The examiners could be hired principally in science areas matched to Hawaii’s areas of technology excellence, but would be assigned patent cases from all over. The examiners’ progress through the USPTO’s training regime and examination operations in the first 2-3 years would need to be supervised at the regional office location, but senior examiners could later expand office operations by telecommuting from home offices. The regional office may require in the range of 40,000 square feet of leased space, for classrooms, large seminar rooms, examiner offices, and telecommunications facilities. A lead agency such as PICHTR, with experience in setting up training and advanced technology projects in the State, could be tapped as a local counterpart to work with USPTO training and office facilities personnel.

A Hawaii regional patent examining office would also be able to establish broader synergies with the Patent Office and with local technology and research communities. It would bring prestige and increased patent and IP awareness to Hawaii as an innovation center. Our universities would be invited to work in partnership with the USPTO to offer IP courses to science and engineering students, develop examiner internship programs, and provide career counseling for tech graduates as potential examiner candidates. Foreign science and engineering students (non-citizens) in Hawaii can also participate in external operations ancillary to the USPTO, such as for foreign technical translation of examination resources. For the USPTO, the Hawaii regional office would establish a far western presence for promoting U.S. and international patent and intellectual property policies. The regional office would also make Hawaii more visible as an Asia-Pacific venue for international patent and IP conferences.

With President Obama and his Administration taking a new trade policy focus toward Asia, the new Secretary of Commerce Gary Locke being more trade-oriented, and a new Director of the Patent Office about to be appointed, it is time to revisit the proposal to locate a regional patent examining office in Hawaii. The USPTO Strategic Plan and goals line up perfectly with the advantages Hawaii offers in terms of a large available pool of examiner candidates, high job attractiveness and retention, supporting universities and research centers, a far western presence in the United States for the USPTO, and an international conference venue on patent and IP policies.

A Hybrid Business Model for Renewable Energy Companies in Hawaii

In my Feb. 8 blog article, “An ‘Unfair Advantage’ for Hawaii R&D Companies in Renewable Energy Technology”, I proposed that a hybrid business model for R&D companies in renewable energy technology partnering with a developer of an on-site RE power producing facility can provide significant advantages over the typical venture business model. This blog article explains in more detail how the hybrid business model for Hawaii RE companies would work.

The typical venture financing model for startup technology companies in Hawaii has been structured around lowering risk by taking advantage of the State’s 100% investment tax credits (Act 221/215). With a Hawaii average of $5 million funding for a promising deal, the company will staff up with a senior management team, rent office and lab space, and employ an engineering team, product development team, and marketing and sales teams. It typically has a burn rate of $100,000 per month, expending its funds in 4 to 5 years. But Hawaii tech companies seldom can attain market visibility or anywhere near their projected sales targets due to the previously mentioned “perfect storm” of disadvantages they labor under. Making a case for further venture funding then becomes extremely difficult. If the company has not gained enough traction to ramp up product sales to at least break-even levels, it goes into “life-support” mode until the 5-year tax credit recovery period is completed. The Hawaii investors are deemed adequately compensated by the tax credits, and the Mainland investors can try to recover value from the company’s remaining assets, typically its intellectual property and patents.

In contrast to the venture financing model, Hawaii companies developing a new renewable energy technology can use a hybrid business model that provides significantly better results for the company and its investors. Instead of a business plan based on ramping up to unreachable product sales, the Hawaii company in the hybrid business model is formed as an R&D company that will conduct a validation stage of research on a new RE technology with a dedicated customer such as a developer of an on-site photovoltaic (PV) power producing facility. The PV facility is set up to pay for its installation costs separately through federal and state RE tax credits and low-interest-rate debt financing which is more than covered by the expected energy savings.

The R&D company acts as operating manager of the PV facility and researches a “smart” energy management system that can maximize efficient energy usage of the PV facility. Raw PV arrays and windfarms produce power that fluctuates intermittently with changing cloud or wind patterns. Due to hysteresis effects, the fluctuations result in usable energy output less than the facility's real-time generating capacity. The customer/developer would need to make up for power fluctuations by buying electricity from the grid at full retail price plus utility-imposed standby-power charges. If a “smart” energy management system can be devised to squeeze out a 30% increase in energy usage of the facility and minimize the need for backup grid electricity, the R&D company can both validate the technology and justify the installed cost of the “smart” energy management system.

Since the R&D company has access to a full test bed facility, and since its business plan is not based on product sales, there is no need to staff up a senior management team, product development team, or marketing or sales team, or pay for office or lab space or product manufacturing. All investor funds can be used primarily for hiring an engineering team and performing the R&D work. Therefore, the R&D company needs to raise perhaps only in the range of $500K in the validation stage of their new energy management technology. This level of funding is within range for a Hawaii angel investor, and should fully qualify for the 100% Hawaii investment tax credits, and the State's 20% refundable business tax credit on qualifying R&D expenses ($100K on $500K research expenses). Since the test system is to be used for energy efficiency purposes at the developer’s site, the installation costs should also qualify for immediate 65% federal and state RE credits on installed costs.

If the test system proves effective in providing energy cost savings to more than justify its installation costs, the R&D company can then sell the proven system at cost to the customer/developer after the 5-year tax recovery period and distribute the proceeds to its investor(s). Counting Hawaii investment tax credits, federal and state RE credits, and recovery of facility costs, the cumulative payback to the Hawaii angel investor(s) would total at least 165%+ return (net present value) on investment (assuming half the funds are spent on installed equipment and the other half on engineering salaries). The Hawaii angel investor would also retain a larger, undiluted equity share for full upside participation if the R&D firm can now profitably commercialize the now-proven technology.

The R&D company would own intellectual property rights in the developed energy management technology in the form of copyright-protected software, patented invention rights, and/or licensable engineering know-how. It can monetize these intellectual property rights by seeking to license the technology to established RE facilities installation companies in the Mainland U.S. and globally. Alternatively, it can now credibly seek the next stage of venture capital funding for expansion of the company to commercialize the now-proven technology for sale in Mainland U.S. and global markets.

The hybrid RE business model can greatly reduce investor risk in the technology validation stage, and lessen the burdens on the company for early fund raising. It also allows the constrained venture funding pool that exists in the State to fund more companies to develop more innovative approaches to RE technology that would make achievement of the State’s ambitious goal of 70% renewable energy use by 2030 more likely. Last, but not least, the hybrid RE model would slow down the rate of saturation of wealthy investors for and defer usage of the State's investment tax credits until the RE technologies have proven their commercialization potential.

Legal Issues of Making Hawaii A Patent-Free Zone For Renewable Energy Technologies

Respondents to my earlier blog “Should Hawaii Be A Patent-Free Zone For Renewable Energy Technologies?” have raised the question, “Why limit patent-free use of renewable energy technologies in Hawaii to research grantees? That would leave out non-grantee patentees and out-of-state patentees. Why not pass a State law to exempt renewable energy technologies from patents State-wide?” This blog will outline some of the legal issues involved.

The U.S. Patent Laws are a federal statute implemented under authority of Article 1, Section 8, of the U.S. Constitution granting Congress powers (inter alia) … “To promote the progress of science and useful arts, by securing for limited times to … inventors the exclusive right to their … discoveries.” No state can enact legislation which contravenes or interferes with the U.S. Patent Laws under the well-established constitutional doctrine of Federal Pre-Emption. Therefore, the State of Hawaii cannot enact a state law that would contravene or interfere with the U.S. Patent Laws.

Enactment of any state law that would allow use of a patented invention without just compensation would probably also run afoul of the Due Process Clause of the Fourteenth Amendment to the Constitution, that “No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of … property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

The U.S. Patent Laws could be amended to modify provisions for patents on renewable energy technologies in the United States. However, this would require hearing, debate, and passage through both houses of Congress, and therefore must be legislation that would be favored by Congress as consistent with national patent policy.

Another approach might be to invoke immunity from patent suits under the States’ Immunity Clause of the Eleventh Amendment to the Constitution, that no suit may be “commenced or prosecuted against one of the … [states] by citizens of another state, or by citizens or subjects of any foreign state”. However, in order to pass muster under the Constitution, prior Supreme Court precedents indicate that a state must demonstrate that compulsory licensing of patents is necessary to achieve an overriding state purpose, the state must create a state agency to own the facilities as to which it will invoke immunity, and it must offer procedural and substantive due process of providing “just compensation” to the patentees of infringed patents. These requirements may be too complex and onerous for a state to implement.

As suggested in my prior blog, perhaps the quickest and most effective way to create a patent-free zone for renewable energy technologies in Hawaii would be to have grantor agencies for renewable energy research implement a policy of offering grantees to voluntarily exchange a non-exclusive royalty-free license to use any patented technology in Hawaii developed under research grant funding in exchange for a similar license to them to use those of any other grantees. This would be a simple “quid pro quo” for receipt of grant funds, and would probably be of most benefit to the grantees themselves. It would be entirely consistent with grantor agencies’ policies to promote cooperative and effective research efforts on renewable energy in Hawaii.

The shared patent licensing pool can be expanded by encouraging State agencies to join the pool, for example, by having the University of Hawaii and the Hawaii Natural Energy Institute renegotiate appropriate incentives for patent royalty sharing with its researchers to offset potential loss of patent revenues due to royalty-free use in Hawaii. Private companies doing renewable energy research, as well as Hawaii's utility company HECO, could also be encouraged to join the patent-free licensing pool since they have far more to gain by eliminating legal costs and roadblocks to deploying RE technology than they stand to lose in patent revenues foregone in Hawaii. Even out-of-state patentees might find it advantageous to join the patent-free licensing pool and make profits by selling RE products and systems in the State without roadblocks from patents owned by others.


** For full disclosure, Leighton Chong has handled patent matters in renewable energy technologies for the University of Hawaii, Office of Technology Transfer & Economic Development, Hawaii’s utility company HECO, and private renewable energy companies in Hawaii and on the Mainland.

An "Unfair Advantage" for Hawaii R&D Companies in Renewable Energy Technology

Hawaii tech companies are typically underfunded by a factor of 1/5 to 1/10 what their Mainland counterparts can command for the same venture proposal. At the same time, Hawaii tech companies need to offer compensation competitive with the Mainland to attract senior company officers for assurance to venture capital investors. Often key technical employees also need to be hired from out-of-State. Hawaii’s geographical remoteness from enabling business infrastructure, alliance partners, and distribution channels, along with high transportation costs, all combine to limit product sales to Hawaii’s small domestic economy (1/300 of Mainland GDP), as low levels of venture funding would make a national or global sales effort unattainable.

However, the renewable energy (RE) technology sector in Hawaii may finally reverse this decades-long “perfect storm” of disadvantages, perhaps even giving our RE tech companies an “unfair” advantage over their counterparts in other states. Based on mostly fossil-fueled power generation, our electricity rates are the highest in the nation, hitting 31 cents/kwh in October 2008 and still holding at around 19 cents/kwh, compared to a Mainland average of about 11 cents/kwh or less. This means that there is a strong economic incentive for our local businesses to install RE power generating facilities at their business locations to save on utility costs. Even at $8,000 to $10,000 per installed KW of generating capacity, they can save on utility costs more than enough to pay back on long-term (15 to 25 year) debt financing for the facility, taking into account the 65% return in RE tax credits (35% Hawaii, 30% Federal) that the project owner gets on the installed costs of the facility. When the PUC issues its rulemaking in mid- to late-2009 on feed-in tariff rates for selling excess RE-generated power back to the utility, many if not all commercial and industrial users in the State should seriously consider installing some level of solar PV or other RE power generation facilities at their business sites.

At the same time, the new forefront in RE innovations in Hawaii is not in “big-science” discoveries of exotic new materials or processes to achieve higher RE conversion ratios (which typically take decades to perfect and bring to market), but rather in near-term, practical energy efficiency improvements, “smart” energy usage management, on-site storage optimization, new user interfaces to a “smart” utility grid, etc. A tech company can partner with an RE facility owner to use the already-financed RE power generating facility as a test bed for conducting R&D on a new energy efficiency or “smart” energy management technology. Such targeted R&D on non-fossil-fuel energy technology and/or advanced software-based energy management controls should readily qualify for the State’s 100% investment tax credit and 20% refundable R&D business tax credit, even if the Hawaii investor tax credit law (Act 221/215) is amended to remove certain abuses during the current legislative session.

The anatomy of a new hybrid business model for an R&D leveraged company in renewable energy technology in Hawaii might look like this. The R&D company can partner with the owner of an RE power generating facility as a test bed. As an example, current electricity costs can justify a $3 million debt financing to pay for a 300 KW capacity, solar PV system (such as the recent installation for Tony Group Autoplex reported in the Honolulu Advertiser) as a self-amortizing business loan to be repaid over 25 years from the expected savings on utility costs, with close to $2 million in renewable energy tax credits off State and Federal tax liabilities. As a partner in the R&D work, the project owner may be given a percentage of company stock, the continued use of any successful energy efficiency or energy management system tested at their site, and/or a percentage of profits on any technology successfully proven and later commercialized by the R&D company.

The R&D company now only has to raise perhaps $500K in venture capital to test their new energy efficiency or energy management technology at the test bed site, instead of having to raise an additional $3 million to build the test bed site. Since the venture investment is specifically for R&D activity which qualifies under the Hawaii tax credit law, the investors in the R&D company will get back their $500K in State investment tax credits, and the R&D company will also get a business tax refund of up to $100K from the State for the amounts it expends on qualifying R&D costs. By having to raise only 1/7 the venture capital financing than if they had to build the test bed site, the R&D company can now focus all of the raised funds on its R&D activity, and avoid the high costs and time distractions of raising a 7x larger venture financing, hiring senior company officers, and diverting scarce venture funds into product manufacturing, distribution, marketing, sales, and customer service.

If the R&D company is successful in developing a new energy efficiency or energy management system, it can transfer the system at cost to the facility owner to continue receiving the energy savings benefits off utility costs. The R&D company will own any patent rights, copyrights in software, and other intellectual property (IP) rights in the system which they can then exploit commercially throughout the Mainland U.S. and globally, either through licensing or by then seeking venture capital financing for expansion of their company to commercialize their now-proven technology.

Should Hawaii Be A "Patent-Free Zone" For Renewable Energy Technologies?

Patents are sought by inventors to secure exclusive legal rights in their inventions. For a patent to be granted, the invention must meet a high standard of being "new" and "nonobvious" over all prior published knowledge cited in Patent Office examination and in any subsequent legal challenges. Once granted, a patent provides the inventor with exclusive rights for a limited term of 20 years from filing within which to try to derive profit from their invention. A principal requirement of the patent system is that the inventor provide a complete disclosure to the public in the patent document of how to do something that was not known before in exchange for grant of a 20-year patent monopoly.

However, the U.S. patent system has been increasingly criticized as imposing heavy transaction costs and creating legal frictions that stifle competition in industries due to what some economists refer to as "excessive rent-seeking behavior". Defending against patent infringement claims can impose heavy legal costs on companies seeking to develop new products in areas where others have obtained prior patents. Also, in seeking to maximize the acquisition of patent rights, typical company policies require company research to be kept secret until patents are applied for.

In certain fields of cooperative research requiring the participation of multiple parties, such as in long-term medical research or joint university research, it is common to form research consortiums to jointly manage or pool together patent rights in order to remove ownership and enforcement issues as obstacles to sharing research work among participants. Also, in circumstances where multiple parties must develop and optimize different parts of a complex system, such as occurred in the development of digital television and microprocessors, allowing component developers to be licensed under collective patents for the whole system can remove the legal friction that might otherwise occur from the assertion of patent rights between contributing parties.

The State of Hawaii, in partnership with the U.S. Department of Energy, has set ambitious goals (the "Hawaii Clean Energy Initiative") to convert its current, almost total dependency on imported fossil fuels to 70% renewable energy usage by 2030. To accomplish this, many new or improved renewable energy (RE) systems, processes and products must be developed, optimized, and deployed widely in the State within the 20-year timeframe. This will require cooperation in research in diverse fields among multiple parties, as well as the removal of legal frictions between multiple contributors to complex systems.

I suggest that renewable energy policy agencies in Hawaii should consider making Hawaii a "patent-free zone" for renewable energy technologies. Since much RE research will be funded at least in part by research grants, implementing a "patent-free zone" policy can start by grantor agencies adopting a policy to retain shared patent licensing rights for all grantees to use any RE technology developed in whole or in part under research funding received from those agencies.

Companies can still file for their own patent rights to keep their investors happy, but would be able to license or enforce them only outside Hawaii. Since Hawaii's economy is relatively small in relation to national and international markets, the loss of possible licensing revenues foregone in Hawaii would be relatively small, while the benefit to all companies working toward the State's renewable energy goals would be large.

As an example, the Federal Government already requires retention of a royalty-free non-exclusive license under the Bayh-Dole Act when it allows small companies to take title to inventions funded under government research grants such as SBIR and STTR. The Federal Government will only exercise its access rights if the patent owner does not or can not commercialize a patented technology that is needed within a relevant industry.

As a parallel example in the State of Hawaii, the Hawaii Renewable Energy Development Venture (HREDV) has been set up through PICHTR as a central coordination agency for channelling federal funding for RE research in Hawaii. HREDV would be well-positioned to institute a "patent-free zone" policy by retention of licensed access rights to RE technologies developed by companies receiving research grant funding. Since it is a private industry organization, HREDV could implement such a policy without requiring the passage of legislation. It can also serve as an example or starting point for State-funded research entities like the University of Hawaii and the Hawaii Natural Energy Institute, and private companies in renewable energy research and Hawaii's utility company HECO to join the "patent-free zone" policy.

With at least the main clusters of RE research in Hawaii implementing a "patent-free zone" policy, all participating companies can freely cooperate on RE research in Hawaii knowing that they will not be blocked from using whatever they have contributed, thereby promoting shared research and removing legal frictions to help attain the State's renewable energy goals.

Gaining Host Community Approval for Renewable Energy Facilities

Local opposition to siting renewable energy facilities has the potential to derail Hawaii’s ambitious goals for converting to 70% renewable energy use by 2030. Power generating facilities of significant capacity (e.g., over 1 MW), such as large windfarms, solar photovoltaic arrays, and biodiesel conversion plants, can impact residents view planes, create noise, occupy large land areas from other uses, emit trace odors or fumes, etc. The State has partnered with the U.S. Department of Energy in the “Hawaii Clean Energy Initiative” (HCEI) to showcase Hawaii as a leader in renewable energy usage. Besides keeping $18 billion a year at home that would otherwise be spent for imported oil, achieving HCEI goals would create thousands of high-skilled “green collar” jobs. But implementation of these goals will require siting many new renewable energy facilities near resident communities across the State, so the big question now is, “How do we achieve these goals?”

A useful example of how to address potential local opposition due to siting impacts is the Payments for Ecosystem Services (“PES”) model developed by the United Nations Environment Programme (UNEP) and used in recent years by the World Bank and Asian Development Bank for siting infrastructure projects in environmentally sensitive areas in developing countries. The PES model is used to promote equitable benefit sharing and sustainable resource management with communities that host development projects that impact their environment. In the PES model, the ecosystem host community negotiates an equitable agreement with the project developer to share in the economic benefits of a project, as recompense beyond the usual considerations of facility design, operation, amenities, and impact mitigation.

In a similar manner in Hawaii, communities that are hosts to renewable energy power generating facilities that impact their environment can share in the benefits with the utility company or project developer. Benefit sharing can be readily implemented through the convenient vehicle of applying discounts to metered electricity rates for residents in the host communities. This approach, which I call “Metered Benefit Sharing”, allows host communities in effect to partner with the utility company or project developer by sharing in the economic benefits of renewable energy power generating facilities sited in their communities. By encouraging communities to become proactive consumers (“prosumers”), Metered Benefit Sharing can change the so-called NIMBY syndrome (“not-in-my-backyard”) into PIMBY (“put-in-my-backyard”) cooperation.

The State Legislature should give the Public Utility Commission statutory authority to study the use of Metered Benefit Sharing, which might be used to change the attitudes of host communities to enable widespread siting of renewable energy generating facilities within the 2030 timetable for achieving the State's ambitious renewable energy goals. While sharing in the economic benefits, Hawaii residents can do their part to reduce imported oil costs and supply risks for all energy users in the State and promote the economic health and sustainable future of the State as a whole. For developers and investors, the Metered Benefit Sharing model can mitigate or eliminate risk that a project will be derailed, giving them an incentive to participate in achieving the State’s renewable energy goals.