The U.S. Patent and Trademark Office is sitting on hundreds of potential small businesses – and, according to its director, 'millions" of jobs – because it can't keep pace with patent applications.

"Hundreds of thousands of groundbreaking innovations that are sitting on the shelf literally waiting to be examined - jobs not being created, lifesaving drugs not going to the marketplace, companies not being funded, businesses not being formed - there's really not any good news in any of this," said David Kappos, the patent office's director. Kappos was speaking on a panel at the annual trade show of the Biotechnology Industry Organization in Chicago.

And the news gets worse. The 1.2 million application backlog – at an agency Kappos refers to as 'our country's innovation agency' -- stifles economic advancement at exactly the time China is investing heavily in research and development. According to the World Intellectual Property Forum, China has the world's third-busiest patent agency behind the U.S. and Japan, but may soon overtake Japan.

More than 700,000 of those 1.2 million applications in the pile haven't had so much as a preliminary examination, Kappos said – 'which by the way is too many by at least a factor of two and a little bit more than that.'

What's the big deal about a paper jam? Technologies go unprotected or become obsolete, while inventors and investors are forced to pace the halls, unable to start their businesses. Attempts by the patent office to catch up on its paperwork have also been disastrous for entrepreneurs: An extensive Milwaukee Journal-Sentinel investigation last year revealed that in an effort to catch up with its paperwork, the agency rejected applications at an unprecedented 60 percent rate, including many that were later proved worthy of a patent.

"Highly innovative firms rely on timely patents to attract venture capital," Kappos said, adding that 76 percent of start-ups say their venture backers needed the validation of a patent to invest.

The potential companies are also unable to hire. Half of new jobs come from new companies in their first five years, according to figures cited by Gary Locke, the U.S. Secretary of Commerce. 'New companies are established to monetize innovation,' the Commerce Secretary wrote.

Locke, whose department includes the patent office, voiced support of patent office reform, currently the subject of bills in both the House of Representatives and the Senate. 'America may still be a world leader in key metrics of economic success – like levels of entrepreneurship, R&D investment and IT infrastructure – but a report last year from the Information Technology and Innovation Foundation concluded that no advanced economy has done less than the United States to improve its competitive position over the past decade,' Locke wrote.

Kappos was on Capitol Hill this week for a hearing related to the proposed patent reform, which would hand the agency more control to manage its finances, which currently are controlled by Congress. Attempts at patent reform have failed twice in the past three years. (Read Kappos's testimony here.)

One thing you can expect either way: An increase in patent fees. Kappos said the agency needs the cash to meet the goals in its proposed $2.322 billion budget for next year. Among the goals: Reducing the average time for preliminary examination of an application to 10 months by 2014, and reducing total average wait time for patent applications to 20 months by 2015. (Plans are also afoot to publish monthly statistics on wait times.) To meet those goals, Kappos said the office will need to hire 1,000 new patent examiners a year for the next two years.

Want to have your say about patents? The agency is taking written comments on patent quality and ways to improve it until June 18. In addition, it will hold (and Webcast) two public roundtables, May 10 in Los Angeles and May 18 in Alexandria, Virginia. For information on the Webcasts, click here.