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1.
OVERVIEW

During the first half of this decade, the chorus of critics of the current operation of the U.S. patent system has increased in size, and even included the occasional member of the popular press. The outcry has culminated in a series of reports by governmental and public interest organizations recommending a number of reforms to the system.2 Based for the most part on the recommendations in these reports, a bill (H. R. 2795) was recently introduced in the U.S. Congress that would introduce a number of far-reaching changes to the system. Hearings related to the proposed changes in the bill have been held in the Senate and the House, and in the various subcommittees it has been substantially revised, in response to critiques by stakeholders in the system. At the present time it is not clear when and whether and in what form legislation will issue, but that something will come out of the process seems almost certain.

My presentation today discusses the economic rationale for the patent system, briefly reviews the changes to the U. S. patent (and innovation) system that have led to the current situation, and summarizes the arguments behind the calls for reform. It then discusses in more detail the issues that are under consideration for legislation and the current prospects for that legislation.

2.
PATENTS AND INNOVATION

For an economist, the central patent policy question is whether the patent system, which entails costs and benefits, increases innovative activity on net.3 In testimony before the Federal Trade Commission/Department of Justice (FTC/DOJ) hearings on Competition and Intellectual Property Law in the Knowledge-Based Economy, I offered a simple chart as a framework for thinking about costs and benefits of patents (Table 1).

This chart is intended to suggest that in addition to the familiar arguments that patents increase innovation via incentive effects and diffusion and decrease competition because they create temporary monopolies, there are offsetting effects in both cases that have become more apparent in recent years.4 These offsetting

2

In particular, see Federal Trade Commission, To Promote Innovation: The Proper Balance of Patent and Competition Law Policy, October 2003; National Research Council, A Patent System for the 21st Century, Washington, D.C.: The National Academies Press, 2004; and the Reply to the National Academies Report by the American Intellectual Property Law Association, 2004.

3

A secondary question might be whether the patent system increases innovative activity so much that it rises above the social optimum. Most scholars and policy makers seem to agree that this is an unlikely possibility.

4

This is not to say that these effects have gone completely unrecognized in the past. Consider the following quotation from a sugar manufacturer in Great Britain during the 19th century: “In the manufacture with which I am connected—the sugar trade—there are somewhere like 300 or 400 patents. Now, how are we to know all these 400 patents? How are we to manage continually, in the natural process of making improvements in manufacture, to know which of these patents we are



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