Patents as an Instrument in Restraint of Trade

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Patents as an Instrument in Restraint of Trade

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PAfBsras as ait xHdtRtiKSRT Xir mtmiattT of m m

by Otto Fredric Freitag

A dissertation submitted la partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Department of Political Science, la the Graduate College of the State University of Iowa May, 1948

ProQuest Number: 10984056

All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is d e p e n d e n t upon the quality of the copy subm itted. In the unlikely e v e n t that the a u thor did not send a c o m p le te m anuscript and there are missing pages, these will be noted. Also, if m aterial had to be rem oved, a n o te will ind ica te the deletion.

uest ProQuest 10984056 Published by ProQuest LLC(2018). C opyright of the Dissertation is held by the Author. All rights reserved. This work is protected against unauthorized copying under Title 17, United States C o d e M icroform Edition © ProQuest LLC. ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 4 8 1 0 6 - 1346

FOEIWORD

The patent grant, whose principal purpose is to encourage inventora to reveal an invention so that society may receive the benefits of technological advance, has been diverted at times from this purpose to become an instrument for restraining trade and establishing monopoly. Thus the patent grant at times comes into conflict with Anti-Trust Acts, The purpose of this study has not been to analyze the whole field of patent problems, but rather to discover the scope of the patent grant as interpreted by the courts under the Anti-Trust Acts and the patent laws, to analyze the significance of the court interpretations, and to point out a method for reconciling the patent grant with the purposes of the Anti-Trust Acts— a competitive economy. Not all aspects of the problem of patents have been discussed.

The study has been limited to those

which seem to the author most significant and which appear to be most in conflict with pure competition. Sources studied in investigating the scope of the patent grant and the patent practices have consisted primarily of court oases, the Hearings before the Temporary National Economic Committee in 1936-1939, and the Hearings before the Bouse Committee on Patents in 1935 and 1936. V It has often been difficult to avoid casting off the role of impartial ^observer and assuming that of advocate. If the author has appeared to M £ fall in this respect it is in spite of a conscientious attempt to be N

^objective. If he has succeeded, much of the credit must go to Associate o ”Professor Ethan P. Allen, of the Political Science Department of the i/;State University of Iowa, under whose direction this dissertation was i:Ljwritten.

-iii-

Ihc author desires to acknowledge his deep indebtedness to Professor Allan for a careful reading of the manuscript and invaluable suggestions during all stages of its preparation, Much credit is also due Professor George Robeson and Professor Prank Horack of the Political Science Department of the State University of Iowa who have reviewed this manuscript*

The author’s wife has done much toward making this

work possible* Besides providing needed Inspiration and encouragement, bar patience in typing has greatly aided in the preparation of this dissertation* Any credit which this study may deserve is gladly shared with her*

Iowa Gity, Iowa April £7, 1942

0* Fredric Freitag

CONTENTS

Chapter

Page

I Background of Patenta ...................... ♦ Patent Law in the United States

........

. .

Relation of Patent® to Competition . . . . . . . XX The Anti-Trust A ct a ........ III License Restrictions

. .

X 4, 0 16

...................

28

Prlee Restrict ions to Make and V e n d ........

29

Produetion Restrictions..................

32

Market Restrictions..........

34

"Tying" Clauses . . . • « . . . . . . . . . . .

37

Resale Prices

........

44

IY Suppression, "Fencing", and Litigation........

50

V

...........

Consolidation of Patents

............

YX Patent Pools

68 02

YXX A Patent Policy for Today

.......... 106

References....................

124

Bibliography

147

...................

1 Chapter I BACKGROUND 07 PATENTS The Industrial arte are deeply embedded in the past and the efforts to promote the arte and sciences through the centuries are part of our cultural legacy. Before beginning a discussion of the law of patents to promote the progress of science and the useful arts, it is necessary to survey briefly the history of patents, both in England and the United States* In the early days of the English government, patents were granted by the crown as personal privileges to some currying favor in the court*

These grants were neither Issued under any authority given

by acts of Parliament nor regulated by any statutes, but emanated direct­ ly from the king*1 During the Middle Ages it was felt that the granting of exclu­ sive monopolies for temporary periods might prove wise in the promotion of trade and industry.^ This policy of attempting to bring prosperity to England by encouraging trade and Industry through monopoly grants was followed* Apparently it was quite successful for during the Middle Ages the industrial attainments of the English were far below the level of their continental rivals,3 but by the end of the fourteenth century con­ siderable manufacturing had arisen and its development is "universally attributed to the fostering influence of the crown* . ."4 From the reign of Henry III to the ascendency of Queen Elizabeth to the throne, the granting of special privileges was maintained and pro­ tected by the crown.

One authority states that under Elizabeth "this

pernicious practice reached its high water mark*

The very necessities

of life were controlled under royal grant by a chosen few of her favorites.

Salt rose from sixteen pence to fourteen shillings the bushel, while other staples soared likewise through the grafting activities of this favored coterie of monopolists. Along with their arbitrary power came the right to violate personal liberty to the point of searching stores and private property to hunt for such commodities as would Infringe upon their unfair advantage."5 These conditions threatened the Infant industrial system and resulted in agitation for reform.®

"in 1601, Queen Elizabeth, owing to

threatened action by Parliament, summarily cancelled the most objection­ able patents, and allowed the courts of law to pass judgment upon the n

remainder •”

The following year the common law basis for future patent

decisions was established in the ease of Darcy v. Allin.8 Darcy was granted by letters patent from Elizabeth, full power to make, buy, and import, end otherwise trade in, playing cards. Allin, who had imported cards and thus reduced Darcy*s market, was sued by Darcy for damage, deciding tile case the court stated:

m

"How therefore I will shew [showj

you how the judges have heretofore allowed of monopoly patents, which is, that where any man by his own charge and industry, or by his own wit or invention doth bring any new trade into the realm, or any engine tend­ ing to the furtherance of a trade that never was before: and that for the good of the realm: that in such cases the King may grant to him a monopoly patent for some reasonable time, until the subjects may learn the same, in consideration of the good that he doth bring by his inven­ tion to the commonwealth*, otherwise not."8 Meanwhile, James I had ascended the throne.

The decision in

the Darcy case had given a legal sanction to the popular unrest and the

-3King suspended all monopolies except those of the trading companies and guilds* Due to his nssd for revenue, however, James issued a new flood of patents*10 mus the intensity of the issue concerning patent grants grew until Parliament answered the popular appeal for redress of griev­ ances by passing the famous Statute of Monopolies in 1623.11 mis act voided all monopolies.12 Any patent which was granted prior to the enactment, however, was extended for another twenty-one years.13 In spite of the strong language of the act in outlawing monop­ olies, a later section states "• * . mat any Declaracon before mencohed shall not extend to any tree [letters] Patents and Graunts of Privilege for the teaxme of fowerteens yeares or under, hereafter to be made of the sole working or makings of any manner of new Manufactures within this fiealae, to the true and first Inventor and Inventors of such Manu­ factures, which others at the tyme of makings such tres [letters^ Patents and Graunts shall not use, soe as alsoe they be not contrary to the Lawe nor mischievous to the State, by raisings prices of Comoditles at home, or hurt of Trade, or generallie Inconvenient; the said fowerteens yeares to be accompted [accomplished] from the date of the first tres [letters] Patents or Grant of such priviledge hereafter to be made, but that the same shall be of such force as they should be if this Act had never byn made, and of none other.*14 m e statute gave to any person or persons who might be "hindered, grieved, disturbed, or disquieted" on pretext of a royal grant, a right of action for threefold the amount of the damages and double the costs sustained; and provided that all such suits "should be forever after examined, heard, tried, and determined by and according to the common

-4« law* of the realm and not otherwise In this sotting the patent, as an instrument of the arts and solenses, received its initial legislative sanction.

This statute was

the expression of a public policy which has continued to live, and the many incidents and eases fhich followed were merely an effort to sub* due the power of the kings for the more common good. P ^ g n t^ w in ^ e ^ te ite d ^ a te s

As the movement of peoples started across the Atlantic to the Hew World,' they brought with them an established culture.

In being

transferred to a new environment it became necessary to adapt to the new conditions, but many of the old bonds remained. A number of colonies rested upon a grant of letters patent to a proprietor or company and this was the very foundation of the colonies' existence.

The patent,

therefore, is one of our oldest institutions and the common law pertain* ing to them was transferred to early America. In respect to letters patent for the promotion of invention, the colonial period carried on very little manufacturing as agriculture was the principal interest of the people. England looked upon the colonies as a source of raw material and a market for finished products, and through her policies of taxation, the granting of commercial monop­ olies, and tariffs she was able to meet any potential competition from the colonies. But in spite of the policy of the mother country, some patents were issued. During these early days each colony had the authority to grant a patent upon a petition to its legislature, and there is evidence that

«»£)«■ patents were granted.

la 1646 Joseph Jenks applied for and wae granted

a patent on an "engine for the wore speedy outting of grass."

South

Carolina issued a patent on pumping machinery hat required that the patentee build for all applicants alike and maintain reasonable prices.1® Under the Articles of Confederation the system of state grants was continued# With the breakdown of the government under the Articles of Confederation and the attempt of the Constitutional Convention to remedy its many defects, the power "to promote the progress of science in

and the useful arts" was entrusted to Congress.

Under the authority

granted by this provision Congress passed the first patent law in 1790.

18

Under this Act an examining board composed of the Secretary of State, the Secretary of War, and the Attorney General could issue a pat­ ent for fourteen years if they considered the invention or discovery 19 "sufficiently useful and important." In 1790 only three patents were granted; in 1791, 33; in 1798, 11; la 1793, 80.80 Due to the dose supervision of Mr. Jefferscm the Act of 1790 became unpopular,^ so In 1793 a second patent law was passed.

This

statute substituted regulation for the rigid examination of the previous Act. One had merely to swear to the originality of his Invention and 94 pay his fee to secure a patent; its validity was decided by the courts.* 23 In 1836 an act was passed which repealed the law of 1793, and marked the beginning of our present patent system,

this Act again provided for the examination system and created the Patent Office. The law of 187024 was largely a consolidation of the Act of 1836 and supplementary statutes, and with slight changes it is still in operation today. One

author

states that since 1836 "the history of the patent system has been a

series of variations on a common theme.

Hae refinement of procedure,

the accommodation of the statute to the growing perplexities of in­ dustry , the establishment of a patent office, the development of a tradi­ tion* the creation of a special caste of examiners and attorneys— these eg have been the hallmarks of a century*a development.”* from the inception of the present United States Patent Office System in 1636 until 1646* the law allowed for the patenting of four statutory classes of subject matter.

1fceae classes were machines,

articles of manufacture, process or methods, and compositions of matter. op In 184£ the Patent Laws were amended to provide for designs, and in 1930 provision was made for the issuing of patents on plants* Some of these terms require definition. A machine "comprises a combination of component parts which operate together according to an inherent mode or law of operation"®9— for example a cotton cleaning or "ginning** machine. An article of manufacture is "an assemblage of parts passively useful in reaching a beneficial result"30 — for example, a tooth brush or a lamp. An art is a process, method or "mode of treating a physical thing for the purpose of transforming it into a different state."31 Processes may be of a chemical nature— such as the vulcaniza­ tion of rubber; a mechanical nature— such as metal lathe; or an elec­ trical nature— such as the telephone.

A composition of matter Is the

intermixture of two or more Ingredients, possessing properties pertain­ ing to none of the ingredients separately, and a new and useful result must be evolved,

— such as dynamite or ethyl gasoline. A design is

the form or configuration of an article, or It may reside in the surface ornamentation or in both configuration and ornamentation of an article

26

-7of manufacture33 — such aa an automobile, or knife and fork* A plant mast be a distinct and new variety, it must not be tuber-propagated, and it must be dhown to be asexually reproductive3* — such as the juni­ per tree* Patents may not be granted on a principle of foree of nature for the Supreme Court has stated that **A principle is not patentable* A principle, in the abstract, Is a fundamental truth, an original cause, a motive; these cannot be patented, as no one can claim in either of them an exclusive right* Nor can an exclusive right exist to a new power, should one be discovered in addition to those already known* Through the agency of machinery a new steam power may be said to have been generated* But no one can appropriate this power exclusively to himself, under the patent laws*

The seme may be said of electricity and

of any other power in nature, which is alike open to all, and may be applied to useful purposes by the use of machinery*

In all such cases,

the processes used to extract, modify, and concentrate natural agencies, constitute the invention*

The elements of the power exist, the inven-

tion is not in discovery then, but in applying them to useful objects."^ A discovery of a physical property is not patentable.

In 1846

Dr. Horton, a Boston dentist, discovered that ether could be used as an anesthetic and he secured a patent on his discovery, but in subsequent litigation the court said that " . . . a discovery is not patentable. A discovery of a new principle, force, or law, operating, or which can be made to operate, on matter, will not entitle the discoverer to a patent. The statute grants ". . .to the patentee, his heirs or assigns,

for the term of seventeen years, • . . the exclusive ri^ht to make, use end vend the invention or discovery throughout the United States and the Territories thereof. • .

The exclusive right granted by the patent

is often misunderstood. Even though the statute appears to grant the "exclusive right to make, use and vend the invention," actually no such rights ere given for the inventor has no more ri^tt to practice his in­ vention than he had before. A patentee, however, is given the right to exclude others from making, using or selling the invention that is covered by the patent.

This is a negative ri^ht, the importance of which

cannot be overstressed.

Its full significance will become more obvious

in following chapters. The ri&it to restrain others in making, using and selling the invention has been protected by permitting the United States Courts "to grant injunctions . . . to prevent the violation of any right secured by patent . • .w3® If, in a suit for infringement, it is found that the patented article has been infringed, the court "may enter judgment there­ on for any sum above the amount found by the verdict as the actual damages sustained • . . not exceeding three times the amount of such verdict to­ gether with the costs."39 Relation of Patents to Competition The legal basis of the American patent system has remained es­ sentially the same as it was a hundred years ago.

The patent system is

fundamentally a rationalization of the competitive economic system, for it shares nearly the same basic features and assumptions as competitive eoottomie theory.

It is necessary, therefore, to examine briefly the

American economy of the early nineteenth century when conditions more nearly fit the theory*

This brief analysis will permit a better under­

standing of competitive theory and its relation to the patent philosophy* The first outstanding characteristic of the American competi­ tive system is freedom of private enterprise— and that Implies competi­ tion* freedom of enterprise exists when any individual is legally at liberty to engage in any economic activity he chooses*

Under this

philosophy men are free to engage in any type of business, such as wagon making, or to develop a new one * Early patent law was in harmony with this principle in that the law permitted the inventor to establish his own factory and exploit his invention*

It was in this early period that

the theory of equality of opportunity more nearly fit the conditions of the times, for there was real equality of opportunity which made real competition*

There were three factors that made for this equality*

first, in America there were few industrial capitalists when America started her industrial expansion* No class was entrenched in in­ dustry as there was in England. Capital requirements, too, were modest enough due to the small Chops with their simple tools, to insure equal opportunity to enter into the various fields of activity*

Second, the

exploitation of natural resources in America was open to everyone. Here was a vast amount of land and natural resources that were available and had only to be exploited to establish a factory. foreign investment in America.

Third, there was little

This created opportunities for the small

enterpriser for he could establish his business on a small scale, and with diligence and intelligence he could amass a sizeable fortune.*1 in this early era of real free enterprise and small units of

—10 business every person was a self-sufficient bargaining unit.

The labor*

er was both laborer and businessman, the technician both technician and financier*

The patent illustrates this clearly for a patent is essen­

tially a reward for a businessman.

It grants a monopoly over an inven­

tion so that the reward for inventing must be obtained by becoming a businessman and financier. The second pillar of the competitive economy is private profit. The profit motive obviously assumes a materialistic psychology and this has been carried over into American patent law. Our law accepts the profit motive as stimulus enough to bring forth all socially desirable inventions, and postulates personal material gain as the major incentive to*the individual inventor. The third pillar of the competitive economic system is private propertyThe theory most generally advanced to explain and defend the institution of private property is called the ”social utility theory* of property.4'® According to this theory private property rights exist and may be justified because private property is socially the most use­ ful mode of utilizing wealth.

The criterion that is set up Is the pro­

motion of the social welfare, and it justifies private property on the ground of its social usefulness as an incentive to the production and utilization of wealth.

The social welfare is promoted by permitting

each individual to have and dispose of the product of his labor, the theory being that if everyone has the right to enjoy the fruits of his toil he is spurred to greater efforts, and by promoting his own self interest he promotes the public interest. The patent laws are in harmony with this concept of property,

-11 that is, one has a right to the product of his labor and thus, indirect­ ly promotes the social welfare* By granting the inventor a right "to use, sell or vend1* his invention for seventeen years, the state guaran­ tees the Inventor the right to the product of his labor and also promotes the social welfare of the state* As has been previously stated the patent law is, in general, a rationalisation of competitive economic theory*

there is one excep­

tion to this, however, which has made possible the use of the patent to attain and maintain a position of monopoly,

this exception is the grant

by the government of the exclusive right "to make, use, and vend" an in­ vention* Actually the patent gives the inventor no more right to prac­ tice his invention than he had before, but he does have the right to exclude others from making, using or selling that which is covered by the patent* This means of rewarding an inventor for his creation is incom­ patible with the competitive laisses fa ire society that existed when Adam Smith wrote his famous treatise and when American patent law was formu­ lated* For example, the milliner or the Shoemaker had an absolute right to do with his product as he wished.

The inventor, like the milliner

or the shoemaker, created a new product and he, too, was entitled to the product of his ability and initiative*

There is one fundamental

distinction, however, for the milliner*s or shoemaker*s right to his pro­ duct does not deprive other men of a similar right to make hats or shoes; whereas the granting of the patent gives the holder of the patent a monopoly over the article end prevents others from making the same good. While the competition of substitute goods are a threat, never-

-1£theleas, within the field of hie demand he has a monopoly*

Competition

assumes that the number of producers will be large enough so that the effect of one producer on the market is negligible, but under the grant of the patent the patentee can exclude others from entering into compe­ tition with him. It is obvious, therefore, that the patent law is in­ compatible with competition* 45 The term competition is used as meaning "pure competition*** "Pure competition" is distinguished from "perfect competition" in that pure competition is unalloyed with monopoly elements*

It means only the

absence of monopolistic elements and does not include perfection in any of the other aspects of perfect competition— such as perfect mobility of the factore« perfect knowledge of the market or that adjustments are made instantaneously*

The market may be very imperfect but it is purely com­

petitive* Patents were further justified on the theory that one could not be deprived of the right of entering a trade when that trade had not pre­ viously existed; however, when the patent has expired the trade becomes common and the field is thrown open to all.

Bros, no one loses: the in­

ventor is paid for his efforts, society gains a new product, and even­ tually a new trade*

This philosophy is clearly shown in a speech given

by Jamas Whitney in 187b:

"Could any system be more plainly founded on

substantial justice, both to the inventor who creates and sells, and the public that buys and uses? . . * The inventor simply sells to the world what it never possessed before, and the public pays him* • • • Die world will not buy unless It can find its own profit in buying and thus the patentee cannot profit unless the world be a gainer also."44

-13On the basis of this brief analysis it is apparent that the patent system reflects the competitive economic theory and conditions of the nineteenth century.

It is now necessary to examine briefly the

change in our economy since the establishment of the patent laws. The competitive economy has been the tradition in America. Every school boy knows that according to tradition competition is unre­ stricted and if he invents a better mousetrap he may rise to wealth and position as easily as the heroes of Horatio Alger.

In observing the

American economy today, however, it becomes apparent that competition does not exist in many fields of economic activity.

Die breakdown of

competition in these fields has introduced rigidity in these non­ competitive parts and impaired our traditional economy.

The transition

from the competitive system of our forefathers to an economy in which monopolistic elements prevail, has challenged the philosophy which com­ petition has as Its foundation. The development of the machine ushered in a period in which the large industrial units and business organization replaced the small shop of former days.

This was inevitable because it was impossible for the

small shop to adopt mass production techniques and specialised division of labor. As the new industrial order entered, into the various economic fields the free competitive society that had been known was radically altered. After the factory system supplanted the small enterprise of the period before the industrial revolution, the corporation arose to again affect the economic system.

The first manufacturing enterprise to be

organized as a corporation was in 1813,44 after which one aspect of

-14 economic life after another came under corporate away,

in 1899 the cen­

sus reported 66.7 per cent of all manufactured products as made by cor­ porations , while 87 per cent of goods were so produced in 1919, and Berle and Means felt that It was fair to assume that over 94 per cent 47 of manufacturing was carried on by corporations in 1934. thus the modern machine, with the business organization that is required to make it function efficiently, has substituted large con­ centrated units of production for the small units of the early American and Adam Smith type. As the corporations continued to develop the move­ ment of concentration of control set in nfcich has been so keenly analyzed by A. A. Berle, Jr., and Gardiner Means in The Modern Corporation and Private Property. The development of monopoly4® followed closely and was depen­ dent upon the ever-increasing concentration of control over industry. One writer says "• • • the movement towards concentration certainly does contain the most fundamental germs of monopoly, the desire and^the ability of manufacturers to dominate in their branch of industry or line AQ of trade in order to increase profits." With the emergence of monopoly the econouqr of competition began to weaken. One of the major premises of competition was being challenged. This premise is that the number of firms selling a given product must be so great that the effect on price of the output of each is negligible.50 This condition no longer existed with the rise of monopoly, and today it is found that prices In many fields are no longer established by the forces of supply and demand but are established or administered by busisi ness executives. This idea was more fearfully expressed by a statement

signed by 140 American economists In 1932 which states, "There is grow­ ing doubt whether the capitalistic system, whose basic assumption is free markets and a free price system, can continue to work with an ever widening range of prices fixed or manipulated by monopolies*" That patentahavebeen-a factor in the attainment of a monopoly -

~

~









*

position is generally acknowledged■✓Tor as one authority says, "Indus­ trial monopoly, where it does not depend upon natural monopoly, Is usually the by-product of protection or a system of trade marks and patent legislation definitely inimical to competition."ss The ri^it to use, sell or vend an Invention grants a monopoly for seventeen years and so long as it runs, the owner has the market for his wares very largely to himself.

During this period of temporary protection, he has every op­

portunity to dig in and barricade his trade against the newcomer.

The

WBQ reports that "He builds up good will, induces consumer acceptance, employs advertising, erects a marketing system, comes into control of the channels of distribution. When his patent expires, he remains in coamand of the strategic heights. He is able to put at a disadvantage 54

any adventurous concern which would dispute the market with him."

It is quite apparent that the economic institutions which have grown up around the legal framework of the patent system have changed very radically. Recognizing, then, the change in our economy and teSftmlogy,ytnii^^dijt^ld(§tion..m XXX.....dttem® Are patents used as an instrument in restraint of trade?

«tion— ,

Chapter II SHE ANTI-TRUST ACTS It has been pointed out that the Constitution empowers Congress "to promote the progress of science and the useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries#"1 Innocent as this grant of author­ ity at first appears, a controversy arises when this clause is set be­ side another grant of power in the same article of the Constitution which states "Congress shall have the power * • * to regulate commerce with foreign nations and among the several states • # The controversy appears when it is considered that a grant of an "exclusive right" means the grant of a monopoly. Such being the case, Is it sot obvious that a conflict will arise between the monopoly granted by Congress and the efforts of Congress to regulate interstate businesses carried on with patented products which effect material modifications in the character and scope of the patent grant? The Sherman Act was a weapon for controlling "big business" that has come down to us from another era. At the time the Act was being considered the factories were still relatively small and using simple mechanical processes.

The telephone and the electric light were still

in their infancy, the airplane was still a wishful hope, and the radio and motion picture were yet unthought of.

In this period the captains

of industry were able to stake out their industrial areas at the expense of the public. Out of this era arose the demand for the eradication of the trusts and the restoration of the competitive processes as they were sup­ posed to work. Amid this background Congress passed the Sherman Act

-17under the authority of the commerce clause, for it was felt that the eco­ nomic system could function effectively and without severe dislocation only if competition were enforced in all industries and all restraints on the production and sale of goods were prohibited. While the word "com­ petition" is not found any place in the Sherman Act, the debates before Congress reveal that preservation of cospetition was the avowed objective of Congress.5* Congress, therefore, passed the Act which was entitled "An Act to Protect Trade and Commerce Against Unlawful Restraints and Monopolies."

The first two sections of this measure read as follows:

"See. 1. Every contract, combination In the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars or by imprisonment not exceeding one year, or both said punish­ ments, in the discretion of the court. "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a misdemeanor, and on conviction thereof shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or both said punishments, in the dis­ cretion of the court."4 Due to the generality of the prohibitions under the Sherman Act "there is no single case or even group of oases which set forth a com­ plete and definitive exposition of the meaning of the act."8 It is the purpose of this chapter to attempt to find what is considered to be a "restraint of trade," a "combination or conspiracy," and "monopoly" as used in the Sherman Act. Briefly, the substance of the doctrine of restraint of trade under the common law is this:

Trade

is said to be restrained when freedom of competition is hampered among

—13— employers. In relation to the Sherman Aet the courts have said that re­ straint of trade consists of "the destruction, restriction or stifling of free competition in trade and commerce among the states*"

In the

n

case of Nash v. United States the court said at common law and under the Sherman Act the words "restraint of trade" or "restrains trade" em­ braced only such acts, contracts, agreements or combinations "as by reason of intent or the inherent nature of the contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing the course of trade." A great variety of acts performed by American business have the effect of restraining trade, yet such acts are not all necessarily unlaw­ ful*

The court, in the case of Standard Oil Co* v. United States® es­

tablished the principal test of legality— restraint is illegal only if it is unreasonable. According to this criterion, not every contract or combination which operates to restrain free competition between the parties is deemed as unlawful under the act, but only those contracts which aim at a monopolizing of the trade or business, or which are un­ reasonable in the sense that they are prejudicial to the public interest. The court has held that trade combinations which affect competition are Q lawful, when their purpose is to prevent trade "abuses" and a combina­ tion which is simply an effort after greater efficiency is not in viola­ tion of the Sherman Act.10 In United States v. The American Tobacco Company,11 the court stated still more emphatically the "rule of reason" in construing and applying the Sherman Act, for it said the application of the rule of reason " . . . we now, in the most unequivocal terms, re-express and re-

-19affixm.*1® The court said, In the case of Board of Trade v. United States13 "The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is siash as may suppress or even destroy competition." It is thus apparent that no hard and fast rule or precise cri­ teria as to the legality of restraints of trade can be laid down, for the court has said that "To determine that question (legality of restraint of trade) the court must ordinarily consider the facts peculiar to the 14 business to which the restraint is applied. . . . " To better understand the meaning ofthe Sherman Act, it sary to find what is meant by "combination orconspiracy" as used

is neces­ in the

Act. A conspiracy is a "combination of two or more persons, by some con­ certed action, to accomplish some criminal orunlawful purpose or

to ac­

complish some purpose not in itself criminal or unlawful, by criminal or unlawful means."1® When applied to combinations among businesses, this means that their activities are criminal if their aims are illegal or if the methods they use to attain their purposes are illegal. This wording is still too vague to shed light upon the applica­ tion of the doctrine to specific cases.

There are no concrete tests to

be applied, so it is necessary to again turn to specific cases, for 1he court has said that the intent of the parties and effect on the public and such considerations can generally not be applied academically or theoretically, but only upon a realistic consideration of the nature and conditions of the business.1® The court stated, in the Apex Hosiery Company Case, that only such contracts and combinations are within the Sherman Act as, by reason

•80* of intent or the inherent nature of the contemplated acts, prejudice the publlo interest by unduly restricting competition or unduly obstructing the course of t r a d e T h i s indicates that the legality or illegality of purpose rests on the mot ire of the combination as revealed by its actions* In regard to intent or motive, it has been said that one of the most satisfactory ways to "determine what is the reasonableness or un­ reasonableness of the restraints put upon trade by a contract is to con­ sider the motive, extent and effect of the contract, consider the cir­ cumstances under which it was made, consider what the parties had in mind, what motives served to move them to the various ends they sought to attain, and then in the light of those considerations say whether or not that which they did was, under all circumstances, obtaining in its nature and effect unreasonable in its restraint upon the free flow of the Ifi commerce involved." If the underlying motive is immediate injury to the public or the lessening of competition, the combination is a conspiracy in restraint of trade.

On the other hand, if the main purpose appears to be ultimate

betterment to the public and the injury to a competitor merely an un­ avoidable and incidental accompaniment, the combination would be lawful. When businesses compete with one another for sales, each is exercising his own rights and at the same tin© is in conflict with the others* rights. As a result of competition certain businesses may be financially ruined, but they have no legal redress against their rivals so long as they have not been Injured intentionally or by unfair methods.

Ttie

court has said that restraints on competition "are not illegal under the

-81Shaman Anti-Trust Act, unless the restrainta are shown to have or are intended to have an effect on prices in the market or otherwise deprive purchasers or consumers of the advantages which they derive from free competition**19 Several other points arise out of the conspiracy doctrine which have been established by court decisions* An agreement to restrain com80 meroe is an offense irrespective of whether it was actually carried out* Furthermore, if the purpose is to restrain Interstate trade, the degree of restraint is immaterial•

Finally, the amount of commerce affected

is not material to the charge of restraint of trade

The doctrine of

conspiracy to restrain trade then, means a combination or conspiracy to fix price8, divide the market, curtail production* The Sherman Act also states that any person who shall "monop­ olize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or comma rce among the several states, or with foreign notions** is guilty of a misdemeanor. It becomes necessary therefore to attempt to find how the court has in­ terpreted the word "monopoly.” In the ease of Burrows v. Interborough Metropolitan Company^ the court said that the word "monopoly” as used in the Sherman Act is not used in a strict legal sense, but it is used in a different, but equally well understood, sense as meaning the ob­ taining of a substantially complete control of a particular business or article of trade* It becomes necessary as a result to turn to the court cases to find what factors enter into a charge -of control or monopoly.' The court stated, in the case of Lynch v. MagnavoxCompany,®4 that "monopolize” under Section 8 of the Sherman Act menus u?tha'acquisition

of power to fix prices, limit production, or deteriorate quality." On the Oasis of what the courts have said regarding a conspir­ acy in restraint of trade and a monopoly, It is necessary to see the re­ lation between the two.

In the case of United States v. Whiting25 the

court said "ftiare may he . . . an unreasonable restraint of trade which does not constitute a monopoly; though there can be no monopoly which does not constitute an unreasonable restraint of trade•** Thus it is found that the practices which constitute restraint of trade also are practices which are within the power of the monopoly— namely, fixing prices, curtailing production, division of the market and/or deteriorating quality* A conflict26 appears between the patent laws which grant to the patentee the "exclusive right to make, use and vend the invention or discovery . . . " and a conspiracy in restraint of trade or a monopoly, since every patent holder enjoys a legal monopoly for a limited period, and patents have thus been used to defeat the purposes of the anti-trust laws by means of patent consolidations and restrictive licensing, by which prices may be fixed, production curtailed, the market divided among sellers, and quality of product reduced. These practices restrict the opportunity for new firms to enter into the various industrial fields, and groups are able to intrench themselves in power which enables them to have far-reaching control over production, prices and the industry in general.

The objectives of these

devices has been the circumvention and nullification of the competition sought by the anti-trust laws. The line between action that is legally permissible as within

-83the eeope of the patent monopoly and the Illegal action of restraint of trade Is, indeed, very thin, hut of exceedingly great importance for it is this line that will, and does, determine if we are to have a free competitive economy* As one writer says, "Competition and monopoly stand as opposites in economic terminology.

They represent mutually exclusive practices

and principles. They are as opposite as freedom and bondage, as liberty «» and s e r v i t u d e I t is necessary, therefore, if we wish to retain a free functioning economy, to remove the obstacles that make possible the attainment and maintenance of monopoly and restraint of trade.

That

patents may be used to foster monopoly and restrain trade is apparent, for as one author says " . . . many Issues along the boundary between the patent laws and the anti-trust laws have never been brought to trial* Patents are being used to allocate markets to particular enterprises, to set up systems of production control, to control the terms of sale of products, to erect an elaborate control of the price of a finished product upon a basis of some small patented detail of the product, and to develop contracts which have the effect of extending controls like those Just mentioned, not for seventeen years, but for two, three, and OQ four times that period." By approaching the problem through a case study of the methods or techniques used by the patent holder to attain or maintain a position where he may Influence the price of a good or service, it is possible to find how far the patent monopoly has been extended and to what extent the anti-trust acts have limited the extension of the patent monopoly. The application of the Sherman Act to patent licenses falls

-24into two classes.

First, Its application to individual licenses, and,

second ite application to groups of lieenses (patent pools) as a part of a general schema to restrain trade and create a monopoly. The object of the patent grant is the creation of a monopoly, while the object of the Sherman Act is the outlawing of monopoly. While the line of demarcation between lawful and unlawful monopoly is not clear, nevertheless the following chapters will attempt to find what is per­ mitted under the patent grant and what is held to be a restraint of trade or monopoly under the Sherman Act. If the patent as a legal sanction is available to offset the anti-trust act, then perhaps it is necessary to recognise the situation and change one or the other.

If the manufacturer is able to use patents

of dubious validity to maintain a defense against competition, the price to him is small.

If license agreements contain restrictions in respect

to price, production, and territory, then perhaps the way is open for ingenious restraints of trade, or monopoly.

If such protection is valid,

the patent owner becomes sovereign to an industry; a private corporation may thus establish an industrial government. All modem industry rests upon machine technology and there is hardly a product or a process which a patent and a bit of ingenuity cannot control or obstruct. In the following pages it may be well to remember the words of a prominent witness before the TNEC, who said "In law a monopolistic practice is one that can be proved to be a violation of existing law. To economic science, however, a monopolistic practice is one that inter­ feres with the flow of free and fair competition in industry, even thou^t 29 the practice or condition may be unreachable by existing law.**

-25In 1914 Congress passed the Clayton Act "To supplement exist30 lng laws against unlawful restraint end monopolies." The most im­ portant seotion of the Clayton Act is Section 5 which states that it is "unlawful for any person engaged in comaerce, in the course of such com­ merce, to lease or make a sale or contract for sale of goods, wares, merchandise, machinery, supplies or other commodities, whether patented or unpatented, for use, consumption or resale within the United States or any Territory thereof or the District of Columbia or any insular pos­ session or other place under the jurisdiction of the United States, or fix a price charged therefor or discount from, or rebate upon, such price, on the condition, agreement or understanding that the lessee or purchaser thereof Shall not use or deal in the goods, wares, merchandise, machinery, supplies or other commodities of a competitor or competitors of the lessor or seller, where the effect of such lease, sale, or contract for sale on such condition, agreement, or understanding may be to substantial­ ly lessen competition or tend to create a monopoly in any line of com­ merce Before either the Sherman Act or the Clayton Act was passed, a series of practices had developed which used patents to control an industry.

Some of these abuses were within the scope of the Sherman Act

but it was later thought desirable to supplement the Sherman Act with the Qlayton Act. The relationship between these statutes was clearly pointed out in the United Shoe Machinery Company case: "The Sherman Act and the Clayton Act provide different tests of liability.

This was determined

in the recent cause of Standard Fashion Company v* Magrane-Houston Company,

-86ante 346.

In that caao we pointed out that the Clayton Act was intended

to supplement the Sherman Act, and within its limited sphere established its own rule. Under the Sherman Act as Interpreted by this court before the passage of the Clayton Act, contracts were prohibited which unduly restrain the natural flow of Interstate commerce, or which materially interrupt the free exercise of competition in the channels of interstate trade.

In the second section monopolisation or attempts to monopolize

interstate trade were condemned.

The Clayton Act (Section 3) prohibits

eontraets of sale or leases made on the condition, agreement or under­ standing that the purchaser or lessee shall not deal in or use the goods of a competitor of the seller or lessor where the effect of such lease, sale, or contract, or such condition, agreement or understanding •may* be to substantially lessen competition or tend to create monopoly.

133®

cause of action is therefore not the same. "That the leases were attacked under the former bill as viola­ tive of the Sherman Act Is true, but they were sustained as valid and binding agreements within the rights of holders of patents.

The Clayton

Act specifically applies to goods, wares, machinery, etc., whether tpatented or unpatented.* This provision was inserted In the Clayton Act with the express purpose of preventing rights granted by letters patent from securing Immunity from the inhibitions of the act."32 That the Clayton Act is to have a broad interpretation is ob­ vious, for the court has said that "All contracts or acta which were unreasonably restrictive of competitive conditions, either from the na­ ture or character of the contract or act, or where the surrounding cir­ cumstances were such as to justify the conclusion that they had not been

27 entered into or performed with the legitimate purpose of reasonably for­ warding personal interest and developing trade, but, on the contrary, were of such a character as to give rise to the inference or presumption that they had been entered into or done with the intent to do wrong to the general public and to limit the right of individuals, thus restrain­ ing the free flow of commerce, and tending to bring about the evils, such as enhancement of prices, which were considered to be against public policy*1,33

-J3-

Chapter III LICENSE KE3TRICTI0NS In approaching the problem of patents and the nee of restric­ tive licenses from the point of view of the anti-trust laws, the validity of a single restriction is whether its tendency toward monopoly out­ weighs the purpose of the restriction of encouraging invention through the protection of the patent grant. Various kinds of restrictions in the licensing of patents are permitted under the patent grant.

The present chapter has to do with

the nature and extent of the restrictions which may be Imposed upon li­ censes* As the patent monopoly is limited and defined it is important to remember that the court and not the economists has established the limits of the patent grant.

The definition of the patent should be

stated in terms of an economic philosophy since the patent is an econo­ mic institution, but the approach of the courts to the problem of pat­ ents often omits the economic and social repercussions of the strict legalistic approach. With this in mind the present chapter is an attempt to establish the scope of the patent grant as established by the decisions of the courts. While the social and economic consequences are not completely ignored, the author is pausing only long enough to point out the affect of the restrictions upon a competitive economic system. Before approaching the legal aspects of restrictions in li­ censes it will be of value to survey some of the underlying circumstances which have caused businessmen to look upon restrictions as desirable in the licensing system.

The patent owner, if he is exploiting the patent,

and the licensees themselves have been alert to the advantage of a system

-29of licensing whereby a large portion of an industry is made to accept limitations on price, production, or markets.

It is often felt that the

royalty is a small charge for the legal shield it may appear to offer against too active competition and the consequent threat to profits. There are several general restrictions that the courts have passed upon.

The right to make, use, and vend may be transferred in

whole or in limited part*’ and cannot be extended by the patent holder beyond the original letterspatent£ or by the licensee beyond the grant to him.

The legal sale of a patented article passes beyond the monopoly

grant,* but the sale of one type of patented machine does not permit the e

use of another type owned by the same manufacturer.

In general, the

patentee may attach such limitations on the licenseefs use of patented articles as do not go beyond the influence of the patentee *s complete monopoly without granting licenses.^ Price Bestrictions to Make and Vend The right to impose price restrictions in licenses to make and vend was first upheld by the Supreme Court in the case of Bemont v. 7

national Barrow Company.

In this case a combination of manufacturers

owning a patent to make float spring tooth harrows, licensed others to make and sell the products under the patent, on the condition that dur­ ing the continuance of the license they would not sell the product at a price less, or on more favorable terms of payment and delivery to pur­ chasers, than were set forth in a schedule which was a part of the li­ cense.

This was held to be a valid use of the patent rights of the owners

of the patent.

To the objection that this made for monopoly, the court

-30Btated, "The very object of these laws la monopoly, and the rule is, with fsw exemptions, that any conditions which are not in their very na­ ture illegal with regard to this kind of property, imposed by the pat­ entee and agreed to by the licensee for the right to manufacture or use or sell the article, will be upheld by the courts*

The fact that the

conditions in the eomtraete keep up the monopoly or fix prioea does not render them illegal."® In the ease of United States v. General Electric Company,

Q

General Electric licensed Westinghouse to manufacture patented tungsten incandescent lamps, and to sell them at a price fixed by the licensor— General Electric. Both of these companies together supplied eighty-five per cent of the electric light bulbs sold in the United States and the other licensees of General Electric accounted for another eigbt per cent. The court held that the restrictions were valid and that no violation of the Sherman Act was shown.

In regard to the price fixing by the licensor

the court said: "It would seem entirely reasonable that he (the patentee) should say to the licensee, 'Yes, you may make and sell the articles under my patent, but not so as to destroy the profit that I wish to ob­ tain by making and selling myself.*"10 A. recent decision of a lower court11 did not question the legal­ ity of a license agreement which stated that the "Licensee agrees not to give away any of these baskets made under this license agreement, except the sample; nor to sell any such baskets for less than the fair market price thereon; and on such terms and conditions as licensor may from time to time decide are Just and equitable."1® It appears then that the right to fix prices to the first buyer

-31is perfectly legal,

That a price may be controlled for a whole industry

through restrictive licenses is mads apparent by the policy of the Hartford-Empire in the milk bottle trade.

In this industry practically

all manufacturers operate by the grace of Hartford licenses,13 Hartford has made price reductions unattractive, and those who would out prices may he brought in line by the threat that the three large producers 14

whose licenses are unrestricted would undersell them.

Thus, the larg­

est producer of milk bottles has been able to set the price for the in15

dustry

— apparently with the aid and consent of Hartford.

is

Undoubtedly the right to fix prices at which licensed manufac­ turers may sell means increased profits, but it also means higher prices to the consumer*

The monopolists9 primary desire is to control the out­

put of a conmodity and thus fix prices at will, subject only to oonsumer demand.17 Competition of substitutes is a threat, but within the field of his demand, he rules undisturbed. Patents, as a legal monopoly are very effective for control of production and price fixing,1® and even if not so used, the power exists.

The power to control production and

on prices Is claimed to be used only to prevent the "ruinous competition" of actual sales,®1 Price fixing can be one of the most effective methods by which competition may be suppressed.

It Introduces rigidity into that part of

the price structure which the commodity in question comprises and pre­ vents tbs flexible adjustment of such prices to fluctuations in supply and demand, Mi©ther the prices are unreasonable or reasonable, the es­ sential quality of flexibility and the advantages of competition are destroyed by such restrictive licenses.

-32With the Quickening tempo of modern economic life, prices must he constantly revised if they are to continue to he entirely fair.

If

priees are not to he determined by the forces of supply and demand the question of who is to determine the fairness of prices becomes paramount in Importance . The public obviously cannot rely on the self-restraint of the licensor, especially if the product is fairly well removed from the competition of substitutes or if the licensor holds a dominant posi­ tion in an industry.

Judicial or administrative supervision of the

reasonableness of prices seems to be out of the question, for a ruling approving the prices today is no guarantee that priees will be satisfac­ tory a week or a month from now.

Ihe difficulty too of determining the

"reasonableness" of a price by either a private or public body presents a nearly insurmountable obstacle, for we have only to observe the ef­ forts of the Interstate Commerce Commission in attempting to establish "reasonable rates" for commerce carriers to realize the magnitude of the task.

If, however, we leave the establishment of prices in private

hands it seems that it will Inevitably lead to governmental price fixing in order to protect the consumer. Production Restrictions It is quite apparent that licenses restricting production to certain quotas are also valid.

Hie patent owner is within the scope of

the patent monopoly when he grants licenses to manufacture and requires his licensees to restrict their output in accordance with schedules GUtlined by him.

In four cases22 the patent holders have imposed as a con­

dition in a license that the licensee agree to sell the product on "such

-33terms and conditions as Licensor may from time to time, decide are just and equitable." Production restrictions have been felt to be "just and equitable** by licensors and have been held a valid use of tbe patent grant. The policy2® of restricting output of products manufactured on leased patented machines is not uncommon.24 The power2® to compel such practice by even a slight suggestion2® is an overwhelming inducement an

to contract by lease with the patentee

for a definite market.

The

patentee's valuation of such production privilege, never exercised but a threat to a possible future licensee,22 at times rims as high as 29 #100,000. Private stabilisation of a portion of the general industrial fluctuation is facilitated by this method30 which avoids the competitive retaliation of the free market License restrictions that allocate quotas suppress competition in the same way as does price control; it may, in fact, be one of the methods by which priees are regulated for any manipulation of markets affects prices and is equivalent to price fixing.

It is apparent, then,

that the patent grant provides direct control of the productive processes in an industry end enables curtailment of supply to a point on the demand curve where hoped-for maximum profits are to be found, and the fixing of the price at the intersection.32

Thus in the attempt to equate supply

with the probable demand through the use of production quotas the li­ censee may have to limit the hours his plant will operate or perhaps even Shut down for a time. The regulation of output by a licensor does not necessarily imply curtailment of production, but the test is not whether output is

•34* reduced but whether it la determined at the will of a patent bolder rather than by the nomal operation of competitive forces.

The control of out­

put in private hands is inconsistent with the maintenance of competition and, like price fixing, cannot be tolerated if pure competition is sought. The same economic and administrative objections as apply to price fixing apply here and need not be repeated. That many industries would overproduce if they were not re­ stricted by the patent holder cannot be denied.

This too would raise

serious economic problems, but the solution to such problems is not to be found in any industrial policy which destroys competition and gives dictatorial control of industrial processes to a patent holder.

The ad­

justment of supply to demand through competition is much preferred to private control of the policies of industrial output. Market Restrictions Restrictive licensee are often issued to make and vend that place a limit on the market in which the licensee may sell.

This may

take 1he form of a restriction upon the use for which the patented art­ icle may be sold, an allocation of territory, or a prohibition of sale to certain firms or individuals. The question of licensing to manufacture and sell for specified uses is very important.

To what extent the use of a patented device may

be controlled by an owner of the patent was raised in the recent case of SUL

General Talking Pictures Corp. v. Western Electric Conpany.

The owner

of patents on vacuum tube amplifiers granted a license to make and sail the patented amplifiers for radio broadcast reception, radio amateur

-36reeeption, and radio experimental reception.

One of the licenseea made

the patented amplifiers and sold them to a talking picture corporation* Both the purchaser, who knew of the restriction, and the vendor knew that the articles were to he used for motion picture theatre sound systems. In a suit against the purchaser by the owner of the patents embodied in the device, the court held that the restrictions of the vendor's license were valid under the patent law, and the use of the an^lifier by the pur­ chaser was an infringement. thus, licenses to make and vend for specified uses divide up the patent monopoly. But in some situations they may be used to effect concentrations of economic power and to prevent the growth of competition that would otherwise develop under unrestricted licensing. Territorial limitations are also common, and their legality goes unquestioned.

It is even possible to make a partial assignment of

a patent for certain designated areas, for the Supreme Court has said that "The owner of a patent may assign it to another and convey, (1) the exclusive right to make , use, and vend the invention throughout the United States, or, (£) an undivided part or share of that exclusive right, or (3) the exclusive right under the patent within and through a specific part of the United States."35 The territorial restriction may be used to foster monopolistic practice by dividing up fields where the various licensees would otherwise be in a position to compete. The courts have, however, held that the right to use after the sale of a patented article may not be restricted- as to place or time • 36 In the case of Adams v. Burke .the court decided that a patent license couldn't restrict the use of a certain type of coffin lid to an area whose

radius was within ten Bilee of Boston.

Ifce court held that where a pat­

entee had assigned his right to manufacture, sell and use within a dis­ trict, a purchaser acquired the right to use it anywhere, without refererne to other assignments of territorial rights by the same patentee. Restrictions with respect to the persons to whom sales may he made are uncommon. United States

In the case of Bthyl Gasoline Corporation, et al, v.

the court assumed that the corporation could "exclude at

will from participation in the nationwide market for lead-treated motor fuel all of the IB,000 motor fuel jobbers of the country; by refusing to license any of the 1,000 unlicensed jobbers, or by cancelling, as it may gQ at will, the licenses of any of the 11,000 licensed jobbers." She licensed manufacturers were not permitted to sell to jobbers who were not licensed and it appears to be the general practice to revoke the li­ censes of jobbers who failed to maintain resale prices or otherwise did not comply with the regulations established by the holder of the patent. While an older case40 in tfhich a similar plan for licensing jobbers as a part of a general scheme to control the industry through a restrictive licensing system was declared illegal, the later case upholds the validity of the restrictions with respect to the persons to whom sales may be made. 41 In a case before the Circuit Court of Appeals no question was raised as to the right of the licensor to restrict the sales of the li­ censees* manufacture "(a) To radio amateurs for use in radio amateur stations; (b) to radio experimenters and scientific schools or univer­ sities for use In experimental and scientific school or university radio stations."4®

-37It appears then, that If a patentee is not attempting to control an Industry he may restrict, toy license, those to whom the licensee shall sell,

the right to place restrictions with respect to the person to whom

sales may toe made gives a vast potential power to suppress competition among the purchasers of patentable articles.

While this ri^at comes under

the patent grant, such power cannot be lawfully exercised if It actually restrains trade, for it comes under the prohibition of the 3hsraan Act. The effect of market restrictions is obviously to eliminate competition.

The owner of a patent may be fearful of the effects of com­

petition and resort to market restrictions rather than direct price fix­ ing* Any distribution of business necessarily limits output, increases costs and limits the possibilities of expansion for the least cost firms. The least efficient producers are protected and any advantages of cheaper production and distribution are lost to the consumers. "Tying" Clauses The Clayton Act outlaws the well known "tying" clauses if they "substantially lessen competition or tend to create a monopoly."

it must

be remembered that the Clayton Act involves a consideration of the valid­ ity of agreements and the determination of whether any particular agree­ ment effects or is likely to produce a restraint of trade. Frequently, although not always, attests have been made through the use of the "tying" clause to control a field of economic activity by providing an agreement made by the patent owner with his licensee that the patented article or process be used only with materials or supplies purchased from the patent holder. A business that wishes to obtain the greatest possible profit from its patent may be tempted to explore the

-36possltollltles of controlling the supplies and services employed in keep­ ing the patented machine in operation.

Xf both the machine and supplies

are patented the patent owner has a completely closed market for the machines and supplies.

If, however, the patentee seeks to extend his

control over supplies or accessories by selling or leasing patented articles upon the condition or promise that the licensee should buy other materials exclusively from the patentee, the arrangement may violate Section 3 of the Clayton Act. Before the passage of the Clayton Act, the practices which Sec­ tion 3 now prohibit were controlled by interpretation of the patent laws. It was under the patent grant that concerns attempted to legalise the tying of unpatented supplies to the lease of a patented machine. 44 In the Button fastner Case the contention that the patent grant might result in a monopoly in unpatented supplies for the patented device was considered merely a legitimate control granted under the pat­ ent statutes.

The Button Fastner Company owned patents for a machine for

fastening buttons to shoes with metal fastners.

These machines were sold

only on the condition that they be used with fastners manufactured by the seller, even though the fastners were unpatented.

The Bureka Company

made and sold these fastners which were useable only with these machines. The court held the Bureka Company guilty of infringement and said "The monopoly in the unpatented staple results as an incident from the monop­ oly in the use of complainant's (Button Fastner Company) invention and Is therefore a legitimate result of the patentee's control over the use 45 of his invention toy others." 46 In the Leeds and Gatlin case the Leeds and Gatlin Company

-39made and sold records to bs used with a Victor machine, and contended that "the person who has purchased a patented combination from the pat­ entee has the right to replace an unpatented element of the combination and for such purpose to purchase such element from another than the patentee or his licensee."4^ Leeds and Gatlin further contended that the "replacement" of the records, if unpatented, by the purchaser is not a "reconstruction" of the patented combination but "an act within the JQ

rights of the purchaser."

The court stated that the unpatented state

of the records made no difference In the case and that the Leeds and Gatlin Company was guilty of infringement, because the sale of them for use in the patented combination did not amount to replacement of a worn out part but reconstruction of the combination. the case of Henry v, A* B. Dick and Company49 upheld the two previous oases on the basis of similar facts.

The Dick Company which

manufactured patented duplicating machines attached a notice stating that "This machine is sold by the A. B. Dick Co., with the license restriction that it may be used only with the stencil, paper, ink, and other supfin plies made by A. B. Dick Go." These supplies were unpatented so Henry manufactured an ink which could be used with the patented machine* a suit brought against Henry by the Dick

Company,

In

Henry contended "that

any transfer of the patentee’s property right in a patented machine car­ ries with it the right to use the entire invention so long as the identity of tiie machine is preserved, irrespective of any restrictions placed by the patentee upon the use of the article and accepted by the buyer," and that "by such a sale the patentee disposes of all his rights under his patent, and thereby removes the article from the operation of the patent 81 law." The court denied this contention by stating that this argument

•40 "ignores the distinction between the property right la the materials composing a patented machine, and the right to use for the purpose and in the manner pointed out by the patent » . . the two things are aspar­ able rights," and "if the right of use be confined by specific restric52 tion, the use not permitted is necessarily reserved to the patentee Before the passage of the Clayton Act the Supreme Court upheld the validity of the tying laws in the case of Henry v. A. B* Dick Company* 53 this ease was overruled by the Motion Picture Patents ease.54 In brief, the faets were that the Patents Company held patents for improvements in motion picture exhibiting machines; it had licensed Precision Machine Company to manufacture and sell machines embodying the patented inven­ tions; and the licensee had contracted to sell such machines only upon the condition that they should be used solely with moving pictures leased by a licensee of Motion Picture Patents Company.

The Universal Film Manu­

facturing Company had supplied a theatre with some of its own films, for use with a machine purchased from the Patents Company*s license.

The

Patents Company*s films, originally protected by a patent, were unpat­ ented at the time of the alleged infringement.

The lower courts held

the tying restriction invalid and the Supreme Court affirmed.

The de­

cision was based squarely on the limited scope of the patent grant.

The

patent did not include the right to use the patented machine exclusively with prescribed materials; therefore, control over materials was not protected by the patent law.55 The tying clauses contained in the leases were held invalid in 56 the Second Shoe Machinery ease. The company controlled 95 per cent of the business of supplying shoe machinery and its leases clearly might

-41•substantially lessen competition or tend to create a monopoly.** The R.C.A., in the oaee of Radio Corporation of America v. 57 Lord, granted lieenees to manufacture and sell patented radio receivers, under which licenses it agreed to sell and its licensees agreed to buy from it the number of tubes, to be used as parts of the radio receivers, which were required to make the radio operative. Lord, a manufacturer of vacuum tubes, sought to enjoin the enforcement of the provision re­ garding tubes as being in violation of the Clayton Act.

The patent on

tubes had expired, but the R.C.A. had patents on the entire apparatus, which included tubes as an element.

The court found that the provision

in the license agreement for the sale of vacuum tubes had the practical effect of preventing licensees from using or dealing is tubes other than those sold by the R.C.A.

The license provision substantially lessened

competition and had a tendency to make the monopoly of the defendant complete, and, therefore, was in violation of the Clayton Act. In the case of International Business Machines Corporation v. 56 United States the Corporation, which owned patents upon and manufactured tabulating machines, leased these machines for a specified rental and period upon the condition that the lease Should terminate in case any cards— which were necessary to the operation of the machine— not manu­ factured by it were used in the leased machines. The government sought an injunction against the continued inclusion of this condition in the leases on the ground that it had the effect of substantially lessening competition and tended to create a monopoly in the business of tabulating cards.

The Corporation argued that the leases were lawful because they

did not enlarge the monopoly secured by the patents.

The court denied

-42thia vhen It said

. the language of Section 3 of the Clayton Act. . .

expressly makes tying clauses unlawful, whether the machine leased is 9patented or unpatented9. The section does not purport to curtail the patent monopoly of the lessor or to restrict its protection by suit of infringement* But it does deny to the lessor of a patented, as well as of an unpatented machine, the benefit of any condition or agreement that the lessee ahall not use the supplies of a competitor."59 It is apparent that the patent grant does not permit license restrictions which require supplies, materials or parts to be bought from the licensor for the court has said "the patent right confers no privi­ lege to make contracts In themselves Illegal, and certainly not to make 60 those directly violative of valid statutes of the United States." Sec­ tion 3 of the Clayton Act is such a "valid statute of the United States" and forbids the use of tying clauses which lessen competition or tend toward monopoly. The use of lioense restrictions on the use of patented process­ es and machinery has also been used in an attempt to control the manu­ facture and sale of the unpatented products of patented processes and machinery. By the terms of such license agreements machines and pro­ cesses are permitted to be used only for manufacturing a stipulated quantity of the good made by its patented machine or process and are to be sold at specified prices or in certain markets. The question of the validity of such restrictions in licenses has never been passed upon by the Supreme Court, and there are so few eases in this area that the legality of such practices cannot be estab­ lished* /limitations on production were held illegal by a Circuit Court

Of Appeala la American Equipment Company v. Tuthill.61

In this ease the

owner of patents on brick setting machines licensed a number of brick manufacturers in the Chicago area to use the patented machinery.

Ike

licenses limited the manufacturer to use the machinery to produce only a limited quantity of unpatented brlok, with penalties fixed for devia­ tion from this amount. 62 legal♦

The court held the production restrictions il-

The question of price control of unpatented articles is also unsettled.

There are two lower court decisions that deal with this prob­

lem, but the deoisions appear to be in conflict.

In the ease of American

Equipment Company v. Tuthill®3 the court held that the owner of a patent covering a process or machine for making an unpatented article may not fix the price at which the article shall be sold. Circuit Court of Appeals in New York

In a case before the

it appears that price restric­

tions on unpatented products were upheld. It is obvious that the control of a whole industry might be achieved and maintained if this type of licensing were upheld.

This

type of control is definitely inimical to competition, and it is only necessary to observe the Bartford-Empire Company to confirm this. Ex­ cept for the price fixing clamant this was the system adopted by this company for the glass container industry. At the time of tbs hearings before the TNEC more than 96 per cent of the glass containers were progg duced by licensees of the Hartford-Empire Company* s machinery patents. Host of these licenses contained restrictions as to the kind and quanti­ ty of containers that could be manufactured.®® It seems fair to say that if every licensee under a machinery

nAAm ■■'I®1!*'"

patent was permitted to produce any amount ha wished, at any price, for any marleat and any use, tha patent monopoly on the machine would not he disturbed la the slightest*

In fact, it appears certain that the patent

holder9a profits would he increased if the manufacture and sale of the unpatented product were free and competitive.

Such license restrictions

are merely a means of restraining trade in another field* Resale Prices It is well established that the right to vend after the sale of a patented article may not be conditioned upon the maintaining of a resale price**7 The first ease®® in a long line of cases to condemn resale price maintenance arose in 1913 when the Bauer Chemical Company sold a patent medicine called "Sanatogen" which contained a notice on the pack­ age stating that anyone selling the product for less than one dollar was "liable to injunction and damages*"

O’Donnell sold Sanatogen at less

than the established price and was sued by the Bauer Company for infringe­ ment*

The court decided that where the transfer of the patented article

was full and complete, it was illegal to attempt to reserve the ri^it to fix the price at Which the product Should be resold by the vendee*69 XJnder the doctrine of the Bauer Company case it was obvious that any attempt to directly control resale prices would be looked upon as illegal so a new technique was devised to control resale priees and remain within the law* Machine Company

This technique was used by the Victor Talking

when it attempted by means of "license contracts" with

dealers and "license notices" attached to the patented machines to retain

ths title in themselves eat11 the expiration of the latest patent re­ ferred to in the not lee. Until the expiration of this period, the mach­ ine could only he used with records, boxes and needles manufactured by the Victor Company• Only the right to use the machine "for demonstrat­ ing purposes* was granted the wholesale dealers and these wholesalers could assign a like right "to the public* or to "regularly licensed Victor dealers** (retailers) "at the dealers regular discount royalty."

Ihe

dealers could convey the "license to use the machine" only when a "royalty" of not less than $200 had been paid.

2hus the individual never

came into legal ownership of the phonograph.

The court decided that

the "royalty" was the resale price and the "license notice" was only an effort to fix and maintain resale prices.

It stated that "It would be

a perversion of terms to call the transaction intended to be embodied in this system of marketing plaintiffs (Victor's) machines *a license to use the invention.'"78 A little different method for maintaining resale prices was presented by the American Gramophone Company in their attempt to salvage 73 their plan before the Supreme Court. Under the arrangement of tills company a system was employed whereby it sold, through its agents, its records and other patented products to dealers on the conditions that the dealers must adhere to the price list promulgated by the agents. price lists were established by the American Company.

These

In rendering a

decision the court held that a monopoly conferred by the patent law did not give the manufacturers of a patented article the right, in deroga­ tion of the general law, to fix the resale prices by a contract between its general sales agent and the purchasing dealers.74 The general

-46principle of the illegal ity of resale price maintenance was applied in the recent ease of Ethyl Gasoline Corporation v. United States.^5 The Ethyl Corporation was engaged in selling a patented fluid to oil refiners whloh, when added to gasoline, makes a more efficient fuel for cars*

Ike

Corporation held a patent on the motor fuel made by treating gasoline with the fluid» The refiners were licensed to manufacture and sell the fuel, but were prohibited from selling to jobbers who were not licensed by the Corporation.

One of the requirements for a Jobber*s license was

the maintenance of resale prices.

5his license restriction was held be­

yond the scope of the patent monopoly and in violation of the anti-trust law, for the court said "Agreements for price maintenance of articles moving in interstate commerce are, without more, unreasonable restraints within meaning of the Sherman Act because they eliminate competition, and agreements which create potential power for such price maintenance exhibited by its actual exertion for that purpose are in themselves un76 lawful restraints within the meaning of the Sherman Act. . . . " One technique of maintaining resale prices, however, has been upheld by the Supreme Court.

This, however, Is an indirect method, but

accomplishes the sought-after result. After the early decisions of the court had outlawed resale price maintenance through various techniques the Colgate Company77 was able to circumvent the issue of resale price maintenance by using Its right as a vendor to select its own customers, which as has been pointed out in previous pages, is valld.^® The method employed by the Colgate Company was to distribute price lists among dealers, urge dealers to ad­ here to such prices and notices, stating that no sales would be made to

-47 those who did not adhere to the lists; make requests for information concerning dealers who had departed from the specified prices; investi­ gate and discover those not adhering to the price list and place their names upon "suspended lists"; request offending dealers for assurances and promises of future adherence to prices, and refuse to sell to any­ one who failed to give such assurance. Unrestricted sales were made, however, to dealers who promised to abide by the price lists. In handing down its decision, the court held that the Sherman Act does not prevent a manufacturer engaged in private business from an­ nouncing in advance the prices at which his goods may be resold and re­ fusing to deal with wholesalers and retailers who do not conform to such WQ practices* The decision was based on the reasoning that "The retailer, after buying* could if he Chose, give away his purchase, or sell it at any price he saw fit, or not sell it at all; his course in these respects being affected only by the fact that he might by his action incur the displeasure of the manufacturer, who could refuse to make further sales to him as he had the undoubted right to do*" The line of decisions outlawing resale price maintenance has sincebeen abrogated, in effect, by statutory law. In 1931 California adopted a Fair Trade Act®0 and Illinois adopted this type of act in 1935,

and both acts were sustained by the state courts, and the Supreme

Court. Ihe Supreme Court upheld retail price maintenance in those juris­ dictions where the legislature had abrogated the conmon law. Thedecision thus reverses the previous holdings on statutory grounds so that today trade-marked or branded articles, whether patented or not, can be privately restricted on resale as to price*®8

—40— Due to the feet that the patent monopoly carries with it the grant to exclude all others from it® us© and permits the control of re­ sale prices, hy virtue of statutes, the monopolistic control of produc­ tion and distribution are greatly enhanced.

It seems that the question

of the validity of price restrictions in licenses for manufacture and sale need to he re-examined if we wish to maintain a competitive economy. On the whole the "tying clause” phase of the problem of pat­ ents and competition is well taken care of under the existing law. Less satisfactory, however, is the situation with respect to the use of the restrictive license to strengthen the patent monopoly itself, to control prices, production, to make, use, and vend, and market restrictions.

If

competition is the goal for which we strive, then the various restric­ tions established by licenses are obstacles to purer competition.

Itis

is presented most strikingly in the Hearings before the TNEC where the testimony showed that a patent has not only at times failed "to promote the progress of science and the useful arts,” but has also enabled the creation of larger monopolies whose purpose, perhaps, may be less exalted. The patent practices in the automobile, glass container and beryllium industries were not chosen "with an intent to single out those industries, but because they illustrate typical situations which are common through­ out the Industrial field."®'3 In the glass container industry the restrictive licenses were used to limit the type and amount of glassware that could be produced. Itoese restrictions are valid because they govern the uses to which pat­ ented machinery may be put, but the result of these restrictions is that practically all the milk bottle manufacturers operate by grace of Hartford

-49-

lie©uses.84 Price reduction by restricted lieanseea has been made un­ attractive by Hartford, for a sellerb ability to recover decreased profit per unit by the sal® of more units is limited by production quotas.85 And those who might wish to cut prices may be brought into line by the threat that the three large producers whose licenses are unrestricted®® will undersell them.

The largest producer of milk bottles, with the aid

and consent of Hartford®^ has been able to set the price for the industry.®® While control over the price of unpatented products is not es­ tablished as legal or illegal, the Hartford Company did have indirect control of the prices of unpatented products, and there allegedly was an understanding that new licenses would be issued only when existing chanQQ nels of distribution would not be disturbed. In this regard it is amusing to find the president of Hartford admitting that his company had an "A.A.A. in milk bottles,” but insisting that it was used "intelli­ gently."90 These restrictive licenses and practices allegedly have given 91 Hartford mastery over almost all of the milk bottle trade. The THEC was so impressed by the hearings of the possibility that restrictive licenses may be used to violate the spirit of the anti­ trust laws that they recommended that restrictions on price, production, use, or geographical area be "unconditionally outlawed”; and that any other restrictions which would tend substantially to lessen competition or to create monopoly be declared invalid, unless such restriction is 92 necessary "to promote the progress of science and the useful arts.”

Chapter IV SUPPRESSION, "FENCING", AND LITIGATION In the last half century industrial interests often have been accused of suppressing patents in order to keep competition out of a field of economic activity. President Roosevelt, in M s message to Congress on April SO, 1956, gave credence to this charge when he pro­ posed the "Amendment of the patent laws to prevent their use to suppress inventions, and to create Industrial m o n o p o l i e s T h e issue of suppres­ sion is not one that lends Itself to easy settlement. Evidence, however, indicates that suppression is practiced.

To determine the legal status

and some of the implications of suppression are the purposes of this section. The patent grant to make, use, and vend an invention provides a means of restricting competition in a field of economic activity. The patentee has the right "to restrain others from manufacturing and using that which he [the patentee] has invented,"® and, in addition, the patentee may himself refrain from using a patented invention if he so desires.

The court,•in upholding the suppression of patents, said that

the "inventor receives from a patent the right to exclude others from its use for the time prescribed in the statute, and this ri^it is not dependent on his using the device or affected by his non-use thereof. . •" It was nearly a century after the passage of the first patent law that the Supreme Court recognized the right to suppress patents. This right was recognized when that Court rejected the decision of the Circuit Court for the Northern District of Illinois that "under a patent which gives a patentee a monopoly, he is bound either to use the patent himself or allow others to use it on reasonable and equitable terms."4

■51Ih rejecting the decision of the lower court the Supreme Court declared the patentee had the privilege of any owner to the use of his property, for the court said, "As to the suggestion that competitors were excluded from the use of the new patent, we answer that such exclusion may be said to have been of the very essence of the right conferred by the pat­ ent, as it is the privilege of any owner of property to use or not use \

it, without question of motive#*® This doctrine was again enunciated by the Supreme Court in 1951 when Justice Braudels stated that *lf the patent is valid the owner can of course prohibit entirely the manufacture, sale, or use* of a patented article during the terra of the patent grant#® Although the charge of suppression is denied by a competent authority,7 nevertheless, adequate fact is available to oast doubt upon his assertions of the non-existence of suppression#

Specific information

as to suppression is difficult to obtain, because of the very nature of the problem, but the decisions of the courts indicate that suppression has existed#

The National Barrow Company was found to control eighty-

five patents on sprlng-tooth harrows, some of which had been suppressed#^ In 1906 the court found that the Indiana Manufacturing Company had ac­ quired 105 patents relating to straw stackers which could not be used conjointly, and hence many of them had been suppressed# 9 In the case of the Beaton-Peninsular Button Eastner Company v# the Eureka Specialty Company10 suppression of patents was acknowledged, as it was in the case of the Continental Paper Bag Company v# the Eastern Paper Bag Company#11 Other sources also indicate that suppression has been prac­ ticed#

In 1909 the Baited States Commissioner of Corporations found

that the American Tobacco Company had acquired a patented tobacco-

stemming machine by purchase of a majority of the stock of the Standard Tobacco Stammer Company, After acquiring the patents on the machine the American Tobacco Company ceased manufacturing it and prevented its development and use by its competitors.1® About two-thirds of the patents of the International Harvester Company were not in current use in 1935, and the Ingersoll Rand Company 15 was not using a great majority of Its patents. A study of the patents of the A. B. Dick Company showed that in 1916 this company controlled 1S6 patents relating to only a few subjects, and suppressed alternatives. An investigation of the telephone Industry by the federal Communications Commission has not been made available for distribution, but Bernhard J. Stem was able to study the results of the investiga­ tion1® and he found conclusive evidence of the suppression of patents by the Bell Telephone System. Mr. Stem cites the testimony of Thomas D. Lockwood, then general patent attorney for the Bell System who ac­ knowledged the voluntary suppression of patents. Question; Has the Bell purchased to any extent patents it has not used itself, or which have not actually been used in the business? Answer: Certainly.

Quite a number.

Question: Will you state personally to what extent it has purchased such patents, and why it has purchased them? Answer:

The Bell Company, through persons delegated to look after such

matters, has always thought it well to give Itself the benefit of any doubt that might arise in such connection.

It has not always

been possible to tell, when an invention has been offered to it for consideration, whether, though perhaps not immediately and obviously

useful, it might not be useful and valuable as the business ad­ vanced, and consequently it has seemed prudent to purchase all in­ ventions offered, of either present or potential or prospective value, oy possibly of value or usefulness* A great many, or I would say a very fair proportion of these have turned out to be of use la later stages of the business, after they have been held without being used for a number of years; and so it has seemed best to take this precaution and buy patents, if they could be ob­ tained at a fair price, vdiether they were to be immediately put to use or not# Question: Has the Bell purchased patents at all on the theory that they might be dangerous in the hands of competitors? Answer:

It has, both as regards telephone patents and apparatus pat­

ents# Question: Answer:

To what extent roughly? To the very largest possible extent; in fact, I can only recall

one Instance in which we have failed to purchase patents or inven­ tions of that character and order, and in this connection I refer to the automatic exchange patents; but as regards them we were reasonably sure that they never would be dangerous or valuable to competitors*

In this, however, it has turned out that we were mis­

taken#"1® Mr. Stern also found proof from letters taken from the files of the Bell Telephone System that specific patents were purchased with the object of preventing use by others*

In a letter written by W. W#

Swan, general counsel for the American Bell Talephone Company regarding

-54—

a certain patent he said "It would he well to buy it to prevent its falling into the hands of persona wishing to establish rival companies# A party going into the telephone business a year or so hence will prob­ ably undertake to use magneto transmitters, or, probably, ignoring the Berliner and Edison patents, will use some carbon transmitter that is about as good as the standard Blake# Now if such a party can control the Collier receiver it will be a great help to such a party to show that their receiver is a much better instrument than the one in common use by the Bell Company.

Indeed such a showing would make it necessary for the

Bell Company to take out the receiver now In use and substitute the 9100* receiver# {jfcnphasis supplied by the Commission7J

«17

The Federal Communication Commission concluded by saying "The Bell System has at all times suppressed competition in wire telephony or telegraphy through patents.

It has always withheld licenses to com­

petitors in wire telephony and telegraphy under its telephone or tele­ phonic appliance patents and this exclusion is extended to patents cover­ ing any type of construction* Moreover, the Bell System has added to its telephone and telephonic appliance patents any patent that might be of value to its competitors*

This policy resulted in the acquisition of a

large number of patents covering alternative devices and methods for which the Bell System had no need."'1'9 There are several reasons why patents are suppressed.

In the

case of the individual inventor it may be because of Inadequate finances, Ignorance as to procedure of selling patents, or even indifference.

The

National Be sources Committee found that the economic factors involved in resistance to technological innovations were "Efforts to maintain

55economic advantage and hegemony over competing classes, and over oompetitore in the seme industry and rivals for the same market in allied fields; costs of Introducing the new method or product, which In its early form is usually crude and unstandardized, and hut one of a number Of innovations designed to solve the specific problem at hand; the losses incurred through the depreciation of machinery and goods made obsolete by the innovation; the unwieldly structure and the rigidity of large scale corporate enterprise that hesitate to disturb a market which already yields profit throng restricted production; the difficulties of small-scale enterprise to make the necessary capital Investments. • 19 These then, appear to be the major causes of suppression which are prac­ ticed because " . . . there is involved conscious self-interest in the maintenance of status and, in some cases, even of life itself. Ab­ stract 1progress' usually rates insignificantly compared to the actual, immediate effects which an innovation has directly on the person or class involved."20 Tinder our present economy the principal Incentive that a busi­ ness has to utilize new inventions Is the drive for profits, for as one writer says, "Technical progress far outruns actual practice.

This

margin of non-use is in part due to nonpecuniary factors, but the major explanation is simply that on the whole, industry must be conducted with profits as the immediate goal; hence the first and major consideration In any choice of method Is not merely, Will it do the work? but also Will it pay?"21 Competition between businesses m y stimulate them to adopt new methods to keep ahead of competitors, but if there is a degree of monopoly in the economy which permits the control of prices, restricting

■56-

of outputs, and standardization of products, the incentive for utiliz­ ing new inventions is lessened.

Bn. M. arosvenor has expressed the

sentiments of modern corporate management toward the utilization of new Inventions in the following words:

nI have even seen the lines of prog­

ress that were the most promising for the public benefit, wholly neg­ lected or positively forbidden just because they might revolutionize the Industry.

We have no right to expect a corporation to cut its own throat

from purely eelemosynary motives. • • • Why should a corporation spend its earnings and deprive its stockholders of dividends to develop some­ thing that will upset Its own market or junk its present equipment. • • when development is directed by trained and experienced men responsible to stockholders for expenditures, they have little inducement to try to supersede that which they are paid to develop and improve.”®8 Whatever the causes of suppression may be, it appears that suppression is not within the spirit of the patent laws.

The philosophy

upon which the patent is based assumes that the inventor receives a seventeen-year monopoly so that the inventor will disclose his invention, thus enabling society to attain a new technique and perhaps a new product and a new trade•®3 Suppression, however, does not carry out these pur­ poses, but may "block" a field of technology.

If progress in the field

of technology is an accumulation of techniques, then each step is based upon the last and each step invites the next step.

The practice of

suppression not only may hinder or stop the rate of progress, but it may also throw a barrier across the development of a new technique.

The

field of television apparently has been so closely controlled by the radio companies that general use of television by the public has been

-87extremely H o t .84

Neither does suppression appear to be In harmony with the theory of a competitive economy for pure competition implies the adop­ tion of the most efficient methods of production, providing the cheaper cost of production will at least equal the loss of capital investment. If there are a number of patented productive techniques which lead to the same product and with little difference in cost between them, then it is understandable why corporations purchase and suppress such patented inventions, for these may become a potential threat of cos$>@tition. Thus, the right to suppress an invention may be a weapon to guard against a threat of competition— an Instrument for the promotion of /

monopoly and not for the promotion of the social use of inventions. Suppression of patents may be closely related to the practice of "fencing-in" basic patents.

The practice of "fencing" patents ap­

plies to gathering as many patents as possible on either the patent holder’s own patents or those of his rivals.

Oftentimes the improve­

ment patents that are used to "fence-in" a basic patent are not utilized but are suppressed merely as a protection of the basic patent.

Improve­

ments on a basic invention may be patented by anyone, including the original patentee or his competitors. By securing improvement patents on the basic patent of a competitor it is possible to "fence-in” his AR

basic patent and prevent its reaching an improved stage, patent holder wishes to invite an infringement suit.

unless the

The holder of a

basic patent at the same time may attempt to "fence-in" his own basic patent with a large number of improvement patents in order to protect himself from his competitors, yor the holder of the basic patent the

-08-

improvement patent often has another value. As a basic patent expires other patents must be had to replace it if be wishes to make his realm secure.

The business concern may attempt to obtain as many patents as

possible covering every aspect of the productive process in order to be able to sue any venturesome competitor for infringement. As a result of these practices it seems that "when a patent is acquired by a large concern with large resources capable of establishing research bureaus and employing competent legal staff" it is "perfectly natural to, • • study intensively all possibilities of improving not only the patent which the concern itself owns but every competing patent."26

This practice appears to be quite logical from the point of

view of big industrial concerns for if they can "fence-in" their own in­ dustry through improvement patents their monopoly period may be extended, and if, on the other hand, they can "fence-in" the patents of a rival they may eliminate the possibility of increased competition, vtfhile there may be nothing basic in any of the improvement patents and while each Individual change or improvement may of itself have been a very slight change,, the total of such patents owned by one concern or by a pool makes a formidable array of patents which a new­ comer in the field has to desi^ around or else infringe, or if a com­ pany has attempted to "fence-in" a competitor, the competitor too is faced with the same problem.

If either the newcomer or the established

competitor attempts to Infringe he will quite likely be faced with the possibility of an Infringement suit. the improvement patent he may face

If he attempts to design around i^^OQssi.of sxp0QSivd researoh

and possibly even failure to find a substitute for the patented

-59-

improveasnt.

The result is that established manufacturers may have a

w y practical patent control.

Thus, a large number of minor patents

may offer one of the most valuable possibilities of controlling competi­ tion. Some industries seem to be based almost entirely upon Improve27 memt patents, such as the Motor Wheel Corporation of Lansing, Michigan. The Hartford-Kmpire held improvement patents so highly that they required through their licenses, by ufoich they controlled practically the entire industry, all improvement patents to be turned over to them.

«g

Generally, however, Improvement patents are obtained to ac­ tually improve productive techniques or products; nevertheless the temp­ tation of eliminating potential competition in the hope of greater profits may offer "a very fine and very efficient way to concentrate control of the particular Industry that may be involved."29 It is very likely that only a few of the improvement patents are actually employed, but the array of patents may be terrifying to competitors who might be tempted to enter the market.

General Electric

uses less than twenty patents in manufacturing an ordinary light bulb, yet they hold over three hundred patent grants,

The United Shoe

Machinery Company is barricaded behind approximately six thousand pat­ ents, while Dupont and B.C.A. Victor have also accumulated large numbers of patents.

The Hartford-Empire also has bought the competing mach­

inery patents, the patents of other individuals and concerns, as well as 31 carrying on its own research. Today they have about 720 patents of which

are in use.

It would seem that all these patents could not be

used conjointly in its glass-making machinery.

The control by one company

—60— of hundreds or even thousands of patents obtained from various sources suggests a policy of "fencing-in" and suppression# A company or industry that hope® to dominate its field and keep out competition may use the policies of suppressing and "fencing-in" as a method of industrial control, but the infringement suit is the weapon that makes "feacing-in" and suppression effective# are extremely costly.

Infringement suits

It has been estimated by various experts and pat­

ent lawyers that it costs between seventy-five thousand and a million dollars to carry a single patent suit through the Supreme Court, depend­ ing upon the financial reserves of the parties, the character of the patents, and the ability of the attorneys to delay the proceedings and harrass each other#3* The right under the patent grant to sue for infringement is to save for the inventor the exclusive right to "make, use, and vend;" nevertheless the high cost of litigation appears to make this right even more important to a corporation seeking to dominate an industry# By threatening competitors who have limited resources with infringement suits or by similar intimidation of the competitor's customers, the holder of a group of patents may reduce competition#

Through the policy

of obtaining many improvement patents of no real consequence and follow­ ing up threats of infringement with actual suits, patent holders may be able to perpetuate their monopoly long after the expiration of tho basic patents#

The fact that many of the patent privileges asserted muj be

of doubtful validity apparently is beside the point, because the ex­ pense of establishing that fact in the courts Is often beyond the re­ sources of those against whom the suit is brought, If the independent

-61-

finds that It la beyond his means to defend himself In such litigation, he must either accept a license from the patent holder, generally on the terms of the patent holder, or attempt to continue competition under the handicap of facing expensive suits and loss of customers who fear being contributory infringers. Ifce use of the infringement suit to protect the patent holderfs exclusive right is valid under the law,

but it is hardly conceivable

that this right was ever intended to be used as a method of harrasslag competitors to eliminate competition.

It appears to be more than an

occasional practice for a concern to harrass its competitors with threats; and if threats do not deter, to go into court.

This practice is not new,

for in 1694 the Eastman Kodak Company brought an action against the Boston Camera Company charging the Boston Company with infringement and asking the court for a preliminary injunction against the manufacture and sale of its products. Although the injunction was ultimately lifted and the Eastman Company adjudged to have been the real infringer, the damage had been done because the Boston Company was forced to sell to the Eastman Company.34 A repetition of this strategy had, within four years, won a virtual monopoly for Eastman in the field of photography.35 An excellent example of a corporate enterprise maintaining a monopoly position throu^ an aggressive litigation policy plus the prac­ tice of ttfencing-in" is found in the glass container industry. By using these techniques Hartford-Bmpire apparently has established itself as sovereign over an industry.3* Making bottles is a comparat ively simple art and it appears that if it were not for patents the industry would be open for competition,

-62but due to tbs patent policy In the industry, the industry Is closed to any threat of further competition. The art of "blowing by hand” cannot possibly compete with the modern machine methods of making bottles, and is used today only in making bottles such as expensive perfume and cosmetic bottles.

37

At

present there are only two "economical” methods for making glass eon32 tainere. Owens has developed an automatic suction machine for making glassware and Hartford has patented a gob-feeding device for the same purpose.

In 1924 the two companies entered into a cross-licensing

agreement concerning their feeder patents, and to share the expense of purchasing new patents and prosecuting infringement suits.40 This agree­ ment came about because both companies had patents that they thought covered machinery used by the other with the result that neither could make an efficient feeder because each was blocked by the patents of the other.

In order to avoid litigation the companies decided upon the cross-

licensing agreement.41 The agreement excluded the suction machine of Owens, but the other machines could be used by both; Owens was to receive one-half of Hartford*s divisible income,4^ less #600,000; Hartford could not license certain machinery without Owens' consent; and Owens was to pay royalties at Hartford*s lowest rate.

It was further provided that in certain cir­

cumstances they would Jointly purchase the patent rights of others and that each party should vigorously prosecute infringements of patents AfjL

owned and controlled by it, at its own expense. After the cross-licensing agreement had been entered into Hart ford-Etapire

adopted the policy that "nobody in the glass industry

-6344 should own one piece of glass-making equipment" and it appears that, as a result of this policy, they attempted to either purchase the in­ dependents or ruin them with Infringement suits.

This practice drained

the resources and disorganised the market of the independent.

J. M.

McNash, President of Hassel-Atlas Glass Company testified before the TNEC that between 1926 and 1932 his company was engaged in litigation with Hartford-Empire "on a wholesale basis" and that it cost his company 60 to 150 thousand dollars a year for legal expenses. These figures do not include the time and effort of regularly employed officers or the "distraction from the manufacturing plant.”45 Most of the smaller companies had to capitulate because of these tactics. Hazel-Atlas became a licensee in 1932 because they felt they might as well pay Hartford to produce under its licenses as to pay for lawsuits.4® The divisible Income of Hartford was now divided into thirds.4* Several other smaller companies became licensees of Hartford rather than face ruinous litigation; many of these licenses restricted the type and in some eases the quantity of glass containers that could be produced.48 The Lynch Corporation became a member of the cross-licensing agreement in 193S.4^ It appears that cost of litigation might have forced Lynch Into the agreement because they manufactured a type of glass machinery related to those of Hartford. The Amsler Morton Company produced a machine that was related to a type of glass machinery upon which both the Amsler Coupany and Hartford had patents. Hartford began introducing Infringement suits against Amsler in 1926 and a constant stream of litigation has been kept

-64-

itt the courts involving these two companies,

in 1934 the officials of

the Amsler Company were approached hy three leaders in the glass industry who wished to buy the Amsler Company or reorganize it under the Hartford licenses* Mr. HazeIton, the vice-president of Owens Illinois is alleged to have said, "Boys, we have made a good offer to you now. You can make a lot of money out of this.

I will give you one month to consider it.

If you dcgt't go in with us on this thing, we will enter a suit against 50 you and we will continue to sue you until you are out of business." The Amsler officials did not accept the proposition so Hartford entered suit against the Swindell Company which was a licensee of Amsler*s and whom the Amsler Company had agreed to defend in any litiga­ tion concerning patents. By suing the Swindell Company the Amsler people were not able to bring counter claims for infringement because the Swindell Company had entered into a licensing agreement with Hartford in which they agreed not to contest the validity of the Hartford patent.

51

The Amsler Company won the case In the lower court but lost the ease on the appeal. After Hartford had filed suit against the Swindell Company they attempted to drive away the customers of Amsler through the technique of circularizing the glass trade, advising that Amsler was infringing Hartford's patents.

This would have made the customers of Amsler liable

for contributory infringement, if the decision went against Amsler, which it ultimately did. This policy apparently was quite successful because the Amsler Company had sold approximately twenty lehrs (the machine in contest) per year for over twenty years.

In 1934 the company sold five; in 1935 four;

in 1937, none; and in 1938, one.

In 1926 they had #800,000 worth of

-65business and la 1938 they did $18,000 worth of business*

Thus, the

warnings and suits of infringements of the Hartford Company took another step la the direction of "our plan that nobody in the glass industry should own one piece of glass-making equipment52 Hartford-Empire used the same tactics of infringement suits against other companies that were used against the Amsler-Morton Company, the Khape-Coleman Glass Company was organised in early 1934 to produce ■nr*

glass for the Texas market*

Two or three months later Hartford-Btopire

notified them of patent infringements*®^ Shortly before this notifica­ tion the Liberty Glass Company had paid $50,000 for the bottle rights in all of Texas and now felt "gypped" because an unlicensed rival was operating in the same field, and complained to Hartford*

The Khape

Company attempted to obtain a license from Hartford-Empire but Hartford "consistently refused to discuss even the remote possibility of a milk bottle license in Texas*"®® negotiations failed and an infringement suit was settled out of court with only a six months' license*

After

the license expired the Knap© Company attempted to use hand methods but found them too expensive, so after about a year they went out of business* The Khape Company was always ready to take out a license from HartfordBmpire because the freight differentials were sufficient to continue production®^ but they "couldn't receive a certificate of convenience and necessity from"®® Hartford-Empire, so "The net result of this whole story is to compel the people of Texas to buy glass from places outside of Texas 59

and pay the freight*"

Ball Brothers was also requested to join Hartford as a licensee* The Sail Company was well entrenched in the manufacturing of fruit jars

-66which was covered by Its own. patents. Ball Brothers, however, came into the domain of Hartford In order to avoid litigation®^ and also because Hartford agreed that as long as Ball Brothers made their royalty pay­ ments, Hartford would not thereafter, during the continuance of the li­ cense, grant to any other person any further license or right to use in the continental United States their machinery for the making of fruit fll jars for household use* through these methods the position of the benevolent despot has been attained by Hartford, for in 1933 Owens and Hartford owned or licensed machines producing 96*6 per cent of the country*s glass con62 tainers. When Hartford-Empire did grant licenses the licensees agreed S3 not to dispute the validity of Hartford-Empire patents and to produce only certain articles of manufacture.®4

Through their system of licens­

ing they can keep out competition because they are *ia a position to look over this Industry, determine the proper demand, determine the 65 proper supply, and fix that according to" its own judgment. In summarizing the testimony before the TNEC Chairman 0*Mahonay stated "Here is an Industry in *hich competition is substantially af­ fected by patent control. Here is an industry. • . where the method of employing patents has resulted in a sort of private H.R.A.

This control

is employed to adjust and allocate production. . . it is clear that in­ directly. . • prices are stabilized through production control and that prices are further stabilized through the practice of producers to fol­ low the prices of the largest producer of particular classes of glass ccntainers.

Through the refusal to grant licenses persons desiring to

-

67-

enter the industry have not been allowed to do so . . . As a result of litigation . . . certain producers have been eliminated from the busi­ ness, or have been purchased wholly or in part, by large interests fol­ lowing litigation or other pressures* * . . persons with financial means and responsible connections have apparently been excluded from this in­ dustry . • . Hiose in control of patents are, as a result of the present state of the law, in a position to issue or refuse what amounts to a *certificate of convenience and necessity* to those who may desire to enter the industry • • * The industry illustrates group or corporate control of patents as distinguished from their control by an individual. , . .»66 Thus the glass container Industry offers an excellent example of the value of the patent grant as an instrument of industrial control. It illustrates how one or more affluent corporations may accumulate a number of patents, thus Tencing-iif its own basic patent or that of a competitor, how the infringement may be used against competitors, who, to escape oppressive litigation, accept restrictive licenses. As has been stated previously on these pages the TNEC selected the Automotive and Glass Container Industries "not with an Intent to single out those industries but because they illustrate typical situations which are common throughout the industrial f i e l d W i t h this in mind it is interesting to note the patent practices in these two industries.

The

Glass industry seems to have exploited most of the possibilities under the patent grant to build up a system of industrial control while the Automotive industry has looked upon patents as common property. 66 Ihese two industries, in all likelihood, mark the extremes, and between these extremes lie most of the other industrial fields.

4-4$ —

Chapter V CONSOLIDATION OF PATENTS The aspect of the patent problem that is perhaps the most interesting is the alleged consolidation of patents and the use of patent pools for monopolistic domination of an industry. The Act of 1690 was passed to maintain competition and pre­ vent the concentration of power and wealth in the hands of monopolists that had developed during the previous decade.

In spite of the Sherman

Act, the tendency toward consolidation has seemingly proved irresistable.

In the manufacturing and mining fields alone, It is estimated

that more than 1868 consolidations were fbnned during the post war era.1 The consolidation of giant organizations is quite a modern phenomenon for the earliest eases in this country involving the consoli­ dation of corporations date from the late eighties. Upon the completion of a study in 1932 of cases involving consolidations, one writer says that "the eases are relatively sparse, . * . the deliberations of the Supreme Court have been limited to sixteen cases . . . "

2

Only a small number of the cases dealing with mergers and amal­ gamations involve the use of patents as an important factori nevertheless, the importance of the patent in this field cannot be overlooked.

The

task then is to determine the legality of patent consolidations. In some industries patents have been used to defeat the pur­ pose of the anti-trust laws through the use of the restrictive license. The alleged protection of patent rights may be used eg a cover for prac­ tices not related to patents, and action under 1he anti-trust laws has arisen when patents are ueed as a part of a combination or conspiracy to restrain or monopolize trade by establishing a comprehensive system of

restrictive licensing.

This practice la Illegal if its effect is to

suppress competition or create a monopoly.

Til© Supreme Court has said

that "Any agreement between competitors may he illegal if part of a larger plan to control interstate markets. Montague and Company v. I^wry, 195 TJ. S. 38; Shawnee Compress Co. v, Anderson, 209 U. S. 423. Such contracts must be scrutinized to ascertain vðer the restraints imposed are reasonable under the circumstances, or whether their effect jj is to suppress or unduly restrict competition.*4 Frequently, however, one company can validly do things which two or more companies in combination cannot agree to do because the com­ bination in restraint of trade invalidates the agreement.

If all the

patents are owned by one party and the license system consists of a series of separate licenses, each license is valid if it contains only the provisions which are permitted under the patent grant.

Thus, the

single owner of a series of patents may place restrictions in his li­ censes affecting prices, production and marketing conditions without re­ straining or monopolizing trade under the Sherman Act.

This Chapter is

devoted to the description of the consolidation of patents by a single person or company. There are two methods of acquiring patents.

The first is by

means of a merger or amalgamation, that is the buying up or consolida­ tion of former competitors.

The second method is through the purchase

of the patent rights of potential or real competitors without attempting to acquire the plant or equipment.

These two methods may, however, be

used at the same time by some companies to obtain domination in an eco­ nomic field.

-70Ihe acquisition of patents is valid and there is no restriction on the number of patents which a single party m y legally acquire.

The

court answered this question in the case of Indiana Manufacturing Com­ pany v. Case Threshing Machine Company whan it stated: "Another attack is predieted upon the number of patents*

The proposition is that the

public is entitled to competition between independent inventions.

The

linotype and monotype inventions are referred to as illustrating mach­ ines that produce the same result by essentially different means and modes of operation.

If Buchanan had Invented the linotype, the patent

lews would have Riven him a monopoly. . . . Would he by conferring upon the publie the advantage of that disclosure be barred of the right to make or buy the linotype invention? We do not understand counsel for appellee to say *yesf squarely. But their contention comes to this: If he owned either alone, over that he would have complete dominion; own­ ing both, he controls nothing.

The public has no right in either inven­

tion; therefore the public has the right to have them both in the market competing for buyers. Naught plus naught; the sum of two naughts is a 4 substantive quantity." The legality of control of an industry through the acquisition of patents, however, must be determinedby each individual case before the court, but the following general observations concerning the legality of controlling an industry through the acquisition of all the most Im­ portant patents was made by Mr, Chief Justice Taft when h© said: "fle do not question that in a suit under the Anti-Trust Act the circumstance that the combination effected secures domination of so large a part of the business affected as to control prices is usually moot important in

-n-

proof of a monopoly violating this Act. But under the patent law the patentee la given by statute a monopoly of making, using and selling the patented artiole.

The extent of this monopoly in the articles sold

and in the territory of the United States where sold is not limited in the grant of his patent, and the comprehensiveness of his control of the business in tile sale of the patented article is not necessarily an indi­ cation of illegality of his method. As long as he makes no effort to fasten upon ownership of the articles he sells control of the prices at which his purchaser shall sell, it makes no difference how widespread his monopoly*"5 In this case Chief Justice Taft was referring to con­ trol of resale prices as being outside the protection of the patent laws. The purchase of competitors to secure the patents owned by them apparently is not per se contrary to the Sherman Act • In the Bastman Kodak Case® "Mr. Kastman stated with candor that the purchase of the plant (American Camera Manufacturing Company) was merely inci­ dental to the primary object of acquiring the Houston patents which were regarded as of great value. ****** "Mr. Kastman gave as a reason for acquiring the Blair Camera Company 7

that he wished to acquire the Crane patents • • •"

The court upheld

this merging of these companies when it said n. . . whatever the reason may have been, the purchase was not illegal; and in the absence of any unfair practices in the acquisition of such property I am disinclined to hold that there was anything wrongful in such transaction, or in any of the transactions by which the three specified companies were ac­ quired.**®

-72Tha leading Supreme Court case concerned with the uniting of patent rights under a single ownership is United States v. United Shoe q Machinery Company. Seven independent companies were consolidated into the United Shoe Machinery Company.

Of the seven, four produced a large

share of the shoe machinery; these fbur were (1) the Consolidated and McKay Lasting Machine Company, which prior to the consolidation pro­ duced 60 per cent of the lasting machines made in the United States, (2) the Goodyear Shoe Machinery Company which made 80 per cent of the welt sewing machines and 10 per cent of the lasting machines, (3) the McKay Shoe Manufacturing Company, which made 70 per cent of all the heeling machines and 80 per cent of the metallic fastening machines made in this country, and (4) the Eppler Welt Machine Company, the manufac­ turers of welt sewing machines.^0 In amalgamating these concerns the United Company acquired all the patent rights.^ The purpose of the amalgamation was set forth in a letter sent by the directors of the Goodyear Company to its stockholders in which it stated that "The great advantage to be secured by the control in one corporation, both in the United States and in foreign countries, of the efficient types of shoe machinery, have been for several years recog­ nized by the officers of the principal shoe machinery companies.

For

more than a year your directors and large shareholders have been in negotiation to accomplish this end." To carry out this purpose the United Company made fifty-seven purchases of shoe machinery manufacturing companies; of boot and shoe manufacturing companies; of patent rights or applications for such rights; and of the property and businesses of partnerships and corporations

-73engaged in manufacturing appliances "calculated," in the language of the charter of the company, "directly or Indirectly, to accomplish the ob­ jects, or any of them, of the corporation."13 Through the use of patents the United Company was able to pro­ duce nearly all the Shoe machinery used in this country.

This is clear­

ly shown on the following chart: "Machines in Use In this Country Lasting Machines Standard screw machines Pegging machines Tacking machines Welt sewing machines Outsole stitching machines Loose-nailing machines Heeling machines

Manufactured by Defendants 7,496 409 146 3,488 2,527 2,676 1,835 2,019

Manufactured by all others 7 none none 6 142 758 24 ,. 17 «

The United Company further attempted to insure its position by contracting with inventors and employees for their inventions on shoe machinery.

In 1912 the company had such contracts with "ninety-five per 1 cent of the inventors of shoe machinery in the United States."'1' In 1912 the Supreme Court upheld the consolidation.

The court

said that the only question before them was " . . . whether that combina­ tion taken by Itself was within the penalties of the Sherman Act. • . • On the face of it the combination was simply an effort after greater ef­ ficiency.

The business of the several groups that combined, as it ex­

isted before the combination, is assumed to have been legal.

The mach­

ines are patented, making them is a monopoly in any case, the exclusion of competitors from the use of them is of the very essence of the right conferred by the patents, Paper Bag Patent Case, 210 U. S. 405, 429, and it may be assumed that the success of the several groups was due to their

74 patent® having bean the best. As* by the interpretation of the indict­ ment below* 195 fed* Rep* 591* and by the admission in argument before us* they did not compete with one another* it is hard to see why the collective business should be any worse than its component parts.

It

is said that from seventy to eighty per cent of all the shoe machinery business was put into a single hand*

This is inaccurate* since the

machines in question are not alleged to be types of all the machines used in making shoes* and since the defendants* share in commerce among the States does not appear*

But taking it as true we can see no greater

objection to one corporation manufacturing seventy per cent of three noncompeting groups of patented machines collectively used for making a single product than to three corporations making the same proportion of one group each. ifi The legality of the consolidation of the shoe machinery com17 panics under the United Shoe Machinery Company was again tested in 1918. The court followed the reasoning of the previous case and added that it was to be noted "that the acquisitions in this case were not coincident in time nor parts of the same transaction*

They were scattered througi

the period of years and varied each from the other. • ., were different and unrelated steps in the development of the business.

They must hence

be judged separately, not In accumulation*” The court then went on to say that the effect of the consolidation of all these companies was dif­ ficult to estimate*

"The removal in some degree of competition may be

Charged against some of them and yet* on the other hand* the acquisitions may be said to be justified by the exigencies or conveniences of the situation. * * • They give a false impression by their number.

They

•75 added nothing of obnoxious power to the United Company nor in any practioal or large sense removed competition#* Here the court has upheld a consolidation that seems to ell* minate any possibility of potential competition#

Whether or not there

was competition in the industry at an earlier date appears to he beside the point, for there assuredly was none at the time of the suit#

Fol-

lowing the policy of acculring all the possible patents on shoe mach­ inery the entrance of a new firm into the field was "blocked#*

It seems

fair to infer that the company intended to dominate the industry be­ cause of its policies of acquiring other companies and patents, the tylng agreements19 and other incidents that are pointed out in the opinions of the courts# The Eastman Kodak Company which for years has engaged in the manufacture and sale of photographic apparatus and supplies encountered the Sherman Act when it acquired the plants and patents of about twenty competing companies throughout the country whose plants were dismantled and the business discontinued or transferred to its own plants#

If

these competing companies were corporations, they were dissolved and their officers were bound by contract not to engage in competing business for terms ranging from five to twenty years#

The Eastman Company by con­

tract also obtained "entire control in the United States of the imported raw paper which was recognized as the only standard paper for the manu­ facture of photographic printing-cut paper, and by refusing to sell to other manufacturers compelled several competing companies to sell or go out of business#

It acquired stock houses in the larger cities, which

handled chiefly its own products, and by contracts with other dealers

-76to whom it sold fixed resale prioes and required them to sell its goods exclusively. It was in this case, as has been pointed out,

21

that the court

upheld the purchase of competitors as not being per se contrary to the Sherman Act*

The court, however, did find the company guilty of attempt­

ing to monopolize an industry, but upon other grounds for the court said "The record abounds in compiled figures showing that large amounts of money were paid to acquire the competing concerns to which reference has herein been made, and to show their standing in the trade to prove that such acquisitions were not merely amalgamations of small concerns; also to show the amount of business transacted in different materials by the Eastman Kodak Company, Its great gains and profits, which for the year 1912 amounted to #15,655,551 #33, or about 171 per cent on total sales amounting to #24,765,407.65, and Showing the large disproportion between the cost of manufacture and the price paid by the consumer.

Whatever

reduction the Eastman Kodak Company may have made as to price, on por­ tions of the photographic paper or other materials sold by them, does not compensate for the suppression of competition in the industry as a whole, and it is no justification of an illegal monopoly to assertthat it has reduced the price of an article produced by it, as this may have been done simply to injure a rival. "But all these matters require no further special attention, save in so far as they bear upon the monopolization of the interstate trade in cameras, film plates, and photographic paper; and as to these articles it is undisputed that the Eastman Kodak Company controlled ap­ proximately between 75 per cent and 00 per cent of the entire trade at

-77the time of filing the bill, and bed accordingly attained a monopoly there­ of# • * • Interstate trade and commerce have been unjustly and abnor­ mally restrained by the defendants by the formation of a monopoly in­ duced by wrongful contracts with regard to raw paper stock, preventing the trade from obtaining such stock, by the acquisition of competing plants, businesses, and stock houses, accompanied by convenants restrain­ ing the vendors from re-entering the business, and by the imposition on dealers of arbitrary and oppressive terms of sale inconsistent with fair dealing, and suppressing competition."22 This case was appealed in 1921 but the Supreme Court dismissed the ease on the motion of the counsel for the Eastman Company.83 A license contract containing provisions not to compete, was held invalid in United States v. American Can the Sherman Act.

as violative of

The American Can Company was organized in 1901 with

capital stock of #88,000,000 of which #73,000,000 was used to purchase ninety-five plants which made about 90 per cent of the cans then manu­ factured for sale in the United States.

They also required the sellers

to sign agreements not to engage in business again for fifteen years within three thousand miles of Chicago. About two-thirds of the plants that were bought were closed by 1905.

On the basis of these facts the court stated that "It is clear an

attempt was made both to restrain and monopolize the interstate trade in tin cans.

Trade was restrained.

For a moment a substantial monopoly PR was obtained and in many sections of the country, long maintained. In regard to the control of patents in the can-making industry the court said "Some of the moat modem machines . . . were covered by

-78patents.

If these patents could be secured and arrangements made with

the few machine Shops In the country which were then equipped for turn­ ing out machinery of that class, competition in can-making and canselling would be greatly hampered* • . . The record shows that the de­ fendant did acquire such control. . . After 1905 the company pursued the policy of purchasing other competing companies in the can business, but so many new competitors arose because of the inducement of high profits that by 1913 it con­ trolled only about 50 per cent of all tin cans manufactured for sale. Due to control of the American Can Company over the can-making processes and machinery the "so-called *independents1 were not until 1907 able to 27 get the best automatic machinery" for can-making. The court held that the dissolution of "so finely adjusted an eg industrial machine" would serve no public purpose and the case was left open until future actions should warrant a definite decision.29 The consolidation of patents by means of a merger or an amal­ gamation apparently is a perfectly valid procedure. Without patents thase companies appear to dominate the field, and with patents they are assured of their position.

Competition can not easily arise because a

new line of competing inventions would be necessary as well as a large supply of capital.

Therefore any threat of competition apparently is

effectively "blocked." Another method of attaining a dominant position in an industry is through the acquisition of patents by purchase and issuing licenses. There is only one ease that deals with the legality of this practice and it upheld such a practice as within the scope of the patent grant, and

-79 therefore legal* The Indiana Manufacturing Company omed the pioneer patents for pneumatic straw stacker devices end as new patents appeared on this device the company purchased them* Under the authority of the patent grant the company issued uniform licenses to all the manufacturers of threshing machines in the country*

These manufacturers were permitted

to use the patents **relating to the art or method of taking straw and dust from threshing machines?30

In return the company required a sell­

ing price of $250 per stacker and a royalty of $50. The company sued the J. I. Case Company for infringement of its patents and violating the license agreement between them*

The court

said that the single ownership of numerous patents and the restrictive licenses granted under them "is within the objects of the grants” hut that "monopoly thus secured, to be immune from the anti-trust act, must he referable solely to the inventions under the patents, and that a combination of licensees formed thereunder may create a monopoly which exceeds the legitisiate scope of the patent privileges, not within the contemplation of the provisions for the grant, and thus violate the general act referred to (Sherman Act). * . •”31 lhe court went on to say that "It is unmistakably a combination of manufacturers to restrain competition in the make and sale of their products, with merger of the patents in one ownership as a means employed for that purpose. . 32 The suit for infringement was not considered because it grew out of an illegal agreement. The decision was appealed frcm the circuit court for the East­ ern District of Wisconsin to the Circuit Court of Appeals3® which handed

-80down a decision that was diametrically opposed to that of the lower court*

The court stated "All the makers of threshing machines have

cons into the system.

That this resulted, without any concert of ac­

tion on the part of licensees, solely from a policy pursued by appellant through a course of years, is virtually admitted and is clearly proven. Appellant started out to supply the trade* right

That was its exclusive

The court then held that such contracts were not in viola­

tion of the Sherman Act but were within the rights of the patent laws, although all of the manufacturers of threshing machines in the United States were licensees, the public had no right to free competition in articles covered by patents*35 By means of the device of consolidating patents a single cor­ poration or company may impose limitations upon licensees which make it difficult if not impossible to compete even if they are so disposed as to grant a license* Quota systems of manufacture and sale may be es­ tablished as well as provisions for maintaining prices. Not infrequent­ ly the licensee may be forced to agree to purchase parts or supplies or to pay royalties on unpatented articles and operations.

The fact that

some of the restrictions imposed may be of doubtful legality or even clearly invalid under the decisions of the Supreme Court does not des­ troy the licensor1s power to impose them for if the licensee does not comply the license may be cancelled or he may run the risk of an infringe­ ment suit. If a license is not granted to the hopeful competitor then it is quite likely that the threats of infringement suits will probably force any venturesome businessman from the field*

It must be remembered,

however, that It is the legal right of every patentee to sue for infringe meat or to refuse to license.

The effect of these practices may re*

strict competition and create a monopoly that is much broader than the patent monopoly created by the statute*

It may be equivalent to a pat­

ent on the industry as such. The consolidation of patents also appears to have a detrimental effect on Inventors and future invention in that the consolidation may hold the basic patents along with improvement patents. Any improvement that may be invented cannot be used with the basic patented invention without a license, therefore the Inventor is completely dependent upon the basic patent holder if he wishes to derive any income from his in­ vention*

The basic patent holder may drive a hard bargain in acquiring

the improvement, for it is more than likely that there will be but the one purchaser.3® Ho matter what one may think about the economic and technolo­ gical advantages of the integration and concentration of industry, it must be recognised that the control of nearly half of the nation* s in39

dustrial wealth by some two hundred corporations

is not entirely

compatible with the basic assumption of pure competition which pre­ supposes that the number of firms selling a given product must be large enough that the effect on the price of the output of each is negligible. Yet the consolidation of industry has proceeded and the merger and amal­ gamation of patents has been held to be valid by the courts.

-SiChapter VI PATENT POOLS It often happens that there an® two or more outstanding manu­ facturers in a particular field who have adopted the policy of acquiring all available patents relating to the subject matter of their business, and it may well be, they having good engineers and good research depart­ ments and ample finances, that each of them may acquire a substantial number of patents on important inventions relating to the com&on field* Certain obvious results follow such a situation*

If each stands on his

own patent rights no one can use the improvements patented by the others, and the public cannot get the best product*

By combining the patents

owned by all companies under a cross-licensing arrangement the competi­ tors can give the public the benefit of all improvements in a single machine*

The argument that is most frequently advanced in behalf of

patent pools is that under conditions of modem industry with its rapid development and constantly changing Improvements it is impossible to conduct manufacture without Infringing some patent*^* A company may develop a patent but need the patent rights of other companies to per­ fect its invention to enable it to place a finished product on the mar­ ket*

One writer in the field says w. * . the process of Invention is

more than ever a complex process of minute accretion, the individual pat­ ent is seldom large enough to exploit by Itself; therefore patents are 9 pooled as a basis of exploitation by the firm which acquires them*w Consequently, patents have become dependent upon each other and unless all the necessary patents for a specific operation are owned or controlled or licenses are acquired, manufacturing becomes legally hazardous. An excellent example of this is found in the following

-83quotation:

«*we went into our factory and if we tried to wind the coil

this way somebody out in Oklahoma had a patent for it; and if we tried It another way somebody else in Peoria, Illinois had a patent for it} and it we decided not to wind it at all we found omitting it was covered by a patent of somebody else,"3 The diversified ownership of patents has naturally led to much patent litigation* Patent litigation is very complex, exceedingly cost­ ly, and slow* As a result, companies have attempted to avoid these dead­ locks through patent pools to avoid such litigation** By combining patents under a cross-licensing arrangement the competitors can not only give the public the benefit of all improvements in a single machine and avoid litigation, but the cross-licensors may greatly strengthen their chances of preventing newcomers from competing in their particular field* With these advantages the patent pool appears to have grown in popularity as a method of acquiring patents and restricting competition. It has been stated that "Increasingly, businessmen are wondering If they cannot enjoy some of the benefits of mergers without having to destroy their Independence or separate Identities of their organization* Humor­ ous companies in many of our principal industries are getting together with the aim of achieving through association the same objectives that other concerns are attempting to accomplish through consolidation* "This cooperative movement is tending in several different di­ rections but principally, as follows: "(1 ) Cooperation for the interchange of patents."3 Charles A* Welsh, Jr., the economic adviser to the Committee

-64on Patents of the House of Representatives, in a report baaed upon the investigation of patent poole and cross-licensing agreements made the following statement:

"The extent of patent pools and cross-licensing

agreements in American industry is very large coordinate with the extent of mechanized industries in which patented inventions play a part or which are based on so called basic patents, such as, for Instance, the communication industries, or the electrical Industries*

In all of the

following major industries . * . seme form of patent consolidation is in use in an attempt to circumvent the existence of patent deadlocks and overlapping inventions: Automobile, agricultural machinery, avia­ tion, building equipment and supplies, chemicals, communications, elec­ trical-equipment industries, food Industries, glass, machinery and mach­ ine equipment, mining, monitions, oil, office equipment and machinery, paper, radio, railroad equipment, rubber, steel, scientific instru­ ments, utilities."* While this is a rather startling list of industries in which patent arrangements flourish, nevertheless, it is extremely difficult to find authentic information concerning them.

The result of a study to

determine the nun&er of industries having cross-licensing agreements in the United States was reported in a memorandum to the House Committee on patents and states that the

. • search revealed that little or no

authentic information exists, although numerous references to the prac­ tice of pooling patents was found*

Sufficient evidence on the subject

was found to show that the practice of pooling patents is quite common* Of course, this conclusion is partially based upon the number of court 7

decisions centering about patent pools during the past 35 years. • •"

-05The difficulty of obtaining reliable and accurate information then, makes the approach to the problem through a case study nearly com­ pulsory.

The alleged advantages and opportunities for abuses can thus

be observed in the practices that have arisen in oases before the courts and in the Hearings of the Temporary National Economic Committee. The pooling of patents may be accomplished by organizing a corporation to which patent owners holding competing patents assign their patents to the corporation and take back licenses, or by cross licensing. It should be clearly understood that the patent pool is not per se il­ legal for the Supreme Court has said "Where there are legitimately con­ flicting claims or threatened Interferences, a settlement by agreement, rather than litigation, is not precluded by the Act. . . . An Interchange of patent rights and a division of royalties according to the value at­ tributed by the parties to their respective patent claims is frequently necessary if technical advancement is not to be blocked by threatened litigation.

If the available advantages are open on reasonable terms to

all manufacturers desiring to participate, such interchange may promote a rather than restrain competition." Unfortunately, however, there are instances in which the patent owners are not content merely with the interchange of patents, the set­ tlement of conflicting claims, and the division of royalties. Often times a system of restrictive licensing is a part of the patent pool and In such cases they may desire to curtail the production of the product, to fix the prices at which they sell, place various market restrictions in the agreement, or fix royalties at an oppressive amount and the court has stated that "the power to fix and maintain royalties is tantamount

- 80-

to the power to fix pricea."

9

The seme test as to the legality of license restrictions ap­ plies to patent pools as were applied in the consolidation of patents. Hestrictions which are valid under the patent grant may be a violation of the Sherman Act if part of a restrictive licensing system to create a monopoly.

In other vords restrictive clauses, when part of a compre­

hensive system of restrictive licensing, are invalid when used as a part of a combination or conspiracy to restrain or monopolise trade. In the ease of Rational Harrow Company v. Bench1*** a combination of patentees and licensees was held to be an unlawful combination in re­ straint of trade when the provisions of their agreements were to prevent competition in business and enhance prices. The National Harrow Company originated In an agreement between six manufacturers who held various patents on float-spring harrows.

They

organised a corporation under the laws of New York and assigned all the patents each owned or would thereafter acquire relating to the floatspring tooth harrows to the corporation.

The Individual manufacturers

were then licensed to manufacture and sell the harrows under certain con­ ditions. At the time of the case the combination Included twenty-two firms or corporations including Bench, which controls 90 per cent of the manufacturing and selling.11 Later, a corporation was formed under the New Jersey laws "in furtherance of the general scheme "and issued a second license to Bench which was about like the first.

The licenses which were like all li­

censes issued by the corporation1® required that the licensees "agree not to sell float-spring tooth harrows, float-spring tooth harrow frames

-87without teeth, or attachments applicable thereto, at lees prices or on more favorable terms of payment and delivery to the purchasers than as is set forth in the schedule annexed to the license, unless the licensor should reduce the selling prices and make more favorable terms for pur­ chasers, and that the defendants will not directly or indirectly manu­ facture or sell any other float-spring tooth harrows, etc., than those which they are thus licensed to sell and market • . • They agree to pay to the corporation one dollar upon each float-spring tooth harrow, etc., manufactured and sold by them agreeably to the terns of the license, and the sum of five dollars as liquidated damages for every harrow, etc., manufactured and sold by them contrary to the terms and provisions of the license, and the corporation agrees to defend all suits for alleged in­ fTlngement brought against the licensees.”is The corporation brought suit against Henoh to compel the per­ formance of the license agreement and the lower court held the contracts to be a part of an illegal combination and a restraint of trade.14 15

Upon appealing the ease to the Circuit Court

the court stated

that "It is manifest, as well from the contract as from the proofs out­ side of it, that the purpose of the parties was to form a combination be­ tween the various manufacturers of these harrows, to prevent competition in business and enhance prices; and such is the effect of their agree­ ment.

The corporation, provided to hold the legal title of the several

patents. Is merely an instrument to effect this object.

The prior owners

are still the beneficial owners, with right to continue their business, subject only to the restraint in Its management imposed by the contract. The provision for licenses Is made necessary by the transfers of title,

-88and ia simply another part of the scheme for combination and control of the business of the several patentees,

the result would be the same in

legal contemplation if the corporation and licenses had been dispensed with, and the contract had provided simply, as it does, for combination and restraint of competition.

That such a contract would be unlawful

seems clear."1® Restrictions which were part of a license agreement between two parties were upheld by the Supreme Court in Bement v. Rational Harrow Company,1^ since there was no evidence that similar agreements had been made with other licensees and since the contract was appropriate and reasonable to maintain the monopoly given by the patent. Bement and Sons had assigned patents to the corporation and had taken out licenses to manufacture and sell harrows.

The licenses

were nearly identical to those in the case of National Harrow Company v. Bench so will not bear repeating.1®

The National Harrow Company sued

Bement for violating their license agreement and to compel performance of the contract, and the New York Supreme Court19 held the license agree20

ment void as against public policy and the New York anti-trust law.

Upon appeal to the Supreme Court21 it was held that the license contracts were valid.

The evidence was examined by a referee and the

court stated that "The omission of the referee to find . . . that there was a general combination among the dealers in patented harrows to regu­ late the sale and prices of such harrows, furnishes no ground for this court to assume such facts.

The contracts • • , are to be judged by

their own contents alone and not construed accordingly.n22 In regard to the patent grant the court said, " . . . the general

-89rule is absolute freedom la the use or sale of rights under the patent laws of the United States.

The very object of these laws is monopoly,

and the rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, im­ posed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the article will be upheld by the courts*

The

fact that the conditions in the contracts keep up the monopoly or fix prices does not render them illegal The case of United States Consolidated Seeded Raisin Company 24 v. Griffin and Shelley was upheld on the basis of the reasoning of the Bement case although in the Consolidated case there were crosslioensing agreements among eight corporations. In 1900 eight independent raisin-seeding businesses assigned all their patents to the United States Consolidated Seeded Raisin Company and received licenses from the company in return.

The license agreement

imposed certain conditions as to the use of the machines, imposed royal­ ties to be paid to the company, allowed the company to Inspect the books of the licensees and prohibited the licensor from licensing any other party unless four certain named licensees consented.

The Consolidated

Company sued the Griffin and Shelley Company, a licensee, for violation of the license agreement.®® The court held that the case of Bement v. National Harrow Company26 was controlling and that "the contract in question in the present ease is not void as against public policy as tending to create a monopoly, or as obnoxious to the provisions of the Sherman anti-trust act." A license agreement between the owner of a patent and a large

90number of other manufacturers, in the case of Rubber Tire Wheel Company v. Milwaukee Rubber Works Company,®8 was held to be Illegal not because the contract provided for the payment of royalty, fixed the prices, and limited the production of each licensee, but because these contracts at­ tempted to raise and maintain the prices in states where the patents had been held void and to create a fund for crushing the competition of out­ side manufacturers* The Rubber Tire Wheel Company which owned a patent for a rubber tire entered into license agreements with all of the large manufacturers of tires In the Waited States*

The license agreements were uniform and

provided for a royalty of four per cent of the net selling price, fixed the price of tires at a higher level than the market price and limited production to a certain per cent of the production of all*

If the li­

censee made less than his "quota” he was paid a rebate of twenty per cent on the value of the shortage and if he made none he had to pay a royalty of twenty per cent on the excess*

The agreements also provided

for a board to supervise the operations of the licensees* One half the royalties were paid to this board and they had the power, with the con­ sent of a majority of the licensees, to purchase tires from any of them to resell the tires at prices considered the best for all.®9 The company brought suit against the Milwaukee Rubber Works Company to recover royalties that had not been paid*

The court held

that the licenses went beyond the rights of the patent monopoly in rais­ ing and maintaining prices in the states composing the Sixth Federal Circuit in which the Circuit Court for that district had held the patent Invalid.8® The license was also void because it created a fund to be

91 used to purchase tiros and undersell competitors, thus crushing compe­ tition.3* Upon appeal, however, the Circuit Court overruled the lower court,



when it stated, "The only grant to the patentee was the right

to exclude others, to have and to hold for himself and his assigns a monopoly, not a right limited or conditioned according to the sentiment of judges, hut an absolute monopoly constitutionally conferred by the sovereign law-makere.

Over and above an absolute monopoly created by

law, how can there be a further and an unlawful monopoly in the same thing? If plaintiff were the sole maker of Grant tires, how could plain­ tiff’s control of prices and output injure the people, deprive them of something to which they have a right? Is a greater injury or depriva­ tion inflicted if plaintiff authorizes a combination or pool to do what plaintiff can do directly? To say yes means that substance is disre­ garded, that mere words confer upon the people some sort of a right or interest counter to the monopoly, when by the terms of the bargain the people agreed to claim none until Grant’s deed to them shall have matured. ♦ # * * + * "Hone of the provisions of the contract in our judgment, touched any matter outside of the monopoly under the patent."33 One of the leading cases dealing with the use of patents to monopolize through a restrictive licensing system Is the Standard Sanltary Manufacturing Company v. United States,ZA The principle of this case is similar to the Blount case, which pertained to cross licensing. In the Sanitary Manufacturing Company case independent competing manu­ facturers combined under a license agreement to limit output and sales

-98of their product, to create exclusive areas for exploitation, and to set prices. The company had purchased a patent from an inventor, Arrott, which improved the method of enameling iron ware and also improved the product.

Subsequently the company used the device and manufactured 50

per cent of the sanitary ware.

The company was unwilling to "enter into

any arrangement which would lessen the advantage which it had by reason of the ownership of the Arrott patent"33 and as a result other manufac­ turers had to produce Inferior wares.

It was claimed that the public

was therefore defrauded and the enamel ware discredited with resulting harm to the market for the good products. cernible only by experts.

The defects, however, were dis­

To avert these "evil results" Standard was

willing to permit other manufacturers to use the Arrott patent. Under the plan of Standard the patent was conveyed to one dayman along with two other patents that were said to be infringements. Wayaaan then li­ censed manufacturers of enamel ware to use the Arrott patent. Under the license agreements a commission of six, chosen from the licensees, de­ termined the selling prices of both manufacturers and jobbers.

They pro­

vided for geographical division of the market, for the payment of royal­ ties, and for rebates and penalties to prevent the violation of the agreements.

The manufacturers also agreed not to sell to jobbers who

did not have a jobber’s license while the jobbers in order to obtain a license were required to buy only from the licensed manufacturers. Sightyfive per cent of the manufacturers and ninety per cent of the jobbers were in this combination. ffhen the oase appeared before the Circuit Court,3S the Standard

-93Company pleaded that the plan was immune from the Sherman Act because it was baaed upon a patent, main questions:

in reaching a decision the court answered two

"(1 ) Would such a combination as was attempted, and in

a large part brought about, have violated the Sherman Act, had patents. . • played no part in It?

(2) If It would, did the part played by those

patents make lawful what otherwise would have been forbidden?"®^ In answering the first question the oourt held that the motive and result indicated an unlawful combination.

The agreements not only

raised prices but prevented reductions that would otherwise have been made.®® In answer to the second query the court said "The fact that Wayman had a patent on something else, even though it was a tool used in one step of the making of the ware, gives neither him nor his licensees the right to restrain interstate trade In the ware.

The ownership of a

patent for a tool by which old, well known, and unpatented articles of general use can be more cheaply made gives no right to combine the makers and dealers in the unpatented articles in an agreement to make the public 39 pay more for it." 40 The Supreme Court on appeal also declared the combination Illegal.

Ifce court said, "Before the agreements the manufacturers of

enameled ware were independent and competitive. By the agreements they were combined, subjected themselves to certain rules and regulations, among others not to sell their produce to the jobbers except at a price fixed not by trade and competitive conditions but by the decision of the committee of six of their number, and nones of sales were created and the jobbers were brought into the combination and made its subjection complete

and its purpose successful. *, * * * * * "The agreements clearly transcended what was necessary to pro­ tect the use of the patent or the monopoly idilch the law conferred upon it* They passed to the purpose and accomplished a restraint of trade condemned by the Sherman Law*"41 In the glass container industry the patent grant appears to have been fully utilised as an Instrument to dominate an industry for in addition to "fenoing-in" its own as well as its competitors basic pat­ ents and following an aggressive litigation policy the Hartford-Bmpire operates to restrict the field of competition through the patent pool.4*® The Bartford-Smpire owns nearly all the patents in the field of glass >|i

making,

and it can grant, revise, or revoke its licenses at its plea-

8ure--for

it is the right of the possessor of the patent. Hartford-

Bmpire delegates to each company the product it Shall make, decrees its 44 price, and limits its output. It is not competition but Hartford-Bmpire who determines who shall enter the industry* Bo matter how capable a newcomer may be, he cannot hope to enter the trade unless there is room for him in the trade, and that depends upon the judgment of HartfordBmpire.45 These practices have enabled Hartford-Empire to "study, as 46 far as possible, the general glass industry." In addition to these practices the company has carried on research to prevent duplication of its own machines, block competitor's developments, and fence-ln competlog machines, besides extending its manufacturing monopoly.47 The policies pursued by Hartford-Empir© apparently have replaced the free play of the market under competition by the controls exerted by

-95their board of directors.

They are not opposed to competition but only AO

seek to prerent "ruinous competition,"

The smaller concerns appear to

exist only at the will of Hartford-Bwpire, for licenses may be revoked at any time and of the three independents in the glass industry two wre being sued for infringement in 1940.49 Here the letters patent have established a dominion to be gov­ erned by Hartford-Smpire that cannot be Invaded by potential congpetltors. It is at once a government and a system of law for an industry* The cross-licensing agreement is another method for competitors to secure patents on improvements of products and processes without run­ ning the risks of infringement suits.

Cross licensing is merely an

agreement between companies or persons, each owning their own patents, to permit one another the right to use the patents of all of the parties to the agreement. Usually royalties are paid as rental payment to the extent to which the patents are used by the respective parties. Most of the rules regarding the validity of the license agree­ ments of patent holding corporations apply to cross licenses.

This fol­

lows from the fact that it is the agreement for an unlawful purpose which is important and not the way or form in which the purpose is attained.

50

It is important to point out again that while each individual restriction in an individual license taken by itself is unobjectionable, yet a system of licenses may be contrary to law.

This has been pointed

out by the court when they said "$ven if separate elements of such a scheme are lawful, when they are bound together by a common intent as parts of an unlawful scheme to monopolize interstate commerce the plan 51

may make the parts unlawful."

la the case of Bloimt Manufacturing Company v. Tale and Towns Manufacturlag Company6® the cross-11 censing agreement with restrictions not to compete was not held to be within the Sherman Act, though it was considered illegal when there was an elaborate plan to restrain improvements, maintain prices, pool profits, end eliminate competition. The contracts between four manufacturers, including the com­ plainant and the defendant, which restrained each of the parties in the exercise of its rl^its under its own patents and in their sales, as well as authorising each of the parties to use a patented invention belonging BJZ

to the others,

was viewed by the court, "as related parts of a general

plan to regulate and control the business of dealing in liquid door checks.

The plan comprehends the maintaining of prices, the pooling of

profits, the elimination of competition, and the restraint of improvemanta."®5 In declaring these contracts invalid the court said "If, as a result of mutual licenses, there is put upon the market an article embody­ ing the inventions of both patentees, so that as the effect of exchange of licenses a new article of commerce Is developed, it is doubtful if the public is thereby unlawfully deprived of any of its rights or expec­ tations of free competition. Where, however, each patentee continues to make his own goods under his own patents, and seeks to enhance his profits by an agreement with competitors, who make either patented or unpatented articles, then it seems to follow that the agreement of each to restrain his own trade cannot be regarded merely as an incident to the assignment of patent rights.

The patentee then restrains his own trade, not for the

purpose of enhancing the value of the license which he grants, but for

-97the purpose of enhancing the value of his trade by removing competition."5® The patent grant permits royalties to be charged for use of a patented process.

The Standard Oil case57 however, permits the members

of a cross-licensing agreement to establish royalties at a level that may plaoe the licensees at a competitive disadvantage. The Standard Oil Company, along with three other members of a cross-licensing agreement, who with a number of others who manufactured cracked gasoline under licenses, were charged with creating a monopoly and restraining trade by controlling that part of the supply of gasoline which was produced by the process of cracking. The Standard Oil Company of Indiana, the Texas Company, the Standard Oil Company of Stew Jersey, and Gasoline Products Company all owned patents covering their respec­ tive cracking processes.

The companies formed a cross-licensing agree­

ment "to avoid litigation and losses incident to conflicting patents."5® The arrangements under the agreements provided for division of royalties which, it was contended, maintained or increased the royalty charged the licensees and hence increased the cost of cracked gasoline.

Thus

the four companies exclude gasoline which would, under competitive roy­ alty rates, be produced.

The court denied this by stating that "Such

provisions for the division of royalties are not in themselves conclusive evidence of illegality."59 The government also contended that the royalties charged were onerous, and licensees who had to pay the heavy royalty could be excluded from selling cracked gasoline which would, under lower competitive roy­ alty rates, be produced by the licensees.

The court stated that "This

argument Ignores the privileges Incident to ownership of patents. Unless

-98industry is dominated or interstate commerce directly restrained, the Sherman Act does not require cross licensing patentees to license at reasonable rates others engaged in interstate commerce#*®0

The court

went on to say, however* that "The rate of royalties may, of course, be a decisive factor in the coat of production#

If combining patent owners

effectively dominate an industry, the power to fix and maintain royalties 61 is tantamount to the power to fix prices#" By themselves, the fixing and maintenance of royalties, even though the fee be onerous, are without significance# To determine the operation and effect of the challenged agree­ ments, the court examined the evidence which showed that "the four pri­ mary defendants, owned or licensed, in the aggregate, only 56 per cent of the total cracking capacity, and the remainder was distributed among twenty-one independently owned cracking processes," and that "the out­ put of cracked gasoline in the years in question was about 26 per cent of the total gasoline production#"

On the basis of this the court said

that "the primary defendants could not effectively control the supply or fix the price of cracked gasoline by virtue of their alleged monopoly of the cracking process, unless they could control, through some means, the remainder of the total gasoline production from all sources. Proof of such control is lacking#"®® Where the court found that two companies, as a result of a crosslicensing agreement, had absolute control over the market for their products, such an agreement was held to be a violation of the Sherman Act. Remington Band and the International Business Machine Corpora­ tion each owned certain patents relating to non-manual automatic sorting

-99and tabulating machines*

in order to settle disputes over alleged in­

fringements and to avoid further litigation they entered into a crosslicensing agreement*

The contract provided, among other things, that

the parties cross-license each other’s use of their respective present and future patents on the manufacture of their own respective machines; that the parties could lease, but not sell, their respective sorting and tabulating machines upon terms of rental not less than those stated in a schedule annexed to the agreement; that neither party could solicit users of the machines of the other party for the purpose of selling cards (necessary for the use of the machines) unless such prospective purchaser were the user of the machines of both parties; that the scheduled prices for the rental of machines would be maintained and that the parties would do nothing vfoich might effect a lowering of those prices; and that the agreement was to continue for five years. 63 In addition to this the court found that "the contracting par­ ties between them control all of the automatic, non-manual, tabulating and sorting machine business in the United States and all the patents pertaining thereto* Between them they owned substantially all of the automatic tabulating machines in use in the United States. No other machine made can, singly or in combination with other machines, perform the functions of the machines of these parties without the intervention of additional manual operation.

The parties here are also the only con­

cerns which manufacture and sell the tabulating cards used in their mach­ ines.”®4 The court decided that the effect of the agreement was to create between them a complete monopoly of the industry and that the

-100-

cohtract was invalid.®5 This court distinguished this case from the Standard Oil Com­ pany case when it stated that "The court (Supreme Court) undoubtedly would have come to a different conclusion (la the Standard Oil case) had there been domination of the industry and fixing of prices.

The distinc­

tion is that here there was complete control of the industry, whereas in the Standard Oil case there was no such control."®® The automotive industry presents a striking contrast to most of the other industries that have been considered previously. When this industry is compared with the Class Container industry,

especially, one

finds a much more peaceful picture in terms of their lack of aggressive action In the use and scope of patents. In 1879 C. B. Selden applied for the basic automobile patent, which was "The combination with a road locomotive, provided with suit­ able running gear including a propelling wheel and steering mechanism, of a liquid hydrocarbon gas engine of the compression type, comprising one or more power cylinders, a suitable liquid fuel receptacle, a power shaft connected with and arranged to run faster than the propelling wheel, an intermediate dutch or disconnecting device and a suitable carriage body adapted to the conveyance of persons or goods . . . " 68 This patent, however, was not granted until sixteen years later, 1395. 69 Selden granted an exclusive license to the Slectrie Vehicle Company in 1899 and after a period of litigation they joined the Associa­ tion of Licensed Manufacturers.

This association adopted a vigorous

policy of suing for Infringement against unauthorized manufacturers, their dealers, and even customers. A royalty of It per cent of the sale

101-

pric® of the ear m e collected from persons licensed under the Selden patent* 70 71 In 1909 the Selden patent was upheld but Henry Ford refused to accept the decision and appealed*

The Circuit Court of Appeals, in

1911, held that the patent had to be restricted and that Ford was not an infringer*78 Thus the industry was thrown wide open for competition. After the suits over the Selden patent the manufacturers didn’t want to be further harrassed by patent litigation, for they were having difficulty in producing good cars at a price which would bring them to the lower income groups.

To attain peace in the industry the manufac­

turers established a cross-licensing agreement in 1915. The agreement was entered into by sixty-one companies and included 547 patents.^3 This agreement was made for a period of ten years#'74 Hot only were the patents held by manufacturers at the time of the agreement placed in the pool but all patents acquired during the ten year period.

The

association had the authority to grant licenses and shop rights under all patents,^® with certain exceptions.^® With only one exception the association has never refused membership to anyone who applied for a li­ cense.

The one application

was refused because "they" only made

two cars, and at that time it was reported they were primarily interested in selling stock. 77 In 1925 the agreement was extended for another five years.

It

Included only patents owned by members as of January 1, 1925, and patents obtained by members during the term of the agreement were not to be placed in the pool. 78 In 1930 the agreement was extended for another five years at which time all patents obtained between 1925-1930 were

-108included.

79

A renewal of the agreement took place in 1935, which in­

cluded only patents that were in the pool up to 1930,

This last agree­

ment does little more than to make available inventions which have al­ ready been put to common use.

It appears that the reason that new pat­

ents have not been included in the pool is that some of the members be­ gan to feel that they had some patents that might be valuable or might acquire patents that were valuable, and therefore they didn't wish to put them into the cross-licensing agreement.80

There Is some justifi­

cation for this argument, however, because companies have made large investments for research and proving grounds and unless they can exploit Hi some of their inventions their investments might be lost. In the first agreement there were 547 patents, 1,066 in 1985, 1,607 In 1930 and 1,805 in 1935, and at the end of 1938 there were 1,058 patents that were still alive in the agreement In the early development of automobile manufacturing the crosslicensing agreement "tended to throw the automobile industry open to broad competition with rewards going to the companies that made the best product, sold at the lowest price . . • with an opportunity to every company to make a ear based on the best that the art knew at the time." This was due to the fact that any company could take a membership in the association and receive all the licenses for manufacturing cars*84 The Ford Company never belonged to the cross-licensing agree­ ment,®5 nor has the Packard Company, for the Packard Company felt they had a number of patents of considerable value and "measuring what we had against what the other fellows had combined we felt it wasn't a good thing for us to go into."86

The Packard people, however, have been licensed

-103under the pool end nay use the patents in the pool.8^ Ford has granted ninety-two licenses to manufacturers out of the 409 patents that the company owns. out 515 licenses.88

In turn the company has taken

The licenses that have been Issued by the Ford Com­

pany contain no restrictions, no royalty fee is charged, and they will grant a license to anyone who asks for It.89

The company has not been

free of litigation, however, for it has been threatened 346 times with suits of infringement between 1926 and 1938, but only sixty of these threats actually went into court.90 How, however, the capital investment required makes it diffi­ cult for a competitor to enter the field and Mr. Alfred Reeves, Vice President and General Manager of the Automobile Manufacturers Associa­ tion, agrees that "patents are now not of much consequence," and the "benefits of the cross-licensing agreement at the present time so far as they exist are what might be described as psychical or spiritual 91rather than benefit that can be described in terms of patent law."* The public should fully appreciate the use of the patent in the automotive Industry.

The policy of cross licensing— virtual abandonment

of the patent system— has insured to every buyer the incorporation of the latest improvements in his car and has permitted him to choose his auto­ mobile on the basis of beauty and comfort without jeopardizing his need for reliable mode of transportation.

The price he pays for his car is

not burdened with excessive costs of litigation because of suits between competitors, and the royalties are exceedingly low— being less than fifty go cents per automobile for General Motors. The attention and energies of the industry can be turned to improving their product and need not be

—104e'

diverted by the trouble end expense of patent problems*

Since 1915 there

have been no lawsuits between or involving a® adverse parties, the manu95 facturers in the industry* This offers nearly a new chapter In in­ dustrial peace, and patents today are taken out only "for protective pur­ poses."94 With the rise of machine technology the patent system has been forced to depart to a large extent from the patent law, whose purpose is to protect the inventor in his exploitation, and thus promote the public welfare.

The many improvement patents, both large and small, have made

the exploitation of individual patents nearly impossible and have led to the development of the patent pool.

The creation of a patent pool, thus

frees technology from infringement suits or threats of suits, which in­ volve years of costly litigation.

This appears to be the virtual abandon­

ment of the patent system, for the pool negates the individual patent monopoly as the basis for production and fulfills the technological need of cooperation in fitting together the multiplicity of small improvements which have been created.

If the patent pool merely attempts to avoid

this confusion by cooperating to produce a better product the pool will be socially beneficent.

Oftentimes, however, it does not stop there, for

it offers the added incentive of using the pool as a legal foundation and instrument for the preservation of monopoly— a monopoly that may extend over an entire industry. Any successful effort to eliminate the monopolistic element of pools will require, in all likelihood, a change in our patent laws, and if the purpose of the patent law is the promotion of technological prog­ ress and social use of Inventions, then it must be admitted that the pat­ ent pool, in effecting technological advance under modern conditions, is

-105-

an improvement over the patent law as It exists today.

w 10 If"*

Chapter V H A PATENT POLICY FOR TODAY At the end of Chapter I the question, Are patents used as an instrument in restraint of trade? was raised.

The remainder of this work

was devoted to a survey of patent policies in an effort to find an answer to this question.

That survey reveals the development of conditions

which appear to he increasingly unfavorable to pure competition and changes in the use of the patent grant which might undermine one's faith in the patent system* Attempts to reform are often couched in terms of changes in ad­ ministrative machinery, of proposals to establish a commission to decide what is fair and Just. The more urgent problem, however, seems to be the objectives which are sought; administrative forms can then be devised with reference to the functions to be performed. Any change that is desired must be viewed from the broader point of view of our whole social policy. The choice in the matter of social policy then, appears to lie between the preservation of competition by law and the concentration of economic units and the maintenance of monopoly. Competition cannot exist if the Industry is barricaded against entrance by a potential competitor.

The legal right to enter a business

of one's choosing is of little avail unless one has access to the indus­ trial art, and if competition is the goal sought then the patent grant itself is an exception to competitive theory.1 In many instances the pat­ ent has been diverted from promoting the social use of Inventions to the pursuit of legal immunity in the establishment of a monopoly in an in­ dustry.

That industrial monopoly is incompatible with competition and

generally results in higher prices, poorer quality and numerous other

-107evile will not be expanded bene because the economic burden to society of monopoly needs no proof# With the use of the patent as a technique for establishing industrial empires it seems apparent that the patent grant does not have the opportunity to promote the public welfare but has be­ come a burden upon society.2 Previous chapters indicate that patents as legal armament offer ample opportunity for restraining competition and fostering monopoly# license agreements contain restrictive clauses of various kinds. Prices and production quotas may be fixed, sales may be limited to certain areas, and a process may be restricted as to use# Here the patent grant blocks the entrance to the field; whoever would enter must come to terms with the patentee# Furthermore, a concern may buy up competing plants and/or patents and acquire a monopoly of an industrial art. The right to make improvements upon patents also may be per­ verted to serve ends not contemplated by the act# A large number of pat­ ents may be established about a corporate estate so that basic patents are "fenced-in*, thus blocking off a whole field of technology# By this process it is possible to secure a patent to block a competitor’s progress, or to secure a series of patents to "fence-in" competitors# through an aggressive litigation policy the patent may be used to determine what firms may coma into a trade and what concerns must stay out, as well as the conditions upon which they may enter*

All of

these practices may be carried on by one company or in a pool; whichever Industrial organization is used is haraiful to free enterprise*

Thus,

patents may be used to create Immunity to the general law and not to pro­ mote social use of inventions#

-108Thus, It seems apparent that the court interpretations of the Sherman Act and the patent aete have not thoroughly analyzed the conse­ quences of their interpretations.

It is agreed that the anti-trust acts

were intended to maintain a competitive economy, yet the courts have found consolidations of patents and some types of patent pools to be no offense against the act.

It does not seem that one can deny that the in­

creasing size and diminishing number of firms, as well as control of en­ trance into an industry through patents, are among the major immediate causes of the decline of competition.

The courts similarly have refused

to hold restrictive licenses that contain price and production restric­ tions, geographical restrictions, or restrictions on use, to be contrary to the act.

It seems fair to conclude that the "rule of reason" has been

inadequate when confronted with the patent grant in connection with re­ straint of trade. The rights under the patent grant have been extended to the point where they may promote monopoly and restraint of trade and not the advance of technology and social use of invention.

While the anti-trust

acts have In certain areas limited the rights under the patent grant, nevertheless, the patent may be used to defeat the purposes of the anti­ trust acts, leading to a possible increase in size and power of firms and a decline in competition. There appears to be little doubt that our present patent system is breeding economic rigidities and aiding in breaking up our competitive processes.

If we wish to retain a competitive economy it will be neces­

sary to remove the obstacles that hinder its proper functioning, and the patent grant under the present law often is such an obstacle, for it is

109an instrument that may be employed to restrain trade.

Competition and

the patent grant present a clash in values; therefore it seems that a choice must be made between a competitive economy with the patent grant severely limited, or maintain the monopoly grant of the patent and its resulting trend toward monopoly.

There appears to be uncertainty as to

which direction we wish our economy to take. American tradition, the Sherman Act, the Clayton Act, and at times the threats of the government to prosecute those in control of industries if there is any agreement between them to establish or maintain prices or regulate competition, would lead one to believe that we wished to maintain a competitive eco­ nomy.

On the other hand the Federal Government has actively encouraged

and sometimes even insisted upon industries organising to establish uni­ form cost accounting systems, fair minimum prices under such programs as the H.B.A. and the Trade Practice Conferences under the direction of the Federal Trade Commission, which have been tantamount, in many cases, to fostering monopoly in an industry. The whole picture of competition and monopoly is confused as far as governmental policy is concerned. In other words, the desirability or undesirability of pure com­ petition is still an unsolved problem, whether patents are involved or not*

Sooner or later, however, this question will be answered through

our democratic technique so that the public interest may prevail.

If

the desire of the public is to maintain competition, then certain funda­ mental changes In the patent system appear to be necessary.

The recom­

mendations that follow are based upon the premise of a policy maintaining a competitive economy. Even though the evidence might be found to show that the patent

-110-

laws of 1836 promoted technology and the application of invention for social use in the economy of that day, It does not often serve the same purpose in the modern economy.

It is not necessary to condemn the patent

system, it is only that changes have to he made in order to meet the changed conditions.

It seems quite likely that it is too late to hope

for a changed interpretation by the courts for precedent is too well es­ tablished.

The reason for this seems clear.

The courts have been called

upon to interpret the vague formulae of the anti-trust acts in an effort to determine if the restrictions in a license or license agreement tended toward monopoly and thus were violation of the acts, or If the license restrictions fell within the patent grant and encouraged invention. This has amounted to the power to determine economic policy, and the courts apparently have not been willing to limit adequately the patent grant to carry out the avowed purposes of Congress in its attempt to restore healthy competition, for many practices which restrain trade and lead to monopoly from the viewpoint of economic science have not come under the law. As a result the courts today are poorly equipped to restore compe­ tition because of the rule of precedent which emphasizes interpretation based upon continuity with the past, and most of the precedent in this field is antithetical to pure competition. A legal body is essntial in order to secure a consistent application of policy, but it is not the proper agency for determining policy or the means of attaining it. Only through Congressional action can the patent be placed in its proper role in the national economy— to promote technology and the public welfare. At present the line between the patent privilege and the anti­ trust laws is not clearly defined, for the patentee insists that the grant

-111-

©f an "exolueive right" la an absolute right, but the courts have found sob©

restrict ions alleged to be under the patent grant to be subject to

the general law and not immune from anti-trust action. Restrictions in respect to production, price, territory, type of product, and use are apparently legal and if the objective is the maintenance of competition the recommendations of the TNBC that " . . . the owner of any patent be required to grant only unrestricted licenses, and that he not be per­ mitted to impose restrictions upon the buyer in sales of patented 3 articles" should be followed. This would mean that the holder of the patent would not be able to control an industry and restrict competitive forces through the use of restrictive licenses. It appears that the best proposal to restore freedom of compe­ tition is to compel owners of patents to grant licenses to anyone who may demand them, on terms to be fixed by the Patent Office or some other impartial tribunal.4 This raises a question of great complexity concerning the pool­ ing of patents.

Where several patents are employed in manufacturing a

good it is only natural that most of the patentees prefer the pooling of patents rather than a bout of litigation which would leave each of them financially exhausted. Patent pools are not "bad" as such, because they are often necessary to make possible the use of several patents in order to secure the beat good which the technology offers, as well as avoiding the additional cost of litigation.

If our goal is competition, however,

the patent pool may be used to defeat competition.

The present law per­

mits the patentee to license or withhold his license as he pleases and this merely sanctions monopoly under the patent pool, and private interests,

-11£-

entrenched behind this legal sanction, cannot be permitted to decide Who shall enter the field. for those within a patent pool the pool is virtually the aban­ donment of the "exclusive right," but it may offer an insurmountable bar­ rier for one desiring to enter the field, tinder a system of compulsory licensing the need for pools would vanish and the industry would be opened to possible competition*

The pool would vanish because one desir­

ing to use a patent would merely have to apply for a license to obtain the desired patent, and therefore would not have to combine with others to obtain use of one or more inventions* If a patent is suppressed it obviously cannot promote technology, and it has the added possibility of promoting monopoly.

It may not cause

any public loss because there may be several other techniques that lead to the same result, but, on the other hand, It may deter an industrial art*

If a system of compulsory licensing were adopted it would not be

possible to hinder the development of technology, and at the same time it would aid in making possible the restoration of competition.

If there were

several techniques that led to the same result, the most efficient tech­ nique would be adopted and no public loss would be suffered by not using any other methods.

The compulsory licensing system is in harmony with

competition for it does not permit a patentee to block the path of tech­ nological progress but makes possible the knowledge and opportunity neces­ sary to enter most of the industrial fields. "fencing-in" of patents also would be impossible because of the necessity of granting licenses to those who wish to use them.

This re­

moves the barriers to technical progress and frees the competitive forces*

-113Infringement suits could bo avoided through a procedural de­ vice • An application for a patent could be made public and called to the attention of all those who might be concerned.

If any party felt his

patent rights infringed, he could file a protest within some reasonable length of time.

If a protest arose, an administrative hearing could be

held at which all those who had an interest in the proposed patent would have an opportunity to be heard.

Thus, a tribunal of experts could de­

termine the originality of Inventions and the patent would be presumed to be valid.

Such an action, however, would entail more rigid and higher

standards for patentability which, in turn, would reduce the great volume of applications which deal only with minor detail.

This shift from

judicial to administrative control provides a speedy, inexpensive, com­ petent process of judgment, and avoids the expensive litigation of exist­ ing law. It might be alleged that a system of compulsory licensing will destroy the bargaining power of the small inventor who is not in a posi­ tion to exploit hie discovery; for, if a large manufacturer does not like the terns offered him, he can obtain a compulsory license from him. Sven admitting that this is true would this situation be any worse than the position of the individual inventor today under the present patent law? Today the individual inventor who is unable to exploit his own in­ vention finds himself the weaker bargainer facing one or more well en­ trenched corporations.

The reason for this is that virtually all patents

granted are for improvements,® rather than a basic or pioneer invention. A corporation or patent pool may control the basic Invention to which the patent relates and the improvement cannot be legally used in conjunction

-114with a patented basic invention without the concent of the patentee*

in

other words, those who improve basic inventions protected by patents must depend upon the basic patent holder to derive any return from their inventions*

The owner of a basic patent, therefore, has a considerable

advantage in bargaining for patents which cover improvements on his in­ vention, for he enjoys a purchasing monopoly as far as one particular field of invention is concerned* Those who defend the abuses of the prevailing system in the name of the poor inventor should devote their enthusiasm to Increasing his bargaining power.

If the obstacles to competition such as the pos­

sibilities under the present patent laws, were removed and a system of pure competition really flourished, the individual inventor would then be able to sell in a freely competitive open market. It has been stated that compulsory licensing will change the *fundamental principle of the patent system as we have always had it. It is to destroy the exclusiveness of the grant,. . 7 This argument, upon which the patent law is also based, obviously assumes a materialistic psychology in that the profit motive is the stimulus to bring forth all socially desirable inventions.

The exclusive grant is the means of re­

warding the inventor for making known his invention.

To assume, however,

that personal material gain is the only incentive of the individual in­ ventor, is invalid. Financial reward is not the only incentive for invention, for it is very likely that there are various causes which cannot be dissen­ tangled to allow a finger to be placed on any specific incentive,

in­

ventors give conflicting testimony as to the reasons for their inventive

-115activity.

These causes vary from desire for fame and reputation to di­

vine inspiration® and an instinct of contrivanceOne writer in the field goes so far as to say "the patent laws are no more responsible for great inventions than are the copyright laws for great poems.

Watt was

no more impelled by this to make money when he Invented the separate eondensor, than Milton was impelled to earn the equivalent of twenty-five dollars by writing Paradise lost."10 Even if it is assumed that material gain is the primary incen­ tive for invention, the patent laws do not appear to accomplish the noble purpose of rewarding the inventor. As was previously stated, the modern economy makes it very difficult, if not impossible, for the inventor to exploit his invention himself, and the power of the modern corporation or monopoly in bargaining for the use of a patent places the inventor in a position of inequality. Besides encountering these obstacles in the exploitation of a patent grant, the Inventor is faced with the costs of developing the invention.

One writer is extremely pessimistic concern­

ing the possibility of monetary reward, for he says "Any fool may take out a patent; but there are so many steps to pass between even a good marine invention being patented, and a net reward being cashed by the in­ ventor, after tbs assistants, experlmentors, lawyers, builders, capita­ lists, and the competitors who appropriate the idea or fight for it, Il­ legally or lawfully, have all drunk their fill from his invention, that the lay inventor will best protect his happiness by deepest pessimism."n It is apparent then, that the assumption of the patent laws of a materialistic psychology of the Inventor is only partially valid, and what motivating force it may have is lost when difficulty of exploitation

-ne is considered.

The modern research laboratory with Its professional in­

ventors has outmoded the materialistic reward of the patent law, for the Incentives of the modern inventor are a steady Income, a career, and a laboratory. Furthermore, this viewpoint along with the patent laws is based on the assumption of the individualistic conception of the process of invention.

Both assume that each invention Is an entity distinct from

all others and is therefore patentable and exploitable.

This is shown

in the patent laws by the fact that the monopoly grant "to use, sell, or vend,** an invention is granted to a person to exploit.

These single in­

ventions are assumed to be usable of and in themselves and not a process of evolution through development and improvement of the existing state of the arts.

Strictly speaking, no individual makes an invention, for

such products as the automobile, the telephone or agricultural imple­ ments are the aggregate of an infinite number of inventions, each of them the contribution of a separate person.

Invention, then, is a social

growth.^® One writer in this field says, "We cannot find a single ex­ ample . . . but if there were some desired discovery so difficult, so recondite that only five men . • . had the intellect and the preoccupa­ tions which would lead them to it— not one of those geniuses would be 13 necessary . . . since any of the remaining four would find it." Pro­ fessor Ogburn1® asks us to imagine Edison as a caveman fifty thousand years ago. Would the quadruplex telegraph, the incandescent lamp and nine hundred other inventions with which Edison’s name is associated, have been forthcoming? On the other hand if Edison had never been born no doubt these devices would have been invented by other men for every

-117invention is rooted in past technical achievement. If the assumption of the patent law aa to the nature of the in­ ventive process has any validity at all, the technological change in our society in the last century appears to negate the assumptions of the patent system.

Today invention is cooperative in nature, for In the

modem research laboratories many man attempt to find a solution to a single problem.

Thurman Arnold said "The weight of the testimony before

the committee (Temporary National Economic Committee) proved that research and development has now become a group or corporate activity. . . . In dealing with the patent system, it is no longer helpful to think in terms 1B of the erratic and solitary genius." Mr. Kettering, who is an Inventor himself, in testifying before the Temporary National Economic Committee said "A one man invention isn’t very possible these days because there are so many ramifications that we have to work together as a group."16 The Commissioner of Patents, Mr. Conway P. Coe, has even testified as to the changing character of invention when he said "I do not way that the day of the individual Inventor is gone, . . . but I think it is rapidly fading."17 Actually then the process of invention has changed from the realm of the Isolated inventor to industrial research and invention. Here the promotion of technology becomes a group affair which often has be­ come a separate department of corporate enterprise in which specialized personnel attacks problems of the firm or industry.

The TNEC reports

that here "It is the task of the man on salary, not to invent, but under direction to pursue technical research; it is his concern, not to produce a novelty, but to take a hand in solving a stated problem.

The question

118which must be tackled has many ramifications; many persons, each with his distinctive competence, must lend a hand; the answer is a work of collec­ tive authorship.

The accent falls upon the necessity of the moment, not

upon some ’exclusive right* to be obtained. When the creation comes, then is the time to get busy about the patent.

The invention emerges,

not in its independent right, but as an instrument in the service of busi­ ness policy. Many innovations would emerge even if they could be accorded no legal protection, for without them, the concern would lose its strataifi gic place in the industry." In 1930 there were 1000 research laboratories in this country having 30,000 research workers and spending 200 million dollars annually.*9 The importance of industrial research cannot be overemphasized for it occupies a position of real importance in the modern economy. A study entitled Industrial Research and Ohanging Technology by the Works Progress Administration states that the research industry, measured in terms of employment "is equal in importance to the dyeing and finishing of cotton fabrics which in 1937 ranked among the forty-five manufacturing industries Which provided the largest number of Jobs."20 The increase in research personnel in twenty-two industrial groups between 1927 and 1938 is shown in the following table:

—119

Growth of Research from 1927 to 1938 toy Industrial Group*3* Industrial Group _________________________

Parcantag© increase 1927

Chemicals and allied products Petroleum and its products Electrical communication Electrical machinery, apparatus and supplies Oonsultiag and testing laboratories All other machinery Rubber products Motor vehicles, bodies, and parts Agricultural implements (including tractors} Miscellaneous Iron 8 steel & their products not Including machinery Food and kindred products Stone, clay and glass products Nonferrous metals and their products Radio apparatus and phonographs Utilities (gas, light, and power) paper and allied products Trade associations Textiles and their products Forest products All other transportation equipment Leather and its manufactures Tbtal

175.5 538.7 3.7 56.1 127.0 133.2 101.8 190.2 164.7 208.0 189.4 255.1 166.4 78.7 1,600.0 69.4 177.5 96.9 252.9 190.9 17.0 151.6 133.3

"Under our present industrial system most patents of value are owned toy corporations, which either touy them or more often obtain them toy employer-employee contracts, under which assignments of all inventions are made to the employer for nominal consideration.

Such contracts are

required toy many of the large manufacturing companies in the United States, particularly of engineers and research workers who are likely to make in­ ventions in the course of their work. Probably the most valuable pat­ ented inventions of the present day are made in research organizations finanoed toy corporations, for the express purpose of developing new og

products, or solving existing problems in the business.”

* 19

-180That the individual is being replaced toy the corporation in the field of invention la born out toy a study of the THEC which shows the dis­ tribution of issued patents from 1921 to 1938 as follows:

To large cor­

porations of over fifty million, 17*2 per cent; to small corporations, 34*5 per cent; to foreign corporations, 8*4 per cent; and to individuals 23 a decrease of the 1921 mark of 73 per cent to 42.9 per cent. Thus, it becomes more difficult than ever to Isolate any one invention and say that it is the work of any one man.

This means that

the lone Inventor in his toolshop is nearly an historic oddity, for modem technique requires specialized training and costly equipment * The incentive for the modern inventor is a steady Incone, a career, and a laboratory.

The inventors of today, therefore, are trained men who work

in the laboratories of big business units.

Generally, the patents that

are issued on the inventions of these professionals automatically are assigned to the business which pays the salaries and provides the labora­ tories.®* The effects of industrial research and invention are not too difficult to predict.

One authority says, "As organized invention and

discovery gain momentum the revolutionist will have no chance in explored fields. He will have to compete

with more and more men

who have at their

disposal splendidly equipped laboratories, time, and money, andwho may work three and five years before

producing a noteworthy

result.Only the

exceptionally brilliant, trained

scientist will be able

to meetthese

explorers on their own ground. Possibly Edison may be the last of the OR

great heroes of invention#"*

The significance of industrial research is its relation to the

-121

concentration of economic power.

Industrie! research with the help of

the patent m y possibly give an Impetus to the trend of monopoly through the method of "fencing-in" its own hasie patents or those of its competi­ tors, thus enabling it to eliminate competition and secure the field for itself. Eartford-Empire illustrates the way in which technological im­ provements protected by patents have been the means of securing a hi&i degree of control over an Industry and thus fixing prices, marketing policies, and competition*®® As a result of group invention ideas for development are numer­ ous but the process of developing an idea into the production stage is expensive and difficult*

If one company has to bear the burden of

developing the invention it is at a competitive disadvantage if it is compelled to license others because it must cover the cost of its re­ search in its price, which other firms do not have to bear* ever, is not necessarily true.

This, how­

If a company were compelled to issue a

license, the Patent Office or some other impartial tribunal could es­ tablish a royalty fee that would reimburse the company for the cost of its research and thus would not place it at a competitive disadvantage because other companies would have to include the royalty payments as part of their cost of production.

To determine a "fair" royalty fee

would be no small task, but surely if "reasonable rates" can be deter­ mined to seme degree of satisfaction by governmental agencies the task of establishing "fair royalty fees" is not insuperable#

QQ

When the patent system was established it was based on the philosophy of giving an individual Inventor a monopoly for seventeen years as a reward and stimulus for invention. As has been pointed out,

however, this philosophy is not wholly valid because the individual in­ ventor is rapidly fading from the modem inventive field,

furthermore,

the incentive to modern inventors in the research laboratories is a salary, a career, and a laboratory. At the present time the number of basic inventions are few, for the great majority are Improvements which "are developed in response to a public need and appear at widely sspar­ se ated points almost simultaneously." Today it is not a question of a single inventor having a monopoly for seventeen years but a question of a large company or companies controlling patents and restricting compe­ tition.

In view of these changed conditions it appears obvious that the

old justification for the unrestricted monopoly may no longer exist. Thus, a method of reconciling the patent system with a compe­ titive economy seems possible. Under a system of compulsory licensing it would be possible to reward the inventor for his trouble and expense in developing the invention. He would receive the cost of his research through the collection of royalties and play no favorites.

Invention,

therefore, would not be stymied, and an obstacle to pure competition would be removed. If in attempting to formulate a social policy the point of view 31 Is taken that " . . . whether we like it or not, competition is doomed," then it seems that the alternative to the policy of competition is to either permit the unregulated exercise of power by monopolies or to control the exercise of this power.

In the field of patents either of

these approaches obviously gives ea entirely different answer than would be obtained if the decision were to maintain competition.

The objective

that society seeks is a matter which demands further study and the

-UBS formulation of a program must consider the role of patents. The ultimate problem of industrial organization is one of de­ ciding the proper location of authority over economic resources* Within this broader problem falls the problem of patents and. their uae.

The

foregoing study has indicated the nature of patents as an Instrument in restraint of trade and has been an effort to point the way to attaining a competitive economy, once competition Is determined to be the objective that is sought•

- IAV-

EBmSKCBS Chapter I 1. United States v. Amerloan Bell Telephone Company, 128 U. S. 315 at 360. (I860). 2. U. S., Temporary National Economic Committee, Patents and Free Enterprise. Monograph No. 31 , p. 11. Note: Hereafter this source is sited TNEC, Monograph 31, p.— . 3.

I. W. Hume, "the History of the Patent System under the Perogative and at Common Law. " Law Quarterly Review, April 1896, Vol. XII, No. 46, p. 141.

4. X. W. Hune, "The History of the Patent System under the Ferogatlve and at Connon Law," Law Quarterly Review. April 1896, Vol. XII, No• 46, p . 142. 5. Mole H. Avram, Patenting and Promoting Inventions, p. 31. 6. K. W. Hune, "The History of the Patent System under the Perogative and at Common Law," Law Quarterly Review. April 1896, Vol. XII, No. 46, p. 53. 7. Floyd L. Vaughn, Economics of Our Patent System, p. 17. 6 . Darcy v. Allin, Hoy at 182 (1602), The English Reports Reprints. Vol. LXXIV, Kings Bench Division Vol. 3, p. 1139. 9.

Darcy v. Allin, Noy at 188 (1608), The English Reports Reprints, Vol. LXXIV, Kings Bench Division Vol. 3, p. 1139.

10. TNSC, Monograph 31, pp. 14-15. * 3ft* Statutes of the Realm, "An Act Concerning Monopolies Dispensa­ tions with Fenall Laws and the Forfeyture thereof." Volume the Fourth, Part II, MDCCCXIX, p. 1212. 12. The Act states " . . . That all jgson and jgsons Bodies Politique and Corporate whatsoever, which now are or hereafter shallbe, shall stand and he disabled and uncapable to have use excise or putt in ure any Monopolle or any such Comission Graunt Licence Charters tree [letters] Patents Proclamacon Inhibicon Restraint Warrant of Assistance or other Matter of Things tendinge as aforesaid, or any Libtie Power or Faeultie grounded or pretended to be grounded upon them or any of them.*' The Statutes of the Realm. "An Act Concerning Monopolies Dispensations with PenallTaws and the Forfeyture thereof." Volume the Fourth, Part II, MDCCCXIX, Section 3, p. 1212. The Statutes of the Realm. "An Act Concerning Monopolies Dispensa­ tions with Fenall Laws and the Forfeyture thereof." Volume the Fourth, Part II, MDCCCXIX, Section 5, p. 1213.

-12514.

The Statutes of the Realm. "An Act Concerning Monopolies Dispensetions with Fenall Lawsand the Forfeyture thereof." Volume the Fourth, Part II, MDCCCXIX, Section 6, p. 1213.

18* Th» Statutes of the Realm, "An Act Concerning Monopolies Dispeneatlone with Penall Laws and the Forfeyture thereof." Volume the Fourth, Part II, MDCCCXIX, Section 4, pp. 1212-13. 16.

1NEC, Monograph 31, pp. 20-21.

17.

The Constitution of the United States, Article III, Section 8.

18.

1 Stat. 109, (1790).

19.

1 Stat. 109 at 110, (1790).

20.

TRBC, Monograph 31, p. 25.

21.

TNEG, Monograph 31, p. 25.

22. 1 Stat. 321, (1793). 23. 5 Stat. 119, (1836). 24.

16 Stat. 201, (1870).

23. TEQSC, Monograph 31, p. 26. 26. 3 Stat. 119, July 4, 1836. This section reads as follows: "Any person vftio has invented or discovered any new and useful art, machine, manufacture or composition of matter, or any new and use­ ful improvements thereof . • . may, upon paymsnt of the fees re­ quired by law, and other due proceedings had, obtain a patent therefor." 27. U. S. Code, Title 35, Section 32, (1940). 28* U. S. Code, Title 33, Section 31, (1940). This section reads: "Any person . . . who has invented or discovered and asexually reproduced any distinct and new variety of plant, other than a tuber-propagated plant . . . may, upon payment of the fees required by law, and other due proceedings had, obtain a patent therefor." 29. Leon H. Amdur, Patent Fundamentals, p. 25. 30. Leon B. Amdur, Patent Fundamentals, p. 29. 31. Leon H. Amdur, Patent Fundamentals, p. 31. 32. Leon H. Amdur, Patent Fundamentals, p. 33.

-i86~ 99* Leon H. Amdur, Patent Fundamentals, p. 81. 34* Leon H. Amdur, Patent Fundamentals, p. 863# 35. LeRoy v. Ththam, 14 Howard 155 at 175, (1858). 36. Morton v. Hew York Ear Hospital, 17 Federal Oases 079 at 079, (1868), Federal Oase Mo. 9,865. 37. Revised Statutes of the Bnited States, 43d Congress, 1st Session, Section 4864. 38. Hnlted States Code, Vol. 3, Title 35, Section 70, p. 3169, (1940). 39. 0. S. Code, Vol. 3, Title 35, Section 67, p. 3169, (1940). 40. Wm. H. Kiekhofer, Economic Principles. Problems and Policies, p. 73. 41. Louis M. Hacker, The Triumph of American Capitalism, pp. 10-15. 42. Wm. H. Kiekhofer, Economio Principles. Problems and Policies, pp. 902-3. 43. Edward Chamberlin, The Theory of Monopolistic Competition, pp. 6-7. 44. James Whitney, "The Relation of the Patent Law to American Agri­ culture, Arts and Industries," Reprint of speech before Mew York Society of Practical Engineering, Mew York, 1875. 45.

"Its (the small units of business) doom was sealed when steam and electricity supplanted hand power as the source of Industrial energy; when the machine made possible a growing expansion of pro­ duction and when new methods of communication and transportation extended the market from the village or city to the state, the nation, and even to the outside world. These changes necessitated the pooling of constantly larger quantities of capital and gave rise successively to the partnership and the corporation.** Harry Wellington Laidier, Concentration of Control in American Industry, pp. 3-4.

46.

This was the Boston Manufacturing Company, first of the large Mew England textile firms, established at Waltham, Massachusetts. A. A* Berle and Gardiner Means, Modern Corporation and Private Property, p. .10.

47. A. A. Berle and Gardiner Means, The Modern Corporation and Private Property, p. 14. 48. Monopoly is the power to regulate the market price or supply as ones own interests dictate. Vernon Arthur Mund, Monopoly, A History and Theory, p. 116* ——

-12749# Herman Levy, The Hew Industrial System. P* 135. 50. Mrs. Joan Robinson, "What Is Perfect Competition,** Quarterly Journal of Economics. November 1934, Vol. 49, pp. 104-120. 51. Caroline F. Ware and Gardiner 0. Means, The Modern Economy in Action, pp • 26-31. —— 52.

THEQ, Pt. 5, p. 1673, Quoted by Frank A. Fetter.

53. Lionel Robbins, The Great Depression, p. 189. 54.

1HSC, Monograph 31, p. 162.

1.

The Constitution of the United States, Article 1, Section 8, Paragraph 8.

2.

The Constitution of the United States, Article 1, Seotion S, Paragraph 3.

3.

21 Congressional Record1323, 1763, 1796, 2436, 2455, 2556, 2597, 2639, 2723, 3133, 3145, 4086, 4559, 4598, 5940, 5981, 6116, 6312, 6208. (1890).

4.

0. S. Code, 1935, Title15, Chapter 1, Sections 1 and 2, p. 203.

5.

William L. Ransom, "TheSherman Anti-Trust Act and the Hewer Problems of Trade Restraint and Competition,** Proceedings of the Academy of Political Science. Vol. XVIII, 1938-40, p. 217. Quoted from Govern­ ment brief file# in United States District Court for the Southern District of H« Y„, "The Meaning of the Sheman Act.**

6. Worthem Securities Company v. United States, 193 U. S. 197 (1904); Arkansas Brokerage Company v* Dunn and Powell, 173 Fed. Rep. 899, (1909)• 7.

229 0. S. 373 at 376, (1913).

8. 221 U. S. 1, (1911). 9. Fashion Originators Guild of America v. Federal Trade Coumisaioa, 114 Fed. Rep. (2d Series) 80, (1940). 10. 0. S. v. Winslow, 887 0. 8. 208, (1913). 11. 221 U. S. 106, (1911). 12. 281 U. S. 106 at 180 (1911).

-12813.

Chicago Board of Trade v. United States, 246 0. S. 231, (1918).

14.

Chicago Board of Trade v. United States, 246 0. S. 231 at 238, (1918).

15. United States v. Hutchison, 32 F. Supp. 600, (1940). 16. Westway Theatre v. Twentieth Century -Fox Film Corporation, 30 F. Supp. 830, (1940). 17. Apex Hosiery Company v. Leader, 310 0. S. 469, (1940). 16. Continental Candy Corporation v. California and Hawaiian Sugar Re­ fining Company, 270 Fed. Hep* 302, (1920). 19. Apex Hosiery Company v. Leader, 310 0. 8. 469, (1940). 20.

United States v. Trenton Potteries Company, 273 0. S. 392, (1927).

21.

United States v. Patterson, 201 Fed. Rep. 697, (1912).

22.

Ufelted States v. Socony Vacuum Oil Company, 310 0. S. 656, (1940).

23. 156 Fed. Rep. 389, (1907). 24 . 94 Fed. Rep. (2d Series) 883, (1938). 25.

212 Fed. Rep. 466, (1914).

26. One writer says that "It was . . . inevitable that there should be a clash between the patent statute which employs thelanguage of complete monopoly and the anti-trust laws, to which monopoly is anathema." Mortimer Feuer, "The Patent Monopoly," Columbia Law Review. Hov. 1938, Vol. 38, p. 1146. 27. John Franklin Crowell, Trust and Competition, pp. 48-9. 88. Corwin 0. Edwards, "Preserving Competition versus Regulating Monopoly," American Economic Review, Supplement, Mar. 1940, p. 169. 29.

TKBO, Part 5, p. 1651.

30. 38 Stat. 730, (1914). 31. 38 Stat. 730, Section 3, (1914). 32. United Shoe Machinery Company v. United States, 258 0. S. 451 at 459, (1928). 53.

Standard Oil Company v. United States, 223. U. S, 1 at 58, (1911).

-189Chapter III 1« Virtue v, Creamery Package Company, 227 0. S. 8 at 32 and 37, (1913) . 8. Paper Bag Cases, 108 0. S. 77$, (1881). 3. Rubber Company v. Goodyear, 76 0. S. 788, (1869). 4. United States v. Shoe Machinery Company, 247 0. S. 32 (1918). 8* the Bureau of National Affairs, Inc., Verbatim Record of the Proceedings of the Temporary National Economic Corcmittee. Vol. 1, p. 238, Col. l and 2• Hereafter this source will be cited, Verbatim Record, p.— , Col.— . 6. Vulcan Manufacturing Company v. Maytag, 73 Pad. Rep. (2d Series) 136, (1934); 293 0. S. 353, (1935) ; Cert, dismissed 294 0. S. 734, (1935). 7.

186 0. S. 70, (1908).

6.

I86 0. S.70 at 91, (1902).

9.

272 0. S. 476 (1928).

10. 11.

272 0 . 8. 476 at 490, (1926). Straight Side Basket Corporation v. Webster Basket Company, 10 Fed. Supp. 171, (1935).

12. Straight Side Basket Corporation v. Webster Basket Company, 10 Fed. Supp. 171 at 172, (1935). 13.

7MIC, Fart 2, p.

384.

14.

3MSC, Fart 2, p.

404.

15.

1N1SC, Fart 2, p.

530.

16.

IMBC, Part 2, pp. 412-13.

17*

Verbatim Record, p. 275, Col. 2; p. 517, Col. 1.

18.

Verbatim Record, p. 213, Col, 1; p. 511, Col. 2.

19,

Verbatim Record, p. 815, Col. 3; p. 210, Col. 3; p. 260, Col. 2. Verbatim Record, p. 213, Col. 3; p. 860, Col. 2; p. 448, Col. 2; p. 518, Col. S.

21.

Verbatim Record, p. 210, Col. 3; p. 287, Col, 1.

13022.

Bement v. National Harrow Con^any, 186 U. S. 70, (1908)$ United States v. General Electric Company, 278 U. S. 476, (1926); Indiana Manufacturing Company v. J. I. Case Treshin^ Machine Company, 154 Fed* Rep* 365, (1907); Straight Side Basket Corporation v. Webster Basket Company, 82 Fed. Rep. (2d Series) 245, (1936).

8S*

Verbatim Record, p* 210, Col.

8.

24.

Verbatim Record, p . p . 890,' Col *1"2.

25.

Verbatim Record,p. 267, Col. 3$ p. 268, Col. 1.

®6*

Verbatim Record.p. 878, Col. 1.

2V.

Verbatim Record,p. 209, Col. 1; p. 878, Col. 1; p. 281, Col. 3; p. 884, Col. 3.

28.

Verbatim Record, p. 278, Col. 1; p. 268, Col. 2.

89.

Verbatim Record, p. 286, Col, 1 and 2.

206, Col. 2; p. 207, Col. 2; p. 279, Col. 2;

30* Verbatim Record, p. 209, Col. 3. 31.

Verbatim Record, p. 211, Col.

3.

32. Edward Chamberlin, Ifceory of Monopolistic Competition, p. 6. 33.

See pp. 31-2 of this text.

34 . 304 0. S. 175, 1938 (affirmed on rehearing Nov. 21, 1938, 305 U. S. 124, (1938). 35. United States v. General Electric Company, 272 U. S. 476 at 469, (1926). 36.

17 Wallace 453 (1873)} 84 0. S. 453,(1873)..

37.

17 Wallace 453 (1873) ; 84 0. S. 453at 453, (1873).

38 . 309 0 . 3. 436, (1939). 39. 309 U. 3. 436 at 452, (1939). 40.

Standard Sanitary Manufacturing Company v. United States, 226 0. S. 20, (1912).

41. Radio-Craft Company v. Westinghouse Electric and Manufacturing Company, 7 Fed. Rep. (2d Series) 438, (1925). 42. Radie-Craft Company v. Westinghouse Electric and Manufacturing Company, 7 Fed. Rep. (2d Series) 432 at 433, (1925).

-131 43.

Ethyl Gasoline Corporation v. Halted States, 309 U. 3. 436 at 452453, (1939).

44. Heaton-Peninsular Button Fastner Company v. Eureka Specialty Company, 77 Fed. Rep. 288, (1896)* 43. Heaton-Peninsular Button Fastner Company v. Eureka Specialty Company, 77 Fad. Rep. 288 at £96, (1896). 46* Leeds and Gatlin Company v. Victor Talking Machine Company (Ho. 2), S13 U. S. 325, (1909)• 47. Leeds and Catlin Company v. Victor Talking Machine Company (Ho. 2), £13 3. S. 325 at 332, (1909). 48. Leeds and Catlin Company v. Victor Talking Machine Company (No. 2 ), 213 U. S. 325 at 332, (1909). 49. 224 U. S* 1, (1912). 50. 224 U. S. 1 at 26-7, (1912). 51. 224 U. S. 1 at 18, (1912). 52. 224 U. S. 1 at 24, (1912). 53. 224 U. S. 1, (1912). 54. Motion Picture Patents Company v. Universal Film Manufacture Company 243 U. S. 502, (1917). 55.

MotionPicture Patents Company v. Universal FilmManufactureCompany 243 U. S. 502 at 312, 513, (1917).

56.

United Shoe Machinery Corporation v. United states, £58,U.S. (1922).

451,

57 . 28 Fed. Rep. (2d Series) 257, (1928) i certiorari denied 278 U. S. 648, (1928). 58. 298 U. S. 131, (1936). 59.

298 U. S. 131 at 137, (1936).

60. United Shoe Machinery Company v. United States, 258 U. S. 451 at 463, (1922). 61. 69 Fed. Rep. (2d Series) 406, (1934). 62. American Equipment Company v. Tuthill, 69 Fed. Rep. (2d Series) 406 at 409, (1934).

•13263.

69 Fid. Rep. (2d Series) 406, (1934).

64.

Straight Side Basket Corporation v. Wehster Basket Company, 82 Fed. Rep,(Bd Series) 845, (1936).

65.

HUSO, Part 2 , p. 383.

66 .

Verbatim Record, p. 316, Col. 1.

67.

This was well stated by Circuit Judge Knappen in thecase of Ford Motor v. Union Motor Sales, 244 Fed. 156, (1917). "At least subject to oertain limitations • • • it is the general and well-settled rule that a system of contracts between a manufacturer and retail dealers, by which the manufacturer, in connection with absolute sales of his product, attempts to control the resale prices for all sales, by all dealers, eliminating all competition and fixing the amount which the ultimate purchaser shall pay, amounts to restraint of trade, and is invalid both at common law and, so far as it affects interstate commerce, under the Sherman Anti-Trust Act • • ."

68 .

Bauer v. O’Donnell, 229 U. S. 1,

(1912).

69.

Bauer v. O’Donnell, 829 U. S. 1 at 14-16, (1912).

70.

Strausv. Victor Talking Machine Company, 243 U. S. 490, (1916).

71.

Strausv. Victor Talking Machine Company, 243 U. S, 490 at 495, (1916).

78. Straus v. Victor Talking Machine Company, 243 U. S. 490 at 501, (1916). 73.

Boston Store v. American Gramophone Company, 246 U. S. 8 , (1917).

74.

Boston Store v. American Gramophone Company, 246 U. S. 8 at 25, (1917).

75.

309 U. S. 436, (1940).

76.

Ethyl Gasoline Corporation v. United States, 309 U. S. 436 at 458, (1940).

77. United States v. Colgate Company, 230 U. S. 300, (1919). 78.

See pp. 44-8 of this text.

79. United States v. Colgate Company, 250 U. S. 300 at 307, (1919). 80.

See case of The Pep Boys v. Fyroll Sales, 299 U. S. 198, (1936).

81.

Old Dearborn v. Seagram Corporation, 299 U. S. 183, (1936).

133 82•

Old Dearborn v. Seagram Corporation, 299 O. S. 183 at 192, (1936)* The recant amendment to the Shaman Act permita Interstate retail price maintenance* 50 Stat* 693, 75th Congress, lat Session, Chapter 690, Title TOI, approved August 17, 1937.

83*

m e , Part 2 , P« 256 »

84.

m e , Part 2 , P* 384*

85.

m e , Part 2 , P. 4 04.

86*

m o , Part £» P. 404 *

87*

m o , Part 2 , 412—13 *

88*

m e , Part 2 , P. 53 0.

89.

m e , Part 2 , PP . 611-14

90.

m e , Part 2 , P- 413*

91.

m e , Part 2 , p. 385*

92* Recommendation of Department of Justice, Preliminary Report of the Temporary Rational Economic Coamittee, July 17, 1939 (Sen* Doc* Ho. 95, 76th Congress, lat Session, (1939)), p. 16* Chapter 17

1* Message from the President of the United States **Strengthening and Enforcement of Antitrust Laws,*1 Senate Document No. 173, 75th Congress, 3rd Session, (1938)* 2. Continental Paper Bag Company v* Eastern Paper Bag Company, 210 U. S* 405 at 424, (1908). 3* Continental Paper Bag Company v. Eastern Paper Bag Company, 210 U. S. 405 at 406, (1908). 4* Roe v. Knap, 27 Fed. Rep. 204, (1886). 5* Continental Paper Bag Company v. Eastern Paper Bag Company, 210 U. S. 405 at 429, (1908). 6.

Carbide Corporation of America v. American Patents Development Corporation, 283, U. S* 27 at 31, (1931).

7* Harry A. Toulmin, Patents and the Public Interest, pp. 65-73. 8*

Rational Harrow Company v. Bement, 21 App* Biv. N. T. 290, (1897).

1349.

Indiana Manufacturing Company v. 1. I. Case Machine Company, 148 Fed* Rep, 21 , (1906)*

10*

77 Fed. Rep. 288, (1896).

11,

810 U. S. 403, (1908).

18. U* S. Commissioner of Corporations, Report on the Tobacco Industry, (Washington, D. C., 1909) Part I, p. 84 cited in Bernhard jr. Stern "Restraints upon the Utilisation of Inventions," The Annals of the American Academy of Political and Social Science. Nov. 1938 .Tol. 800, p. 17. : 13. U.S. Congress, House Committee on Patents, Pooling of Patents. Hearing on H. R. 4523, Part IV, pp. 3412, 3453, (19361*. 14. Floyd W. Vaughn, "Suppression and Non-Working of Patents," American Economic Review. Vol. 9, (1919), pp. 694-95. 15. Bernhard J. Stern, "Restraintsupon the Utilization of Inventions," The Annals of the American Academy of Political and Social Science. Nov. 1938, Vol. 200~pT~17. ~~ 16. Federal Communication Commission., Engineering Department. Telephone Investigation. Special Investigation, Docket 1. Report on Patent Structure of Bell • Its History and Policies Relative thereto, Feb, 1, 1937 (Exhibition 1989) as cited by Bernhard J. Stem, in "Restraints upon the Utilization of Inventions," The Annals of the American Academy of Political and Social Science. Nov. 1938, Vol. 200, pp. 17-18. 17. Letter to Hudson, October 5, 1896, Federal Communication Commission, Engineering Department. Telephone Investigation. Special Investiga­ tion, Docket 1. Report on Patent Structure of Bell System. Its History and Policies Relative Thereto. Feb. 1, 1937 (Exhibit 1909)p. 113, as cited by S " . j r . Stern in "Restraints upon the Utilization of Inventions," The Annals of the American Academy of Political and Social Science.Nov. 1938, Vol. 800, p. 18. 18. Federal Communication Commission, Engineering Department. Telephone Investigation. Special Investigation, Docket 1. Report on Patent Structure of Bell 5t£$S”« Its History and Policies Relative Thereto. Feb. 1, 1937 (Exhibition 1989), pp. 121-82, as cited by B. j. Stern in "Restraints upon the Utilization of Inventions," The Annals of the American Academy of Political and Social Science. Nov. 1938, Vol. 200, p. 19. 19. U. S. National Resources Committee, Report of the Subcommittee on Technology, Technological Trends and National Policy, pp. 59-60. 20. U. S. National Resources Committee, Report of the Subcommittee on Technology, Technological Trends and National Policy, p. 61.

*135“ 21.

Harry Jerome, Mechanization of Industry, p. 33.

88*

W* M. Grosvenor, "The Seeds of ProgressChemical Markets. Vol. XXIV (1989), pp. 85-26.

23.

See p. 12 of this text.

24. Frank C. Waldrop and Joseph Borkin, Television: A Struggle for Power. ~ Verbatim Record, p. 830, Ool. 1 and 2. 86*

Verbatim Record, p. 283, Col. 3; p. 239, Col. 1.

27.

Verbatim Record,p. 621, Col. 3.

3®*

Verbatim Record, p. 292, Col. 2,

29* Verbatim Record, p• 239, Col. 1 • 30.

TNEC, Monograph 31, pp. 46-7.

31 •

Verbatim Record, p. 194, Col. 2.

32. Joseph Borkin, "Patents and the Hew Trust Problem," Law and Con­ temporary Problems. Winter 1940, Vol. 7, p. 76. 33.

U. S. Code, Vol. 3, Title 36, Sections67-70,(1940).

34.

United States v •Eastman Kodak Company, 226Fed. Rep. 62 at 68-9, (1916) .

35.

TNEC, Monograph 31, p. 47.

36.

A patent pool was used as the agencythrough which control could be obtained, but due to the method whichHartford Empire used to es­ tablish its Industrial domain, the development of the industry is presented here rather than under the general heading of pools, (Chapter VI)•

37.

TNEC, Part 2, p. 381.

38.

TNEC, part 2, p. 381.

39.

7HEC, Part 2,pp. 381-2.

40.

TNEC, Part 2, pp. 492-3; also at 787, Exhibit No. 135, the 1924 agreement between Owens and Hartford.

41.

TNEC, Part 8 , p. 496.

13642.

Divisible income was defined as gross royalties, licensing fees in excess of coat, profits on parts, damages collected in infringement salts* TNEG, Part 8 , p. 492.

43.

TNEC, Part 2, pp. 491-2.

44. Verbatim Record, p. 294, Col. 3. 45.

TNEC, Part 2 , pp. 536-7.

46.

TNEC, Part 2 , p. 538.

47.

TNEC, Part 2 , p. 540.

48.

TNEC, Part 2 , pp. 585, 587-9.

49.

TNEC, Part 2 , pp. 605 and 762.

50.

TNEC, Part 2, p. 599, Testimony of P. L. Geer, Treasurer of AmslerMorton.

51. for details see Hartford-Emplre Company v. Swindell Brothers, inc., 96 Fed. Hep. (2d Series) 227, (1938). 52.

TNEC, Part 2, pp. 596-601.

53.

Verbatim Record,p. 300, Col. 2.

54.

Verbatim Record, p. 300, Col. 5*

55* Verbatim Record, p. 301, Col. 2. Verbatim Record, p. 301, Col. 3 . 57 •

Verbatim Record, p. 300, Col. 2.

58.

Verbatim Record, p. 303, Col. 1.

59• Verbatim Record,p. 302, Col. 2. 60.

TNEC, Part 2, p. 555.

61.

TNEC, Part 2, pp. 555 and 553.

62.

TNEC, Part 2, p. 383.

63.

Verbatim Record,p. 323, Col. 3.

64.

Verbatim Becord. p. 324, Col. 3.

65.

Verbatim Becord. p. 316, Ool. 1.

-137 6e‘ Yorbatla Record. p. 382, Col. 1 and 8* 67.

TWXC, Part 2, p. 856,

68. See p. 100 of this text. CHAPTER V 1. Harry Wellington Laidler, "Growth of American Monopolies," Current Hlatory. Hov. 1931, Vol. 36, p. 204. 2. Milton Handler, "Industrial Merrors and the Anti-Trust Laws,« Columbia Lav Review, Feb. 1938, Vol. 32, pp. 182-3. 3. Standard Oil Company v. United States, 283 TJ. S. 163 at 169, (1931). 4.

Indiana Manufacturing Company v. J. I. Case Threshing Machine Company, 164, Fed. Rep. 365 at 371, (1906).

5. United States v. General Electric Company, 272 U.S. 476 at 485, (1926). 6.

United States v. Eastman Kodak Company,

226 Fed. Rep. 62, (1915).

7.

United States v. Eastman Kodak Company, 226 Fed. Rep. 62, at 70, (1918).

8.

United States v. Eastman Kodak Company, 226 Fed. Rep. 62 at 70, (1915).

9. £47 U. S. 32, (1918). 10.

United States

11.

United States v. United Shoe Machinery Company, 247 U. S. 32 at 39, (1918).

y

. Winslow,

12. United States (1918).

y . United

13. United States (1918).

y

14. United States (1918) .

y . United

.

227 U. S. 202 at 215-6, (1913).

Shoe Machinery Company, 247 U. S. 38 at 41-2, -

United Shoe Machinery Company,, 247 U. S. 32 at 86 , Shoe Machinery Company, 247 U. S. 32 at 89,

15. United Shoe Machinery Company v. LaChapell©, 212 Mass. 467 at 476, (1912)* 16. United States

y

.

Winslow, 227 U. S. 802 at 217, (1913).

1381?#

United

States

v. United

Shoe Machinery

Company,247 TJ.

S.32, (1916)

18*

United States 54, (191$)*

v. United

Shoe Machinery

Company,247 U.

S*32 at

19* For discussion of this aspect of their policy, See Chapter III, pp. 61-7. 20. United States (1915)•

Eastman Kodak Company, 226 Fed. Rep. 62 at 62-3,

21.

See p.78 of this text.

22.

UnitedStates v. Eastman Kodak Company, 226 Fed. Rep. 62 at 79-60, (1915).

23.

255 U. S. 578, (1920).

24.

230 Fed. Rep. 859, (1916).

25.

230 Fed. Rep. 859 at 881, (1916).

26 . 230 Fed. Rep. 859 at 874, (1916). 27 . 230 Fed. Rep. 859 at 880, (1916). 28 . 230 Fed. Rep. 859 at 903, (1916). 29.

230 Fed. Rep. 859 at 901-5, (1916).

30.

Indiana Manufacturing Company v. jr. I. Case Threshing Machine Company, 148 Fed. Rep. 21 at 24, (1906).

31.

Indiana Manufacturing Company v. J. I. Case Threshing Machine Company, 148 Fed. Rep. 21 at 25, (1906).

32.

Indiana Manufacturing Company v. J. I. Case Threshing Machine Company, 148 Fed. Rep. 21 at 28, (1906).

33.

154 Fed. Rep. 365, (1907).

34.

154 Fed. Rep. 365 at 370, (1907).

35. Certiorari denied, 207 U. S. 603, (1907). 36.

mBC, Fart 2, p. 380.

37. A* A. Berle and Gardiner C. Means, Modern Corporation and Private Property, p. 8®.

139Chapter VI

lo Joseph Borkin# "Patents and the New Trust Problem," Law and Contem­ porary Problems. Winter 1940, Vol. 7, p. 77. 8.

Alfred E. Kahn, "Fundamental Deficiencies of American Patent Law," The American Economic Review. Sept. 1940, Vol. XXX, p. 481.

3• Bouse Committee on Patents, Pooling of Patents. Hearings on H. B. 4523, 74th Congress, 1st Session (l935), pp. 563-4• 4.

TNEC, Part 2, p. 330.

5. John Allen Murphy, "Cooperation as a Substitute for Mergers# Crosslicensing as a Preventative of Monopoly," Sales Management. May 11, 1929, pp. ' 6.

Bouse Committee on Patents, pooling of Patents. Hearing in H. R. 4523, 74th Congress, 2nd Session, Part IV, p. 3361.

7. Bouse Committee on Patents, Pooling of Patents. Hearing in H. ft. 4523 , 74th Congress, 2nd Session, Part IV, p. 3366. 6.

Standard Oil Company v. Baited States, 283 U. 3. 163 at 171, (1931); See also National Barrow Company v. Bench, 83 Fed. Hep, 36 at 38, (1897). The Court said "Patentees may compose their differences, as the owners of other property may, but they cannot make the occasion an excuse or cloak for the creation of monopolies to the public dis­ advantage."

9.

Standard Oil Company v. United States,283 U. 3. 163 at 174, (1931).

10.

76 Fed. Hep. 667, (1896)} 83 Fed. Hep. 36, (1897).

11.

National Barrow Companyv. Bench, 76 Fed. Rep. 667 at 668 , (1896) *

12.

National Harrow Companyv. Bench, 76 Fed. Hep. 667 at 669, (1896).

13.

National Harrow Companyv. Bench, 76 Fed. Hep. 667 at 668-9, (1896).

14.

National Harrow Companyv. Bench, 76 Fed. Hep. 667 at 670, (1896) •

15*

National Barrow

Company v. Bench, 83Fed. Rep.36, (1897).

16.

National Harrow

Company v. Bench, 83Fed. Rep. 36 at 38, (1897).

17.

I86 0. S. 70, (1902).

18.

For the detailsof the facts, see 186 U. S. 70 at 72-4# (1902).

19.

186 B. 3. 70 at 71, (1908).

-14080.

81 App. Div. N. X., 890, (1897).

81*

Boment

22.

Bementv. National Harrow Company, 186 U •S. 70 at 85, (1908).

83.

Dementv* National Harrow Company, 186 U. S. 70 at 91, (1908),

24.

126 Fed. Hep. 364, (1903).

v.National Harrow Company,186U.

S.70,(1908).

25. United States Consolidated Seeded Raisin Company v. Griffin and Shelley Company, 126 Fed. Hep. 364, (1903). 86 .

186 U. S. 70, (1908).

87.

United States Consolidated Seeded Raisin Company v. Griffin and Shelley Company, 126 Fed. Rep. 346 at 369, (1903).

86 .

142 Fed. Rep. 531, (1906).

89. Rubber Tire Wheel Company v. Milwaukee Rubber Works Company, 142 Fed. Rep. 531 at 531, (1906). 30.

All Circuit Courts must pass upon the invalidity of a patent before it becomes void throughout the United States unless the Supreme Court invalidates the patent.

31. Rubber Tire Wheel Company v. Milwaukee Rubber Works Company, 142 Fed. Rep. 531 at 538, (1906). 52.

Rubber Tire Wheel Company v. Milwaukee Rubber Works Company, 154 Fed. Rep. 358, (1907).

33. Rubber Tire Wheel Company v. Milwaukee Rubber Works Company, 154 Fed. Rep. 358 at 363, (1907). 34.

226 U. 3. 20 , (1912); United States v. Standard Sanitary Manufactur­ ing Company, 191 Fed. Rep. 172, (1911).

35.

226 U. 3. 20 at 37, (1912); United States v. Standard Sanitary Manufacturing Company.

36. United States v. Standard Sanitary Manufacturing Company, 191 Fed. Rep. 172, (1911). 37. United States v. Standard Sanitary Manufacturing Company, 191 Fed. Rep. 178 at 177-8, (1911). 38. United States v. Standard Sanitary Manufacturing Company, 191 Fed. Rep. 172 at 181,, (1911).

-141' 39# United States v. Standard Sanitary Manufacturing Company, 191 Fed. Rep. 178 at 198, (1911). 40.

Standard Sanitary Manufacturing Company v. United States, 286 U. S. 80, (1912).

41.

Standard Sanitary Manufacturing Company v. United States, 226 U. S. 20 at 47-8, (1912).

48.

The Hartford-Empire is a patent pool but due to its aggressive policy In using the infringement suit, it is an excellent example of such a practice. See pp. 61-69 of this text. Verbatim Record, p. 195, Col. 1.

44.

Verbatim Record, pp. 203-6; p. 344,

Col. 1.

4B* Verbatim Record, p. 208, Col* 3; p. 209, Col. 1. 46.

Verbatim Record, p. 344, Col. 2. Verbatim Record, p. 347, Col. 2; p. 348, Col. 1.

48.

1NSC, Fart 2, p. 427.

49.

TNEC, Monograph 31, p. 118.

50.

Rational Harrow Company v. Bench, 83 Fed. 36, (1897).

51.

Swift and Company v. United States, 196 U. S. 375 at 375, (1905).

52.

166 Fed. Rep.555, (1909).

53.

166 Fed. Pep. 555 at 555, (1909).

55.

166 Fed. Rep. 555 at 536, (1909).

56.

166 Fed. Rep. 555 at 557-8, (1909).

57.

283 U. S. 163, (1931).

58.

Standard Oil Company v. United States, 263 U.

S. 163 at 168, (1931).

59.

Standard Oil Company v. United States, 283 U.

S. 163 at 171, (1931).

60.

Standard Oil Company v. United States, 283 U.

S. 163 at 173, (1931).

61.

Standard Oil Company v. UnitedStates 283 U. S. 163 at 174, (1931).

62.

Standard Oil Company v. United States, 883 U. S. 163 at175-7,

(1931).

-14%63.

Remington Rand, Inc. v. International Business Machine Corporation, 3 N. Y. 2d 315 at 516, (193?). Hot appealed.

64* Remington Rand, Inc. v. International Business Machine Corporation, 3 M.Y. 84 313 at 518, (1937). 65. Remington Rand, Inc. v. International Business Machine Corporation, 3 N.Y. fid 513 at 518, (1937). 66 .

Remington Rand, Inc. v. International Business Machine Corporation, 3 N.Y. fid 518 at 581, (1937).

67.

See pp. 61-70 ofthis text.

68 .

Electric VehicleCompany v. C. A. Duerr and Company, 172 Fed. Rep. 923 at 924, (1909)•

69.

"The claims were reworded and the specification amplified many times, and usually, after a rejection made or criticism offered by the ex­ aminer, Selden did nothing by way of amendment or reply for about two years— the extreme limit of inactivity permitted him by the then rules of Patent Office practice. By these means he received in 1895 a pat­ ent for an invention of 1879 . . 172 Fed. Rep. 923 at 934, (1909).

70.

m e , Part 2, p. 269.

71.

Electric VehicleCompany v. C. A. Duerr and Company, 172 Fed. Rep. 923, (1909).

72. Columbia Motor Car Company v. C. A. Duerr and Company, 184 Fed. Rep. 693, (1911) e 73.

TNEC, Part 2 , P* 287

74.

TNEC, Part 2 , P. 288

75.

TNEC, Part 2 , p. 676

76.

TNEC, Part 2 , p. 288

77.

TNEC, Part 2 , P» 286

78.

TNEC, Part 2 , P* 290

79.

TNEC, Part 2 , P* 291

00.

TNEC, Part 2 , p. 291

81.

TNEC, Part 2 , P* 297

@2 *

TNEC, Part s, P- 292

-14363.

7NE0, Part 2 , pp. 291-2.

84.

TNBG, Part 2, p. 892.

85.

Mr. Sdsel Ford stated no reasonsfor notjoining theassociation, except that ha said "As a matter ofpolicy wepreferred not to." TNEC, Fart 2 . P« 272.

86.

TNEC, Fart *. P. 304.

67.

m e , Fart 2 , P. 310.

86.

TNEC, Fart 2 * PP . 873—4*

89.

TNEC, Fart 2 , P. 257.

90.

TNEC, Fart 2 , p. 258.

91.

TNEC, Fart 2 . p. 295.

92.

TNEC, Fart 8 . P» 367.

93. TNEC, Fart 2 , p. 292. 94. TNEC, Fart 2 , P* 330; 363-4 Chapter VII 1. See Chapter I, pp. 8-15. 2.

The effectiveness of the patent as an instrument to restrain competi­ tion and foster monopoly is clearly stated by a statement of three members of the Temporary National Economic Committee. This state­ ment reads as follows; "No one can read the testimony developed before this committee on patents without coming to a realization that in many important segments of our economy the privilege accorded by the patent monopoly has been shamefully abused. It is there re­ vealed in striking fashion that the privilege given has not been used as was intended by the framers of the Constitution and by the Congress, "to promote the progress of science and the useful arts," but rather for purposes completely at variance with that high ideal. It has been used as a device to control industries, to suppress competition, to restrict output, to enhance prices, to suppress invention, and to discourage inventiveness." TKSC, Final Report and Recommendations of the Temporary National Economic Committoe, p. 36.

3.

THSG, Final Report and Recommendations of the Temporary National Economic Committee, p. 36.

-144 4#

The BQEO made the same recommandatIon when It stated **. • . we recommend that the Congress enact legislation which will require that any future patent is to be available for use by anyone who may desire its use and who is willing to pay a fair price for the privilege.** ITOSO. Final Report and Recommendationa of the Temporary national Economic Committee, p. 36. '"m

5.

TNEC, Monograph 31, p. 150.

6.

Leon H. Amdur, Patent Fundamentals, p. S3.

7. Jo. Bailey Brown, "The Situation Confronting Our Patent System,** University of Pittsburgh Law Review. May 1939, Vol. 5, p. 255. Emphasis in the original. 8.

Goodyear wrote, "He who directs the operations of the mind can turn it to the development of the properties of nature in his own way, and at the time when they are specially needed. The creature imagines he is executing some plan of his own, while he is simply an instru­ ment in the hands of his Maker for executing the divine purposes of beneficence to the race.** Holland Thompson. Age of Invention, p. 165.

9. In answer to the question "Why do inventors invent?** Waldemar Kaempffert says "Ho satisfactory answer can as yet be given because too little is known about the psychology of invention. . . . Although the evidence collected is not as complete as it might be it is clear enough that the impulse to invent is much like the impulse to write an ode to the ni^itingale or to paint the sea dashing against a rockbound coast." Waldemar Kaempffert, Invention and Society, pp. 18-19. Many authorities have recognized the instinct of contrivance, for the HKSC reports that "the •innate propensity* to contrive and project is doubtless as strong as that 9to truck and barter.*" TNEC, Mono­ graph 31, p. 30. Taussig states that "the biographies of inventors give abundant Illustrations of the state of inward happiness which comes from the exercise of the contriving bent.** frank William Taussig, Inventors and Money-Makers, p. 15. Charles Kettering, who is vice president of General Motors and on inventor, agrees that the Individual inventor Invents with his eye on the device and not with his eye on the patent, for he says, "An Inventor is a fellow who wants to do something because he doesn*t know why he wants to do it but he has an aptitude for it, just like a fellow who wants to play a musical instrument or paint a picture. Be would invent whether he got a patent or not and he doesn*t know why he invents. He has an aptitude for doing that thing and he wants to do it and enjoys doing it.** Kettering, TNEC, Part 2, p. 344. 10. Waldemar Kaempffert, Invention and Society, p. 19.

-14511*

S. Colum Gilfillan, The Sociology of Invention, p. 92. That the in­ ventors of the past have been ampljTrewarded appears to be a north. Twenty years ago the late Thomas Edison said "Unhappily there is ab­ solute certainty that under our present patent laws the poor devil of an inventor would never receive any reward." Thomas Edison, Literary Digest. June 19, 1920, p. 114* Another writer has said, "It is a notorious fact that many, if not most of the pioneer in­ ventors to whom the edifice of modern technology owes some of its chief pillars, have died in poverty, or if alive are receiving ab­ solutely no reward at all for the incalculable benefits conferred upon industry by their labors." H. S. Hatfield, "The Encouragement of Invention," Psyche» 10:90,pp. 111-2 . i 12 . " . . . tiie essential process of invention and technical progress is reflected under the head of general efficiency, not of major inven­ tions. The multitudinous little turnings-up not only overbalance the big in importance, but Include the big and compose them. For what we call a major invention . . . is composed of at least a dozen minor inventions and usually thousands, all of whichare bound to­ gether by some physical principle that they all involve. . S. Colum Gilfillan, The Sociology of Invention, p. 21. 13.

S. Colum Gilfillan, The Sociology of Invention, p.

74.

14.

William Fielding Ogbum, Social Change, p.

IB.

TNEC, Supplemental Data Submitted to the Temporary National Economic Comaittee. Fart 31A, p. 16486.

16.

TNEC, Fart 2, p. 342.

17. House Committee on Patents, Hearings on H.R. 4523, 74th Congress, 2d Session, p. 1068. 18. THEC, Monograph 31, p. 155; TNEC, Part £, p. 355. 19. Maurice Holland with H. F. Pringle, Industrial Explorers, p. 9. 20. Works Progress Administration, National Research Project, Industrial Research and Changing Technology, by George Perasich and P. M. Field, 1940, p. 40. 21. Works Progress Administration, National Research Project, Industrial Research and Changing Technology, by George Perasich and P. M. Field, 1940, p. 19. 22. Jo. Bailey Brown, "The Situation Confronting Our Patent System," University of Pittsburgh Law Review. May, 1939, Vol. 5, p. 252. 23. Verbatim Record. Exhibit 187, p. 419, Col. 2.

• 140*

24.

see Case Comment, "Master and Servant— Patents— Employer* s Slop Ri^tit in His Employee's Invention,” Minnesota Law Review, Dec* 1957, Vol. 28, pp. 115-6.

85. Waldemar Kaempffert, Invention and Society, p. 30* 86 .

TNEG, Part 8 , pp. 547-548.

£7.

7MKG, Part £» pp. 388-361. Mr. Knudsen and Mr. Kettering of General Motors 'both testified as to the importance of the period of develop­ ment.

88 .

the 1HH0 recommends that **Machinery • • * should be set up to deter­ mine whether the royalty demanded bythe patentee may fairly be said to represent reasonable compensation or is intended to set a pro­ hibitive price for such use.” TKEC, Final Report and Reccsaaendations of the Temporary National Economic Committee, p» 36. -I..r-..T- ltT-

89. Editorial, ”Compulsory Licensing of Patents,” the George Washington Law Review. May 1938, Vol. 6 , p. 515. 50.

Corwin D. Edwards, "Preserving Competition versus Regulating Monopoly j Can the Anti-Trust Laws Preserve Competition,” American Economic Review. Supplement, Mar. 1940, p. 164.

- I47~

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i*