Part 4
Because patents have become an instrument of power-hungry and power-seeking groups in industry, grave doubt now exists as to whether our economy can longer tolerate and permit the control and consolidation of patents by industrial oligarchies.
Among the many serious abuses to which patents have become subject within the last few decades, it is necessary only to specify a few.
1. Patents have been used illegally to establish regimented systems of industrial control by private groups.
2. Patents have been used, contrary to the tradition and intent of the American economy, to stifle new enterprise, to limit capacity and production, to divide world markets, to impose artificial and arbitrary price levels, and to set up private tariff walls.
3. In their determination to eliminate competition among themselves and to prevent the emergence of new enterprise, monopoly groups in industry have used patents as a shield for conspiracy to violate the antitrust laws.
4. Employing the instruments of law designed to secure justice and protection to the small inventor and small businessman, monopoly interests have used litigation and threats of litigation based on patents to compel the submission or surrender of independent enterprise to the dictates of monopoly control.
5. Patents have been used by industrial giants here and abroad to fasten their grip on international trade by setting up patent cartel agreements which slice world markets into exclusive trade areas. In many instances these international patent cartels have made it plain that they consider adherence to monopoly rules to be above and beyond the laws of the United States and other countries.
6. Our experiences in the first World War and the present global war have demonstrated conclusively that the interests of hostile countries have been able to use patents as weapons in economic warfare against the United States. By delaying the development of strategic new industries, by withholding know-how, and by strangling the market with exorbitant prices for critical materials, monopoly groups in aggressor nations have sought to weaken the war potential of the American economy.
7. In numerous instances, scientific research has been perverted and misused in order to strengthen monopoly restrictions illegally based on patents.
In the scores of Department of Justice cases involving patents and illegal agreements based on patents and in the testimony before various congressional committees investigating the facts, it has become overwhelmingly clear that if free enterprise is to be maintained, patent abuses must be eliminated. At the same time, the protection which the patent right was designed to give to the independent inventor and businessman must be strengthened and restored. If the system of economic competition on which this nation depends for its well-being is to be preserved, it is imperative that economic opportunity be granted to all on equal terms. This cannot be accomplished if privileged groups are able to obtain unfair advantage over new enterprise or to amass huge patent structures which block the road to industrial initiative.
In a whole roster of industries, patents have been employed as the police power of private economic governments. Our industrial history is replete with examples of industries dominated by a few small monopoly groups whose power rested on patents. In the radio industry, in explosives, in spectacles, in glass containers, in magnesium, in vitamins, in medicines, in building materials, in dyestuffs, in electrical equipment and in synthetic rubber, to mention prominent examples, the development of the industry has been decided by the arbitrary discretion of groups controlling concentrated patent structures. Using patents as an excuse, monopolists have sought to determine who shall be given permission to manufacture, to buy and to sell. They have determined what prices should be fixed and in what markets sales might also be made. Illegally wielding their patent power such groups have completely squelched free enterprise in these and in many other industries. Such control is regimentation and bureaucracy in an extreme and pernicious form. The independent businessman who falls victim to this system of control is without recourse.
Many businessmen seriously object to the regulation of industry by government. What they do not realize is that it is not public government but private government which exercises the most rigid control over industrial conduct. Such regimentation violates the fundamental and elementary principles of economic liberty. If we believe in free enterprise, we cannot at the same time tolerate the existence of private economic government which bears no responsibility to the public. This type of regimentation has acquired such influence in numerous branches of industry that free enterprise no longer operates.
A striking example of the manner in which patents are misused to create private industrial governments is afforded by the glass container industry. For more than a generation this industry has been dominated by a monopoly group whose main function it has been to acquire and license patents. This private governing body produced nothing itself, yet the production of practically all the glass containers made in this country was subject to its will. The amount of glass containers to be produced by any manufacturer was closely regulated and limited. The type of bottle he could make was determined by a system which permitted practically no competition. Outsiders who attempted to enter the industry were promptly eliminated by vigorous and costly patent suits.
The patent policy of the monopoly group was neatly set forth in a company memorandum which states:
“In taking out patents we have three main purposes: (a) To cover the actual machines which we are putting out and prevent duplication of them ... (b) to block the development of machines which might be constructed by others for the same purpose as our machines, using alternative means; (c) to secure patents on possible improvements of competing machines so as to ‘fence in’ those and prevent their reaching an improved stage....”
In the administration and regulation of the glass container industry, this group pursued a licensing policy equally intended to perpetuate its monopolistic position. In a memorandum outlining this aspect of its control, the following statement appears:
“Consequently, we adopted the policy which we have followed ever since, of restricted licensing. That is to say, (a) We licensed the machines only to selected manufacturers of the better type, refusing many licenses whom we thought would be price cutters, and (b) We restricted their fields of manufacture, in each case, to certain specific articles, with the idea of preventing too much competition. (c) In order to retain more complete control of the situation, we retained title to the machines and simply leased them for a definite period of years, usually 8 or 10 years, with the privilege of renewal of a smaller additional term.”
Obviously, the patent and licensing policy in the glass container industry constitutes a system of oppressive regulation which neither promotes the progress of science and the useful arts nor permits the operation of competitive economic processes. Yet, instances like the glass container industry could be multiplied for it is by no means unique in modern American industry.
The restrictive effects of patent abuses on the production of critical materials in this country became clearly apparent following the outbreak of war. Shortage followed shortage, and in nearly every instance the basic device restricting our expansion of capacity and output was found to be a patent cartel agreement.
A dramatic illustration of a shortage resulting from a restrictive patent agreement enforced by cartel groups is provided in the case of tungsten carbide. Few items are as important as machine tools to our economy both in peace and in war. The best cutting edge for machine tools is made from tungsten carbide. Because of a patent cartel agreement between the General Electric Company of this country and the Krupp Works of Germany, the price was maintained at such a high level that the second largest manufacturer of this commodity said:
“The control of the tungsten carbide patents by the General Electric Company and the Krupp Company has resulted in keeping the prices at exorbitant levels. Now when the emergency has come, industry has not learned how to use tungsten carbide and has not the machines, the skilled men, or the technique which it would have had if the material had been available at the same low prices at which it was available to German industries.”
Before the patent cartel was organized, the price in the United States was less than $50 a pound. After the cartel was formed in 1928, the price of tungsten carbide rose to as high as $453 a pound or, in other words, much more than the price of gold. Significantly enough, the price in Germany never rose above $50 a pound.
While we recognize that technology is the most dynamic factor of change in the modern world, it is not sufficiently realized that in the struggle to control technological development and to confine research within their feudal domains, monopolistic interests divide the universe of technology in exactly the same way that they parcel out world territory. Using the huge patent structures which they have amassed, industrial giants divide among themselves the major branches of technology and allow no one to encroach on their preserves.
Although we depend upon research as the principal source of those advances which promise a better and a healthier world, we tend to overlook the fact that the power which modern monopoly wields over research, by virtue of patents, often perverts the spirit of discovery. How the deliberate misdirection of research is carried out is clearly indicated in at least three cases involving electric lamps, plastics, and dyestuffs.
Electric lamps in the United States are practically the private preserve of a domestic monopoly. The history of this industry can be written in terms of the elimination of competition, based largely on the abuse of patent litigation and price fixing. One of the great threats to monopoly control can come from the virility and imagination of our inventive genius. For this reason the vested interests attempt not only to control their current monopoly, but take every precaution to project their control into the future and to guard against the development and exploitation of inventions by outsiders.
One of the greatest developments in the lighting art since Edison invented the incandescent lamp is fluorescent lighting. It has already proven to be many times more efficient, and cheaper, than incandescent lighting. The rapid development of this newer type of lighting which would come from a competitive situation has been carefully suppressed by the monopoly group. Patent control by the monopoly group controlling incandescent lamps has been the main instrument for the suppression of fluorescent lighting. Not only the monopoly group governing incandescent lighting, but the electric utility companies as well, fear the effects of the widespread use of more efficient means of lighting, since it would reduce their sale of electricity and hence their profits. A letter from the manager of the lighting bureau of a large power company to the General Electric Company should be of interest to the public:
“Increasingly I seem to become the ‘father confessor’ on fluorescent lighting as far as the utility men are concerned. This concerns one of the displays dealing with fluorescent lighting in your G. E. building at the New York World’s Fair. I must confess that although I have been in your exhibit twice I did not see this particular display.
“It appears that 20 watts of fluorescent lighting are compared with 20 watts of incandescent lighting, the sign purporting to read something to the effect ‘See the difference between equal wattages of fluorescent and mazda lighting.’ Of course, the readings on the foot candle meters show dramatic differences.
“If this demonstration is as explained to us, I think it does _violate the spirit of the understanding that our group had in Cleveland. As a matter of fact, I would think it violated the fundamental concept of the lamp department that advances in the lighting art should not be at the expense of wattage_, but should give the customer more for the same money. I hope you can find a way to change this exhibit, so that it does not give misleading impressions to the crowd who will see it.”
Here is the reply by the General Electric Company:
“When Miss Winters showed me the attached letter ... I immediately got in touch with Al Reas with regard to the demonstration at the fair. Apparently this particular demonstration was temporarily loaned for use at the fair, and is now being returned to the exhibit shop. _Therefore, by removing this particular exhibit, Sharp and the other utility men need have nothing to worry about._”
Even if such flagrant misuse of patents did not occur, the grip on our economic life which monopoly holds through patents would be a threat to our system of enterprise. The spirit and substance of free enterprise cannot exist in an environment where an independent businessman with an independent idea, or an inventor with a new discovery in a monopoly-ridden field, finds himself compelled either to submit to monopoly control or to be barred from the market. It is ironical but true that while a patent is supposed to give protection and encouragement to the inventor, possession of a patent today is little more than an invitation to predatory litigation. The threat of expensive and protracted patent litigation is perhaps the most effective means by which monopoly enforces its private rule on industry to eliminate competition.
The small businessman facing such obstacles has limited choices of action. He can sue the large group, or risk suit, but in either event will find himself involved in a costly, lengthy process. He generally emerges with a broken spirit and a petition in bankruptcy.
The files of the Department of Justice are crowded with complaints and pleadings of these little men. They have found these handicaps insuperable in their attempts to compete. In giving testimony before the Temporary National Economic Committee, one small manufacturer in the glass container industry recited a tale which is frequently and tragically repeated throughout many branches of production. This particular witness, sued for infringement on nine or ten counts, stated:
“We naturally were finally forced to hire a patent attorney. We had to acquire the services of a Texas attorney, and I think there are some two or three patent attorneys in the State. They brought us into court in April of 1935, as I recall. Well, when I arrived in San Angelo and met them there in the hotel, I can conservatively say there was a half train load of attorneys and equipment. There were motion picture projectors and attorneys all over the place. I don’t know anyone of the Hartford legal staff that was not there. They were prepared to give us a nice battle. Well, I had only one attorney and he was considerably lost in that crowd. I wish you might have seen his face that morning. So I promptly asked for a recess until the afternoon in order to see if we couldn’t settle the case out of court.”
As the witness testified at the time, the “settlement” was “a sort of slow death arrangement.”
This situation has become a common condition, but it is not new. Thomas Edison once stated that patent litigation cost him more than he ever made from an invention. Unfortunately, the government has not as yet developed any procedure to protect the legitimate rights which a patent is supposed to confer on the little man. I have hopes that this aspect of the problem will be considered and met in the not too distant future.
Even if every other charge of malpractice or problem of monopolistic abuse of patents were ignored, there would remain a crucial question. Technology is an index of national security, and technological strength depends upon technological freedom. Yet, in two world wars we have learned that the infiltration of American industry by foreign and hostile interests has been conducted through patents and patent agreements.
In 1914, we experienced severe and crippling scarcities of dyestuffs and medicines, because patents held by German interests had prevented the development of American production. In the case of salvarsan, Ehrlich’s “magic bullet” for the cure of syphilis, we found that a patent protected the product, but did not reveal the method of its manufacture. The same situation occurred in other drugs, such as veronal and novocaine, and in other fields, such as metal alloys and special electrical equipment.
Since the outbreak of the present war, our vulnerability to this method of attack has been revealed once more. The use of patents as the spearheads of attack in industrial and economic warfare, intended to weaken our war potential, is illustrated in the beryllium industry, in synthetic rubber, in pharmaceuticals, in optical goods, and in other important military and civilian supplies. It is clear that abuses of this nature, having consequences which affect both our national security and our standards of living, cannot be tolerated.
Whether at the hands of domestic or foreign interests, misuse of the patent system and abuses of patent power militate against the best interest of the American people. It is our task and our responsibility to uproot these malpractices. Within the space of four years the Antitrust Division of the Department of Justice has brought more than forty cases involving these typical abuses, and this Division is investigating many more.
I should like it clearly understood that I believe the patent system in many respects has served this country well. As long as it stays within its proper orbit it can continue as a great force in the industrial and scientific development of our country. Indeed, it must be one of our aims to strengthen the patent system to make it more effective for the protection of small business and for the encouragement of new invention. Those who have a deep belief in the patent system should support the government’s action in uprooting and eliminating the abuses which have done so much to discredit the patent system generally.
The vigorous enforcement of the antitrust laws is, of course, our greatest guarantee that democratic opportunity will be kept alive in our economic system. Something more is needed, however, to make certain that free enterprise has a fighting chance. In this connection, it is encouraging to note that the Senate has had under consideration legislation intended to provide access to technology to government and public alike. It is, of course, absolutely necessary that in the present stage of technological development, where the military security of the nation may depend upon the quality of its technology, that the government have every facility at its disposal to keep abreast of technological change. From the standpoint of economic health, however, means must be found of granting to the small businessman or the small inventor, who cannot hope to compete on an equal footing with the massive strength and enormous resources of great industrial laboratories, a chance to initiate and develop new ideas, new processes and new products.
In numerous instances patents have been used to discourage research by independent inventors and businessmen. What incentive is there to inventors to develop new products or processes when they may be, in effect, inventing themselves into a patent infringement suit? Very often in such cases the fact of infringement is never determined. We all know that patent litigation is costly and time consuming. In disputes between monopoly groups and smaller opponents the difference in economic strength between the two parties is usually the determining factor. In this situation small competitors often find it less expensive to depend upon the research and the largesse of great corporations, by accepting licenses which are usually restrictive. Under such conditions neither the opportunity nor the fact of free enterprise can flourish.
Conduct of research by government does not mean that it would enter into competition with industry. Rather, research sponsored and carried on with the facilities and support of the government would constitute a strong stimulus to private initiative.
The government would enter no business as a result of carrying on research. It would sell nothing, and it would not prevent others from going into business. The fruits of discoveries produced by government research would be open to all. It is primarily those interests which seek to deny access to technology by independent enterprise that are opposed to the entry of government into this field.
The great need of small business in the post-war world for new opportunities and new directions cannot be fulfilled if the small businessman is denied access to technology. If the government provided the scientific and technical resources which placed small enterprise on an equal footing with great corporations, we should undoubtedly witness a revival of the spirit of industrial adventure.
Ultimately, the entire public as consumers would receive the benefits of a government research program. When competition is absent and research is dominated by monopoly groups, the consumer not only pays higher prices for what he does get, but has no assurance that he is obtaining the best possible products. Monopoly has no incentive to progress, and so long as it is able to control research it need not strive to make better products at lower prices.
In addition to meeting the needs of small business and consumers, the maintenance of scientific research by an over-all public agency is a direct concern of government. The importance of technology to national welfare has been shown strikingly during the present war. There are many areas of scientific research and development which private industry cannot adequately explore and develop. There are many branches of science and technology, as well as of industrial development, where government cannot afford to be dependent upon the efforts of private monopoly groups. The lists of shortages which hampered our war effort in early days of the present struggle resulted in nearly every instance from restrictive effects of monopoly control. Government was forced to turn to monopoly groups which dominated the market. It is essential for the future that the hazard of dependence on monopoly be removed.
Industry itself, large as well as small, would profit tremendously if research conducted by the government supplemented private efforts and increased our stock of scientific knowledge. The creation of new industries would open up new channels for private investment and would help to eliminate the periodic effects of depression. The constant flow of new ideas into industry is essential if we wish to have both full production and full employment. Government research could become one of the principal means of stimulating and encouraging new industry and at the same time overcoming the effects of the business cycle.