The Abuse of Patents

» Next to winning the war, there is no subject so fraught with national consequence as the Department of Justice’s investigation of the patent pools. The process of invention is the mainspring of our business activity. How shall it be regulated in the post-war world?

by THURMAN W. ARNOLD

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SHOULD the practices of big business be cauterized at this time? It is a fair question and I believe there is only one answer. I myself have no feud against big business as such. I know how much we depend upon it in this emergency and how much we shall have to look to it for help as we emerge into the world to come. But I do feel that for our common good we must recognize certain elementary facts which have come to light in the final preparations of our war effort — facts which have a direct bearing upon patents and monopoly.

The man in the street does not realize that big business itself has been the victim of restrictions on production that have sapped the efficiency of its research men, its technicians, and its managers. To this situation we owe our present shortages in all our basic materials.

For example, there are not many businessmen bigger than Henry Ford. He has had to make his car out of steel. Magnesium and aluminum are lighter than steel. Magnesium is a third lighter than aluminum. One pound will do the work of one and onehalf pounds of aluminum and five pounds of copper. This lightness does not interfere with its strength. It can be cast and forged easier than aluminum. Its welding properties are better. Yet an illegal combination held the production of magnesium down so that it never exceeded six thousand tons a year, kept its price above aluminum so that it would not compete with that metal, and prevented Henry Ford from developing a lighter car.

Henry Ford has been experimenting with a car made of plastics. Window glass also can be made of plastics. Yet the plastics industry has been subject to the same kind of monopoly control and has thus victimized our great manufacturers by depriving them of this cheaper material at lower prices.

Our transportation companies are big business. They, too, have been deprived, by combinations in American industry, of lighter and cheaper transportation facilities because the development of new metals has been held back by private groups in order to keep prices up and new enterprise out.

There are not so many big businesses in housing as there should be. Houses could be turned out like Fords. Modern science has given us prefabricated materials. Aluminum and magnesium can be used in houses. They are far more plentiful than iron and steel. Yet combinations in the housing industry have kept big business efficiency out in order to maintain obsolete methods. Labor has added its share toward maintaining these restrictions. Plumbing is high today because cheaper methods of distribution have been eliminated. There is a new product called hardboard which can be used for walls, and even pressed into such a form as to be substituted for bathroom tiles. Yet by reason of a combination of private groups there is only one hardboard manufacturer in the United States today, and we are desperately short of this material. Such combinations have victimized big business and prevented it from using the efficiency of mass production in the housing industry.

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Mention of production restrictions and the stifling of new enterprises in terms of antitrust prosecutions and consent decrees may sound vague and mysterious to the average man or woman. In the mumbojumbo of legal language the issues seem remote. Translate these issues into the food you eat, the leaky roof over your head, the spectacles you can’t afford, the rubber tires and the gasoline you are being asked to do without, the priority restrictions that prohibit overcrowded communities from building new houses, the shortages of essential drugs for the sick, the inadequacy of arms and ammunition for the sons we are sending to the fighting front, and immediately these problems of production become a vital, personal matter to every American.

Our airplane production has been tardy, our rubber supply dangerously low, our whole economic system so disrupted that women must even cut down on hairpins, as well as pots and pans, when a great source of available metal, such as magnesium, has been left untapped.

I like small business just as much as big business. But small business is dependent upon big business production. When the housing industry is stopped, thousands of small businessmen are deprived of an economic opportunity. Think of the hundreds of thousands of small businessmen who owed their living to the rapid development and full production of the automobile industry. The same thing could have happened in building if rapid development and mass production had not been stopped by combinations in restraint of trade.

Many people blame the capitalistic system for the shortages in basic materials which now confront us, and for the failure to use our full productive capacity during the two years before Pearl Harbor. To blame these shortages on the capitalistic system is defeatism of the worst kind. I believe in the capitalistic system — not only as a guarantee of individual freedom, but as the most efficient way of production. It is the system we are fighting for against the totalitarian ideals of our enemies. Big business is not an economic danger so long as it devotes itself to efficiency in production and distribution — so long as its policy is not directed at maintaining high prices and low turnover.

The great majority of the men responsible for business production the technicians, the salesmen, the plant managers, indeed everyone directly connected with output of production - are interested in doing the best job of production of which their organizations and machinery are capable. They are being victimized, hampered, and exploited by a powerful minority. That minority has been manipulating corporate privileges, legislative privileges, and patent privileges to prevent consumers from benefiting from the economies of mass production. They have sought to stabilize prices, to restrict production in their own enterprise, and to prevent new production by new enterprise. And the reason for this sabotage of production has been to make it easier for them to continue their domination over the distribution of the necessities of life.

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Do not get the idea that the production men in big industry, on whom our war effort depends, like this sort of management. Recently I talked to a man in the employ of Standard Oil of New Jersey, whose name — obviously — I cannot disclose.

“It’s awful! ” he said. He was referring to the suppression of synthetic rubber in the United States by the manipulation of a few people in the management of that great corporation. “People are going to have to walk in the winter time,” he said, “and the Army is going to be short of rubber because of this stupidity of a few top men in the company. They are not unpatriotic,” he added loyally; “they are nice fellows, but they are the wrong men to run an organization like this.”

It is not against big business as an institution that antitrust prosecutions are directed. We prosecute only the type of management in business, large and small, that restricts production, stifles new enterprise, and exploits its fellow citizen. We want to make that kind of management subject to a criminal penalty. When we rid big business of that kind of management we shall not only win the war, but we shall establish an economy of abundance after the war with a minimum of government regulation or control.

There can be no greater nonsense than the idea that a mechanized age can get along without big business - its research, its technicians, its production managers. Not only our production during the war, but our way of life after the war, depends on big business. So we must protect big business from domination by fat-minded men whose principal business policy is to avoid a competitive race for efficiency in production and distribution. These men have been too lazy, too timid, to risk their power in a competitive struggle to see which can serve the consumer best. Their skill has not been in production, but in public relations. Their competence lies in intrigue and in corporate manipulation to coerce into their restrictive schemes the people in the industry who are interested in full production. They are the real enemies of the capitalistic system. They believe in a system of soft enterprise, - soft in the way that an octopus is soft, with tentacles that stifle and suffocate,— a system repulsive to every ideal of industrial democracy.

Therefore, I repeat, the antitrust law protects efficiency in big business. The thing it attacks is combinations of businesses growing into domestic and international cartels which stifle production and independent initiative, and which result in economic scarcity, idle capital, lack of exchange between the products of the farm and the products of great manufacturing centers, want in the midst of plenty.

Perhaps I had better explain what I mean by a cartel. A cartel is a group of business concerns which join together in order to keep new companies from coming into the field and interfering with their domination of the market. It is an attempt to confine industry to a little ring of favored companies. It inevitably pursues a policy of high cost and low turnover, because short-run profits are always more attractive to a cartel than the struggle for competitive efficiency which comes of full production.

Small business cartels may stifle the economic life of a city — raise the price you pay for milk, and food, and local transportation. Big business cartels can create a national shortage in drugs, machine tools, and all the basic materials on which the success of the war depends.

Cartels begin by restricting production at home in order to keep up prices. This in turn compels them to prevent new enterprise or new techniques of production. When the cartel gets a stranglehold over the domestic market, it feels the necessity of preventing competition by foreigners. So the domestic cartel becomes international in its scope. It divides up the foreign market and erects private protective tariffs. This leads to control of international economic policy. It uses this control to give away foreign markets to our enemies in return for the privilege of restricting production at home. In this way, for example, Germany got control of all the drug outlets in South America and built up in this hemisphere a powerful instrument of enemy propaganda and economic influence.

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The principal smoke screens under which domestic and international cartels have cloaked their activities are patent laws— which, like lost sheep, have gone astray. A simple example is the patent pool. I take the patent pool in synthetic rubber as an example, because the effects have hurt not only war production but every private consumer.

In 1926 Standard Oil of New Jersey was afraid of competition from synthetic gasoline. So it set out to get world control of the production through control of patents. The German Dye Trust wanted to control synthetic rubber — also by control of patents. So Standard Oil and the Germans formed an international cartel. They pooled the principal patents. In the gasoline field, Standard controlled the patent pool. In the chemical field. — which included rubber, — the German Dye Trust had control and dictated who should be allowed to produce under these patents. Of course, Standard Oil concealed this. It gave the State Department a positive statement that Standard had the control of synthetic rubber and that the German interest was a minority one.

Here is how the damage was done. Dow Chemical Company and Goodyear Rubber Company are big businesses with as good research men as can be found. In 1938 they wanted to develop synthetic rubber. Had they been allowed to do so, no one can estimate the progress that could have been made. But Standard Oil refused to give them patent licenses, except on terms which prevented development. The secret reason given in a letter by Mr. Frank A. Howard, vice-president of Standard Oil, was that Germany did not want development in the United States. The letter reads: —

The thing that is really holding us up, however, is not the lack of a plan either from Goodyear or ourselves, but the inability of our partners to obtain the permission of their government to proceed with the development in the United States.

Of course, Standard Oil justified the trade on the ground that it was getting information from Germany. But here is how that worked. In 1935 Germany declined to release full information about rubber, because (I quote from a document taken from Standard Oil files) “The Hitler Government does not look with favor upon turning the invention over to foreign countries.” Standard Oil knew why this information was not turned over, because Mr. Howard told its executive committee that the reason was (I quote from a document) “military expediency.”

Standard Oil was sorry about this, as the executive committee memorandum in 1938 states: —

Mr. Howard deplored the fact that the German Government s restrictions on I.G.’s [The German Dye Trust] freedom of action have prevented our [Standard] making material progress in the American field, particularly as there is some indication that the American rubber companies are making independent progress.

Nevertheless, they sympathized with Germany and decided to abide by the restrictions which Germany imposed, as appeared from another letter from Mr. Howard in 1938: —

Until we have this permission [from Germany], however, there is absolutely nothing we can do and we must be especially careful not to make any move whatever, even on a purely informal, personal or friendly basis, without the consent of our friends. We know some of the difficulties they have, both from business complications and interrelation with the rubber and chemical trades in the United States and from a national standpoint in Germany, but we do not know the whole situation, and since under the agreement they have full control over the exploitation of this process, the only thing we can do is to continue to press for authority to act, but in the meantime loyally preserve the restrictions they have put on us.

In pursuance of this policy, synthetic rubber was made a high-cost specialty. I quote from a memorandum in which Standard Oil explains its policy with regard to this product. Written on February 1, 1940, after the defense emergency was fully realized in the United States, the document reads:

A high royalty rate (7.5 cents lb.) is fixed so as to make the operation practical for the rubber company only so long as the product is used as a relatively high cost specialty.

There are hundreds of other documents in this story, but these are enough to give the reader a general picture of how a cartel works to deprive the people of America of a necessity of life, and the Army of an essential war material.

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These cartels know no national boundaries. They do not recognize even a state of war. I quote from a letter from Mr. Howard in 1939, after Standard Oil realized that we were apt to be in the war with Germany:-

Pursuant to those arrangements I was able to keep my appointments in Holland, where I had three days of discussion with the representatives of the I.G. They delivered to me assignments of some 2000 foreign patents and we did our best to work out complete plans for a modus vivendi which would operate through the term of the war, whether or not the U. S. came in.

This attitude is fundamental in cartel thinking. It applies just as much to little domestic things as it does to big international things. General Electric has been indicted for being a party to a cartel which suppressed the machine-tool industry in this country prior to the war. This suit has been temporarily postponed at the request of the Army and Navy.

The following memorandum taken from the files of that company, introduced before the Senate Committee on Patents, shows the same frame of mind operating on a small consumers’ item: —

Two or three years ago we proposed a reduction in the life of flashlight lamps from the old basis on which one lamp was supposed to outlast three batteries, to a point where the life of the lamp and the life of the battery under service conditions would be approximately equal. Some time ago, the battery manufacturers went part way with us on this and accepted lamps of two battery lives instead of three. This has worked out very satisfactorily.

We have been continuing our studies and efforts to bring about the use of one battery life lamps. I think you will be interested in the attached analysis which Messrs. Prideaux and Egeler have worked up covering the various points involved in going to the one battery life basis. It this were done, we estimate that it would result in increasing our flashlight business approximately 60 per cent. We can see no logical reason either from our standpoint or that of the battery manufacturer why such a change should not be made at this time.

Messrs. Parker and Johnson now have this matter up with the battery manufacturers and I would urge that every assistance be given them to put it over.

This is a little thing, the memorandum was written a long time ago; but it gives a neat picture of how cartel management thinks about production.

A more recent example during the World’s Fair, which is supposed to have advanced the progress of industry, will drive the point home. In 1939 an official of a public utility company wrote to General Electric objecting to an exhibit of fluorescent lighting at the Fair. You can see his reasons from the letter:—

BUFFALO NIAGARA & EASTERN POWER CORPORATION

May 24, 1939
Mr. Ward Harrison
General Electric Co.
Nela Park, Cleveland, Ohio
DEAR WARD:
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 me, 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.
Sincerely,
(signed) HOWARD
Howard M. Sharp
Manager Lighting Bureau

Here is the answer: —

5-26-39
WARD HARRISON:
When Miss Winters showed me the attached letter from Howard Sharp, 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.
Incidentally, I have suggested to Al Reas that when the exhibit returns to Nela Park it should be set up so that we could have a chance to go over it carefully in order to determine whether any changes should be made before it is sent out again. From preliminary discussions, I believe that one or two changes in the descriptive card will remove anything that is now objectionable.
A. B. ODAY

This was before the war. Yet today the Antitrust Division of the Department of Justice is charging that General Electric is engaged in a continuing conspiracy to restrict the production of electric lighting. For example, we are so short of fluorescent lighting that civilian supplies have been cut off. Moreover, such lighting is important in the war effort because it saves electric power, since a fluorescent lamp uses only one-third the current required by incandescent lamps. This is another instance of an attitude that must be abandoned if we are to win this war.

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In the middle of this war there is no point in muckraking or trying to find individual goats on whom to lay the blame for the idleness of our national industrial plant. The time has come for action. No country in the world compares with us in initiative, energy, and ingenuity. We need only a new broom to sweep out the restrictions on production that have been keeping the benefits of that energy, initiative, and ingenuity from being used. If we use that broom we shall find that the energy of America, once its fetters have been cut away, is powerful enough to defeat the primitive and decadent tyrannies that oppose us. And we shall further find that the necessities of full production will create a new economy of abundance after the war.

We are fighting a war to preserve industrial democracy. We entered the war handicapped not so much by the lack of a big army and a big navy as by the lack of basic materials with which to manufacture equipment for the Army and Navy. Furthermore, these basic materials which we need for the war would have been just as useful in peace. They would have built us houses, given us cheaper transportation, made food costs lower. Had there been full production under a competitive system, we would have had so much industrial production that farmers, labor, and small businessmen could have exchanged their work or their products for better houses and better living. We could have rebuilt America with the very materials whose production we were restricting.

But the cartel system hits us at home as well as abroad. It is an economic disease that affects every American in the spectacles he wears, in the plastic dentures he must buy when his own teeth fail him, in the drugs he has to have when he is sick. It hits him hardest not in luxuries but in necessities.

We are now on the verge of a new industrial age — the age of light metals and plastics and chemicals. The economic progress of man is dependent upon the discovery and use of new metals. The scarcity of the bronze age was succeeded by the plenty of the iron age. Then a new economy of plenty was created by the steel age. Today the unlimited possibilities of the age of light metals and chemicals lie before us.

The so-called common metals on which our economy is now based are really not common, but scarce. Copper, lead, zinc, and nickel combined are only one-twentieth as abundant as magnesium. Magnesium alloys are stronger and easier to work than aluminum. They can take the place of steel. Aluminum is twice as abundant as iron. Plastics can take the place of glass and steel and other metals. They are based on chemicals whose supply is unlimited.

This means more abundant housing, cheaper transportation. Airplanes, trains, and automobiles will be lighter and stronger. They will be operated by more efficient fuels. Each of these new materials will compete with others. Soon we shall increase magnesium production from 6000 tons to 360,000 tons. This means that the steel companies must produce better steel to compete with the light metal, instead of Idling under the umbrella of non-competitive practices as they did in the past.

With the unrestricted production of these new light metals the whole price structure will be lower. The consumer’s dollar will be worth more. The farmer can exchange his products for houses built like Fords, for lighter and better farm machinery. Millions of jobs will be created by the unleashing of this new productive capacity which can be exchanged for full production on the farm.

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Winning the war is going to make the capitalistic system work, because it will revive that system with the new blood of full production. There is only one danger: that the new light metals or other vital materials will again fall into the hands of cartels with power to restrict their supply and make them high-cost specialties.

What is the remedy? What can we do to free our capitalistic system from the economic disease that is preventing it from using the efficiency of mass production? The answer is simpler than most people think. It consists in taking up one industry at a time and breaking down, through antitrust prosecutions, the power of the cartel groups that restrict production.

This is not hard to do if the public understands and supports such enforcement of the law. We have already freed magnesium from the cartel restrictions. Rubber is now free. We are attacking, one by one, cartel control in aluminum, plastics, military optical instruments, machine tools, glass, bulbs, hormones for wound and surgical shocks, dyestuffs, aspirin, cameras, photoprinting materials, synthetic gasoline, fuel oil, toluol, and nitrates. In many, we have already cleared the way for full production.

So far as the patent law is concerned, we need a legislative provision which prevents the owner of a patent from using it as an instrument of business policy to dominate industry and destroy independent enterprise. We have no objection to an inventor’s collecting royalties. We assert, however, that he should be prosecuted if, instead of using the patent to get the most royalties, he uses it to prevent a necessity from being produced in the greatest possible quantity. If he tries to do that, we believe that the law should cancel his patent.

We also believe that a patent holder who has abused his rights should not be permitted to assert his patent until the effects of this abuse have been completely dissipated. That the courts are already looking in this direction is indicated by a recent decision of the Supreme Court in which there was stated the principle that “Equity may rightly withhold its assistance from such a use of the patent by declining to entertain a suit for infringement, and should do so at least until it is made to appear that the improper practice has been abandoned and that the consequences of the misuse of the patent have been dissipated” (Morton Salt Company v. The G. S. Suppiger Company, decision January 5, 1942). We further believe it is imperative that legislation be enacted to prevent patents from being used by foreign powers as instruments of economic warfare directed against us.

These problems are being studied by the Patent Committee of the Senate. It is our hope that, out of that study, legislation will come which will make patents serve the purpose intended by the Constitution — that is, to promote the progress of science and useful arts,” instead of holding back the fruits of research and scientific achievement of businessmen small and large, scientists, farmers, and consumers.

  1. THUBMAN W. ARNOLD has been serving as Assistant Attorney General since March 21, 1938. In his writing, as in his practice, he has campaigned against monopoly with great force.
  2. Born in Laramie, Wyoming, in 1891, Mr. Arnold took his A.B. at Princeton in 1911, his LL.B. at Harvard in 1914, and his M. A. at Yale in 1931. After marked success in private practice, he served as a member of the Wyoming House of Representatives and as Mayor of Laramie; then he turned his energies to the teaching of law. Yale appointed him Professor of Law in 1931, and his subsequent experience at New Haven and at Washington laid the groundwork for his notable books. The Folklore of Capitalism and The Bottlenecks of Business.