We Must Reform the Patent Law

» In the July Atlantic Mr. Thurman Arnold, the Assistant Attorney General, and Mr. Lawrence Langner, a leading patent lawyer, presented their sharply conflicting opinions on patents and monopoly. In this paper Mr. Arnold replies to his critics and then makes a downright plea for a new law to curb the abuse of patents.

by THURMAN ARNOLD

IN THE July issue of the Atlantic I explained how the abuse of the patent privilege has been one of the principal means by which domestic and international cartels maintained their monopoly control over our markets at home and abroad. The Atlantic has asked me to develop more fully my ideas of an appropriate remedy and to reply to Mr. Langner’s spirited defense of patents which also appeared in the July issue, under the title “We Depend on Invention.” In this article I will restate the problem, make a brief analysis of Mr. Langner’s defense, and finally suggest a remedy for the patent racket.

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When the Sherman Act was passed, the principles of trusteeship were the principal cloak for monopoly practices. Hence the name “Antitrust Law,” which still persists long after the trust device has been exposed and abandoned. The years of sporadic enforcement since 1890 have seen numerous Trojan horses pushed forward to conceal organized attacks on independent enterprise and full production: the corporate franchise was abused; the trade association became an instrument of coercion; apparently innocent publications of trade statistics became a method of dividing markets; even codes of business ethics and fair trade practices have been used to restrict production and crush independent business. The latest and today the most extensively used instrument of monopoly control is the patent privilege.

There are two reasons why patents in the hands of great organizations became an effective tool to raise prices and restrict production. In the first place, most people think of patents as a protection to struggling inventors. To dress a huge corporation in the clothes of an inventor gives it a sentimental advantage of great strategic value. In the second place, the patent law became so complicated that its abuse was difficult to present in terms understandable to the layman. Behind this mysterious smoke screen of patent technicalities vast schemes of corporate control could be — and were — worked out, while in front of it ceremonies were observed in honor of the poor inventor.

Mr. Langner begins his article with a beautiful example of how this smoke screen works. He tells the story of Tom Midgley, who invented the anti-knock fluid that gives us ethyl-treated gasoline today. He implies that my attack on the umbrella patent in the ethyl case shows disrespect and lack of gratitude to Tom. He neglects to tell us that Midgley does not own the patent. He does not tell us that a long time ago Tom’s patent became part of the corporate empire of Du Pont, Standard Oil of New Jersey, and General Motors, all of whom jointly own the Ethyl Corporation, which in turn owns the patent. Nor does he explain the tricks in the patent by which this corporate empire rigged prices of unpatented gasoline on a nationwide scale. They worked it this way. They not only got a patent on the anti-knock fluid itself; they also got a patent which prevented anyone from mixing that, fluid with gasoline or burning the mixture in cars without a license from them. One gallon of the fluid will make 4200 gallons of regular antiknock gasoline. Accordingly, by getting a patent on the mixture, they could control 4200 gallons of unpatented fluid with one gallon of patented fluid. In this way they controlled the price of 85 per cent of the fuel used by the American motorist.

Ethyl Corporation got the power of life or death over 11,000 jobbers. It could put any one of them out of business without cause by revoking his license to sell his own unpatented gasoline if 1/4200 of that gasoline was ethyl fluid. This is not industrial democracy, it is dictatorship. The jobbers couldn’t afford expensive infringement suits while their supplies were cut off. The reason Ethyl could cut off their supply was that all the major refiners (except Sun Oil Company) took out licenses. These major refiners had enough money to contest the patent. But it was obviously not to their interest to do so when Ethyl was helping them fix prices.

The shaky patent was therefore never contested, and the public was gouged to the tune of $150,000,000 a year. Moreover, when the price is fixed on a necessity the actual cost goes beyond the direct cost. If you are an average citizen getting $2000 a year or less and the Ethyl Corporation adds $25 to your gasoline bill, the only place you can get that $25 is from your food budget. So you buy less farm products. Transportation costs also go up, increasing the spread between the farm and your table. The farmers lose a part of their market. Then the government must step in and subsidize the distribution of food, and the gasoline user, who must pay a higher fuel bill, must also pay more taxes in order to pay back the subsidy. All this happens when patent cartels control the price of necessities.

Royalties to the struggling inventor were not involved. These shaky ethyl patents were licensed royalty-free. They were not being used to exploit the invention, but solely to control the market.

And now appears Mr. Langner with his pathetic story of Tom Midgley, the inventor. Tom had nothing to do with this scheme. He did not profit by it. He did not own the patent. In using him as a front for this combination of Du Pont, Standard Oil of New Jersey, and General Motors, it is Mr. Langner who is guilty of disrespect to Tom Midgley, not I.

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Next Mr. Langner gives us a list of specific commodities under investigation by the Antitrust Division, to show how well international cartels are working and how wrong are the hearings before the Truman and Bone Committees of the Senate. He approves the activities of patent cartels in the following instances: —

Tetracene (a percussion explosive).
Optical glass and instruments.
Plexiglas (a plastic glass used for airplanes).
Carboloy (used in making machine tools).
Buna rubber (a synthetic rubber substitute).
Magnesium (a substitute for aluminum).
Atabrine (a substitute for quinine).
100-octane aviation gasoline.
Synthetic toluol for TNT.

Here are the facts.

Tetracene, The use of this important explosive was dictated by Germany under agreement with American concerns against our own national policy. In 1941, while the lend-lease program was on, Remington Arms decided they could not sell superior tetracene ammunition to England because they were bound by a secret cartel agreement with Germany.

Optical glass and instruments. Bausch & Lomb violated the directions of the Navy Department not to give Germany information. They created through their German combinations a situation which resulted in an unbelievable artificial shortage when war broke out.

The terms of the agreement between Bausch & Lomb and Carl Zeiss of Germany offer a shocking commentary on the actual workings of international patent cartels. Under them: —

1. Patents developed by Carl Zeiss were held for the German company’s account in the name of Bausch & Lomb, thus concealing the German ownership of the United States patents.

2. Bausch & Lomb paid royalties on all military optical goods whether patented or not, including sales to the United States Government. [Thus, after 1921, by analysis of the royalty payments, the German company could easily determine the purchases made by the United States Army and Navy.]

3. The Bausch & Lomb military department was to be supervised by persons acceptable to Zeiss.

4. Bausch & Lomb was to sell only in the United States, Zeiss in the rest of the world.

5. Technical information, drawings, designs, and military secrets were exchanged.

Plexiglas. Rohm & Haas Company of Philadelphia promised Rohm & Haas Company of Darmstadt, Germany, to give away our foreign markets in exchange for the right to be free from competition in the United States. True, when Britain and Germany went to war the restrictions were relaxed, but this was on condition that Rohm & Haas of Philadelphia should sell Plexiglas in foreign markets only through Rohm & Haas agencies under German control. In this way Rohm & Haas of Philadelphia were duped into assisting the Germans to run the British blockade for the Germans in South America, giving German interests foreign exchange. The German company still retained the right to limit the number of manufacturers in the United States. This arch was sustained by the keystone of a patent right.

Carboloy — suppressed in the United States by a cartel agreement with Germany to the detriment of our machine-tool industry.

Buna rubber. Documents show that Standard Oil of New Jersey sent full information about butyl rubber to Germany in accordance with its patent cartel agreement, knowing that I. G. Farben was withholding information supposed to be given in exchange. It did this because it wanted to keep the monopoly power over rubber which the patent cartel gave it. Using that power, it pursued, as its documents show specifically, a policy of making rubber a high-cost specialty. Even after war broke out in Europe, Standard Oil tried to protect German interests in the event that the United States should enter the war in order to perpetuate its cartel. Its officers positively concealed the nature of its German cartel connection from the Securities and Exchange Commission, the State Department, and the Truman Committee. The Standard Oil patent cartel was an important contributing cause of our failure to develop synthetic rubber.

Magnesium. The powerful domination by a patent cartel under contract with Germany restricted the production in this country. To the Aluminum Company of America’s participation in this patent cartel we owe the fact that our production remained down while that of Germany increased by leaps and bounds.

Atabrine. A single patent, controlled by I. G. Farben, dictated the terms by which this essential drug could be manufactured in the United States. Sterling Products had an interest in this patent, but even during our lend-lease program officers of Sterling Products gave assurance to Germany that their interests would be protected during and after the war. Sterling Products is now rid of German domination. Today the situation is further safeguarded by the seizure of the German rights by the Alien Property Custodian. But the spectacle of the production of this essential drug, left so long to the secret manipulation of a German-American combination during a period when Germany was preparing for war against us, is too shocking to need elaboration.

100-octane aviation gasoline. The obstacles which a patent cartel put in the way of coöperation in our own national defense are shown by the following memorandum from the files of Standard Oil of New Jersey: —

Any program by which the Army Air Corps can obtain their objective of a oneor two-year start over the rest of the world on this vital matter bristles with difficulties and sacrifices from our standpoint. We shall not have to cross the bridge finally until our present experiments are completed. When and if we are able to demonstrate that the hydrogenation plants are capable of turning out an aviation product which with the usual quantity of lead can be brought up to 100-octane number, we shall be faced with the situation mentioned above. To meet the very proper desires of the Air Corps as expressed to us we shall have to violate our agreements and perhaps forfeit the confidence of our associates, both American and foreign, and beyond this we shall either have to avoid any commercial use of the new method or run the very grave risk of finding that our efforts at secrecy have been abortive.

Synthetic toluol. This commodity was never before the Bone Committee. No charges of illegal patent control were made. Toluol came before the Truman Committee because of documents showing that Standard Oil lied to the Trojan Powder Company and thus kept Trojan from competing for an Army contract. Mr. Langner implies that the Truman Committee in showing up this fraud was attacking our patent system.

The cartel activities in the commodities listed above have been stopped by the prosecution and exposure. The patent pools have been broken up. Mr. Langner objects both to the prosecution of such abuses and to their investigation by Congress. His main thesis seems to be that adequate exchange of technical information with foreign countries is imperiled unless we turn it over to private patent cartels with power to combine with our enemies and to violate our national policy without public responsibility.

To sum up, Mr. Langner’s article is an avoidance of the issues before the Patents Committee of the Senate. It ignores the abuses which are the subject of that investigation. It fails to refute or even analyze any part of the testimony (which consists not of accusations, as he implies, but of actual documents). The whole effect is like telling a man whose head is splitting with an abscessed tooth not to have it pulled because teeth in general are such fine things and because he still has some good teeth in his head.

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This is not a new problem. Farsighted members of the patent bar years ago warned of the danger of monopoly control. In 1923 a prominent patent lawyer now deceased wrote to the head of one of our great cartels:

Your . . . patents have, I believe, been sustained as often as it is wise to attempt to sustain them.... So long as the public has limited sources from which it can purchase, just so long will it be stated that the public is forced to pay too much for these necessary articles; and a combined and concerted attempt to voice this feeling and resentment will result in something, along some lines, legal or legislative.

This advice was not followed because monopoly power is inherently not capable of following such advice. As Dr. Moulton of the Brookings Institution points out over and over again in his books, the monopolies never tend to reduce costs when efficiency is increased, because they can always get a larger short-run profit by charging all that the traffic will bear.

Where necessities are involved, there is no brake on this tendency, and exploitation by patent control is most effective in necessities like housing, fuel, drugs, and basic materials. Buyers can go without luxuries when the price is not attractive. But when a man needs a roof over his head, he must pay the price he is asked, however high. Accordingly, inventions in building construction became a tangle of patent restrictions preventing experimentation by outsiders, preventing the mass production of houses at low cost. New light metals more efficient than iron and steel were kept out of production so that the prices of older metals might not be disturbed by inter-industry competition. Housing had to be subsidized while luxuries like automobiles and radios reached the lowest income groups without subsidies.

For example, it is estimated that forty million people in the United States need spectacles. The distribution cost is usually between 300 and 400 per cent. The retailer alone has a mark-up of 100 per cent. Compare this with automobiles, where the dealer nominally gets only 20 per cent — actually less than that because of used-car losses.

The patents used to dominate the spectacles market were in most cases not good patents but shaky or worthless ones. They were backed, not by court decisions, but by threats of long and protracted litigation no small concern could survive. As an illustration I quote from the reply of Mr. Carl Bausch of the Bausch & Lomb Optical Company to a naive inquiry by one of his staff asking why the company continued to pay royalties on worthless patents: —

A great many of the patents that we are operating under are very weak and if we wished to, we could break them ourselves and not pay royalties, but good business judgment, I believe, justifies the idea of paying royalties even on weak patents in order to maintain a price control picture that is helpful.

This sort of memorandum can be picked up in the files of any great corporation which is maintaining a patent cartel. For example, the patent attorney of Standard Oil tells his company how to sabotage production of rubber as follows: —

... all manufacturing patent license of licensees will help to build up licensors’ dominating position, but no licensee will get the benefit of any other licensees’ manufacturing patent rights. In other words, this is not a cross-licensing agreement, but one in which patents are piled on patents in the hands of one centralizing company, [The italics are mine.]

An analysis of the thousands of documents in the files of the Antitrust Division illustrating this kind of patent abuse would fill several volumes. In this limited space I can only quote two more typical statements of patent policy. In an interoffice memorandum from C. L. Bausch to Dr. W. B. Rayton entitled “Patent Protection,” dated September 28, 1938, the following statement is made: —

Of our sales in 1937 about half of the products sold were protected by patents, roughly $5,000,000 on which we paid an average of 5% royalty, $250,000 to outside sources for protection on our product and for buying the means of accomplishing price control. A great deal of money, but apparently justified by the figures in most cases. [The italics are mine.]

M. J. Root, Jr., of Shuron, a member of a spectacle cartel, a Ful-Vue sublicensee, stated the same belief oil August 13, 1935, when he wrote to a Shuron employee: —

Frankly, the Ful-Vue patents are so weak that they are a tremendous task to uphold, because the American Optical Company cannot be too severe in its tactics in keeping the licensees in line, because if they were forced to bring suit the patents might be knocked out and the whole Ful-Vue license system would topple, and Ful-Vueand Hi Bo products could then be made by anybody at any price, and the nice margin of profit in this business would be lost. [Again the italics are mine.]

The two most common methods of keeping these worthless patents alive were: (1) agreements not to litigate among the dominant concerns using patents to stabilize and restrict production, and (2) the threat of protracted litigation against weaker concerns unable to stay in business and in court at the same time. The infringement suit as a coercive instrument had unlimited possibilities. Banks will not lend money while an infringement suit backed by a great corporation is pending. Customers are scared away. Business goes to pieces.

A short case history of patent control taken from the building industry will illustrate how patent control grows.

In 1924 the manufacture of air filters was in its infancy. (Air filters are not only essential in building construction but today they are installed in aircraft, tanks, and factories engaged in war production.) In December of that year an American patent was issued to a German citizen. It was a shaky patent ; indeed the same device had been declared invalid in Germany for want of invention. Company A got hold of this patent. It got together with Company B, which had another patent on air filters, and out of this came Company C, a patent holding company. Company C acquired two of its competitors, D and E. It was then big enough to begin the infringement suit racket. The result was that under duress it absorbed Companies F, G, H, I, J, and K. Of course it did not take over all outsiders. The little fellows not strong enough to defend an infringement suit were ruthlessly destroyed.

These astounding results, based on an all-out patent offensive, were brought about despite the fact that the officials of Company A were strongly of the opinion that the principal patent was invalid. All in all, this patent pool acquired 105 patents. The only suit ever tried ended in a declaration that the particular patent was worthless. Most of the patents were never tested, but the very purpose of schemes like this is to avoid a court test. And so, out of sixteen competing manufacturers in 1925, all except two either were crushed or were brought into the ring.

Recently the air filter companies were indicted. They paid $88,000 in fines but they still have their patents, potential threats that may be used again.

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All this results in: —

(1) Suppression or postponement of new inventions. Suppose a great corporation has vast sums of money in an industrial process which will be made obsolete by a new invention. Suppose it gets control of that new invention. There is every temptation to hold the new invention off the market until the cartel has made the public pay for its investment in the obsolete device.

(2) The stabilization of artificial price in necessities.

(3) The power delegated to private groups to tax an entire industry.

(4) The suppression of new enterprise and new invention.

(5) The control and division of international markets.

Private control of foreign economic policy without public responsibility has no justification. As worked out it made us the dupes of Germany. Hitler made it a criminal offense to give information on any industrial process without submitting it to a government agent. We relied on secret cartel agreements. Hence we got no information from the Germans that Hitler did not want us to have. We find Standard Oil giving away information as to butyl rubber and getting nothing in return as to Buna (Mr. Langner’s statement to the contrary is contradicted by the files of Standard Oil itself). Not only did we give information to Germany, but we helped the Germans to develop their industry. This arrangement permitted the benefits of the information to go to Germany, and the benefits of restriction of production to come to American cartels.

When the American Government tried to stop information from going abroad it was met with policies like the one expressed in the following memorandum taken from the files of Bausch & Lomb: —

Heretofore, the Government has merely been insistent that none of the details as regards the designs of these instruments be made public, but lately it seems as if the quantities, prices, etc., and the amount of the equipment purchased, etc., are also considered secret. Obviously, our agreement with Messrs. Carl Zeiss cannot work satisfactorily unless at least the latter information becomes common knowledge to both parties, but some arrangements must be made whereby we are assured this information will be kept in strictest confidence.

When the American Government tried to get information from our cartels they were met with the kind of policy which is illustrated in a memorandum from the files of Standard Oil: —

Because of the possible application of butyl to some of the Navy’s requirements, Mr. Werkenthin [of the Navy’s Bureau of Construction and Repair] had been instructed also to look into the manufacturing process. You will recall that I took up this question with you before his arrival. As agreed upon, I took Mr. Werkenthin over to the “K” Plant when it appeared that I could not very well steer his interest away from the process. However, I am quite certain that he left with no picture of the operations other than that a considerable amount of distillation and refrigeration is involved in the handling of the light hydrocarbons, and that refinery gas rather than straight butadiene is the raw material.

The effect of these patent cartels on production is well illustrated in the machinetool industry. General Electric in combination with Krupp obtained patent control of tungsten carbide, the next hardest substance to diamonds. Germany developed this material until it became the heart of the machine-tool industry. General Electric used the patent pool to maintain fantastic prices — 400 to 600 per cent higher in this country than in Germany from 1929 to 1940.

After an indictment procured by the Antitrust Division of the Department of Justice, American prices dropped to the German level. However, Gerald Firth, the second largest domestic manufacturer of tungsten carbide, tersely states the effects of those former patent restrictions: —

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.

Against the force of subsidized writing, indignant denials, and evasions of the issue stand the specific cases set out in Antitrust indictments and before the Truman Committee and the Bone Committee. The conclusion is inescapable that Germany obtained much of its initial advantage in production of basic metals by exploiting the desire of the leaders of American patent cartels to be free from competition at home and abroad. Recently the Antitrust Division uncovered a list of 162 cartel agreements affecting American business made by I. G. Farben alone. These agreements penetrate nearly every great industry. A large part of them are based on the abuse of the patent privilege.

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The remedy is to strike — and strike hard — at those who abuse patents. When a patent owner uses his patent to build a domestic or international cartel or to stifle enterprise or production in any commodity, the patent should be annulled by the courts in order to make the industry free again. Monopoly power can be destroyed only by taking away the instruments by which that power was built up and maintained.

There is nothing wrong with the fundamental principles of our patent law. The idea of protecting inventors and likewise the persons who invest their money in inventions represents a just and equitable purpose. Nevertheless, the fundamental principle of protecting independent enterprise against aggression, and consumers against exploitation, should be applied to any patent law, reformed or unreformed.

The outline of that principle is simple. It consists in the right of the government to ask a court to cancel any patent privilege whose owner has used it as an instrument of business policy to dominate the market, fix prices, or destroy independent business. If we are to stop that sort of activity we must make it more hazardous than it is today. Taking away the instruments of monopoly power involves no new principle. It is a curb which is put on practically every other business privilege today. It has been applied to the corporate franchise ever since the Sherman Act. The right to incorporate is even more essential to our economy than the right to patent. Yet when a corporation abuses its powers it may be dissolved; it is not permitted to continue to occupy the dominating position which it illegally acquired. There is no reason why the same principle should not be applied to any single patent or any combination of patents.

The Patent Office cannot protect us against the patent cartel. It must pass hurriedly on 60,000 applications a year, any one of which may be cleverly designed for use in a scheme for industrial domination. Only by the power to cancel the patent can we compel the corporate owner to think twice before risking it in a buccaneering expedition.

There never has been, nor will there ever be, a rule of thumb to determine what is unreasonable domination of the market or restraint of trade. Indeed, the great virtues of the Sherman Act are that the absence of a rule of thumb permits each industrial situation to be considered on its facts. The test of a restraint is found in the rule of reason. The working of that test is illustrated in the Appalachian Coals case. There a group of corporations formed a marketing association to get better prices and more orderly marketing for its members. This was obviously a restraint of trade. The question was whether it was reasonable. Mr. Justice Hughes considered two factors: first, the keen competition in the coal industry; second, the very limited control over the nation’s supply which this marketing agency exercised. Under these circumstances he held that the combination was reasonable. Recognizing that such a combination might in the future grow and dominate the market, he kept the case pending to allow the government at some future time to dissolve the corporation if the situation changes.

Every corporation operates today under a hazard of so dominating the market that it risks criminal penalty and dissolution. This is the sole protection which our government gives against the abuse of a corporate franchise. Let us apply the same principle to patents in a hypothetical case. Suppose you had a patent on a superior fountain pen. So long as there were plenty of other fountain pens on the market, so long as you were not in a position to control this commodity artificially, you would be in no danger. When, however, either by a patent pool or by a single patent, you substantially controlled the entire output of fountain pens with the power to restrict production and raise prices of that important consumer’s item, you would run the risk of patent cancellation.

As a safeguard for the man who acts in good faith, a procedure should be established by which any corporation could submit its patent-licensing policy to the Department of Justice in advance if it found itself gradually getting control of the commodity. Where such submission was made in advance no penalties should be imposed. In such a case the right to enjoin without penalty or cancellation of the patent is all that is needed.

This principle has been operating ever since the Appalachian Coals case in nonpatented commodities. There is an imperative necessity that it be specifically applied to patent cartels today. There should be no broad exemption in the law to induce industry groups to resort to the patent privilege to destroy independent enterprise while the abuse of other privileges is curbed.

An actual case of this sort is found in the hearing on the Dzuz patent before the Bone Committee, which Mr. Langner attacks in his article. It is a patent on a small screw, necessary to complete an airplane. The owner refused to license any competitor to make them. The supply got short. Airplanes were held up on assembly lines. Aviation companies were protesting. All Dzuz would do was to give temporary licenses, not to competitors but to his customers, and these were to be revoked in the future the moment Dzuz could supply the screws himself. Of course no one could go into manufacture under those conditions and no one did, although one of the airplane companies attempted to make the screws by hand in order to avoid buying expensive machinery which Dzuz would control in the future. Nevertheless airplanes stood still on assembly lines while Dzuz attempted, not to get royalties on his patent, but to maintain control by refusing to license. There were other patents, but Dzuz’s position was strong enough actually to hold up assembly lines in the time of war.

Struggling inventors ought to get protection but not domination of any commodity. When they find themselves in a position of domination, they should be forced to license to others. And whether they are in that position or not should be a question of fact and not of theory. A patent issued, as the Constitution says, “to promote the progress of science and useful arts" should not be a weapon to slow down production.

Because Germany never adopted the principle of the Sherman Act its industry became completely cartelized. Cartels can be stopped only by a law that penalizes those who create them and destroys their instruments of power, whether that instrument is the corporate franchise, collective bargaining by labor, the patent privilege, coöperative marketing, or any other device. Cartel management takes the law as it finds it. It ingeniously uses legitimate devices to maintain its aggressive power. It is this power that needs to be attacked.

The best curb on such domination is the case-by-case principle illustrated by the antitrust law. The steel industry is different from the drug industry. What is reasonable in one may be unreasonable in another. Our common-law system is great because it has developed the law from specific cases. The alternative is bureaucratic control by general regulation. What I propose is a curb on coercive action in industry to restrict production or eliminate competition which can be applied in the light of the actual facts in each case and each industry. Vigorous enforcement of such a curb would destroy the patent cartel, both domestic and international, by preventing the use of a patent as an instrument of business domination.