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.
The means of correcting patent abuses and of renewing competitive
opportunity in industry are available in existing law and with
relatively minor modifications in the scope of governmental authority.
Unless we are willing to accept private industrial government as a
substitute for a free economy, it must be our determination that the
spirit and purpose of the patent laws and the conditions necessary
to competition shall be securely established. If we would avoid the
destruction of the patent system as the consequence of its abuse, it
must be made clear to monopoly groups and industry that they cannot
base their restrictive practices and policies on patent privileges.
5
_Medicines_
In a very real sense the producers and distributors of medical products
occupy a position of public responsibility. On the whole, those in the
drug industry who are charged with this responsibility have carried
out their obligations in a highly praiseworthy manner. They are to be
commended and congratulated.