marked effect in stimulating investment in research and in enterprise based on new products.10

The patent system stimulates product competition in many forms. Competition may be that of the manufacturing newcomer challenging-with a patented product-the existing products of the established industry. It may be that of a royalty-supported research organization compelled to maintain its own pace of development ahead of the field or otherwise lose its royalty income. The competition may be that of established manufacturers seeking to maintain or improve their respective industry positions in relation to other established manufacturers, or seeking to save the expense of royalty payments to others, or to prevent foreclosure of some product line by reason of adversely held patents. And-with respect to the individual inventor seeking to sell a patented invention-the patent system provides an atmosphere of competition among his prospective manufacturing customers, each realizing that it may be foreclosed from a promising development if it closes the doors to such items. In all of these areas the patent system does more than serve as an incentive. It compels action in view of the activity or threatened activity of others. The stagnation that public policy abhors in the field of business activity generally is precluded in the field of research and development by the effects of the patent system.

Color television gives us a vivid example of current competition in development." The two principal patent licensing organizations in the industry are RCA and Hazeltine. RCA is said to have invested $65 million to date in color TV research. Hazeltine has concentrated on color TV research during the last 5 years, with an annual expenditure for its research and license service activities of approximately $1 million. Neither company has yet received any significant return on this investment. And each faces the vigorous and effective competition of other organizations. Indeed, the first color television system licensed by the Federal Communications Commission was the CBS field sequential system."

One area will illustrate the current activity. The cathode ray tube is the heart of a color TV receiver. It must not only reproduce the televised image as such, but in addition it must faithfully show the color content. At the present time at least four different types of color tubes are competing for supremacy. One currently the leaderis the "shadow mask" type tube which has been the main point of emphasis by RCA. Significant improvements in the method of manufacture of this type tube have come from CBS-Hytron, one manufacturer of the tubes. General Electric is actively developing what

10 There has been considerable difficulty in connection with the status of an exclusive royalty bearing license under a patent as a "sale" giving rise to capital gains income, and with respect to the question whether the patentee is disqualified from capital gains status because he is in the "trade or business" of inventing. See Gitlin and Woodward, Tax Aspects of Patents, Copyrights, and Trade-Marks, Practicing Law Institute, (1950) pp. 17-27. The difficulties in these respects are in great measure overcome by sec. 1235 of the 1954 Internal Revenue Code. See also Public Law 629, 84th Cong., 2d sess., approved, June 29, 1956. 11 See, e. g., Fortune, November 1955, p. 136.

12 The history of the field sequential system shows the risks in technical development and the need for the active pursuit of all approaches despite industry controversy. At the time the Federal Communica tions Commission licensed CBS the simplicity of this system and the quality of the picture available under favorable conditions were apparent. It did suffer from an inherent difficulty of not being "compatible” with black and white transmission, but it then was not certain that alternative systems could do better. More recent developments-induced at least in part by the CBS activity-have resulted in the greatly superior system now adopted as standard by the Federal Communications Commission.

is known as the "post accelerator" type tube, operating on a fundamentally different principle. And from sources outside the industry the Lawrence "chromatron" tube is being developed.13 Fifty percent of the stock of Chromatic Laboratories, which is developing this tube, is owned by Paramount Pictures. Finally, an independent radio manufacturer, Philco, is developing the so-called "apple" tube.

Only time can resolve the rivalries between proponents of various color TV systems. Nor can there be any present resolution of the current industry controversy of whether color TV is premature.14 The important consideration is that development is being vigorously pursued under competitive conditions on many fronts. As work proceeds and especially after manufacturing and sales experience accumulates-many avenues of current development may prove impractical. Indeed, the field sequential system using rotating disks to provide color selection vigorously pursued by CBS less than a decade ago is now confined to a limited number of special applications. And when the industry matures, the probability is that designers will have various alternatives from which to choose, each having its individual advantages and disadvantages. We can be certain that the public interest is served by active development of the various approaches in a competitive atmosphere.16

15

It is difficult to see how this activity could go on in the absence of a patent system." With respect to Hazeltine, its only source of in

13 The Lawrence tube was conceived by Dr. Ernest O. Lawrence, a physicist famed for his work with the cyclotron. As is usually the case, however, the conception of the new product left much work to be done before a marketable product could be achieved. In this instance staggering manufacturing problems attend the application of the Lawrence concept and must be overcome before the tube finds its way into home color TV receivers. Additional problems reside in perfecting the receiver circuitry required to operate the tube.

14 E. F. McDonald, Jr., president of Zenith Radio Corp., announced to stockholders recently that color TV is "premature" and that sets sold today "will be obsolete within a year." He reiterated an earlier charge that RCA is prematurely forcing color TV into the market. Wall Street Journal, April 25, 1956, p. 2. is See footnote 12, supra.

18 For an analogous competitive race in the development of equipment for converting the successive electrical impulses of an electronic computer to permanent visual form see Business Week, Aug. 25, 1956, p. 87. Hughes Aircraft Co., RCA, General Dynamics Corp., Standard Register Co., and General Electric Co. are listed as having mechanisms for this purpose in being or under development.

17 Prof. W. Rupert Maclaurin of MIT has made a comprehensive study of the radio industry, resulting in the publication of Maclaurin, Invention and Innovation in the Radio Industry (Macmillan, 1949). His over-all conclusion "is that the patent system, in spite of its weaknesses, did operate to encourage research and invention during the period under review" (p. 260).

In a related paper, Patents and Technical Progress-A Study of Television, 58 J. Pol. Econ. 142 (1950), Professor Maclaurin considers specifically the development of monochrome television and concludes, at p. 152:

"Television seems to be a clear case in which the provision of a strong incentive has acted as a stimulus and protection to research. We have seen how many years it took to develop the product to a stage where it was commercially feasible. During this entire period there was almost no advantage to being the 'first in' on the product. Before regular broadcasting could be initiated, the Federal Communications Commission had to fix engineering standards for transmission which determined the type of receivers that could be sold. And television receivers can be imitated very readily. In fact, the second largest producer of television sets today-Admiral-did no pioneering research in television at all. Yet the company is rivaling RCA because of merchandising and promotional skill. The major financial incentive to RCA was the possibility, which it, in fact, realized, of building a patent position on which it could collect royalties from the entire industry.

"Without such incentives, it seems unlikely that Westinghouse and RCA would have spent over $9 million on televiston development before they received any returns. A possible analogy is the case of the automobile industry and headlight glare. Any system devised to eliminate glare will have to be installed on all automobiles simultaneously, and presumably no individual company will profit by the development. In consequence no automobile manufacturer has undertaken any significant research on this problem. And, although I really think RCA would have done some work on television without the patent incentive, I believe that progress would have been much slower."

For a similar study of the lamp industry see Bright, the Electric Lamp Industry (Macmillan, 1949) and Bright and Maclaurin, Economic Factors Influencing the Development and Introduction of the Fluorescent Lamp, 51 Jl. Pol. Econ. 429 (1943). And see Kottke, Electrical Technology and the Public Interest (1944) and Maclaurin, Technological Progress in Some American Industries, 44 Am. Econ. Rev. 178 (1954).

come is patent royalty and service fees to licensees. 18 RCA-though it does manufacture-could hardly undertake the staggering investment it has made in color TV in the absence of a patent system.19 Surely the publicity and transitory production advantages associated with such research could not justify investment of this magnitude even by the industry leader. And certainly Paramount Pictures would not be likely to enter the field at all if it did not see an opportunity to recover the research and development investment. And with respect to Philco there is a multiple motive of obtaining both manufacturing and royalty income coupled with a desire to avoid paying patent royalties to others.

The color TV development is significant in another respect. The over-all problem is so big that individual research and development activity can touch only upon some narrow segment of the industry. Effective general research demands scientific skills in communications, electronics, optics, and even psychology, coupled with an appreciation of the manufacturing aspects of the industry.20 Group research is a necessity and clearly in the public interest. Unless the patent system is effective as to group research as well as to individual activity the economic motivation for investment in this area will certainly diminish and the pace of development will be slowed.

Recent activity in connection with coal-mining machines illustrates current competition in machinery development. Squeezed between increased labor costs and the competition of oil and gas, the coal industry has fallen behind the general economic growth. Today the future is bright-largely due to research relating to the mining and utilization of coal.21 Progress has been especially impressive in the development of machines which attack and remove solid coal in underground mining-the so-called continuous coal-mining machines. Less than a decade ago the first such machines were manufactured for sale and general use. The early competition was primarily between the Joy continuous miner and the Colmol machine. The former operates on the principle of the chain saw to rip into the coal seam whereas the latter uses a large number of rotary cutters for this purpose.22 Today a variety of machines based on competing principles and manufactured by many companies are available. In addition to the chain-saw and rotary-cutter principles, some machines vibrate blunt hammers against the coal to break it loose, some use vibrating

18 Hazeltine is but one of a number of organizations looking to patent royalties for virtually all of their financial support. Universal Oil Products Co. operates in the field of oil refining in much the same way that Hazeltine operates in the radio industry. A number of universities and colleges have foundations supported by patent royalties. The ammoniated tooth powder development, for example, is the result of work by Dr. Kesel of the University of Illinois. The patent is assigned to the University of Illinois Research Foundation. See University of Illinois Research Foundation v. Block Drug Co., 133 F. Supp. 580 (E. D. III. 1955). Research Corp. of New York is another example of the use of patent royalties to support research. This organization has agreements with some 60 colleges and universities and some 17 other nonprofit organi zations for which it handles patentable discoveries and inventions. Income is used to support research activities (hearings, October 10-12, 1955, pursuant to S. Res. 92, pp. 149-50).

19 The history of RCA is a prime example of how economic considerations influence patent license policy. The company initially licensed only the manufacture of tuned radio frequency receivers, technically inferior to the superheterodyne receiver which was reserved for its own manufacture. The licensees nevertheless outsold RCA. This experience-together with a recognition that the license royalties were a source of considerable income-led to the policy of licensing the industry. (See Maclaurin, Invention and Innovation in the Radio Industry, (1949) pp. 134-152).

20 The range of the research behind color TV is brought out by the exhibits attached to the petition of Radio Corporation of America, et al., for approval of color standards for the RCA color television system, filed with the Federal Communications Commission on June 25, 1953. Virtually 700 printed pages of technical papers are included in the petition. In the press release at the time, RCA stated that it would spend $25 million in color TV research by the end of 1953.

21 See, e. g., Lessing, Coal, Scientific American, July 1955, p. 50.

22 See, e. g.. Continuous Coal Mining, Fortune, June 1950, p. 111; Wolfert, Revolution in Coal, Reader's Digest, December 1954, p. 19. Joy Manufacturing Co. invested $1 million in 20 speculative continuousmining machines in 1947, which were sold at nominal profit for experimentation. The Colmol was de veloped by two individuals who put $750,000 into the venture.

wedges for this purpose, others apply combinations and modifications of these principles, or still other techniques.

The development of a continuous coal-mining machine entails not only initial conception and design, but the expensive construction and thorough testing of the machine under operating conditions. The industry practice is to patent each machine and to rely upon the protection thus obtained to justify these developmental costs. Each machine has its own advantages and disadvantages-in terms of first cost, operating cost, flexibility, reliability, ability to operate under specific mining conditions, ability to produce coal of a particular size, and the like. No one can identify any one machine as "best" or even state with confidence which will prove most generally useful in the future. Indeed, the applications are so diverse that the industry will doubtless find need for a variety of machines from which to select. We can say with assurance that this competitive machine development accounts in large measure for the fact that since 1950 coal output per man-day has almost doubled, and for the current prospect that our most plentiful hydrocarbon source will recover markets lost and acquire new markets. Significantly, a recent authoritative report states that "almost all" of the recorded research expenditures in the field of coal mining have been made by manufacturers of mining equipment and points to this phase of the industry as representing "progress of a high order." 24

23

Development of the continuous cool-mining machines also shows how competitive research and development generates its own chain reaction of opportunity and activity. Machines now available break loose the coal more rapidly than it can be transported to the surface. The result is a current competitive race to devise new machines for transporting the coal.25 Here again the industry looks to patent rights for protection of its research and development investment.

The history of oil refining provides one of the earliest examples of competitive research and development and vividly brings out the importance of this activity to national defense. Initially, petroleum refining was little more than a simple distillation process, producing kerosene as the principal product and in the proportion naturally occurring in the crude oil. Gasoline-at first a nuisance byproductincreased in importance as the automobile industry created a growing demand. Shortly before World War I, it became apparent that demand for gasoline would soon exceed the amount available from simple distillation of crude petroleum. At that time the trained. chemists in the industry-probably not more than 20 in all—were concerned mainly with analytical work. Research was virtually unknown. Dr. William M. Burton of the Standard Oil Co. (Indiana) perceived the opportunity to increase gasoline yield through thermal cracking. The resultant efforts by Burton and his coworkers led to the development of the Burton cracking process, patented in 1913.26 This success opened the door to a whole new era in petroleum refining for it showed that through research the refiner could devise ways to vary the proportions of gasoline, kerosene, and other products obtained from the crude oil. The lesson was not overlooked by

23 See Bureau of Mines, Outlook and Research Possibilities for Bituminous Coal, Department of Interior Information Circular, No. 7754, May 1956, p. 15.

24 Id. at p. 14.

25 See, e. g., Business Week, July 31, 1954, p. 126. The "Roper" coal carrier recently announced by Goodman Manufacturing Company illustrates one result of the new competitive race. See Chicago Tribune, December 11, 1956, Business Section, p. 7. This ingenious device-based on the conveyor belt principle is the subject matter of Patent No. 2,773,257, dated December 4, 1956.

2 Giddens, Standard Oil Co. (Indiana) (1955), pp. 140–171.

competitors, with the result that a great many improved thermal cracking developments followed in rapid succession. These included the so-called Dubbs, Tube & Tank, Holmes-Manley, and Cross processes.27 Most of these processes were in competition with each other and were the subject matter of patent applications and patents. The cracking process development led to the organization and maintenance of research laboratories by each of the major petroleum refiners and to the organization of independent research and engineering companies serving the small refiners.28 As research continuedunder the stimulus of competition demanding improved quality, lowered costs, and increased yields-a great variety of new processes were developed. The catalytic cracking process, developed just prior to World War II, was a major milestone in petroleum technology. As to the importance of this and other developments on the eve of World War II, a review of the activity of the Petroleum Administration for War states:

And so, when the war threw down its challenge, oil technologists had developed catalytic cracking, without which it would not have been possible to produce enough "base stock" for aviation gasoline; they had developed alkylation, without which we could not have made enough of the high-octane blending agents necessary for aviation fuel; and they had developed catalytic polymerization and hydrogenation, which proved to be useful tools in more ways than one. Of especial importance, they had developed knowledge and techniques for manufacturing the 100 octane gasoline which played so important a part in victory; and for making raw materials for synthetic rubber.29

The significance to the war effort of oil technology and its accomplishments through competitive research can hardly be overstated. Throughout the war the United States and its allies had 100 octane gasoline in contrast to the Axis powers that were largely confined to gasoline of approximately 87 octane rating. In terms of aircraft engine weight required to produce a fixed power output, 100 octane gasoline makes possible a 20-percent reduction as compared with 87 octane-in terms of work produced per pound of fuel, 100 octane gasoline produces 15 percent more work than 87 octane gasoline.30 A four engine World War II bomber with a total engine horsepower of 6,000 could carry 5 more 1,000-pound bombs on a 1,000-mile mission when fueled with 100 octane gasoline as compared with 87 octane gasoline.31 Or-in terms of fixed bomb load-the same bomber could travel to and from a target an additional 300 miles from its base when fueled with 100 octane gasoline rather than 87 octane gasoline.32 Moreover, the same research interest and emphasis that

27 See U. S. v. Standard Oil Co. (Indiana), 33 F. 2d 617, 619–623 (N. D. Ill., 1929), reversed at 283 U. S. 163 (1931); Universal Oil Products Co. v. Globe Oil & Refining Co., 322 U. S. 471, 475-478 (1944); Giddens, op. cit., footnote 26, supra, at pp. 256-280.

28 Universal Oil Products Co. is one such company. Universal was formed to exploit the Dubbs cracking process, the principal capital being the investment of $2 million by J. Ogden Armour in 1926. When perfected, the Dubbs process permitted-for the first time-continuous runs extending as long as 30 days as compared with the maximum 2-day run of the competitive processes. Universal early adopted a policy of licensing refiners on an equal basis, a policy that is now common in the industry. For the story of the vicissitudes of the company in its early days see The Salvaging of the Armour Fortune, Fortune, April 1931. p. 49. And see The Oil and Gas Journal, May 27, 1937, p. U-8 et seq. 29 Frey and Ide, A History of the Petroleum Administration for War (1946), p. 192.

30 Hearings before the Committee on Patents, U. S. Senate, 77th Cong., 2d sess., on S. 2303 and S. 2491. p. 5088. 31 Id. at p. 5089.