ROLE OF PATENTS IN IMPROVEMENT OF AUTOMOBILE PARTS Mr. CARLTON. The members of this association only. It is probable that you are wondering why we spend so much money in experimental and development work. The parts manufacturer selling to the manufacturer of automobiles and trucks is a servant to his customer. The parts manufacturer must live by his wits. He can only be successful in holding his business so long as he can continue to improve his product. He must make his product better constantly, lighter if possible. His customer, the automobile manufacturer, may be able at any one given moment to make the product that he is buying from the parts manufacturer as cheap or as well, but he must be convinced that the parts manufacturer because of his specialization in one product; because of the fact that he has a large volume of business gathered from a large number of manufacturers of automobiles and trucks, because of those things he can make it cheaper and he can afford to specialize, be can afford to do all of this research, all of this experimentation. As long as the parts manufacturer maintains this position of research and experimentation constantly, then he has a successful business. The minute he lets down then he is going to lose his business, because, as I said before, his greatest potential competitor is his own customer. The parts manufacturer, in my opinion, and I believe it is the unanimous opinion of our industry, could not afford to engage in this very large amount of development and experimental work without the protection afforded by the patent system. Looking over the large number of parts manufactured by the industry, it is evident that practically all of the companies manufacturing those parts started because of patents. Speculative capital was attracted to these new parts industries when they were new, because investors were convinced that here was something that could be sold in a large volume to the automotive industry, and that they could secure protection long enough to secure the return of their capital and make a fair profit on it. So in the beginning of practically all of these various parts industries the patent was the nucleus around which they were built. It is not unusual for a parts company to spend a half-million or even a million dollars, and well over that in many cases, in the development of a single new part or device. The patent affords the parts manufacturer the opportunity to get his initial development and tooling expense back before his competitors start copying his device. The parts manufacturer doesn't ask for a continuous monopoly, because experience has taught him that his industry changes so rapidly and competition is so intense and so fierce in the industry that nothing that he patents today is going to continue in the form in which he patents it, It would be foolish to insure speculative capital, for example, that if he puts his money into this given part in this industry, that for 17 years we are going to continue to make this part in this given form, because we know that we must progress and that competition is going to build something better, and therefore we must build something better or we will have no business in a very few years. All we want is a hesitation period, a head start, as we used to say when we were boys, to give us a chance to get the experimental and developmental money back. Senator KING. I suppose the mortality in your industry is very great? Mr. CARLTON. It has been exceedingly great. It has settled down now to a much more stable business than it has been. A patent granted to a competitor in this industry has proved to be the greatest incentive possible to other competitors. For example, if one of my competitors tomorrow should bring out a wheel which would revolutionize the wheel industry and threaten to put the company with which I am connected out of business, that in itself would be the greatest incentive in the world for us to use every possible means to get around that patent and to devise something quickly to save our very lives and our physical existence, and I am sure we would do it. We have been faced with that situation time after time. We have lived through the days when all wheels were wood, as you remember on your automobiles, where we had investments of several million dollars solely for wood. Then you remember how we all switched to wire, and we switched to wire along with it. Then you saw the switch to steel and we switched to steel along with it. We obsoleted equipment and equipment and equipment, and we learned to do new things and to do them better, so I say that patents granted to somebody else are the greatest incentive to force the other fellow to do something new himself. PATENTS INCENTIVE TO PRODUCTION OF NEW INVENTIONS Mr. CARLTON. Patents, then, as I say, instead of becoming monopolies, become incentives to produce other inventions. The CHAIRMAN. How many different ways are there of meeting the new competition which arises from such a patent? I am asking you now from your experience. Mr. CARLTON. Well, I think those ways are endless. They have to be endless or you would give up. The CHAIRMAN. What has been done. Could you give us one or two examples of just what has been done to meet a particular situation? Mr. CARLTON. Well, a few years ago a new brake drum came on the market. You can remember only a few years ago, if you got seven or eight or ten thousand miles from a set of brake lining, and mentioning brake lining, I should have said that that also is not within this industry. There are a lot of sales; I should have said that the fabric upholstery in your automobile isn't in our sales either. You can remember that if you got 10,000 miles on a set of brake lining without having your brakes relined at a considerable expense, that was something. Then along came cast-iron brake drums, and they were better. Then along came another type of drum. A few years ago we brought out what we believed to be a real invention in brake drums. We were practically forced to bring that invention out. We had to have something better. We had to have it or we weren't going to hold our business. We were going to lose all of our brake drum business, and that is a terrific lot of business. Of course we had a nice replacement business in brake drums. That replacement business is gone now, because the drums last almost the life of your car. They do, today. We spent over $2,000,000 in the development and in highly specialized machinery which can't build anything else but this brake drum, and in a building, the building cost only a little over $300,000 to build that one item. The CHAIRMAN. That is one method. That method I should describe as the invention of another and better device. Another method would be to purchase an outstanding patent. Mr. CARLTON. Yes, sir. The CHAIRMAN. Another method would be to license a new, an improved device. Mr. CARLTON. Yes, sir. The CHAIRMAN. You have followed all three of those proceedings, have you? Mr. CARLTON. We have done all three of those. Another method is to find a better method of manufacture, so you can manufacture more cheaply than the other fellow. The CHAIRMAN. Do you have in this industry which you have described, in this association, a cross-licensing system? Mr. CARLTON. Well, not in the association at all, as an association, because we are competitors in the wheel business; they are in the carburetor business; they are in all these lines of business. There are cross-licenses existing among groups of competitors. The CHAIRMAN. All right. Now let us take the carburetor manufacturers, for example. Do they cross-license their devices? Mr. CARLTON. I don't know about that. I know about the wheel business. The CHAIRMAN. All right, let's ask about the wheel business. The wheel business is an old industry. The company with which I am, and its predecessor company, started in 1903. The Motor Wheel Corporation owns over 500 patents. I asked our competitors how many they owned, and I know that they own well over 500 patents. We never sued anyone, with all the patents that we own, except once. A fellow got a little nasty and we sued him and we settled it out of court and we gave him a license, and they went out of business anyway. If those people in that wheel industry, with those thousand patents, started suing each other, the management ought to be discharged, because they would ruin themselves financially. You take a thousand patents and start clubbing each other over the beads with them, all the people in the industry would be broke, so common sense dictated just one thing, to stop this monkey business of fighting each other, and I will give you a license and you give me a license, and we will stop any further law suits in this industry. Those licenses are just simple cross-licenses, nonexclusive licenses, in which we license a competitor, but we retain the patents ourselves and the rights to license anyone else that we please, and he does the same thing. Mr. PATTERSON. Mr. Carlton, does your association have any kind of an arbitration board where, once you see that some of these companies are about to go to war, you step in and try to help them? Mr. CARLTON. No, we do not. There are groups within the association that get together and try to do that among themselves, but we have such a varied lot of different kinds of competitors, and they are so very independent, that each fellow wants to be independent and he doesn't want any association or anybody else to tell him anything. LICENSING OF PATENTS The CHAIRMAN. Well, now, these licenses are nonexclusive. Do they carry any restrictions of any kind? Mr. CARLTON. No restrictions of any kind. The CHAIRMAN. They are open licenses? Mr. CARLTON. Wide open, nonexclusive licenses. The CHAIRMAN. What provision is included in the license by way of consideration for the granting of the license? Mr. CARLTON. No royalty. The CHAIRMAN. No royalty? Then what do you receive by way of consideration for the granting of the license? Mr. CARLTON. A license from the other fellow. The CHAIRMAN. It is merely an exchange of licenses with the other fellow. Mr. PATTERSON. A quid pro quo. Mr. CARLTON. Exactly. The CHAIRMAN. So that every license from the Motor Wheel within this association is available to all the competitors on equal terms, nonexclusive, without restrictions, absolutely open and no royalties. Mr. CARLTON. That pertains only to passenger car wheels. When you get into truck wheels, it is a very varied industry. The CHAIRMAN. With respect to passenger car wheels, have I stated it correctly? Mr. CARLTON. Yes, sir. The CHAIRMAN. With respect to the other types of wheels, what is the difference? Mr. CARLTON. With respect to the truck industry, that is a varied thing-cast-iron wheels, and so on. The CHAIRMAN. What you mean to tell us is that in that industry you do not grant these nonexclusive, open licenses. Mr. CARLTON. In that industry, when it comes to a demountable pressed steel wheel, so far as I know, the same people that make passenger-car wheels are making those wheels, and those people are crosslicensing the same as they are on passenger-car wheels, but when you get into all these other types of wheels I know very little about them. We know very little about them; we don't make them. The CHAIRMAN. When you made that qualification it was only because you didn't know what the facts were, and not because you knew it was different from this other phase? Mr. CARLTON. That's right. The CHAIRMAN. Thank you very much. Mr. CARLTON. I would like to finish the story of this brake drum thing because I know it is very interesting. Having spent this $2,000,000, we couldn't go ahead with the thing until we got this patent through, because we couldn't venture $2,000,000 to build an article which is selling for approximately 60 cents, and that 60-cent price is competitive with another article which our competitors are building-it is different, but it accomplishes about about the same thing, so if you are going to sell an article for 60 cents and spend $2,000,000 to develop it, you have to have some protection there to be sure the other fellow isn't going to step in and take it away from you before you get your $2,000,000 back and a little profit on the $2,000,000 if you can get it. The CHAIRMAN. Now with respect to the manner in which you use this patent or the manner in which you grant these licenses, I should have said, do you grant them to any applicant? Mr. CARLTON. You are now talking about this cross-licensing on wheels? The CHAIRMAN. Yes; your licenses on wheel patents. Mr. CARLTON. It just happens that in this passenger-car wheel business there are only 3 manufacturers that have survived. I can remember within my time in the industry when there were 18, and they have fallen by the wayside financially until there are 3 left, and I have explained the situation within those 3, and that is all there are. The CHAIRMAN. Now suppose that another group were to form a new corporation to engage in the manufacture of motor wheels in competition with you. Would you freely grant a license to such a new group? Mr. CARLTON. I will now speak for my company only. There is no agreement between the 3 people as to what they would do. A licenses B, B licenses C, and each fellow acts as an individual, but within this industry, where these three people are today, we are terribly overtooled and overbuilt or have over-production. We have a capacity to build more than 5,000,000 sets of this material, and in 1939 we are looking forward to maybe a 3%1⁄2 million car year. Now I am very positive that our company wouldn't license another fellow to get into this business when there is an overproduction. Why allow another fellow to get in? We would do everything we could to keep him from getting in with all the patents we had, and my guess is the other fellows would act about the same way with their patents. The CHAIRMAN. Of course you would be entitled to do that, because a patent is an exclusive right; but I was curious to know whether there was any understanding in the cross-licensing system by which you would exclude any but those who were in the system for using or receiving a license?" Mr. CARLTON. There is no understanding to that effect. Mr. DAVIS. Mr. Carlton, you spoke of there being within your recollection 18 manufacturers of these car wheels, and that that number has been reduced to 3. How many of those 18, if any, were merged with or acquired by one of the 3 remaining companies? Mr. CARLTON. Several of them were. For example, I think, Judge, you remember that the Motor Wheel Corporation purchased the physical assets of two of these companies because we were sued and we bought ourselves out of difficulty. In the beginning of the steel-wheel situation in 1923 we got into trouble. We started the manufacture and we thought we developed something, and one of these companies sued us and we took a license and were paying a very high rate of royalty. Then another company sued us, and then that company sued the one we were paying royalty to, and neither one of them had any business, had no customers to amount to anything. Each of them had about one customer, and they had a very small volume of business, and financially they were both broke, and so they were suing us for a livelihood. The Motor Wheel Corporation, since 1920, has spent over $2,000,000 in patents. Now, we acquired those patents by buying the physical 124491-39-pt. 3-15 |