The CHAIRMAN. You haven't developed the cause of that gap, have you? You made some reference to rules and regulations. Mr. FLANDERS. Yes. Well, the cause of that gap is, I think, clear to all of us. There were mistakes made in years past in that gap, and banks failed and rules are made and those rules are being followed, and the rules are pretty stiff because the banks are insured by the Federal Deposit Insurance Corporation. It is necessary to follow rules. The whole thing is safer, the whole banking situation is safer than it ever was, and yet the field for enterpirise has been restricted. The CHAIRMAN. You don't wish us to infer that in your opinion the laws which have made the banking structure more safe have been the cause of this gap? Mr. FLANDERS. Yes; they have been one of the causes of this gap. The CHAIRMAN. That is a different matter. You now say one of the causes. That is what I was hoping you would say. Mr. FLANDERS. You are getting me into territory in which I am not an expert. I am only telling you now what I see as someone off on the sidelines looking into a territory where he doesn't belong, and I think perhaps it might be better to keep me on the stuff I know something about. The CHAIRMAN. Before we dismiss you from that, I might just ask this one question, whether you think that it would be very far wrong to suggest that one of the primary causes of this gap has been the progressive concentration of control over the industrial system which makes it very difficult for a man to compete with this collective unit of which you were speaking a moment ago. In other words, a small banker in a small town isn't going to finance an enterprise which will compete with a large national corporation as readily as he would have financed an ordinary applicant 25 or 30 years ago. Mr. FLANDERS. I presume that may be so, Senator O'Mahoney. There have been no cases of that that have come into my experience. Dr. LUBIN. Mr. Chairman, I would like to ask Mr. Flanders this one question. It has particular bearing upon rules and regulations that have been made to control banking and investment. I wonder how far, in your opinion, the disappearance of this risk-taking spirit which formerly was personified in confidence in individual peoplehow far that risk-taking spirit has disappeared as the result of the fact that some of these individuals have proven themselves unfit to be trusted. How far has the fact that now the public knows when dishonesty exists, because of these regulations, been a factor? Mr. FLANDERS. I think if we look back to the times of our childhood, we will remember an immense amount of rascality, if our mind goes that way, which became public. My recollection is that there was just as much of defalcation and dishonesty in the nineties and the early nineteen hundreds as there is today, if anything perhaps a little more of it, and perhaps a little more condoned, but it was not concealed in those days, but the recognition of that thing was a part of the risk. I don't think we are having any worse men in business or any worse things shown up now than we had 30 and 40, 50 years ago. I don't think we are any worse. In fact, I think on the whole we are better, standards are a bit higher. The CHAIRMAN. Mr. Dienner, I think we have carried Mr. Flanders very far afield from your outline. If there are no other questions, the witness is excused. Your next witness. Mr. DIENNER. Mr. Chairman, we shall turn to Mr. Graham, who is president of the Motor Improvements Corporation. Mr. Graham, will you take the stand. The CHAIRMAN. Mr. Graham, do you solemnly swear the testimony you are about to give in this proceeding shall be the truth, the whole truth and nothing but the truth, so help you God? Mr. GRAHAM. I do. TESTIMONY OF JOHN A. GRAHAM, PRESIDENT, MOTOR IMPROVEMENTS, INC., NEWARK, N. J. Mr. DIENNER. Mr. Graham, I understand you are president of Motor Improvements, Inc. Mr. GRAHAM. Yes, sir. Mr. DIENNER. And how long have you been president of that company? Mr. GRAHAM. Since April 13, 1925. Mr. DIENNER. Explain what the business of that company is. FORMATION OF COMPANY TO ESTABLISH NEW INDUSTRY Mr. GRAHAM. The business of that company-it was originally organized for the purpose of establishing a new industry, oil filters, filtering the oil of an internal combustion engine as the oil circulated. The idea was presented by an inventor who had in a preliminary way conducted experiments that showed him that under certain conditions, he could perform that function, but he hadn't worked it out and hadn't applied it, and he came to a group of men in Newark and New York who became interested in the problem, and in 1923 a company was organized. At that time the filtration of oil which had been tried by several inventors and proven a failure, was accomplished, and it was up to our company first to prove the principle; secondly, to apply it, because when you go to deal with an automobile motor, you find so many variables that what applies to one will not apply to all. So that the work of application before we could go out and attempt to interest the automobile engineer was quite a task and required the expenditure of an immense amount of money. After the development was proved practical, then the job of introduction came in. The automotive engineers are about the hardestheaded group of engineers that there is in the country, and one of the policies of the automobile maker is not to put an extra nickel in the car until two things can be proven: First, that it will cut down the construction costs of the car; and secondly, it will increase the utility and decrease the upkeep cost on the automobile. So we had a difficult job in that respect and before those three stages were accomplished, the initial investment in the company had been spent and it was necessary for the original subscribers of stock to invest more money. The company was originally organized for $400,000 cash, and before I came into the company two series of notes of $200,000 each had been subscribed for, so that at that time there was an investment of $800,000 before any money began to come back. It is a little difficult for me to follow three experts and talk about patents, but one nice thing developed yesterday, that the last pre ceding witness proved to be a customer of ours, and in his talk this morning I find another need for our product on that thread-grinding machine. We have developed our business much beyond the stage at which it was when I came into the company and we are building filters today for all sorts of purposes, even filtering toothpaste, lacquers and all sorts of products of that nature, and the reason I am telling that story at this point is the fact that things happened to us that made it necessary for us to diversify, and while we started in to merchandise a new invention and establish a new industry, we found that we had to go far afield while staying in the filter business, to develop new uses for our product. I have listened with a great deal of interest to these gentlemen who have preceded me. I am not an engineer, just a common, ordinary businessman, and I want to tell you what our experience has been. We have probably had the opportunity a hundred times during the last year of looking at new inventions. Invariably the developer of an idea does just the same as Mr. Sweetland did in developing the filter idea, and when a company is organized to put that production on the market, you have only got the idea, you have got to work it out, and that takes real money. Mr. DIENNER. Mr. Graham, may I interrupt to put your name on the record? Mr. GRAHAM. John A. Graham. Mr. DIENNER. Now will you proceed with your story of Motor Improvements? Mr. GRAHAM. May I refer to notes? I have made a running story of our experience and it will be easier for me to cover it in that way. Mr. Sweetland, as well as being an inventor, was a very capable businessman and when he wrote the agreement under which our company is operating, we paid him $105,000, and at that time he had no patents issued. His applications were made to the Patent Office in 1920 and the years following. No patent came to issue until July 1926, so that by the allowed claims of the Patent Office we had faith in the product and undertook its development. I have heard it said that ordinarily the inventor doesn't get much out of the merchandising of the invention. In our case, it has been the reverse, because in the years that we have been operating, after paying $105,000 we have paid the inventor $851,000, so that that "poor" inventor got well paid. In the early days of our experience, naturally our job was to sell the car companies. Chrysler, when that was put on the market in 1924, was equipped with our filter, known under the trade name of Purolator. That happened in 1924. In 1925 Buick, Cadillac, Oakland units of General Motors adopted our filter. Following that, Nash, Studebaker and Peerless, and a lot of cars whose names you would hardly recognize today, adopted the filter as equipment. The last half of 1925 and the first half of 1926 we got to where we were making money. We established our price based on our ability to build 50,000 filters a month, and at that point we would break even. Beyond that point we would make some profit, we went along and when we took on these bigger production cars, our volume went up and naturally we began to get a little money back. It became necessary for us in that period, due to the fact that automobile produc tion is up this month and down next month, to be in position to take care of the peak production, so we had to provide new buildings. We built a building, two stories, 100 by 150 feet, and bought equipment to put us in position to manufacture economically. PATENT INFRINGEMENT LITIGATION DISCLOSES EVILS IN PRESENT PATENT SYSTEM Mr. GRAHAM. In the early part of 1926 a patent infringement occurred and a company started in to build oil filters, appropriating the patent that we had spent so much money in developing. In 1925 and 1926 we had this volume business. In the early part of 1926 this new filter appeared on the market, experimentally, and at the buying season of the year, which is July 1, we had lost Buick, Cadillac, and in November of that year we lost Oakland, and that cut our business more than in half and drove us immediately from an earning company to a heavy losing company. Fortunately for me, I didn't have to go to the public for finance because the original people were thoroughly willing to support the company, and a bond issue was put on the plant and that provided us with enough money to pay for these investments we had made and to give us some working capital, but it increased the investment in that business from $800,000 to $1,100,000. Now in the regular course, when our patents came to issue in July 1926, we started first by notifying the infringer of the infringement, and asked him to desist and account. Failing to do so, in the fall of 1926 suit was started, and a supplemental bill was filed in the spring of 1927. That case took its regular course and it went to the district court in which the ruling was, or the decision, that every claim of every patent was infringed, but the judge declared the patents invalid. We took an appeal to the circuit court of appeals at Cincinnati. That was late 1928. The district court tried the case in April of 1928, and in 1930 that case was argued before the circuit court of appeals. We felt we were in the right and we employed Mr. Charles Evans Hughes and he and Mr. William Houston Kenyon argued our case before the circuit court of appeals. That case in 1930, I believe it was-no, it was early 1931, was decided and the trial judge was reversed, claiming that two of the five patents were valid. Well, those two patents were the important patents. The defendants petitioned for a new trial and were refused, and then they petitioned the Supreme Court for writ of certiorari and that was refused. The CHAIRMAN. Who were the parties to this suit? Mr. GRAHAM. And they are a unit of General Motors. When the Supreme Court refused to take that case under consideration, it was referred back to the trial judge for the issuance of an injunction. We got an injunction I think on the 2d of November 1931, and then that was filed I think on November 14. Immediately the judge ordered an accounting. By reason of the fact that there were so many units of the General Motors interested in the case, the accounting was a very laborious one. They had the AC Spark Plug Co., the Buick, Cadillac, LaSalle, Oakland, and the United Motor Service, all of whom were parties to the case. It took about a year and a quarter for that accounting to be completed. After that was completed, then it became necessary for us to employ accountants to study that accounting and to recast it, which used up a lot of time because so many of the records required the interviewing of officials and department heads that our recasting of that lasted about a year and a half. After that recast was filed, another thing we had to do was to employ accountants also to find what our damages were, to make our own calculation of how much we had been damaged. Then we started a series of arguments with the master that had been appointed, and that carried us through another year and a half. The heads of departments had to be called before the master and the points at issue argued, and it usually had to be done under a court order. So we come up to December 22. The case was completed before the Master, I believe, in the beginning of 1936 and we had expected before the end of that year that we would have the Master's ruling, but unfortunately, on December 22, 1936 he died without leaving any indication as to what his findings or recommendations might have been. Then we were up against the problem of doing all that work over again, but the judge had compassion and he decided to end the case himself, and in a series of arguments he went down the list, he allowed us this, he denied us that, and he allowed us this and denied the next item, and that took the early part of 1937, and on April 26 he decided that we were entitled to this, not that, and then it was put back to the accountants for both sides to agree upon the computation of the amount due us, and that again was argued, and on October 11, 1937, he gave us a judgment, entered a judgment based on the findings of the two sets of accountants, and that judgment was for $1,045,000, with a supplemental judgment based on the possibility of tax savings not to exceed $139,000, so that it made a possible judgment of $1,184,000. We didn't think that that was a sufficient amount, for the reason that the judge in rendering his decision took the instrument apart. Our patent covered an extended area type of construction, and he took the filter apart and only allowed that portion of their product which could be attributed to the filtering element itself. We contended that the whole item was the patented item, so at that point our regular attorneys recommended to me that they were so close to the forest that they couldn't see the trees, or something to that effect, and wanted me to get other counsel to review the situation. We employed Mr. W. H. Davis, of Penny, Davis, Marvin & Edmonds in New York, and their recommendation was to us that we had a just right, with the expectancy of an increased judgment, to appeal the case. That case was appealed and went back to the circuit court of appeals in Cincinnati, and while the narrative statement was being prepared it consumed almost all of 1938 and fortunately before the end of the year settlement was had by agreement. That is the story of the infringement, and one of the reasons why I, as a businessman, feel that some action should be had that will make it impossible for a case to stay in court 12 years. The CHAIRMAN. You regard your company as a small company? Mr. GRAHAM. Yes, sir. The CHAIRMAN. Are you now making the filters for General Motors? Mr. GRAHAM. We have certain units, but we have none of their car accounts. 124491-39-pt. 3- -8 |