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 organizations 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.

23 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 deloped 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 coal-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 "Ropex" 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.

26 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. III., 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 8. 2491. p. 5088.

31 Id. at p. 5089.

fathered 100 octane gasoline also made possible effective methods for the production of butadiene from oil-a critically important raw material for the wartime synthetic rubber program.33

Today the petroleum refining industry continues its emphasis on competitive research. A number of competing catalytic cracking processes, including the U. O. P. Fluid, Model IV, Orthoйlow, Thermofor, Houdriflow, and Houdresid processes, have been developed. Similar development of competing reforming, Alkylation, and other processes has taken place. A recent analysis of the industry reports that 6 different catalytic cracking processes, 12 patented catalytic reforming processes, and 5 patented alkylation processes are available to the industry under patent licenses.34

Competitive research progress in the petroleum industry has also brought forth a new industry-manufacture of petrochemicals. The wartime synthetic rubber program first emphasized the importance of petroleum as a raw material for the chemical industry and not just as a source of oils and fuels. Today, petrochemicals are conspicuous as raw materials for plastics, synthetic rubber, synthetic fibers, and detergents.35 A recent report states that present plant investment is 4 billions of dollars and is expected to go above $8 billions by 1960— all made possible by competitive research of the kind that first took place in the days of the thermal cracking process development. And in the entire field of petrochemicals the oil refiners are facing the research and other competition of the established chemical manufacturers.

Another example of competition in research is found in the field of antibiotics. Penicillin and effective methods for its production are in the public domain.36 The success of this drug led to the development of streptomycin in 1944 by Dr. Waksman at Rutgers University in conjunction with Merck & Co.37 The Merck chemists have since developed dihydrostreptomycin, a form of the drug less likely to lead to the auditory nerve reaction often associated with prolonged streptomycin dosage. Another fairly early result of antibiotic research was the development by scientists at Parke, Davis &

33 See Frey and Ide, footnote 29, supra, p. 222 et seq.

34 See Race for High Octanes Changes Oil Refining, Business Week, July 7, 1956, p. 75, and Oil and Gas Journal, March 19, 1956, pp. 138-159.

35 The Oil and Gas Journal, September 3, 1956, p. 64.

36 Penicillin is a classic example of what may happen to an important scientific break-through in the absence of sufficient incentives for its exploitation. Dr. Alexander Fleming of St. Mary's Hospital at the University of London had discovered penicillin, ascertained its general properties, and published his results by 1928. He tried to interest others in pursuing the matter without success. For a decade the discovery lay dormant. Fortunately for humanity Dr. Fleming continued to cultivate the mold during this period so that it was available when the necessities of war stimulated research on its use and the development of effective production techniques that ultimately led to the commercially useful drug.

The experience of Fleming should be contrasted with that of a contemporary, Dr. Wallace Carothers. Carothers had, by 1927, developed a theory that certain polymers would-after initial mechanical stretching become tough elastic materials. DuPont employed Carothers to pursue this matter in 1927. In 1930, Dr. Julian Hill-working at duPont with Carothers-experimentally demonstrated the Carothers' theory. From these theoretical beginnings the work continued to the production of nylon thread in 1938. By 1950 duPont had invested $45 million in nylon research and $196,800,000 in plants and facilities for nylon production (U. S. v. Imperial Chemical Industries, 105 F. Supp. 215, 222 (S. D. N. Y. 1952). And see Heckert, Synthetic Fibers, 30 J. Chem. Education 166 (1953).

Query: To what extent does the experience of Fleming, as distinguished from that of Carothers, reflect the fact that until 1949 the British patent law did not provide for the patentability of chemical substances, such as penicillin? (See White, Patents for Inventions, 2d ed. (1955) pp. 54-55 and 63; Patents Act 1949, 12, 13 and 14 Geo. 6, ch. 87, secs. 101 (1) and 4 (7); Final Report of Departmental Committee, Patents and Designs Acts, Cmd. 7206 (London, 1947); Riesenfeld, The New United States Patent Act in the Light of Comparative Law, 34 J. P. O. S. 406, 417-8 (1954)).

37 The development of streptomycin has been described as follows:

"We examined some 10,000 cultures,' relates Dr. Waksman, 'obtained antibiotic substances from about 1,000 of them, found some 100 specimens that gave promise of being medically useful, and finally narrowed the chase to 10 that seemed worth following closely.' The first to be studied was the antibiotic known as streptothricin. When discovered in 1942 it seemed highly promising but later tests with animals showed that it was too toxic for medical use. Streptothricin was not without value, however, for it led to the discovery of streptomycin" (Gray, The Antibiotics, 181 Scientific American 26, 30 (August 1949)).

83984-57-3

Co. of the product sold under the trademark "Chloromycetin." This product was developed as the result of biosynthetic processes utilizing a microorganism isolated by Dr. Burkholder of Yale University. In this instance, however, further investigation and research led to the determination of the chemical structure of the antibiotic and to commercially feasible chemical processes for making the antibiotic. The chemical processes have now replaced the biosynthetic method of producing "Chloromycetin." 38

The race for new antibiotics is highly competitive. In the words of one commentator:

*** Changes come thick and fast. Demand for each new wonder drug as it hits the market is tremendous. Fierce competition springs up overnight. Research moves ahead at breakneck speed. The drug is improved and modified; production time is cut; costs are slashed; the price of the drug drops like a plummet. Then, before the smoke has cleared, somebody comes out with another antibiotic-and the cycle starts all over again.

*** shouldering a big part of the burden-if not most of it are research scientists.

Not only are they under pressure to beat existing competition on existing drugs; they're under pressure to beat the field to new drugs. *** 39

The annual reports of the leading companies in the field confirm this characterization. All emphasize research and the direction of continued research activity. Royalty earnings and research budgets run in the millions of dollars-and represent a pace that would hardly be maintained in the absence of patent protection.40

A similar research competition has developed in the broader field of synthetic chemicals generally. The first commercially applied synthesis of a natural chemical compound-Perkin's synthesis of

38 With respect to the patent system Parke, Davis has stated:

*** Patents on medicinal products, and on processes for their manufacture, give the pharmaceutical manufacturer, during limited periods, the opportunity to attempt to recover the heavy costs of the research which is responsible for the products and processes. Only after the costs of research, and then still other costs, have been recovered is there an opportunity to make a profit. Much of this profit, incidentally, is promptly reinvested in further research.

"Thus patent protection provides encouragement for the continuing investment of large sums, risked with no certainty of return, which lead to the development and constant improvement of healthgiving and life-saving medicinal preparations." Which One Will Open Next? Parke, Davis & Company, (1956). 30 Business Week, September 26, 1953, p. 186.

40 Thus the 1955 Merck & Co. annual report gives net sales of $158 million and research expenditures of $8,500,000, or 5.4 percent of sales. The report notes that 60 percent of the business of the company was in products introduced through research in the past 10 years. It states that the company introduced two new antibiotics during the year-"cathomycin" and "oxamycin." It also notes that in each instance the same antibiotics were independently announced by other companies. The 1954 Parke, Davis & Co. annual report gives 1954 net sales at $110 million, research and product development expense at $4,500,000, and "royalties and other income" at $2,200,000. The 1955 American Cyanamid Co. annual report gives a 1955 sales figure of $450 million, research and process development expense at $21 million, and income from royalties, licenses, and service charges of $6,600,000. The company reports that 15 percent of the time of its employed scientists is allotted to exploratory work and basic research chosen by the scientist and that one result of the work thus pursued was the ascertainment of the chemical structure of ACTH. The antibiotic field is but a part of the overall business of American Cyanamid and represents only a portion of the figures given above.

The tranquilizing drugs form a new center of attention and of competitive pharmaceutical research. Smith, Kline and French, Wyeth Laboratories, Chas. Pfizer & Co., Ciba Pharmaceutical Products, Inc., Carter's Products, Warner-Lambert Pharmaceutical Co., and other companies in the industry have developed and are marketing drugs of this kind. See Wall Street Journal, May 7, 1956, p. 1, and Newsweek, May 21, 1956, p. 68.

Ciba Pharmaceutical Products, Inc.-one of the leaders in the field of tranquilizing drugs—is the United States subsidiary of a Swiss parent company. The United States company reports that about 9 percent of its sales dollar volume is spent on research, and that 20 percent of its employees at its plant are engaged in research. The company further states that "A company like Ciba is stimulated by the patent system to spend millions in research-building modern research laboratories and staffing them with the finest creative talent available-all to develop new drugs, new dyes, new plastics, and other chemical products for the benefit of mankind ***. See, How a New Drug Is Developed, Ciba Pharmaceutical Products, Inc., (1956).