AWAR blurs the perspective of the social revolution within which it is set. Today a military façade conceals a great revolutionary movement. Thus a handful of phenomena reveals a culture in violent transition. The balance of power has become a term which no longer makes political sense. It is difficult, without an accent of the archaic, to talk of the sovereignty of small countries. New variations are being written to the old theme of the Polish question. It is impossible to assign the nations of the Balkans, the Near East, Latin America to sharp political categories. Portugal, with second-rate facilities, has come to be an important trading center. The Swiss merchant marine, without benefit of a national port, has for some years been sailing the seas; Switzerland, surrounded by an uncompromisingly militant Power, has kept her independence intact. Holland, in terms of downright fact, may be defined as a gigantic holding company fitted out with the attributes of sovereignty. The patent, through the license by which the invention is put to work, has come to be one of the most important of international controls. Each of these facts -- and a hundred like them -- has implications which bristle with meaning for the future of culture. Discover the significance of such strange phenomena and a measure of clarity is brought to the current scene.

The international trade in legal documents is a neglected aspect of the truce which prevailed between the two wars. The obligations of contract, corporate equities of assorted kinds, rights to the use of technical processes cross the frontier and leave their impress on the industrial pattern. Yet no official record is kept of their kinds and quantities; there are no statistics of import and export. Few public officials or business executives at the time of the last Armistice visualized such a traffic as one of the economic consequences of the peace. None seems to have anticipated the volume and importance of this commerce in intangibles. Yet, a direct result of the Treaty of Versailles, it was the economic answer to the autarchic trends let loose there. It represents the accommodation of business -- in general, big business -- to a world cut up by political frontiers.

The era between the wars, still far less known to us than we love to think, was marked by two opposing trends. The one, the impulse toward nationalism, has been often recited. The other, the counterrevolution staged by business, is far less known. At Versailles the idea that a people had a right, ordained by nature and nature's god, to shape its own destiny was a moral principle. And, with little critical discussion, it was taken for granted that the political state was to be the instrument of popular salvation. The usages, realities, urges of the system of business enterprise were little taken into account. Even then it was too late for a Great Power like Great Britain or the United States to maintain a national economy complete to the last non-essential commodity. To attempt to operate industrial systems all their own, France, Sweden, China, Italy, Japan had to cover deficits in resources with a lot of make-believe. Lesser nations could do no more than strut a fictitious sovereignty they were without power to implement. The result was a serious clash between the dynamics of industry and the political structure of nations.

As culture, commerce, science impelled the creation of a larger community, the hold of nationalism tightened. The industrial system had already become a weapon in the hands of the state at war; and with the return of peace, every country little or big set out to create a self-contained economy. Embargoes were decreed; tariff walls erected; currencies nationalized and blocked; the taboos of boycott hurled against the alien and his goods. A stimulus was given to discovery and invention, especially among the have-not nations. An attempt to make inferior materials do the work of superior ones created an age of synthetics. But, try as it would, the magic of man's mind was not up to the job of fitting out any old state with an economy all its own. The result was the denial of the advantages of commerce, the statesmen's creation of scarcity, the condemnation of peoples to poverty.

Thus the spirit of autarchy turned a legacy into a menace. In its early days the political frontier had done no harm. It testified that leet, manor, burrough, market town had been caught up into the larger unity of the realm. The stuff of life came from hard by; however small a state was, it was larger than the territory from which the folk drew their livings. And if the upper classes demanded luxuries in accordance with the stations to which they had been appointed, the customs acts interposed little of a barrier. Every gentleman had his smuggler; and laws were enforced with the conscientious laxity essential to that leeway without which an honorable trade could not perform its legally forbidden function. As the first industrial revolution introduced the machine-process, established factories remote from places of use, and converted petty trade into the great industry, little damage was done, for its coming was attended by the most characteristic of nineteenth century procedures, the sharp separation of state and economy. Great Britain, which had the jump, went in for free trade. The United States had a continent to exploit and its tariffs were of far less public concern than the hullabaloo over them would seem to indicate. The rest of the world needed cheap fabricated goods which it could not afford to make. So long as laissez-faire prevailed, business was relatively free to go where it would. The political state might be of diminutive size; yet from Waterloo to Sarajevo, its economy was little pent in by artificial boundaries.

The turn came with the Armistice; in the wake of Versailles economies began to be cut to the size and shape of political states. Business enterprise was made to conform to a neo-feudal map, now newly revised. The transition to the new order was abrupt. The political frontier, at most an obstacle to be overcome, suddenly came to be a stubborn and dominant fact. Business, for better or worse, is committed to the pursuit of gain; its quest of profits carries it wherever markets are to be had. Just as a corporation of Delaware or Nevada operates in other states, so the chartered company of England, Panama or Sweden seeks to invade other countries. The political frontier becomes, not an arresting wall, but a challenge to invention. In commerce, as in nature, accommodation is the law of life. In the 20 years between the wars, business enterprise did not surrender to the dictates of a rigid nationalism. It adapted itself to, rather than accepted, an unfavorable habitat not of its making.

The materials are still too scanty for it to be possible to recite in detail the story of the counterrevolution. It was a movement alike of foresight and fumbling, of playing by ear and discovering that the music was in tune. If high tariffs kept the export of consumers' goods from being worth while, trade was driven to the export of producers' items. Thus Germany, instead of sending finished drugs abroad, exported only the rare ingredients and had the medicines compounded in the country of sale. And thus American companies, instead of importing albums of classical music, had symphonies recorded abroad, imported the matrices and pressed the records here. It is but a step from producers' goods to the apparatus of production itself. If markets could not go to the factories, the factories might be made to come to the markets. So the export of capital tended to replace the export of commodities; merchants sent their ownership where they could no longer send their wares.

If applied science had been at a standstill this might have been the end of the matter. But the tide called "the second industrial revolution" was coming in strong. As physics and mechanics had been domesticated in the late eighteenth century, so industry now was making captive biology, metallurgy, electronics, a whole series of chemistries. The advance of the sciences was recorded in a stream of patents. Rights in the useful arts came to be bought and sold; and, since tariff acts were as yet little concerned with intangibles, a flood of equities -- divorced from the physical movement of goods -- was easily thrown across the political frontier.

It required, however, the invention of a new form of commerce to surmount this frontier. Among the miracles of the second industrial revolution was mass production. A commodity fabricated in quantity at a strategic center could be bought and used by a widely scattered multitude of people. But mass production depended upon mass consumption and mass purchasing power. The United States afforded a market broad enough to give full play to the new technology; the Balkans, the Near East, Latin America, cut up by trade barriers, did not. Although intangibles, such as corporate equities and rights to industrial processes, might flit hither and thither, an autarchic nationalism decreed that the physical goods should be produced at home. The larger sales area demanded by quantity methods was broken down into a series of small provincial markets. For each producer to establish a factory in every country he served was to sacrifice efficiency. If home production could not be escaped, multiplication of facilities could. It was easy enough for rivals to see the advantage in a division of territories. In contracts, conventions, "treaties" -- as they are called in the international language of business -- between the dominant firms in an industry, political frontiers became boundary lines between proprietary market provinces. This is not to say that the nationalistic orgy of the twenties and thirties is the mother of all cartels. The disposition of business to coalesce by industries into huge international combinations is a product of too many impulses to be so simply explained. But autarchy accelerated a trend long in the making.

One further factor was capitalized by business in its strike-back. The managerial group, intent always upon its own advantage, prefers to carry on within the tolerance of the law. From the days of primitive man, monopoly has been odious; a combination of rivals to divide or to control the market smells strongly of "conspiracy." In promoting the commerce in intangibles, it was desirable -- if legal artistry could be made to turn the trick -- to be able to harness the law of the land to the ends of business. Accordingly the search turned to the discovery of legal devices with which to convert a curse into a sanction. Among the most ingenious of these was the transformation of the ancient writ of letter-patent into a warrant for the private government of an industry. So brilliant -- and ominous -- an achievement demands recitation in some detail.

II

If the intent of the Fathers, in giving Congress the power to reward invention with an "exclusive right," was to sanction private cartels a century and a half later, the records of the Convention make no mention of it. To the contrary, the Constitution itself sets down the power conferred as "to promote the progress of Science and the useful Arts." Although the grant was well known, the term "letter-patent" does not occur in the Constitution. Instead the inventor was for a "limited time" to enjoy an "exclusive right" -- however the Congress might define it -- in his invention. The privilege was to be instrumental to the general objective of technical progress. The grant was to be prod and bait to the man of talent to come across with something new and different.

An institution, like the heart of man, may go astray. A line engrossed on parchment may be diverted to a purpose it was never intended to serve. It is the nature of business enterprise to convert whatever is handy into an instrument for the pursuit of gain. To sanction a writ of monopoly in an economy which is to operate as a system of free enterprise is dangerous business. And, even if the glorious purpose is the progress of science and the useful arts, the hazard remains. The curious mind, or the mind made curious by money-making, is certain to ask how far the exclusiveness can be made to extend; how many activities the right can be made to cover. The inventor, at least the starry-eyed inventor old style, would have been too intent upon his "projects" to have gotten far with such questions. But the law has allowed them to be put by deputy on behalf of his modern successor. It permits the letter-patent, which had to be taken out by the "first, sole and true" inventor to be "assigned" to a person, natural or corporate, who will -- or will not -- "work it." Today the great mass of grants are taken out by technicians working in the laboratories of large corporations. The fact of assignment is revolutionary; it removes that patent from the inventor's to the executive's world. Its use is then no longer attuned to the folkways of science but to those of business.

At once the letter-patent, the supposed spur to technical progress, becomes the instrument of business policy. A host of moves are made to enhance its pecuniary value. The letter of the law says that the grant shall run for 17 years. If the date of the grant can be deferred, the expiration date will be moved forward to correspond. To let lie, to discover mistakes which must be corrected, have been worked up into an art of procrastination. The right which is exclusive must be given the largest possible area in which to operate. In the application the novelty is elaborated into a large number of claims; the language, forsaking alike simple English and good science, becomes a polysyllabic and legalistic jargon. The so-called invention is not accurately defined; the technical boundaries of the privilege sought are deliberately left indefinite in order that it may carry rights to whatever it may later be made to cover. A new process may find expression, not in one patent, but in a series of them.

The corporation-owner is always beset with a dilemma: whether to try to keep the invention a trade secret, or to obtain legal protection through disclosure. Faced with a necessity of choice, the shrewd and experienced executive takes both precautions. Enough is revealed to secure the grants asked for; so much is held back that an outsider cannot obtain from the letters-patent sufficient knowledge to work the invention. To this end an ingredient may be wrongly named; a temperature may not be exact; claims may overlap; gaps may be left between separate grants. The frequency with which the term "knowhow" is used in connection with these matters attests the width of the gulf between disclosure and practical application.

All of this indicates that, to a corporation, its "patent position" is a matter of grave consequence. Upon the maintenance -- or the improvement -- of this patent position much effort is expended. The patent runs for only 17 years -- and the corporation, whose existence knows no such life-span, demands a protection far more enduring. The "improvement" is itself subject to patent; and, as the "basic grant" expires, three or four fresh writs are likely to be there to take its place. As invention runs thin, numbers make up for a dearth of novelty and through the "chain patent" a continuity is given to the legal sanction. In respect to the telephone, shoe machinery and the recording of music, the foundation patents expired several times 17 years ago. But by piling improvements upon improvements upon improvements, these processes of production are more adequately guarded today than ever before. A number of companies, beginning with a mere fistful of patents, are now able to cover their production processes with thousands. How good any one is, whether the "portfolio" as a whole will stand up, are questions which only the courts can answer. But the sheer volume of writs which can be thrown up as a defense makes a bout at law rather uninviting to the challenger. In fact the big idea is, by a multitude of grants, to blanket a whole technology. The "arsenal" is as useful for offense as for defense; it puts the corporate owner in a position to say, "You cannot come into this industry save by my leave."

To such an end a simple legal device has been artfully elaborated. The owner of a patent is not compelled to work his invention himself. He may, if he will, "license" others to use it. He may issue an "exclusive" license to a single concern; he may, if he prefers, issue "non-exclusive" licenses to all who meet his terms. In granting a license he is free -- that is within the tolerance of the law -- to impose his conditions. And here, under the dominance of business urges, the most distinctive of institutions has been erected; for the patent owner can make his license an instrument of coercive control. He -- person, corporation, the collect -- decides who may and who may not make use of his arsenal of inventions. If, as is often the case, there is no rival technology, his license is a franchise to enter the industry. The owner of the patent can specify what products his licensee is to manufacture, in what quantities they are to be produced, within what areas they are to be marketed, at what prices they are to be sold. The relation of patent-owner and licensee falls into a kind of feudal formula of lord and vassal.

Although in form it rests upon contract, in fact it is enduring. For the license comes to be divorced from any particular patent. It usually carries the right, subject to a series of conditions, to make use of all the patents owned by the licensor which are needed to manufacture the permitted products. It thus comprehends the right to use patents not yet granted and even inventions not yet made. It is thus made to run, not for 17 years, but for 30 or 50 or until "notice of termination" is given, or indefinitely.

The license thus becomes a sanction upon which a private government for an industry can be rested. In the United States -- and in many other countries -- it is against the law for a group of competitors to combine or conspire to manipulate the market. The letter-patent, issued by the Government, is widely employed as a warrant with which to legalize a united front among the gentlemen of a trade in the making or selling of a ware. The owner of a patent for a process by which food products are impregnated with a certain vitamin has created an ingenious patent structure. One concern is granted the right to its process in respect to raw breakfast foods; a second, in respect to cooked cereals; a third, food for horses, mules and asses; a fourth, food for cows used in the production of "fluid milk" only; a fifth, food for cows whose milk is to be processed as surplus; and likewise through the succession of dogs, cats, wolves and white mice, and so on down the gradations of the animal kingdom. An elaborate code governs the conduct of all these licensees; their factory capacities are specified; their production quotas set; their respective markets assigned; their prices fixed. If a quota is exceeded, a fine has to be paid. If the code is violated, a first offense may provoke only a grim warning; if it is repeated, or threatens to become a habit, the patent-owner -- or the closed industry itself through its government -- can bring into action what is in effect its own police. Its offending member has done what his license has not given him permission to do. He is haled into a public court and there sued for infringing patents. The occurrence is rare; captains of industry respect their obligations of contract; if men lack honor, a threat is customarily enough. The result usually is that the grants operate as if they were valid without ever being put to a judicial test. And the private government clicks with a precision to which no political state can aspire.

Such a domestic model is neatly adapted to foreign commerce. Although there are "conventions" upon the subject, there is at law no such thing as an international patent. Yet the ingenuity of business -- and of lawyers -- has contrived a substitute which really does just as well. A patent -- most often a portfolio of grants -- is taken out in every country in which a corporation, or a cartel of corporations, does business. The grants are written in as nearly the same terms as local statute will allow. Identity is, however, a secondary matter; the main thing is to fasten a grip which the law will respect at the strategic points of a useful art. The result is an exclusive right in the technology wherever the goods which emerge from the patented process are to be sold. Then at the pleasure of the patentee licenses can be assigned to a series of companies to operate in various countries. Or, instead, a number of separate corporations may each take out a series of patents in all countries where buyers are likely to be found. Companies which wish to employ rival technologies are faced with the prospect of a protracted struggle in the courts to determine what patents are valid, and what companies have the right of lawful access to markets. From so costly, vexatious and uncertain a campaign at law all parties are likely to shrink. A settlement is usually made by which each of the strong issues licenses to all the others under its patents. The weak have to accept what is offered. Exclusive areas of sale are, of course, assigned; and good neighbors are counted upon to respect each other's preserves. A single corporation or a group of corporations is in command of an industry.

The single control is the thing; whether of monarch or oligarchy does not matter. In either case a political order emerges, distinct from the state and resting upon a series of license agreements. In either case the private government is international in character. Gentlemen, considerate enough of each other to reconcile their patent claims, are not likely to quarrel over markets. A contract, convention, treaty is solemnly entered into and scrupulously observed. Like the kindred domestic instruments, it is to all effects a constitution for the regulation of an industry. It is almost certain to specify fields of production; it usually sets up barriers against export; it may or may not specify capacity and output. Almost without exception it assigns exclusive marketing provinces to the several companies; it elaborates guarantees against any member encroaching on another's territory. In such an assignment the various nations are parceled out as if they were proprietary demesnes. If, however, there is trespass, the offender is brought before a public court for patent infringement.

Thus the autarchic state has been accepted as a fact of life. A commerce truly world-wide in character is fitted to the rigidities of an outworn political map; the national frontier is converted into the boundary line between marketing provinces. The pursuit of gain has adapted itself to a highly artificial habitat.

III

In the era between the wars the national frontier was the great fault line in culture. It remains as the neglected creation of a crisis in history. The political map, however neatly the boundaries are drawn, is a product of another age. The economy, under the impulses of a continuing revolution, refuses to be pent up within a series of circumscribed areas. Its dynamics are forever beating upon the barriers placed by the state in its path. The statesmen of the nineteenth century were wise enough, if not to abolish, at least to sterilize the frontiers which held it in leash. The statesmen of the decades just closed have attempted to vitalize obsolete boundaries. In the Victorian age politics accommodated itself to business enterprise, but in the period between the Roosevelts the economy had to make the adjustment. Yet iron walls of tariffs and blocked currencies have not held back industrial forces; they have done no more than transmute foreign commerce from physical goods to legal documents. It was the equity in the corporation, the obligation of contract, the right to technical process which, as intangibles, went where material things could not go. Though the state did not control the traffic, all this had not been left to laissez-faire. It has been subject to an elaborate scheme of private control. In the process business has not displaced the state; rather trade has created its own politics of industry. Business has done this by turning to its own account sanctions which the state uttered for another purpose.

In the years between the wars this trend was denational rather than international in character. Its dominant note was an emancipation of corporate enterprise from national ties. For decades the usages of the economy have been moving that way. Shares of stock are sold without inquiry as to the citizenship of seller or buyer. A corporation, engaged with petroleum, chemicals, light metals, operates under many flags and possesses securities widely held. An honorable company chartered in Delaware, Nevada, Brazil, Sweden may be owned and operated by persons foreign to its native state; it is only nominally a national of its own country. A corporation, created by the State of Virginia, may possess subsidiaries whose corporate life derives from Iran, Italy, Mexico, Switzerland. A group of aliens may operate as an American corporation; a group of Americans may do business here as a foreign corporation. Any lawyer with no more than routine ingenuity can devise ways of avoiding any requirement of domesticity a statute may impose. The cloak of a friendly country or of neutrality can be thrown about any corporate property, even when ultimate ownership rests with the enemy.

The corporation, operating in more lands than one, has tended to denationalize all it has touched. Our own corporations exchange laboratory notes with their peers abroad; it is often a mere matter of choice whether a patent is taken out in the name of an American, a Briton, or a German. Markets, and the harvests they yield, are the ends of business enterprise. Wherever on the face of the earth they lie, the nationalistic credentials essential to access are easily obtained. The pursuit of gain is an urge pure and undefiled. A national loyalty running along with it, as when war contracts are to be had, will burn brightly; when corporate and national loyalties clash, an allegiance to one's country imposes a serious strain. If in ownership, operation, managerial personnel, a corporation is of many countries, it will not avidly disrupt a far-flung organization as a sacrifice to the national state whose nominal creature it is. Politics is an inescapable nuisance to it; in the documents the threat of a military front across the corporate imperium is referred to as a "specified event" against the dangers of which measures must be diligently taken.

Although the accord between large corporations is a creation of business, it is affected with a political interest. As we have noted, its private controls invade the field of public regulation; it tends to substitute its own dominion for that of established government. In a rationalized industry a minority may be left at the mercy of the majority; the member who rebels at restraints imposed upon him may not dare to go to court for fear of reprisals. A clause in contracts or treaties often compels all who sign to submit disputes to arbitration. Judgment then is rendered by reference to the code of the industry, not by the law of the land, and questions of the public interest can be avoided. Tariff rates may be made to guard market provinces. The suit for patent infringement may be made to police agreements providing for a division of territories. The operation of our reciprocal trade pacts is impeded -- or even rendered nugatory -- by private agreements as to corporate spheres of influence.

Such arrangements are of concern to the political state, although they are not of its making. In peace as in war the national economy is the instrument of the people. These larger corporate accords carry power to shape that instrument. At this point variety in political theory comes into the picture. We of the United States are not accustomed to regard the state as architect to the industrial system and hence have never attempted to supervise the bargains of our corporate nationals with their fellows overseas. Although the regulation of foreign commerce is entrusted to the Congress, "treaties" between corporations domestic and foreign, which in reality impose a pattern upon such commerce, are not submitted to the Senate for ratification. In Great Britain, however, a practical working arrangement is maintained between the mercantile interests and the Board of Trade. And in dynastic states, like Germany and Japan, the Government seeks to impose its own ends on such agreements. As a result, contract, convention, license agreement become media through which the will of a "tough state" is imposed upon the industries of a weak one. It is an instrument of economic warfare, designed to create weakness in the potential enemy.

A discussion like this, which concerns a single aspect of patents and cartels, falls short of an answer to "the cartel problem." The case for the cartel has been often recited. It dwells upon the "insanity" of an overdone competition; points to industry as a field in need of law and order; stresses the efficiency and economy of a well-ordered trade. Unfortunately the argument breaks off just when the going begins to get hard. It leaves unanswered the question of how the public interest is to be protected in a private monopoly. It fails to suggest a dependable substitute for the incentives offered by free enterprise. It suggests no adequate safeguards against the routine and bureaucracy into which all human institutions are prone to fall. It provides no insurance that the urge to break new paths, without which there can be no progress in the useful arts, can be kept dynamic. In short, it fails to indicate how a closed industry can be an instrument to an advancing society. And if all the urges and checks essential to the maintenance of a free commerce must be imposed by regulation, the socialization of industry may well appear more attractive by comparison.

But whatever the clash of ultimates, the immediate problem is clean-cut. The cartel represents an attempt to regiment industry to conform to the political pattern of autarchic states. A union of autarchy with a corporate political order is a serious hazard to the democratic state. The first step is clearly to sterilize the political frontier; to remove the barriers which hold industries to narrow and artificial markets; to tear down the dams which hold back the turbulent forces of an expanding economy. If that is done, the world may become a less favorable habitat for the politics of industry. If, however, tumultuous industry is to continue to beat against obsolete national boundaries, mankind -- in a world of scarcity susceptible to war -- must take the consequences.

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  • WALTON HAMILTON, Professor of Law, School of Law, Yale University; author of "Patents and Free Enterprise"
  • More By Walton Hamilton