Nice article in The Freeman (from 2001) illustrating the pernicious effects of patents. Here, a patent on an early automobile design was used by the Association of Licensed Automobile Manufacturers (ALAM) to restrict competition in the auto industry. For a related episode, see Boldrin & Levine’s discussion of “how the Wright brothers used their patents to try to block the emergence of a US aircraft industry. Interestingly, this pattern of behavior continued. In 1972 the US government charged the aircraft industry with an antitrust violation, basically because they kept using their patent pool and cross licensing to prevent entry. IP-inefficiency at its best.” (ch. 4, Against Intellectual Monopoly).
Melvin Barger is a retired corporate public relations representative and writer who lives in Toledo, Ohio.
More books have been written about auto pioneer Henry Ford than any other person in the car business. Though he had critics, the judgment of history is that he put the world on wheels with his famous Model T. But less well known is the fierce independent streak that led him to wage a lone and heroic battle for the right to run his own business. It was a struggle against the kind of people who think they should have the power to determine what’s best for the rest of us. They were private businessmen, but they were also smug social planners who counted on the assistance of the state.
One of the persistent delusions nourished by social planners everywhere is that elitists in high places can divine who will be the winners and losers in any developing industry. Sometimes called “industrial policy,” this was touted as the secret of Japan’s economic success until that country’s fortunes went sour in recent years. Whether done by government officials or private firms with policing powers, any such planning is a bad idea.
But we don’t have to go to present-day Japan for proof of such failure.
At the very beginning of the American auto industry, a group of carmakers made a blatant attempt to establish an industrial policy for their own benefit. In the guise of protecting the public from “unreliable upstarts” and “fly-by-nights,” they formed the Association of Licensed Automobile Manufacturers (ALAM) in 1903. The industry was in its infancy, but there were already complaints about some of the crude entrepreneurs who were entering the field. The 11 car manufacturers who formed the ALAM promised to tidy things up a bit.
Their weapon was the 1895 Selden patent, and their claim was that it covered all gasoline-powered vehicles. By controlling this patent they asserted the right to decide who should be allowed to build and sell cars. Carmakers who didn’t join the ALAM and pay royalties on each car sold could be sued and possibly forced out of business.
Like many such groups, it professed to be combining for the public’s own good. As one of the members said of the ALAM, “It will not try to shut out reputable and established manufacturers who build a reliable vehicle; it will license all such, but it will license no unreliable upstarts. In this way the association will protect the public and be a boon to all purchasers of gasoline automobiles.” Another auto manufacturer stated: “Those already licensed can more than supply the demand.”1
With this form of industrial policy established, the ALAM was now positioned to choose the winners and losers for the future auto industry. And one of the first applicants to be refused a license was a known loser, Henry Ford. At 40, he was broke and appeared to be all washed up. His fledgling Ford Motor Company, formed on June 16, 1903, showed many signs of being the kind of “unreliable upstart” the ALAM sought to exclude from business. It was poorly financed, and paid-in capital of $28,000 had been nearly exhausted in its first month of operation. Ford himself had headed one failed automobile company and was eased out of another before persuading some investors to back him for a third try. Any rational observer would have called it a high-risk venture. So when he applied to the ALAM for a license, he was turned down on the grounds that he was only “an assembler,” not a true manufacturer.
The rejection was the organization’s way of telling Ford that he had no right to be in business. But after he was turned down a second time, he moved ahead to build and sell his own cars without a license. So the ALAM reacted by attacking him in newspaper advertising and then filing lawsuits, apparently in the hope of forcing him to quit.
But Ford and the free market for automobiles had other plans. At a time when most cars being built were expensive rich men’s toys, he wanted to build low-priced vehicles for average-income people, making the car a “necessity rather than a luxury.” It worked, and far from failing, Ford built and sold 1,700 cars profitably in his first 15 months of business. This was only a beginning, and in little more than ten years he would be building 300,000 vehicles yearly, more than half of all the motor-vehicle production in the United States. Along the way, he gathered the resources and support he needed to carry on his battle with the ALAM and the Selden patent.
It was not an easy victory, however, and the struggle went on from 1903 until 1911. At some point early in the fight, Ford probably could have negotiated a peace treaty with the ALAM, but that would have violated his principles. The definitive book on the Selden case is William Greenleaf’s Monopoly on Wheels. As Greenleaf wrote, “‘What is the greatest thing in the world—your greatest ambition?’ Ford was once asked. ‘To be free—a free man,’ he shot back. . . . Ford knew that he could not be free so long as the Selden patent clouded the destiny he had marked out for himself.”2
The shameless arrogance of the ALAM had also aroused his ire. By rebuffing him, Greenleaf noted, the ALAM had disparaged Ford’s ability as a designer and builder of automobiles. Greenleaf added, “By the time the Selden challenge arose, Ford had devoted almost a decade of thought and labor to planning and building motor cars. He jealously prized as a hard-won creation the automobile which bore his name. That car, like those of other automobile manufacturers, owed nothing to the teachings of the Selden patent.” Ford himself pointed out that the car was the product of his own brain and no man on earth was entitled to any “rake-off “ from that particular car.3
The Selden Patent
What was the Selden patent, and how did it give the ALAM what amounted to policing power over the auto industry? It started with George Selden (1846–1922), a patent attorney in Rochester, New York, and also a sometime inventor. He was apparently a competent attorney and did the early patent work in photography for George Eastman of Kodak fame. Eastman’s signature even appears as a witness to the Selden patent.
That was the only impressive thing about Selden’s patent. It described an automobile, but later attempts to build a car to the patent’s specifications ended in failure. Selden’s was a patent for a car that wouldn’t run more than a few thousand yards. Yet Selden and his later associates made the broad claim that the patent covered every gasoline-powered car built! This was an extraordinary claim, because none of the estimated 300 men who were trying to start car companies borrowed anything from Selden’s patent, and the engine shown on his patent drawing was never successfully used on any commercial road vehicle. The only thing the Selden patent had in common with other cars of the day was its specification of gasoline as the fuel.
In processing his patent application, Selden engaged in what is now seen as a form of legal trickery. He made his application in 1879 but then delayed the actual date of issuance by filing amendments every two years. The patent did not go into effect until 16 years after his initial filing. The suspicion is strong that he used the amendment process to delay the starting date until something resembling an auto industry was starting to form. He had no way of knowing what would happen over the 17-year life of the patent, but he must have believed by 1895 that the industry was about to take shape and he would be able to collect royalties from the other manufacturers.
He was certainly right, for things were starting to happen. The automobile had actually been invented in Germany in 1889 by Gottlieb Daimler, with help from Karl Benz and Nicholas Otto’s invention of the four-cycle internal combustion engine in 1876. In the 1890s, cars were built in the United States by Charles Duryea and Ransom E. Olds. Then, in 1896, only seven months after Selden had obtained his patent, Henry Ford rolled onto the streets of Detroit driving a strange machine called a Quadricycle. It was a far cry from anything the Ford company builds today, but it did run and it had the effect of making Henry Ford a minor celebrity in Detroit. During the months he drove it, Ford put about a thousand miles on the Quadricycle before selling it for $200. (He later bought it back for $65, and it’s now displayed at the Henry Ford Museum in Dearborn, Michigan.)
Ford had displayed considerable ingenuity in building the Quadricycle, and he had even constructed his own gasoline-powered engine. But he was the first to acknowledge his debt to all the inventors and dreamers who had gone before him. “I invented nothing new,” he conceded many years later. “I simply assembled into a car the discoveries of other men behind whom were centuries of work, and the discoveries of still other men who preceded them. Had I worked fifty or ten or even five years before I would have failed. So it is with every new thing. Progress happens when all the factors that make for it are ready, and then it is inevitable. To teach that a comparatively few men are responsible for the great forward steps of mankind is the worst sort of nonsense.”4
It’s highly unlikely that Ford or most of the other auto pioneers even knew about the Selden patent as they forged ahead with their plans. They would have quickly dismissed it because it contained nothing that they could or would use in designing and building their own cars. Selden had even committed the grave error of mounting the engine directly on the front axle. Even if the type of engine he specified had been suitable for cars, such a design wouldn’t have survived more than a few miles of rough travel. So for the first few years, the Selden patent lay quietly in the files with no takers to manufacture Selden cars and thus pay the inventor a royalty.
Out of Obscurity
But in 1899 some strange things occurred that would bring the Selden patent out of obscurity and initiate one of the most celebrated cases in patent history. A Wall Street syndicate headed by financiers William C. Whitney and Thomas Fortune Ryan gained control of a firm called the Electric Vehicle Company. For a time it had seemed that there might be a future in electric-powered cars, partly because electric streetcars were performing well. But then as now, the problem was lack of a good lightweight battery with enough charge to do the job. So with electric vehicle sales plummeting, the firm’s resourceful manager came up with the idea of acquiring rights to the Selden patent and then demanding all other manufacturers of gasoline-powered vehicles to pay royalties of 5 percent on each vehicle’s retail price. They struck a deal with Selden that gave the inventor an initial payment and a portion of future revenues. With the patent under control, Electric Vehicle engaged a New York law firm to send out letters warning all manufacturers that they were infringing the Selden patent and should desist or make suitable compensation to the owner thereof.
The notice shocked the industry, and to drive home their point, Electric Vehicle sued several manufacturers, including the prestigious Winton Company of Cleveland. While Winton was fighting back, other manufacturers huddled to develop an answer to the Selden threat. Realizing that they had combined strength, the group met Whitney in New York and put forth three proposals: (a) They would pay a 1 1/4 percent royalty, with half going to Electric Vehicle and the rest to their association; (b) the association would decide who would and would not be sued under the patent; and (c) the association would say who would and would not be licensed under the patent.
Whitney, realizing he had been outmaneuvered by men who could put him to considerable expense in court fees, agreed to their demands, and thus the ALAM was born. The lawsuit against Winton was also dropped, and Winton joined the ALAM, switching from opponent to advocate of the Selden patent.
Some auto builders accepted the ALAM’s terms and became licensed manufacturers. But others held out and looked to Henry Ford for guidance as the dispute lingered on for years. In the meantime, attorneys for both sides gathered depositions and took part in hearings as they prepared for trial. The issue was also debated in the press, and considerable sympathy grew for Ford as a David battling the Goliath of organized special interests. A number of the independents who were outside the ALAM were confident that Ford would win the federal court trial, thus invalidating the Selden patent. This would relieve everybody of the need to pay royalties or obtain licenses. It would also deny the ALAM the power to police the industry.
But Ford was in for a surprise that tested his tenacity and determination. The Selden patent case finally came to trial on May 28, 1909, before Judge Charles Merrill Hough in the federal court for the southern district of New York. Ford’s attorney had been apprehensive about Judge Hough because the jurist did not seem to understand the technical issues in the case. Hough took all summer to review the evidence and then ruled in favor of the Selden interests—that is, the ALAM—on September 15, 1909. It was a crushing blow for Ford and the independent manufacturers who had hoped the patent would be ruled invalid. Most of them deserted Ford. The most important person to surrender was Billy Durant, who had founded General Motors the year before. He made his peace with the ALAM by joining and paying $1 million in back royalties for the car companies now in the GM tent. For most manufacturers, the battle was over, and they reconciled themselves to paying royalties until the expiration of the patent in November 1912.
Ford Holds Out
But not Henry Ford. Though he was now well on his way to great wealth and could have easily paid current and back royalties, he was not prepared to yield anything to the ALAM. Digging in his heels, he backed his legal team in filing an appeal. He was joined by a French company, because the ALAM had also demanded licensing of importers. The appeal was delayed for a time because the Electric Vehicle Company, which actually controlled the Selden patent, had gone bankrupt. The patent was then assigned to another firm and the appeal moved forward.
And now the gods of destiny smiled on Henry Ford. With the three-judge federal appeals court, he finally won vindication. The case opened on November 22, 1910, and the judges handed down their decision on January 9, 1911. They ruled that the Selden patent was valid, but only for cars made to its specifications. This was a total victory for Ford, because no working automobile had ever been built to Selden’s design. Thus the appeals court actually ruled that no royalties were required of anybody.
Ford was suddenly a national hero. The decision even benefited the members of the ALAM, because they too were no longer required to pay royalties at a time when auto production was beginning to boom, though they undoubtedly felt some regret about having contributed to the $5 million paid in for royalties under the Selden patent. Selden himself had received about $200,000 of that amount, a tidy sum for a design that never added anything to the development of the gasoline automobile.
What lessons can be drawn from the Selden patent case? One lesson is that no elite group, whether government or private, can really determine winners and losers in an emerging industry. (But even if they could, the market should be open to all contenders.)
A second lesson is that the market has a mind of its own when it comes to rewarding or punishing specific producers. The eccentric Henry Ford ranked low in the esteem of other early carmakers and was one they wanted to weed out in advance of any actual market test. But with his development of the popular Model T in 1908, he went on to win the largest market of all, while most of his early rivals eventually failed and went bankrupt.
A third lesson is that we should never underestimate the power of a determined person with an intense belief in his own ideas and destiny. Such a person was Henry Ford in his determination to make the car “a necessity rather than a luxury.” All he ever needed or wanted was the opportunity to compete freely in the market—and it’s to our benefit that a blatant attempt to police him out of business didn’t work.
- William Greenleaf, Monopoly on Wheels (Detroit: Wayne State University Press, 1961), pp. 101–102.
- Ibid., p. 112.
- Ibid., p. 113.
- From a 1934 article in New Outlook, quoted in ibid, p. 138. Interestingly enough, these thoughts by Henry Ford parallel the same arguments made by Leonard Read in his classic essay, “I, Pencil,” from FEE and online at www.fee.org.