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[Adam Mossoff, guest-blogging, May 2, 2009 at 10:23pm] Trackbacks
The Sewing Machine Combination -- The First American Patent Pool:

We are now approaching the climax of our story of the sewing machine, as we've covered its invention, its patenting, and the rise of the first patent thicket -- the Sewing Machine War. How did this patent thicket come to an end? The answer to this question is in the title to this post.

By the mid-1850s, sewing machine firms were spending all of their time, money and energy in patent litigation, and, as a result, the sewing machine was languishing as a commercial product. The situation demanded a solution, and this solution came from an unlikely source: an attorney, Orlando B. Potter, who was heavily involved in the Sewing Machine War representing a prominent sewing machine manufacturer, Grover & Baker, of which he was also President. Potter's solution was groundbreaking but also breathtakingly simple: the relevant patent-owners should combine their patents into a patent pool that would be administered as a commercial trust.

The opportunity for Potter to present his idea to the warring parties arose in October 1856, when by chance most of the principal sewing machine patentees and firms were in Albany, New York for the first trial being held among the litany of lawsuits that had been filed since 1854. In a meeting held shortly before the trial began, Potter floated his proposal that I.M. Singer & Co., Wheeler, Wilson & Co., Grover & Baker, and Howe combine their patents. By 1856, these four parties owned the patents that covered the core elements of the fully practical sewing machine as a commercial product.

Little is known about the exact details of this fateful meeting in Albany. It is clear, though, that Potter proposed his "Combination" as a solution to the patent thicket that was the Sewing Machine War. Scholars and historians recount that the three manufacturers agreed to Potter's plan to create the Sewing Machine Combination.

Howe, however, initially opposed it, and, given the fundamental status of his 1846 patent in the sewing machine industry, the patent pool could not work without Howe's participation. Howe's opposition was understandable: The manufacturers made their money by producing sewing machines, and thus they would profit from a patent pool that freed them to manufacture and sell their products. But Howe was a non-practicing entity who made his money through licensing fees, which he was garnering through threatened infringement lawsuits and actual injunctions. In fact, throughout the 1850s, Howe was not attempting to manufacture sewing machines at all, and the profits he earned on the basis of his 1846 patent were obtained solely through royalties.

The three firms convinced Howe to join the patent pool by providing him with special concessions, which included a special royalty of $5 for each sewing machine sold in the United States and $1 for each sewing machine exported to foreign markets. Most important, Howe wrung a third concession from the other three firms that the Sewing Machine Combination would have no less than 24 licensees, which ensured a steady income stream for Howe from his special royalties on sales of sewing machines by these licensees. With these special terms, Howe agreed to join the Combination.

The Sewing Machine Combination functioned as a classic patent pool. As with modern patent pools, its four members were free to compete with each other in the sewing machine market, but they issued cross-licenses to each other in the use of their respective patents. Each member paid a $15 license fee for each sewing machine they produced. This fee was distributed among the four members of the Combination as follows: a small portion was put into a war chest to cover expenses for future lawsuits involving any of the Combination's patents, Howe then received his special royalty payment, and the remaining monies were apportioned among all four members. In 1860, the Combination reduced this fee from $15 to $7, and Howe's royalty was reduced to $1 for all sewing machines.

Yet the Combination was more than just a patent pool, it was also a trust. The consent of all four members of the Combination was required for licensing its patents; in practice, though, this collective consent was granted as a matter of course with the exception of license applicants who sought simply to copy one of the Combination member firm's own sewing machines. Unfortunately, the Combination's records were lost in a fire, but a few remnants remain, which show that member and non-member firms received licenses for producing hundreds of thousands of sewing machines. As the head of the Combination, Potter also became a lead plaintiff in many of the future infringement lawsuits concerning the Combination's patents. Lastly, the Combination's rules did not expressly require or promote price collusion among its members, but it was alleged to have occurred, which is unsurprising.

In my next posting on the history of the sewing machine, I will discuss the commercial innovation in the sewing machine market following the formation of the Sewing Machine Combination. This will be the last posting on the history, and then I'll conclude with some of my last postings as a guest-blogger with some observations of what we can perhaps learn from this tale, incorporating some issues already discussed in the comments to my blog postings.

Steven Den Beste (www):
Under current law, all this would be illegal, wouldn't it?
5.2.2009 11:22pm
Josh644 (mail):
Most important, Howe wrung a third concession from the other three firms that the Sewing Machine Combination would have no less than 24 licensees, which ensured a steady income stream for Howe from his special royalties on sales of sewing machines by these licensees.

I don't understand this sentence. Did they have to find 21 additional licensees? How did that affect his income, if he was being paid per machine?
5.2.2009 11:28pm
Adam Mossoff (mail):
Josh644: It was a minimum of 24 licensees by the Combination, i.e., 24 manufacturers above and beyond the 3 in the Combination. With 24 other manufacturers making sewing machines, then Howe was making more money given the extra production. In sum, a total of 27 manufacturers makes a lot more sewing machines than just 3 manufacturers. In fact, the Combination licensed a lot more than just 24 manufacturers. Howe made a bundle -- millions, in fact. (see my last post).

Steven Den Beste: Antitrust scrutiny of pools has been variable over the years, but a pool as such can be legal under certain conditions. I'll talk a bit about the antitrust implications in my final postings, but I'll just say here that the price collusion was without-a-doubt illegal, but the Combination itself (as defined in the 1856 agreement) was likely legal under current antitrust law. In earlier times, however, the whole thing might have been found to be illegal. As I said, the nexus between patent law and antitrust has long been frought with tension and has constantly changed over the years.
5.3.2009 12:24am
Javert:

but I'll just say here that the price collusion was without-a-doubt illegal, but the Combination itself (as defined in the 1856 agreement) was likely legal under current antitrust law. In earlier times, however, the whole thing might have been found to be illegal.
I don't understand this. The Sherman Act wasn't passed until 1890.
5.3.2009 1:00am
corneille1640 (mail):
Javert,

If I understand correctly, many states had antitrust laws prior to the Sherman act, although later than the 1850s, if I'm not mistaken. Some laws--statutes or common law (I'm not a lawyer, so I'm speaking a bit off the cuff)--might be considered "antitrust" in spirit. I'm referring to laws against such practices as conspiracy or "forestalling" the market.
5.3.2009 1:11am
John Thacker (mail):
I don't understand this. The Sherman Act wasn't passed until 1890.


Javert: The tenses are confusing you in the part you quoted, as it's in response to Steven Den Beste's question about whether the Combination would be legal today. In "the Combination itself... was likely legal under current antitrust law, "current" does not return to "current when the Combination existed" but "current" as in 2009. "In earlier times" means pre-now, but post-Sherman Act.

Naturally, of course, if the Combination were illegal today it would not be a possible model for solving patent thickets.
5.3.2009 1:52am
corneille1640 (mail):
John Thacker:

Thanks. I misinterpreted that comment, too. (And my non-lawyerly "legal commentary" might have been a bit off as well.)
5.3.2009 10:24am
Joe in NM:
The MPEG patent licensing organization mpeg la seems like modern analog.
5.3.2009 11:46am
Steven Den Beste (www):
What this reminded me of was the shenanigans by Rambus after it joined JEDEC in the 1990's.
5.3.2009 6:43pm

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