Make the Rules or Your Rivals Will

The Strategist's Dream Controlling Competition Without the rule of law, including the rights of property and the enforceability of contracts, the growth miracle of capitalism, indeed capitalism itself, might not have been possible. --William J. Baumol, The Free-Market Innovation Machine (2001) Every measure that strengthens the power of the law . . . seems unavoidably to broaden the license offered to those who [use it] to accumulate wealth. --William J. Baumol, Entrepreneurship, Management, and the Structure of Payoffs (1993) It was not an auspicious start for a new business. The year was 1903, and a brash, forty-year-old entrepreneur named Henry Ford was launching his third attempt at entering the automobile business. He had a radical idea: to use assembly-line technology to design and market a reliable, cheap car for the masses. But now, a mere five weeks after opening the doors of the Ford Motor Co., he faced disaster--a lawsuit for patent infringement brought against him by the most powerful, well-heeled firms in the auto business. Automobiles in 1903 were hand-tooled, customized playthings for the rich, and the leading car firms were determined to keep it that way. Fearing an influx of destructive competition from the hundreds of mechanics who were trying their hand at making cars, the most powerful manufacturers had organized themselves into an association and acquired a key, strategic property right: a pioneer patent covering all gasoline-powered cars using internal combustion engines. The so-called Selden Patent, awarded to a lawyer named George Selden based on an application he filed in 1879, described a "road engine" that had never been built. Selden was not much of an inventor, but he was a skilled manipulator of the patent system. Under the Patent Office procedures of that era, applications remained secret until the day a patent was issued. And there was no limit on how long an application could remain pending. Selden's strategy was to delay receiving his patent long enough for the car business to turn into a genuine industry capable of supporting him with a rich stream of patent royalties. Instead of inventing a car, he had invented a "stealth" legal weapon that would remain cloaked until he thought the time was right. He nurtured his application for sixteen years, updating and amending it to incorporate new developments in automobile technology. Then he pounced. In 1895, the Patent Office issued patent number 549,160 for a "safe, simple, and cheap road-locomotive" using a "liquid-hydrocarbon engine." The novelty of Selden's claim was not his design for the car itself but, rather, for the combination of the basic car design with a gasoline-powered, internal combustion engine. Selden's patent referenced one such engine invented by an Englishman named George Bailey Brayton. Once issued, the patent was good for seventeen years, until 1912, unless a court ruled it invalid. At first, most professionals in the car business scoffed at Selden's patent. "Let him try to enforce it," they said. "Then he can talk to us about royalties." But Selden got a break. Some of the larger car manufacturers saw the Selden Patent as a way to bring order to their unruly industry. They acquired the patent in 1900, organized the Association of Licensed Automobile Manufacturers, and began writing a new set of rules for doing business. Anyone who wanted to sell an automobile in the United States, including foreign importers, would have to come to them. Their strategy was simple. First, the association enrolled all the most important firms, giving them an equity stake in the Selden Patent. Then it built a large legal war chest to back its program of patent litigation attacking the rest of the industry. It selected the weakest manufacturers first, bullying them into settlements. A patent case could cost a maShell, G. Richard is the author of 'Make the Rules or Your Rivals Will', published 2004 under ISBN 9781400050093 and ISBN 140005009X.