The great pharmaceutical patent robbery, and the curious case of the Chemical Foundation

Christopher Wadlow*

Keywords

Patents—healthcare—chemicals and pharmaceuticals—expropriation—collective ownership— international trade—legal history—United States law.

Abstract

In 1918, the United States confiscated virtually all German-owned intellectual property assets within its jurisdiction. Out of 6,000 patents in the chemical field, 4,500 were assigned for a very modest consideration to an newly-established entity, the Chemical Foundation, which was incorporated with the objective of licensing and managing them for the benefit of the United States chemical industry. This article describes the origins and activities of the Chemical Foundation, and considers whether it provides useful lessons for the collective management of patents today.

Status and citation

This is a pre-publication draft of an article originally published in Intellectual Property Quarterly, [2010] I.P.Q. 256-292 (published by Sweet & Maxwell in association with the Intellectual Property Institute, London). Some minor variations compared to the published text may remain. Citations should be to the published version.

* Professor of Law, UEA Law School, University of East Anglia, Norwich, UK. [email protected]. Introduction

Setting the scene

It was the pharmaceutical industry’s worst nightmare. The scene was a former British colony, now proudly independent, and the principal actor a lawyer turned minor politician with populist tendencies and presidential ambitions. Shrewdly choosing a moment of international crisis, this ambitious and unscrupulous apparatchik seized the opportunity to enlarge the powers of his obscure government department, invoking those same powers, even after the crisis had passed, to expropriate the patents and trade marks of the world’s leading chemical and pharmaceutical companies. These assets he subsequently had transferred, at an absurdly low valuation, to a kind of trust or foundation, which promised to license them freely for the public good (though not, or course, to foreigners), and to re-invest its modest income in support of badly-needed scientific and technical education and research, from which a truly native and independent pharmaceutical industry would soon emerge.

Though our protagonist was a politician, he was no conventional ideologue of either right or left, and his new order of pharmaceutical patent ownership sought to avoid the extremes of capitalism and socialism alike. On the one hand, the patents would be placed in private, rather than state, ownership. On the other hand, unregulated private ownership would have risked the formation of monopolies or cartels; or might have fomented self-defeating beggar-my- neighbour behaviour among rivals trying to block or outbid one another, which was equally to be deplored. After all, the patents in question had in more than one sense been purchased not with cash, but with his fellow citizens’ blood. They were pre-eminently a public good rather than a private one, and the regime for their ownership and exploitation had to reflect this.

The solution

The proposed solution was the foundation already mentioned, to which the confiscated patents (as well as trade marks and copyrights) would be sold, supposedly at a fair value, but in reality for a song. The foundation would be independently managed by a trusted subordinate, but this would be something of a formality, since it would in principle license any and all of the patents it controlled, on a non-exclusive basis, to any reputable (and domestically-owned) manufacturer. Government and its various departments would be entitled to royalty-free licences on demand. Imports of products which were not manufactured locally were also to be licensed, the royalties typically being paid by the former patent owners, and ultimately recovered from the consumer. The income from royalties and occasional awards of damages for

2 Christopher Wadlow infringement, less the not inconsiderable costs of administering the foundation and policing and enforcing the patent portfolio, was not to be distributed to the shareholders, but would be used to sponsor educational activities and research.

The system was frankly protectionist, but like every example of trade protection before or since, it was sufficiently justified in its author’s eyes by the special circumstances obtaining, and by the prospect that after a very few years the protection would no longer be needed, so that the formerly sheltered industry could thrive for itself. The whole affair was also clearly in breach of international law, but by an unexpected twist of fate (and the unpredictable convolutions of diplomacy) the former patent owners were effectively denied all compensation, unless from their own fellow-taxpayers’ much-depleted pockets. In any event, the corporate victims of this coup were already subject to such paranoid excesses of opprobrium and xenophobia, that neither the expropriation itself, nor the modest size of the purchase valuation (none of which ever reached the former owners) attracted adverse comment at the time.

The man with a mission

Who was this person, but more to the point, what was he up to? Is he perhaps no more than a figment of the imagination, a cypher attached to a flight of authorial fantasy? Well, I can assure you that he was more than real enough, but his identity can wait a little longer, for our protagonist was a man with a mission, and the mission comes first. Putting his political ambitions aside for the moment (which is more than he ever did) the expropriation order he signed, under emergency legislation which he himself had promoted, had addressed a clear and present danger to his homeland, and was patriotic and far-sighted in the aims it had in view. Heretofore, his artless but well-intentioned country had been played a sucker’s game so far as its open-to-all patent system was concerned. Far from encouraging domestic industry and inventiveness by striking a fair bargain between government and inventor, in the crucial field of organic chemistry—with which he was principally concerned—it was a more a case of winner- takes-all, with the patent system serving only to entrench foreign dominance, stifle competition, and suppress native ingenuity.

Amazingly, not only did the patent legislation then in force in this country lack any provision for compulsory working of patents in the public interest, but within the past decade its Government had entered into a bilateral—but entirely one-sided—treaty designed to perpetuate that state of affairs by equating working abroad with working in the country where the patent was in force, the other party to the treaty being the very country whose industrialists

3 The great pharmaceutical patent robbery owned virtually all of the important patents which might otherwise have been susceptible to compulsory licensing.

These included the patents on the irreplaceable “magic bullets” of the pharmacopeia: the Nobel-prize-winning defences against the scourge of a lethal sexually-transmitted disease afflicting as much as 10% of the population, which was dreaded as much for its social stigma, as for its toll of physical and mental degeneration, and the inexorable prospect of an agonising and humiliating death. Under the new regime, the aggregate royalty rate for non-exclusive licences under four key patents would be set at just five per cent for commercial firms, new manufacturers would appear as if by magic, and prices would fall to less than 20 per cent of what they had been before.1

The dramatis personae

A. Mitchell Palmer

So much for the perils stalking the land: but cometh the hour, cometh the man. So who was our hero? Step forward Alexander Mitchell Palmer (1872-1936), or A. Mitchell Palmer, as he preferred to be known: the “Fighting Quaker” and onetime pacifist; corporation lawyer and party loyalist; Custodian of Alien Property, 1917-19, Attorney-General and Cabinet Member, 1919-21, and aspirant candidate for the Democratic Party in the presidential election of 1920.2

Though the presidency of the United States of America was to elude him, and although he is now almost forgotten, Mitchell Palmer certainly made his mark on American politics. A successful Pennsylvania lawyer by profession, he served as a Democratic Member of Congress in 1909-1915, but failed to win election to the Senate in 1914. He helped manage the campaign of Woodrow Wilson at the Congress which selected Wilson as the Democrats’ presidential candidate in the 1912 election, and when Wilson became President in 1913, he offered Palmer the office of Secretary of War. Palmer refused, most probably because the office was a minor one at the time, which offered little scope for self-advancement, but ostensibly

1 For reasons which may already be obvious, footnote references have been suppressed from this Introduction. The year was 1919, and the lethal disease was not AIDS but syphilis. The “magic bullets” (and the first drugs to be so-named) were Salvarsan and Neo-Salvarsan, whose inventor, Paul Ehrlich had been awarded the Nobel Prize for Medicine in 1908. The “former British colony” was the United States of America. Other allusions (if not obvious already) should become clear as the article progresses.

2 For a biography, see Stanley Coben, A. Mitchell Palmer: Politician (New York: Columbia University Press, 1963).

4 Christopher Wadlow because of his Quaker and pacifist beliefs.3 The latter were rapidly jettisoned when President Wilson declared war against Germany in April 1917, and from October 1917 to March 1919 Palmer served as Alien Property Custodian.4

In March 1919 Palmer was promoted to the cabinet and appointed Attorney-General of the United States, a position he held until the Wilson administration left office in March 1921. It was in this capacity that Palmer has gone down in history as the author of the “Palmer Raids”— an extra-legal campaign of vilification, intimidation, mass arrests, imprisonment and deportation waged against thousands of Russian and Eastern European immigrants accused of un-American activities, as part of America’s first “Red Scare”.5 In 1920, Palmer ran for the Democratic nomination for the presidency, lost badly, and retired to private life.6 His active political career had lasted just twelve years.

Patrick Garvan

Palmer’s “Great Work” as Alien Property Custodian was continued by his former right-hand man, Francis P. Garvan (1875-1937). Garvan was chosen by Palmer to head his “Bureau of Investigation”, succeeded him as Custodian, served him as deputy Attorney-General, and was President of the Chemical Foundation of this article’s title until his death.7 Garvan’s antipathy

3 Coben, Mitchell Palmer, 1963, at pages 71-72.

4 Coben, Mitchell Palmer, 1963, chapter VIII.

5 Coben, Mitchell Palmer, 1963, chapters XI and XII. Robert K Murray, Red Scare: A Study in National Hysteria, 1919-1920 (Minneapolis: University of Minnesota Press, 1955).

6 Coben, Mitchell Palmer, 1963, chapter XIII.

7 Most of the literature on the Chemical Foundation comes from historians of technology and industrial development, rather than legal scholars. The leading author is Karthryn Steen, of Drexl University. Kathryn Steen, “Patents, Patriotism, and ‘Skilled in the Art’: USA v. The Chemical Foundation, Inc., 1923-1926” (2001) 92 Isis 91 is an exceptionally detailed and readable account of the Federal Government’s 1922 lawsuit against the Foundation. See also Kathryn Steen, “Confiscated Commerce: American Importers of German Synthetic Organic Chemicals, 1914-1929” (1995) 12 History and Technology 261; and Kathryn Steen, “German Chemicals and American Politics, 1919-1922” in John E. Lesch (ed.) The German Chemical Industry in the Twentieth Century (Dordrecht: Kluwer, 2000). All these have benefitted from access to the Chemical Foundation papers in the archives of the American Heritage Center at the University of Wyoming, Laramie (so well out of the reach of the present author); the records of the Custodian of Enemy Property in the U.S. National Archives; and the multi-volume set of trial transcripts, briefs, and exhibits at the Hagley Museum and Library, in Wilmington, Delaware.

5 The great pharmaceutical patent robbery towards anything and everything German was even more marked than that of Palmer, and if Palmer was extreme in his denunciations, then Garvan was hysterical.8

Garvan’s visceral hatred of Germany, and his vision of corporate capitalism in the service of the American national interest, were perfectly embodied in his support for the Chemical Foundation. As Kathryn Steen observes:9

“Garvan’s years in the Office of Alien Property gave focus to the rest of his life. To the day of his death in 1937, Garvan dedicated himself to promoting the American chemical industry at the expense of its German competitors. His bullying and often rude personality could cause friction even among friends and allies, but he earned the respect of the chemical manufacturers and chemists by the sheer force of will and energy he brought to their cause. Born and married into wealthy families, Garvan seemed motivated not by money but by a patriotic conviction that drove him into increasingly isolationist, autarkic policy positions and questionable legal territory.”

The Chemical Foundation

The third member of the cast is not an individual, but a company, the Chemical Foundation, Inc.10 The Foundation was incorporated in Delaware in February, 1919, perhaps to take account of that state’s famously accommodating companies legislation, but in any event giving it the same corporate domicile as one of its two main corporate promoters, E.I. du Pont de

8 See A. Mitchell Palmer, “Germany’s Industrial Army on American Soil” (1918) 87 Central Law Journal 61; Francis Garvan, Address before the National Cotton Manufacturers’ Association, New York City, April 25, 1919; reprinted as “Industrial Germany—Her Methods and Their Defeat” (1919) 11 Journal of Industrial and Engineering Chemistry 574.

9 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 106.

10 See above, fn.7. The classic overview of the international chemical industry in the early 20th Century is Ludwig Haber, The Chemical Industry, 1900-1930: International Growth and Technological Change (Oxford: Oxford University Press, 1971). For a history of the American industry in six volumes, see Williams Haynes, American Chemical Industry (New York: van Nostrand, 1945-1954). The most relevant volumes for the present period are II and III, The World War I Period, 1912-1922 (New York: van Nostrand, 1945), which were the first to be published. The publication date, and the fact that the work was originally a pet project of Garvan’s, mean that objectivity was hardly to be expected from Haynes, and his routinely partisan treatment of the Chemical Foundation occasionally slips into absurdity, as with his likening of Garvan to D’Artagnan from Dumas’s Three Musketeers (volume III, p.259). In places, Haynes is also gratuitously inaccurate on matters of legal detail, such as describing Mitchell Palmer (who never held judicial office) as a “Federal Judge” (ibid.), and misinterpreting the March 1918 amendment to the Trading with the Enemy Act as authorising the seizure and sale of the German patents.

6 Christopher Wadlow

Nemours and Co, the other being the National Aniline and Chemical Company, of Buffalo, New York.11

According to its certificate of incorporation, the Foundation was created to purchase enemy- owned patents seized by the Custodian, and to hold them in a fiduciary capacity:

“[F]or the Americanization of such industries as may be affected thereby, for the exclusion or elimination of alien interest hostile or detrimental to the said industries, and for the advancement of chemical and allied science and industry in the United States.”

To that end, the Foundation was empowered to grant non-exclusive licenses to the United States, and to grant similar (i.e. non-exclusive) licenses, on equal terms and without advantage as between licensees, to American citizens and corporations under control of American citizens.12 The terms and conditions of these licenses were to be set by the Foundation’s Board of Directors. The Board could refuse to issue any licence, or could revoke any licence granted by it. The Foundation was required to enforce its rights, and to protect the rights of its licensees. There were provisions for shares, interest payments, and dividends;13 but their details are not really relevant, because any operating income was not to be returned to the shareholders, but was to be:

“[U]sed and devoted to the development and advancement of chemistry and allied sciences, in the useful arts and manufactures in the United States, in such manner as the board of directors may determine.”

The first President of the Foundation was named as Francis Garvan. Garvan was of course also the incoming Alien Property Custodian. He had succeeded Palmer in that role on March 4, 1919, becoming President of the Foundation on March 8 of the same year.

11 See Haber, Chemical Industry, 1971, p.187; Steen, “Confiscated Commerce” (1995) History and Technology 261, 269; Mira Wilkins, “German Chemical Firms in the United States from the late 19th Century to post-World War II”, in John E. Lesch (ed.) The German Chemical Industry in the Twentieth Century (Dordrecht: Kluwer, 2000), at pp.303-314.

12 There is a list of the 735 licences granted up to 1926 (by licensee and patent number) in Haynes, American Chemical Industry, 1945, volume III, Appendix LIII, pp 483-505.

13 For a list of the original shareholders in the Foundation, see Haynes, American Chemical Industry, 1945, volume III, Appendix LII, p.482.

7 The great pharmaceutical patent robbery

The announcement of the creation of the Chemical Foundation and the appointment of its officers received a welcome from the Journal of Industrial and Engineering Chemistry in which the metaphor may have been mixed, but the sentiment was undiluted:14

“The names of these officers guarantees that the objects of the Foundation will be actively promoted and its rights vigorously defended. A new tower of strength thus springs into existence for the protection of the American dyestuffs industry and the closely related industries of synthetic medicinals and photographic chemicals.”

A clear and present danger

German dyes and American patents

In 1914 the United States had enjoyed a fully functional patent system for well over a century, which was in some ways more advanced than any other in the world. The United States had led the way with official examination of patent applications, and the wide dissemination of printed specifications. All kinds of invention (as then understood) were freely patentable, at a time when many countries restricted chemical patents to specific processes, or banned pharmaceutical patents altogether. The Patent Office was subsidised, application fees were kept low, and no renewal fees were payable. Yet this highly favourable environment had not resulted in a domestic organic chemical industry of any significance.15 On the contrary, the United States not only lagged behind Germany, France, and the United Kingdom; but even behind Switzerland, which had pursued a patent-free industrial policy in the late 19th century.16 The only field of medicine in which the United States excelled was in so-called “patent” medicines, of no therapeutic value, which proliferated like toadstools, and made the fortune of many a huckster.

Another unusual feature of the American patent system, by the standards of the time, was that there was no provision for the forfeiture or compulsory licensing of patents for non-working, or

14 Editorial, “The Chemical Foundation, Inc” (1919) 11 Journal of Industrial and Engineering Chemistry 279. Charles Herty, the editor of the Journal and a former President of the American Chemical Society, shared a very similar outlook to Garvan’s. He is sometimes credited with the original idea for the Chemical Foundation, which is plausible but impossible to verify, and he worked closely with Garvan and the Foundation for the rest of his career.

15 See Steen, “Confiscated Commerce” (1995) History and Technology 261, 263-266 for an overview.

16 See below, at fn.138. The first Swiss Patents Act (of 1888) only protected mechanical inventions.

8 Christopher Wadlow for meeting demand by importation.17 The German chemical industry was therefore perfectly free to use its patents to protect a strategy of manufacturing its products in Germany, and exporting them through local agents and distribution networks to its United States customers. Only a few companies (notably Bayer, Merck, and Heyden) broke the trend to any significant extent, by manufacturing in the United States, though generally from imported chemical intermediates.18

On one contemporary estimate, German imports accounted for about 90 per cent of United States dyestuff consumption immediately before the War, and a corresponding percentage of American dyestuff patents were under German ownership.19 The situation in the rest of the World was no different, since the once-dominant dyestuff industries of England and France had faded almost completely out of the picture, and it was the Swiss who supplied the ten per cent or so of the world market which Germany did not control.

“In technical virtuosity and aggressive enterprise, this leap to hegemony, almost to monopoly, has no parallel.”20 It was, in short, “Imperial Germany’s greatest industrial achievement.”

The reaction to German dominance

Until shortly before the War, German domination of the United States’ organic chemical industry had apparently not attracted much attention, but calls to amend the Patent Law to

17 For a post-war overview of international legislative provisions against non-working and working by importation, see Royal E. Montgomery, “The International Aspects of Patent Legislation” (1923) 31 Journal of Political Economy 90. Haynes, American Chemical Industry, 1945, volume III, p.258, comments that the combination of ready availability of product patents for novel substances, compounds and mixtures, coupled with the absence of any obligation to manufacture, was unique in the world.

18 See generally Wilkins, “German Chemical Firms” in The German Chemical Industry, 2000; Johann Peter Murmann, Knowledge and Competitive Advantage: The Coevolution of Firms, Technology, and National Institutions (Cambridge: Cambridge University Press, 2003). Palmer himself had factors such as these in mind in deciding to set up the Chemical Foundation: A Mitchell Palmer, “Report of the Alien Property Custodian” (1919) 1 Journal of the Patent Office Society 497, 501-503. The latter is an extract of patent-related material from the full Report of the Alien Property Custodian for 1919, published as Alien Property Custodian Report; a detailed Report by the Alien Property Custodian of all Proceedings had by him under the Trading with the Enemy Act during the Calendar Year 1918, and to the close of Business on February 15, 1919 (Washington: Government Printing Office, 1919; Reprinted New York: Arno Press, 1977).

19 Floyd W. Vaughan, “Suppression and non-Working of Patents, with Special Reference to the Dye and Chemical Industries” (1919) 9 American Economic Review 693. (But see fn.158 below).

20 David Landes, The Unbound Prometheus (Cambridge: Cambridge University Press, 1979) p. 276. With due deference to Horace (Odes (III.2.13), and even more so to Count Danilo in Franz Lehar’s operetta Die Lustige Witwe, one might have coined a new patriotic motto: “Oh, es ist süß für Vaterland zu färben!”

9 The great pharmaceutical patent robbery provide for compulsory licensing intensified as the War progressed, and the Allied naval blockade caused painful shortages of dyestuffs and drugs, which could no longer be imported in adequate quantities. There were in fact three separate tendencies at work, even before the War. One was directed at industrial “trusts” in general, whether foreign or American, and the extent to which they were supposed to have misused the patent system to keep out competition by filing for hundreds of overlapping patents of dubious validity, and to have tied in customers by means of tactics such as full line forcing and limited licences.21 Most of the popular villains in this particular category were familiar American names: General Electric, International Harvester, Western Electric, United Shoe Machinery and so on.22

Secondly, there was the issue of foreign-owned patents being worked only by importation, or not at all.23 This added a patriotic dimension, but this issue should really have been of much less concern than the first, if only because American manufacturers were more than adequately protected by tariffs in most fields of business. In so far as organic chemicals were an exception, it suited the textile industry rather well to buy its dyestuffs from Germany, rather than America. The German companies were of course subject to the Sherman anti-trust Act in respect of their American operations,24 and under pre-War conditions German dyes were plentiful, innovative,

21 The tying case of Henry v A.B. Dick Co, 224 U.S. 1 (1912), though decided in favour of the patent owner, provided a focal point for opposition to the patent system. The Dick case was effectively overruled on its facts five years later: Motion Picture Patents Co. v Universal Film Mfg Co, 243 U.S. 502 (1917).

22 A Bill was introduced by Congressman William A. Oldfield in 1912 which would have greatly extended the reach of the antitrust laws at the expense of the patent laws, including provisions for extensive compulsory licensing. (62nd Congress, 2nd Session, HR 23,417). “Would Put Patents in Trust Class”, New York Times, July 19, 1912. For (mainly hostile) commentaries see Gilbert H. Montague, “The Proposed Patent Law Revision” (1912) 26 Harvard Law Review 128; Otto R. Barnett, “The Oldfield Bill” (1913) 22 Yale Law Journal 383; Otto R. Barnett, “Revision of our Patent System by the Oldfield Bill” (1914) 8 Illinois Law Review 427. This bill, and a successor introduced by Oldfield in 1913, failed to progress.

23 In the period leading up to the Washington revision conference for the Paris Convention (1883), which took place in May and June 1911, the United States supported proposals for the abolition or restriction of sanctions for non-working or importation. See Legal Memoranda relating to Enemy Patents sold by the Alien Property Custodian to the Chemical Foundation, Inc, (New York: Chemical Foundation, 1922), at pp 27-28, citing the Annual Reports of the Commissioner of Patents for 1908-1911. The Bacon- Bernstorff Treaty of 1909 (below, fn.28) had been a preliminary move in this direction. In 1912, however, the policy was reconsidered: see Chemical Foundation, Legal Memoranda, 1922, at pp.28-29, reproducing a statement by the Commissioner of Patents in support of a Bill to amend and consolidate the Patent Law, which included provisions for compulsory licensing. (62nd Congress, 2nd Session, Senate Document 555). The bill did not progress.

24 A concerted challenge to a supposed “German Dye Trust” was launched in the Pennsylvania District Court in 1913, “More Dye Trust Suits”, New York Times, June 5, 1913, but it pesumably settled: Steen, “Confiscated Commerce” (1995) 12 History and Technology 261, 266 fn.36.

10 Christopher Wadlow varied and of excellent quality. Outsourcing supply to Germany to the benefit of both parties alike was a classic case of what economists call comparative advantage.25

Finally, there were the wartime shortages of dyestuffs and medicines of German manufacture which were directly caused by the Allied naval blockade, but for which the Germans were expected to carry the blame.26

A bill for the selective abolition of chemical product patents, and to provide immunity for United States citizens who would otherwise have been liable for the infringement of chemical patents which were only being worked by importation, or not at all, was introduced by Congressman Calvin de Witt Paige in 1915,27 but failed to progress. Moreover, the Germans had covered their position in advance with the bilateral Bacon-Bernstorff Treaty of February 23, 1909, which prohibited discrimination (as regarded sanctions for non-working) on grounds of nationality, and provided that for the purposes of compulsory licensing, etc. manufacture in the exporting country (typically Germany) would count as manufacture in the importing country (the United States).28 There was a separate attempt to suspend patent protection for the important anti-syphilitic drug, Salvarsan, once war had been declared.29

The Alien Property Custodian

The office of Alien Property Custodian was created under the Trading with the Enemy Act, of October 6, 1917, and Mitchell Palmer was immediately appointed as Custodian. It might easily

25 It is so treated by Wilkins, “German Chemical Firms” in The German Chemical Industry, 2000. The Germans excelled in organic chemistry, so why should U.S. businesses play catch-up, when there were plenty of other opportunities which suited them better? See also the contemporary opinion of Arthur D Little, below, at fn.162.

26 See, e.g. William Macomber, “The War and our Patent Laws” (1916) Yale Law Journal 396.

27 As HB-11,967, 64th Congress, 1st Session. See Robert H. Parkinson et al “Report of the Committee on Patent, Trademark and Copyright Law” (1916) 2 American Bar Association Journal 580, 595.

28 Convention between the United States and Germany concerning Patents, (February 23, 1909; U.S. Treaty Series 531). For the text of the treaty, see (1909) 3 American Journal of International Law (Supplement) 277-8. The treaty was considered to have lapsed with the U.S. declaration of war. For further background, see “German Patent Machinations”, Haynes, American Chemical Industry, 1945, Volume III, Appendix LI, p.481.

29 A Bill to that effect was introduced by Senator Knute Nelson of Minnesota (S. 2178, 65th Congress, 1st session); noted (1917) 3 American Bar Journal 504. See also “Want Salvarsan Patent Suspended”, New York Times, June 1, 1917. The issue became moot with the passing of the Trading with the Enemy Act, with its comprehensive licensing provisions, but supplies of Salvarsan, and its price, remained very much a live issue.

11 The great pharmaceutical patent robbery be supposed that this was essentially an old-fashioned trust lawyer’s sinecure, rather than a suitable posting for an active and ambitious politician. After all, was not the Custodian simply a kind of public trustee, in whom enemy property was vested during the war, for ultimate restoration to its owners after the cessation of hostilities? Initially Palmer might have agreed, at least in public.30

Actual procedure was that once enemy property had been identified, it was sequestered (but not confiscated), valued, and held on a separate trust.31 The Custodian might also become involved in running the business, or even take it under his control, depending on the level of German ownership, and the loyalties of the management.32 To that extent, the work of the Custodian had not been significantly different from what had become conventional practice in war. The convention remained, that states made war against one another, not against one another’s citizens, so that custodianship was no more than a temporary arrangement made necessary by the exigencies of wartime, which was to be unscrambled by restoring the property to its former owners as soon as hostilities ceased.33 Selling any of the property under custodianship was permitted only when it was perishable, or where the rights of the owner would be frustrated if it was held indefinitely.

As of December 5, 1918, over 32,000 separate reports of enemy property had been received. After investigation, the property of each enemy person was treated as a separate trust, and over 29,000 such trusts were being administered. The trusts which had been valued amounted to over $500 million, which was expected to rise to around $800 million when all investigations were completed. To administer all these assets, the Office had a staff of nearly 600 at its Washington headquarters and New York branch, with others elsewhere.34

30 A. Mitchell Palmer, “The Great Work of the Alien Property Custodian” (1919) American Law Review 43. This was reprinted from an address to the New York City Bar Association, on December 10, 1918.

31 Palmer, “Great Work” (1919) American Law Review 43, 45.

32 Palmer, “Germany’s Industrial Army” (1918) 87 Central Law Journal, 61.

33 See Julius H. Cohen “The Obligation of the United States to Return Enemy Alien Property” (1921) 21 Columbia Law Review 666; Carl Zollmann, “The Return of Property by the Alien Property Custodian” (1922) 21 Michigan Law Review 277; Edwin M. Borchard, “Editorial: Enemy Private Property” (1924) 18 American Journal of International Law 523; Rex M. Potterf, “Treatment of Alien Property in War Time and After by the United States of America” (1927) 2 Indiana Law Journal, 453.

34 Palmer, “Great Work” (1919) American Law Review 43, 45.

12 Christopher Wadlow

Patents (as well as trade marks and copyrights) were dealt with separately in the Trading with the Enemy Act.35 There was initially no provision in the Act for them to be seized, valued, held on trust, or sold in any circumstances. However, fears of the consequences of infringing German-owned patents might have inhibited the war effort, and the Act authorised the Federal Trade Commission (not the Custodian) to grant such licences as were necessary, at a flat royalty rate of 5%. The royalties were to be held on trust for the owner until after the War, with the possibility after the end of the War of the licence being retrospectively cancelled, or the royalty rate revised.36

The Custodian aspires to greatness

With effect from March, 1918, Palmer set out to change the nominally passive nature of his role. He proposed to arm himself with powers to confiscate and sell outright the property under his custodianship, and to do so with the primary aims of assisting the United States’ war effort, and discomforting the German economy both during and after the hostilities. The sale price of the property would in principle still be held on trust for the former owners, but their rights and interests would be overreached, and would count for nothing in deciding whether and when to sell, and if so to whom, and on what terms.37

A first amending Act was adopted at Palmer’s urging on March 28, 1918, which allowed the sale of enemy property, after valuation, though only to American citizens, and normally only by public auction.38 To Palmer’s disappointment, the amendment to the Trading with the Enemy

35 See Thomas Ewing, “The ‘Trading with the Enemy Act’ in Relation to Patents, Trademarks and Copyrights” (1917) 6 Georgetown Law Journal 4.

36 Section 10(f) of the Trading with the Enemy Act provided that the owner of the licensed patent had to sue to recover the accumulated royalties within one year after the end of hostilities, i.e. July 2, 1921. The existence of over a hundred such suits by the time the limitation period expired in 1922, half of them involving the Chemical Foundation, was one of the factors precipitating the Government’s 1922 lawsuit seeking to have the sale to the Chemical Foundation set aside. See Steen, “Patents, Patriotism” (2001) 92 Isis 91,102.

37 Palmer, “Germany’s Industrial Army” (1918) 87 Central Law Journal, 61; Palmer, “Great Work” (1919) American Law Review 43, 60.

38 This amendment, and that of November 1918, went through Congress tagged onto emergency revenue bills. Even so, Senate rejected Palmer’s attempt to give himself unrestricted powers to dispose of property by private sale. Palmer did discuss the March amendment, at least, very fully with President Wilson, who was initially reluctant to approve it. Palmer also spent an hour discussing the proposed sale to the Chemical Foundation with Wilson on March 3, 1919, during a break from the peace negotiations in which Wilson briefly returned to America. U.S. v Chemical Foundation (1925) 5 F.2d. 191, 202; Coben, Mitchell Palmer, 1963, pp.137-138, 148. This was also the occasion on which Palmer obtained Wilson’s consent for Garvan to replace him as Custodian.

13 The great pharmaceutical patent robbery

Act was interpreted by the Justice Department so as not to authorise the confiscation and sale of patents, trade marks, or copyrights, on the basis that these were subject to the special regime of s.10 of the principal Act, and so were not technically “enemy property” at all. Since many German-owned businesses would have been valueless if sold without their intellectual property assets, and especially if the latter had reverted to the former German owners when the war ended, a second amending Act was passed on November 4, 1918, barely a week before the Armistice, permitting these assets too to be confiscated and sold.39

Though the Armistice had by now come into effect, Palmer acted to confiscate the remaining assets of the German chemical industry which had now come within his jurisdiction, and to sell them without waiting for the outcome of the peace negotiations which would formally end the state of war.

The first of these German-owned businesses to be sold off was Bayer, which had an important manufacturing facility at Rensselaer, opposite Albany on the upper Hudson River. There were five bidders, and the Bayer business, its plant and premises, along with 1,200 patents and the BAYER and ASPIRIN names and trademarks, were sold to Sterling Drug for $5.3 million. Sterling was only interested in the medical side of the business, and immediately sold the dyestuffs business, part of the plant, and the relevant parts of the patent portfolio to another company, Grasselli, for $2.5 million. Other German chemical companies which had their premises and inventory seized and put up for sale were Merck and Heyden.40 These three, however, were relatively unusual in having significant manufacturing operations in the United States,41 as did Bosch Magneto, which was also seized and sold off around this time.42 For the most part, though, the German chemical industry had preferred to manufacture at home, and export its finished products through agents.

Setting up the Chemical Foundation

To return to the chemical patents, the problem as it presented itself in 1918 and 1919 was a complicated one. Once the possibility of returning the patents to their original owners after the War had been ruled out on political grounds, the options were really rather limited, especially

39 Palmer, “Great Work” (1919) American Law Review 43, 58-59; John E. Roe, “War Measures, the Alien Property Custodian, and Patents)” (1943) 25 Journal of the Patent Office Society 692.

40 Steen, “Confiscated Commerce” (1995) History and Technology 261, 271.

41 Steen, “Confiscated Commerce” (1995) History and Technology 261, 265.

42 See fn.71 below.

14 Christopher Wadlow as American patents of the time did not have to be renewed from year to year, and would not quietly disappear if ignored. The sale of Bayer’s business to Sterling had been a commercial success, but Bayer’s American business had been sold as a going concern, and the ease with which it had found a purchaser was not necessarily a reliable precedent for the sale of bundles of patents on their own. Moreover, to the extent that Bayer had formerly enjoyed a monopoly, then that monopoly had simply been transferred from German, into American, hands.43 From the point of view of trade customers, consumers and competitors, it was not an entirely helpful precedent.

So what was to happen to the German patents which remained in the Custodian’s possession after the sale of Bayer? The November 1918 amendment to the Trading with the Enemy Act had subjected the patents to the same regime as had applied to other kinds of enemy property since March 1918, and the latter allowed the President to waive the statutory requirement for a public sale by auction, if that was in the public interest. When President Wilson had sailed to Europe for the Versailles Peace Conference he had delegated this power to the the acting Secretary of State, Frank L. Polk, and Polk, acting on behalf of the absent President, now agreed to waive the normal requirement for valuation, and to approve a private, unadvertised, sale to the Chemical Foundation, at a consideration which was arbitrary, if not actually nominal. As Palmer himself explained:44

“These patents, as had been already indicated, formed a colossal obstacle to the development of the American dyestuff industry. Evidently they had not been taken out with any intention of manufacturing in this country or from any fear of American manufacture, which the Germans apparently thought could not be successfully carried on under conditions prevailing in this country in regard to costs and to the supply of technicians and skilled labor. Upon consideration, however, it seemed that these patents offered a possible solution for the problem, hitherto unsolvable, of protecting the new American dye industry against German competition after the war. If they were not taken out in order to prevent American competition they must have been obtained as a weapon against competing imports. If they were sufficient to stop importation of competing Swiss, French, and English dyes, they would presumably serve, in American hands, to stop the importation of German dyes. This was particularly probable in the case of the product patents, since most of the coal-tar dyestuffs are definite chemical combinations to which a product patent is entirely applicable. The idea was accordingly conceived that if the German chemical patents could be placed in the hands of any American institution strong enough to protect them, a real

43 Palmer reported that he was flooded with complaints on this score. Coben, Mitchell Palmer, 1963, p.148. One reason for the complaints was that Sterling itself was suspected of being German- controlled, wrongly, as it turned out.

44 Palmer, “Report” (1919) 1 Journal of the Patent Office Society 497, 506.

15 The great pharmaceutical patent robbery

obstacle might be opposed to German importation after the war, and at the same time the American industry might be freed from the prohibition enforced by the patents against the manufacture of the most valuable dyestuffs. Accordingly, these considerations were laid before various associations of chemical manufacturers, notably the Dye Institute and the American Manufacturing Chemists Association. The suggestion was met with an instantaneous and enthusiastic approval, and as a result a corporation has been organized to be known as the Chemical Foundation (Inc.), in which practically every important American manufacturer will be a stockholder, the purpose of which is to acquire by purchase these German patents and to hold them as a trustee for American industry ….”

Polk actually made two orders, one dated February 26, 1919, and the other dated April 5, 1919, which between them authorised the Custodian to sell the patents to the Foundation, at a private sale and without advertisement, upon such terms and conditions as the Custodian thought proper. Pursuant to these orders, on April 10, 1919, the Custodian assigned about 4,500 formerly German patents to the Foundation,45 for a consideration of $250,000.46

The orders contained a formal statement of the reasons for why these arrangements for the sale were considered to be in the public interest.47 Even so, it had to be admitted that the sale of the patents to the Chemical Foundation was to some extent the least of several evils:48

“In 1922, Garvan explained to the Senate that there had been three basic alternatives open to the government. First, it could follow the British model and retain the patents, afterwards throwing them open to public use. Second, the [Alien Property Custodian]

45 The patents were chosen by a team of patent agents seconded from Du Pont and General Aniline, who also paid for the exercise. Steen, “Confiscated Commerce” (1995) History and Technology 261, 273-274; U.S. v Chemical Foundation (1925) 5 F.2d. 191, 195. According to the same source, the Foundation later refunded the cost.

46 Subsequently, more patents were assigned, making the total number 4,764 at the formal end of the War in 1921, and the total consideration $271,850. Steen, “Patents, Patriotism” (2001) 92 Isis 91, 100. Writing in 1945, Haynes gives a figure of 4,923 patents in all: Haynes, American Chemical Industry, 1945, Volume III, Appendix LII, p.483. At least one patent was voluntarily assigned to the Foundation by its inventor: Haynes, ibid, p.105 at fn.73, but this was rare, if not unique. For simplicity, the figures of 4,500 patents and $250,000 will be taken as sufficiently precise for this article. Likewise, no separate mention will be made of the 874 trade marks and 492 copyrights assigned to the Foundation (Steen, ibid).

47 See the judgment of the Supreme Court in U.S. v Chemical Foundation (1926) 272 U.S. 1, 8 (delivered by Justice Butler). The decision to set up the Foundation was justified at greater length in A. Mitchell Palmer and Francis P. Garvan, Aims and Purposes of the Chemical Foundation, Incorporated: and the Reasons for its Organization (New York: De Vinne Press, 1919). This was assembled from Palmer’s official Report to Congress, above, fn.18, and a speech by Garvan to the National Cotton Makers’ Association, above, fn.8, with the official Prospectus for the Foundation as an annex.

48 Declan O’Reilly, “Vesting GAF Corporation: The Roosevelt Administration’s Decision to Americanise IG Farben’s American Affiliates in World War II” (2006) 22 History and Technology 153, 158-159.

16 Christopher Wadlow

could dispose of them at public auction. This, of course, left unresolved the possibility of monopoly because it would be impracticable to sell the patents singly. Third, the Federal Trade Commission could license them: at the war’s conclusion, such licences would be deemed perpetual and subject to whatever royalty payment the Germans agreed to. Garvan rejected the first and last of these three alternatives on political grounds; clearly they would have involved continuing irksome government intervention in industry. ... Rather than sell the remaining seized patents publicly and risk them passing to US monopolists Garvan decided to sell them privately to a specially incorporated, semi- public, company called the Chemical Foundation. Given the political climate at the war’s end it was by no means certain that Palmer and Garvan’s ambitious scheme would achieve fruition.”

Finally, the President made an Executive Order dated February 13, 1920, which ratified of all the earlier transactions, and removed some marginal doubts about the validity of certain assignments of claims for damages and royalties.

Even after the sale to the Chemical Foundation, some 5,000 or more assorted enemy patents remained in the Custodian’s hands. His (partial) solution was to issue a blanket license, dated December 20, 1920, by which he granted the United States Government a non-exclusive license under all the patents which were otherwise undisposed of, in consideration of a one-off payment of $100,000. This license also released the Government from any claims for damages for past infringement in respect of the same patents.49

Palmer’s exploitation of the Custodianship

In other forced sales of enemy property, Palmer, though not obviously venal himself, had approved undervalued sales which were certainly contrived or connived in by corrupt subordinates or colleagues.50 For Palmer himself, though, pecuniary gain was irrelevant, and everything he did is entirely explicable in terms of personal political ambition. Palmer had entered the Government in 1917 still under a cloud of suspicion as a doubtfully-repentant pacifist—which public opinion of the time readily equated with outright treason—but he had swiftly and effectively reinvented himself as “the fighting Quaker”, turning the unpromising office of Alien Property Custodian into a personal power base, as well as a pulpit from which he constantly denounced and harried the enemy at home and abroad, greatly boosting his own

49 Alexander Holtzoff, “Enemy Patents in the United States” (1932) 26 American Journal of International Law 272, 273; Roe, “War Measures” (1943) 25 Journal of the Patent Office Society 692.

50 Coben, Mitchell Palmer, 1963, pp.138-147; see also at fn.70, below.

17 The great pharmaceutical patent robbery credentials for higher office all the while.51 Not for Palmer the mere passive role of custodian- as-trustee: he thundered, he struck, and the legions of the enemy quailed and ran. During his cross-examination at the Delaware trial,52 as reported by the New York Times, Palmer was ready with his answer to the question on the recruiting poster: “Daddy, what did YOU do in the Great War?”53

“It was the darkest hour of the War. ... It was about the time that General Haig had said that Great Britain was fighting with its back to the wall. ... the Secretary of War, on returning from the front told a party of twenty men at the house of Hugh Wallace ... that it was the general opinion that Paris was about to fall and that the Channel ports would be taken. ...

I asked the President to let me go down to the Congress and ask Congress to hit the Germans where it would hurt, to strike a blow from which they knew they could never recover, and let them know right now, as an act of war that we proposed to Americanize this property.”54

Even Palmer’s undoubted tolerance of corruption in his department seems to have been a case of business as usual, according to the political conventions of the time.55 Though no millionaire, his successful legal practice had made him more than adequately wealthy in his own right, and his position as Custodian gave him plenty of opportunities to pay off old political debts and favours, and to build a credit balance of obligations in his own favour by greasing the palms of those who could help or hinder his presidential ambitions.56 It was for practices such as these that Palmer was denounced by the crusading lawyer and trust-buster

51 Coben, Mitchell Palmer, 1963, pp.131-132, 137.

52 i.e. the trial of the suit by the Government to recover the patents from the Foundation, below, at fn.74.

53 “Palmer says Wilson had Patents Sold—Asserts Plan was Adopted as Blow to Germany when Fall of Paris was Feared”, New York Times, June 29, 1923.

54 If the “blow from which [the Germans] could never recover” was the confiscation of the very assets subsequently transferred to the Chemical Foundation, then Palmer was as incompetent as any World War I general. He had to admit (New York Times, ibid) that the March 1918 amendments had failed to give him the power to confiscate or sell any of the German patents at all, which is why he had to go back to Congress in November 1918, by which time the Germans were suing for peace. Palmer’s timing is also awry. He had originally requested his extended powers on March 7, 1918, all of two weeks before the start of the German Spring Offensive on March 21.

55 Coben, Mitchell Palmer, 1963, pp.132 et seq; 138-147. As Attorney-General, Palmer continued to sell Government offices in his power in return for support, ibid, pages 247-248.

56 Coben, Mitchell Palmer, 1963, pp.132 et seq.

18 Christopher Wadlow

Sam Untermyer in a speech in January 1920 calling for an inquiry into his (and Garvan’s) terms of office:57

“The vast powers and patronage of those great officers are said to have been used, and it is the general belief that they were incidentally used, to build up a political machine which fortunately failed of its purpose. … Fortunes in patronage are believed to have been squandered among favorites in the form of lawyers and directors’ fees taken out of the pockets of citizens and aliens whose properties were seized or unfortunately came under the control of the Government. ... The policy of confiscation involved in the Alien Property Act was contrary to this country’s best traditions and in violation of treaty obligations, while the manner of executing the laws was medieval and brutal.”

This kind of patronage may have been one of Palmer’s lesser failings, though, since his biographer comments:58

“Most of the criticism that centered on Palmer’s administration of the Alien Property Custodian’s office arose not from his appointments or the fees allowed, but from his sales of enemy property. To some it seemed that Palmer was passing around a gigantic gravy bowl to his friends and political associates.”

However, so far as the establishment of the Chemical Foundation was concerned, and the terms of the sale, these probably reflected Palmer’s (and Garvan’s) perfectly genuine belief that among the limited options open to them, this was the best model of organisation for the industry in the immediate post-war years.59 If not, then Palmer’s sole guide seems to have been his populism: the public were still intensely suspicious of “trusts”, so anything of the sort had to be avoided, at least for the sake of appearances. The public had no idea how much the patents were worth, and they neither knew nor cared that none of the price paid was going to the former owners, but it was easy enough to present the sale of the patents to the Foundation for $250,000 as a devastating blow to the Enemy and a corresponding victory for Uncle Sam, and if the public did not spontaneously see it that way, then Palmer was not slow in explaining it in those terms.

Reactions to the sale

The sale of the patents to the Chemical Foundation attracted mixed responses. On one view, the transfer of the patents to the Chemical Foundation was a brilliant coup de main, which set the American chemical industry on the path to independence from Germany, and allowed it to

57 “Untermyer Calls for Palmer Enquiry”, New York Times, January 19, 1921.

58 Coben, Mitchell Palmer, 1963, pp.135-136.

59 Coben, Mitchell Palmer, 1963, pp.147-149.

19 The great pharmaceutical patent robbery compete internationally for the first time. On the other hand, antagonisms were raised—and once raised they were not ameliorated by Francis Garvan’s abrasive personality. Thomas Ferguson identifies some of the industrial and political confrontations which the formation of the Chemical Foundation gave rise to:60

“Though the peace agreement ... acknowledged the U.S. right to the patents, a Homeric struggle quickly broke out over what was to be done with them. Internationalists wanted to return at least some of them so that the Germans could build up an export capacity and pay off war debts. The chemical industry wanted to keep them. At first, the chemical industry prevailed. The Chemical Foundation was established to hold and license the patents. DuPont held about one-third of the stock, and the rest was held by other concerns. The foundation became the battleground for internationalist and protectionist forces. German chemical company agents worked with American bankers and government officials, including senators and President Harding himself, to get the patents back. To keep track of these efforts, the Chemical Foundation’s able head, Francis P. Garvan, engaged private detectives. The surviving reports from these men, who were probably former F.B.I. agents, can be partially verified from other sources and vividly testify to the tensions that quickly developed. The banks and their allies could not overcome protectionist opposition. Former Attorney General Daugherty was indicted for taking a bribe to help return German assets. J. Edgar Hoover, a close political ally of Chemical Foundation attorney A. Mitchell Palmer and Garvan, was appointed, and removed suspected German agents from the Federal Bureau of Investigation. And the government lost the suit it brought to force the Chemical Foundation to return the patents—in Wilmington, Delaware.”

The Chemical Foundation litigation

Now that’s what I call service

The scene is a dinner for four at the Ritz Carlton Hotel in New York, and the date is September, 30, 1921. Prohibition is in force, but one would hardly think so, to see the Champagne celebrations of Richard Merton and his three guests.61 Merton, a multi-millionaire businessman, had come to America to lodge a claim for compensation for the confiscation of 49% of the the share capital of the American Metal Company, which had been seized (and subsequently sold) by the Custodian on the basis that its ultimate owners, Metallgesellschaft

60 Thomas Ferguson, “From Normalcy to New Deal: Industrial Structure, Party Competition, and American Public Policy in the Great Depression” (1984) 38 International Organisation 41, 74; also published as part of Thomas Ferguson, Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems (Chicago: University of Chicago Press, 2005). Ferguson’s conclusions are based on papers from the Chemical Foundation’s archives, at the University of Wyoming.

61 What follows is adapted from the exceptionally detailed and circumstantial account in Joseph Borkin, The Crime and Punishment of IG Farben (New York: Free Press, 1978), pp.169 et seq.

20 Christopher Wadlow and Metallbank, were German. Not so, argued Merton. True, the shares had formerly been owned by the German companies, but the real owner was a neutral Swiss company called Société Suisse pour Valeurs de Métaux, which Merton’s family owned, and which happened to have become the beneficial owner of the shares in American Metal by an improbable (but perfectly regular) sequence of oral contracts which had fortuitously divested the former German owners of their entire beneficial interest, a month or two before America declared war. (The Department of Justice had previously opined, on a hypothetical no-names basis, that a version of events in which the shares had vested in Société Suisse after the declaration of war, but before their seizure by the Custodian, was unlikely to result in a successful claim).62

The guest of honour at this dinner was none other than the Alien Property Custodian himself, who ceremoniously handed over to Merton $6.5 million in U.S. Treasury checks and $514,000 worth of Liberty Bonds in full and final satisfaction of the latter’s claim. For the claim, which Merton had only lodged on September 20, had been approved in three days flat, despite its inherent complexity and transparent implausibility. The dinner, and the gift of a gold cigarette case, were Merton’s way of saying “thank-you”.63

But by now the Custodian was neither Palmer nor Garvan, for the Wilson administration had been replaced by that of Warren G. Harding, and the incoming president had awarded the vacant office to one of his own supporters. The new Custodian was Colonel Thomas W. Miller, a former Republican Congressman who had lost his seat in the 1916 election, and had gone to fight in the trenches. If the $200 cigarette case was a spontaneous gesture of gratitude, though, the same could hardly be said of the $50,000 which found its way into Miller’s bank account through the good offices of the remaining two guests at that dinner, namely John T. King, a Republican national committeeman and intimate friend of the newly-appointed Attorney- General, Harry M. Daugherty, and Jess (or Jesse) W. Smith, who combined a successful career as a bootlegger with acting as Daugherty’s gofer and bag-man. It was King (a strident abolitionist in public) who had supplied the Champagne.64

In all, King had arranged for Merton to pay $50,000 up front, plus a success fee of five per cent of the amount recovered, provided the claim was approved within two-and-a-half months, or

62 Borkin, Crime and Punishment, 1978, pp.169-170.

63 Borkin, Crime and Punishment, 1978, p.171.

64 Borkin, Crime and Punishment, 1978, p.171.

21 The great pharmaceutical patent robbery half that if it took a month longer.65 The shares in American Metal had been sold at auction for $5.5 million, to which about $1.5 had to be added for interest and dividends, making a round $7 million in all. At five per cent, that meant King had another $350,000 from Merton to distribute, of which $50,000 went to Miller, for services rendered.66 For those same services Miller would be convicted in 1927 for conspiracy to defraud, and sentenced to 18 months in custody.67 Daugherty, who as Miller’s boss almost certainly received the lion’s share of the balance—though not necessarily for his own exclusive enjoyment—was put on trial with Miller. But between 1921 and 1926 King had conveniently died of pneumonia, Smith had even more conveniently committed suicide, and Daugherty himself had gone to extraordinary lengths to destroy all the papers relevant to the case, even including the original ledgers of his bank accounts. Daugherty’s refusal to testify in his own defence entered legal history, but two successive juries failed to agree on a verdict, so he was acquitted.68

A whiff of scandal

A whiff of scandal was part of the way of life for successive holders of the Office of Alien Property Custodian, though only Merton actually served time for corruption. The Custodian’s work, as Palmer and his successors understood it, involved making sure that the alien property under his control was administered in the best interests of the United States’ war effort. This required active management of the assets, rather than mere passive trusteeship, and it involved the creation of a huge administrative staff.69 Some degree of mismanagement was probably inevitable in view of the sheer size of the business empire under the Custodian’s control, and the circumstances in which he had been given command of it. However, there was more than mere mismanagement to complain of under Palmer’s administration. Palmer’s director of sales, Joe Guffey, and his deputy in the Philippine Islands, Francis Burton Harrison, were both guilty of serious and persistent acts of embezzlement, which Palmer overlooked until they threatened to become public.70 Palmer was also personally involved in the rigged sale by auction of the

65 Borkin, Crime and Punishment, 1978, p.170.

66 Borkin, Crime and Punishment, 1978, p.171.

67 Borkin, Crime and Punishment, 1978, p.178.

68 Borkin, Crime and Punishment, 1978, pp.174-179.

69 See above, fn.34.

70 Coben, Mitchell Palmer, 1963, pp.140-142.

22 Christopher Wadlow business of Bosch Magneto, which resulted in its being sold to political associates of his for about half its true value.71

These instances apart, Palmer’s exercise of the Custodian’s powers was generally characterised by highhandedness, a lack of concern for legalities, and a tendency to play to the gallery. The mechanics of custodianship, even if carried out with kid gloves, would have aggrieved the many innocent bystanders who must have been drawn into its labyrinth unawares. But kid gloves were not part of Palmer’s working wardrobe, still less Garvan’s, and the sale of the patents to the Chemical Foundation was only one of a number of grievances.72 Ironically, the Chemical Foundation sale was one of those in which Palmer was least at fault, at least in terms of any personal financial impropriety.73

United States v the Chemical Foundation, Inc

The body which eventually took the allegations against the Foundation most seriously was the Federal Government itself. On September 8, 1922 the Government filed suit against the Chemical Foundation in the District Court of Delaware, demanding the return of the patents.74 As later summarised in the Supreme Court, the Government’s basic allegations were that:75

“[A] number of domestic manufacturers as a result of war conditions had been able to combine and monopolize certain chemical industries in this country, and, fearing that at the end of the war German competition would destroy the monopoly, they conspired to bring about transfers and sales of the patents at nominal prices to themselves or to a corporation controlled by them; that the patents so obtained would control the industries in question and perpetuate the monopoly; and that the sales were procured through the fraudulent deception of the President, the Alien Property Custodian, and other officials.”

71 Coben, Mitchell Palmer, 1963, pp.143-147. Palmer was charged over this affair in 1930, but the prosecution could not produce sufficient evidence to secure an indictment.

72 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 102.

73 One response of the Foundation was to publish a pamphlet under the title Legal Memoranda relating to Enemy Patents sold by the Alien Property Custodian to the Chemical Foundation, Inc, (New York: Chemical Foundation, 1922). While the collection of primary materials is useful, the commentary is far from impartial.

74 The text of a letter from President Harding to the Alien Property Custodian (Colonel Thomas W Miller) directing him to demand the return of the patents from the Foundation is printed in Haynes, American Chemical Industry, 1945, volume III, Appendix LVI.

75 U.S. v Chemical Foundation (1926) 272 U.S. 1 at page 4; See also Steen, “Patents, Patriotism” (2001) 92 Isis 91, 103-105.

23 The great pharmaceutical patent robbery

To make these allegations stick, the Government set itself to prove that the sale of the patents to the Foundation was the result of a conspiracy between Francis Garvan and the chemical industry, which had been initiated by Maurice R. Poucher (a former BASF man who had defected to du Pont in 1916) while Garvan was Director of the Custodian’s New York Office; that Garvan and his advisors had placed themselves in positions where their duties and interests conflicted; that Congress and the President had been misled about the plans to sell the patents to the Foundation; and that the sale price was a gross undervaluation.76

The trial opened at Wilmington on June, 4, 1923 before Judge Hugh M. Morris, a Democrat and a recent Wilson appointee to the bench. It lasted seven weeks, over forty witnesses testified, the closing speeches took five days, the written briefs amounted to 2,000 pages, and the total record to 9,000 pages.77 Oral arguments were finally concluded on October 12, and judgment was delivered on January 3, 1924.78 Judge Morris found for the Chemical Foundation on every point, and dismissed the suit. According to the New York Times, the result was a foregone conclusion for anyone who had followed the trial;79 and in any event, the Government had long since lost the sympathy of the public and the press.80

So far as the allegations of conspiracy were concerned, the Judge was quite indignant that any such charges had ever been brought at all:81

“Notwithstanding the generality of the allegations and the unlimited opportunity afforded the plaintiff to support them by evidence, the charges of deception and conspiracy have failed utterly.”

76 The best summary of the Government’s version of events is probably that given by Judge Wooley on appeal in U.S. v Chemical Foundation (1925) 5 F.2d. 191, 193-196 (Third Circuit Court of Appeals). This needs to be compared to the “official version’, largely accepted by the court, at 196-204.

77 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 103; U.S. v Chemical Foundation (1924) 294 Fed. 300, 335 (trial); U.S. v Chemical Foundation (1925) 5 F.2d. 191, 194 (Third Circuit Court of Appeals).

78 U.S. v Chemical Foundation (1924) 294 Fed. 300 (District Court, Delaware). For some well- directed criticisms of the judgment, see Comment (anon): “The Sale of German Owned Patents under the Trading with the Enemy Act as Amended” (1924) 33 Yale Law Journal 760.

79 “The Chemical Foundation Suit”, New York Times, January 5, 1924.

80 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 117. The Harding administration was, of course, well on its way to becoming a byword for corruption, with Daugherty himself enmired in every kind of scandal. By the end of 1923 Daugherty was having to fend off calls for the investigation of his own department, which culminated in the exposure of the Veterans’ Bureau and Teapot Dome scandals, and his own enforced resignation in March 1924.

81 U.S. v Chemical Foundation (1924) 294 Fed. 300, 332.

24 Christopher Wadlow

The Government appealed to the Court of Appeal for the Third Circuit,82 and from there to the Supreme Court,83 but with no greater success.

A corporation crowned with righteousness

With hindsight, what is perhaps rather more remarkable is the extent (and the degree) to which the Judge sided with the defendants on every point.84 The recitals of supposed fact at pages 308 to 311 of the judgement, or at 318 to 320, are indistinguishable from the propaganda materials from which they have obviously been reconstituted, and no more credible. The encomium for the Foundation and its officers which comes between pages 327 and 330 is so obsequious as to be embarrassing, and, in one instance, blasphemous.85 There was not a single issue of fact or law on which the Government made any headway, not even the valuation of the patents.

On some highly contentious issues one might be left with the impression that the Government had not actually bothered to call any evidence at all. For example, one of the Foundation’s tropes was that German patents were deliberately drafted so as to make it impossible to perform their instructions successfully. (This was relevant to rebut the charge that the patents were undervalued, and to support the proposition that the Germans had unfairly dominated the industry prior to 1914). To help resolve his issue, Judge Morris had intervened and personally directed that one of the Government’s witnesses, a young chemist called Louis Freedman, should attempt to prepare an analgesic called Cincophen by strictly following the instructions given in the patent.86 The resulting experiments were hurriedly performed by Freedman at nearby Swarthmore College over a weekend towards the end of the oral hearings, and provided

82 U.S. v Chemical Foundation (1925) 5 F.2d. 191 (Third Circuit Court of Appeals). The Circuit Court dealt with the alleged conspiracy at greater length, but was equally dismissive. Noting that Palmer had included full details of the proposed sale in his February 1919 Report to Congress, the court acidly commented: “... such an act is unusual for one engaged in a conspiracy against the Government.” ibid. at p.210. One reason for the failure of the Government’s case was that they could never make up their mind whether to cast Palmer as the innocent dupe of Garvan and du Pont, or as one of the leaders of the conspiracy.

83 U.S. v Chemical Foundation (1926) 272 U.S. 1; 47 S.Ct. 1; 71 L.Ed. 131.

84 U.S. v Chemical Foundation (1924) 294 Fed. 300, 308-311, 318-320, 327-330.

85 For the allusion to II Timothy iv 7: “The defendant has kept the faith.” U.S. v Chemical Foundation (1924) 294 Fed. 300, 328 (four lines from bottom of page).

86 “Court Orders Test of German Patent”, New York Times, July 22, 1923; Steen, “Patents, Patriotism” (2001) 92 Isis 91-92 and 114-115.

25 The great pharmaceutical patent robbery what has been called “a theatrical finale to the trial”.87 As it turned out, the results could be used to support either party’s case. Freedman had indeed produced Cincophen, but not very much of it, and it was not very pure. On the other hand, he had been rushed and ill-prepared. So which side did Judge Morris decide had done better from this experiment, which he had personally ordered to break the evidential deadlock? Your guess is as good as mine, as he did not refer to it in his judgment at all, but took refuge in hearsay and generalities.

The international settlement and arbitration

There was one final round of litigation arising from the circumstances in which the Chemical Foundation was set up, but which did not directly involve it as a party.88 The Harding, Coolidge, and Hoover administrations were all concerned with the legal and practical implications of the uncompensated confiscation of German property during and after the War, and sought to regularise the position. The Versailles Peace Treaty (Article 306) had provided that the Allies could keep all the intellectual property expropriated under wartime powers, and that compensation to the former owners should be paid by the German Government, and set off against the latter’s liabilities to make reparations. Needless to say this never happened, and in any event the Senate refused to ratify the Versailles Treaty.

The non-ratification of the Versailles Treaty left the United States with the problem that it was still technically at war with Germany, even after its allies had agreed terms of peace. Three years after the Armistice, a peace treaty was finally concluded between Germany and the United States, which provided for the United States to keep the seized property, but made no provision for ultimate restoration or compensation.89 In 1925, the German Ambassador renewed the claims for compensation, but was told that the matter depended on Congressional action.

87 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 92.

88 For the period 1923-28 see Steen, “Patents, Patriotism” (2001) 92 Isis 91, 119 et seq. For the Section 10(f) lawsuits in respect of royalties accrued under wartime FTC licences, above, fn.16, see, Steen, ibid., and Farbwerke Vormals Meister Lucius & Bruning v Chemical Foundation and others, 283 U.S. 152, 51 S.Ct. 403, 75 L.Ed. 919 (1931). This case also resulted in victory for the Chemical Foundation at all levels, and a comprehensive defeat for the former German owners. For the economic and political climate, see Steen, “German Chemicals” in The German Chemical Industry, 2000, which takes the story up to 1931; and Wilkins, “German Chemical Firms” in The German Chemical Industry, 2000, which continues into the post-World War II era.

89 See Cohen “Obligation to Return Enemy Alien Property” (1921) 21 Columbia Law Review 666; Zollmann, “Return of Property by the Alien Property Custodian” (1922) 21 Michigan Law Review 277; Borchard, “Editorial: Enemy Private Property” (1924) 18 American Journal of International Law 523; Potterf, “Alien Property in War Time” (1927) 2 Indiana Law Journal 453.

26 Christopher Wadlow

In 1928, Congress passed the Settlement of War Claims Act, which was intended to deal with all outstanding claims against the United States by German (or Austro-Hungarian) citizens, and to return any enemy property still in the hands of the Alien Property Custodian.90 The Act provided for the appointment of an Arbiter to hear three categories of claim: for the seizure of merchant ships in harbour in the United States at the outbreak of war;91 for the sale to the United States Government (for a nominal consideration) of the Sayville radio station; and in respect of:

“[A]ny patent which was licensed, assigned or sold by the Alien Property Custodian to the United States; and the use by or for the United States of any invention described in and covered by any patent seized by the Alien Property Custodian.”

Compensation was to be paid on the same basis as if the patent had been licensed, assigned or sold to the United States by an American citizen, but excluding compensation for any use by the United States between the declaration of war and the armistice. The total amount to be awarded by the Arbiter in respect of all claims was capped at $100,000,000.

In so far as the patents were concerned, the Arbiter was faced with 1,069 separate claims, involving an aggregate of about 6,000 patents. Since, in principle, each of these had to be separately valued, and bearing in mind the typical length and cost of ordinary litigation even on a single patent, it will readily be agreed that the Arbiter “was confronted with a problem which seemed gigantic and stupendous.”92

The Arbiter’s initial response was to determine several points of law of general relevance. Of these, the most important for present purposes concerned the patents assigned to the Chemical Foundation. The problem for their former owners was that the Custodian had not “licensed, assigned or sold” these patents to the United States at all, but to a private, non-Governmental company. As such, these patents fell outside the words of the 1928 statute. As a fall-back, the former proprietors argued that their claim was justiciable by the Arbiter because the Chemical Foundation had granted a blanket licence to the United States of all the patents it held, which

90 See Glenn McHugh, “Settlement of War Claims Act of 1928” (1928) 14 American Bar Association Journal 93.

91 The seizure of the merchant ships was a particularly clear violation of international law, since it contravened the express provisions of the 1907 Convention Relating to the Status of Enemy Merchant Ships at the Outbreak of Hostilities (Hague VI), Article 2. Claims not in relation to ships had to be based either on customary public international law, or on an expansive reading of Thomas Jefferson’s Prussian- American Treaty of Amity and Commerce of 1785.

92 Holtzoff, “Enemy Patents in the United States” (1932) 26 American Journal of International Law 272.

27 The great pharmaceutical patent robbery brought their claims within the terms of the statute. The Arbiter disagreed, and ruled that only direct licences from the Custodian to the United States counted. With this preliminary ruling, the former owners’ hopes of compensation came to an end, except in so far as any patents assigned to the Chemical Foundation in 1919 had previously been licensed directly to the United States.93

Of the $100 million theoretically at the Arbiter’s disposal, $5 million was awarded for the Sayville radio station and 75 associated patents, about $74 million was awarded in respect of the shipping claims, and the successful patent claims amounted to $12½ million, of which $9 million was compensation,94 and the rest interest.95 In all, the awards amounted to just short of $87 million. In fact, these claims were never fully satisfied, as the Great Depression intervened, and the necessary funds were withheld in retaliation for Germany’s default on its debt repayments to the United States.96

Valuing the Patents

The problem of expert evidence

It is widely, indeed almost unanimously, agreed that the price of $250,000 or so paid by the Chemical Foundation for those 4,500 patents was an absurd undervaluation, even assuming that more than a few of them were either invalid, or of no practical value, or both.

Certainly, the sale valuation is hard to take seriously. According to one witness, Karl Holdermann,97 the cost of filing a patent averaged $85, compared to the average of $55 at

93 ibid., 275. For the Arbiter’s decision see Edwin B. Parker, “Settlement of War Claims Act of 1928 —Administrative Decision No. I—Dealing with Patent Claims” (1929) 23 American Journal of International Law 193.

94 The successful claims included $739,000 awarded to I.G. Farben for use of its patents by the military between 1914 and 1917. This is another figure well worth comparing to the $250,000 paid by the Chemical Foundation for these patents (presumably) and many others. Steen, “Patents, Patriotism” (2001) 92 Isis 91, 120.

95 Holtzoff, “Enemy Patents in the United States” (1932) 26 American Journal of International Law 272, 279.

96 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 120 fn.69. Payments not made by June 1934 were embargoed by the Harrison Resolution of June 27, 1934, which ordered the Custodian and the Treasury to withhold payments otherwise due while Germany remained in default. According to Otto C. Sommerich, “Treatment by United States of World War I and II Patents and Copyrights” (1955) 4 American Journal of Comparative Law 587, 592, only 50% of the value of the successful claims was ever paid.

97 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 109 et seq.

28 Christopher Wadlow which the Chemical Foundation had purchased the initial 4,500 patents. Holdermann also gave evidence that in 1913 alone his firm had collected $325,000 profit on products manufactured under BASF’s dye patents and sold to the United States, and that in his opinion the Haber patents for nitrogen fixation would have carried a market value of at least $17 million in 1919.

Holdermann’s testimony was attacked as partial, but the underlying figures could not easily be ignored. Simply in its capacity as as successor in title to patents which had been licensed by the Federal Trade Commission during the War, the Foundation had collected over $1 million in royalties already paid or due, or more than four times the price received by the Government for the sale of those patents, and many others. Some of the patents and trade marks in the portfolio were for world-renowned products of enormous significance in the pharmacopeia of the times, such as those for Salvarsan and Neo-Salvarsan, the original antibiotic “magic bullets”, and the only effective treatment at the time for syphilis. Despite post-war conditions which must have made supplies scarce, and trading conditions difficult, Herman Metz98 testified that he had paid $140,000 to the Treasury from 1919 to 1922 under his FTC licenses for Salvarsan and Neo-Salvarsan. For 1913, his importing firm had sales of $380,000 for the two products, and a net profit of $150,000, rising to sales of $970,000 and profits of $430,000 in 1916. He estimated that the market price of the Salvarsan and Neo-Salvarsan patents would have been about $1 million in 1919. The patent for the local anaesthetic Novocain, another Hoechst product, would have been worth another $200,000, at a minimum. In addition, there were the three trademarks, which in Metz’s opinion were worth as much as the patents.

The Government’s problem, however, remained the difficulty of finding anyone not associated with the German industry who was both willing and competent to put a valuation on the patents which would be proof against appeals to prejudice and xenophobia,99 and Herman Metz was another witness whose evidence was dismissed as tainted. Kresel, the Foundation’s attorney, accused Metz of being an agent or catspaw under the control of Von Bernstorff, the former German ambassador, of deliberately supplying defective salvarsan to syphilitic allied soldiers, so that they died, of profiteering on supplies of the same drugs to the army and navy,

98 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 110 et seq.

99 The Chemical Foundation represented virtually the whole domestic chemical industry, and, if only for that reason, no senior American chemists could be found who were willing to testify for the Government. In addition, they may genuinely have deplored the Government’s intervention. Steen, “Patents, Patriotism” (2001) 92 Isis 91, 111. Conversely, the cream of the American chemical industry were at the disposal of the Foundation.

29 The great pharmaceutical patent robbery and of instigating the Government law suit for the ultimate benefit of Germany. None of this was remotely proven, nor even plausible, but the mud stuck.100

Sources of comparison

It is instructive to compare the selling price of the patents with the aggregate royalties received by the Chemical Foundation during its lifetime. The last of the German patents would have expired in 1936. An audit to 1941 showed that the Foundation had received about $7.5 million in royalties, and a further $1 million in damages and settlements.101 That is certainly a high return on an initial investment of $250,000, but well below the figure of $18 million mooted for just four patent families. Ironically, however, the most valuable patents turned out not to be ones relating to organic chemicals at all, but to ammonia (the Haber process102), and stainless steel.103

One should, of course, bear in mind that despite Garvan’s aggressive and hyperactive personality the Foundation did not seek to maximise its licence income. In fact, Garvan seems to have been more than willing to give away its crown jewels for nothing, if that served the wider public interest, as the following passage shows:104

“Take Salvarsan, and that is the most valuable one …. That patent in the hands of a private individual who wanted to confine the manufacture to one man and maintain the price of three dollars and a half would be worth any amount of money, because 10,000,000 syphilitics would want it. We gave it for free to the New York State Health Board, to the Massachusetts State Board of Health, and will give it free to any State

100 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 110-111. The Foundation even went to the lengths of feeding the local Associated Press reporter an entirely fictitious account of how Metz had broken down under cross-examination, and admitted to paying a German spy. ibid at page 117.

101 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 121.

102 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 121.

103 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 121. Incredibly, the Foundation even ended up with a patent (No. 1,122,011) on an X-Ray tube: Chemical Foundation v General Electric Co, 49 F.2d 697, 5 U.S.P.Q. 206, (Second Circuit, 1931).

104 Evidence of Francis Garvan to a Senate Inquiry in 1919, quoted in Potterf, “Alien Property in War Time” (1927) 2 Indiana Law Journal, 453, 468-469. The figure of 10 million syphilitics (about 10% of the population) may seem high, but it is not implausible, and syphilis was supposed to be the greatest single cause of death in the world. See also Garvan’s statement in his own defence in the article “Daugherty begins Criminal Action on German Patents”, New York Times, July 10, 1922, under the heading “Medical Phase at Issue”. Garvan claimed that his policies had resulted in there being six domestic manufacturers of Salvarsan, compared to none before the War, and that prices had fallen from $1.50 to 18 cents (for the Government), and from $3.50 to 60 cents (for individuals).

30 Christopher Wadlow

Board of Health which will equip itself to manufacture it safely. The Foundation will never get anything from them.”

Solicitude for America’s 10 million syphilitics did not inhibit the Foundation from obtaining an injunction in 1919 against the importation of arsphenamine (the generic name of Salvarsan) from sources in Europe, however.105

Licences for arsphenamine, as well as its derivatives neo-arspehanamine and sulfarsphenamine, were also available on a commercial basis, but relatively little has been published about the terms on which the Chemical Foundation actually licensed the patents in its portfolio to commercial companies. According to John Roe, who served as assistant general counsel to the Custodian when the office was revived in the Second World War:106

“Licenses granted by the Chemical Foundation were non-exclusive and non- transferable. They bore royalties at varying rates calculated on net selling price and ran for the life of the patent, but were terminable by the Foundation after notice and hearing, the decision of the trustees being final, conclusive and not reviewable.”

Fortunately, the most informative example of a licence for which we do have useful details actually relates to Salvarsan. It comes from a lawsuit by E.R. Squibb in 1937 to recover overpaid royalties under licences for neo-arsphenamine (Neo-Salvarsan) and sulfarsphenamine, at five per cent of gross sales.107 What is more interesting, however, is that Squibb were also licensed under a bundle of four patents relating to arsphenamine (Salvarsan) itself, for which the royalty rate (presumably for manufacture) was also five per cent of Squibb’s gross sales receipts, regardless of the number of patents employed. Although the patents cannot all be identified with certainty from the report, they seem to have consisted of the original patent for arsphenamine itself as an active ingredient in the form of the free base, a formulation patent for

105 Haynes, American Chemical Industry, 1945, vol III, p.262 at fn.16. See also “Industrial Notes” (1919) 11 Journal of Industrial and Engineering Chemistry 993.

106 John E. Roe, “War Measures” (1943) 25 Journal of the Patent Office Society 692, 720.

107 E.R. Squibb & Sons v Chemical Foundation, Inc 93 F. 2d. 475 (Second Circuit, 1937). Squibb miscalculated the expiry dates of the neo-arsphenamine and sulfarsphenamine patents, and as a result overpaid. The Chemical Foundation refused to pay the money back, partly on the basis that it was a charitable foundation, and had already dispensed the money in good faith, on various good causes. The court disagreed: “Charitable corporations no less than individuals should be just before they are generous.”

31 The great pharmaceutical patent robbery an ampoule, a patent for the preferred method of administration, and a patent for the water- soluble di-hydrochloride salt.108

Apart from this instance, details of actual royalty rates do not seem to be available from published sources.109 Steen reports aggregate figures for 1919-21 of royalties amounting to $700,000, including $270,000 from domestic manufacturers, and $365,000 in respect of imported dyes.110

The case for a low valuation

All the same, and before accepting either version of this patent myth in the making, we should consider the case to the contrary:111

“Prominent chemists from universities, Du Pont, Calco, and Abbott Labs testified that the German patents excluded vital information, preventing American chemists and manufacturers from producing dyes and chemicals solely from the description in them. Instead, industrial chemists were required to invest an extraordinary amount of time conducting additional research to obtain commercial chemical products supposedly covered by the patents. In no case did the manufacturers make a commercially viable product from the patents without gaining supplementary information, they testified. When asked to place a dollar figure on the patents, one witness after another agreed with Abbott’s chief chemist, Ernest H. Volwiler, that the value of the patents was ‘purely

108 The four arsphenamine licences and the one neo-arsphenamine licence were all dated June 16, 1919. The sulfarsphenamine licence was dated April 27, 1923. The di-hydrochloride salt patent is undoubtedly U.S. 1,116,398, since it is identified in the judgement by its serial number, and the expiry date, description and claim all correspond. The four arsphenamine-related licensed patents had dates of expiry which ranged from to March 7, 1928 (arsphenamine base) through December 16, 1930 (ampoule and administration) to November 10, 1931 (hydrochloride salt). Since Paul Ehrlich only confirmed the anti-syphilitic effects of arsphenamine late in 1909, and his employers Hoechst applied to patent it in Germany in 1910, this might appear to have been a more than respectable exercise in patent life cycle management (or “evergreening”), at least for the period. In fairness to both Ehrlich and Hoechst, the problems of formulating and administering arsphenamine safely and successfully were very real, and arsphenamine itself was an improvement in all respects over the original arsenical compounds for which Ehrlich had been awarded the Nobel Prize in 1908. Neo-arsphenamine and sulfarsphenamine were the results of further attempts to make administration safer and more reliable, but at some cost to efficacy.

109 Royalties of $13.50 per ton under two patents for stainless steel (or one per cent of receipts in unspecified circumstances) are mentioned in Chemical Foundation v Universal-Cyclops Steel Corp 2 F.R.D. 283, 53 U.S.P.Q. 173 (1942), but these are obviously useless as comparators when one’s main interest is in organic chemistry.

110 “Patents, Patriotism” (2001) Isis 91, 100-101. These figures come from papers filed in the Delaware lawsuit. The aggregate is consistent with newspaper reports of Garvan’s evidence, “Garvan shows Loss on Seized Patents”, New York Times, July 3, 1923, which also put the Foundation in deficit at the end of 1922 to the extent of about $150,000.

111 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 111. Salvarsan itself attracted contradictory evidence as to how easy it was to prepare from the information in the patent specification. Steen, ibid., 112-114.

32 Christopher Wadlow

nominal.’ Some credited the patents chiefly with a certain ‘nuisance value,’ functioning primarily as a means to keep German competitors out of the American market. Volwiler explained that Abbott Labs had to invest $17,000 and two and a half years of research to supplement information from the German patent in order to produce cincophen. Novocain had cost even more in time and money in cooperative research between Abbott and the University of Illinois before Abbott could bring the pharmaceutical to market.”

As Custodian, Palmer was not remotely interested in maximising the cash return on the forced sales of any of these former German-owned assets, even though it was by now accepted all round that the proceeds would go to reduce the burden on the American taxpayer, and not to reimburse the former German owners. Moreover, once the Government, or Palmer, had decided that the patents were to be sold to the Chemical Foundation on the basis that the Government would be entitled to royalty-free licences under all of them, and that ordinary licences were to be non-exclusive and available on demand, but only to American businesses, then most of the value which they might have had as monopolies was foregone.112 These were among the factors which pointed to the patents having a low sale value, even considered as pure rent-seeking monopolies.113 As well as the $250,000 to buy the patents, the stockholders had to invest another $250,000 for working capital and as a fighting fund to underwrite any infringement actions which might have been necessary before royalties began to accumulate. The total investment was not trivial—even for a company like du Pont—not least because the American dyestuff industry had become loss-making under immediate post-War conditions.

Just as there were very few American companies which were in a position to commercialise even a fraction of the German patent portfolio, so its practical value was largely confined to excluding the former German patent owners from practising the technologies they had themselves invented and patented. If Palmer had been interested in maximising the price paid for the patents, then he might have divided them into more manageable lots, or have tried to encourage a bidding war, or opened the bidding to friendly foreign companies. However, contemplating any kind of foreign ownership of the patents was always beyond the pale, and it was by no means certain that the few potential American bidders would have competed with one another, especially as they had become used to co-operating during the War. Valuing

112 This was expressly relied on by the Court of Appeals, which had been prepared to find (by reference to Wartime licensing income) that the $250,000 would not have been a fair price on an ordinary, unconditional, sale. U.S. v Chemical Foundation (1925) 5 F.2d. 191, at page 213 (Third Circuit Court of Appeals).

113 Steen, “Patents, Patriotism” (2001) Isis 91, 109 et seq.

33 The great pharmaceutical patent robbery individual patents was more problematic than it sounded, and required skills which were in short supply.114 The various technologies were not distinct: a particular chemical or process might be equally valuable for dyestuffs, pharmaceuticals, or even explosives, and even an expert could not necessarily say which. Moreover, there was no point in American businesses paying (or overpaying) for the former German patents, if German competition could be kept at bay by other means.

Patents, tariffs, or both?

That meant tariff or quota protection against German imports. However, the danger was that tariffs on German dyestuffs would be successfully resisted by the American textile industry. With a huge domestic market, and ample supplies of cheap raw materials, textiles were big business in America, much more so than the emergent pharmaceutical and dyestuff industries. The Versailles Peace Treaty had even provided for Germany to supply stocks of dyestuffs (and chemical drugs) to America by way of reparations in kind, a move which was obviously more popular with end-users in the textile industry, than with the chemical manufacturers.115 With factors such as these in mind the American chemical industry reached into its pocketbook for

114 One reason why Du Pont was such a strong supporter of the Chemical Foundation was the fear that National Aniline (with its greater experience in dyestuffs) was better placed to undertake this sort of exercise, and would get the better of any bidding war. Steen, “Patents, Patriotism” (2001) 92 Isis 91, 100, 115.

115 Versailles Treaty, 1919, Article 236 and Annex VI. See Haynes, American Chemical Industry, 1945, volume III, pp.262 et seq and Appendix LIV; Steen, “Confiscated Commerce” (1995) History and Technology 261, 274-275.

34 Christopher Wadlow

$500,000,116 at the same time as supporting an import licensing scheme,117 and lobbying for having imported chemicals, of whatever origin, subjected to prohibitively high tariffs.118

But where there is a threat, there is often an opportunity. Assign the former German patents to the Foundation, and the Foundation could act as the industry’s very own exciseman, independent of Congress, the textile industry, and public opinion. If maximum protection was what was wanted, then the patents could be used to stop imports altogether; if not, then importers could be soaked for royalties, which would go to the Foundation, and not to the taxpayer. From this point of view the Foundation did indeed get a bargain, but it would have been very difficult to quantify the value of the patents on this basis, in advance, as it crucially depended on how rapidly trade with Germany would have bounced back after the disruption of war.

What were the patents worth?

There was a more fundamental problem in valuing the patents, which was that the potential buyers simply lacked the technical capability to say how useful they were, or even to match

116 $250,000 to purchase the patents, and the same amount for working capital and as a fighting fund.

117 As part of the “Longworth Bill” (HR 8078, 66th Congress). See Haynes, American Chemical Industry, 1945, volume III, pp.266 et seq; Haber, Chemical Industry, 1971, at pp.239-240. For a selection of coverage in the New York Times see: “Bill to License Dyes”, June 24, 1919; “Dye Licence Plan is losing Favor”, August 3, 1919; “Dye Question in House”, September 23, 1919. The licensing system came into effect, and was extended under the Dye and Chemical Control Act of May 27, 1921 (which was part of the Emergency Tariff Act of the same date) but only as a temporary measure. Attempts to make it a permanent as part of the Fordney-McCumber Tariff of 1922 were voted down (all from the New York Times): “Moses condemns Embargo on Dyes”, August 12, 1921; “Bolt of Republicans beats Dye Embargo”, July 16, 1922; “Leaders Surrender on Tariff Bolters”, September 15, 1922; “Dye Embargo Killed”, September 21, 1922.

118 The intense (and well-funded) lobbying efforts of the Foundation attracted unwelcome attention, though in the end it saw its critics off. “Lobbying Inquiry sought in Senate”, New York Times, May 13, 1921; “Moses condemns Embargo on Dyes”, New York Times, August 12, 1921. The textile industry failed to prevent duties on imported dyestuffs being set at the historically high rates of 30% ad valorem, calculated on the American selling price, plus 5 cents per pound weight, under the Fordney–McCumber Tariff Act of 1922.

35 The great pharmaceutical patent robbery specific commercial dyestuffs to particular patents. According to David Hounshell and John Smith:119

“When the Bayer Company patents came up for sale the Du Pont leadership investigated purchasing the patents, but, despite their best efforts, they simply could not evaluate how advantageous the patents would be for their company. Estimates ranged from ‘enormous value’ to ‘relatively small value.’”

So what does a purchaser of a bargain lot of confiscated patents actually expect to get for their money? If they want to practise a technology which is beyond their current technical capabilities, then what they need is not bare ownership, but something akin to a turnkey technology transfer contract, with plenty of training, know-how, and support thrown it. At the Delaware trial, Elmer K. Bolton of Du Pont, after recounting the difficulties his chemists had had in getting German patent specifications to work, concluded that the patents “do not have any practical value without the know-how”,120 and even the Government agreed. Accustomed as we are to thinking of a patent as something inherently valuable, although it is really no more than a right to exclude potential competition, this may seem to be a perverse way of looking at things, but it had plenty of basis in the factual situation at the time.

If actions speak louder than words, then the point is amply proved by Du Pont’s own efforts to recruit experienced German dyestuff chemists from Europe in 1920, when they offered salaries of ten or fifteen times the going rate for scientists who were prepared to breach their contracts of employment with BASF or Bayer, which invariably contained three-year restrictive covenants against working for a competitor. Of four chemists (and one engineer) recruited from Bayer, two were arrested at the Dutch frontier with a suitcase full of confidential papers, and two more were arrested on arrival in New York, but all four were subsequently released under pressure from the State Department. (The engineer appears to have dropped out of the story, one way or another). Du Pont’s atavistic return to the business practices of its founders121 was almost

119 David A. Hounshell and John Kenly Smith, Science and Corporate Strategy: Du Pont R&D, 1902-1980 (Cambridge: Cambridge University Press, 1992), at p.89, noting that the Germans had made an art of marketing their dyes anonymously, so they could not be linked to particular patents. Hounshell and Smith also mention Umgehungs Patente (“evasion patents”) taken out to send competitors down dead-ends, and conclude that “even after Du Pont and other manufacturers gained access to the thousands of German patents confiscated during the war, making sense of them was well-nigh impossible.” See also Steen, “Patents, Patriotism” (2001) Isis 91, 111.

120 Steen, “Patents, Patriotism” (2001) Isis 91, 100, 111.

121 See Doron S. Ben-Atar, Trade Secrets: Intellectual Piracy and the Origins of American Industrial Power (New Haven: Yale University Press, 2004) pp.152-153.

36 Christopher Wadlow certainly criminal, and its behaviour was widely condemned on both sides of the Atlantic, but the company was unrepentant.122

Some Lessons for the Present

The comparison and its limits

The supposed problem of patents with specifications which were intentionally insufficient, or even downright misleading, illustrates the extent to which complaints about the working of American patent system in the early and mid-20th Century mirror those against the Global patent system today. The few legal scholars who mention the Chemical Foundation, such as Peter Drahos123 and Luigi Palombi,124 expressly do so for the comparisons which may be drawn between the situation then, and that obtaining now.125 For example, Peter Drahos:126

“The problem, though, was that once the Chemical Foundation members got hold of the patents they were very reluctant to diffuse their benefits through US industry. Cartelism is a highly addictive way of life. ... What US industry learnt from German industry was that patents were matchless instruments of business domination. In the following decades the US patent profession put its energies into perfecting the use of this instrument.”

It is no part of the purpose of this article to dispute the relevance of these comparisons, but there are two very important reservations which need to be borne in mind if the exercise is not to be a futile one.

The first is that one should be careful about the company one keeps. No one with any concern for historical accuracy should take the rantings of Mitchell Palmer or Francis Garvan against the German chemical industry at face value. The two of them were, at best, unscrupulous opportunists; at worst, paranoid fantasists. No one would still take seriously their joint

122 Hounshell and Smith, Science and Corporate Strategy, 1992, at pp.92-94. According to Hounshell and Smith (if I have understood them correctly) Du Pont offered the émigrés salaries of up to $25,000 p.a. each, guaranteed over five years, meaning that Du Pont was prepared to pay twice as much for four (and a half) real, live, German scientists, as the Foundation paid for 4,500 German patents.

123 Peter Drahos, Information Feudalism: Who Owns the Knowledge Economy? (London: Earthscan, 2002), at pp.65-67.

124 Luigi Palombi, Gene Cartels: Biotech Patents in the Age of Free Trade (Cheltenham: Edward Elgar, 2009), at pp.48-51, 53-58.

125 See also Graham Dutfield, Intellectual Property and the Life Science Industries, 2nd ed (Singapore: World Scientific, 2009), pp.86-89.

126 Drahos, Information Feudalism, 2002, at p.67.

37 The great pharmaceutical patent robbery insistence (which may have been perfectly sincere) that the fabric of American society could only be saved from imminent destruction by the arbitrary arrest and deportation of thousands of left-leaning Eastern European immigrants, in the infamous “Palmer Raids”; and one should exercise similar caution when it comes to what they had to say about the supposed German abuses of the patent system—always bearing in mind that their knowledge of it was entirely derivative, that their interpretation of events was guided by the exigencies of wartime propaganda and the interests of the American chemical industry, and that their concerns were never with the system as such, but with the extent to which it had supposedly been perverted and abused by America’s enemies. This is not to say that they were always wrong on matters of fact, and Garvan, in particular, has a record of exposing German abuses which his contemporaries were only too willing to overlook.127 All the same, one must exercise caution, and always look for corroboration.

The second is that one must be careful to distinguish between effects which were attributable to the patent system itself, and those which depended on other factors. In particular, business practices in the United States at the end of its “Gilded Age” were often as brutal and corrupt as in present-day Russia, so it almost comes as something of a pleasant surprise to be told that a purely legal and essentially benign institution, such as patents, had any effect at all amidst this lawless free-for-all.128 Perhaps they didn’t, in which case the patents may simply have provided a convenient screen for the monopolist’s usual range of abusive practices, such as intimidation, predation, and bribery129—or perhaps it was simply a case of legitimate

127 Both sides of Garvan’s character are shown in his opposition to the nominally independent American I.G. Chemical Corporation. Mira Wilkins, The History of Foreign Investment in the United States, 1914-1945 (Cambridge, MS: Harvard University Press, 2004), at p.295, gives details of a “remarkable” letter Garvan composed, and may have sent, to the directors of American I.G., upbraiding them for their lack of patriotism and foresight. Publicly, Garvan was just as hostile to American I.G., but on this occasion his was a voice crying in the wilderness.

128 The United States’ “Gilded Age” is generally taken to have ended soon after 1890, being followed by the “Progressive Era”, but Palmer’s and Garvan’s fulminations against German domination of the chemical industry referred to the pre-World War I situation, and that position must have been built up over a period of many years.

129 There is no doubt that all the German firms treated bribery as a normal commercial practice in the United States, but that was neither more nor less than their customers expected. Palmer, Report to Congress, 1919, at p.34; Murmann, Knowledge and Competitive Advantage, 2003, at p.149.

38 Christopher Wadlow comparative advantage, with German companies such as Bayer, Hoechst, and BASF doing industrial organic chemistry better and more efficiently than anyone else.130

A lesson in commodification and mutualisation

On one way of looking at it, the episode of the Chemical Foundation epitomises two entirely contemporary phenomena. First, the tendency towards the commodification or commoditisation of human intellectual productions or discoveries as “intellectual property”, without regard to incentive, reward, consent, or desert; and secondly, the mutualisation or collectivisation of those assets for the benefit of those responsible for the process of commodification and its outcome, quite possibly without regard to the interests of those who were responsible for the productions in the first place.131

So far as the first is concerned, there is a theoretical justification of the patent system which holds that its effectiveness in no way depends on the offer of incentives to inventors, nor on the provision of rewards, nor even on the implicit “bargain” of disclosure of the invention as the consideration for the patent grant, but which simply arises from the existence of the system as a mechanism for allowing certain intangible intellectual productions to be consolidated or commodified into a legally-recognisable form of property which we call “patents”, which can then be traded between those who have them, for whatever reason, and are willing to sell; and those who have them not, but are willing and able to buy.132 Professor Coase and his

130 According to a Congressional investigation in 1908, the cost of building and running a dyestuff plant in Germany was 44 per cent less than in the United States. Murmann, Knowledge and Competitive Advantage, 2003, at p.146, citing Johannes Pfitzner, Beiträger zur Lage der Chemischen, Insbesondere de Farbstoffindustrie in den Vereinigten Staaten von America (Jena: Gustav Fischer, 1916). Murmann also points out that German domination of the dyestuff industry had nothing to do with the availability of raw materials (Germany imported the necessary “coal tar” from England), nor (after an initial period) with proximity to customers and markets. The German textile industry was not large by international standards, and the chemical companies were heavily dependent on exports. Murmann, Knowledge and Competitive Advantage, 2003, at p.34.

131 It is interesting that the few intellectual property lawyers to have had much to say about the Chemical Foundation in recent times are particularly concerned with these phenomena, notably in relation to genomic information: Drahos, Information Feudalism, 2002, and Luigi Palombi, Gene Cartels, 2009. (The question of whether “commodification” and “commoditisation” are the same will not be pursued here).

132 The argument based on commodification can be extended to the whole of “intellectual property”, including artistic creations. See Peter Drahos, A Philosophy of Intellectual Property, (Aldershot: Dartmouth, 1996), at pp.109-111. That it is rarely heard except when more familiar arguments are lacking (as with routine genomic information of no demonstrated utility) is presumably accounted for by its complete lack of instinctive appeal to anyone’s sense of justice, fairness, or morality —but that may reflect the prejudices of the audience, rather than any fault with the argument.

39 The great pharmaceutical patent robbery eponymous theorem133 can then be relied on to take care of everything else, including distributing the commodified information in the most efficient and socially utile way.134 Or perhaps not, since Coase also accounts for the reverse phenomenon of patent pools and other forms of mutualisation, at least in so far as the transaction costs associated with individual patent ownership—acquisition, maintenance, clearance, licensing and litigation—may be so high that members of a whole industry may decide to sacrifice their individual rights to exclude one another from their own particular fragments of turf, for the greater good (or greater convenience) of participating in a common pool.

In the case of the Chemical Foundation, the actual inventors of the 4,500 patents (or rather the companies which employed them) had long-since forfeited all the benefits associated with patent ownership, and, conversely, the members of the Foundation found themselves the proud new owners of an equal number of patents for inventions which had nothing to do with their own, (or rather their employees’) expertise or ingenuity, or their own investment in research. Patents which were the keys to products they could not make, processes they could not practise, and technologies which they did not even begin to understand. Like barbarians who had conquered a great city filled with timeless works of art and literature, they could neither use nor enjoy its contents themselves, but they could certainly see to it that no one else had access to them.

The selective abolition of patents in one sense ...

Perhaps the most curious aspect of the story of the Chemical Foundation is that it approximated in some respects to the selective abolition of patent protection within a particular country, and for a particular industry, both of which have always purported to hold patents in an almost sacred regard. Or rather, what was abolished was the historical overhang of German chemical patents from the pre-War years. Except for the former Bayer patents, these were all subjected to a kind of privately-administered compulsory licensing regime, at a modest royalty, with that royalty being recycled for the ultimate benefit of the licensees, rather than the licensors.

133 “The Theorem says that in a world with zero transaction costs, initial rights allocations are unimportant; they will be transferred to their highest-value use through private bargains.” Robert P. Merges, “Of Property Rules, Coase, and Intellectual Property” (1994) 94 Columbia Law Review 2655, referring to the “Coase theorem” as stated in Ronald H. Coase, The Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988).

134 It is consistent with Coase that notwithstanding the confiscation of the 4,500 patents, a very similar equilibrium between the German and American industries re-established itself in only 10 years: see below, at fn.170.

40 Christopher Wadlow

It is often said that developing countries benefit from having a weak patent system (or no patent system at all) for as long as their industries are relatively backward, switching to a strong patent system as soon as those industries have caught up with the developed world and are ready to make inventions of their own.135 The expedient of the Chemical Foundation made it possible for the United States to have, in effect, a patent system which was both weak and discriminatory in relation to organic chemistry (where the United States was atypically backward), combined with a strong patent system for everything else.136

To this extent, the events of 1919 corresponded to what happens when a country without a patent law introduces patent protection for the first time, or when a category of technology which was previously unpatentable is brought within the patent system, whether as a result of formal amending legislation, a change in court or office practice, or simply a change in perceptions and expectations. So far as the first is concerned, patent laws were new for the German Reich in 1876,137 for Switzerland in 1888 and 1907,138 and for the Netherlands as late as 1910.139 So far as the patentability of chemicals is concerned, the situation is more complicated, since it depended as much on actual custom and practice as on the letter of the law. In principle, chemical substances as such were not widely patentable in Europe until the 1960s or 1970s, but in practice generous protection for process patents often filled the gap.

135 See, for example, Juan C. Ginarte and Walter G. Park, “Determinants of Patent Rights: A Cross- national Study” (1997) 26 Research Policy 283. For the phenomenon in relation to the German dyestuff industry, see J.J. Beer, The Emergence of the German Dye Industry, (Urbana: University of Illinois Press, 1959); and Murmann, Knowledge and Competitive Advantage, 2003.

136 Before the Paris Convention was widely adopted, states could, and frequently did, follow overtly discriminatory policies. As the 19th Century progressed, the United States moved from a patent system which was both discriminatory and protectionist, to one which was commendably fair and open. Before 1836 U.S. patents were only available to citizens and intending immigrants. After 1836, anyone could apply, but until 1861 the application fee for foreign inventors was $300 ($500 if the inventor was British), compared to $30 for American citizens. After 1861 everyone paid $35. B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920, (Cambridge: Cambridge University Press, 2005) at pp.54, 57.

137 Prior to 1876, the patent laws of the various independent German states were highly fragmented, (or in some cases non-existent), and consequently very weak overall. Whether coincidentally or not, the original phase of development of the German dyestuffs industry (in the 1860s) was marked by the wholesale copying of British and French technologies, with the German industry beginning to innovate for itself in the 1870s, and completely overshadowing the rest of Europe from the 1880s onwards. See Beer, Emergence of the German Dye Industry, 1959, Chapter 6; Murmann, Knowledge and Competitive Advantage, 2003.

138 Patent protection in the chemical field was not available until the 1907 Act.

139 For an overview, see Dutfield, Life Science Industries, 2009.

41 The great pharmaceutical patent robbery

In the United Kingdom, chemicals were excluded from patentability per se after World War I,140 in a move intended to encourage the domestic chemical industry to grow after decades of German domination, but were restored to patentability (subject to compulsory licensing for medicines) after World War II.141 Chemicals have always been patentable per se in the United States, but in other several arts (biotechnology, computer programs, business methods) there has been a recognisable break-point before which patents were granted rarely or not at all, and after which patents were granted fairly readily.142 What all these transitions had in common with the establishment of the Chemical Foundation was that they resulted in a whole industry being trained, for a while, to think of patents almost wholly in positive and self- serving terms. Under such circumstances patents were bound to be seen in terms of an opportunity to be grasped, rather than a threat to be feared: an open prairie waiting to be fenced and grazed or planted, not an impenetrable forest needing to be felled.

... but selective intensification of the system in others

However, if the creation of the Foundation amounted to a partial abolition of patents in one sense, then in another respect it represented an intensification of the patent system, but with the members and licensees of the Foundation as the sole beneficiaries. First, and most obviously, all the protectionist aspects of patent protection were maintained, or increased. Cheap (or free) licences were available almost as of right, but only to the Government and domestically-owned companies, and preferentially for domestic manufacture—a double whammy of protectionism. Royalties from these licences funded the protectionist campaigns of Francis Garvan. The delicious irony of all this was not lost on the industry.143

“An interesting by-product of the Foundation is the new angle given to the subject of ‘product patents’. The chief argument of those who have sought the elimination of such from our patent system has been the German practice of patenting a product in this country, not for the purpose of manufacture, but rather to prevent manufacture and to secure importation from Germany alone. Now the boot is on the other foot. These very product patents will prevent importation and will give time and opportunity to development of American manufacture.

140 Patents and Designs Act, 1919, section 11 (restricting protection to the product when made by a specific process by introducing a new section 38A into the Patents and Designs Act, 1907).

141 Patents Act, 1949, section 41.

142 Respectively Diamond v Chakrabarty, 447 U.S. 303 (1980); Diamond v Diehr, 450 U.S. 175 (1981); Street Bank & Trust Co. v Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).

143 Editorial, “The Chemical Foundation, Inc” (1919) 11 Journal of Industrial and Engineering Chemistry 279.

42 Christopher Wadlow

The irony of the situation, however, lies in that section of the articles of incorporation which provides that ... surplus earnings of the Foundation are to be devoted to ‘the advancement of chemical and allied science and industry.’ That which was intended as an effective means of strangling the chemical industry in this country becomes now the strong support of its thorough development.”

Finally, all the benefits of patent protection for inventions yet to be made were still available to the American chemical industry, but (for the time being) without the corresponding disadvantages and liabilities. Unhindered by constantly having to glance over its shoulders to see if it might be infringing the rights of others, each firm could concentrate on building up the largest possible armoury of patents to protect its own position in the future.

Preserving the status quo

In its time, one likely effect of the existence of the Chemical Foundation was to preserve the status quo against calls for the American patent system to be reformed in the direction of weaker protection. Early in the War, there seems to have been a swing of opinion in favour of lower patent protection in the chemical field: specifically an end to chemical product patents, higher standards of sufficiency of description, and compulsory licensing for non-working, or for importation.144 This consensus was possible because the industrial customers of the German dyestuff firms would have preferred to be free from the usual consequences of monopoly, the emerging American chemical industrialists wanted to be able to manufacture the Germans’ patented products, and the professional pharmacists and retail chemists wanted to forget about patents altogether, and have cheaper and more plentiful drugs for everyone.145

However, with the creation of the Chemical Foundation, and the assignment to it of the bulk of the pre-War German patent portfolio (Bayer’s pharmaceutical patents going to Sterling, and their dyestuff patents to Grasselli), the former consensus was broken. It now suited the chemical industry very well indeed to have a means of directly controlling which firms could get manufacturing or importing licences; while pre-War objections to the excessive coverage and dubious validity of these patents were forgotten once those same patents were safe in the industry’s own hands. The retail chemists and the textile industry were wary of the Foundation, but they were out-manoeuvred and could not upset the decision to sell the German patents to

144 See above, at fn.27.

145 See the Report of the Committee on Patents and Trademarks of the American Pharmaceutical Association, August 1919, reproduced at (1919) 2 Journal of the Patent Office Society 76.

43 The great pharmaceutical patent robbery it. Besides, their essential interests were not really at stake.146 It is impossible to say whether America would have moved in the direction of lower patent protection in the 1920s and 1930s in the absence of the Chemical Foundation, nor with what consequences for itself and the World in the longer term, but the existence of the Foundation certainly removed one incentive to this kind of change.

Passing judgment on the Chemical Foundation

A solution for present-day problems?

Are there any practical lessons to learn from the example of the Chemical Foundation? At first sight, the Foundation might be thought to provide a ready-made model of a public-private, policy-oriented, non-profit-making patent pool,147 at a time when commentators are crying out for just such a vehicle to administer licences under pharmaceutical patents for the benefit of AIDS sufferers in developing countries.148 As such, the Foundation would seem to be rather more directly relevant to this specific problem than the patent pools in the American aeroplane, motor car, and radio industries which were formed at about the same time, and on which attention has been concentrated.149

146 The cost of dyestuffs was no more than a minor headache to the textile industry—historically never exceeding 1% of the price of finished cotton piece goods according to Steen, “Confiscated Commerce” (1995) History and Technology 261, fn.45—but their price was a matter of life and death to the chemical industry.

147 The Chemical Foundation does not strictly comply with familiar definitions of a “patent pool”, in so far as it lacks any element of voluntary cross-licensing. (The patents which made up the pool were all contributed under compulsion, by companies which were then excluded from it). Unlike most pools, too, there was no provision for members (or non-member licensees) to contribute their own patents for improvements or new developments.

148 The literature is large. For an academic treatment, see Robert P. Merges “Institutions for Intellectual Property Transactions: The case of Patent Pools” in Rochelle Cooper Dreyfuss, Diane Leenheer Zimmerman and Harry First (eds), Expanding the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society (Oxford: Oxford University Press, 2001). For a more socio- economic analysis, see David Serafino, Survey of Patent Pools Demonstrates Variety of Purposes and Management Structures (Knowledge Ecology International, KEI Research Note 2007:6, June 4, 2007). For the UNITAID Patent Pool Initiative, see http://www.unitaid.eu/en/The-Medicines-Patent-Pool- Initiative.html.

149 The Manufacturers Aircraft Association, the Association of Licensed Automobile Manufacturers, and the Radio Corporation of America. The Chemical Foundation was very probably modelled on the Research Corporation, which had been set up privately in 1912, but this source of inspiration was never acknowledged at the time. See Steen, “Patents, Patriotism” (2001) 92 Isis 91, 100; and www.rescorp.org/ archives-and-history/history. Be that as it may, the Chemical Foundation had much more money to spend than the Research Corporation, and a far more focussed (not to mention political) agenda to spend it on. Haber, Chemical Industry, 1971, at pp.68, 360.

44 Christopher Wadlow

There is a certain amount of poetic justice in the thought of the corporate descendants of the original beneficiaries of Palmer’s largesse being subjected to a regime corresponding to that which was proposed, endorsed, and fiercely defended by the leadership of the American chemical industry of the time. But that is just wishful thinking, and the present-day European pharmaceutical companies would quite rightly object that their predecessors never derived any benefit from the Chemical Foundation (quite the reverse), while the German industry might additionally ask why its assets were effectively being confiscated for a third time.150

The German chemical industry in pre-War America

Everybody, then and now, acknowledges that the German organic chemistry industry was completely dominant in the decades before the First World War, whether measured by market share, or share of granted patents, and that this was true not only of the United States, but the world at large. As one recent historian of the dyestuff industry over this period comments:151

“Beginning as an importer rather than as a producer of synthetic dyes, the United States never achieved a significant degree of independence from foreign supplies. By 1913, the United States had become the second largest market for dyes, importing a full 88 percent of its dye needs .... Domestic firms that made the remaining 12 percent of dyes consumed imported virtually all dye intermediates from abroad ....”

And:152

“German individuals and firms captured the vast majority of dye patents in all major industrialised countries in 1899 and 1904. At home, German individuals and firms received about 75 percent of the dye patents, and the Swiss 12 percent, whereas only 8 percent were British controlled. In the United States, 79 percent of all dye patents were held by Germans and 14 percent by the Swiss. ... [P]atent shares by national industry and their respective world market share are almost perfectly correlated, indicating a strong link between patents and market power.”

150 All German intellectual property assets in the United States were sequestered on the entry of the United States into World War II, and most were confiscated permanently at its end. See Roe, “War Measures” (1943) 25 Journal of the Patent Office Society 692; John Dickinson, “Enemy Owned Property: Restitution or Confiscation?” (1943) 22 Foreign Affairs 126; Sommerich, “World War I and II Patents and Copyrights” (1955) 4 American Journal of Comparative Law 587; O’Reilly, “Vesting GAF” (2006) 22 History and Technology 153.

151 Murmann, Knowledge and Competitive Advantage, 2003, at p.37 (citations omitted). See also Beer, Emergence of the German Dye Industry, 1959.

152 Murmann, Knowledge and Competitive Advantage, 2003, at pp.39-41. (Citations and graphics omitted).

45 The great pharmaceutical patent robbery

Opinions differed then, as they do now, on the reasons for this phenomenon.153 One reason was undoubtedly the scientific pre-eminence of German organic chemists, both in universities and in industrial research laboratories, and the sheer number of highly qualified individuals.154 Palmer (amongst others) had drawn attention to the relatively large number of university- educated organic chemists in Germany, in relation to those produced by the the United States educational system.155

“As a consequence of these conditions [favourable public opinion and government support for academic science], the universities were at an early date provided with the most elaborate and advanced equipment for research work, and attracted to themselves an extraordinary proportion of the ablest young men of the nation. They accordingly proceeded to turn out a constantly increasing number of highly trained technical men, whose services were available to the rising chemical industry. ... These advantages were made use of to an extent nowhere else approached, because from a comparatively early date the importance of research work to practical industry was firmly grasped by both the industrial and governmental ruling classes. The alliance of the manufacturer and the university professor became constantly closer and more complete.”

From a more recent perspective, Johann Murmann concludes:156

“The most important institution in the early success of the German dye industry was the university system, but patent laws were a second key factor that allowed the German firms to capture a dominant position.”

Murmann’s position on the importance of patents is more nuanced than this may suggest, because he attaches great importance to the fact that the weak patent situation in Germany

153 Too much reliance should not be placed on Vaughan, “Suppression and non-Working of Patents” (1919) 9 American Economic Review 693. Vaughan’s data were by no means up to date (his direct comparison of imports with patent data broken down by technical field as well as nationality ended in 1900 or 1902), his general tone is biassed and conclusory, and his legal analysis is fanciful. However there is no doubting that the level of domestic American activity in the dyestuffs industry, whether measured by production figures, or by patents, was very low, and there seems no reason to doubt Vaughan’s estimate that at the beginning of 1914, German firms supplied about 90% of America’s requirements of dyestuffs, nor that they held a proportionate number of the relevant patents.

154 George Meyer-Thurow, “The Industrialisation of Invention: A Case Study from the German Chemical Industry” (1982) 73 Isis 363.

155 “How Germany Dominated the American Chemical and Dyestuff Industry”, in Palmer, Aims and Purposes of the Chemical Foundation, 1919, at p.3. Compare Murmann, Knowledge and Competitive Advantage, 2003, at pp.51 et seq. (Germany), pp.59 et seq. (United States).

156 Murmann, Knowledge and Competitive Advantage, 2003, at p.28, agrees on the superiority of the German academic system, and the network effects of German universities and their professors interacting with local industrial firms, to an extent which could not be replicated in the United States.

46 Christopher Wadlow prior to 1876157 resulted in very low barriers to entry in the new dyestuff industry, and a profusion of competing firms, with the reforms of 1876 coming at precisely the right moment to lock in the technological advantages of the few firms which had survived and prospered in the initial free-for-all. In the final analysis, Murmann attributes German success in dyestuffs primarily to evolutionary factors: many more organic chemistry firms were started in Germany than elsewhere, and most failed—but the few that survived were the fittest to succeed in terms of research and development, management and organisation, relationships with government and customers, and grasp of business strategy.158

Palmer and Garvan, on the other hand, saw German pre-eminence in organic chemistry as part and parcel of a long-term state-supported project of global industrial and military domination159—which therefore had to be resisted, regardless of cost—and plenty of ordinary Americans would at the very least have accused the German companies of operating a cartel or trust for the suppression of competition, and the maximisation of their own profits.160 In other areas of chemistry, such as the so-called heavy industrial chemicals, inorganic chemistry, petrochemicals, and mining, the United States and its chemists more than held their own.161

The American chemical industry in 1919

Before commending the Chemical Foundation for adoption as a model solution to present day problems, one should step back for a moment and examine rather more closely just how successful it was in its own time and place, and whether its successes (if any) would be likely to be replicated in a different age, under different conditions, and in places very different to the United States of America.

The situation in 1919 was not promising. The futility of America trying to outdo the German organic chemical industry had been recognised in 1915 by Arthur D. Little, the former

157 The year the first Patent Act for the German Reich was passed. Above, fn.137.

158 Murmann, Knowledge and Competitive Advantage, 2003, at p.43.

159 For both Palmer and Garvan, see above, fn.8.

160 Palmer himself was happy to share the credit for slaying the supposed pre-War German dyestuff trust: “Says Wilson Aimed to Kill Dye Trust”, New York Times, June 30, 1923, reporting Palmer’s testimony at the Delaware trial. A Senate inquiry in 1922 (Hearings, Alleged Dye Monopoly, 67th Congress, 2nd Session, 1922, S. Res. 77) had cleared the dyestuff industry of charges of cartelisation, though by that time the situation was very different.

161 Murmann, Knowledge and Competitive Advantage, 2003, at p.212.

47 The great pharmaceutical patent robbery

President of the American Chemical Society and founder of the management consultancy of that name:162

“The plain underlying reason why we have been unable during thirty years of tariff protection to develop in this country an independent and self-contained coal-tar industry while during the same period the Germans have magnificently succeeded is to be found in the failure of our manufacturers and capitalists to realize the creative power and earning capacity of industrial research. This power and this capacity have been recognized by Germany and on them as corner-stones her industries are based. As a result the German color plants are now quite capable of meeting the demands of the whole world when peace is once restored. Why, then, should we duplicate them only to plunge into an industrial warfare against the most strongly fortified industrial position in the world. Let us rather console ourselves with a few reflections and then see how otherwise we might spend our money to our better advantage.”

Moreover, there was no question of the German companies (at least under peacetime conditions) withholding supplies, or charging more than domestic manufacturers would have done. On the contrary, the main complaint of the American chemical industry was of dumping and perpetual undercharging—though the accusation made so little economic sense, that it may well have been no more than an excuse to cover their own relative inefficiencies. Customers of the German firms in the American textile industry may have grumbled about the price of German dyes, but the price was partly the result of high tariffs, and they had nothing but praise for the quality and variety of the products on offer.

What did the Chemical Foundation achieve?

The Chemical Foundation was established in 1919, and effectively became defunct some time after 1936, when the last of its patents would have expired.163 Its actual achievements may be compared to this statement in its Prospectus, issued in 1919:164

“[The patents]will be used to encourage manufacture in this country and discourage importation from Germany. The Foundation will issue non-exclusive licenses under them, on reasonable and equal terms, to manufacturers whose Americanism and competence are unquestioned. It will also prosecute with all possible vigor, suits against all persons who attempt to import any infringing product. Since many of the patents are product patents, the Foundation should be able to exclude infringing goods

162 The quotation is from a speech by Arthur D. Little, “The Dyestuffs Situation and its Lessons”, reproduced at (1915) 7 Journal of Industrial and Engineering Chemistry 237, and at Murmann, Knowledge and Competitive Advantage, 2003, at p.178, fn.213. The same Journal disputed Little’s conclusions in a patriotic Editorial: (1915) 7 Journal of Industrial and Engineering Chemistry 272.

163 For the history of the Chemical Foundation post-1923, Steen, “Patents, Patriotism” (2001) Isis 91, 121 et seq; Steen, “German Chemicals” in The German Chemical Industry, 2000.

164 Prospectus, see fn.48 above.

48 Christopher Wadlow

from any source whatever, and should thus be able to give partial protection to a part, at least, of the new American dye industry.”

However, this mission statement must have been seriously compromised even as early as 1921, since more than half of the Foundation’s income to that year had come from royalties on imported dyestuffs;165 while in the longer term the Germans had almost completely re- established themselves by 1929, when the American I.G. Chemical Corporation was formed.166

Looking back at the progress of the American chemical industry between 1919 and 1929, or between 1919 and 1939, and concentrating on speciality organic chemicals such as pharmaceuticals and dyestuffs, then what can the Chemical Foundation be said to have achieved? According to TIME magazine, in 1929:167

“The Chemical Foundation has changed the U.S. Chemical industry from a whining, rickety infant to a closemouthed, lusty brute, equal to Germany’s and England’s. For ten years the brute has paid the Foundation its millions of royalties, and for ten years the Foundation has given those millions away—to scientific institutions and universities, for publishing magazines and books, for student prizes.”

But this still begs at least two questions: had the U.S. chemical industry really changed all that much, and were the changes really attributable to the Chemical Foundation, or to other factors?

As to the first of these questions, then yes, the American chemical industry was indeed far larger and stronger in 1929 or 1939 than it had been before or even immediately after World War I, but that is what one might have expected anyway, from the rate of America’s general economic and technological development, and in some respects that progress had been very patchy. In some areas, all that had changed was that the German modus operandi now favoured the creation of joint-venture manufacturing companies in the United States in partnership with local businesses, instead of importation of finished products through commercial agencies. To this extent, there had indeed been a shift from manufacture in

165 Steen, “Patents, Patriotism” (2001) Isis 91, 100-101 reports aggregate figures for 1919-21 of royalties amounting to $700,000, including $270,000 from domestic manufacturers, and $365,000 in respect of imported dyes. These figures come from papers filed in the Delaware lawsuit.

166 See below at fn.170.

167 “Science: the Garvans”, TIME, January 28, 1929. It was in 1929 (the tenth anniversary of the Chemical Foundation) that the American Chemical Society awarded its most prestigious award, the Priestley Medal, to Garvan. “FP Garvan to get Medal”, New York Times, April 30, 1929; “The Priestley Medal” (1929) 21 Industrial and Engineering Chemistry 715. In the same year, the American Institute of Chemists awarded their Institute Medal jointly to Francis P Garvan, and his wife, Mabel Brady Garvan. Anon “The Institute Medal” (1929) Journal of the Patent Office Society, 223, reprinted from The Chemist, for February 1929.

49 The great pharmaceutical patent robbery

Germany for export to America, to manufacture in America—but this was probably due to high tariffs, “buy-American” sentiment, and improved American manufacturing capabilities as much as to patent protection; and, since research and development remained under German control, the new technologies and their related patents remained firmly in German hands, in practice if not always on paper.

Kathryn Steen points out that the American chemical industry in the 1920s and 1930s was at its most successful in developing entirely new technologies, such as synthetic resins (Bakelite) and polymers (Du Pont), and markedly less successful in establishing a lead in fields such as dyestuffs and pharmaceuticals, which Germany had dominated prior to the War.168 Ludwig Haber comments that the Chemical Foundation was doubly unsuccessful: it raised much less in royalties than had been expected, and its contribution to the development of an American dyestuffs industry was “very small”. Haber attributed both these failures to the fact that the Foundation could only grant non-exclusive licences, which held little attraction for companies intending to use the licensed patents to introduce new products or processes.169

So on the one hand, there were several wholly American companies such as Du Pont, Dow, Allied Chemical, and Union Carbide which had grown enormously in stature since 1919, and had in some cases opened up entirely new branches of technology. On the other hand, German industry, reconstituted after World War I in the form of I.G. Farben, had reasserted its technical lead in its traditional organic chemistry strongholds. Referring to a successful corporate restructuring in 1929, which resulted in the creation of the nominally-independent American I.G. Chemical Corporation, Declan O’Reilly comments:170

“It was a remarkable achievement. In 10 short years, the Germans had recovered everything they had lost in 1918. In the USA alone, IG Farben owned or controlled property worth US$60 million. Its worldwide holdings were even greater.”

168 Steen, “Confiscated Commerce” (1995) History and Technology 261, 279.

169 Haber, Chemical Industry, 1971, pp.220-221, 360-361.

170 O’Reilly, “Vesting GAF” (2006) 22 History and Technology 153, 168. Garvan (and the Foundation) protested at the degree of German control over American I.G., but to no effect. “Fraud in Bond Issue Charged by Garvan”, New York Times, January 29, 1930.

50 Christopher Wadlow

It is ironic that the tenth anniversary of the creation of the Chemical Foundation was marked both by the personal honours conferred on Garvan;171 and by the formation of American I.G. as the culmination (for the time being) of everything he had opposed.172

When the extent of German domination of the American chemical industry was revealed after Germany’s declaration of war on December 11, 1941, the situation turned out to be every bit as horrifying to patriotic American sentiment as it had been in 1917-19.173 Even after World War II, and another round of confiscations and sales,174 America never wrested the technical lead in dyestuffs away from Germany, albeit that the American pharmaceutical industry, for instance, was by 1945 well on its way to overshadowing its former masters.

The Foundation’s “educational” mission

Conversely, one may wonder how much good was really done by the Chemical Foundation’s use of the money it received by way of royalties and damages: about $9 million over its whole life history, less its running costs. In theory, the money was spread over a variety of deserving causes. TIME may have given the impression that the main recipients of the Foundation’s largesse were academic institutions conducting serious research, but Kathryn Steen paints a rather different picture:175

“Despite the substantial income, expenses of $850,000 left the nonprofit corporation with a net loss after four years. The largest single expense of the Chemical Foundation from 1919 to 1922 came from the distribution of pamphlets, books, and articles that promoted the chemical industry and the study of chemistry. During the four years the foundation spent $340,000 to send over fifty different items to an array of groups and individuals, including businesses, trade associations, civic groups, newspaper editors, educators, agricultural agents, and the Boy Scouts.”

171 Above, fn.167.

172 No one could have been more acutely aware of this than Garvan himself, see above, fn.127.

173 The mood of the time is authentically conveyed by the splendidly-titled Patents for Hitler. Günter Reimann, Patents for Hitler, (New York: Vanguard Press, 1942); as well as Joseph Borkin and Charles A Welsh, Germany’s Master Plan: The Story of Industrial Offensive (New York: Duell, Sloan and Pearce, 1943). But even Reimann (an exiled anti-Nazi resistance member) is almost an apologist for I.G. Farben in comparison to Howard Ambruster, Treason’s Peace: German Dyes & American Dupes (New York, Beechwood Press, 1947). Borkin renewed his onslaught on I.G. Farben (his “Great White Whale”) 30 years later in Borkin, Crime and Punishment, 1978.

174 Sommerich, “World War I and II Patents and Copyrights” (1955) 4 American Journal of Comparative Law 587; O’Reilly, “Vesting GAF” (2006) 22 History and Technology 153.

175 Steen, “Patents, Patriotism” (2001) 92 Isis 91, 101,

51 The great pharmaceutical patent robbery

This lobbying and public relations effort is the aspect of the Foundation’s work which seems to have left the most visible mark on the historical record. From the beginning, the Foundation served as a platform for the voice and opinions of Francis Garvan in every forum and in every possible medium, and as publishers of material ranging from such frankly propagandistic items as the first American edition of Victor Lefebure’s Riddle of the Rhine,176 by way of mass-market textbooks such as Chemistry in Medicine,177 through to every kind of printed ephemera, some of it blatantly political and having little or no connection with chemistry.178

Conversely, unqualified statements such as “all of which [income] it [the Foundation] has expended for the advancement and development of chemical science in the United States”;179 or “royalties from lease of the patents by the Foundation were directed into chemical and medical research”180 are incomplete to the point of being misleading.181 The Foundation did

176 Victor Lefebure, The Riddle of the Rhine (New York, Chemical Foundation, 1923). This was an historical account of both sides’ production and use of chemcial weapons in the War, coupled with an attack on I.G. Farben and the continuing military threat from Germany’s post-War chemcial industry. It was originally published in England (London: Collins, 1921), and was republished by the Foundation as part of a campaign in support of the U.S. Army’s Chemical Warfare Service, which was being disbanded. See Dominick Jenkins, The Final Frontier: America, Science, and Terror (New York: Verso, 2002), at pp. 39, 53. According to Garvan at the Delaware trial, the Foundation financed and distributed 580,240 copies of a pamphlet asserting the national importance of the Chemical Warfare Service: “Denies Politics in Patent Sales”, New York Times, July 4, 1923.

177 Julius Stieglitz, Chemistry in Medicine (New York: Chemical Foundation, 1928). There were companion volumes Chemistry in Industry and Chemistry in Agriculture. Stieglitz, a Professor at the University of Chicago and one of America’s leading academic chemists, had been a witness for the Foundation in the Delaware litigation.

178 For example, the Chemical Foundation published a lavishly-illustrated re-issue of two anti- German polemics by Garet Garrett, the editor of the Saturday Evening Post. Garet Garrett, The Rescue of Germany; and, As Noble Lenders (New York: Chemical Foundation, 1931). According to TIME magazine, 500,000 copies of the booklet were printed. TIME, December 21, 1931, “National Affairs: Debts & Dissent”. Likewise, the Foundation enjoyed a relationship of mutual admiration with the isolationist propagandist Samuel Crowther, author of America Self-Contained (New York: Doubleday, 1933). The Foundation published several of Crowther’s works, and Crowther lavished praise on the Foundation.

179 U.S. v Chemical Foundation (1925) 5 F.2d. 191, 202 (Third Circuit Court of Appeals).

180 John E. Lesch, The First Miracle Drugs: How the Sulfa Drugs Transformed Medicine, (Oxford: Oxford University Press, 2007), at pp.26-27. This is in the context of the Foundation’s support for research by Hugh H. Young of the Johns Hopkins Brady Institute into the systemic antibiotic use of mercurochrome, a topical antiseptic which Young was promoting for intravenous injection. Far from being the all-American wonder drug promised by Young, injected mercurochrome turned out to be neither safe nor effective, and the Foundation withdrew its support.

181 The acknowledged source of the latter is an in memoriam notice for Garvan, so not the most objective provenance.

52 Christopher Wadlow indeed support an impressive roster of scientific publications:182 Chemical Abstracts, the Journal of Physical Chemistry (where the Foundation and Garvan became embroiled in an editorial scandal),183 the Journal of Chemical Education, Stain Technology, and the Journal of Cancer. It also directly funded scientific research,184 but one should not overlook its output of propaganda.

Palmer’s legacy revisited

As to the second question arising from the TIME quotation,185 the Chemical Foundation was always intended as part of a comprehensive American industrial strategy, also embracing import quotas or tariff protection, closer cooperation between industry and universities, and various forms of Government support. One of the Foundation’s first campaigns was to lobby for a national research centre for chemical and medical research.186 Some of those components fell into place, while others, such as an import licensing system, and Government funding for chemical weapons,187 did not. As David M. Kennedy put it in his book Over Here:188

182 With the proviso that it is generally impossible to distinguish the Foundation’s support from that contributed by the Garvans from their personal fortunes.

183 John W. Servos, Physical Chemistry from Ostwald to Pauling: The Making of a Science in America (Princeton: Princeton University Press, 1990), Chapter 7.

184 For a listing of the Foundation’s major donations to 1929, see Anon “The Institute Medal” (1929) Journal of the Patent Office Society 223, reprinted from The Chemist for February 1929. The largest individual donation listed here was $275,000 given to the American Chemical Society to support Chemical Abstracts. The next-largest donation seems to have been $195,000 given to Professor John J Abel of Johns Hopkins University Medical School for research into the common cold, which established the cause as a viral infection. See New York Times, January 11, 1928, 10 (donation) and ibid, November 7, 1930, 14 (virus). The Garvans and the Foundation also generously supported cancer research at Johns Hopkins, where they founded a specialist department and endowed a Chair.

185 Above, at fn.167.

186 The Foundation is reported to have published one million copies of a recommendation to that effect: Reid Hunt, The Future Independence and Progress of American Medicine in the Age of Chemistry (New York: Chemical Foundation, 1921). This effort may have contributed to the establishment of the National Institute of Health in 1930 (by re-naming the government’s Hygienic Laboratory), but the actual level of Government funding was derisory, and private benefactors did not emerge. See Ronald Hamowy, Government and Public Health in America (Cheltenham: Edward Elgar Publishing, 2007) at pp.358 et seq.

187 Jenkins, Final Frontier, 2002, at pp.39, 51-54, 59-60, 198.

188 David M. Kennedy, Over Here: the First World War and American Society (Oxford: Oxford University Press, 1980), at p.313. (Citations omitted, emphasis in original).

53 The great pharmaceutical patent robbery

“Palmer’s actions indicated a remarkably ambitious and comprehensive plan to use the war crisis for long-term American advantage. Nothing in the policy of wartime blockade of Germany necessitated the permanent transfer of assets and rights to technology that the Alien Property Custodian so energetically effected. But Palmer from the outset fixed his gaze beyond the horizon of the immediate conflict. He aimed at nothing less than the establishment in America of a scientific-industrial complex second to none. ‘No other industry,’ he said of dyes and chemicals, ‘offers a livelihood to any such large numbers of highly-trained scientific chemists nor any such incentive to continuous and extended research.’ Securing the German patents, Palmer boasted, was ‘the most important piece of constructive work which has been possible in my department.’ The Chemical Foundation, he claimed, ‘may well ... form the nucleus of the greatest research organization in the country.’ Here were the rudiments of the kind of government nurtured research and development activities that would later in the century play such a key role in stimulating economic growth. More immediately, Palmer provoked the German government to complain that his policies ‘were designed to destroy Germany’s economic existence upon this continent.’ The essential truth of that statement must severely qualify Woodrow Wilson’s claim that America alone among the great powers was disinterested in economic gain from the war.”

Patents, piracy and TRIPs

By the mid 1980s, the American pharmaceutical industry was not only well established, but it was well on its way to achieving a degree of Global hegemony not far short of that which the German organic chemical industry had enjoyed before World War I. In Geneva, negotiations on the revision of the Paris Convention189 were grinding towards a conclusion, or an impasse.190 The main sticking point was the refusal of the United States to contemplate more effective sanctions for non-working, in particular for pharmaceutical patents. In response to a proposal from the developing countries that the compulsory licensing regime under the Paris Convention should be extended to include the power to grant exclusive licences (so excluding the patentee from importing, as well as from working the invention locally) the United States representative, Ambassador Schuyler, is reported to have objected:191

189 The Paris Convention for the Protection of Industrial Property (Paris, 1883). The last substantive revisions to the Paris Convention had been made at Stockholm in 1967.

190 Susan Sell, Power and Ideas, (Albany: State University of New York Press; 1998), pp.119-130. The negotiations began in Geneva in 1980, adjourned to Nairobi in 1981, returned to Geneva, and were broken off in 1985, one year before the Punta del Este Declaration started the Uruguay Round of negotiations on GATT. The latter ultimately resulted in the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPs) in 1994.

191 Quoting Sell, Power and Ideas, 1998, p.125. By the time of Ambassador Schuyler’s intervention, the relevant draft article (the so-called “Nairobi Text”) had been toned down so as to provide for exclusive compulsory licensing only when importation and/or non-working was combined with some other kind of abuse of monopoly, ibid. However, text then under consideration also contemplated forfeiture of patents (without prior compulsory licensing) in rather arbitrary circumstances, and the United States also stongly objected to this.

54 Christopher Wadlow

“A patent right is the right to exclude others from using an invention. A right to use one’s own invention is an individual right. ... What abuse could possibly be so terrible that it warrants depriving an individual of his right to use his own property? ... This Delegation repeats its objection; it will not be a party to any treaty which deprives an individual of the right to use his own invention.”

Whether the negotiating position of the developing countries was wise or just may be questioned. It would have amounted to the de facto conversion of the original patent right into an unmerited state-sponsored monopoly, most probably under the control of a well-connected local businessman, who would have bought the right to exclude the patent owner and its products from the patent territory, in return for a doubtful promise to pay some kind of royalty to the otherwise dispossessed patent owner, and an even more dubious promise to manufacture locally. So the proposed compulsory licensing regime had the potential to turn what would otherwise have been a “property right”—in the phraseology of Calabresi and Melamed—into no more than a royalty-bearing “liability right”,192 and even, it might be said, into an outright source of liability from which the patent owner would rather have been relieved altogether. In short it would not have been so very different from the regime that Palmer and Garvan imposed in 1919, except that their regime was applied to 4,500 patents without compensation, and at a single stroke of the pen, whereas the Nairobi proposal would have operated (in theory at least) on the merits (or otherwise) of the individual case, and would have allowed the proprietor a few pence in the pound by way of royalties, more as solatium for the insult, than as compensation for the injury.

Disagreement over compulsory licensing marked the effective end of the Geneva negotiations, but in a brilliant stroke of “forum shifting”, the United States and its allies not only transferred de facto international competence over intellectual property from WIPO to the GATT, but changed the whole language of the debate. No longer were patents to be understood as economic monopoly rights for individual states to grant or withhold according to laws framed with one eye on public policy or political expediency; rather, it was as if the relevant rights had always existed on the plane of natural law, so that the patent grant was simply the belated

192 By reference to Guido Calabresi and A. Douglas Melamed, “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral” (1972) 85 Harvard Law Review 1072. See also William Cornish, Intellectual Property: Omnipresent, Distracting, Irrelevant? (Oxford: Clarendon Press, 2004), at p.3.

55 The great pharmaceutical patent robbery acknowledgement by the state of a pre-existing entitlement. Henceforth, infringers and non- infringers alike were simply “pirates”:193

“The piracy metaphor effectively changed a policy debate into an absolutist moral drama. Theft is simply wrong, and theft by violence is even worse. There is no room for a policy discussion about the merits of piracy, nor any space for compromise in the direction of pirates. Consider the stridency of C.L. Clemente, the vice president-general counsel of Pfizer: ‘Why is it that another government can base a policy of helping the consumers in their country to steal foreign-owned technology? ...’ Similarly, when the PMA voiced its opposition to a ten-year phase-in for the strict GATT patent requirements, association representatives decried the effort to provide a ‘long “grace period” for piracy.’”

Finale

The badger’s tale

A political leader so self-righteous, but so utterly selfless, as President Woodrow Wilson seems to have stepped straight out of a fairy tale. Not one of the the dark and dangerous tales of the European oral tradition; but the safe, moralising ones of Hollywood, the sort for which celluloid seems to have been invented. Walt Disney’s Pinocchio perhaps? But Wilson (were he still alive) would be the first to acknowledge that Jiminy Cricket had another president’s identity stamped all over him, not to mention the same initials. Perhaps T.H. White’s The Sword in the Stone?194 Surely Wilson—with the Kaiser and Senator Cabot Lodge equally in mind—would ruefully have identified with the one time Wart, the future King Arthur, who begged that he might “encounter all the evil in the world … so that if I conquered there would be none left.”

In the last of the seven transformations which Merlin arranges for Wart to undergo, the badger teaches him a most un-Darwinian account of the origin of species. In the beginning, when all the animals were identical embryos, God told each of them that they could choose up to three defining characteristics to help them survive in the struggle for existence, and the animal which

193 Robert Weissman, “A Long, Strange TRIPS: The Pharmaceutical Industry Drive to Harmonise Global Intellectual Property Rules, and the Remaining WTO Legal Alternatives Available to Developing Countries” (1996) 17 University of Pennsylvania Journal of International Economic Law 1069, 1088. (Citations omitted, and the internal quotation has been truncated). The generic companies (and the countries in which they operated) were indiscriminately labelled as “pirates” regardless of whether the products they copied were actually patented (or even patentable) in those particular countries or not, provided they were patented somewhere. For the most part generic companies, sensibly enough, avoided actual patent infringement.

194 T.H. White, The Sword in the Stone (London: Collins, 1938).

56 Christopher Wadlow chose most wisely would rule over all the others. So the proto-badger, for instance, chose a thick skin for protection, strong jaws for hunting, and feet made for digging. Others chose what made them best able to fly or to swim, to hunt or to escape. Only the embryo which would become man correctly guessed the answer to the riddle.

No selfish ends

If Wilson could have compared the behaviour of the embryos to that of the Allies at the Peace Conference which ended the Great War, he could not have failed to have been struck by the similarities. For the most part, the victors practically fought one another for the spoils, and if they did not quite go to war among themselves, that was at least in part because of the different valuations they put on what was up for grabs. France took back Alsace and Lorraine from Germany, the coal mines of the Saar, and some colonies in Western Africa. Italy took parts of the Tyrol and Adriatic coast from Austria, not to mention the Dodecanese islands. Britain and France divided up what was left of the Ottoman Empire, with Britain having the foresight to help itself to most of the latter’s oil reserves. France ousted the Germans from any Champagne houses they still owned.195 Everyone claimed more cash than Germany was ever likely to pay, unless Fritz Haber succeeded in his plan to pay off the reparations by extracting gold from sea- water.196

Everyone, that is, except Wilson. Only the United States remained aloof from the feeding frenzy, claiming neither cash, nor colonies, nor chattels. Had not President Wilson, on the eve of America’s declaration of war, proclaimed:197

“We have no selfish ends to serve. We desire no conquest, no dominion. We seek no indemnities for ourselves, no material compensation for the sacrifices we shall freely make…. [W]e fight without rancour and without selfish object, seeking nothing for ourselves but what we shall wish to share with all free peoples ....”

The embryo which was man had been right all along. The correct answer was “nothing”, and the reward for desiring nothing, was universal sovereignty.

195 The French business of the German Mumm family was sequestered and sold by the French authorities, while the American importing business was sequestered and sold by the Alien Property Custodian: see Société Vinicole De Champagne v Mumm Champagne & Importation Co 13 F.Supp. 575 (District Court New York, 1935).

196 Dietrich Stoltzenberg, Fritz Haber: Chemist, Nobel Laureate, German, Jew (Philadelphia: Chemical Heritage Press, 2004), at pp.241 et seq.

197 Wilson’s War Message to Congress, April 2, 1917. “Text of the President’s Address”, New York Times, April 3, 1917. http://wwi.lib.byu.edu/index.php/Wilson's_War_Message_to_Congress.

57 The great pharmaceutical patent robbery

La propriété, c'est le vol

So much for the fairy story. The reality is that when Woodrow Wilson unpacked his bags on his return to the White House from Versailles, they inexplicably contained the keys to a technological future brighter by far than any amount of oil could illuminate, or Champagne enliven. There was a claim to 20% of the German submarine cable network, for instance, the “internet backbone” of the time. Or if cables were rather too 19th Century then there was the great Telefunken radio station at Sayville, Long Island, and the patents connected with its operation, all of which Mitchell Palmer had confiscated and sold to the United States Navy for a pittance. Plus a few million dollars worth of synthetic dyestuffs, the merchant ships the U.S. had seized when War began (including the S.S. George Washington, on which Wilson had travelled to and from Europe), the multi-million-dollar business empire assembled by Palmer,198 and, by the way, those 12,000 patents.199

“You wouldn’t steal a car; you wouldn’t steal a handbag; you wouldn’t steal a television; you wouldn’t steal a DVD.”200 But stealing 12,000 patents? That’s something different, and not just the same thing in a different league.

198 Palmer estimated its aggregate worth at $500 million, rising to $800 million, but this apparently did not include the patents or other intellectual property rights. Palmer, “Great Work” (1919) American Law Review 43, 45.

199 The total number of German-owned patents confiscated by the United States in World War I was about 12,300. Of these, about half (the 1,200 Bayer patents and the 4,767 patents sold to the Chemical Foundation, making just short of 6,000 in all) were in the chemical field, and were never returned. The majority of the 6,000 non-chemical patents were (or should have been) returned to their owners after 1928, if they were still subsisting, but subject to any licences which had been granted in the meantime. Roe, “War Measures” (1943) 25 Journal of the Patent Office Society 692, 703 comments: “Licensed patents were returned subject to the licenses and only a trifling number ... remained to be returned free and clear.”

200 See Patricia Loughlan “‘You wouldn't steal a car...’: Intellectual Property and the Language of Theft” [2007] E.I.P.R. 401. As for stealing television, I can only refer you to the even more curious case of Philo Taylor Farnsworth and the Radio Corporation of America.

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