1 Financing Laboratories: the Role of RCA's Patent Management in The

Financing Laboratories:

The role of RCA’s patent management in the 1930s

Shigehiro Nishimura

Introduction

Studies in the past have shown that the US patent system promoted technological development and economic growth.1 In addition to this, some studies have focused on linkages between research and development (R&D) and economic growth. Achieving economic growth based on new technologies requires pouring resources into R&D and commercialization of innovative technologies. It has been pointed out that financing innovative companies and entrepreneurs has remarkably affected the patent system as well as market development, personal networks (informal finance) and institutional finance, such as the stock market.2

These studies are particularly true of the 19th century, when innovative individuals, small companies and startups were the main players in the economy. In the 20th century, however, in-house research laboratories of modern enterprises conducted a substantial portion of R&D activities. At about the same time, patent management was internalized in parallel with the progress of R&D in large enterprises. While some studies made it clear that development of the technology market needed intermediaries that promoted the use of the

1 H. I. Dutton, The Patent System and Inventive Activity during the Industrial Revolution (Manchester, 1984); Christine MacLeod, Inventing the Industrial Revolution: The English Patent System, 1660-1800 (New York, 1988); B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 (New York, 2009). 2 Naomi R. Lamoreaux & Kenneth L. Sokoloff, Financing Innovation: In the United States 1870 to the Present (Cambridge, MA, 2007).

patent system and economic growth, 3 intermediaries such as patent attorneys and individuals who were competent to manage patents were internalized and organized as patent departments in modern enterprises. Although the studies mentioned above described how individuals and firms secured resources from the market and invested them in R&D, so far, little attention has been paid to how enterprises arrange for, or manage the flows, of such resources internally. The aim of this paper is to clarify the kind of organizations that coordinated resource allocation and financing in R&D of radio-related technology through the case study of Radio Corporation of America (RCA) from the 1930s to the first half of the 1940s.

This paper considers the financing for R&D as a part of patent management. The definition of patent management is “to make personnel control or regulate rights, technology, information, etc., in order to maximize profits by taking advantage of the patent system.”4 Patent management is relatively independent of R&D management. A study pointed out that in the radio-related fields, the direction of R&D targeted the acquisition of patents, that is, strategic R&D for patents existed.5 On the other hand, some studies emphasized that patent management systematically promoted and arranged global technology flows.6 This paper will examine how patent management of RCA controlled the

3 Naomi R. Lamoreaux & Kenneth L. Sokoloff, “Intermediaries in the U.S. Market for Technology, 1870-1920,” in Stanley L. Engerman, et al. (eds.), Finance, Intermediaries, and Economic Development (Cambridge, UK, 2003); Naomi R. Lamoreaux, Kenneth L. Sokoloff, and Dhanoos Sutthiphisal, “Patent Alchemy: The Market for Technology in US History,” Business History Review 87 (Spring 2013): 3-38; Tom Nicholas and Hiroshi Shimizu, “Intermediary Functions and the Market for Innovation in Meiji and Taishō Japan, Business History Review 87 (Spring 2013):121-149; David E. Andersson and Fredrik Tell, “Patent Agencies and the Emerging Market for Patenting Services in Sweden, 1885-1914,” Entreprises et Histoire 82 (Avril 2016):11-31. 4 Shigehiro Nishimura, International Patent Management in Japan: The Formation and Development of Local Patent Management via Cooperation between GE and Toshiba (Tokyo, 2016). 5 Leonard S. Reich, “Research, Patents, and the Struggle to Control Radio: A Study of Big Business and the Use of Industrial Research,” Business History Review 51 (2): 208-235. 6 Shigehiro Nishimura, “The Adoption of American Patent Management in Japan: The Case

finance for R&D.

The primary sources for this study are David Sarnoff Research Center records of

Hagley Museum & Library, and Minutes of Directors’ Meeting of RCA, in Owen D. Young

Papers, held in the St. Lawrence University. The patent data and related publications issued by the USPTO have also been used.

The rest of the paper is organized as follows. The first part examines RCA’s patent management during the 1920s, when it was an enormous radio patent pool. The next section describes the changes in business structure and in patent management, in which

Otto S. Schairer is a key member to be made note of. Finally, the patent management system which financed R&D activities in the latter part of the 1930s and in 1941 will be analyzed.

Business and patent management, 1919-1930

A Telecom Carrier

RCA was formed when General Electric Company (GE) acquired the Marconi Wireless

Telegraph Company of America (American Marconi), a subsidiary of Marconi’s Wireless

Telegraph Company Ltd., of the UK (British Marconi). Prior to World War I, British and

American Marconi companies controlled US international radio communications. But from the viewpoint of national security, the US Government required GE to buy it out and put international radio communications under American control.7

of General Electric” in Pierre-Yves Donzé and Shigehiro Nishimura (eds.), Organizing Global Technology Flows: Institutions, Actors, and Processes (New York and London, 2014). 7 Federal Trade Commission, Report of the Federal Trade Commission on the Radio

In order to operate an international radio telecom business, RCA needed to secure essential patents covering radio-related technology. Although American Marconi, which GE bought, held some of the essential patents such as those of Marconi, Fleming, and

Fessenden, it was not sufficient. In order to collect all the essential patents, GE had to make some companies, which held important radio-related patents, participate in RCA. American

Telephone & Telegraph Company (AT&T) and its manufacturing subsidiary, Western

Electric Company, held triode patents of De Forest (No. 841386, No. 841387, No. 879532).

As a result of the negotiations, AT&T acquired ordinary shares and preferred shares of RCA, and concluded mutual patent license agreements without fees for 10 years with RCA, in

1920. 8 The United Fruits Company and its subsidiary, Wireless Specialty Apparatus

Company, which had operated wireless communication services, both, internally and publicly, and had crystal radio patents, participated in RCA as well. Furthermore,

Westinghouse Electric and Manufacturing Company (Westinghouse) participated in RCA in

1921. Westinghouse engaged in wireless-related business through its subsidiary company named The International Radio Telegraph Company. It held heterodyne patents of

Fessenden, and also acquired Armstrong’s regenerative circuit patents and Pupin’s patents in 1920.9

Therefore, in the beginning, the directors were elected from among the main shareholders, as shown in Table 1. The Board comprised four directors from GE, two from

Westinghouse, two from AT&T, and one each from United Fruits and International Radio

Telegraph. Furthermore, Walter J. Gifford and Frederick A. Stevenson from AT&T retired in 1922 with the sale of common stocks by AT&T.

Industry (Washington, DC, 1924): 18-22. 8 Although AT&T sold common stocks and withdrew directors in 1922, it maintained the license agreement with RCA for ten years. 9 FTC, Report, 22-24.

RCA’s business of the 1920s was composed of four departments: traffic, sales, marine and engineering. 10 The traffic department was engaged in international commercial wireless telecommunications business and ship-to-ship or coastal communications business. The main competitors for this department were submarine cable service companies. The sales department was in charge of the sales of wireless equipment to the governments and wireless stations. Initially, it was for business. Sales of radio receivers became a big business with the spread of radio broadcasting. The marine department did the business of leasing or selling wireless equipment to steam ship companies. The engineering department worked on the erection and improvement of wireless stations.

Table 2 shows the business structure of RCA through 1928, as viewed from its sales.

In 1921, sales billed by inter-oceanic wireless communications were larger than their other business, however, from 1922 onward, the sales of wireless equipment, especially that of radio receivers, expanded rapidly, accounting for the majority of sales billed. As will be seen later, the radio receivers sold by RCA were manufactured by GE and Westinghouse.

Managing the Patent Pool

Having surveyed RCA’s business in the 1920s, the patent management during this period will be clarified in this section. RCA was an international wireless telecommunication carrier and a distributor of equipment for it. It was a gigantic, exclusive patent pool at the same time. The patent pool consisted of both, international and domestic agreements.

Internationally, RCA concluded agreements for patent and international wireless

10 Radio Corporation of America, Annual Report for the year 1921, 1922.

communication with British Marconi, Compagnie Generale de Telegraphie Sans Fil of

France, and Telefunken GmbH of Germany. Considering the agreement with British

Marconi for example, there were some features. First, it provided each exclusive territory:

RCA’s territories were the United States of America, its territories and possessions, where it held exclusive rights under the patents and inventions made by British Marconi and RCA.

On the contrary, British Marconi’s territories were the British Empire and its territories, where it held exclusive rights under the patents and inventions made by both companies.

Under the contract, the two companies were to acquire the right to inventions of employees of both companies, and if one filed for a patent application, the other party may be informed, for a patent application in their own territory.11 In other words, RCA received the results of the R&D of the affiliated company, and at the same time, it secured the US patents covering such foreign inventions.

Domestically, RCA, GE, Westinghouse, AT&T and Western Electric, United Fruits and

Wireless Specialty Apparatus, and Radio Engineering Co. of New York concluded agreements for wireless patents and technologies. The main content of a series of contracts was that RCA secured an exclusive license for selling wireless apparatus covered by patents held by the parties. Under the agreements, GE and Westinghouse produced wireless equipment at 60 to 40, which RCA sold. With AT&T, both companies agreed to use related patent rights mutually, on the condition that they coexist by segregation of the market as wireless communications for RCA and wire telecommunications for AT&T. Through a series of contracts, RCA secured exclusive licenses under about 2,000 wireless-related patents in the Unites States.12

11 “Abstract of Contracts” n.d., Secretaries File: 137-A, Box 8, RCA Victor Camden/ Frederick O. Barnum III collection, Hagley Museum & Library. 12 FTC, Report, 3.

Therefore, the main objective of RCA’s patent management during the 1920s was to administer the patent pool with affiliated companies. The core organization for it was the

Patent Policy Committee, which was a permanent committee set up within the Board of

Directors. The committee was appointed to operate its licensing policy, as the original one was formulated in April 1922. The original licensing policy was restrictive and it was stipulated that the Board of Directors of RCA would strongly control the license. For example, with regard to wireless equipment for land, it was stipulated that licenses and equipment for international wireless communications should not be sold or leased unless approved by the directors.13 Table 3 shows the members of the Patent Policy Committee from 1922 to 1932. In addition, Table 4 shows the participants and their titles at the meeting by invitation. The committee members comprised RCA’s proper directors14 and directors from GE, Westinghouse and United Fruits, who represented interests of their own companies. Participants by invitation were attorneys who were responsible for patent administration, patent attorneys, and persons in charge of the patent departments in each company. The role of this committee was to review the matters and make recommendations to the Board of Directors. The matters under review included consideration of patent license policy, discussing whether to approve or deny the application for license out from a third party, and judgments on acquiring rights related to inventions and patents and on filing lawsuits. These subjects were discussed at least once a month at the committee, and deliberations were reported to the Board of Directors.

13 Minutes of directors meeting, April 21, 1922, Folder 224A, Box 95, Owen D. Young Papers, St. Lawrence University. 14 John H. Hammond, Jr., who had technologies and patents relating to carrier current communications, sold to RCA his patents and service and become a director of RCA in 1923. From April of that year on he had been a member of the Committee. Minutes of directors meeting, February 2, 1923; April 20, 1923. Hammond, Jr. could have been owner of Wireless Specialty Apparatus Company. Albert Abramson, Zworykin: Pioneer of Television (Urbana, Chicago & Springfield, 1995): 87.

It was the Patent Department that was responsible for patent administration. The leaders of the department were Ira J. Adams, Patent Attorney, and H. G. Grover and J. G.

Norton, who were Assistant Patent Attorneys during the 1920s.15 The functions of the department are summarized into the following six points.16 The first was to ensure that patent and trademark applications and acquisitions were filed. 17 The second was to investigate infringement and make recommendations to the Vice President.18 The third was to check the products sold by RCA from the perspective of patents, which was commonly referred to as patent clearance. The fourth was to investigate and evaluate patents and inventions brought into the company. The fifth was to respond to consultations related to intellectual property from each department of the company. The sixth was to review papers published by executives, engineers and employees before publication, in order to comply with standards governing the disclosure of sensitive matter and patent requirements. To summarize the above, the main function of the patent department in the 1920s was filing patent applications and examining patents and inventions.

Engineering, Research, and Patents

RCA's main business in the 1920s was international wireless communications,

15 RCA, Annual Report, 1921. Norton became Assistant Patent Attorney since 1922. 16 RCA, Regulations, January 1st, 1924, RCA Corporation Records, Box 8, Secretary’s Files No. 138, Hagley Museum & Library. 17 “The Patent Attorney is charged with the responsibility of arranging for protection of the inventions, trademarks and copyrights of the Corporation by promptly taking the necessary steps to obtain patents or registrations in the Unites States and in foreign countries.” RCA, Regulations. 18 “The Patent Attorney shall inaugurate investigations bearing on all questions involving infringement of patents, trademarks and copyright registrations of the Corporation and will make recommendations to the Vice-President and General Manager for the filing of infringement suits. With the approval of the Vice-President and General Manager, the Patent Attorney shall advise with the General Counsel and Patent Counsel of the Corporation in regard to prosecuting infringement suits.” RCA, Regulations.

ship-to-ship or coastal communications, and sales of radio equipment. At the same time, it was also a huge patent pool. On the other hand, RCA was reluctant to conduct R&D and to acquire new patents by itself. R&D and patent acquisitions during the period were as follows. RCA had the Engineering Department to back its wireless telecommunications business. The main task of the department was the erection and improvement of wireless stations and the development of high power long distance tubes transmitting set in cooperation with GE. E. F. W. Alexanderson, the Chief Engineer, who was also from GE, was in charge of the department. The department was divided into two divisions: the

Design Division and the Construction and Operating Division. Each division was headed by

C. H. Taylor and A. E. Reoch, both of whom were Assistant Chief Engineers. Furthermore,

W. A. Graham was appointed as the Operating Engineer in the department.19

On the other hand, research on wireless technology was owed to related companies, especially GE and Westinghouse and their research laboratories. In addition, through patent agreements with foreign companies, RCA was able to secure the results of R&D made in Europe. Although RCA held the Research Department from the beginning, its functions were limited. In 1921, Dr. Alfred N. Goldsmith was appointed as the Director of

Research.20 The laboratory was located in the College of the City of New York, in which researchers devoted themselves to studying wireless communications.

However, earlier, there was a debate within the Board of Directors that the RCA itself should have R&D functions by relocating and extending the laboratory. At the directors’ meeting held in September 1923, some directors expressed an opinion that “it would be desirable to move the research laboratory from the College of the City of New York.” The

Board then appointed a subcommittee consisting of E. W. Rice, Jr., of GE, E. M. Herr of

19 RCA, Annual Report for 1922, 1923. 20 RCA, Annual Report for 1921, 1922.

Westinghouse, and Hammond, Jr., to consider the opinion. The points which were placed before the subcommittee as actionable elements were: 1) “to consider the research department problem of the corporation,” 2) “to consider the needs of the corporation in this respect,” and 3) “to make such recommendations to the Board as might tend to bring about advantageous cooperation between the research laboratories of Mr. Hammond, the General

Electric Company, the Westinghouse Electric & Manufacturing Company and the Radio

Corporation.”21 Following the examination, however, a negative report was submitted to the Board of Directors. Specifically, “the Board was in sympathy with the idea that the

Radio Corporation should have adequate staff for testing apparatus presented to it by the manufacturing companies, but it was not in sympathy with having a research staff to do that research work which can and should be done by the manufacturing companies.”22

Accordingly, the Board of Directors had decided to construct the Technical and Test

Laboratory to deal with the standardization of model and design for mass production of radio receivers. The laboratory did not have research functions.23 It was housed in a newly erected a three-story brick and concrete building at Van Cortlandt Park in New York City, and was staffed by RCA experts.24

Thus, while RCA maintained an engineering department in the 1920s, it did not have

R&D functions. Such a structure is also shown in the patent statistics. Figure 1 shows the trend of patent applications of RCA from 1920 to 1940.25 From this figure, it is clear that the number of patent applications increased more than 200 since 1929, but in the 1920s it is clear that the number was extremely small as compared with the subsequent years. Also,

21 Minutes of Directors Meeting, September 24, 1923. 22 Minutes of Directors Meeting, October 5, 1923. 23 Minutes of Directors Meeting, February 15, 1924. 24 RCA, Annual Report for 1924, 1925. 25 Sorted patents applied for and issued by 1945 in the name of RCA by application date.

until 1928 more than half of the applications in the United States were based on foreign inventions. Further, Table 5 shows the features of patent application as seen in stock. The number of patents held in 1929 was 1,183, of which 188 (15.9%) developed independently by the RCA, 261 (22.1%) from foreign companies, 734 purchased 62.0%). It was a feature of the 1920s that RCA did not acquire patents through internal R&D activities, but purchased patents and inventions from foreign countries and patent pool outsiders.

From carrier to manufacturer

Business Development

In May 1930, the Department of Justice filed a lawsuit against RCA and related companies, asserting that cross-licensing agreements between RCA and related companies violated the antitrust law. In 1932, RCA signed a consent decree with the Department of

Justice, thereby making it independent from GE and Westinghouse. Of course, this incident had a major impact on RCA’s business, but the business structure that affected RCA’s patent management has already begun to change. During the period from the late 1920s to the independence of RCA, progress was made in the entertainment, wireless communication, and manufacturing businesses.

In the entertainment field, RCA established NBC in 1926 with GE and Westinghouse to strengthen the broadcasting business. RCA operated WJZ broadcasting station in New

Jersey and WRC in Washington, DC, but it also took over WEAF from AT&T and added it to its network.26 Furthermore, RCA founded RCA Photophone, Inc., in 1928 in collaboration

26 RCA, Annual Report for 1926, 1927.

with GE and Westinghouse. This company developed sound-motion picture projection equipment and a method to record sound on film. In the same year, RCA took capital stocks in the movie company Radio-Keith-Orpheum Corporation, and strengthened the entertainment business.27

In the wireless communications business, RCA established Radiomarine Corporation of America in December 1927, and transferred its own ship wireless service business and the assets of a company it acquired (Independent Wireless Telegraph Company) to the new corporation.28 In March 1929, it established R. C. A. Communications, Inc., which carried out the international wireless communication business, and transferred RCA’s personnel to the new organization.29

Further, major changes were also seen in the manufacturing business, in the late

1920s. RCA bought Victor Talking Machine Company (Victor) in 1929 with share exchange and cash. Victor had factories in Camden, New Jersey, Oakland, California, and Argentina.

In addition, Victor owned all of the shares of the subsidiaries in Canada, Brazil, Chile, and a part of Victor Talking Machine Company of Japan Ltd., and Gramophone Company Ltd., of

Britain.30 The acquisition of Victor gave RCA not only a firm basis for manufacturing capabilities, but also the foundation for R&D, since the 1930s.

Along with progress in the entertainment, wireless communication, and manufacturing businesses, the organizational structure to manage them was adjusted. In

1930, RCA changed organizations, whereby RCA itself became a holding company, and established operating (subsidiary) companies for each business. In the manufacturing and sales business, RCA Victor Company, Inc., manufactured and sold radio receivers, and RCA

27 RCA, Annual Report for 1928, 1929. 28 RCA, Annual Report for 1927, 1928. 29 RCA, Annual Report for 1929, 1930 30 Ibid.

Radiotron Company, Inc., engaged in the manufacturing and sales of radio vacuum tubes.

In the entertainment field, National Broadcasting Company, Inc., continued to engage in the broadcasting business, and RCA Photophone, Inc., operated in the field of sound recording and reproduction and talking motion pictures. In the field of wireless communication, R. C. A. Communications, Inc., managed international wireless telecommunication, while the Radiomarine Corporation of America was responsible for ship-to-ship/coastal wireless communication. In addition, R. C. A. Institutes, Inc., was organized to educate and train employees and communication staff, and Radio Real Estate

Corporation of America was organized to manage the real estate of radio stations. In addition, E. T. Cunningham, Inc., was included under the umbrella, and distributed

Cunningham brand vacuum tubes. Under this decentralized organizational structure, the headquarters were in charge of resource allocation, coordination of subsidiary activities, and management of patents, licensing, and legal matters.31

License Policy and Integration of Manufacturing

The license policy of RCA also gradually changed through the 1920s. RCA and the radio group (GE and Westinghouse) thought that unlimited licensing would intensify competition in the beginning. Therefore, the radio group strictly restricted and controlled licensing for those who were outsiders to the patent pool. As aforesaid, RCA decided a licensing policy in April 1922 and established the Patent Policy Committee to manage licenses. The first licensing policy (April 1922) set strict regulations on the manufacture and use of wireless devices, and decided not to license out for the manufacture and sale of

31 RCA, Annual Report for 1930, 1931.

vacuum tubes.

However, with the expansion of radio broadcasting and demand for receivers, licenses of patents owned by RCA were required from manufacturers. In 1927, RCA granted licenses to 25 manufacturers of radio sets. In the following year, it began licensing vacuum tube patents with limitations, although RCA did not license the super heterodyne patent, which was the state-of-the-art receiving circuit at the time.32 In 1929, it decided to grant a license to a company with all names. While the license fee was initially as high as 7.5%, it was reduced to 5% in 1932, making it easier for manufacturers of radio sets to be licensed.33

Relaxing the licensing terms and granting licenses to radio set makers caused the price of radio equipment to decline. In order to maintain competitiveness in the field of vacuum tubes and radio receivers, RCA was required to integrate research, engineering, manufacturing and sales activities which had been dispersed to the radio group companies so far. RCA had already taken its first steps toward entry into the manufacturing business by acquiring Victor and its assets. However, it had to be done through transfer and unification of manufacturing facilities from GE and Westinghouse.

In October 1929, the directors of RCA recognized that it should acquire the manufacturing rights and facilities that GE and Westinghouse had, and that it needed to unify research and engineering of the radio group companies as well. A special committee was appointed at the Board meeting that same month to formulate an integration plan for the manufacture and sale of equipment. In the second meeting that same month, the integration plan was approved.34 Based on that plan, negotiations were held between RCA, and GE and Westinghouse. The three parties agreed that RCA could acquire exclusive

32 RCA, Annual Report for 1927, 1928. 33 W. Rupert MacLaurin, Invention & Innovation in the Radio Industry (New York, 1949): 136. 34 Minutes of Directors Meeting, October 4, 1929; October 18, 1929.

licenses based on the radio group’s patents, which were granted to GE and Westinghouse so far. 35 In other words, GE and Westinghouse decided to transfer all the rights to manufacture radio equipment to RCA. In addition, it was decided that RCA would acquire real estate, factory, other manufacturing facilities, employees, and shares in NBC, RCA

Victor Company, RCA Radiotron Company, RCA Photophone and GM Radio Corporation, which were held by GE and Westinghouse. By possessing all the shares of these RCA subsidiaries, RCA could obtain all the royalties that had been shared between RCA, GE and

Westinghouse. In addition, RCA could lower the cost of radio equipment and vacuum tubes it manufactured and sold, to such arrangements.36 These were the motivations for the integration.

According to the decisions of the Board of Directors, manufacturing, engineering and research functions were focused on RCA. In the production of radio receivers and sound reproduction equipment, it focused its manufacturing activities on RCA Victor Company,

Inc., Camden, New Jersey. In addition, RCA gathered research, engineering and manufacturing, which had been dispersed in each company under one roof, and relocated sales headquarters from New York to Camden.37 In the field of radio vacuum tubes, RCA integrated manufacturing, engineering and sales functions of GE and Westinghouse into

RCA Radiotron Company, Inc. The headquarters was located in Harrison, New Jersey, which was originally a vast land of GE's Edison bulb factory. Harrison factory had developed as a center of R&D along with the head office function. Talented people selected from laboratories of GE and Westinghouse, were placed in the laboratory.38

35 Minutes of Directors Meeting, April 4, 1930; RCA, Annual Report for 1930, 1931. 36 Minutes of Directors Meeting, April 4, 1930. 37 RCA, Annual Report for 1930, 1931. 38 Ibid.

Otto S. Schairer and the Changes in Patent Management

Changes in RCA's licensing policy and its entry into manufacturing had also changed patents management. In the 1920s, the Patent Policy Committee was established to manage the patent pool, and main responsibilities of the patent department were filing patent applications and investigation of patent-related problems. However, in the 1930s, patent management began to play a role in promoting R&D, as well as patent applications and investigation. It was Otto S. Schairer who was responsible for the patent management as

RCA’s business evolved.

Schairer was born in Saline, Michigan, on October 7, 1879. He got his Bachelor of Arts from the University of Michigan in 1901 and a second bachelor’s degree (Science in

Electrical Engineering) in 1902. In the same year, he became an apprentice worker at

Westinghouse and was trained at its motor factory. He then moved to the engineering department in fall that year. Originally, Schairer was an engineer. But a few months after moving to the engineering department, he “was offered a regulatory job in the patent department.”39 In response to the offer, Schairer entered the patent department and was involved in the preparation of the specifications for the invention of George Westinghouse, the founder. After that, he became a registered Patent Attorney and studied law, and passed the bar examinations in Pennsylvania in 1912.

In 1919, Schairer became the Director of Patent Development at Westinghouse. His official title was “Director of Bureau of Engineering Development in the Patent Field” and its role was “finding and encouraging the development of new products for the company to manufacture and sell.” He regarded, in particular, “electrically-driven and heated machines

39 “An Autobiography – Otto Sorg Schairer, Read to the Old Guard of Princeton in 1944,” Box M&A11, Folder 38, David Sarnoff Research Center Records, Hagley Museum & Library.

and appliances for home and industrial uses, such as refrigerators, washing and ironing machines, thermostats, oil well drilling machinery and high-speed passenger elevators,” as promising fields and arranged to develop such new fields. 40 Schairer worked at

Westinghouse to develop patents and R&D strategies which were the basis of diversification for the purpose of growth. The most important work that Schairer did at Westinghouse, was

“to prepare plans for acquiring a patent position in the radio field which would enable the

Westinghouse Company to obtain a footing in that very promising business.”41 Schairer then became the manager of the patent department at Westinghouse in 1926, and became responsible for all of its patent operations.

Schairer, as a representative of Westinghouse’s patent department, attended the

Patent Policy Committee of RCA by invitation (Table 4 above). As RCA’s business developed, he was appointed Director of Patent Development on May 1, 1929, upon the request of President J. G. Harbord. When Schairer was appointed to this position, the regulations of the organization also changed. The Patent Attorney and assistant Patent

Attorney were originally in the patent division of RCA, but the position of Director of Patent

Development did not exist. The new position was defined thus: “The Director of Patent

Development is charged with the direction of the patent interests of the Corporation including the activities of the Patent Attorney and his subordinates. He will keep in touch with the general patent situation as it may affect the Radio Corporation of America, and will take such action and make such recommendations as are necessary to safeguard its interests, and strengthen its position.”42 To sum up, he was in a position to report directly to the Executive Vice President (David Sarnoff), he also supervised the Patent Attorney

40 Ibid. 41 Ibid. 42 “General Order No. 71,” April 17, 1929, Box M&A11, Folder 39, David Sarnoff Research Center Records.

(position assumed by Harry G. Grover) and was planning the entire patent policy of RCA.

Furthermore, he was appointed the Vice President in Charge of the Patent Department on

June 5, 1930.43

Independence of RCA

Setting up a new title of the Director of Patent Development and the appointment of

Schairer to that position in 1929, were necessary for the RCA’s patent management to go beyond simply controlling licensing within the patent pool, and to develop into patent management that lead the independent R&D and manufacturing business. Therefore,

Schairer’s initial work was to compile negotiations to revise restrictive license agreements with related companies in order to respond to the consent decisions with the Department of

Justice.

It was in May 1930 that the Department of Justice prosecuted RCA for the violations of antitrust law. Schairer, who became the Vice President in Charge of the Patent

Department the following month, intensively considered the creation of an “open patent pool.”44 Specifically, Schairer negotiated with GE, Westinghouse, and AT&T to remove restrictive clauses from each contract. Schairer recalled that “during the next several years my principal attention was devoted to negotiating with the parties to the contracts under criticism, and to drafting new contracts which were approved by the Department of Justice and the trial Court, and also to negotiating settlements of most of the other litigation.”45

Taking the negotiation with AT&T as an example, the results of the revision negotiations on

43 Minutes of Directors Meeting, June 5, 1930. 44 RCA, Annual Report for 1931, 1932. 45 “An Autobiography – Otto Sorg Schairer.”

the basic agreement (the principal agreement) between the radio group, AT&T and Western

Electric, were reported to the Patent Policy Committee, in June 1932. It was reported that all parties agreed to change contracts from those that contained the exchange of exclusive licenses to those that provided mutual grants of non-exclusive licenses. The Patent Policy

Committee submitted Schairer’s report to the Board of Directors the same month as a recommendation, and a contract revision with AT&T was decided.46

A revision of the basic agreement with RCA like this was also done with GE and

Westinghouse. RCA, GE, and Westinghouse arrived at two agreements at the same time, to waive the exclusive nature of a patent license that had been mutually granting so far. As a result, the other two companies, in terms of paying royalties, were placed in a position to compete with RCA in the manufacture of radio sets, vacuum tubes, accessories and other specific product lines for radio purposes. On the other hand, RCA got licenses on a royalty basis, in the specific field where GE and Westinghouse had patents with exclusive rights so far. GE and Westinghouse decided to dispose of RCA shares.47

The antitrust law suit filed by the Department of Justice was resolved with RCA signing a consent decree on November 21, 1932. It was to avoid economic loss and industrial collapse due to prolonged litigation. RCA became an independent company with

GE and Westinghouse disposing of RCA shares, while at the same time, the directors representing GE and Westinghouse resigned and became independent from the human networks.48

46 Minutes of Directors Meeting, June 17, 1932. 47 Minutes of Directors Meeting, November 14, 1932. 48 Minutes of Directors Meeting, November 22, 1932. However, Owen D. Young, from GE, remained director for next few years.

Financing RCA Laboratories

Research and Advanced Development

Since it attained independence in November 1932, RCA further integrated its manufacturing business and started full-scale R&D. In this section, the progress of R&D and development of patent management in the 1930s are examined.

After independence, RCA expanded its manufacturing business by entering into the manufacture of radio transmitting equipment. Subsidiaries engaged in manufacturing business were RCA Victor and RCA Radiotron, Inc. The former had manufacturing and sales headquarters in Camden, New Jersey, and was engaged in manufacturing business related to radio receivers. The latter had its headquarters in Harrison, New Jersey, and was manufacturing vacuum tubes, while RCA Victor of Camden was responsible for vacuum tube sales.49

In the beginning, each subsidiary was responsible for manufacturing as well as R&D, but there were moves to integrate them. RCA organized RCA Manufacturing Company, Inc., on January 1, 1935, and put this company in charge of manufacturing, researching, engineering and sales. Since then, RCA Victor Company and RCA Radiotron Company became the divisions of this company.50 This was done with the aim of concentrating the

R&D functions that dispersed each division, as well as returning the results to other divisions to enhance the competitiveness of each business.

The main R&D areas of the 1930s were long distance communication, ultra-high frequency (UHF), television, and vacuum tubes. In the television field, Vladimir Zworykin

49 RCA, Annual Report for 1933, 1934. 50 RCA, Annual Report for 1934, 1935.

completed a practical imaging tube, the iconoscope, in 1933. In the same year, a very small radio vacuum tube was developed, which was very effective in the UHF field. Besides, gramophone and talking picture technologies were also being researched and developed.51

As RCA organized R&D activities independently, the number of patent applications and the number of possessions increased. Looking at Figure 1 above, we can see that patent applications had rapidly expanded in 1929, when O. S. Schairer was appointed as the

Director of Patent Development, and it had been about 300 applications per year until 1931.

Also, the number of applications based on inventions made in the United States increased, and at the same time, the number of applications transferred from abroad decreased. From

1932 onward, the number of applications further increased, and from 1936, it turns out that there are over 500 applications per year. The results of R&D in the 1930s were clear even in the stock of the patent, not the flow of the patent applications. Table 5 above shows that the patents invented by RCA increased. The number of patents possessed in 1944 was 8,258, of which 4,919 (59.6%) were independently invented, and that number increased markedly more than 15.9% in 1929. On the other hand, the proportion of those acquired from foreign companies decreased dramatically from 22.1% to 13.1%, the proportion of those purchased from other companies decreased from 62% to 27.3%.52

This increase in the number of patent applications and possessions, together with aggressive licensing policies, became the condition of finance for R&D. Its cost was originally borne by each subsidiary of RCA and such a thing was “being charged against its operations.”53 However, if each subsidiary company bore R&D expenses and collected the

51 RCA, Annual Report for 1933, 1934. 52 “Report of RCA Laboratories for 1944 (Summary by Schairer for Davis Sarnoff), February 27, 1945,” Box M&A 11, Folder 52, David Sarnoff Research Center Records. 53 “RCA Laboratories: A New Center for Radio Research, Addresses by David Sarnoff and Otto S. Schairer, March 12, 1941,” Box M&A 11, Folder 46, David Sarnoff Research Center Records.

cost by adding to the products and services made by RCA, there was a possibility that the cost of products and services would increase and price competitiveness would be lost.54

Therefore, “since 1935, the cost of most of research and advanced development had been borne by RCA itself. To supervise such expenditures of its funds and to coordinate the research activities of the RCA companies, Ralph R. Beal was appointed Research

Director.”55

R&D expenses that RCA was to bear were covered by licensing fees from external licensees and RCA divisions and subsidiaries. Table 6 shows the relationship between the receipt of patent license fees from 1935 to 1944 and R&D expenses from them. The majority of R&D expenditure was covered by licensing fees from external licensees, and there was more receipt than expenditure on R&D expenses, so we can see that the R&D expenditure account had been always in surplus. Although divisions and subsidiaries paid license fees to

RCA, by adopting such a system, only a part of R&D and patent-related expenses were included in the selling and administrative expenses of each division, which kept products and services of RCA’s divisions and subsidiaries competitive in the markets.

Extension of Patent Management

From 1935 onward, RCA, rather than its subsidiaries became responsible for R&D expenses, but expenses were allocated to them. Each was conducting R&D according to its own goals. Therefore, RCA Laboratories was established in March 1941, so as to consolidate widely diffused R&D activities in one place, and to be able to carry out unified long-term

54 “Report of RCA Laboratories for 1944 (Summary by Schairer for Davis Sarnoff), February 27, 1945.” 55 “RCA Laboratories: A New Center for Radio Research, Addresses by David Sarnoff and Otto S. Schairer, March 12, 1941.”

research and development projects. At first, RCA Laboratories was defined as “A Service of

Radio Corporation of America,” to direct and to be responsible for all research and original development56 of the RCA family. Secondly, researchers and engineers who had belonged to scattered sections or locations were transferred to RCA Laboratories. Thirdly, the building of the main laboratory was constructed in Princeton, New Jersey, where accessibility was easy from the headquarters of the factory. All research activities and original development activities were relocated there. Then, O. S. Schairer became the Vice

President in charge of RCA Laboratories.57

Although RCA Laboratories was established on the basis of the social demands of expanding research by the National Defense Program, the reorganization was not only done to conduct R&D under a unified command, but also to systematically unite R&D activities with patent management. In other words, Schairer aimed to promote R&D with patent management. This was more clearly shown in the plan to organize RCA Laboratories, created by Schairer, and submitted to David Sarnoff, the President, and the Board of

Directors. In the proposal, he insisted that most of the staff of the patent department should be transferred to Princeton, and further set up an account which integrated RCA

Laboratories and patent departments “in order that their operations may be readily followed and the net results observed currently.”58 Table 7 is a trial calculation table that

Schairer would have created and submitted when proposing this scheme. Looking at the balance for the 10 months up to October 31, 1940, royalty receipts from external and RCA

56 “Original development means the development of a new product in a form in which it can be turned over to production engineers for design and refinement for manufacture and sale in quantity or as a standard or regular product. It does not include adapting an existing type of product to new conditions or re-designing it in a new form or with new or modified characteristics or performance. The latter is the function of production engineers and organization.” From O. S. Schairer to David Sarnoff, December 30, 1940, Box M&A 11, Folder 45, David Sarnoff Research Center Records. 57 Ibid. 58 Ibid.

divisions and subsidiaries were about $5.2 million, patent division costs were about

$770,000, television development amortization were $200,000, patent depreciation and amortization were $750,000, subsidiary R&D expenditure was about $880,000, and the total cost was about $2.6 million. The balance was a surplus of approximately $2.6 million.

RCA tried to obtain revenue from the fruits of the R&D results and devote it to expenses for further research and development with a patent mediated model.

The organizational scale of RCA Laboratories was as follows: there were about 300 employees working in the laboratory, of which over 200 were scientists or engineers. The patent department held 135 staff members, 35 of whom were patent attorneys. In total, the number of staff was about 435, most of who were to work at Princeton, New Jersey.

What was the result of the management method that enlarged the sphere of patent management and linked license fees and R&D in RCA Laboratories? The net royalties received by the RCA from 1919 to 1944 were about $115.5 million, of which $105 million was gained in the period from 1929 to 1944. Within the latter, approximately $21 million was paid for by RCA’s subsidiaries and divisions, while about $84 million came from outside the company. Therefore, it can be noted that the RCA could obtain sufficient funds from the market by patenting the results of R&D and licensing them out under consolidated patent management.

Schairer summarized that the “adoption of the liberal policy of granting licenses to all responsible applicants, instead of bringing suits against those who were not licensed, converted sources of expense, annoyance and ill-will into sources of royalty revenue with large net financial gains.”59 In fact, royalty was a reliable source of revenue throughout the year, and was evaluated as contributing greatly to the stability of RCA’s management.

59 “Report of RCA Laboratories for 1944 (Summary by Schairer for Davis Sarnoff), February 27, 1945.”

Table 8 shows sales billed and profits of RCA from 1921 to 1945. The profits averaged from

1935 to 1941 was about $16 million, while average royalties received during the same period was about $7 million. RCA has this unique system as an extension of patent management.

Conclusion

The purpose of this paper was to clarify the kind of organizations that coordinated the allocation of resources and supply of funds for R&D in large enterprises. Further, it was to recognize the allocation of resources inside modern enterprises by using the concept of patent management.

In the case of RCA, the patent management and R&D varied greatly between the

1920s and 1930s. Through the 1920s, RCA was a huge applicant for wireless patents, so that the purpose of patent management was to control its operation and licensing, and not to conduct research. However, in the 1930s RCA entered into the manufacturing business and started R&D activities, following the progress of the radio industry and the signing of the consent decree with the government in the antitrust law suits. Since 1935, RCA backed R&D activities in the highly progressing fields of radio, television and electronics through licensing fees which were received in exchange for granting patent licenses. It was O. S.

Schairer who systematized the flows of resources and funds for R&D. He had been in charge of patent management for many years since the Westinghouse era. In RCA, he expanded the scope of patent management and coordinated the flow of funds supply to R&D.

Most of the license fees received by RCA came from external licensees. In order to effectively pour it into R&D, patent management was necessary. The internalization of patent attorneys and human resources with management skills into modern enterprises led

to progress in finance for R&D.

600

US origin Foreign origin 500

400

300

200

100

0 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 Source: USPTO data; Espacenet data. Figure 1: RCA's patent applications (US)

Table 1: Member of the Board of Directors (1922) Owen D. Young Gordon Abbott General Electric Co Albert G. Davis Edwin W. Rice, Jr. Guy E. Tripp Edwin M. Herr Westinghouse Electric & Manufacturing Co. Harry P. Davis Walter J. Gifford* American Telephone & Telegraph Frederick A. Stevenson* George F. Davis United Fruit Co Arthur E. Braun International Radio Telegraph Co. John W. Griggs Griggs, Baldwin & Baldwin Edward W. Harden Jas. B. Colgate & Company James R, Sheffield Sheffield & Betts Edward J. Nally Former President of RCA (1919-1922) James G. Harbord President of RCA Note: Gifford and Stevenson retired in 1922. Source: RCA, Annual Report for 1922, 1923; do, Annual Report for 1920, 1921; FTC, Report, 20-21.

Table 2: Gross Income of RCA, 1921-1928 (Thousand dollars) Income from operations Other Trans-oceanic Real estate Gross Income Gross Sales Marine service Royalties income communicatrions operations 1921 1,469 2,139 553 4,161 1922 11,286 2,914 630 14,831 1923 22,465 3,192 738 26,395 1924 50,747 3,359 742 54,848 1925 46,252 3,418 763 379 183 50,994 1926 56,094 3,633 874 52 183 60,836 1927 56,652 3,934 991 3,311 194 65,082 1928 86,900 4,596 1,537 6,392 202 2,225 101,852 Source: RCA, Annaual Report , several years.

Table 3: Member of the Patent Policy Committee, 1922-1932 Name Period Company Note James G. Harbord 1923-1932 RCA President (-1929) John H. Hammond, Jr. 1923-1932 RCA Director Senior Vice-President David Sarnoff 1928-1932 RCA President (1929-) George S. Davis 1922-1926 United Fruits Deceased in 1926 Albert G. Davis 1922-1932 GE Vice-President Edwin M. Herr 1922-1929 Westinghouse President Harry P. Davis 1929-1931 Westinghouse Vice-President Harold Smith 1931-1932 Westinghouse Vice-President Source: Minutes of Directors Meeting, Owen D. Young Papers.

Table 4: Attendants to the Committee by Invitation, 1922-1932 Frequency Name Note (of 81) Victor S. Beam 59 Patent Counsel, Westinghouse Charles. A. Terry 50 Vice-President, Westinghouse Ira J. Adams 48 Patent Attorney, RCA David Sarnoff 40 Vide-President and General Manager, RCA Harry G. Grover 32 Assistant Patent Attorney, RCA Stephen H. Philbin 30 Attorney Otto S. Schairer 23 Directors of Patent Development, Westinghouse Charles Neave 22 Attorney L. F. H. Betts 15 Patent Counsel, RCA C. C. McClair 14 Unknown Manton Davis 14 Vice-President and General Attorney, RCA Harry E. Dunham 13 Patent Attorney, GE Julius M. Mayer 10 Unknown Note: Those who attended more than 10 times. Source: Minutes of Directors Meeting, Owen D. Young Papers.

Table 5: Where RCA’s patent came from 1929 1944 Number % Number % Patent held 1,183 100.0 8,258 100.0 Own development 188 15.9 4,919 59.6 Acquired from foreign companies 261 22.1 1,083 13.1 Purchased 734 62.0 2,256 27.3 Source: Box M&A 11, Folder 52, David Sarnoff Center Records.

Table 6: Gross Income, Expense and Net Income of RCA Laboratories Before Federal Income Tax (Thousand dollars) Other than RCA RCA Divisions & Division & Foreign Subsidiary Other Credit Gross Income Expense Net Income Subsidiary Licensees Companies Companies 1935 4,323 415 1,202 5,940 4,447 1,467 1936 5,216 597 1,422 7,235 4,782 2,498 1937 5,485 633 1,639 7,757 4,936 2,821 1938 4,241 563 1,426 6,230 4,782 1,448 1939 4,194 550 1,462 6,206 4,900 1,306 1940 4,572 312 1,620 6,504 4,870 1,633 1941 6,216 264 2,270 8,760 4,522 4,238 1942 7,430 368 1,547 1,183 10,529 6,538 3,992 1943 4,573 163 497 1,897 7,130 6,033 1,097 1944 4,555 157 591 2,098 7,401 6,334 1,067 Source: “Report of RCA Laboratories for 1944 (Summary by Schairer for Davis Sarnoff) February 27, 1945,” Box M&A 11, Folder 52, David Sarnoff Center Records.

Table 7: Statement of Patent Department Operations 10 Month Ended Oct. 31, 1940 (Dollars) Royalties paid by others than Subsidiaries- Broadcast Receivers 2,385,237.92 Receiving Tubes 691,381.13 Miscellaneous Domestic 519,661.03 Foreign 302,528.65 Past Damages 5,555.96 Royalties paid by Subsidiaries- RCA Manufacturing 960,257.68 R.C.A. Communications 279,085.90 Radiomarine 72,236.83 Other Income 3,965.69 Toral Income 5,219,910.79 Operating Expense of Patent Department Salaries 456,884.38 Rent 48,774.00 Retainers and Outside Counsel 152,150.25 License Division Expense 41,456.84 RCA Manufacturing 30,273.53 Sundry Expense 36,397.03 Toral 765,936.03 Television Field Test Amortization 200,000.00 Patent Amortization 750,000.00 Research and Advanced Development- Subsidiary Companies RCA Manufacturing, Victor Division 416,403.44 RCA Manufacturing, Radiotron Division 304,500.00 R.C.A. Communications 155,209.61 Sundry 5,652.20 Total Expense 2,597,701.28 Gross Margin 2,622,209.51 Source: M&A 11, Folder 45, David Sarnoff Center Records.

Table 8: Sales, Income and Profit (Thousand dollars) Gross Income Net Income (b)/(a) Net Profit (a) (b) 1921 4,161 399 9.58 427 1922 14,831 2,704 18.23 2,548 1923 26,395 4,562 17.28 1,644 1924 54,848 9,010 16.43 3,357 1925 50,994 5,372 10.53 2,910 1926 60,836 7,075 11.63 4,661 1927 65,082 11,463 17.61 8,478 1928 101,852 23,662 23.23 19,835 1929 182,138 19,645 10.79 15,893 1930 137,038 14,922 10.89 5,526 1931 102,645 11,546 11.25 769 1932 67,361 5,076 7.54 -1,134 1933 62,333 3,655 5.86 -582 1934 78,757 9,490 12.05 4,249 1935 89,229 10,343 11.59 5,127 1936 101,186 11,464 11.33 6,156 1937 112,639 15,422 13.69 9,025 1938 99,968 13,391 13.40 7,412 1939 110,494 13,927 12.60 8,083 1940 128,492 17,358 13.51 9,113 1941 158,696 30,360 19.13 10,193 1942 197,024 32,839 16.67 9,002 1943 294,535 47,142 16.01 10,192 1944 326,422 48,664 14.91 10,263 1945 279,504 35,186 12.59 11,317 Source: RCA, Annaual Report , several years.