revealed by the 1939 FCC report to Congress on its investigation of the telephone industry, and a court decree for stopping the same was not obtained until 1956. Thus, for 17 years the patent misuses were permitted to continue, except as to certain abatements thereof, which began early in 1949 when the Bell System companies announced a new patent licensing policy. In 1940, it became apparent to the FCC that RCA intended using its TV broadcast structure for controlling and/or influencing industry recommendations to the Commission of technical standards for monochrome transmissions of TV broadcast stations. In 1944, it was apparent that RCA's patent structure and practices were sufficient to control industry recommendations of technical standards for TV broadcast stations. The time the Government's pending antitrust suit against RCA will terminate either in a consent decree, or decision of the court, is uncertain. Thus, the time between detection of the intention of RCA to practice patent misuses in connection with the Commission's technical standards for TV broadcast stations, and the stopping of such misuses by court action, can be said to be 16 years, plus. The question is can the Commission continue, under any standard of public interest, to ignore this long delay between detection, and action for stopping patent misuses arising through the instrumentality of the technical standards it promulgates. The answer definitely is 'No'-the solution is the promulgation of the patent rule proposed for docket 10090.

"Proposals

"40. In the light of all matters involved, it is my considered belief that you should now send forward for the Commission's general agenda my memorandum of March 1, 1956, proposing a modified rule in docket 10090, and a report and order for explaining and justifying said rule. So that the Commission will be fully advised, in addition to the supporting reasons for said rule in the March 1, 1956, memorandum, the additional supporting reasons set forth in the March 14, 1956, memorandum to the Associate General Counsel, as well as those set forth in this memorandum, should be presented. If, after such presentation, the Commission desires to make final its previous vote, i.e., terminate the patent rulemaking proceedings in both dockets 10090 and 11228, then, it is my belief, we should propose that the entire matter of past and present patent misuses as unfolded herein respecting the Bell System companies and RCA, be referred to Senator O'Mahoney's subcommittee on patents for its consideration in determining whether our present antitrust laws, and our present patent system, are adequate; and particularly, whether an FCC rule, such as my memorandum of March 1, 1956, proposes for docket 10090, is necessary in connection with the technical standards it promulgates for radio-TV services including broadcasting, for helping to maintain a prime purpose of our patent system and of our antitrust laws, namely, competition in invention and competition in business respectively."

CHAPTER III. PATENT SITUATION RESPECTING PROPOSED TECHNICAL STANDARDS FOR TV BROADCAST SUBSCRIBER SERVICE, DOCKET 11279

Introductory.-There are three proponents of technical standards; each is a patent holder. In its notice of rulemaking (docket 11279) the FCC requests information respecting patent control of the transmitting or receiving equipment to be used. Information is also requested respecting licensing practices of the patent holders as to the equipment required under the proposed standards.

Each of the proponents made reply to the Commission's notice as to patents. The patent situation as defined in the patent adviser's report for FCC is based on an examination of these replies, plus an examination of the U.S. Patent Office records respecting expired patents and related unexpired patents owned by others than the proponents of the technical standards.

Patent adviser submits analysis of patent situation respecting proposed TV broadcast subscriber service.-The patent adviser's memorandum to the General Counsel on this matter is dated July 21, 1955; it was distributed to the Commissioners and staff by the General Counsel's memorandum dated September 19, 1955, mimeo 22974. The introduction and summary of the memorandum are reproduced below.

Introduction

"1. The Commission's notice of February 11, 1955, calling for comments in the matter of proposed rulemaking for TV broadcast subscription service (docket 11279), asks for information respecting patent control of the trans

mitting and receiving equipment to be used; and also asks for information respecting the arrangements which will be employed in licensing the patents involved 'for the competitive manufacture of subscription television equipment.' "2. Three parties have proposed subscription TV broadcast service. Each proponent in its comments set forth the changes in the Commission's technical standards which are believed necessary for its particular proposal, and each proponent indicates its patent interest and the patent licensing policy it will likely follow should its proposal be adopted by the Commission. The proponents are: (1) The International Telemeter Corp. (Telemeter); (2) Skiatron TV, Inc., and the Skiatron Electronics & Television Corp. (Skiatron); and (3) the Zenith Radio Corp. and Teco, Inc. (Zenith).

"3. Since the operations and equipment proposed for transmitting and receiving subscription television programs by the respective proponents above are patentable and since each proponent seeks changes in the Commission's technical standards for television broadcast stations to incorporate its system, it is believed the Commission may desire a discussion of the overall patent situation as to subscription television service, including the possibilites of drafting changes in current technical standards to avoid placing patent control in any one of the proponents or other company. With these objectives in view the subject memorandum covers the following matters:

“(a) The Commission's purposes for considering patents when adopting technical standards for broadcast stations;

"(b) The type of claims in unexpired patents which are pertinent to the drafting of standards;

"(c) The principal patentable operations or features (as limited by prior public usage and prior patents) proposed by the respective proponents of TV broadcast subscription service;

"(d) Patent holdings of the proponents of TV broadcast subscription service;

"(e) Prior public usage and prior U.S. and foreign patents which limit the claims of unexpired U.S. patents on TV subscription service;

"(f) The patented or patentable aspects of the changes in technical standards proposed by each proponent;

"(g) Unexpired patents held by others on systems for TV broadcast subscriber service;

"(h) RCA's patent position as to any TV subscriber system for which standards may be adopted;

"(i) Monopolistic aspects of the patent licensing policies set forth in the comments of the proponents of TV subscriber service; and

"(j) Further actions necessary should the Commission decide to consider patents in drafting technical standards for TV broadcast subscriber service."

Summary

"4. A summary of the major points of the subject memorandum follows: "(a) The Commission's purposes for considering patents in proceedings on technical standards for broadcast stations are: (1) To avoid, if possible, giving any particular company an unwarranted advantage over its competitors by virtue of its patent position; and (2) to ascertain if any one is in position to exercise monopolistic control in the industry as a result of the patents it owns or controls. If standards are adopted which require operations covered by unexpired patents owned or controlled by the one company, said company is provided with a great incentive to obtain and maintain patent control in one form or another of the equipment necessary for the broadcast service to which the standards apply. This is true even though the company having patent control is willing to license its patents for the manufacture and sale of equipment at reasonable royalties because the licensee-manufacturers become dependent on the company having patent control, to keep them free of patent infringement; they support the company for maintaining its patent control; and any changes in Commission's standards for incorporating improvements accomplished by others than the company having initial patent control, become quite remote.

"(b) The Commission's technical standards adopted in the past for TV broadcast stations have spelled out only functional operations and specific requirements or values for carrying out said operations. Each of the proponents herein offers a system for rendering TV broadcast subscription service which has many operations that can be made the subject of patent

claims. However, due to prior public usage and prior patents (United States and foreign) the patent claims obtained are limited to specific operations within the respective systems proposed. Some of the system operations employed by one proponent are employed by another. However, due to prior public usage and prior patents it appears that each can use its own system without conflict with the patents of either of the other proponents.

"(c) Zenith appears to be the only U.S. company which has built a patent structure on TV broadcast subscriber service; it is the owner of more than 46 such patents. It appears that Skiatron has but one issued patent on TV subscription service. Telemeter has 10 pending patent applications on its proposed system but holds no issued patents thereon.

"(d) Skiatron states that it expects to make arrangements whereby upon reasonable royalty payments authorized competing persons may procure and operate systems and components which use the principles of its system; it does not state that it will license its patents on a reasonable basis for the manufacture and sale of the transmitting or receiving equipment necessary for its system. Telemeter holds out that it may license others under its patents on a reasonable basis, but reserves to itself control of local franchise dealerships for distributing and servicing equipment after manufacture. Under Zenith's plan no decoders will be sold on the open market; Zenith intends to retain complete control of both coding and decoding equipment.

(e) It appears to be the intention of both Telemeter and Zenith to control subscriber service rendered to each community. Whether this control is to last only during the beginning of the service, or it is to be permanent, is not clear from the statements made.

"(f) Patentwise, the changes in the Commission's technical standards proposed by Skiatron for TV broadcast subscription service are ideal, i.e., none of the changes or additions proposed constitute operations sufficiently specific to bring them directly within claims of unexpired patents. On the other hand, Telemeter seeks a number of additions to the Commission's standards which call for operations with such specificity that they would undoubtedly be covered, either singly or jointly, by claims obtained in patents to issue on Telemeter's pending patent applications. Two of the additions to the Commission's standards proposed by Zenith are objectionable because they specify operations which are within the claims of Zenith patents.

"(g) It appears that there are no unexpired patents owned or controlled by others than the proponents herein with claims which cover operations proposed as additions to the Commission's standards for TV broadcast subscriber service by said proponents. RCA has patents on secret transmission of facsimile pictures; it has no patents, however, specific to TV broadcast subscriber service.

"(h) All existing transmitters and receivers for TV broadcast stations have been manufactured and sold under RCA patent licenses." The general rule is that the first authorized sale of a patented article exhausts the patent monopoly, i.e., a patent holder cannot justify further restrictions upon the use of an article after the same has been manufactured and sold. However, despite this general rule it is the holding of the Supreme Court that a license to manufacture and sell a patented product for use only in a specified field, is valid. Thus, RCA can include in its standard licenses for the manufacture and sale of TV transmitters and receivers a restriction against the use thereof for TV broadcast subscription service.

"(i) The fact that none of the proponents herein makes a clear offer to license its patents at reasonable royalties for the manufacture and sale of transmitter and receiver equipment, plus the fact that Telemeter and Zenith each indicates that it intends to retain control of the coding and decoding equipment in all communities where TV broadcast subscription service may be established, constitute sufficient warning for the Commission to make every effort to draft standards for TV broadcast subscription service which do not require operations which are covered by unexpired patents, or are covered by claims that would probably be allowed in pending patent applications of the parties to the proceeding, and thus to avoid giving

TV receivers manufactured and sold by Zenith are excepted.

32090-59-pt. 7-16

any one company an advantage over its competitiors, and also avoid furthering or assisting in the establishment of monopolistic patent control in any form.

"(j) Should the Commission decide to consider patents in connection with the drafting of technical standards for TV broadcast subscriber service the following actions are necessary: (1) Require each person to the proceeding to list the TV broadcast subscriber patents he owns or controls; (2) require each person to the proceeding to furnish powers of attorney giving a designated member of the Commission's staff the right to inspect his pending patent applications on transmitting or receiving equipment for TV subscriber service; and (3) require its staff to ascertain that any technical standards submitted for adoption, avoid, if at all possible, specific operational requirements which appear to be covered by claims in existing unexpired patents, or claims that may be granted by the U.S. Patent Office in any pending patent application which is examined in connection with the proceeding."

Mr. O'HARA. For the purpose of the record, Mr. Lishman, that is not quite plain to me. I presume that a document to some degree is a statement of Mr. Bauer to the committee. Is that the situation? Mr. LISHMAN. Yes.

I hand you another document consisting of 81 mimeographed pages which was given to me by the FCC entitled, "Summaries of the Parts and Chapters Constituting Report On Patent Misuses of the Bell Systems Holding Companies and the RCA," and the FCC mimeograph number of this document is 38303. I ask if you, in the course of your duties at the FCC, prepared this document.

Mr. BAUER. I did. I would like to make a correction, Mr. Lishman, to the effect that the mimeograph number on this document is

48731.

Mr. LISHMAN. I accept the correction.

Mr. BAUER. The mimeograph number that you referred to is the preceding documents from which this was taken. This is a summary of the parts and chapters constituting these two volumes that were just introduced.

This summary follows the index of the first volume of the two just introduced.

Mr. LISHMAN. Mr. Chairman, I would like to have this submitted for the record in the same manner as the preceding two volumes have been received.

The CHAIRMAN. Let it be received for the record. (The document referred is as follows:)

SUMMARIES OF THE PARTS AND CHAPTERS CONSTITUTING REPORT ON PATENT MISUSES OF THE BELL SYSTEM HOLDING COMPANIES AND THE RCA (FCC MIMEO 38303)

Patent Misuse Defined (p. 2430)

1. Patent misuse is synonymous to patent abuse. The doctrine of patent misuse applies where practices, policies, or agreements provide a patent structure or patent pool which in turn creates a monopoly in one form or another not within or contemplated by the claims of the patents constituting the patent structure or pool.

2. A patent misuse does not constitute in every case an antitrust violation. The reason for this distinction is that the consequences which flow from some misuses are not drastic enough to meet antitrust prerequisites of effect on competition. To hold a patent law transgression to be per se an antitrust violation, would put the patent owner on a different footing than owners of other property subject to the antitrust laws, because the antitrust laws have their own measure of permissive and wrongful conduct.

Part 1 (p. 2431)

Bell System patent holding companies maintain patent structure or pool capable of supporting patent misuses-RCA's first patent misuse

3. Chapter I.-Long prior to 1910 the Bell System patent holding companies had brought into use practices for establishing and maintaining a patent structure or patent pool capable of providing one or more monopolies of one form or another in the telephone public service field which were not within the scope of the claims of the patents constituting the patent structure or pool. These monopolies jointly and/or severally produced a number of effects contrary to and/or detrimental to public interest, or injurious to private interests, or both. The effects of these monopolies were continuous and ultimately were accepted by industry as essential side effects of the Bell System patent structure or pool. 4. Some of the side effects of the Bell System practices and patent structure

were

(a) Many alternative or improved devices and constructions resulting from Bell System technical developments were suppressed;

(b) The Bell System companies maintained excessive patent protection for suppressing competition in the wire communication fields, and for monopolizing the manufacture and sale of patented equipment used by the Bell System telephone operating companies;

(c) Comparative cost prices for equipment standardized for the Bell System telephone operating companies were not available;

(d) Bell System patent licenses were issued only in fields which in no way threatened the primary interest of the Bell System companies;

(e) The patent structure maintained by the Bell System patent holding companies gave to them the ability to control the exploitation of potentially competitive and emerging forms of wire communication; and

(f) The patent practices and patent structure of the Bell System companies substantially eliminated competitive research in the wire and radio telephone public service fields.

5. The Bell System patent structure covered equipment and operations for telephony (wire and radio) in both private and public service fields; it included equipment and operations for telephony through the employment of submarine cables; and it included telephony insofar as necessary for teletypewriter exchange or similar services.

6. In 1915 the three-electrode tube made possible the opening of the transcontinental telephone line. By the year 1920 the Bell System companies possessed patents and patent rights that covered every use of the vacuum tube in telephony. This patent position was made possible by the 1919-20 cross-licensing agreements between the Bell System companies and the radio patent holding companies. The Bell System companies to these agreements were the American Telephone & Telegraph Co. (A.T. & T.) and the Western Electric Co., Inc. (WE). The major radio patent holding companies to the agreements were the General Electric Co. (G.E.) the Radio Corp. of America (RCA) and the Westinghouse Electric & Manufacturing Co. (Westinghouse).

7. At the time of the cross-licensing agreements the Bell System companies believed their patent position in radio was sufficient to control equipment and operations for radiobroadcast program service. In 1926 this belief was entirely dispelled by an arbitration proceeding which ended in new agreements between the same companies. The effect of these new agreements was to give A.T. & T. exclusive patent rights in the field of public service telephony and to give GE, Westinghouse, and RCA exclusive patent rights in the areas covered by Wireless Telegraphy, entertainment, broadcasting, and the manufacture and sale of receiving tubes and sets to the public. A.T. & T. was given exclusive rights to furnish wire telephone services for radio broadcasting.

8. As of 1935 the patent structure of the Bell System companies had grown from the two original Bell patents to the ownership of more than 9,000 patents, and rights under an even greater number of patents owned by others. Control of these patents rights had, ab initio been centralized in the parent company of the System. This Bell System patent structure represented the hard core of patent control insofar as concerned radio or wire telephony for private or public message services. In 1930 the Bell companies obtained control of the manufacture and sale of the teletypewriter, and in subsequent years they obtained patent control of the devices considered necessary for broad band carrier systems utilizing coaxial cables or the like.