A History of American Monopolists: Remembering One's Non-Monopoly Roots

As the story goes, Ford Motor Co. almost never got off the ground because of a monopolist. In 1903, the Association of Licensed Automobile Manufacturers (ALAM) tried to stop Henry Ford from building his first gasoline-powered four-stroke automobile. The ALAM was composed of 11 car manufacturers, including, at the time, Cadillac, Winton and Packard. Its goal was to keep “unreliable upstarts” out of the car market. At that time, the relevant market was mainly targeted at providing luxury cars to the rich and famous of the Gilded Age. The ALAM wanted to keep demand high and supply limited so as to drive prices up, which the elite of society were all too willing and able to pay for their toys—classic monopolist conduct the Sherman Act had just been passed to stop. The means by which the ALAM fueled its anti-competitive engine was through a registered patent. The patent had been applied for and issued to one George Baldwin Selden of Rochester, N.Y. Selden was a patent lawyer by trade and proclaimed inventor of the internal combustion engine powered by gasoline for the sole purpose of propelling a car. His patent application was filed in 1879 for a “road engine.” Through continuous revisions to his claims, he kept the application pending for 16 years. In 1895, Selden was finally granted a patent for a three-cylinder gas-powered car. Selden himself did not build a prototype of his invention until much later, but the patent nevertheless allowed him to collect royalties from all American car manufacturers. Selden formed a holding company called the ALAM to handle the licensing of the patent to the car manufacturers in the United States. The licensing fees started at $10,000 and in time increased, as did the holding company to include rival car competitors, including those, like Winton, that had been successfully sued for the licensing fees. Licenses were not easily granted. Vowing to protect the public from shoddy car makers, the ALAM held all the cards and let only the chosen few join its vaunted club.

Then, along came 40-year-old Ford. He had formed Ford Motor Co. in 1903 with limited financing and dwindling capital but had a hope and a dream to build a necessary (not just luxury) car for the masses at reasonable prices that common people could afford. Classic American Dream stuff. But he represented the very type of high-risk venture by an “unreliable upstart” the ALAM had vowed not to grant license rights to under the Selden patent. When Ford was turned down twice for a license, he built his car anyway and tried to sell it on the open market without a license. The ALAM responded by launching a nasty media campaign against Ford (“don’t buy a lawsuit with your car”). Ford countered with his own ads saying, “When you buy a Ford Motor car from John Wanamaker, you are guaranteed against any trouble with the trust.” The ALAM finally filed a patent infringement case to stop Ford in his tracks. Ford fought back hard in the courts for eight years. The defense was not based on the brand-new antitrust laws but more basically that the patent did not cover the type of car that Ford was building. Selden was forced to finally build two cars under his patent to challenge Ford, which barely ran. But Ford countered by driving up to the courthouse in a modified Ford car that outdrove the Selden prototype, after Selden’s expert testified it would never work. Finally, after Ford proclaimed, “We will fight to the finish,” the U.S. Court of Appeals for the Second Circuit unanimously reversed the district court and found that Selden’s patent was valid but was restricted to two-cycle compression engines and not Ford’s four-stroke spark-plug variety. Therefore, no patent infringement was found to have occurred. As the ultimate vindication to Ford, the Second Circuit stated that, “The defendants neither legally nor morally owe him [Selden] anything.” Two years later, the Selden-restricted patent expired and the ALAM monopolist expired soon thereafter.