Then so did Henry Ford.
The specifics of the tale remain vague. Neither Ford, Couzens, nor Durant ever provided details.*6 The only account was by Benjamin Briscoe, which had him playing a key and likely inflated part in the negotiations. What is clear is that for the acquisition, the Ford Motor Company would be valued at $3 million. Whether Ford, Couzens, or Durant initially proposed this figure is not known, but in any case it was wildly low. If Ford’s assertion that the Model T was poised to change the face of American transportation was correct, it was not inconceivable that Ford Motor could have earned that much in one year, as it ultimately did. Ford never indicated why he would have been willing to sell out at such a price—never, in fact, acknowledged that the offer had been made, although others, including James Couzens, did. What was more, Ford himself would not have gotten $3 million, but only 58.5 percent of that payment, representing his share at the time of Ford Motor Company stock.
But the deal collapsed.
Durant’s notion was to put together his consortium by granting stock in the new company to the owners of the carmakers he absorbed. While he likely could have raised a good deal of cash—there were any number of financiers he could have persuaded—Durant did not want to be burdened by debt. Rather, he wanted to give everyone who threw in with him a stake in the company’s future, in effect making the owners of the acquired companies partners rather than sellers. Olds and Briscoe agreed. But Henry Ford did not want partners. He was, in fact, intending to divest himself of the ones he already had. So he demanded that the $3 million be paid in cash.
Again, accounts differ on what happened next. Briscoe insisted that when Ford demanded cash, Olds did as well, the same $3 million, and that $6 million was more than even Billy Durant could raise. It seems unlikely, however, that if Ransom Olds was serious about joining up with Durant and the others—and with far lower sales, he certainly had more incentive to do so than Ford—that he would have valued his company at the same level. In addition, Durant seemed to have been able to raise the sum he needed, or almost as much, as he soon proved.
With the collapse of the first deal, sometime in the summer of 1908, Durant immediately sought another. Briscoe would not come back so soon, so Durant went it alone. On September 16, 1908, eleven days before the first Model T shipped, the General Motors Company was incorporated in New Jersey, capitalized at $2,000. Within two years, that figure had increased to more than $60 million as Durant brought ten carmakers, two truck manufacturers, and thirteen parts fabricators into the fold. Some of the names would remain familiar for a century, including Buick, Cadillac, and Oldsmobile, while many, such as Elmore, Marquette, Ranier, and Welch, would eventually wither away. The acquisitions included Champion Ignition Company, where Albert Champion had invented a high-performance, porcelain-coated spark plug, and eventually Fisher Body, which remains a division of General Motors.12
“Nobody at the time knew what would work best,” Durant said later, “what types of motors, gears, axles, magnetos, wheels, springs, radiators, would become permanent or practical and useable. Everybody in the business was experimenting. We sought to control basic patents. We scrapped what wasn’t considered practical. But the essential and tried product of the several companies was kept and developed.”13
This time Durant was almost entirely successful in persuading his new partners to take stock in lieu of cash. “I bought that company in 1908 for $2,500,000,” Durant said of the Olds Motor Works. “We paid $18,500 in cash, which was the amount of the Olds company’s current liabilities. The balance was paid in the stock of the newly formed General Motors Company.”14 But Henry Leland at Cadillac balked. Like Henry Ford, he wanted cash on the barrelhead. Cadillac was integral to Durant’s plan, so he acquiesced, paying Leland $4.4 million, which he raised in a matter of weeks from Michigan bankers only months after he theoretically could not come up with Henry Ford’s $3 million.
Durant’s General Motors, of course, turned out to be every bit the brilliant idea that its founder claimed it would be. Just not for Durant. Ambition and a lack of moderation—also two of his greatest strengths—did him in.
“General Motors was a conglomeration of companies acquired because they were available rather than because they fitted into any coherent pattern. Only Buick and Cadillac were money-makers. Oldsmobile had a great name but not much else, Oakland was a promising newcomer, and the others have to be classified as odds and ends, some of them sheer gambles on Durant’s part.”15 By moving too fast and not sufficiently thinking through the company’s expansion, Durant had sacrificed cash flow to ambition. By 1910, General Motors seemed poised to go under. The company was saved by a consortium of bankers, who exacted both high interest and draconian concessions, one of which was that Billy Durant withdraw from running the business.*7 (He would, however, retain his stock.) Durant agreed and left the company he put together with vision, energy, and, mostly, nerve.
He would be back.
* * *
*1 The valve-on-the-track story might well have been apocryphal. Vanadium steel had also been written up in European engineering journals, and more than one account has it being brought to Ford’s attention by one of his staff, probably Harold Wills. (When Ford suggested its use, Charles Sorenson noted, “We had already read about vanadium steel.”) But these journals were available to everyone, and only Ford chose to employ the alloy in his cars. Why other American carmakers did not seek an improvement so readily available is uncertain. But, with the point of view that luxury trumped utility, that bigger was better, and that focusing on high unit profit margins was better business than seeking to make money on volume, perhaps Ford’s competitors also assumed that heaviness connoted quality and lightness the lack of it. Similar thinking in the 1970s, the association of “made in Japan” with light and flimsy, doomed the Big Three automakers—including Ford—to failure in their competition with Toyota, Honda, and Datsun.
*2 These decisions buttress the notion that Wills was the source of the vanadium steel idea and that, while Ford might have been cooling to Wills as a colleague, he felt he needed him until the metallurgy had been finalized. Ford had brought in an English metallurgist, J. Kent Smith, to establish production parameters for the alloy, and Wills became his liaison at the company, spending a good deal of the following year with Smith in Canton, at the blast furnace Ford had acquired to produce the metal.
*3 The famous line “You can have any color you want as long as it’s black,” which may or may not be attributable to Ford, wasn’t uttered until 1913, when the assembly line was running at full tilt and varying the paint colors would slow down production.
*4 Buick could not settle into anything and lost all his money. At one point, Durant gave him $100,000.
*5 The others were Bob Burman, Louis Chevrolet’s brother Arthur, and Louis Strang. The trio would win more than five hundred races in the next three years, driving the Models 10, 16, 17, and D.
*6 As with a subsequent attempt by Durant to acquire Ford Motor, sympathetic Ford biographers have used the lack of detail to justify their extreme skepticism that Henry Ford would have seriously considered bailing out when he was so close to success. But the overwhelming evidence, from a number of sources both inside and outside the Ford family, is that he did. Herbert Satterlee, for example, who was Pierpont Morgan’s son-in-law as well as Benjamin Briscoe’s lawyer, stated unequivocally, “Ford and Olds were planning on getting out of the business.” George Perkins, a Morgan partner, was so enthusiastic about merging the three automakers that he had even come up with a name for the new firm—The International.
*7 The Model 10 lasted only as long as Durant. It represented almost half of the 8,820 cars Buick sold in 1908, doubled to 8,100 in 1909, and then rose to 11,000 in 1910. With Durant’s departure, the new management team discontinued the Model 10 and instead focused on higher-priced cars. Sales plunged, dropping by more than half in just one year, and Buick went from being the second-largest automaker to fifth.
CHAPTER 23
In spring 1909, after six years of depositions, demonstrations, and delays; after reams and reams of paper, much of it extraneous; and after an advertising war that had cost each side hundreds of thousands of dollars, the patent infringement suit against Henry Ford by the Electric Vehicle Company seemed ready for trial. In the interim, Ford had grown from an obscure, quixotic independent, the vulnerable fledgling whose resources could be overwhelmed by legal fees, to the largest automobile manufacturer in America. At that point, in fact, Henry Ford was far more powerful than any of the parties who were suing him. Even if he lost, ALAM (through the Electric Vehicle shell) could no longer feel confident about running him out of business, but the millions of dollars the cabal stood to collect in royalties, penalties, and interest were of course as appealing as ever.
But in order to have a call on those millions, ALAM had a steep grade to ascend. There was little doubt among most of the knowledgeable observers following the case that Selden’s assertions were at best flimsy. It did not seem possible that the Selden, which its putative inventor had so unfortunately chosen to exhibit, could be the controlling example of automobile technology. Although the trade magazines had, in most cases, contorted themselves to remain neutral, there was a stream of hints that the suit had devolved to anticlimax, with Ford’s victory ensured. Any remaining doubt should have been dispelled when the case was assigned to Judge Charles Merrill Hough, who had been appointed to the federal bench just three years before by fellow Republican Theodore Roosevelt, whose war on monopoly and oligopoly was at the apex of his domestic agenda.*1
Then Ford lost.
—
Hough, fifty-one, had graduated from Dartmouth in 1879, then returned to his native Philadelphia, where he taught school and read law, gaining admission to the bar in 1883. Soon afterward he moved to New York to practice, and despite poor eyesight, he also served in the state naval militia. He became an authority on admiralty law, but he had almost no experience with patents. Hough was never considered to have a brilliant legal mind, nor was he especially active politically, but he was appointed because of a reputation for being thorough, serious, and fair.
Those traits were tested soon after his appointment when, in April 1908, he was assigned to preside over the trial of the “Ice King,” Charles W. Morse, who had been one of the prime movers in the attempt to corner the copper market that had precipitated the Panic of 1907. Morse was one of the most flamboyant and notorious of the speculators who had run rampant through the financial system.*2
Morse had experience cornering markets—in 1900, he had done so with ice, at the time derived mostly from river water and stored underground. Once he had control, he proceeded to squeeze families and businesses that had no other means of refrigeration. “The sixty-million-dollar Ice Trust, known as the American Ice Company, which has succeeded in securing what is practically an absolute monopoly of the ice business in New York City, has just increased the cost of ice to consumers 100 per cent, and threatens further advance in prices,” wrote The New York Times in 1900. “This 100 per cent tax upon a commodity that is a necessity to all the people of this city has aroused the bitterest feeling in the community.”1 Morse’s ruthlessness did not impact his position in polite society. In 1901, his boxmate at the opera was William K. Vanderbilt Sr., Willie K.’s father, and Willie K. himself often spent evenings listening to tenors and sopranos with Morse as his companion.
Although Morse continued to make lurid headlines—his marriage to an Atlanta socialite was annulled in 1904 when it was discovered she had not bothered to properly divorce her first husband—he also continued to thrive. By 1906, among his other holdings, Morse served on the boards of more than fifty banks and was majority owner of eighty-one steamships. But late in 1907, soon after the copper scandal, the National Bank of North America, in which Morse held controlling interest, collapsed. Morse was arrested the following February as he stepped off the gangplank of a luxury ocean liner returning from Europe. He was charged with illegal manipulation, selling essentially worthless American Ice stock to the bank for hundreds of thousands of dollars, as well as obtaining overdrafts of more than $200,000 “at the height of the panic,” immediately before he was forced to liquidate his interest. The bank’s president, Alfred Curtis, widely seen as a dupe, was charged as well.
In April, Judge Hough was assigned the case. It was a delicate situation—Morse still had quite a few influential friends, and many of his stock market gambits were not all that uncommon. He amassed a legal team that consisted of, among other luminaries, a former United States congressman. Morse assumed that a newly seated judge with no real reputation might be reluctant to take too aggressive a stance against such an array.
But Hough set his tone early on when he denied virtually all of Morse’s pretrial motions. When the trial finally began in October, prosecuted by assistant United States attorney and future secretary of war Henry Stimson, Hough infuriated Morse’s lawyers—who took his actions as a “reflection on themselves”—when he broke a twenty-five-year precedent and sequestered the jury. He also ordered Secret Service agents to guard key witnesses.
Once the proceedings began, Morse tried to portray himself as an innocent victim of unscrupulous characters, which elicited public guffaws. Curtis testified that Morse “dominated” the bank and that he, Curtis, had warned him often, sometimes in writing, that the institution was threatened with insolvency. When Morse saw the tide moving against him, he unsuccessfully feigned illness in an attempt to postpone the proceedings. The case went to the jury in early November and both men were found guilty the next day, although the jury recommended mercy for Curtis, whom they regarded as a “weak tool.” Morse took the verdict stoically, but Curtis wept. They were then returned to a cell they shared in the Tombs.
Two days later, Hough sentenced Morse to fifteen years imprisonment at the Atlanta Penitentiary and denied bail pending appeal. When Morse was removed, “the crowd, which filled every inch of the room…jeered.”*3, 2 Curtis received five years, but Hough suspended the sentence, to the cheers of the spectators. The case received nationwide attention and vaulted Hough into prominence. Within months, he was assigned the Selden-Ford patent case.
But while fame could disguise Hough’s shortcomings, it could not eradicate them. He was thorough but not profound, energetic but not insightful, even-handed but extremely impressionable. “His was not a reflective mind….He had a firm command of the rules and principles of patent law, but he knew nothing of automotive history and mechanical engineering….Like most judges who sat in patent cases, he had less than a passing acquaintance with the background and terms of the art.”3 While Hough was certain to plow through the mountains of evidence that were presented to him, he would be challenged to grasp the nuances of a technology that he had never before seen.
But in this, Hough cannot be judged too harshly. It is the essence of patent infringement suits, especially those involving new technologies, that the presiding judge will likely know less about the intricacies of the case than either of the parties. Both plaintiff and defendant will be well versed, of course, and each side will choose lawyers with sufficient experience in patent law to be aware that learning as much as they can about the technical aspects of the patented device is part of their job. And they have their clients to learn from. Judges do not. In most judicial proceedings, knowledge of the law is sufficient to render a proper decision. In patent suits, however, it is generally not the law that is in dispute, or even the actions of the participants, but some arcane and often impenetrable technical definition.
In pioneer cases, pressure on the judge was exacerbated. He was required to unravel not only the specifications of the device at issue but also whether or not similar and more advanced devices fell under the same umbrella. Hough would therefore be required to, in effect, create a definition of a hydrocarbon-powered internal combustion engine and then determine whether or not Selden’s version controlled Ford’s.
For all the thous
ands of pages of testimony and exhibits, then, the case was really about only three basic questions. First: Did George Selden’s patent describe a practical theory? In other words, could a workable automobile be built from the specifications in his patent? There was no requirement that this be a good automobile, only that one could be built. Second: Was Selden’s patent deserving of pioneer status, which meant that it described a great and original leap forward in the art of automaking? Third: Had Ford extrapolated from the principles enunciated in the Selden patent, or had he employed an unrelated technology?
Hough gave an early sense of what Ford’s lawyers in particular were up against when, during the opening remarks, he suggested with surprising candor, “Someone will have to explain to me what the liquid hydrocarbon gas engine is.” Further, he tacitly warned the lawyers to keep to the larger issues, as “during the hearing it became increasingly evident that precision of argument irritated him.”4
The judge seemed to accept early on that Selden’s machine had, in fact, run, which would establish practicality—and that it was Selden’s machine. Although he did ask the plaintiffs at one point whether the patent was simply a “prophecy,” overall Hough also seemed to accept their contention that “there was no state of the art prior to Selden.”
That left the third question. From the start, both sides chose to reduce this to a question of engine type. In other words, was Selden’s engine, based on the Brayton constant-pressure cycle, distinct from the engines used in virtually every modern automobile, which were based on Otto’s four-stroke compression principle? In this, Ford’s lawyers, relying on technical arguments, could not seem to make headway. When they attempted to demonstrate that the Otto model was different and, in being different, did not fall under Selden’s patent, Hough did not seem to comprehend the distinction. To him, compression was compression and, as long as they were of the liquid hydrocarbon type, other petty distinctions were “beside the issue.”5
Drive!: Henry Ford, George Selden, and the Race to Invent the Auto Age Page 31