I've got a secret

Trade secrets and industrial espionage in the talking machine industry

April 2004
This article is part of the Noteworthy News archives.

Copyright 2016 Lynn Bilton

In the winter of 1811 an unassuming Harvard-educated mathematician and Boston businessman named James Cabot Lowell took a vacation in Scotland. As he visited the nearby towns of Lancashire and Derbyshire with their newly-built mills Lowell announced to the local people that he had come 'for reasons of health.'

In fact, Lowell was a spy and he was after Great Britain's most important national secret: the Bridgport Loom.

A water powered weaving machine, the Bridgport Loom performed the work that had been done by hundreds of artisans. It allowed the British to command the world textile trade. American cotton had to be shipped to England where it was woven into cloth, and then resold to American merchants.

Installed in fortress-like factories ringed by walls buttressed with spikes and broken glass, the Loom was also protected by strict patent laws and legislation. The export of cotton technology was a crime. Skilled workers' rights to go abroad were limited.

Lowell talked his way into the factories --the local managers didn't believe a foreigner was smart enough to understand the complexities--and when he returned to New England the secret of the Loom was carried in his photographic memory.

James Cabot Lowell wasn't the first recorded industial spy in history--that honor probably goes to two monks who smuggled silkworm eggs out of China in the fifth century on behalf of the Byzantine emperor Justinian. But he was probably America's first industrial spy, and his exploits illustrate the battle of defending intellectual property (patents and trade secrets), a battle fought by the early talking machine industry, as well as by modern corporations.

What is a patent?

The word patent is derived from an Old French word meaning 'open.' By publishing a patent --that is, by making it open--the government hopes to stimulate commerce and in return gives the inventor exclusive rights for a term of years. In the talking machine industry, at least, the rights were usually sold for a flat sum or in exchange for royalties.

During most of the years of the early talking machine industry the patent process was governed by some version of the Copyright Act of 1861. For a $15 filing fee the application was forwarded to an examiner adept in that field. A diagram of the invention was required, and until around 1880 a model of the invention was required. After 1880 a working model was not required except for (sensibly enough) heavier-than-air flying machines and perpetual motion machines.

The process could be long and arduous. Rejections and amendments could cycle through the mails. The examiner could declare an interference: some other patent was claiming the same idea. If an interference was declared the inventor was entitled to an administrative hearing and an appeal in a special Federal court.

Since priority was granted upon time of filing the law encouraged a mad race. In one famous instance involving the competing telephone interests of Alexander Graham Bell and Elisha Gray, an alcoholic clerk was bribed to say that Gray had filed a few hours before Bell.

Many phonographic patents were granted within a few months, although a delay of several years was not atypical. (The all-time record goes to a man named Fritz whose pursuit spanned 36 years, the patent evenually accruing to the deceased's wife.)

Edison, who was the recipient of 1093 American patents over his career, called this system 'a temptation to rascals.' By this he most likely meant that the very openness of the system allowed others to steal his ideas, make slight changes, and claim them as their own.

The issuance of a patent was not an adjudication of its validity. Any patent of commercial importance was likely to be challenged in court. And valid or not, a patent could be used as a bludgeon against competitors with significantly fewer resources. Edison hounded Lambert over the use of celluloid and bankrupted Lambert by 1905, even though every court decision went in favor of Lambert. Victor boasted that it had spent over a million dollars defending its needle-in-the-groove patent.

What is a trade secret?

As opposed to a patent, which endured at this time for 17 years, a trade secret could last forever, or at least until revealed. The principle of trade secrets had been established in American law in 1868, when a Massachusetts manufacturer named Joseph Peabody sued a former employee, John Norfolk. Peabody had discovered a new, improved way to make a gunny sack (burlap bag), and had signed Norfolk to an agreement not to disclose it. Norfolk left and started a gunny sack factory with a third party. In ruling for Peabody, the court articulated what would remain the definition of a trade secret: that it must be something not known in the trade, and something that puts its owner at a competitive advantage.

Anything can constitute a trade secret--a list of employees, a list of customers, a process of manufacture. Trade secrets can protect intellectual property not appropriate for patents. Trade secrets and patents aren't mutually exclusive, in fact, there was an art to drawing patent applications that were just general enough so as not to reveal trade secrets, and a good patent attorney such as Columbia's Philip Mauro was a cherished asset. Versus patents, trade secrets were also far, far more difficult to legally enforce.

A lot of the trade secrets in the phonograph industry related to record manufacture. Sometimes a competitor would try to reverse engineer a product. In the 1890s, for instance, Edison's wax was the best in the industry. Columbia tried and tried to duplicate the wax, but couldn't, and eventually wound up buying their wax from Edison. Edison himself was in a similar bind during World War I. Dependent on shipments of phenol from Europe for his disc records, he was faced with a wartime embargo. Told that the production of phenol involved a trade secret, he set a team of forty men to work and within two months was ready to manufacture the six tons a day that he required.

Filching the goods

The simplest technique of obtaining a trade secret, then and now, has always been to get it from a former employee. Joseph Jones, the young nephew of one of Berliner's investors, worked for Berliner for about a year. When he left he took Berliner's electroplating secrets with him. The Graphophone Company eventually owned the patent. There was also a lot of turnover among employees in the industry, particularly for Edison, who did not enjoy the reputation of paying well. John English was a very good chemist who was an authority on recording materials. He was employed at various times by Berliner, Zonophone, Victor, and the Burt Company. Wherever he went the quality of the records immediately improved.

The phrase 'industrial espionage' didn't enter the vocabulary until the 1930s, and the talking machine companies didn't have divisions of corporate intelligence like modern companies. But turn-of-the-century corporations did engage in exercises of dubious legality, most of course unheralded because they were cloaked in a veil of secrecy. One episode that did come to light occurred in 1893 when General Electric (the successor to the Edison Electric company) and Westinghouse were fighting over an enormous prize, the power station at Niagara Falls. GE was accused of paying a Westinghouse employee to steal the plans for a generator. In an era when bribery of elected officials was not only commonplace but almost mandatory, such conduct could not have been exceptional.

Spy vs. spy


Start-up record companies were a favorite target of Edison corporate intelligence. Edison operative Joseph McCoy did the investigation of the Indestructible Record company. When McCoy discovered that too many of Edison's dealers were selling the bakelite records, Edison responded with threats and litigation. Indestructible then negotiated a deal to deliver its entire output to Columbia.

And the talking machine companies retained spies. It is certain that Edison retained spies, because the reports have survived in the Edison archives. It can be inferred that Edison's competitors retained spies from a reading of the testimony in court cases, although the archives of Edison's competitors have long vanished.

For around 50 years Edison employed a remarkable spy named Joseph McCoy. McCoy had come to Edison's attention through an association with Charles Cheever, one of the investors of the Edison Speaking Phonograph Company. Sometimes McCoy would pose as a customer. In 1905 he informed an Edison official that a number of Edison dealers were selling Victor products on consignment. Often McCoy would pose as a dealer intimately connected to the phonograph trade. Edison was especially interested in investigating start-up companies. In 1901, for example, McCoy presented himself at the offices of Balm and Harris, a new record company. He inquired about the company's credit with local shopkeepers, and informed Edison that there was nothing to worry about. McCoy had done the investigation of the Norcross record company (discovering that Ivory Soap was being added to the vat) and of the Indestructible company.

On another occasion McCoy was informed that Edison wanted intelligence about the Graphophone Company's Bridgeport, Connecticut plant. What was their tax assessment? The size of the building? The number of records shipped each month? The percentage of stearic acid used in making blanks? "I made the acquaintance of the men who made the material," said McCoy in a memoir, "and was introduced to the assistant shipping clerk."

Edison, who in early years had made his facilities freely available to the press, later restricted access and deployed night watchmen. Eldridge Johnson barred the fire department from his Victor laboratories during a 1904 blaze.

What is the cost of industrial espionage? There's no doubt that modern corporations expend (or save) millions of dollars each year. But consider again the episode of John Cabot Lowell (after whom Lowell, Mass. is named) and the Bridgport Loom. When Lowell returned to the United States he built a working model of the loom. When he was satisfied that he understood it thoroughly he build a full scale loom. Lowell's theft of the secret of the Bridgport Loom led to the birth of the textile industry in New England, which fueled the industrial revolution in the United States, which led to the invention of the phonograph and the American Century.

Sources: Koenigsberg, Allen. Patent History of the Phonograph.
Wile, Ray. Interview
Lieberstein, Stanley. Who Owns What Is in Your Head?
Fialko, John. War By Other Means.
Edison Papers. www.rutgers.edu
Thomas A. Edison, Unorthodox Submarine Hunter. www.worldwar1.com

Copyright 2016 Lynn Bilton

Lynn Bilton
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Randolph,OH 44265
330 325-7866

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