Part 9

“In reply to your letter of February 24th we are very much interested in modifying our contract with respect to the maximum and minimum provisions in the baking field. In fact, we believe the simplest way to handle this question is to delete from our present contract the clause specifying maximum and minimum provisions. This, of course, was explained to you over the telephone in our recent conversation concerning General Baking. I believe unless some change is made in the maximum and minimum provisions all business in this field will be lost by the licensees of the Foundation.”

The Foundation recognized the need for abandoning these artificially high price levels and on March 14, 1940, Barney of the Foundation wrote to King of duPont referring to “a quotation from General Mills at a price of 60¢ per million” and stated: “This will acknowledge receipt of your letter of March 5th regarding the maximum and minimum price provisions with respect to the baking field. Shortly, Ward [Ross of the Foundation] will send Art [Connolly of duPont] either a letter agreement or supplemental contract deleting this provision from the contract.” On July 19, 1940, Connolly wrote Ross again asking elimination of the price-fixing provision and finally on July 30, 1940, Ross of the Foundation wrote to duPont deleting the price-fixing paragraph from Article 2 (C) of the agreement.

DuPont’s aim in all of its Vitamin D operations was to obtain high, non-competitive prices for its products. This thought is expressed time and time again. A memorandum dated July 26, 1932, from Bradshaw to Atkins, both of Acetol, states: “This morning I reported to Mr. Protto and Mr. Robinson regarding conversation with Dean Russell and also the known facts concerning Lever Bros. business. It was Mr. Protto’s feeling that we should raise our prices as much as possible and not sell the material cheap.” The next day Atkins replied:

“It seems obvious to me that we should always try to get the maximum price for any of our goods, keeping in mind the possible potential volume and competitive conditions.

“According to authentic price information which we have secured, Fleischmann have been selling and offering Vitamin D at slightly less than $1.00 per 1,000,000 Steenbock Rat Units. This is what influenced my suggested price of $1.00 to Lever Brothers and I was very much surprised when you informed me that Fleischmann was not in a position to furnish irradiated ergosterol. If this were true, I apparently had gone too low on our initial price in view of the fact that we were the exclusive source of supply.”

The profit levels resulting from the Foundation’s activities were enormous. In a letter dated March 9, 1938, addressed to Ward Ross of the Foundation, King of duPont stated: “With respect to the Chesney matter, all I know is that 35¢ per million units was quoted to General Baking Company.”

Vitamin D is of the greatest importance to expectant and nursing mothers, infants, and children and, consequently, milk is one of the most natural and most important vehicles for this vitamin. The Council on Foods of the American Medical Association stated in the _Journal of the American Medical Association_ for January 16, 1937, “Of all the common foods available, milk is most suitable as a carrier of added Vitamin D. Vitamin D is concerned with the utilization of calcium and phosphorous of which milk is an excellent source.” Next to the pharmaceutical industry, milk was probably the most promising outlet for Vitamin D from a profit standpoint. The Foundation therefore became active in promoting the use of Vitamin D in the milk industry.

On November 1, 1938, the Foundation granted licenses to five producers of evaporated milk, The Borden Company, Carnation Company, Indiana Condensed Milk Company, Nestle’s Milk Products, Inc., and Pet Milk Company, to activate evaporated milk. The agreements allocate the evaporated milk field exclusively to these five producers. Like the Foundation’s other agreements, these evaporated milk agreements provide for the maintenance of the division of fields. Article XX, in protecting the evaporated milk field, states: “The Licensor agrees that in all licenses for the activation of fluid milk by the use of irradiated ergosterol or by direct application of ultra violet rays, it will incorporate a provision preventing the use or sale of such activated milk by such licensees for the manufacture of activated unsweetened evaporated milk.”

The rights of the evaporated milk producers were similarly restricted to prevent encroachment on other exclusive fields. Article XII specifically protects the pharmaceutical field by providing that “said evaporated milk shall not be intended or sold as a cure for rickets.” The other fields of use of Vitamin D are protected from invasion by activated evaporated milk by Article IX which provides: “The Licensee agrees that it will not knowingly directly or indirectly sell its unsweetened evaporated milk activated under this license to others ... as a source of Vitamin D for any other product when such product is intended to be sold or resold on a commercial basis.”

There are several methods by which fluid milk may be activated and the Foundation has issued licenses for each of these methods. In one method, irradiated yeast is fed to cows to increase the Vitamin D content of the milk; in the second method, the milk is irradiated directly; and in the third method, an activated concentrate is introduced into the milk.

The Bill of Particulars in the Vitamin Technologists suit lists 138 dairies licensed to activate milk by feeding irradiated yeast to cows. In its agreement with West Haven Creamery, Inc., which is typical of all of the licensees of this class, the Foundation licensed and empowered the licensee to purchase from Standard Brands, Incorporated, dried yeast “antirachitically activated” upon the following terms and conditions:

“First: The Licensee shall buy and use such yeast for no other purpose than that of feeding cows to impart antirachitic qualities to milk.

* * * * *

“Fourth: The Licensee shall not sell any of its antirachitically activated milk to others for use or incorporation in any other marketed product when Vitamin D or antirachitic claims are made or intended to be made for such other marketed product.

“Fifth: The activated yeast purchased by Licensee pursuant to this License shall not be resold or otherwise used except for feeding the same to the Licensee’s animals, pursuant to the conditions of this license.”

The Steenbock patents do not even purport to cover anything more than a process of irradiating or an irradiated product. Under no circumstances could the milk from an irradiated-yeast-fed cow be an infringement of the Steenbock patents. Article Fourth is a bare-faced attempt to carry out the artificial division of fields. Milk from an irradiated-yeast-fed cow could, for example, be used in the commercial making of bread, but such use would be an invasion of the exclusive bread and breadstuffs field. It was, therefore, necessary for the Foundation to insert this limitation in the West Haven Creamery’s license even though the limitation was entirely outside the Steenbock patents.

The prohibition of resale in Article Fifth likewise lacks any taint of legal justification. A patentee’s right under a patent is completely exhausted by the first sale of the patented product. Here again the Foundation is seeking to prevent any use of the irradiated yeast which may in any way conflict with the division of fields.

As the demand for activated milk increased, the addition of concentrates was accepted by the medical profession. This business was so attractive that the Foundation decided to engage in the sale of these concentrates for addition to milk. The Foundation did not, however, wish to enter a market in which any competition existed and since Standard Brands had rights in this field, it was essential that the Standard Brands competition be eliminated. In the agreement of February 1, 1939, the Foundation agreed to pay Standard Brands 40% of the profits derived by the Foundation from the sale of concentrates in return for Standard Brands’ withdrawal and agreement not to compete.

Vitamin D is of the utmost importance in the poultry industry since it is essential for the prevention and cure of rickets and for bone development, egg production and hatchability. Prior to the war some Vitamin D could be obtained from cod and other fish liver oils, but at the present time, the requirements must be obtained almost exclusively from synthetic Vitamin D. Even apart from war time shortages, synthetic Vitamin D presents certain advantages over fish liver oils. The synthetic product may be used for forced feeding without adversely affecting the flavor of the poultry, while too generous use of fish liver oils results in a somewhat fishy flavor.

The size of the poultry market in the United States involves almost astronomical figures. The crop report of September 1, 1943 of the United States Department of Agriculture on poultry and egg production states that there were over 316,000,000 laying hens; over 318,000,000 pullets and over 224,000,000 chicks. The egg production for August 1943 was 3,863,000,000. This crop report also states that the average cost of feed for farm poultry ration on August 15, 1943 was $2.13 per hundred pounds. Dr. Harry Titus of the Poultry Nutrition Section of the Bureau of Animal Industries of the Department of Agriculture estimates that 25,000,000 tons of commercial mixed feed are used annually in the poultry industry and that 75% of this feed is fortified with Vitamin D.

The wartime demands on meat make the poultry market unusually important and any artificial restraints or artificial price levels affecting the poultry market are of the most serious national importance.

The discovery upon which Steenbock’s patent No. 1680818 is based is that certain substances, known as pro-vitamins take on antirachitic properties when irradiated with ultra violet light. These pro-vitamins are sterols which may be obtained from either vegetable or animal sources and the effectiveness of the irradiated product is dependent upon the nature of the pro-vitamin.

In the early days, vegetable pro-vitamins were used almost exclusively but it was subsequently found that the animal pro-vitamins were superior. Vegetable pro-vitamins were unsuitable for poultry feeding and the exploitation of this market awaited the development of the animal pro-vitamins, cholesterol and 7-dehydrocholesterol.

The animal and poultry feed field had been exclusively allocated to duPont and its predecessor, Acetol. This exclusive arrangement highlights the artificial nature of the Foundation’s division of fields. In the case of cows Vitamin D in the feed will result in a Vitamin D content in the milk. Vitamin D may also have some antirachitic effect on the cow itself. In interpreting this provision of its agreement with the Foundation, duPont was obliged to consider the question whether the effect of the Vitamin D feed is in the cow or in the milk. Finally, however, duPont resolved the doubt in its own favor. A letter dated February 20, 1935, addressed to Kupperian of duPont, from Connolly, a duPont attorney, states: “Irradiated cholesterol may therefore be used in feed for cows regardless of whether its purpose is to enhance the Vitamin D content of the milk or prevent rickets in the cow itself.”

Prior to 1936, duPont recognized the importance of the animal sterols, cholesterol and 7-dehydrocholesterol, in the poultry feed field. DuPont immediately set out to secure a monopoly over these pro-vitamins and through them to control the entire poultry feed field. The first step in this direction is described in a letter dated January 21, 1936 from King of duPont to Nielsen of Abbott which states:

“We were, of course, largely interested in the poultry field, and to protect our position had made tentative arrangements to secure all of the available cholesterol in the country, or perhaps we might say, in the world.”

Apart from attempting to corner the sources of animal sterols, duPont also sought exclusive rights in the field of animal sterols within the licensing scheme of the Foundation. The agreement of November 15, 1935 between the Foundation and duPont grants duPont an exclusive license to irradiate sterols from animal sources. When the Foundation wished to grant new licenses and submitted the proposed licenses to duPont for approval, duPont insisted upon retaining exclusive rights in the animal pro-vitamin field. In a report to the Executive Committee of duPont recommending approval of the Foundation’s license to Merrell, E. G. Robinson states:

“The Foundation now wishes to grant a license to the William S. Merrell Company of Cincinnati, Ohio, limited to Vitamin D from non-animal sources for sale only as medicinals or pharmaceuticals for human use, which this department is willing to approve. It is limited to non-animal sources in the pharmaceutical field and, therefore, we do not think it will materially interfere with our own developments. Also, the Foundation is able to grant a license with respect to yeast ergosterol without our permission, since that product is not in our license field; and if the license to Merrell is limited to yeast we will not have the opportunity of selling Merrell our own ergosterol.”

Thus, while duPont desired to protect its animal sterol field it did not wish the Merrell license so limited as to deprive duPont of a potential market for non-yeast ergosterol. In both instances the Foundation was most willing to cooperate.

8

_Quebracho Extract_

Quebracho extract is of great use to the nation in the war effort. It is a material which has been found most desirable for tanning the leather which goes into the shoes, harness, straps and other leather articles of the armed forces. It is of some interest to every man, woman and child whose ration stamps are used to buy a pair of shoes.

Practically all heavy leather tanned in this country has been tanned by use of a blend in which this material is an important ingredient. It comes from the southern part of South America, and there have been times when it was difficult, and others when it appeared it might be impossible, to ship the material to this country. The production and sale of the material is controlled by a monopoly pool or cartel, and this country is at the mercy of the pool in procuring the material in adequate quantities and at a reasonable price. The pool has exercised its power to curtail the quantity shipped to this country, to prevent any adequate stock pile in this country, and to raise prices out of proportion to any increase in costs.

In the Spring of 1942 the Department of Justice submitted the facts of this monopoly pool to a Federal Grand Jury in New York, and it promptly returned an indictment against five American corporations, one Canadian and one British corporation, and five individuals, officials of four of the American corporations. Pleas of _nolo contendere_ were subsequently entered by three of the American corporations and four of their officials. Fines were levied against and paid by these defendants, totalling $59,002. A _nolle prosequi_ was entered as to the two remaining American corporations, the two British corporations, and one official. The reason for the _nolle prosequi_ in the case of the two foreign corporations was that they were outside the jurisdiction of the court.

The national interest in such a situation plainly warranted a diligent effort long ago to find an adequate substitute which would relieve us from entire dependence upon the ability and willingness of a foreign cartel to supply us with a vital material.

The extract is obtained from the quebracho tree. For commercial purposes the growth of these trees is limited to Argentina and Paraguay. Although there are quebracho forests in southern Brazil, the extract manufactured from these trees is inferior to Argentine and Paraguayan extract, and cannot compete favorably with it in the market. Ninety-eight per cent of the world production of quebracho wood and extract comes from Argentina and Paraguay. In 1942 the total production amounted to approximately 300,000 metric tons of extract and was valued at $25,000,000.

This war has naturally affected the market for quebracho in Europe. Several years before the war the German Government took steps to render that country less dependent upon the continuance of quebracho imports. Clauses were inserted in all Army and Navy contracts for the purchase of leather goods that at least 12 per cent of such goods should be tanned by German-manufactured tanning agents. This resulted in the development of a new industry based upon the production of tanning material from German trees. Tannic acid was extracted from the oak trees of South Germany and was permitted to find a place in the tanning industry by reason of the Government policy. Thus the German leather industry gradually became independent of quebracho importation from South America.

The loss of the continental European market due to the war was not felt to any great extent by the quebracho exporters because of the great increase of exports to the United States. During the war the imports of quebracho almost doubled due to the tremendous production of leather goods for the armed forces.

The quebracho industry consists of twenty-two producers in Argentina and Paraguay. Five of these are owned or controlled by the British corporation, The Forestal Land, Timber and Railways, Ltd., through its Argentine subsidiary, La Forestal Argentina S. A. de Tierras, Maderas y Explotaciones Commerciales e Industriales. These five companies have a productive capacity which constitutes approximately 57 per cent of the total capacity.

All producers, except four having a capacity of about eleven per cent of the entire industry, are members of a Quebracho Pool which regulates the production and sale of the product. Quebracho is sold by official agents of the Pool, and it recognizes two official agents in the United States: The Tannin Corporation and the International Products Corporation, both of New York.

Forestal of England controls La Forestal of Argentina through the ownership of a majority of its stock and a substantial portion of its bonds. One John B. Sullivan, Chairman of the Board of Forestal of England, is also the manager of Forestal of Argentina. Sullivan is an Argentine citizen who was formerly a citizen of the United States and a graduate of Harvard College.

By reason of La Forestal’s ownership of 57 per cent of the total productive capacity of quebracho in South America, which is approximately eight times the capacity of its next largest competitor, Forestal has completely dominated the quebracho industry. Its policy has been to restrict production and maintain high prices. Forestal’s economic dominance in Argentina has enabled it to exert a great influence upon the government of Argentina. For example, in 1942 the efforts of John B. Sullivan alone were primarily responsible for the imposition by the Argentine Minister of Agriculture of highly restrictive export quotas upon each producer. These restrictions were imposed upon the industry at a time when it appeared that the efforts of Forestal to continue similar restrictions upon the South American producers might fail.

Forestal’s domination extends not only over the production of quebracho, but over its distribution as well, including importation into this country. Through St. Helen’s Ltd., a Canadian corporation, Forestal of England owns substantially all of the stock of Tannin Products Corporation, a Delaware corporation, which in turn owns all the capital stock of The Tannin Corporation, a New York corporation.

The Tannin Corporation imports approximately 70 per cent of all quebracho extract consumed in the United States. The Tannin Corporation has been controlled by Forestal of England since 1913 and during the past thirty years its controlling officials have been completely subservient to the policies of Forestal of England. Thus Forestal controls this material from the tree to the United States consumer.

The questionable character of the functioning of these American subsidiaries is indicated by portions of a letter written December 23, 1941, by Carl B. Ely, President of the Tannin Corporation, to J. B. Sullivan of Forestal, whom he addressed as “My dear Jack”:

“You will recall the formation for good and practical reasons of the Tannin Products Corporation in 1925, at which time a very large dividend was paid, which procedure continued in a more or less degree during the following years, particularly in 1929 and 1934. The company, as you will see, earned $3,284,427.28 and paid out dividends of $4,200,000.00. In other words, we declared practically $1,000,000 more during the sixteen-year period than we earned.

“Under the circumstances I have no fault to find with this, provided our principal stockholders, the Forestal Company, are aware of it and are prepared to take care of our money situation as the same arises....

“To come right down to the last analysis, we have been living on Government funds, which under proper business procedure should be reserved for income tax payments, but, as these payments are not due until next year, it has been possible to use this money. We owe the Government today $500,000. This money, together with your most helpful postponement of payments, has made it possible for us to have cash to pay the dividend we did. I believe that with the extra terms on future purchases of extract we will make our position stronger during the next six months, and we are trying diligently not to borrow from the banks, as in this particular case it would appear that such borrowing was done to pay dividends. This I believe would have a very bad effect on our good will and financial standing--and we enjoy today the good will and respect of the tanning industry as we never have before.”

I have already pointed out that Forestal controls five of the South American producers. One of the other seventeen is the International Products Corporation of New York. Another producer, Samuhi S. A., is controlled through ownership of a majority of its stock by two American corporations, Proctor Ellison and Howes Bros. of Massachusetts. International Products Corporation and Samuhi together have a capacity of about eight per cent of the entire industry. Both of these producers have been ineffective in preventing La Forestal from carrying out its policy of restricted output and high prices, and International Products has in the past frequently cooperated closely with La Forestal to further such a policy.

Since 1934 International Products Corporation has consulted with Tannin about the prices to be charged to quebracho extract consumers in the United States, so that the prices of both companies have been fixed, uniform and high. From May, 1934 to July, 1939, Tannin owned a substantial amount of the stock of International Products Corporation, and from May, 1934 until May, 1936, the president of Tannin, Carl B. Ely, was a member of the Board of Directors of International Products Corporation. On February 26, 1935, Ely wrote to Sullivan:

“I am giving the I.P.C. problems a lot of my time, and, as previously told you, have found that there is a lot to be done to straighten out that problem. I am working slowly so as not to upset the apple cart any more than is necessary....

“I am getting their sales policies straightened out and believe now there will be no more monkey business.”