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.”
From 1934 to 1939 International Products Corporation was a member of
the Quebracho Pool, and by reason of its designation as an official
pool agent for the United States gave up its business of selling
extract in England and in Asia.
American purchasers of quebracho might well wonder whether this
American company was more concerned with giving them a good deal or
with favoring certain foreign concerns, from the concluding paragraph
of a letter from one of its officials to its President dated November
16, 1939:
“You undoubtedly know that Mr. Seldes was successful in substituting
Casado extract to fill the order we had for Forestal for 535 tons of
Supremo for delivery in Buenos Aires for shipment to Japan. We paid for
the Casado extract with a dollar draft and have since received from
Forestal the sterling representing the sale. The net result of the
whole transaction represents a loss of a little more than a $1.00 per
ton, which, as explained in a previous letter, is really not a loss at
all, as we will use this extract to fill orders for North America which
will net us a nice profit.”
The production of Samuhi was so small, being about one per cent of the
entire industry, that it could hardly contain any competitive threat
to La Forestal. Nevertheless, our records show that for many years
Forestal harassed this company by every means and sought to buy up its
assets and its stock.