Chapter III: Front Matter (3)

Cortin is derived from the cortex of the adrenal glands. There is still some question as to the role which this hormone plays, but there is no doubt that it is essential to life. It apparently affects the metabolism of sodium, potassium, and carbohydrates. This hormone plays an important role in the concentration of body fluids and their distribution between the inside and outside of body cells. The hormone is therefore of some use in diseases or conditions where there occur marked changes in the distribution of the body fluids. Specifically, it means the hormones of the adrenal cortex are useful in the treatment of Addison’s disease, where it seems to strike a balance in the intake of salt. It has also been suggested that since surgical shock is associated with unbalance of body fluids, this hormone may be of value in counteracting the shock effects. Shock is so complex a condition, however, that there is no general agreement on the effects of the hormone. However, the hormone, or crystalline preparations possessing hormonal activity, are being used by army surgeons both here and abroad for whatever value they possess.

It is with these and certain other pharmaceutical specialties that the hormone cartel has concerned itself. The cartel is composed of five large European companies: Schering A. G. (Berlin); Ciba (Basle); N. J. Organon (Oss, Holland); C. F. Boehringer & Sons (Mannheim); and Chimio (France). Each of the first four has had a subsidiary or affiliate in this country which has been used to carry out the policies of the European company and of the cartel. I shall describe in some detail the practices which were followed in aiding the German companies to avoid the effect of the British blockade and Black List in Latin America.

The Schering A. G. firm is one of the most important pharmaceutical and chemical manufacturers in Germany. It makes photographic supplies, soaps, cosmetics and many other products. However by far the largest part of its production consists of medicinal specialties and fine chemicals, the former being the more important. It is the largest German exporter of pharmaceutical and medical specialties, specializing in sex hormones, vaccines, remedies for venereal and other contagious diseases, rheumatism, tuberculosis, etc., and also laxatives, anti-acids, opiates, etc. It is also one of the larger German exporters of fine chemicals, laboratory chemicals and plant protection chemicals.

At the time of the first World War, Schering A. G. did comparatively little export business. Its export system, established and carefully developed after 1918, is mainly the result of the work of one man, its former president Dr. Julius Weltzien. This export system spreads over the entire world. The procedure in establishing outlets abroad has been as follows: At first sales are made to all who may wish to buy; then, with increasing turnover, a local firm is made sole agent. When the yearly turnover reaches about $25,000, an expert sent from Berlin is coordinated with the sole agency firm. When the yearly turnover exceeds about $50,000, Schering A. G. sets up a firm of its own, directed by managers sent from Berlin. Germans, or men of German descent, are placed in all key positions, and the remainder of the staff is partly German, partly persons of the country in which the agency is located. The final step is to set up factories in the most important markets which are equipped to ampule the finished solutions and to tablet the finished substances which are used in that form. The supervision of all firms abroad is strongly centralized in Berlin.

Until recently, Schering A. G. was one of the largest sellers of pharmaceutical and medicinal specialties in South and Central America. Testimony before the Truman Committee indicated that approximately one-third of all materials shipped into South America by airmail over the German controlled _Lati_ airline, during a six months period in 1941, were chemical and pharmaceutical products. Approximately the same amount of books, maps, etc., intended for espionage and propaganda work was also shipped by air since it was the only means of avoiding the British blockade. On the return trips four-fifths of the air cargoes were of mica for the Nazi war machine and most of the remaining fifth was made up of other important war materials. The important role played by the pharmaceutical exports in providing the exchange for purchase of war materials should not be overlooked.

The interruption of exports due to the war caused Schering A. G. to adopt several different methods of continuing its foreign business. Prior to the invasion of Belgium and Holland, firms in those countries and in the Scandinavian countries were used as blinds to avoid the British blockade. Before Italy entered the war, the Milan factory was utilized as a point from which the German goods, labeled in Italy, could be sent out to the rest of the world.

The final step was to transfer to the United States the business of supplying the markets cut off by the blockade. In preparation for this emergency, several measures had been taken long before the actual outbreak of the war.

The center of the new supply system was Schering Corporation (Bloomfield, New Jersey), a firm now held by the U. S. Alien Property Custodian. This firm was established as a Schering A. G. subsidiary in 1929 to manufacture medical specialties for the market in this country. Differing from most other Schering factories outside Germany it developed the finished solutions and substances out of raw or semi-manufactured imported materials, where the others merely finished the process by placing the material in ampule, tablet and package form. Gradually extending its research, laboratory and manufacturing facilities it came to be as fully equipped to manufacture, although on a much smaller scale, all Schering medical specialties as Schering A. G. itself.

All of the common stock of this New Jersey corporation was owned by Chemical and Pharmaceutical Enterprises, Ltd. (Chepha) and held in the name of a nominee of the Swiss Bank. Chepha was owned 51 per cent by the Swiss Bank and 49 per cent by other related interests. However, it has recently come to light that the transaction in 1937 by which Chepha and the Swiss Bank got apparent control of the Schering Corporation, included an option agreement which made it possible for Schering A. G. to regain its interest at any time it so desired. Obviously the transaction was a mere sham to make it appear that the American corporation was controlled from Switzerland rather than from Germany. Actually Schering A. G. had never ceased to exercise its domination over Schering Corporation up to the very outbreak of war between Germany and the United States.

As of January 1, 1938 the two corporations entered into an extensive and detailed agreement. Two paragraphs of the preamble of this agreement are as follows:

“Schering A. G. is engaged in the development, manufacture and/or sale of medicinal, pharmaceutical, biological, and bacteriological preparations. It is the owner of processes and formulae used in the production of such preparations and is also the owner of U. S. A. patents and patent applications pertaining to such preparations. For many years it has maintained and operated and still does maintain and operate laboratories to carry on research and development work in connection with such preparations, and has thereby acquired valuable scientific knowledge, data and material concerning the aforesaid sphere of activities.

“Schering Corp. has an organization suited for national distribution and promotion of such preparations in the United States of America, and is equipped to manufacture such preparations. It also maintains and operates laboratories to carry on research and development work in connection with such preparations, but has not acquired the extensive scientific knowledge and practical experience in this field that Schering A. G. commands by reason of its longer and more extensive research work and experience.”

This language portrays the true relationship of the parent and subsidiary companies.

The parties agreed to exchange patents and information and to deal in each other’s products in their respective territories. The division of territory, as in so many of these German-American agreements, gave the United States to the American corporation as its territory and the remainder of the world to the German firm.

Article V, Paragraph 5 is as follows:

“Schering A. G. agrees not to deal in selected preparations nor to sell selected preparations to any corporation or person in the U. S. A. except to Schering Corp., nor knowingly to sell them to any corporation or person for purposes of exportation to or resale in the U. S. A. unless Schering Corp. shall first have given its written consent.”

Article V, Paragraph 7 is as follows:

“Schering Corp. undertakes not to export, either directly or indirectly, from the U. S. A., or knowingly to sell for purposes of export to any third party any such preparations unless Schering A. G. shall have previously given its written consent.”

A letter from Schering Corporation to Schering A. G. dated June 2, 1939 contained the following:

“In view of your assignment to us of certain patents in the female-sex-hormone field and your assistance in connection with the acquisition by us of licenses under patents in the male-sex-hormone and cortin fields, we agree not to sell or offer for sale any product made pursuant to the said assigned and/or licensed patents or any of them in any country outside of the U. S.”

All Schering A. G. patents and trademarks in the United States are owned by Schering Corporation or its affiliates. However, the agreement is not limited in its terms to the mere fixing of compensation for the use of patents and trademarks. The American corporation agreed to pay Schering A. G. a royalty on all its sales of pharmaceutical products which had nothing to do with Schering A. G. patents and trademarks. It even went so far as to agree to pay the German firm a royalty of not to exceed 12½ per cent on sales of new preparations developed by itself in this country. The following provisions of Article X of the agreement make clear this unusual relationship:

“In either of such cases [if net sales of Saraka, a proprietary laxative, are more or less than $1,200,000] the royalty shall be as follows:

“(b) On that portion of such amount derived from sales of preparations commonly available in the open market and not sold under a trademark, such as insulin, milk of magnesia, thyroid, or codliver oil, and in the manufacture of which no special Schering A. G. process is utilized, 6¼%;

“(c) On that portion of such amount derived from sales of new preparations developed by Schering Corp, wholly independent of Schering A. G. and which do not fall within a field of preparations already developed or in process of development by Schering A. G., a percentage, less than 12½%, to be determined and agreed upon by the parties from time to time.”

Up to the outbreak of the war there was a constant exchange of experience and knowledge by frequent mutual visits. This differs radically from the conditions which prevailed in many other fields. In the case of synthetic rubber for instance, the Hitler government flatly prohibited the giving out of technical information while using every means of securing the information of developments in this country. It seems obvious that in the case of Schering A. G., the plan, as subsequently carried out, was to place Schering Corporation in a position of being able to carry on Schering A. G.’s overseas business. In this rapidly changing field of hormones, this meant keeping the American corporation completely informed as well as getting from it all available information.

Schering Corporation, before the outbreak of war, was provided with complete instructions about the technicalities of exporting Schering products, with a complete set of Schering export packages, labels, prescriptions, etc., indicating all details of the complicated system of packages which differ from country to country and from product to product. This was done to enable Schering Corporation to start exporting without delay in case of emergency. For these products which, before the war had not been made by Schering Corporation, the necessary manufacturing directions were sent from Berlin. About these products until as recently as 1941 there was a constant exchange between Bloomfield and Berlin.

In addition to establishing a “neutral” manufacturer and supplier in the United States which in case of emergency could be resorted to as a new center of the overseas business, Schering A. G. took other measures as well. The Schering subsidiary in London, Schering, Ltd., was also sold to Chepha. It is understood that it has since been or is being wound up by the British government. Shortly before the outbreak of the war in 1939, all Schering A. G. firms in the British Empire, except London, and those in Latin America, were transferred to Foreign Investments and Invention Company, Ltd. Basle (Forinvent.) This was done to “neutralize” these Schering firms and thus to protect them from seizure in the British Empire or blacklisting in Latin America. Forinvent is wholly owned by Palladium A. G., also a Swiss holding company which in turn is wholly owned by the Swiss Bank Corporation, Basle. Forinvent, like Chepha, is within the premises and organization of the Swiss Bank. The president is the same Dr. Samuel Schweitzer of the Swiss Bank, who is in charge of Chepha, and the connections of Forinvent and Chepha with the Swiss Bank are practically identical. Due to the fact that the selling transaction in the case of Forinvent took place immediately before the outbreak of war, Forinvent could not escape being placed on the blacklist. The same holds true for the Forinvent (Schering A. G.) subsidiaries in Latin America, while the Forinvent (Schering A. G.) subsidiaries in the British countries were placed under enemy alien control.

The carefully laid plans were put into effect upon the outbreak of war. Forinvent advised the British Empire companies to get their further supplies from Schering Corporation and at the same time advised the latter to supply them, which it did.

The fact that the British government acted quickly and placed Forinvent and its subsidiaries in Latin America on the blacklist partially upset the plans which had been made. In view of the increasing anti-German attitude in the United States and the possibility of this country entering the war sooner or later, Schering Corporation had to be very careful of its outward connections with the Schering A. G. set-up. Therefore when Schering Corporation was finally advised to supply Latin America, steps were taken to conceal any connections with the blacklisted Forinvent firms. On January 2, 1940 Schering A. G. gave a release to Schering Corporation as to all products excepting hormones, and on March 1, 1940, cabled a blanket release in the following terms: “We authorize you until further notice to deliver pharmaceutical and technical chemicals to our South and Central American representatives or through their mediation to their customers.” These releases, of course, did not apply to foreign firms not associated with Schering A. G., and evidence shows that the restrictions as to these other companies were still continued, and Schering Corporation refused to sell to them.

Two paper corporations were created to avoid use of the name Schering although both corporations are in the same building with Schering Corporation and are completely identified with it except as to name. Pharmex, Inc., owned by Gregory Stragnell, vice president of Schering Corporation, dealt directly with the ex-Schering A. G. subsidiaries in the British Empire, except Schering Corporation, Limited, of Canada. The latter deals directly with Schering Corporation of Bloomfield.

Delta Pharmaceutical Corporation, owned by Sherka Chemical Company (which was in turn owned by Chepha), purchased raw materials from Sherka and hormone products from Schering Corporation and sold them to Atlantis, a corporation organized in Panama. These two companies, Pharmex and Delta, were really the export department of Schering Corporation. Part of their employees were on the pay roll of Schering and part on the pay rolls of Pharmex, Delta and Sherka. Both companies were under the direction of Dr. Weltzien and Dr. Stragnell, then president and vice president, respectively, of Schering Corp.

Atlantis S. A., Panama, is a wholly owned subsidiary of Forinvent organized in 1940. Its president is Dr. Samuel Schweitzer, who is likewise in charge of Chepha and Forinvent. At first it was considered advisable to set up an actual office in Panama. However since so many technical questions, passport difficulties and tax questions were involved, the whole Atlantis business was centralized in Basle, Switzerland, under the direct supervision of the Swiss Bank Corporation, in closest cooperation with Schering A. G. of Berlin.

One of the problems faced by Schering Corporation in its new foreign trade was that of packaging and labeling the products so that they would seem to be identical with those formerly supplied by Schering A. G. Since one of the chief considerations prompting this whole scheme was preservation of good will, in order that the business could be turned back to Schering A. G. after the war, this factor was most important. On February 10, 1940 Forinvent cabled Pharmex as follows: “fundamental changes of packing latinamerica may jeopardize turnover on account customers mentality and will probably cause difficulties with registration authorities therefore please adopt present style of packing and labeling ... suggest airmailing you immediately films for making plates [for printing Schering A. G. type of labels].” It was not necessary to use the films in question inasmuch as Delta had samples of all the Latin America packages it had used as a standard pattern. Delta on January 28, 1941, sent to Swiss Bank samples of all packages used for export, pointing out that the differences between the new and old packages were very slight.

From early in 1940 until Pearl Harbor the supplying of Schering A. G. firms in Latin America was accomplished in a circuitous manner. Each of the firms kept in close touch with Basle and so with Berlin. They advised Atlantis of their requirements. Atlantis, in Basle, cabled the orders to Delta at Bloomfield and instructed Swiss Bank in New York to honor Delta’s drafts. Delta delivered the goods to a forwarding agent of Atlantis in New York, which shipped them to a dummy consignee in Latin America and they were there received by the particular Schering firm which had placed the order.

About 40 or 45 cents of each dollar paid by the Latin American firm went to Atlantis and thus to Schering A. G. Out of its share, 55 or 60 cents, Delta (actually Schering Corporation) made its manufacturing costs and whatever profit there might be for it. The advertising expense was borne by Atlantis or Schering A. G. The advertising and continuance of the familiar German packages, labels and Schering trade-mark constituted an important form of German propaganda. It was possible for the German agents in Latin America to point to the continuance of German pharmaceutical supplies as indicative of their ability to overcome the British blockade and to carry on their commerce with this hemisphere.

It has been mentioned that the Germans used pharmaceuticals which have a high value in proportion to bulk and weight to make up one third of the air cargoes which were flown into South America along with propaganda and other materials. Pharmaceuticals also constituted an important part of the air cargo which was carried eastward, ranking third among the materials which were flown over the blockade. One order of 10 kilos (22 pounds) of testosterone propionate, the semi-manufactured male hormone, valued at $50,000 was shipped one kilo a week by air mail from Argentina to Spain and from there to the Schering factory at either Milan or Berlin. This and other similar orders, were placed by a dummy of Schering A. G. in Portugal.

Thus far I have been discussing the relations of two firms, one, the largest of the European manufacturers of synthetic hormones, and the other its affiliate or subsidiary, the largest American producer. There are other large European members of the cartel and each has its subsidiary in this country.

Ciba (Society of Chemical Industry in Basle, Switzerland) is another important cartel member. It has been in existence for some sixty years, engaged in the manufacture and sale of dyestuffs and pharmaceutical products throughout the world. In July 1936 it organized a subsidiary, Ciba Pharmaceutical Products, Inc., of Summit, New Jersey. Ciba Basle also came to own several other corporations in fields other than pharmaceuticals and hormones in this country, and companies in Canada, Brazil and Argentina which sell dyestuffs and pharmaceuticals. Ciba’s close relation to Schering A. G. is indicated by its joint ownership with the Swiss Bank of the common stock of Chepha, which in turn owns all the common stock of Schering Corporation.

Until just before the war Ciba Pharmaceutical of Summit, New Jersey, produced no hormone products. These were all purchased by it from Ciba Basle. However, since its organization it has been distributing hormones under its own label.

The subservient attitude of Ciba Summit to the Society (Ciba, Basle) is clearly shown in the following paragraph from a letter of October 17, 1939, from H. Kamp, vice president of the New Jersey corporation, to James Brodbeck, Secretary of Ciba Basle:

“As I have repeatedly said, I am not interested in making profits for Summit out of sales of raw materials or even finished packages sent to foreign countries. _All I am interested in is to help Society in getting the business_, but we must have a certain rule as regards profits for Summit. The simplest way would be if Basle fixed a percentage profit over our price II on all products shipped in bulk to any foreign country. The same, of course, could apply to finished packages if we were to supply finished packages to foreign countries later on. _We want to help Society as I fully realize that we are working for the interest of Society and not for the interest of Ciba Summit alone. Whatever seems most advantageous from your point of view will meet with my approval._”

The same attitude is also reflected in a letter of September 22, 1939 from H. Kamp of Ciba Summit to Dr. J. Weltzien, president of Schering Corporation:

“At the meeting which took place on May 10, 1939 in your offices, among other points, the introduction of desoxycorticosterone acetate was discussed. It was finally agreed that Ciba would introduce the product, but would abide by your suggestion that no other indications be mentioned in the literature than Addison’s Disease. We were, therefore, more than surprised to read your advertisement in the ‘Druggists Circular’ announcing ‘CORTATE,’ where it is suggested that the drug may be of use in the more chronic constitutional types of cortical deficiency, in asthenias, and that certain allergies should be benefited by the administration of Cortate....

“It is again one of your usual methods by putting the other parties before accomplished facts. I have discussed your tactics very thoroughly while in Basle, and I can assure you that our friends in Basle are more than fed up with your _methods. In fact, I have the full authority to give you a dose of your own medicine at the next opportunity, and this I am going to do without any hesitation whatsoever!_”

N. V. Organon of Oss, Holland, is a large manufacturer of hormone products and so is F. Hoffman-LaRoche of Basle, Switzerland. The latter company has had a subsidiary in Nutley, New Jersey called Hoffman-LaRoche, Inc. N. V. Organon of Oss and Hoffman-LaRoche, Inc., of Nutley, have jointly owned a corporation called Roche-Organon, Inc., organized in 1937 and engaged in the sale of hormones. In 1940 Ciba licensed Roche-Organon to manufacture products in the cortin field under a patent for which it had made application in 1938. Ciba agreed to pay Roche-Organon 20 per cent of all royalties collected from other licensees except Schering. Roche-Organon agreed to pay Ciba 6 per cent on its entire turnover in the United States in the Cortin field from January 1, 1940 to June 17, 1955 regardless of whether the turnover involved products made under Ciba’s patent.

The German firm of C. F. Boehringer and Sons of Mannheim-Waldhof, Germany formerly owned 50 per cent of the stock of Rare Chemicals, Inc., Nepera Park, New York. The president of the German firm was the father of E. T. Fritzsching, formerly secretary and more recently president of Rare Chemicals. A memorandum of the younger Fritzsching of Rare, dated March 29, 1939, contains the following opening paragraph:

“In view of the boycott situation and in view of a number of other reasons I have come to the conclusion that the best way to avoid any further trouble for Rare Chemicals is to arrange for a definite purchase of the Boehringer shares by an American citizen. It is my intention to make an offer to Boehringer, by which I shall take over their assets in this country and pay for them at whatever price I could possibly obtain them. I am assuming this obligation personally for the reason that it really makes very little difference whether the shares are owned by Boehringer or by me, since through this transaction the assets would morally still remain within the same family interests. It would also work along the lines of my personal interest and that of my family in the event of war.”

The remaining 50 per cent of Rare’s stock was owned by Pyridium Corporation also of Nepera Park, New York. A letter to Erwin Fritzsching c/o C. F. Boehringer & Soehne, G.m.b.H., Mannheim-Waldhof from W. S. Lasdon of Pyridium and president of Rare dated August 18, 1939 contained the following statement: “I agree with your suggestion to the transfer of the B.&S. stock to a Swiss Company, instead of to you, and of course, your participation in the profits of Rare is to be cancelled upon the signing of this agreement, the understanding being that you and W. S. Lasdon will represent the stockholding interests.” The products of the two companies were exchanged with definite restrictions upon their distribution. The following excerpt indicates that the German firm kept a tight rein on the use by the American firm of the former’s products. It is taken from a letter from Fritzsching of C. F. Boehringer & Soehne, G.m.b.H. to Rare Chemicals, Inc., dated October 31, 1936. It concerns a request of Rare to be allowed to manufacture a product called Eucupin.

“We are acknowledging the receipt of your letter of October 19th and regret to say that we cannot comply with your wishes.

“We must take into consideration also the German interest when weighing the question whether it is right to send manufacturing processes to foreign countries, even though they may go to our friends in these countries. We cannot be responsible for it to give you manufacturing processes, the use of which is not to be expected within a reasonable time. In such a case we cannot truthfully answer any possible questions from authorities to the effect that we can say that when giving away a manufacturing process it will make it possible to manufacture and sell in a foreign country a German preparation, the sale of which from Germany due to duty difficulties and other restrictions cannot be considered. In this fact lies the German interest, and this we have to consider in first line.”

In the summer of 1942 Rare was taken over by the Alien Property Custodian and subsequently sold at public auction to a wholly American independent organization.

After certain separate agreements and considerable negotiation a five party agreement was entered into on May 26, 1937 to which the European firms Schering A. G.; Ciba, Basle; N. V. Organon, Oss, Holland; C. F. Boehringer & Sons, and Les Laboratoires Francais de Chimiotherapie of France (Chimio) were the parties. The male hormone, female sex hormones, and cortin, the cortico adrenal hormone, are covered by the agreement. It involved a division of territories with certain parties being definitely excluded from certain territories. Competing producers of pharmaceutical products were expressly named as firms with which any kind of cooperation is prohibited. Among these were E. Merck, Darmstadt, Germany, and Merck & Co., Inc., of Rahway, New Jersey. Subsequent agreements removed the prohibition as to these firms.

Of course, one of the chief purposes of the cartel agreement was to fix prices. The European parties agreed upon prices and their American affiliates did likewise. A memorandum of a meeting held at Summit on October 6, 1938 between representatives of Ciba and of Schering discusses the fixing of prices on various hormones. The artificial and arbitrary character of the pricing policies is indicated by quotations from some of the documents which were written following this meeting. One of them indicates an agreed price of $3 for a certain hormone product. It then states: “This price was later refused by Mr. Kamp [Ciba’s general manager] who then advocated $4.00. This was submitted to the other with our O.K.”

A memorandum of a discussion held at Bloomfield, New Jersey on October 7, 1938 between representatives of Rare and of Schering, recites a detailed list of prices agreed upon between Schering and Ciba the preceding day as having been submitted to Rare.

As to the item on which the price had been changed as just indicated an endorsement on this memorandum states: “Informed Mr. Landon [Rare official] by phone of Summit’s desire to change this price to $4. He agreed to this.”

The entire world cartel system has been bound together with patents. The contracts among the American companies have been carefully planned and drafted abroad to avoid any appearance of violating the antitrust laws. They were couched in terms of licensing patents to give the impression that the parties were merely procuring rights under patents and not engaging in restraints of competition. The evidence indicates that the cartel participants in Europe had attempted to allocate the issue of patents in the United States to the associated firms in such a manner as to strengthen the defense of the American firms against charges of antitrust law violations. At a discussion in Berlin on March 18, 1939 among representatives of Ciba, Organon, and Schering, A. G. there was set in motion reciprocal concessions of priority in interferences between Organon and Ciba in the U. S. Patent Office relating to the male hormone, and to cortin. It was arranged for Schering to drop out of the interference proceedings. It appears from a circular letter from Organon to Ciba and Schering that the plan was for Organon to concede priority to Ciba in the male hormone interference and for Ciba to concede priority in the interference regarding cortin. The intent of the parties, as to the male hormone interference, was to transfer the application of Organon to the United States Ciba firm. This circular letter of April 4, 1939, from Ciba to Organon and Schering, A. G. reads in part:

“It is up to Ciba to take care in accordance with the several single agreements in the United States for a correct and clear basis of the agreements relating to the male hormone field because corresponding proceedings are intended in the paranephros [cortin] hormone field in which Roche-Organon shall obtain the basic patent claims. In accordance with the opinion expressed here since Ciba gives its consent already in the letter of March 9, 1939 to transfer the basic application in which the patent claims for paranephros are established (Case 1577/1-4) to Roche-Organon, that however, is dependent upon corresponding proceedings of the Organon in the male hormone field.”

The reasons for this “swapping” were very clearly indicated in the last mentioned document:

“As it is known in the United States the antitrust legislation is of extremely great significance. The different agreements which are in the state of preparation in the United States are intended to put all contractors into position to sell hormone compounds in the United States without any violation of those statutes.... So far as ... cross promises to maintain prices exist, this promise is only lawful if the licensee, in this case Ciba, possesses the protection of a patent claim....

* * * * *

“According to the information of Dr. Joseph Engi almost daily new indictments based on the antitrust legislation are made. Under such circumstances it is extremely important to obtain as fast as possible the protection of the most important patent claims.”

However, Roche-Organon resisted the transfer of the application, writing in its circular letter to Ciba and Schering, A. G., dated April 15, 1939: “An expert would understand immediately that the transfer of this application served only aims which have to be considered as lawful according to the antitrust legislation. We couldn’t even mention any consideration given the Ciba.”

Although Organon’s male hormone application was in fact not transferred to Ciba, the result which the parties contemplated appears to have been effected. Ciba, apparently relying upon its own male hormone patents in the United States, became the licensor of Roche, Schering, and Rare, while Roche-Organon participated in the licensing arrangements only under its cortin patents.

There are numerous indications in the Schering correspondence that the American license agreements are so bound up with the basic cartel agreements that the sums of money paid by the American firms to each other are regarded as parts of the total considerations which the European firms are bound to pay each other.

As in the case of Schering A. G. and Schering Corporation the other cartel members bound their United States affiliates to agreements which precluded exports in any manner which would interfere with the division of territory among members of the cartel. The agreement of April 1, 1938 between N. V. Organon and Roche-Organon contains the following provisions: “Roche-Organon agrees not to deal in or manufacture glandular and hormone preparations other than those originated by Oss [N. V. Organon], nor to export or sell for export from the territory any glandular and hormone preparations.” (The territory is defined as the United States, its territories and possessions, Canada and the Philippine Islands, and Cuba.) The other agreements contain similar restrictions with some variations as to the exact territory.

The principles of competition, price, and research heretofore discussed are well exemplified by the case of Stilbestrol (diethylstilbestrol), a recently discovered pharmaceutical which has effects similar to those of the female sex hormones. It is the product of research supported by Government grant in England, several scientists of the University of London and of Oxford University, headed by E. C. Dodds, being responsible for the development. Throughout all of the work of Dodds and his colleagues the Medical Research Council, a British government organization, undertook the necessary financial support. (While Stilbestrol is not a synthetic hormone, it has most of the valuable therapeutic effects of these substances although it may not be entirely free from side reactions. Its cost of manufacture--and the price to the consumer--are much lower than those of the equivalent hormones).

The American hormone cartel members were aware of Stilbestrol and its possibilities as early as 1939. In a conference of Roche-Organon, Ciba and Schering officials, held on August 1, 1939 the following discussion took place, according to minutes found in Ciba’s files:

“Mr. Kamp [Ciba] brought up the subject stilbestrol.

“Mr. Hammer [Schering] said he thought that any concern would have a hard time getting stilbestrol accepted in this country.

“Dr. Oppenheimer [Ciba] pointed out that in this country estradiol prices may not be too much out of line with those of stilbestrol compared with Great Britain.

“The question of side effects from stilbestrol was then discussed.

“Dr. Josephy [Roche-Organon] told of reports from Amsterdam on the use of stilbestrol in animal experimentation. He said that he thought the government would look not only at the favorable reports on a preparation which was submitted but also the unfavorable ones.

“Mr. Kamp said he thought some concern had already filed with the government a request to market stilbestrol.”

A memorandum in Schering’s file concerning this same conference of August 1, 1939 is somewhat more revealing:

“XVIII _Stilbestrol_. Ciba and Roche-Organon want to have it just to be able to knock it with physicians. They say the hormone business in England has been destroyed just by this new product. On the other hand, it is said to injure the liver and there is doubt that the U. S. Government will allow it to be used.”

In the minutes (from Ciba’s files) of a conference of representatives of the three companies on Friday, October 27, 1939, there is this statement: “During the discussion Stilbestrol was mentioned and Dr. Weltzien [President of Schering] remarked he hoped ‘none of us will introduce Stilbestrol’.” These quotations indicate the hostility of cartel members towards a new product which endangers their control of the market. Stilbestrol was put on the market in this country late in 1941 and had an immediate effect upon the sales of the higher priced hormone products.

From what has been said it seems clear that in the field of synthetic hormones the cartel control has been such as to be detrimental to our national interest. When such control can be used to make American corporations the tools of those of other countries it is exceedingly unfortunate. When carried to the point of causing corporations in this country to aid the Axis it could not be and was not tolerated. The seizure of two of these companies by the Alien Property Custodian has put an end to the German control. From the point of view of encouragement of research those two companies are much better off than they were when tied to the apron strings of their parent companies in Germany. Complete removal of cartel restrictions from the entire industry would be definitely in the interest of the general public in this country and throughout the world.

7

_Vitamins_

The monopolistic control of one of the most essential products of our modern era--the sunshine vitamin, also known as Vitamin D--has been magnified by the fact that it is the poorer elements of our country which have the greatest need for this product, since it is a preventative and a cure for certain diseases most commonly found among the lower economic strata of our population. Vitamin D is essential for proper bone growth and development, the prevention and cure of rickets, and the prevention or reduction of tooth decay.

The Wisconsin Alumni Research Foundation acts as a screen behind which a group of monopolistic chemical, pharmaceutical and food companies control Vitamin D. The story of the Wisconsin Alumni Research Foundation is of extreme importance because it indicates how a quasi-public research organization can be flagrantly misused.

At the outset I should like to state that the Wisconsin Alumni Research Foundation has no formal connection with the University of Wisconsin, and that the University of Wisconsin has absolutely no control over the policies and practices of the Alumni Foundation. It should be clearly understood, therefore, that what I say here does not reflect in any manner upon the University of Wisconsin.

A report of the Trustees of the Foundation dated June 22, 1931, defines the objectives and purposes of the Foundation as follows:

“Indeed one of the soundest reasons for the development of the Foundation as a suitable means of handling the Steenbock process lies in the rigid control through which it is possible to protect the public and prevent unscrupulous commercialism from capitalizing the Steenbock discovery.”

The investigation by the Antitrust Division of the Department of Justice indicates, however, that somewhere along the line these laudable objectives were lost. Instead, a summary of our investigation discloses the following facts about the Wisconsin Alumni Research Foundation:

(1) It has been the vehicle for creating a domestic monopoly resulting in division of fields, price fixing, control of container size, and limitation of potency of vitamin products--as a result of which the public has been charged excessive and arbitrarily high prices. (The Foundation has been described by a licensee as being “merciless in beating out competition” in the field of vitamins.)

(2) It has considered plans to denature and adulterate Vitamin D preparations in order to maintain high prices.

(3) It has exhibited a lack of interest in research unless a commercial advantage could be obtained.

(4) It has used threats of patent litigations under patents which it knew were very weak to eliminate competition. (Some of these patents upon which the monopolistic scheme rested were, in fact, declared invalid in 1943 by the Circuit Court of Appeals for the Ninth Circuit.)

(5) It has suppressed the use of competing processes.

(6) It has organized international cartels with I. G. Farben of Germany and Joseph Nathan & Co., of Great Britain, in order to eliminate world competition by dividing world territory into noncompetitive areas.

(7) It has attempted to suppress the publication of scientific research data which were at variance with its monopoly interests.

(8) It has acted as a police organization for its licensees--in order to maintain its price fixing arrangements--by setting up a black list of price-cutting distributors.

(9) It has used its licensing scheme to discourage research by its licensees.

(10) It has endeavored to suppress or prevent truthful advertising in order to eliminate competition.

(11) It has required its licenses to charge unreasonable prices to the government.

(12) It has forced farmers to buy vitamin-enriched animal feeds in a monopoly market.

Since 1925 the production and use of Vitamin D has been under the control of the Wisconsin Alumni Research Foundation. The control has been based upon the so-called Steenbock patents, especially upon patent No. 1680818, which the Foundation regards as the basic patent on Vitamin D.

About 1925 Dr. Steenbock, then a professor at the University of Wisconsin, conducted experiments which eventually resulted in the Steenbock patents. Recognizing the commercial possibilities of his developments, Steenbock offered his patents to the University, but the Regents of the institution did not feel they were in a position to commercialize them. The President of the Wisconsin Alumni Association at that time was George I. Haight, a very able patent lawyer of Chicago, who immediately recognized the commercial possibilities of the Steenbock development. Together with some of the other leading alumni of the University, Haight founded the Wisconsin Alumni Research Foundation to undertake the exploitation of the Steenbock patents and such other patents as the Foundation might from time to time acquire.

The Foundation was chartered on November 14, 1925 as a non-profit corporation. Its purposes, as stated in its charter were “to promote, encourage and aid scientific investigation and research at the University of Wisconsin by the faculty, staff, alumni and students thereof, and those associated therewith, and to provide or assist in providing the means and machinery by which their scientific discoveries, inventions and processes may be developed, applied and patented, and the public and commercial uses thereof determined, and by which such utilization or disposition may be made of such discoveries, inventions and processes, and patent rights or interests therein, as may tend to stimulate and promote and provide funds for further scientific investigation and research within said University or colleges or departments thereof.”

The Foundation is managed by a Board of Trustees. Originally these trustees personally handled the work of the Foundation but, in 1931, they secured the services of Henry L. Russell, former dean of the University of Wisconsin College of Agriculture. Russell was made Director and executive head of the Foundation. Later, as business increased, L. D. Barney was employed as business manager, and Ward Ross, an associate of Haight, was retained as General Counsel. Steenbock himself appears to have handled most of the technical matters of the Foundation insofar as they relate to Vitamin D. The royalties received by the Foundation are invested and the resulting income is utilized for research.

The Foundation has controlled Vitamin D by reason of its ownership of the Steenbock patents Nos. 1680818, 1871135, 1871136, and 2057399. The underlying concept of all of these patents is that certain substances called pro-vitamins may be “activated” so as to result in a product having a high Vitamin D potency. This “activation” is accomplished by exposing the pro-vitamin to ultra-violet light, and the basic patent is limited to activation by ultra-violet light produced by an artificial source such as a quartz mercury vapor lamp.

The commercialization of the Steenbock patents was phenomenally successful almost from the very outset. The report of the Trustees of the Foundation dated June 22, 1931, states:

“The accumulation from royalties so far has been almost wholly from the ultra-violet patents. During the calendar year 1930, the gross income was $354,590, or very nearly $1,000 a day throughout the year. This income has been developed within less than three years.”

The Foundation’s annual royalties showed a steady increase until 1936, when they amounted to nearly $1,100,000. After 1936, the annual royalties decreased slightly, and in 1939 they amounted to $936,610.70 or over $2,500 per day. Up to 1940, the Foundation had received more than $8,500,000 in royalties.

The royalty rates charged by the Foundation vary from 10% to 3% and less, with higher royalties applying to only a few products. The enormous size of the market is indicated by the munificent revenues yielded by royalties at these rates.

The first requirement for the success of the Foundation’s licensing program was the elimination of competition from non-licensees. The Foundation’s practices in this respect are aptly described in a memorandum dated February 20, 1935, from Connolly, a du Pont patent attorney, to Kupperian, of du Pont: “The Foundation has been merciless in beating out competition throughout the United States whenever such competition threatened to encroach upon the synthetic vitamin D field.”

Some of the leading manufacturers in the country are licensees of the Foundation. Many of these manufacturers have been licensees for years, while in some cases licenses were obtained by the acquisition of companies holding licenses. Both du Pont and Standard Brands obtained their licenses by the latter method.

Acetol Products, Inc., had a license from the Foundation dated November 15, 1929. Du Pont acquired the assets of Acetol and on April 30, 1935, Acetol assigned its license to du Pont. On November 15, 1935, a new agreement was executed between the Foundation and du Pont which superseded the Acetol agreement of November 15, 1929.

Standard Brands succeeded to the rights of the Fleischmann Company under an agreement dated August 8, 1928.

The question naturally arises why these powerful manufacturers paid the Foundation such large royalties on the basis of the weak and limited Steenbock patents. The correspondence indicates that the licensees were not only willing but anxious to pay the royalties in return for the profit opportunities offered under the Foundation’s schemes.

The desire of the licensees to cooperate in the Foundation’s promotional schemes is well expressed in a letter dated July 8, 1935, from Atkins of du Pont to Barney, the Foundation’s business manager:

“The writer feels certain that you understand our desire and willingness to be considered as a part of the Foundation. You know our desire to prevent the Vitamin D field from falling into disrepute because of too many producers of various types of so-called Vitamin D. We would much prefer centralized control in the hands of the Foundation and you may count on us to support you even though, at times, we may have differences of opinion.”

A memorandum dated January 25, 1937, from H. W. Elley, associate chemical director of du Pont, to a number of the executives of du Pont, explains the reason for centralizing “control in the hands of the Foundation”:

“He [Mr. Protto, assistant general manager of du Pont] felt that it would be preferable to deal with the Wisconsin Alumni Foundation since they could be of considerable value to the industry in policing and regulating matters. If, for any reason such arrangements become unnecessary, it would then be possible to consider alternative procedures not involving the use of the Foundation patents, that is, we might commercialize the Milas process.”

The Foundation is organized along the lines of an international cartel insofar as its licensing program is concerned. It is party to agreements with the omnipresent I. G. Farbenindustrie of Germany and Joseph Nathan & Co., of Britain. The agreements, following the standard cartel pattern, create exclusive noncompetitive territories. Nathan and I. G. are prohibited from exporting to the United States and the domestic licensees of the Foundation are prohibited from exporting to Germany or Great Britain.

The domestic licensing policy of the Foundation is characterized by a most complex and minute division of fields into noncompetitive areas. Generally speaking, these fields of activity are made exclusive so that all competition between the different licensees or groups of licensees is eliminated. Provisions of the various agreements, which will be later described, prevent any substantial overlapping of these fields. Often the provisions merely prohibit the licensee from accurately describing his product but the essential object, elimination of competition, is attained.

Fields are divided along three distinct lines: (a) the product to be activated, (b) the method of activation, and (c) the use of the activated product. In the first category there are 13 principal divisions: (1) the pharmaceutical licensees are permitted to activate ergosterol, (2) Standard Brands is licensed to activate yeast and yeast products, (3) du Pont is allowed to activate ergosterol cholesterol and other sterols except yeast and yeast products, (4) S. S. Kovaks is allowed to activate sterols derived from yeasts but not yeast, (5) a group of licensees are permitted to activate evaporated milk, (6) a number of licensees are permitted to activate fluid milk, (7) Quaker Oats is allowed to activate cereals, (8) Borden is allowed to activate a milk product known as Dryco, (9) The Wanter Company is allowed to activate Ovaltine, (10) the Commander Larrabee Company is allowed to activate flour, (11) R. B. Davis and Company is allowed to activate Cocomalt, (12) Loose-Wiles Biscuit Company is allowed to activate crackers, and (13) Ayerst, McKenna and Harrison are allowed to activate a food product known as Glucose-D.

The extent to which the division of fields is carried is exemplified in an agreement dated June 27, 1938, between the Foundation and the Loose-Wiles Biscuit Company. This agreement authorizes Loose-Wiles to activate “Graham Crackers” and “Wafers slightly sweetened to such as English Style Arrowroot Wafers,” but does not permit the activation of “cakes” and “cookies.”

According to the method of activation, fields are divided into direct irradiation and activation by the introduction of an irradiated substance. Some few licensees are permitted to use either method of activation, but most are restricted to a single method. One of the most curious licenses issued by the Foundation permits the activation of milk by feeding cows irradiated material.

The division of fields according to use is most detailed, but can be broken into several general classes. Licenses are issued for the human medicine field, for the human food field, for the fluid milk field, for the evaporated milk field, for the animal feed field, and for a field in which the product is not intended for internal use.

At the outset, it was pointed out that the stated objectives of the Foundation are “to protect the public” and “to prevent unscrupulous commercialization.” Over the years the Foundation’s devotion to these objectives appears to have wavered. The Foundation appears to be primarily interested in royalties, with little or no regard for the public interest. Article VII of the agreement of November 1, 1938, with the milk companies states that if “it should be found that the activation of unsweetened evaporated milk by ultra violet rays under this license is substantially harmful to the user of such milk, or to the milk itself, the licensee shall have the right to cancel this license.”

In a memorandum dated February 8, 1939, Dr. Russell described a similar position of the Foundation in regard to high dosages of Vitamin D: “Steenbock is of the opinion that in view of the fact that Vitamin D is no longer a distinctive Steenbock product but can be secured from a variety of sources that the Foundation might as well favor the commercialization of high dosages unless there is _very_ serious objection on the part of the A.M.A. officials toward a move of this sort.”

It is to be noted that in neither of these cases is the Foundation concerned with public benefit or medical approval, but only with _substantial harm_ and a _very serious medical objection_.

Another instance of the Foundation’s regard for the public interest was the Snider Packing Company matter. In 1931 the Snider Packing Company obtained irradiated yeast from Fleischmann to add to Snider’s tomato juice. The results were apparently not too satisfactory. After this 1931 failure, Snider was persuaded to continue the license and the Foundation undertook to supervise the activation of the tomato juice. Steenbock and Scott recommended Acetol irradiated ergosterol and this recommendation was followed.

Despite the recommendations and supervision and guarantees of the Foundation, the Vitamin D content of the Snider tomato juice did not come up to expectations. This inadequacy was known to Snider, Acetol, and the Foundation, and on February 27, 1933, Russell wrote to Acetol stating:

“It would be most unfortunate if any publicity was to occur as a result of the reduced potency of the Snider product and it would not only ruin the Snider business in this product, but would affect most disastrously you as well as ourselves. If the Government were to discover this situation and publish the result, it would do irreparable injury to the whole Vitamin D situation in foods.”