Chapter IV: Front Matter (4)

The correspondence does not show whether any of the Snider products reached the market under false labels, but the Foundation’s concern in the matter is clear. The Foundation feared only publicity or discovery by the Government.

In 1934 and 1935 some research workers, and especially Dr. Reed of the University of Illinois, found that large doses of Vitamin D were highly beneficial in severe cases of asthma, hayfever and arthritis. These large doses required a highly concentrated product which was most easily used in the form of gelatin capsules. The Foundation and its licensees were greatly interested in this project, but feared the effect this concentrate might have on the pricing structure of viosterol. These fears and a suggested solution are referred to in a report of a conference between Russell and Ross of the Foundation and Nielsen of Abbott, held early in February 1935. This report, signed by Nielsen, states:

“Mr. Nielsen stated that if the capsules were priced considerably lower than the commercial product unit for unit, nothing would prevent the hospitals from opening the capsules and diluting the content with vegetable oil to obtain a ‘250D’ solution far below the regular cost.

“Dean Russell asked for suggestions to prevent this. Mr. Nielsen stated that Abbott Laboratories would give further thought to this problem. Tentatively, he suggested that the concentrate might be denatured by the addition of a drug also indicated in these cases--Ephedrine, for example--that the product be considered as a drug, not a vitamin, and that it be distributed for clinical trial under a special name--all provided that the licensees agree. _Any untoward effects from it thus would not reflect on the Viosterol products on the market._”

Despite its lofty objectives, the licensing program of the Foundation appears to have resulted actually in a substantial reduction of research and development. Its attitude toward research is indicated in a letter from Russell to the licensees dated August 24, 1936:

“We are hardly interested in the prosecution of problems of a purely scientific character that come to us from outside institutions. Nevertheless, if this is a problem that has definite commercial possibilities, we should not make a hasty adverse decision.”

In a letter dated January 6, 1937, addressed to Elley of duPont, Waddell of duPont referred to a meeting in Madison with members of the Foundation and stated:

“He [Steenbock] mentioned that most of the pharmaceutical licensees had not been interested in obtaining rights to the manufacture of crystalline Vitamin D (from ergosterol) and that the present situation might find them in the same attitude. He admitted, however, that if the patent situation and licensing arrangements worked out so that the five pharmaceutical companies were again in a position of having an exclusive hold on the synthetic Vitamin D field that undoubtedly they would be very much interested.”

Thus, in spite of the acknowledged physiological superiority of Vitamin D₃, the Foundation was reluctant to do any research whatever unless the willingness and cooperation of the licensees showed a definite promise of substantial profits.

The effect of the licensing policy on the research activities of licensees is explained in a letter from Kupperian of Acetol to Waddell, research director of Acetol. This letter states:

“According to my reading of the contract with Wisconsin Alumni Research Foundation, we are not at liberty to use yeast in connection with irradiated ergosterol, this field being reserved exclusively to Fleischmann. In view of this fact, I think we ought not to waste time and money on experiments in connection with yeast.”

In at least one case where the Foundation sponsored and financed research, the publication of the results of the research were suppressed by the Foundation because they were at variance with the Foundation’s commercial interests. In an attempt to eliminate the non-infringing product of General Mills from competition with the Viosterol of the pharmaceutical licensees, the Foundation attempted to prove that Viosterol was clinically superior to the General Mills product. To accomplish this, the Foundation made a grant to Drs. Smith and Owens of Freedmen’s Hospital in Washington, D. C., to run certain tests comparing the effectiveness of the General Mills product and Viosterol, and to prepare an article for the medical journals on the results. On June 17, 1936, Drs. Smith and Owens submitted to the Foundation their article, which contains the following conclusion:

“A comparative study of nine cases of varying degrees of rickets receiving 800 U.S.P. units of Squibb’s Viosterol daily with eleven comparable cases receiving 800 U.S.P. units of American Pharmaceutical Company Viosterol [General Mills’ product] shows no significant difference in rate or degree of healing as determined (1) by X-ray of the wrists and (3) Ca and P determination on the blood.”

The attitude of the Foundation and its licensees to this article is described in a letter from Lescohier of Parke-Davis to Anderson of Squibb, dated July 6, 1936:

“If this article is published the Steenbock group are certainly in the position of being hung with their own rope. I should like to see the publication suppressed but am pretty certain that Meade Johnson will see that it is published since they are no longer vitally interested in Viosterol. Certainly anything that can be done to delay publication would be advisable.”

In a letter dated August 17, 1936, Scott of the Foundation expressed the Foundation’s attitude on this article as follows:

“From the outset, of course, we have been opposed to publication of this paper in any form. We have advised Dr. Smith that it was necessary to get the opinions of the pharmaceutical committee, and we intend to confer with them in the near future advising them that publication of the work is not desirable.”

The Foundation has also suppressed the use of competing patents. Article II of the Supplemental Agreement of June 3, 1937, between the Foundation and Meade Johnson, Squibb, Parke-Davis, and Abbott provides for the licensing of additional pharmaceutical manufacturers who had been using Sperti Patent No. 1,676,579 on the irradiation of pharmaceutical products. This section provides:

“It is understood and agreed that such additional Licensees shall be prohibited, by appropriate restrictions in any license agreements that may be entered into between the Licensor and such additional Licensees, from employing the process described and claimed in United States Letters Patent No. 1,676,579 to George Sperti and from advertising the use of said process in connection with products sold under said license agreements....”

Thus, the results of the Foundation’s licensing program have been to stifle its own research activities and the research activities of its licensees, to prevent the publication of information which might jeopardize the Foundation’s financial interests, and to suppress competing patents. Certainly, these are peculiar results of a program instituted “to protect the public” and “to prevent unscrupulous commercialism.”

One of the most important fields in the Foundation’s scheme of exploitation is the pharmaceutical field. All Vitamin D products used in the treatment or prevention of human ills are embraced within the pharmaceutical field, and restrictions in this field thus have a direct and immediate effect on the health and well-being of the general public. Also, at the time the Foundation embarked on its licensing program, the pharmaceutical field probably was one of the most promising, both from a publicity and a profit standpoint.

In or about March 1929, the Foundation made agreements with five licensees, all manufacturers of pharmaceuticals: Meade Johnson & Co., Winthrop Chemical Company, Abbott Laboratories, Parke-Davis & Company, and E. R. Squibb & Sons. These agreements have been amended several times by letter agreements and supplemental agreements. Two letters, dated March 20, 1939 and April 27, 1939, offer the licensees certain royalty reductions, and it is assumed that these reductions were accepted. These letters do not, however, make any substantial changes in the restrictive provisions of the agreement.

This combination in restraint of trade between the Foundation and its licensees is expressed in various ways throughout the pharmaceutical licenses. For example, Article XII of the agreement of March 21, 1929, fixed minimum prices for the sale of irradiated pharmaceutical products. This article contains the following language: “Such prices so established shall remain in effect indefinitely but may be changed by the Licensor not less than ninety (90) days after consultation with all of the Licensees of this group.”

Article XIII of the agreement of March 21, 1939, states that the potencies of the pharmaceutical products shall remain fixed “until and unless changed by the mutual understanding of a majority of the licensees of this group.” Article XVII prevents the assignment of the licenses “without the written consent of the Licensor, the Patentee and the Licensees under similar licenses.” Each of the agreements with Abbott, Meade Johnson, Squibb and Parke-Davis, executed June 3, 1937, also contains long recitals regarding the provisions to be introduced into a new contract with Winthrop Chemical Co., Inc.

Price stabilization was one of the main considerations offered by the Foundation to its licensees in exchange for the royalties. It might almost be said that this price stabilization was the bait which made the licensing scheme of the Foundation so attractive to the various manufacturers. Clough of Abbott wrote to Russell of the Foundation on April 21, 1936, and referred to the importance of price-fixing activities of the Foundation as follows: “It was argued by your Trustees that under our arrangement with the Foundation, we were given certain benefits of price stabilization which was well worth the additional 5%.”

That price-fixing was one of the most important points in the pharmaceutical licensing plan and is described in a memorandum of a conference between Anderson and Lewis of Squibb and Ross and Barney of the Foundation on February 23, 1939:

“We outlined the high potency D situation both with respect to Merrell and Winthrop. Their reaction was first that Squibb would have no objection to Merrell’s continuing to sell its concentrated viosterol if we could line up Merrell on its regular viosterol from the standpoint of container size and price. We indicated that this latter could be accomplished.”

Further, the papers indicate that this price-fixing was carried over into the field of resale prices. This is brought out in a letter from R. D. Keim of Squibb to Dean Russell of the Foundation dated July 23, 1934:

“We gave this matter our very serious consideration and wrote to all the licensees, under date of July 19, 1934, as per copy enclosed and we firmly believe that our suggested _Full Retail Prices per package to the consumer and Minimum Retail Prices per package to the consumer_ for Viosterol in Oil and Cod Liver Oil with Viosterol are more in line with present market trends and the present economic market conditions than those proposed by Parke-Davis & Company.

“We are desirous of acting in harmony with all the other licensees of the Wisconsin Alumni Research Foundation in regard to the stabilization of the market for Viosterol in Oil and Cod Liver Oil with Viosterol. However, we firmly believe that it is necessary to establish a schedule of Minimum Retail Prices to the consumer such as we have suggested in order to bring about such stabilization.”

Prices were not only fixed; they were fixed arbitrarily at levels which can only be regarded as extortionate in view of the economic status of the people whose need for Vitamin D was the greatest. (Barney, the business manager of the Foundation, once stated on examination in a lawsuit: “It is my understanding that rickets is found to a great extent in the so-called poorer class of people.”) Despite this full awareness of the incidence of their high price policy, the Foundation and its licensees remorselessly maintained prices on the Viosterol products so high that their use was practically restricted to those who had least need for them. This is recognized in a letter dated March 30, 1934, from Russell to the pharmaceutical licensees: “Very severe criticism from certain prominent pediatricians has been lodged against the Foundation on account of the alleged high retail prices of certain Vitamin D preparations.”

The price-fixing activities of the Foundation also extended to sales to Federal, State and local governments and government agencies. On May 10, 1940, W. S. Merrell Company wrote to the Foundation:

“We have an inquiry from the Government for a substantial quantity of Irradiated Ergosterol and are wondering if we shall have to abide by the price schedule in our license agreement in quoting. In other words, would our quotation have to be the same as our minimum price to wholesalers, or could we figure on a reasonable profit basis taking our cost on such a large quantity for one shipment into consideration?”

The letter also contained a postscript: “We know that the price would have to be much lower than our price to the wholesalers to secure the order.” In spite of the fact that Merrell was merely asking to quote on a “reasonable profit basis” and assured the Foundation that the price would have to be “much lower ... to secure the order,” the business manager of Foundation replied on May 13, 1940:

“Under the present license agreement with your company and the other pharmaceutical licensees of the Foundation under the Steenbock patents, the minimum price to be quoted to government institutions is the minimum wholesale price as outlined in your contract, less two per cent discount for cash if paid by the tenth of the following month.

“All of the other pharmaceutical licenses of the Foundation have operated under this arrangement for some time. We note, however, your postscript which indicates that the quotation to the government will have to be lower than the price to wholesalers in order to secure the order. We dislike to see your company or any of our other licensees lose business.”

The pharmaceutical agreements fix both the potency and the quantities in which Vitamin D concentrates may be sold by the pharmaceutical licensees. The purpose and effect of these additional controls were stated by an official of the Foundation. “We feel that it is perfectly proper to control the price of Viosterol and cod liver oil from a legal standpoint and, unless we control the potency of the product and size of the container, price control of the product, of course, would be rather useless.”

The pharmaceutical agreements specified that potencies could be changed only by “mutual agreement of Licensees of this group,” while container sizes could be changed by “mutual understanding of a majority of the Licensees of this group.” Operations were in exact accord with these provisions, and only unanimous approval by the licensees could authorize potency changes. Notes of a phone conversation of March 30, 1932, between Nielsen of Meade Johnson and Russell of the Foundation state: “Russell said under no condition could such approval be given. That Meade Johnson had no warrant in changing the potency without the knowledge and approval and consent, not only of the Foundation but also of the other four licensees.”

Prior to December 24, 1936, the Foundation and its pharmaceutical licensees maintained a very effective black list and white list of dealers. While the approval of dealers was ostensibly within the exclusive control of the Foundation, actually it was again a matter for vote by the licensees. L. D. Barney, business manager of the Foundation, described the program to Dr. Russell, director of the Foundation, in a memorandum dated November 6, 1935:

“As you know, the usual procedure in handling requests of wholesale drug concerns with respect to their addition to the approved wholesale list for the sale of Viosterol products is for the Foundation to send the name and address of this company to the five licensees. They, in turn, investigate the company and report back to whether or not they favor the addition of the said company to the list. The general procedure set up several years ago was that a majority of the licensees (three) would constitute sufficient authority on the part of the Foundation to add the name of the company to the approved list.

“By reason of the manner in which these are handled, it is impossible for us to tell the licensee when we refuse their request anything other than the fact that the Committee, which handles the request, did not approve their application, or, stated in another way, the Committee voted in the negative. Obviously, we cannot say that our licensees did not favor the addition of this company to the group.”

W. N. Larson of Meade Johnson recognized that this black list and white list might be illegal, and referred to it in a letter dated December 22, 1936, to Ward Ross, Counsel for the Foundation. He sent copies to each of the other pharmaceutical licensees. Larson’s letter states:

“We would have no objection to the Foundation acting as a clearing house for information relative to those to whom wholesale terms on Viosterol and Cod Liver Oil with Viosterol are extended, except we wonder if such action might not be construed as a violation of law. Anyone investigating this activity might well inquire as to why this was done, if some action which could be construed as collusion or restraint of trade were not contemplated.”

One of the principal functions of the black listing and white listing of wholesalers and retailers was the maintenance of resale prices. This is explained in a letter dated June 29, 1931, from W. N. Larson of Meade Johnson to N. A. Buttle of Winthrop, with copies to the other licensees and to the Foundation. This letter states:

“To our knowledge there have been very few departures from the suggested minimum price, and these departures have been confined to a very few relatively unimportant wholesale druggists whose objectives unlike ours, are not to stabilize conditions in the drug trade. It is the legal right of any manufacturer to refuse to sell to a wholesaler or any other customer in fact, who will not carry out his wishes. I hope that it will not be necessary, but it is entirely possible that it may become desirable for the Foundation to make the list of preferred jobbers a trifle more exclusive than it is at the present time. We would work with the Foundation in any reasonable steps in that direction. Better proof of our desire to have this matter straightened out could hardly be given, we believe.”

At least as early as 1933, the Foundation and the pharmaceutical licensees realized that this black list was illegal. On May 11, 1933, Larson of Meade Johnson wrote to Gunn, attorney for the Foundation, regarding this black list:

“Licensees cannot make agreements among themselves in these matters and must, of course, take the position that they are acting under instructions from the Wisconsin Alumni Research Foundation. The revelation that that is not the case might prove to be very embarrassing, as you probably realize. My suggestion is that, in cases of this kind, you simply inform the inquiring party that your action was guided by a committee, operating under the Wisconsin Alumni Research Foundation, and that this committee does not reveal its reasons for taking any action of this kind.”

Probably in part on account of this growing disquietude concerning the lawfulness of their undercover boycott, in part also, perhaps, because of the vast amount of detail work involved in maintaining the list, the Foundation ceased rendering this service for its licensees some time late in 1936. On December 24, 1936, the business manager of the Foundation referred a prospective wholesaler to the pharmaceutical licensees for direct action.

The pharmaceutical agreements were thus far more than mere restrictive patent licenses. Prices, potencies, dosages and container sizes were fixed by the licensees jointly and black lists of price-cutting dealers were established and maintained. The Foundation offered little more than a facade of respectability to conceal these activities, and it was for this concealment that the licensees were willing to pay so handsomely.

The remaining agreements of the Foundation prohibit the other licensees from invading the pharmaceutical field. Several of the agreements prohibit, in express terms, sales of activated products for pharmaceutical uses, others so limit the potency of the licensed product as to make it worthless for medicinal purposes, while still others merely limit the right of the licensee to claim curative properties for his product in his advertising.

All the agreements of the Foundation clearly show the intention to protect the exclusive market of the pharmaceutical licensees in the human medicine field. Actually this practice is carried to a ridiculous extent. The following statement appears in a memo note of November 14, 1935, written by Ward Ross, General Counsel for the Foundation, regarding a conference with Dr. Hooper of Winthrop:

“With regard to the comparison between Viosterol and Drisdol, I asked Hooper how he would like it if our milk licensees said that one quart of irradiated milk was equal to 10 drops of Viosterol. Hooper claimed that this would be an invasion of the pharmaceutical field by our milk licensees and that they would be selling milk as medicine.”

Apparently, the licensees are prevented from telling the truthful merits of their products if the truth would cause an overlapping of the artificial division of fields.

Another industry capable of using large quantities of Vitamin D was the bread industry. Under an agreement dated November 15, 1939, this field is allocated exclusively to duPont. DuPont’s chief concern in the bread field was price “stabilization” which to duPont meant the maintenance of high price levels. DuPont was even willing to share the field with Standard Brands to accomplish this end. A memorandum, dated September 19, 1935, from Mr. Kenneth T. King of duPont to Mr. Ralph Horton and Mr. W. S. Kies, a Trustee of the Foundation, states: “We would be willing for the Foundation to grant non-exclusive license for the sale of Vitamin D from Ergosterol in the bread field to the Fleischmann Company, providing the price of Vitamin D in the bread field shall be stabilized.” The agreement between duPont and the Foundation expressly stipulates the limits of licensees’ discretion in price policy. Article 2 (C) provides: “DuPont shall not sell said irradiated or activated Ergosterol or its derivatives at a higher price than one dollar and a half ($1.50) or a lower price than ninety-five cents ($.95) per million U.S.P.A. (revised 1934) Vitamin D Units.”

The Foundation’s support of duPont’s policy of high prices is indicated in a letter dated July 18, 1935, from Barney to Atkins of duPont which states: “Dr. Waddell stated that it was his opinion that if General Baking came back into the picture a higher price for ergosterol should be charged. We discussed the possibility of a price of $1.25 to $1.50 per million Steenbock units.”

So long as the Foundation could be “merciless in beating out competition” price-fixing at these levels was quite attractive. But by 1940 the weakness of the Steenbock patents was so apparent that the fixed prices became a competitive hazard. On March 5, 1940, King of duPont wrote to the business manager of the Foundation:

“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.”

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.

It is interesting to observe in what manner the quebracho extract pool operated to carry out Forestal’s policy of restricted output and high prices. Before the formation of the Pool the price per pound of quebracho extract was 2½ cents. By the terms of the pool agreement a directive committee, dominated by Forestal, was empowered to fix the prices of all its members. The directive committee between November, 1934 and January, 1941, decreed six price rises, raising the basic price of quebracho extract for the whole world market from 2½ cents up to 4⅞ cents, an increase of nearly 100 per cent. Sullivan admitted in July, 1942, that at the then existing price, which prevails at present, Forestal was making a net profit of 33 per cent on every ton of quebracho it sold.

The exorbitant profits of the quebracho manufacturers were severely criticized by the famous leading Argentine newspaper, _La Prensa_. The following excerpt was taken from a letter of May 20, 1936, written by the manager of the Buenos Aires office of the International Products Corporation to its president:

“Another matter, which has caused a lot of excitement amongst the manufacturers has been the inopportune declaration, made by the Chairman of the Forestal during the annual meeting of the shareholders, viz. that the understanding of the manufacturers was performed under the auspices of the Argentine Government, in other words, that the Argentine Government was really responsible for the agreement and that it was protecting the same. This news was reproduced all over the world and the _La Prensa_, the most important paper on the Southern Hemisphere, has seized the opportunity to denounce the huge profits made by the quebracho manufacturers, profits which in their opinion mean a loss for the Argentine Republic on account of the decrease in the export of both, Quebracho Extract and Logs. I am enclosing herewith the article, as appeared in the _La Prensa_ of Monday the 18th. inst., and we would add this paper has on more than one occasion criticized the so-called ‘gentlemen agreement.’ Mr. Marti told me that he is at a loss to understand how the Baron made these declarations as Mr. Sullivan has always stressed the necessity of not mentioning the Argentine Government in connection with the manufacturers’ agreement, a fact which can be noted in the balance sheets of the other companies, who, referring to the higher prices, explain that they are due to a better understanding in the sales policy abroad. Anyway, I hope that his faux pas will have no serious consequences.”

To maintain high prices it was necessary to limit the production and the sale of quebracho in the world market. The method used to limit production under the pool agreement was to allocate a quota to each producer in accordance with his respective productive capacity. These quotas limited the amount of quebracho extract which any manufacturer could sell during a given period. Each member of the pool was compelled to make substantial contributions at regular periods to a so-called “battle fund” of the pool. These contributions were retained by the pool unless the producers adhered to the pool’s regulations relating to prices and quotas, in which case a portion of each producer’s contribution was refunded. So restrictive were these quota limitations that producers who desired to sell above their quotas often paid enormous prices to acquire the quota rights of other producers.

This rigid control of the market so severely limited the production of many companies that in 1941 several deserted the pool. These companies were LaChaquena S. A. and Cotan S. A. These two companies, together with International Products Corporation, Samuhi, and Weisburd & Cia. Ltda., a new concern, have been the only producers outside of the pool since 1941. Although the total productive capacity of these five companies did not exceed 12 per cent of the total industry, their threat of full production and decreased prices jeopardized its whole structure. To meet this threat, Forestal succeeded in persuading the Ministry of Agriculture in February, 1942, to impose export restrictions upon each producer which prevented exportation of more than approximately one-third of their total capacity. In addition, Forestal attempted to prevent companies outside the pool from shipping their extract to the United States.

One instance is the experience of Hammond and Carpenter Corporation, an independent importer which has sought to compete with The Tannin Corporation and International Products Corporation in the importation of quebracho. In February or March, 1942, J. A. Barkey, its Vice-President, attempted to import some extracts produced by Weisburd, an Argentine extract manufacturer, who entered the industry in 1941. He called at the offices of the Sprague Steamship Company and spoke to Mr. Bodemann of that company. Mr. Barkey later described the conference as follows:

“Mr. Bodemann retorted that it was very unlikely that our firm would be given any space for the reason that we were newcomers in the import of quebracho extract and for the further reason that the ‘Pool’ had supported his line during the lean years before the war and by reason of such support his line would be obliged to support the ‘Pool’ during the present emergency.”

Similar sentiments were voiced by Mr. Horgan of the Stockard Steamship Corporation. The aid of the Buenos Aires Agency of Moore-McCormack was also previously enlisted. In October, 1941, the Moore-McCormack line stated that “at the request of the Forestal Company they had promised their cooperation for the purpose of keeping out any of the new brands.... The understanding was that whenever they were offered outside extract and they had space they were to reject it and advise the other manufacturers, who would try to offer replacement.”

Forestal’s tactics are well illustrated by the case of Mr. T. Valentine, exporter and concessionnaire of a projected new company. International Products Corporation was informed in September, 1941:

“[It] has proved impossible so far to reach a satisfactory agreement with the new factory at Santiago del Estero. For this reason, the Forestal Company, in an endeavor to impede the exportation of the extract, has seen all the steamship companies requesting them not to give space to any outsiders, but to advise the Forestal who would immediately offer replacement cargo. The steamship companies promised to act accordingly.”