wiped out. Illustrations of this practice were Government exhibits Nos. 936, 1055, and 1048 in that case. One regional executive of one of the defendants in the Lexington case reported with pride to his home office that he had succeeded in breaking the price of Prince Albert to 10 cents per tin, and he continued his report as follows:

This unquestionably shows what patience, intrigue, persuasion and the proper use of advertising money will do after you find out what sources will have the strongest effect on the persons who you would like see do business. It has taken quite a long time for this to come about and I am sure that it is going to be a far-reaching benefit for future sales.

Incidents like this could be multiplied many times. It was nothing unusual to find a pocket tin or pound tin of one of the major smoking tobacco brands being marketed at a price lower than the factory price, for example, Prince Albert or Half and Half, or Velvet, selling for 9 cents a tin, or 59 to 63 cents per pound. This recent advertisement I am showing you, clipped from a Chicago newspaper, advertising Prince Albert at 61 cents a pound tin, appeared when Prince Albert sold at the factory for 79 cents a pound tin. This is a common sort of

occurrence.

Mr. BALLINGER. They sold at the factory for that?

Mr. BLOCH. Seventy-nine cents was the price at the factory.

Mr. BALLINGER. Well, Mr. Bloch, I have a letter in the committee's files that relates the situation you are discussing. This letter says that if you take a can of Prince Albert tobacco selling for 59 cents, which was the circumstances in this gentleman's accusation, the cost of the raw tobacco alone would amount to about 40 cents. Then there is a tax on that.

Mr. BLOCH. A tax of 18 cents.

Mr. BALLINGER. That would be 58; and that would allow nothing for process or distribution.

So, he said, it is a clear case of selling below cost.

Do you agree with that analysis?

Mr. BLOCH. Yes. I think maybe the price of tobacco is a little high in that case, but not very much so.

Mr. BALLINGER. But after you have brought the processing cost, and the distribution cost, it would be below cost.

We will put that in the record, Mr. Bloch.
(The advertisement referred to is as follows:)

PRINCE ALBERT TOBACCO

1# TIN, REGULAR, 894; SPECIAL, 63¢ HALF & HALF SMOKING TOBACCO

1# TIN, REGULAR, 894; SPECIAL, 63¢

Mr. BLOCH. Of course such a situation would be impossible if the jobber to whom the manufacturer sells is to be allowed any reasonable profit, however slim, and if the retailer is also to be allowed a similar modest profit. What makes these low retail prices possible is that the major companies sell direct to selected retailers, as well as to regular jobbers, and then when they order a price level broken in a particular locality, they subsidize the retailers with advertising allowances and free goods, and rebates or special credit terms, to get the retailer to bring his price down to or below the factory price level. Cigarettes

and tobacco prices are so sensitive that once a price war is fomented it can get momentum and spread rapidly throughout a widespread area, as was illustrated time after time in the Lexington case. Then no one is making any money out of the tobacco except the manufacturer.

The late George Washington Hill, former president of the American Tobacco Co. and one of the defendants convicted at Lexington, under cross-examination made an explanation of why he had increased the price of Lucky Strikes during the depth of the depression, which also shows something about the thinking of the Big Three in connection with the relationship between their major cigarette brands and their smoking-tobacco products.

In explaining how he thought he was serving the American public by increasing the price of Lucky Strikes, he explained that, in doing so, he was also reducing the price of Bull Durham to 5 cents a sack, and that that took care of his duty to the American public in a time of deep depression. His then sales vice president, who is now president of the American Tobacco Co., reported to Mr. Hill in 1933, when the Big Three were successfully campaigning to kill the 10-cent cigarettes, that the control of distributors that had been built up through special deals on Half & Half and Bull Durham had been a major factor in helping American to get these distributors to break the price of Lucky Strikes from 15 cents to two for 25 cents in January 1933; and within another month American had succeeded, through a second, below-cost factory price cut, in further breaking the price of Lucky Strikes to 11 and even to 10 cents a package.

Since the Lexington convictions, these conditions and practices have continued substantially unchecked. Apparently, the Big Three, even after the Supreme Court affirmance, have felt under no great compulsion to change practices and conditions so severely castigated by that Court. Price identity of the cigarettes and major smoking-tobacco brands of the Big Three has continued, with one insignificant exception. Drop shipments with free goods are still being used. During the war, and to a lesser extent since then, tie-in sales, predicated on the power of the larger cigarette brands, have been widespread. Selling smoking tobacco below cost has continued, and retail sales subsidized by advertising allowances, free goods, and other favors, are still utilized by the Big Three.

It is assumed that the Department of Justice is going to take some kind of action to wipe out the more flagrant abuses in the tobacco industry, by injunctions and prohibitions in the form of a court decree. However, it is hoped that the Department of Justice will also not overlook, and will take action to protect, the few of us smaller smokingand chewing-tobacco manufacturers who are still in business, by taking away from the three major manufacturers the ability to use the power and profits of their cigarette brands to promote their smokingand chewing-tobacco brands. The Government, in working out a reorganization to restore lawful conditions to the tobacco industry, cannot afford to leave the smaller manufacturers of smoking and chewing tobacco at the mercy of powerful companies which have cigarette brands and cigarette profits which they can and will use to throttle free competition in the smoking- and chewing-tobacco fields.

Mr. RIEHLMAN. Do you have any questions, Mr. Ballinger?

83019-49- -66

Mr. BALLINGER. Just one question.

Do you favor divorcing the smoking-tobacco business from the cigarette business?

Mr. BLOCH. If no other method can be evolved to protect the smaller manufacturer, I say, "Yes." I don't know of any other method. If conditions continue as they have in the past, I would say there will be no small manufacturers in five years.

Mr. BALLINGER. Do you favor stronger penalties in the antitrust laws? Maybe a lot of this would not happen, some people think, if there were really stiff penalties in the acts.

Mr. BLOCH. Well, do you mean monetary penalties?

Mr. BALLINGER. Not necessarily. How about removing the officers, the president of the corporation, and the board of directors, where they violate certain sections of the antitrust law, for a period of 5 years, and then not allowing them to be a president of or officers or directors of any corporation doing interstate business?

Mr. BLOCH. I do not know if that would help, Mr. Ballinger. Other men, of course, will come along.

Mr. BALLINGER. In your industry, you have a perfect example. You have prosecuted and prosecuted and prosecuted, but it has meant nothing. They just go on and do the same thing over again. So, do you think it would be logical that stiffer penalties should be provided? Is that not the only way you can stop people from doing things of that kind?

Mr. BLOCH. All I know is that something has to be done. We have our backs to the wall. Some of us have been fairly successful in our field, but it is getting harder every year to compete. The profits in the cigarette industry of the Big Three are tremendous. They have tremendous resources. The capital of these companies is way up in the hundreds of millions now.

Mr. RIEHLMAN. Thank you very much, Mr. Bloch, for your very fine statement.

The committee will stand adjourned until 2 o'clock.

(Whereupon, at 11:40 a. m., a recess was taken to reconvene at 2 p. m., of the same day.)

AFTERNOON SESSION

(The subcommittee reconvened at 2 p. m.)

Mr. STEVENSON. The committee will come to order.

Mr. BALLINGER. Our first witness is Mr. Joseph Borkin.

STATEMENT OF JOSEPH BORKIN, WASHINGTON, D. C.

Mr. BALLINGER. Mr. Chairman, Mr. Borkin was head of the Patent Cartel Section of the Antitrust Division of the Department of Justice. He is a very competent person on patents and on monopoly pratcices, and devoted a good many years of his life to it; and so I am very pleased that he is able to come before the committee and offer what I think is important testimony.

Give your full name to the record.

Mr. BORKIN. Joseph Borkin.

Mr. BALLINGER. Your address?

Mr. BORKIN. 1017 Ring Building, Washington, D. C.

Mr. BALLINGER. Your present occupation?

Mr. BORKIN. Well, I am an attorney and an economist.

Mr. BALLINGER. All right. Will you go ahead and discuss with the committee some phases of this monopoly problem that you have in mind?

Mr. BORKIN. Well, I should like to state at the outset that there always has been one great misconception for which I have been often beaten on the head, and on which Mr. Arnold and Mr. Berge took what I thought was a tough rap, and that is as to the patent problem. The patent bar was always under the impression, when we engaged in our so-called patent program in the antitrust laws, that we were attacking the patent system. That was not true at all. We had no dispute with the patent system as it stands, at all, and we never did.

The thing that was objected to was the abuse of patents to be used as a veil or screen behind which to violate the antitrust laws. The patent system as it stands now, I think, is a fine thing in the main: that is, to promote science in useful arts by rewarding inventors for their creative work.

Mr. BALLINGER. Does it reward inventors?

Mr. BORKIN. Not always. I think that was the basic concept of the founding fathers of the Constitution; but most inventions today— and I think this is borne out statistically-come out of large laboratories, and inventors there sign agreements that they will forego their rewards, but they manage to invent anyway. Maybe there is some basic drive that will get them to invent whether they are rewarded or not; and maybe we ought to evaluate, as a legal matter, our whole inventive system; that is, if corporations are inventive creatures, to let them take them out so we can get a good look at them, instead of hiding behind little inventors who receive small or large salaries. It is not a rewarding process.

With that, the antitrust laws have no dispute. Where the dispute comes in-and this is fundamental and vital today—is the use of the patent to violate or get around the antitrust laws. What I mean by that is simply this: A patent gives you a monopoly for 17 years. Let us take an example. Mr. Edison invented the electric lamp in 1879, and the 17 years have long since passed. Yet, today no one can make an electric lamp because it is covered by patents. There is something absurd there.

What has happened there was improvement was piled on improvement, and all that is patentable is the improvement and not the lamp; but that is sufficient to bar anyone else from making an electric lamp. That, I believe, is a violation of the antitrust laws if it is true; and I believe it is in that particular case.

In 1938, when we began to look into this problem, that was the beginning of Thurman Arnold's regime in the Antitrust Division. Mr. Ballinger, who was at the Federal Trade Commission, was, I suppose, one of the band of crusaders with a group of us who went out on this fight to see if we would clean up the abuse of patents, especially as they related to the monopoly problem. It is very simple getting that program going, because in just looking around this room, for instance, you have lots of color. You have green on the table; you have red up there; we all have neckties, clothing. In fact, color is one of the predominant things in this room-paint, dyestuffs. Yet, no one-and I mean no one-could go into the business of making color without the permission of a private group. We object when the Government prevents you

from going into a business-as a matter of fact, it is unconstitutional— but private groups can arrogate to themselves powers the Government

does not have.

To make it worse, you could not vote these people out of power, because they never stood for elective office. The control of their corporations, which is another problem that comes in here at the moment, was such that you could not vote them out if you were a stockholder. Yet, they determine who can enter this particular business.

I merely use that as an example. I don't pick the dye people out as a horrible example. They are one of them.

This glass-you could not get into the business of making it, except there are billions of glasses around the United States. It should be a wonderful business, and anyone ought to be able to get into it; but an illegal patent stops that. As I look out the window, there is window. glass-flat glass, so far as I can see-but nobody could make it in this country without permission of this private group. I might add, they rarely, if ever, gave that permission. They kept it in the family or their own private government.

The spectacles you have there, Mr. Ballinger, you could not make, despite the fact that these glass tumblers, windows, spectacles, dyestuffs have been known for hundreds and hundreds of years.

At the bridge stood this illegal patent control preventing anyone from getting into it. It was in the common law the right of a private person to enter any private calling; even the Government can't stop him; but, what the Government could not do, private groups in monopoly control could do.

În 1938, we went after a myriad of these things. You could run down the products of everyday life that you run into, the products that you use, the things whose total value runs to billions and billions. I am thinking of gasoline and motor parts, anything you can think of, where there was a profit; you had the thing bottled up. In fact, at one time, we thought the only business you could go into freely was either to be a shopkeeper or go into the show business, although there arose serious doubts about that business after a while.

Mr. BALLINGER. Suppose you wanted to go into the spectacle business, what would prevent you?

Mr. BORKIN. Here is what I would face. I am interested in going into the spectacle business. So, I start to make them. Three days later, as soon as they found out, I would have a patent lawsuit filed against me for violating one of the patents; and it would not make any diffrence whether it violated them or not. The suit meant that I had to lay money out to defend myself, not money to produce, not money to hire salesmen, not money to set up distributorships; this is just to defend myself in a lawsuit.

Mr. BALLINGER. In an infringement suit?

Mr. BORKIN. Right. If I were very reasonably wealthy, and that would mean very wealthy, because you were up against those who were worth millions, and carried the thing through and it looked as if I would win, then I think they would cut me in, and I would become a member of the club, as I believe may have happened in several industries. But the chances generally are I would have to give up in advance.

Mr. BALLINGER. I mean, did the people that would bring such a suit, the people that were going to bring such a suit, have a legitimate claim?