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NEW YORK QUININE & CHEMICAL WORKS, INC.; MERCK & CO., INC.; AND MALLINCKRODT CHEMICAL WORKS

JULY 7, 1949.—Committed to the Committee of the Whole House and ordered

to be printed

Mr. LANE, from the Committee on the Judiciary, submitted the

following

REPORT

(To accompany H, R. 4653)

The Committee on the Judiciary, to whom was referred the bill (H. R. 4653) for the relief of New York Quinine & Chemical Works, Inc.; Merck & Co., Inc.; and Mallinckrodt Chemical Works, having considered the same, report favorably thereon without amendment and recommend that the bill do pass.

The purpose of the proposed legislation is that Merck & Co., Inc., acting on behalf of itself and on behalf of Mallinckrodt Chemical Works and the New York Quinine & Chemical Works, Inc., pursuant to the wartime arrangement entered into at the request of the Government between the three companies and Defense Supplies Corporation for stock piling critical materials, is hereby relieved from the liability of turning over to the Reconstruction Finance Corporation, as successor to Defense Supplies Corporation, the sum of $139,293.55, which amount was received by Merck & Co., Inc., for the account of Defense Supplies Corporation pursuant to the above-mentioned wartime arrangement.

The companies named in the bill are the three United States manufacturers of narcotic drugs licensed to import crude opium by the Bureau of Narcotics of the Treasury Department. Opium is the raw material used in the production of essential narcotic drugs, such as morphine, codeine, and so forth. It is derived from the opium poppy, grown principally in Turkey, Iran, and India, and is imported into this country in crude form. During normal times the three licensed importers make their own purchases abroad, subject to the strict supervision and regulation by the Bureau of Narcotics.

At the outset of World War II the United States Government determined that immediate steps be taken to acquire a large reserve

H. Repts., 81-1, vol. 513

stock pile of crude opium in this country so that the armed forces would be assured of an adequate supply of essential narcotic drugs.

Early in 1942, at the request of the Commissioner of Narcotics, the three companies selected" Mr. James J. Kerrigan, vice president of Merck & Co., Inc., to represent them in their probable dealings with the Government in connection with the stock piling of crude opium.

In 1942, at the request of the Government, Mr. Kerrigan participated in conferences with representatives of Defense Supplies Corporation and the various other Government agencies in Washington in the formulation of a general program for the purchase of crude opium from Turkey, Persia, India, and other countries. Methods were discussed for purchasing opium and the financing of the purchases. Mr. Kerrigan stated that the three companies he represented were ready and willing to continue to purchase opium directly from the foreign suppliers in sufficient quantities to assure a reserve supply for the manufacture of opium narcotics. The Government representatives decided, however, that the purchases would be made and financed by the Defense Supplies Corporation, with the understanding that the supplies, when received, would be held as a reserve stock pile subject to allocation by the Commissioner of Narcotics.

At that time the DSC requested Mr. Kerrigan, due to his long familiarity with the procurement of opium, to act on behalf of the Government and negotiate the purchase with the foreign suppliers. Mr. Kerrigan acceded to this request, declining on behalf of himself and his company a purchase commission which had been offered.

Under this program Mr. Kerrigan negotiated with producers in Turkey for the purchase by, and delivery to, the United States Government of over 400 tons of crude opium, consisting of 300 tons of Turkish opium and 1,800 cases of Indian and Persian opium amounting to a total of 288,000 pounds. The total purchase price paid by the Government including ocean freight, insurance and other costs, amounted to $3,649,136.66. The opium was received and stored in Government vaults at New York and Denver and held as a reserve stock pile.

Early in 1944, the manufacturers' own supplies of crude opium were exhausted, and Commissioner Anslinger, over a period of approximately 2 years, allocated the entire Government reserve stock pile of crude opium so created in sufficient quantities to meet the requirements of the manufacturers.

As the supplies were allocated, the three companies purchased the crude opium from the DSC under letter agreements which provided a fixed price per pound, plus a commission to the DSC of one-half of 1 percent of the amount of each invoice. The total payments made to the Government under these letter agreements amounted to $3,998,326 which included the $3,649,136.66 paid by the Government to the Turks, plus a commission to the DSC, as provided in the letter agreements, and in connection with the allocations of 314,000 pounds in 1945 and early 1946, an additional $314,000 representing approximately $1 per pound arbitrarily added by the DSC.

The value of crude opium for narcotic manufacturing purposes is based on its morphine content. It is customary, therefore, in purchasing crude opium from foreign sources to pay a provisional price based upon the estimated morphine content and to finalize the price

either upward, by additional payment, or downward, by a refund, after the crude opium has been received and chemically analyzed in this country.

In creating the stock pile, the DSC had paid the Turkish suppliers a provisional price based upon opium represented by the Turks as having a morphine content of 14 percent. The Government's contract with the Turks followed the custom of the trade and specifically provided for adjustment of the purchase price up or down upon final determination of the morphine content. The letter agreements between the DSC and the three companies did not, however, contain such a provision.

When the DSC resold to the three companies, the fixed price was calculated by passing on the provisional price (based upon 14 percent morphine content) paid to the Turks and adding to that the various costs of insurance, ocean freight, handling, and so forth, paid by the DSC, plus the additional $1 per pound with respect to the allocations made in 1945 and 1946. Thus an essential element of the price paid by the three companies to the Government was calculated on the basis of opium having a morpbine content of 14 percent. Except for the addition of the $1 per pound, this computation was in accordance with the companies' understanding of the stock-piling program, namely, that as the opium was allocated they would reimburse the DSC for its payments to the Turks, plus its expenses and plus agreed commissions.

The opium was tested upon arrival for morphine content. The tests, however, were disputed by the Turks, and it was not until late in 1915 that the Turks accepted the tests as indicating a morphine content of only 13.4254 percent. As a result of the opium being under 14 percent morphine content, the Turks were obligated under their agreement with the Government to make a refund on the purchase price of $139,293.55.

Upon determination of the amount of the refund due, the DSC took steps, through the Department of State, to collect from the Turks When it became evident that the DSC was making no headway. Merck suggested that it be authorized to make the collection. authority was granted early in 1946, and Merck effected a collection of the amount due by merely deducting the amount of the refund from balances it owed the Turks on postwar purchases which were entirely separate transasctions.

It is this amount of $139,293.55 which the proposed bill permits the manufacturers to retain.

On September 12, 1946, Merck wrote the RFC, successor to the DSC, that full adjustment had been made and that Merck was preparing to make pro rata distribution among the three companies of the amount of the overcharge. Much to the manufacturers' surprise, the RFC replied that it could find "no legal obligation" under the letter agreements requiring it to permit the manufacturers to retain the overcharge, since the agreements were fixed-price contracts and were silent on the question of disposition of any refund.

As the matter now stands, the RFC has agreed that Merck shall continue to hold the amount of the overcharge for the account of the RFC pending final determination on the proposed bill.

All parties involved recognize that the refund rightfully, if not technically, belongs to the three licensed importers, as they are the ones who suffered the loss resulting from the original overcharge by

the Turks. The DSC has been fully repaid, plus a commission of one-half of 1 percent on the total purchase price, and its successor, the RFC, is offering no objection to the proposed bill and, in fact, it is understood, is prepared to support it.

The necessity for congressional action lies in the fact that due to the pressure of wartime conditions the DSC and the companies inadvertently omitted to make specific provision in the contracts under which the various allocations from the Government stock pile were made for turning over to the manufacturers any refund on the purchase price which might be obtained from the Turks. In the absence of such specific provision, the RFC has come to the conclusion that it has no authority to permit the manufacturers to retain the refund, although on many occasions the RFC has told the manufacturers that it had reached its decision with great reluctance in view of the obvious unfairness of the result.

Hearings were held by the subcommittee on June 30, 1949, and Mr. James J. Kerrigan, vice president of Merck & Co., Inc., testified and his statement is made a part of this report.

In the report rendered by the Reconstruction Finance Corporation to this committee it is stated that

It has been our opinion that there is no legal obligation on the part of RFC to make payment of these claims. It must be assumed that when we sold the opium, Merck had full knowledge of the product they were buying. However, we feel that there are grounds for the view that the manufacturers are equitably entitled to the refund obtained from the Turkish Monopoly on the basis of their contention that it was their understanding (in accordance with the custom of the trade) that the opium was purchased by them on the basis of the morphine content. They further contend that the provision of the contract providing for purchase "as is" related to the physical condition of the opium and not the morphine content.

Mr. George Stoner, assistant general counsel for RFC, testified and stated that the RFC had a net profit of $600,000 out of this transaction in addition to $30,000 commission. Mr. Stoner was asked the question by Representative Frazier, “Is it not true, also, if it had not been for the company, the Government would have lost $139,293.55?Mr. Stoner's answer was, “Yes. I do not think we would have had any chance to collect that from the Turks." Mr. Stoner was asked this question by Representative Lane, “And you favor the passage of this bill, representing the RFC, which is the agency that is involved in this

Stoner's reply was, “Yes. We feel they have an equitable claim under all the circumstances."

Therefore, in view of the circumstances in connection with this claim and that it does not cost the United States Government anything; that it is merely to relieve these companies of refunding the RFC the sum of $139,293.55, which was withheld by them from the Turkish Opium Monopoly, your committee recommends favorable consideration to the bill.

RECONSTRUCTION FINANCE CORPORATION,

Washington, June 15, 1949. Hon. EMANUEL CELLER, Chairman, Committee on the Judiciary,

House of Representatives, Washington, D. C. DEAR MR. CELLER: This is in response to your request of May 12, 1949, for a report on H. R. 4653, a bill for the relief of the New York Quinine & Chemical Works, Inc.; Merck & Co., Inc.; and Mallinckrodt Chemical Works.

On August 11, 1942, Merck & Co. arranged for the purchase of 2,200 cases of Turkish opium from the Turkish Monopoly for the account of Defense Supplies Corporation, a wartime subsidiary of the Reconstruction Finance Corporation. Shipment of this material was made during February and April 1943.

Payment for the 2,200 cases of opium was made through an irrevocable letter of credit which was established on the basis of 14.00 percent anhydrous morphine by Harrison & Self method.

Upon arrival the opium was tested by Merck & Co., which was a condition of purchase, as quoted in a part of Merck's cable sent to their Turkish agent, August 11, 1942, as follows: "Analysis by us as usual. If any analysis disagreement develops requiring second test samples will be submitted St. Louis and Brooklyn and composite average all three examiners will be binding."

Merck's report, showing an average of 12.5024 percent USP anhydrous morphine, which was calculated to be 13.4024 percent by Harrison & Self method, was submitted to the American agent of the Turkish_Monopoly in September 1943. Merck's report was not acceptable to the Turkish Monopoly. The American agent of the monopoly released his samples and a second test was made in accordance with the terms of the purchase giving the following results:

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The composite average of 12.5254 percent is a little above Merck's average of 12.5024 percent and is calculated equivalent 13.4254 percent by Harrison & Self analysis. The combined test was reported to the American agent for the Turkish Monopoly, for submission by cable to their principals on July 10, 1945.

After receipt of Merck's report on the test made in September 1943 which indicated the opium tested less than 14 percent anhydrous morphine by Harrison & Self method, Defense Supplies Corporation requested the Department of State on October 25, 1943, to investigate the transaction, so that suitable action could be taken in regard to a claim against the Turkish Monopoly. Nothing was accomplished through these channels and upon request RFC, as successor to Defense Supplies Corporation, received the approval of the Department of State, in their letter of October 11, 1945, to handle the claim through commercial channels.

On October 15, 1945, we authorized Merck & Co. to handle the claim for this
Corporation pursuant to their offer to do so as stated in their letters of August 2
and September 18, 1945. We received a letter dated September 12, 1946, from
Merck & Co. advising that a full adjustment had been made by the Turkish
Monopoly in the amount of $167,106.38 made up as follows:
Refunds because of differences in test..

$139, 293. 55 Testing 137 samples by Mallinckrodt Chemical Works at $10 each. 1, 370. 00 Testing 137 samples by New York Quinine & Chemical Works at $10 each...

1, 370. 00 Simple interest at 6 percent...

25, 072. 83 Total.....

167, 106. 38 In the letter of September 12, 1946, Merck & Co. advised that arrangements were being made to repay Mallinckrodt and New York Quinine for their testing fees. They forwarded to the RFC their check, in the amount of $24,703.82, representi the interest, $25,072.83 less $369.01, the additional commission due their Turkish representative under the purchase terms. With respect to the refund of $139,293.55, Merck & Co. advised that on the basis of weights invoiced it intended to distribute the refund, resulting from the differences in test, as follows: Mallinckrodt Chemical Works...

$47, 529. 87 New York Quinine & Chemicals Works

26, 583. 91 Merck & Co., Inc.-.-.

65, 179. 77

Total.

139, 293. 55

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