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 morphine 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 1945 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. This 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.

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?" 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 situation?" Mr. 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:

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_

Testing 137 samples by Mallinckrodt Chemical Works at $10 each. Testing 137 samples by New York Quinine & Chemical Works at $10 each___.

Simple interest at 6 percent.

Total

$139, 293. 55

1, 370. 00

1, 370. 00 25, 072. 83

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, representing 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...

New York Quinine & Chemicals Works.

Merck & Co., Inc---

Total

$47, 529. 87

26, 583. 91 65, 179. 77

139, 293. 55

The purchase of the Turkish opium and the processing of the claim by Merck against the Turkish monopoly was consummated by them without any service charge to this Corporation. The entire lot of the Turkish opium was sold to the three companies mentioned above at a profit to RFC of $341,686.15 under six sales contracts. The sales contracts were made as follows:

Our sales contracts did not specify any specific anhydrous morphine content. However, the contracts contained uniform provisions describing the material sold as "Turkish crude" providing for a price per pound and providing that the buyer would accept the material "as is." It is to be noted that 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, which date was prior to the dates of our sales contracts.

Following the receipt of Merck's letter of September 16, 1946, the Board of Directors designated a committee to make a full study of the matter in order to determine whether or not the Corporation was obligated to prorate the recovery made of the claim against the Turkish Monopoly among the purchasers of the material. The committee reported to the Board of Directors on December 19, 1946, and recommended that Merck & Co.'s claim be rejected on the grounds that there were no legal obligations on which the RFC could base payment and Merck & Co. was so advised.

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.

We have been advised by the Bureau of the Budget that they have no objection to the submission of this report to your committee.

Sincerely yours,

H. R. 4653

HARLEY HISE, Chairman.

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE No. OF THE

COMMITTEE ON THE JUDICIARY,

Washington, D. C., Thursday, June 30, 1949.

The subcommittee met at 3 p. m., Hon. William T. Byrne (chairman) presiding. Mr. BYRNE. The committee will please be in order. We have for consideration H. R. 4653, a bill for the relief of the New York Quinine & Chemical Works, Inc.; Merck & Co., Inc.; and Mallinckrodt Chemical Works.

We have present Mr. Kerrigan, Mr. Spiro, and Mr. Schell.

I understand that Mr. Kerrigan has a statement that he wants to present.

STATEMENT OF JAMES J. KERRIGAN, VICE President, MERCK & Co., INC., RAHWAY, N. J.; ACCOMPANIED BY ALBERT A. SPIRO AND ORVILLE H. SCHELL (OF HUGHES, HUBBARD & EWING), NEW YORK CITY

Mr. KERRIGAN. Mr. Chairman and gentlemen of the committee, my name is James J. Kerrigan. I am vice president of Merck & Co., Inc., Rahway, N. J.,

and I am appearing in support of H. R. 4653 for the relief of Merck & Co., Inc., Mallinckrodt Chemical Works, and New York Quinine & Chemical Works, Inc. The statement which I shall make has the approval and concurrence of the other two companies.

The bill, as you know, relieves these three manufacturers of the liability of turning over to the Reconstruction Finance Corporation, as successor to Defense Supplies Corporation, the sum of $139,293.55.

This sum was received by Merck from the Turkish Opium Monopoly as a refund on the purchase price of certain crude opium purchased by the Government through Defense Supplies Corporation as part of a stock-piling operation during the war and resold by Defense Supplies Corporation to the three manufacturers.

The RFC, as successor to the DSC, has taken the position that due to legal technicalities in the letter agreements between the DSC and the manufacturers it has no power to permit them to retain the refund, short of action by Congress. I believe, however, that general counsel for the RFC and others in the organization feel that as a matter of justice and equity the manufacturers are entitled to the refund and, therefore, recommended that we ask Congress for relief.

We frankly feel very strongly that to deny us the refund on the basis of a purely legal technicality would be extremely unfair and inconsistent with our contribution to the stock-piling program. Since I personally participated in the program from its very inception and, in fact, negotiated the purchase of the opium from the Turks on behalf of the Government, I thought that it might be helpful to your subcommittee if I gave you a brief analysis of the facts and the equities involved. I believe that the facts have been set forth in a statement furnished the committee by our counsel, Mr. Schell, and I shall, therefore, not go into them in great detail.

My company and the two other companies named in the bill have for many years been engaged in the manufacture of narcotic drugs and are registered with the Bureau of Narcotics of the Treasury Department under the Federal narcotic laws. Under these laws we are granted permits for the importation into this country of crude opium, the raw material from which we manufacture morphine, codeine, and many of the other essential narcotic drugs.

Crude opium is grown principally in Turkey, India, and Iran, the great bulk of supplies to this country having in the past come from Turkey. From 1916 to the present time I have personally negotiated the purchase on behalf of my company of many millions of dollars of opium from various foreign suppliers, and I think that I can say that I am thoroughly familiar with the well-established procedures and customs in the trade in the purchase of that commodity and, in fact, I was responsible for establishing those procedures.

The value of crude opium to the manufacturers is measured by its morphine content, and the price paid for crude opium is, therefore, based upon that content. The morphine content of crude opium can only be determined by chemical analysis. This analysis is usually made by the purchaser shortly after the crude opium has been received in this country. In addition, an analysis is usually made by the Government to determine whether the morphine content is sufficient to warrant its importation.

Prior to 1916 it was the custom in the trade for the foreign supplier to guarantee a minimum morphine content and to refund on the purchase price if the analysis showed the content to be less than the guaranteed amount. Under that practice, if the analysis showed a greater morphine content than that warranted by the supplier, there was no upward adjustment in the price to the supplier. The natural result of this practice was to prevent the shipment to this country of high-test opium.

In 1916 I was instrumental in having the procedure changed and establishing a new custom in the trade which has been in effect and has been followed since that date and has resulted in high-test opium being shipped to this country. Under the revised procedure the purchaser pays a provisional price at the time the opium is shipped from abroad based upon a representation by the supplier as to the morphine content. After the chemical analysis has been completed, if the morphine content is lower than that represented by the supplier, the supplier refunds part of the purchase price in the ratio of the actual morphine content to that represented by the supplier. On the other hand, if the morphine content is higher than represented, the purchaser pays the supplier an appropriate additional amount on the purchase price.

As you know, the manufacture and sale of narcotic drugs, as well as the importation of crude opium, is subject to a strict control by the Federal Government through the Bureau of Narcotics of the Treasury Department under Federal