agent. When the yearly turnover reaches about $25,000, an expert sent from Berlin is coordinated with the sole agency firm. When the yearly turnover exceeds about $50,000, Schering A. G. sets up a firm of its own, directed by managers sent from Berlin. Germans, or men of German descent, are placed in all key positions, and the remainder of the staff is partly German, partly persons of the country in which the agency is located. The final step is to set up factories in the most important markets which are equipped to ampule the finished solutions and to tablet the finished substances which are used in that form. The supervision of all firms abroad is strongly centralized in Berlin. Schering A. G. is said to be one of the largest sellers of pharmaceutical and medicinal specialties in South and Central America. Testimony before the Truman committee indicated that approximately one-third of all materials shipped into South America by air mail over the German controlled Latin air line, during a 6-month period in 1941, were chemical and pharmaceutical products. Approximately the same amount of books, maps, and so forth, intended for espionage and propaganda work was also shipped by air since it was the only means of avoiding the British blockade. On the return trips four-fifths of the air cargoes were of mica for the Nazi war machine and most of the remaining fifth was made up of other vital war materials. The important role played by the pharmaceutical exports in providing the exchange for purchase of war materials should not be overlooked.

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

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

THE SCHERING CORPORATION AS A TOOL OF SCHERING A. G.

The center of the new supply system was Schering Corporation, Bloomfield, N. J., now held by the United States Alien Property Custodian. This firm was established as a Schering A. G. subsidiary in 1929 to manufacture medical specialties for the market in this country. Differing from most other Schering factories outside Germany it develops the finished solutions and substances of raw or semimanufactured imported materials, where the others merely finish the process by placing the material in ampule, tablet, and package form. Gradually extending its research, laboratory, and manufacturing facilities it is now, although on a much smaller scale, a firm as fully equipped to manufacture all Schering medical specialties as Schering A. G. itself.

The representative of the Alien Property Custodian has informed us that the Schering Corporation is now even larger than Schering A. G. itself, and within recent years its business has grown to proportions exceeding that of the parent company.

Senator MURRAY. That means the American Schering company?

Mr. BERGE. Yes. As I go along, I will always refer to the German company as "Schering A. G." and the American as "Schering Corporation."

Mr. SCHIMMEL. "A. G." means "corporation" in German, doesn't it?

Mr. BERGE. Yes, it means the same thing, but for the purpose of our understanding as we proceed I will use those forms.

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

THE SCHERING A. G.-SCHERING CORPORATION AGREEMENT OF 1938

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

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

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

This language portrays the true relationship of the parent and subsidiary companies in 1938 and indicates their own description of their relationship and their own view, as of that time, of their relative places in the sun.

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

Article V, paragraph 5 of the agreement is as follows:

5. Schering A. G. agrees not to deal in selected preparations nor to sell selected preparations to any corporation or person in the United States of America except to Schering Corporation, nor knowingly to sell them to any corporation or person

for purposes of exportation to or resale in the United States of America unless Schering Corporation shall first have given its written consent.

I might at this point, Mr. Chairman, introduce the whole agreement for the record.

Senator MURRAY. It will be accepted and made a part of the record. Mr. BERGE. So you see those provisions mean Schering Corporation is restricted in its business to the United States unless Schering A. G. consents to its doing business outside; Schering A. G. agrees not to compete in the United States without the consent of Schering Corporation.

Mr. SCHIMMEL. Mr. Berge, the effect of this cartel, then, is to keep any other American concern from getting into the synthetichormone field and the Schering company abroad has limited the exploitation of its patents in the United States to a single German-controlled corporation.

Mr. BERGE. That is right..

Mr. SCHIMMEL. And on the basis of that, the American people could be charged higher prices or research could be slowed down in the United States.

Mr. BERGE. Quite right.

Mr. SCHIMMEL. And the whole operation could be controlled from Germany.

Senator MURRAY. Could the American corporation have had any knowledge of this science before it entered into this agreement with the German organization?

Mr. BERGE. I suppose they had. That is, the American company had been organized in 1929, and, as I understand it, the Germany company had gradually been feeding knowledge, or "know how," as they call it, into the American company, and the patents had been licensed from time to time, but I take it that the volume of the business had not become such--because of the danger, perhaps, of its getting out of control that it was necessary to make the formal agreement until 1937. But it is my understanding that this 1937 agreement. merely formalized the preceding practice. I don't think it initiated provisions that hadn't been in effect as a practical matter prior to that.

Mr. SCHIMMEL. In fairness, we have to admit that the original inventions in this particular field were made in Germany, and the purpose of this cartel was that the German company had to patent in America to prevent an American company from patenting here, that these patents might not be controlled by anyone except the German corporation in Berlin.

Mr. BERGE. That is right.

Mr. SCHIMMEL. That kept American concerns from endeavoring to redo that same work and perhaps do new research along those particular lines.

Mr. BERGE. I think that is a very fair statement of it.

Mr. SCHIMMEL. Mr. Berge, you had intended to summarize, originally, because of the length of this statement. Would it be agreeable to you, Senator?

Senator MURRAY. Yes, and let the complete statement go in the record.

Mr. BERGE. There are places I shall summarize as I go along. I haven't quite reached that portion. I will go into this portion fairly completely.

Article V, paragraph 7 is as follows:

7. Schering Corporation undertakes not to export, either directly or indirectly, from the United States of America, or knowingly to sell for purposes of export to any third party any such preparations unless Schering A. G. shall have previously given its written consent.

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

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

All Schering A. G. patents and trade-marks in the United States are owned by Schering Corporation or its affiliates. However, the agreement is not limited in its terms to the mere fixing of compensation for the use of patents and trade-marks. The American Corporation agrees to pay Schering A. G. a royalty on all its sales of pharmaceutical products which had nothing to do with the Schering A. G. patents and trade-marks.

Senator MURRAY. If they developed something entirely outside of the A. G. patents, then it would be controlled under this agreement? Mr. BERGE. Well, they would have to pay a royalty on it, Senator. It is rather curious. They went beyond the patents, as I understand it.

Senator MURRAY. And they would have to pay royalties on anything they developed themselves?

Mr. BERGE. Precisely.

Mr. SCHIMMEL. Isn't that another way of charging the American consumer an excessive price that is passed on to the German interests? Mr. BERGE. I am going to read directly from the provisions of the agreement which make clear this unusual relationship, which requires the payment of royalties to the German company on business not covered by the patents.

It even went so far as to agree to pay the German firm a royalty of not to exceed 12%1⁄2 percent on sales of new preparations developed by the Schering Corporation in this country.

Senator MURRAY. The effect of that would be to make the American company a subsidiary to the German corporation?

Mr. BERGE. Well, it was a subsidiary. I wouldn't say the effect of this agreement was what made it a subsidiary, but I think the agreement was an agreement by the American subsidiary to pay the German company a percentage on the sales of products which were developed in this country and were not within the protection of the German patents; new developments, new inventions, business carried on by them not under the patents, they still paid a direct percentage on to the German company.

Mr. SCHIMMEL. Mr. Berge, suppose you had two American concerns, a subsidiary and a parent concern, and they made that sort of an arrangement. Wouldn't that be frowned upon as an attempt to milk the subsidiary by the parent company? Haven't there been complaints about such an arrangement in the past, where the subsidiary paid the parent company some moneys for which nothing was done by the parent concern?

Mr. BERGE. Yes. In the public utilities field that has been an issue. Senator MURRAY. Yes. In the State of Montana we pay an immense sum each year to some parent company for services that really don't amount to anything. It is a mere method of milking the local

concern.

Mr. SCHIMMEL. And milking the people of Montana.

Mr. BERGE. It really amounts to double payment of the parent company, because the parent company enjoys its position as stockholder in the subsidiary anyhow and shares in that way through dividends in the normal and reasonable profits the subsidiary makes. In addition to that, they are here paid a bonus or a kick-back or whatever you want to call it, on certain business which the parent company has no responsibility for developing, and it really deserves no credit for the subsidiary's having it.

Mr. SCHIMMEL. Isn't there even an invasion of the income-tax laws involved?

Senator MURRAY. Yes, it escapes the liability for protection.

Dr. HUNTER. This thing had an importance in this respect, too, that just before the war, not very long before, the ownership of this American corporation was transferred in such a way as to make it appear that it was owned by Swiss nationals instead of by Germans. The provisions of this contract continued the income to the Schering A. G., even though it was no longer on the face of it the parent company. Senator MURRAY. I see; it belonged to a Swiss company.

Mr. BERGE. Now, the next three pages of my prepared statement I think I can summarize:

There are two paragraphs which set forth in detail the provisions for these payments which I have already described in general terms. You will see that as to certain products the payment would be 64 percent, and in other cases it may be up to 12%1⁄2 percent, on preparations developed independently of Schering A. G.

Senator MURRAY. I notice they mention Saraka there. Is that a drug that comes from the A. G.?

Mr. BERGE. Yes.

Now, I would like to have the full statement in the record, but I will just summarize the next few pages by saying that prior to the outbreak of the war there was a constant exchange of visits between representatives of the two companies and of technical information and experience. Schering A. G., knowing that there was a likelihood it would be unable to supply its markets in the event of war, made adequate preparations for that exigency. They transferred personnel and facilities to Schering.

Senator MURRAY. Before the outbreak of war altogether?

Mr. BERGE. Just before, probably 1937 on; most of it in the spring and summer of 1939. The full statement indicates that.

They transferred personnel and facilities to Schering Corporation and instructed the latter to supply Schering A. G.'s markets during the war. Two paper subsidiaries were created at Bloomfield, N. J., at the office of the Schering Corporation. One of them was called Pharmex, Inc., to handle the business with companies in the British Empire; and Delta Pharmaceutical Corporation, to participate in the business of supplying Latin America. A corporation was organized in Panama called Atlantis S. A., with headquarters in Basle, Switzerland. It is operated under the direct supervision of the Swiss Bank