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September 9, 1965

United States, Plaintiff
Chas. Pfizer & Co., Inc., John E. McKeen, American Cyanamid Company, Wilbur G. Malcolm, Bristol-Myers Company, and Frederic N. Schwartz, Defendants

Ryan, Chief Justice.

The opinion of the court was delivered by: RYAN

SYLVESTER J. RYAN, Chief Justice.

Defendants, John E. McKeen, Wilbur G. Malcolm and Frederic N. Schwartz move to dismiss the indictment as to them on the ground that they are immune from further prosecution pursuant to the anti-trust immunity act of February 25, 1903, 32 Stat. 903-04, as amended, 15 U.S.C. §§ 32, 33.

 McKeen is president and chairman of the board of Chas. Pfizer & Co., Inc.; Malcolm has served as chairman of the board of directors, vice-president and president of the American Cyanamid Company; Schwartz has been president of Bristol-Myers Company and of Bristol Laboratories, Inc., a wholly owned subsidiary of Bristol-Myers.

 On August 17, 1961, movants and their companies were indicted in the Southern District of New York for violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2. Defendants are charged with conspiracy to restrain trade and commerce, conspiracy to monopolize trade and commerce, and monopolization of trade and commerce in the manufacture, distribution and sale of broad spectrum antibiotics and broad spectrum antibiotic products. Olin Mathieson Chemical Corporation (hereinafter referred to as "Squibb"), the Upjohn Company, and various other individuals were named as co-conspirators.

 The alleged conspiracy concerned the issuance of a patent to Pfizer for the broad spectrum antibiotic tetracycline. The indictment alleges that Pfizer, Cyanamid, and Bristol misled the Patent Office so as to enable Pfizer to obtain this patent, and that subsequently, defendants and co-conspirators conspired and effectuated through licensing agreements a system whereby the manufacture and sale of tetracycline products and bulk tetracycline were confined to defendants and co-conspirators and these products were sold at substantially identical and non-competitive prices by the companies involved. It is charged also that the alleged conspiracy included price fixing of broad spectrum antibiotics.

 Subsequent to the return of this indictment, movants were subpoenaed to appear before a grand jury impanelled in the District of Columbia and testified under subpoena before that jury in May and June, 1962. It is this testimony which movants rely upon as the basis of their contention that they now are immune from further prosecution under the indictment returned in this district. *fn1"

 Defendants have been given access to their testimony before the Grand Jury, and we have a transcript of this testimony.

 Prior to the May-June 1962 hearings of the District of Columbia Grand Jury, there was a Federal Trade Commission proceeding and a Senate Subcommittee investigation dealing with alleged antitrust violations in the production and marketing of antibiotics. When interpreting the relevancy of the grand jury testimony of these defendants to the instant indictment, the background and facts of this industry's activity as revealed in this Federal Trade Commission proceeding and Senate investigation are important.

 On July 28, 1958, the Federal Trade Commission issued a complaint against the five drug companies named herein as defendants and co-conspirators charging them with unfair methods of competition, and acts and practices in commerce in violation of section 5 of the Federal Trade Commission Act, 15 U.S.C. § 41 et seq. The complaint alleged that Pfizer unilaterally attempted to monopolize the antibiotic industry, attempted to and did monopolize the tetracycline industry, by fraud and misrepresentation caused a patent on tetracycline to be issued by the United States Patent Office, and issued invalid licenses under said patent. The complaint further alleged that all defendants by conspiracy fixed the prices of tetracycline, chlortetracycline and oxytetracycline; foreclosed and prevented competition in tetracycline and chlortetracycline by licenses and cross-licenses; attempted to and did monopolize tetracycline and that Pfizer, Bristol and Cyanamid (the instant defendant companies) withheld material information from the Patent Office as a result of which Pfizer was enabled to secure the tetracycline patent; and that Pfizer issued and Cyanamid, Bristol, Squibb and Upjohn accepted licenses under the tetracycline patent with knowledge of such withholding and misrepresentation, and, independently thereof, with knowledge that the invention was unpatentable. Hearings were held at various times from January 5, 1959 to February 4, 1960 before a Hearing Examiner. On October 30, 1961 the Examiner submitted an initial decision in which he found that the charges had not been sustained by the evidence and ordered the complaint dismissed. An administrative appeal was taken and on August 8, 1963, the Commission issued an opinion vacating the initial decision, making its own findings of facts and conclusions of law. The Commission found that Pfizer and Cyanamid did make certain misrepresentations and withheld other information in connection with Pfizer's application for a patent on tetracycline, which prevented the patent examiner from making an accurate appraisal of the patentability of tetracyclines; that the conspiracy charge before the patent office between Pfizer and Cyanamid was "not proven", that Bristol, Squibb and Upjohn did not engage in any unfair methods of competition before the Patent Office; and that Pfizer, Cyanamid, Bristol, Squibb and Upjohn engaged in a conspiracy to fix, maintain and stabilize the price of tetracycline.

 The Commission made the following factual findings:

 The two principal antibiotics, prior to tetracycline, were chlortetracycline and oxytetracycline. Cyanamid and Pfizer owned the patents on chlortetracycline and oxytetracycline, respectively, and sold this product under the brand names of aureomycin and terramycin. Until the discovery of tetracycline, neither of these companies had granted a license under its patent or had sold its product in bulk to any other drug producer or distributor. The prices of these two antibiotics had been virtually identical since 1951, and in 1953, Cyanamid and Pfizer accounted for over 90% of the total volume of sales of broad spectrum antibiotics.

 During the Autumn of 1952 and the greater part of 1953, six applications for a patent on tetracycline were filed. Two of these applications claimed the process of producing tetracycline by the deschlorination of chlortetracycline (aureomycin), while four applications claimed a production process of direct fermentation. By the end of 1953, Cyanamid had three tetracycline applications pending - The Boothe-Morton application, for the deschlorination process, and the Martin-Bohonos and Minieri (purchased from the Heyden Corporation) for a fermentation process; Pfizer had two applications pending - the Conover application, for the deschlorination process and the Tanner application, for a fermentation process; and Bristol had one application pending, the Heinemann application, for a fermentation process.

 Cyanamid had already determined by the autumn of 1953 that tetracycline possessed many properties which in some specific conditions were superior to and more effective than aureomycin. Pfizer knew of this determination. Both Cyanamid and Pfizer knew that tetracycline, if produced and sold commercially, would be fully competitive with aureomycin and terramycin. They both knew or had reason to believe that the value of their respective patents and their dominant positions in the broad spectrum antibiotic market would be impaired by the unrestricted production and sale of tetracycline. Moreover, they knew or had reason to believe that if tetracycline could be sold by other firms in free and open competition, the price of this product and other broad spectrum antibiotics would be forced downward as the price of penicillin had been during and subsequent to World War II.

 On December 28, 1953, the Patent Examiner declared interference on tetracycline and the deschlorination process between Pfizer's "Conover" application filed on October 23, 1952, and Cyanamid's "Boothe-Morton" application filed on March 16, 1953. Pfizer and Cyanamid agreed to cross-license all patents covering tetracycline. Cyanamid licensed Pfizer to produce aureomycin for the manufacture of tetracycline and Cyanamid conceded priority to Pfizer. The interference was terminated.

 Shortly after, on March 2, 1954, the Patent Examiner declared a second interference, this time on tetracycline hydrochloride, between Cyanamid's "Minieri" application filed on September 28, 1953, Bristol's "Heinemann" application filed on October 19, 1953 and Pfizer's "Conover" application.

 In January 1954, Bristol had claimed tetracycline hydrochloride, and had persuaded the Patent Examiner that tetracycline hydrochloride was patentably distinguishable from tetracycline. On October 14, 1954, it was ruled that tetracycline hydrochloride was not patentably distinct from tetracycline and that, in any case, tetracycline was unpatentable as to all parties, because tetracycline was a by-product in the production of chlortetracycline (aureomycin).

 Despite the fact that Pfizer scientists had previously found that tetracycline was present in an aureomycin broth, representatives of Pfizer argued to the patent examiner that there was no reasonable basis for his speculation as to coproduction of tetracycline in the prior art aureomycin processes. The patent examiner informed these representatives that he would withdraw his rejection of Pfizer's tetracycline product claims if they could demonstrate that tetracycline could not be recovered from broths produced in accordance with the patent disclosures for the aureomycin patents. Pfizer scientists conducted these tests and Pfizer representatives stated in test affidavits that tetracycline could not be recovered from these broths in a clearly identifiable form. On the assurances given in these affidavits, a patent on tetracycline was issued to Pfizer. The FTC found, however, that the Pfizer representatives did not disclose to the patent examiner that their scientists had found that the particular broth medium chosen by the Examiner for the test was so poor in antibiotic potency that it had been classified as containing no aureomycin or tetracycline, but that aureomycin patents also disclosed in the other media contained as much as 5% tetracycline; and that in conducting the test, the Pfizer scientists varied the pH level from the range specified in the aureomycin patents to give the best results, and did not employ the best procedures for recovering tetracycline from the antibiotic broth. These alleged statements and the alleged suppression of this information were found by the FTC to have been proven and were the basis for the FTC's conclusion that Pfizer had made false and misleading statements in obtaining the tetracycline patent.

 The FTC also found that various statements denying concomitant production were made by a representative of Cyanamid to the Examiner in connection with Cyanamid's "Boothe-Morton" and "Minieri" applications. Cyanamid, as early as December 1953, had evidence that tetracycline was present in its aureomycin products and it was found that this information was not disclosed to the Patent Examiner. As to Bristol, the FTC found that it never made false statements denying coproduction, but that it did possess information concerning inherent production.

 It appears that on the same day that Pfizer received a patent on tetracycline, it brought infringement suits against Bristol, Squibb and Upjohn, seeking damages and a restraining order preventing them from marketing tetracycline. (Squibb and Upjohn had been buying tetracycline from Bristol in bulk and selling it in dosage form to the drug trade for several months.)

 Bristol, Squibb and Upjohn also filed actions in the Southern District of New York seeking declaratory judgments that they were not infringing any valid claim of Pfizer's patent. In their answers to the Pfizer complaint they claimed the "Conover" patent was invalid because, among other things, it had been allowed by the Patent Office under a mistake of fact induced by Pfizer and that the claims of the patent were unenforceable because of Pfizer's " unclean hands" arising from its misrepresentations of fact to the Patent Office in its prosecution of the application on which the patent was obtained. Throughout most of 1955, Bristol, Squibb and Upjohn took numerous depositions of Pfizer's officials and technical workers and subpoenaed documents from Pfizer. The suits were eventually settled with Bristol receiving a license to manufacture and sell tetracycline. Squibb and Upjohn received licenses to sell tetracycline to the drug trade. The licensees were required to pay Pfizer a royalty of 3 1/2 percent of net sales.

 The FTC's findings of fact also separately dealt with the pricing practices charge. The Commission found that part of the licensing agreement between defendants included an agreement to fix and maintain prices.

 Prior to the licensing agreement, Bristol had adopted the tetracycline price schedules of Cyanamid and Pfizer, and Squibb and Upjohn also adhered to the same price level when they entered the market. These agreements extended to sales in the prescription, the public supported hospital and the non-profit private hospital markets. It was found by the FTC that the defendants had agreed to submit identical bids to the Veterans Administration and that the devices used to forestall effective price competition included the adoption of uniform package sizes, resale price maintenance, avoidance of price competition among different dosage forms, and refusal to give quantity discounts.

 The Commission inferred that there was a conspiracy to fix prices from evidence of conversations and of meetings between officers of the defendant companies.

 A further investigation into the antibiotics industry was at hearings before a Subcommittee on Antitrust and Monopoly of the Senate Committee on The Judiciary in May-September 1960. This Subcommittee's investigation was directed to the price structure of antibiotics and whether it exhibited rigidity and identical pricing between different companies. In an effort to ascertain if these prices were competitive, inquiries were made concerning the companies' profits (including capital structure, stock prices, dividends, return on capital, methods used to finance expansion) and expenses in the manufacture and distribution of antibiotics (including production, general administration, research, officers' salaries and advertising and promotional costs). Comparisons were also made between prices charged by American drug companies abroad and in the United States.

 Inquiry was also directed toward possible monopolies and monopolistic tendencies in the industry. Interrogation covered percentage control of various products, and licensing arrangements between different companies. One aspect of inquiry concerned the use of misleading advertising and promotion in order to gain a larger share of a particular market.

 It disclosed that huge sums were spent by drug companies on direct mailings to doctors of reprints and other information and these mailings were said to cause doctors to prescribe antibiotics under brand names rather than generic names.

 The relationship between the companies' promotional activities was stated by Senator Kefauver at the Senate Committee hearing of May 17, 1960:

"During the course of these administered price hearings concerning the ethical drug industry, it has become increasingly clear that the various forms of promotion of ethical drug products have a material effect on the share of the market that a drug manufacturer obtains.
The record reveals that drug products are promoted in many ways - by personal calls upon doctors by detail men; by direct mail; and by advertisements in medical journals. In many cases the basis of the promotion is an article concerning the drug which has been published in a medical journal. Sometimes reprints of the articles are used; at other times the articles are merely cited to validate the promotional material."

 During this investigation of promotional activities, the Subcommittee looked into the activities of Henry Welch, who during the late 1950's was head of the Antibiotic Division of the Food and Drug Administration. It appeared that he, at the same time, had a financial interest in several medical journals which relied for income upon the sale of advertising and reprints to drug manufacturers. The record shows that Welch was Editor-in-Chief of two journals: "Antibiotics & Chemotherapy" and "Antibiotic Medicine & Clinical Therapy" - both published by MD Publications, Inc., which was owned by Dr. Felix Marti-Ibanez. Welch and Dr. Ibanez owned jointly another company "Medical Encyclopedia, Inc." which published the Antibiotic Annual and other books.

 At the Senate Subcommittee hearings it was disclosed that in exchange for Welch's duties as Editor-In-Chief, "MD Publications" agreed to pay him seven and one-half percent net on advertising income from both journals, fifty percent of net income from sale of reprints from both journals, and twenty-five percent of net income from either journal, when extra pages were added. It was also revealed that in the years 1953-1959 the defendants and co-conspirators named in the indictment before us paid the following amounts to "MD Publications" for advertising, reprints and extra pages: Pfizer, $256,711; Lederle (Cyanamid), $168,495; Bristol, $62,540; Upjohn, $89,055; Squibb, $47,035. The total payments to Welch from "MD Publications" and from "Medical Encyclopedia, Inc." (1953-March 1960) amounted to $287,142.40 (Hearing Record pp. 11,947 and 11,948).

 With this as a background, the Subcommittee focused on what it took to be Welch's efforts in his official capacity to promote the commercial sale of the product of a private company. These efforts took the form of encouraging scientific papers which gave credence to the advertising and promotional claims of certain drug manufacturers for particular products and therefore would tend to influence physicians. As previously noted, Welch served as Editor of the "Antibiotics Annual", which consisted of papers given before a symposium jointly sponsored until 1958 by the Food and Drug Administration and Medical Encyclopedia, Inc. Welch selected the papers to be read at the symposia, and then sold reprints to the drug industry to be used in promotional material sent to doctors.

 The Subcommittee also discussed the relationship between Welch and the Pfizer promotional campaign for Sigmamycin. Sigmamycin is a combination of two antibiotics: tetracycline and oleandomycin. Its most desirable feature, according to Pfizer's advertising campaign, was the fact that it was to be "synergistic". (A product containing two drugs is said to be "synergistic" if the combined therapeutic effect of the two drugs taken together is greater than the sum of the effects of the drugs taken separately.)

 In the summer and autumn of 1956, Pfizer was planning to place sigmamycin on the market, and it was decided that the theme for the promotional campaign for this product would be "synergistic" activity. The key phrase in this campaign was the description of sigmamycin as "A Third Era in Antibiotic Therapy". Welch was scheduled to give the opening address at the Fourth Annual Antibiotics Symposium scheduled for October 1956 and he submitted a draft of his remarks to Pfizer, whose employees made several changes. One of the changes made was the introduction into this speech of the phrase "Third Era of Antibiotic Therapy". At the opening of the Symposium, Welch stated:

"It is quite possible we are now in a third era of antibiotic therapy; * * * the third being an era of combined therapy where combinations of chemotherapeutic agents, particularly synergistic ones, will be customarily used."

 Welch's speech, thus prepared, was used in an international press release sent out by a Pfizer public relations man. Pfizer purchased hundreds of thousands of reprints, quoting Welch from "Medical Encyclopedia" and "MD Publications". Many of these reprints were sent to physicians.

 A further, or third phase of governmental activity concerning the ethical drug industry resulted in the return of the indictment on August 17, 1961, now before us.

 After a recital of the background of the discovery of tetracycline and patent applications on this product, the first count of the indictment charges that, beginning in November 1953, in restraint of trade, the defendants and co-conspirators combined and conspired to the end that the manufacture of tetracycline, the sale of tetracycline products, and the sale of bulk tetracycline be confined to some or all of them, and that the sale of broad spectrum antibiotic products by them be at substantially identical and non-competitive prices. To effectuate this combination and conspiracy, it was charged that defendants used licenses to limit the use of aureomycin and the sale of tetracycline and cooperated to enable Pfizer to obtain the tetracycline patent; that Bristol sold bulk tetracycline only to Upjohn and Squibb and entered into agreements with these companies to this effect; that Pfizer and Cyanamid maintained substantially identical, non-competitive and unreasonably high prices on terramycin and aureomycin products, respectively; and that defendants and co-conspirators introduced their tetracycline products in dosage forms and customer classifications substantially identical with those of the terramycin and aureomycin products in effect as of November 1953, and have continued to use such substantially identical forms and classifications to date.

 Count 2 of the indictment charges that beginning in November, 1953, the defendants and the co-conspirators engaged in an unlawful combination and conspiracy to monopolize the manufacture, distribution and sale of broad spectrum antibiotics and broad spectrum antibiotic products. It is charged that the terms of this combination and conspiracy and the means used to effectuate it were the same as those alleged in Count 1.

 Count 3 charges that beginning in November, 1953, defendants monopolized the manufacture, distribution and sale of broad spectrum antibiotics and broad spectrum antibiotic products and by the same means as alleged in the first count.

 After the return of the indictment, and on October 17, 1962, pursuant to order of this court, the United States served a bill of particulars which we will later consider.

 There is still a fourth aspect of the government's investigation of the antibiotics industry in the proceedings of the District of Columbia Grand Jury during the spring of 1962. This grand jury was impanelled on January 15, 1962; evidence was presented to it by an attorney assigned to the Criminal Division, Department of Justice. *fn2"

 It is undisputed that the scope of this grand jury investigation included the examination of the relationship between Henry Welch and certain ethical drug manufacturers.

 Grand Jury subpoenas were served on defendants McKeen, Malcolm and Schwartz to appear and testify. *fn3"

 Subsequent directions were issued for the production of correspondence, memoranda, and other documents relating to the distribution of certain reprints of articles published in journals of MD Publications and Medical Encyclopedia and of certain books and supplements published by these companies. Some of the reprints and books mentioned were: "An Appraisal of Tetracycline", "Use of Tetracycline Phosphate Complex, etc.", "Tetracycline Concentrations in Blood Serum Bile", "Tetracycline", "Tetracycline in the Treatment of Human Brucellosis II", "Tetracycline, A New Antibiotic", "The Pharmacology of Tetracycline," etc.

 The Attorney of the Criminal Division, who impanelled the District of Columbia Grand Jury has filed an affidavit in which he states that "no witness was called and no documents were subpoenaed - to elicit information relating to violations or possible violations of the antitrust laws." According to this affidavit, the Grand Jury was convened only to investigate the "receipt of monies by Henry Welch that indirectly came from the drug firms" in possible violation of the bribery, conflict of interest, false statements and general conspiracy statutes. The monies said to be received by Welch come from and were a portion of what the drug firms paid for advertising and reprints to publishing companies in which Welch had an interest. The affiant also states that during the course of the grand jury investigation he did not consult with any persons in the Anti-trust Division, and that to the best of his knowledge there was no communication between the two divisions concerning the District of Columbia grand jury proceedings.

 The Antitrust Division has also submitted an affidavit in which it is stated that prior to October 16, 1964 the trial staff assigned to the prosecution of the instant indictment was unaware of the existence of the grand jury proceedings in the District of Columbia, and that no member of this staff had any ...

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