S/PNSC files, lot 61 D 167, NSC 138

Memorandum by the Deputy Director of the Office of International Materials Policy (Armstrong) to the Deputy Assistant Secretary of State for Economic Affairs (Linder)

  • Subject:
  • Decision on Oil Anti-trust Case.

In our conversation of December 23 you asked me to give you a statement of my reasons for preferring the translation of the criminal action into a civil suit, as against the suspension or implied termination of legal proceedings against the oil companies. You have pointed out that in your opinion a civil suit could be as injurious to our foreign policy and national security as a criminal suit. You have further indicated that the translation of the criminal action into a civil action leaves unsolved the problem of documents located in other countries. You have further suggested that it is more desirable for adjustments in oil company practices to be made by a process of free negotiation between the companies and a commission of executive agencies than by means of the legal process. I have perhaps not stated fully all the points covered in our talk but these will suffice for the purposes of this memorandum. The following comments are relevant, in my opinion and in that of a number of other people who are profoundly interested in the question.

The first point is that suspending the criminal action without putting any legal action in its place would be regarded publicly as a whitewash of the oil companies and as a signal that they were so [Page 1310] powerful that the Government could do nothing about them. The appointment of a commission to consider the problem in all its aspects would be regarded as the normal device for starting the process of forgetting about the matter.
The only recourse if the criminal action were dropped and no civil action instituted would be voluntary cooperation between the companies and the Government. The Government’s record in seeking voluntary cooperation shows that in all instances in which the pocketbooks of the oil companies would have been affected by the adoption of Government suggestions they declined to take any of the actions suggested. We have four specific cases in mind. ((a) The MSA attempt to obtain a reduction in price; (b) the idea that Tapline would reduce the delivered price of oil in Europe; (c) the suggestion that ARAMCO cut down the size of its concession—subsequently it actually extended it to a new area; (d) the suggestion that market-sharing agreements be dropped in certain specific cases.) There is the further point that even if oil companies agree to make certain changes, there is no assurance without court action that these changes will be maintained, or that the evils may not reappear in some other form. Furthermore, in some cases the companies may not be able to make certain changes without incurring the liability of private suits for breach of contract. If they have a court decree they can avoid such suits.
The material concerning company practices has been in existence for some time and no conscientious Attorney General can ignore it. It is always, from some standpoint, a bad time to initiate legal action. The only way in which any changes which companies might undertake voluntarily, without a legal action, could be made attractive to the companies would be if they were assured that they would be free from anti-trust action in the future. Executive agencies, including the Department of Justice, simply cannot give such assurances, unless the anti-trust laws are amended. Thus a commission of executive agencies acting in the absence of specific legal proceedings would have little or no leverage with the companies, no means of assuring them that a negotiated settlement would be immune from further anti-trust action, and no way of being certain that the companies would not return to their original practices, even if they agreed to change them.
Our real interest both at home and abroad lies in finding corrective measures without the implications of punitive action. The economic, political and security interests of the United States are in no way promoted by indictments, convicting, fining, and sentencing prominent business executives for civil misdeeds. A criminal process does not regulate the conduct of the companies, the problem with which we should be properly confronted. The only way in [Page 1311] which this conduct can be regulated is through a civil action, and this would have to follow the criminal action anyway, if present conditions were allowed to continue. The regulation of conduct through civil action starts with a general complaint, and is followed by a legal investigation. At some stage in the investigation, or in the process of court action, an opportunity develops to negotiate a consent decree. The consent decree is a legal action of a court which binds both the Government and the oil companies and which provides for the corrective measures. No consent decree or negotiated settlement is legally effective except through court action. In the course of fifteen years from 1935 to 1950, 171 civil anti-trust actions were terminated, and of these 134 were settled by consent decree. This indicates the rather great extent to which the consent decree is used. As a matter of fact, a consent decree in a major anti-trust case serves the purpose of defining the issues and problems for the companies, and eliminates subsequently a good part of the general area in which the law and its application are not entirely clear. It also involves no admission of guilt.
The question of foreign reaction is perhaps most important from the standpoint of the Department. It should be clear in this context that we are talking primarily about possible foreign reaction in the future, rather than about the current reaction, which has thus far been mild. This foreign reaction has several elements:
There is a real distinction between a criminal action and a civil action, and this distinction can be made clear both at home and abroad by appropriate publicity;
There is a very great difference between, on the one hand, branding leading American businessmen and their companies as conspirators and criminals and perhaps imposing jail sentences or fines, and, on the other hand, ordering changes in company practices and structure as a result of a negotiated consent decree which contains a statement to the effect that the companies do not admit any violation of the anti-trust laws. There is no possibility of a negotiated settlement in a criminal action, and a trial cannot be avoided, unless the companies plead guilty, which they certainly will not. In a civil suit a prolonged trial may perhaps be avoided, and a negotiated consent decree action can be readily explained abroad and at home. In fact there should be no more publicity of an adverse nature from a civil action leading to a consent decree than from a commission which might find substantial need for corrective action.
The United States philosophy of competitive enterprise is an important and well justified aspect of our foreign economic policy, and our stake in this policy is very great. The maintenance of this policy is very closely connected with the way in which the current oil company cases are handled. Suspending the criminal action, failing to institute civil action, and appointing a commission to report could lead only to the conclusion on the part of other countries [Page 1312] that the American doctrine of competitive enterprise was intended to apply to their corporations and not to our own oil companies, and that perhaps our insistence upon it abroad was so as to benefit our own corporations. Thus, any action which looked like a whitewash in the case of the oil companies could seriously impair our position abroad, on both economic and moral grounds.
In the case of countries where American companies are engaged in oil production, there is always the possibility that local interests will seek a larger share of the profits and that they may move toward nationalization. These tendencies exist now, regardless of the anti-trust action. The publication of the FTC report, together with the initiation of the anti-trust action, has perhaps supplied new ammunition to the proponents of these two tendencies. This supply of ammunition cannot now be withdrawn. It may put the American companies in a somewhat poorer bargaining position with foreign nationals or sovereigns. But if the anti-trust action shows to other countries that it is the intent of the U.S. Government to correct whatever is contrary to our laws, they may have no very good reason to object. A withdrawal or termination of the action already undertaken, without the substitution of further legal action, might very well lead other countries to assume that the hope of corrective action by the U.S. Government had vanished. They might consequently assume that any action to be taken would have to be on their own initiative, and this might do serious harm to the position of the companies and of the U.S. national interest.
The Communists have made little use of the material already provided. If there were the appearance of a whitewash, and if the Communists chose to take advantage of the opportunity which this created for them, they would have a real gold mine. In the current situation they can take advantage, propaganda-wise, of the companies. If there appeared to be a whitewash, they could direct their entire attack against the United States Government as controlled by the oil “monopolies”. There is no assurance that the Communists would make effective use of good propaganda material, but this is no reason for giving it to them.
The documents question is the only one which has aroused the official concern of foreign governments thus far, and most damage to U.S. interests on this account has already been done. This is by no means an insoluble question. Adequate measures can be taken to assure the protection of the vital interests of governments concerned, while at the same time the Department of Justice can obtain all the documents it needs for its purposes. All that is needed is a measure of commonsense and reasonableness on the part of the Justice Department, the foreign governments, the oil companies, and the court. Perhaps this is too much to expect but there is a very strong possibility that changing the suit from a criminal to a civil action would be exactly what is needed to bring this element of reason into play. This problem is not overriding, however, even though the criminal action should proceed. If some [Page 1313] foreign governments decline to allow documents to be furnished to the court, this will not necessarily impair the ability of the Department of Justice to make its case against the companies.
A civil suit investigation would take a fair amount of time. It should attract only minimum publicity. It can be explained abroad as one of the investigations so common in the United States. Meanwhile, a commission can examine the whole problem and can recommend to the President the basis upon which relief should be sought in the civil suit, and this would provide a useful negotiating base for achieving a consent decree. The commission would presumably have a good many other things to do as well, and it could be the means by which a definitive national policy on foreign petroleum could be developed.
The oil companies have not been particularly frank in telling the Government as much as it ought to know about their arrangements in other countries. Voluntary measures are not enough to ensure that the Government knows what it needs to, especially if it is eventually to be called upon for action in the event an oil company has a real grievance against another government. If the U.S. Government is not properly informed, it may find itself in the position of defending an oil company against a foreign government where the moral basis for the oil company’s position is entirely inadequate. Real cooperation between government and industry is necessary. This is almost impossible while a criminal action is being conducted; it is ineffective if no legal action against the companies is under way or possible, but it can be developed if the civil suit and consent decree are used.
It is not realistic to expect either this Administration or the next Administration to suspend the criminal action undertaken against the oil companies without substituting a legal process which will give every evidence to the public that it is designed equally well to enforce the law. It would be a political error for either Administration to create the impression that it was whitewashing the companies. Furthermore, if the Departments of State, Defense, and Interior were to suggest this, or something which looked like it to the Department of Justice, it would be fought tooth and nail by the Attorney General, and the result might well be no change in the current situation. This would be more harmful to the State Department’s interest in the matter than anything else that could happen. The Department should ask for the solution which is really justified on its merits, and should not seek to bargain with the Department of Justice in the NSC.