Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty

by Daniel Schulman

  Fred’s pitch was simple: By going it alone, they stood little chance; Universal, with its army of lawyers, could bleed a smaller competitor dry with the legal fees alone. Their only chance was to band together to fight back against this latest attempt at oil industry monopoly. They needed to consider a lawsuit against one of them as a threat to all of them.

  The previous week, Koch and Winkler had incorporated a new company for this purpose—the Winkler-Koch Patent Company would act as a legal defense fund for users of the Winkler-Koch cracking process. The plan initially called for each customer to chip in $5,000 for every Winkler-Koch still it operated; in exchange customers would be defended in any litigation brought by Universal Oil Products. To supplement the fund, which in the years to follow ballooned to more than a million dollars, Winkler-Koch tacked a one-cent royalty on to each barrel of oil cracked using its method.

  Less than two weeks after the Wichita summit, Universal made its move, filing suit against Root Refining, its former customer, and Winkler-Koch.

  Fred Koch’s two-decade legal battle against Universal is now a central part of the identity of Koch Industries and of the Koch family. His sons drank it in along with their milk at the family dinner table, and as grown men they recounted the story often, as both a point of pride and a cautionary tale. It features in nearly every news account describing the clan’s history and the origins of their wealth. The narrative plays out along a familiar story line—an underdog company that fought back against would-be monopolists and a tough-as-nails engineer who refused to back down in the face of great odds and held firm to his principles of fairness and justice.

  The truth is more complicated.

  Before going into business for themselves in 1925, Fred’s partners, Lewis Winkler and Dobie Keith, worked for Universal Oil Products, and they knew the company’s patented cracking process intimately. The technique was developed by Carbon Dubbs, a burly, bald-headed inventor said to possess a temperament as volatile as the element he was named for. Before leaving Universal, Winkler had been Universal’s chief engineer, overseeing the construction and start-up of the Dubbs cracking units built in the Midwest. In 1921, Winkler had worked shoulder to shoulder with Carbon Dubbs in Roxana, Illinois, where Universal engineers installed the first commercial cracking unit that relied on the inventor’s process at a refinery owned by a U.S. subsidiary of Royal Dutch Shell.

  Dubbs, the son of an eccentric tinkerer from Pennsylvania oil country, had managed to solve the problem of carbon residue accumulating and hardening like burnt coffee in the refining machinery.

  Between 1918 and 1919, working out of a remote asphalt plant near Independence, Kansas, Dubbs pioneered a method he called “clean circulation,” which allowed refiners to run crude oil without interruption for weeks. The key was continuously circulating cracked oil with crude at 865 degrees Fahrenheit and 100 pounds of pressure per square inch.

  The discovery revolutionized the industry, and Universal banked on the fact that oil refiners would pay handsomely to license its cracking process. What the company didn’t expect was that, before it could fully capitalize on its technology, ex-employees would go head-to-head with Universal in the cracking arena.

  In July 1932, when Universal’s case against Winkler-Koch and Root Refining, the former Universal licensee, went to trial in Wilmington, Delaware, Lewis Winkler declined to testify. Even so, lawyers highlighted his past association with Universal and close knowledge of the cracking method that Winkler’s ex-employer had accused his new firm of imitating. A letter was also introduced in the case in which a Winkler-Koch employee touted the firm’s principals as “post graduates of Universal.”

  Fred Koch’s lawyer J. Bernhard Thiess portrayed Universal as what today would be called a “patent troll.” He argued that Universal was “exclusively a patent holding company” that existed solely to wage “commercial warfare” against competitors. He framed Universal’s business model as a form of extortion, where “a small refiner who is threatened by a powerful patent holding company, is told that if he does not take a license he will suffer the penalty.”

  The case dragged on for more than a month, as Fred anxiously watched the proceedings from the gallery. At one point, Warren K. Lewis, the chair of MIT’s chemical engineering department, whom Fred would have remembered from his college years, took the stand to testify—for the plaintiffs. He proclaimed the Winkler-Koch process a Dubbs knockoff. “The differences that do exist are modifications that do not affect the principle and the process as Dubbs disclosed them, in my opinion.”

  The verdict, nearly two years in coming, arrived on a Friday in late April 1934. Finding for Universal, the ruling cited Professor Lewis’s testimony at length. The Chemical Bulletin called the court decision a “decisive victory” for Universal and added ominously, “It is understood that Universal now proposes to proceed vigorously against all infringers of its cracking patents.”

  Though Winkler-Koch’s lawyers quickly appealed to the Third Circuit in Philadelphia, a three-judge panel upheld the lower court verdict in June 1935. Universal wasted no time telegramming the news to the nation’s oil refiners: “We assume you will be interested to know that the Federal circuit court of appeals, Philadelphia, unanimously affirms validity of Dubbs clean circulation.… Copy of opinion will be mailed to you.” The message sounded benign enough, but it was a warning: Take out a license with Universal. Or else.

  On October 21, 1935, less than two weeks before the birth of Fred’s second son, Charles, he received the distressing news that the U.S. Supreme Court had declined to hear the case. Subsequent events would send Fred a strong message that the U.S. legal system was deeply flawed.

  Though Fred didn’t know it then, he would eventually learn that the ruling that had sealed his company’s fate had been bought and paid for. A few days after the Supreme Court decided against hearing the case, J. Warren Davis, a veteran judge on the Third Circuit Court of Appeals, the body that upheld the lower court’s infringement verdict against Winkler-Koch, worked out a complex transaction with a Pennsylvania lawyer named Morgan Kaufman. Kaufman, who was on Universal’s payroll, was an undistinguished attorney with no experience in the area of patent law, but his real value lay in his association with the judge, an ordained Baptist minister appointed to the federal bench by President Woodrow Wilson. The men agreed that Kaufman would loan $10,000 to one of the judge’s distant cousins, who would then repay the loan—with 8 percent interest—to Davis. Universal had taken no chances that its competitor’s legal challenge would prevail. This was Davis’s payoff—delivered at the conclusion of the case—for making sure Winkler-Koch and Root Refining lost their appeal.

  In March 1941, a highly publicized bribery scandal erupted when a federal grand jury indicted Davis and Kaufman, along with Hollywood producer William Fox (namesake of 20th Century Fox), who’d made two similar “loans” to the judge while his bankruptcy case was pending before the appeals court.

  Fox pleaded guilty, spilling his guts on the witness stand against Davis and Kaufman. The pair escaped conviction, but the extensive federal investigation into Davis’s dealings sullied his other rulings. This opened up a legal avenue for Winkler-Koch’s lawyers, who, in June 1941, requested an inquiry.

  The infringement verdict was ultimately vacated. The irony was that if Universal had not resorted to bribery, it likely would have prevailed over Root and Winkler-Koch—and the tale of Fred Koch’s war with Big Oil would have read quite differently.

  With Universal ensconced in scandal over bribery allegations, Fred went on the legal offensive, striking back at the adversary that had put his company through a nightmarish campaign of litigation. The oil giants who owned Universal hastily offloaded the company to distance themselves from the controversy, but Fred and his lawyers went after them with a vengeance. By 1952, he managed to extract $1.5 million from his foes.

  The victory was bittersweet. The lengthy battle had taken a toll on Fred’s partnership with Lewis Winkler. The
businessmen severed ties in 1944. (Dobie Keith, Fred’s old MIT pal who had brought him to Wichita, left their start-up a few months after Fred joined for a steadier opportunity in Boston.)

  Spanning the Koch brothers’ childhood, their father’s twenty-three-year struggle loomed large in their impressionable minds. The brothers grew up glimpsing the concern knitted into his brow and feeling his anxiety, an apprehension so great it almost seemed to occupy physical space in their household. “It was a living hell to him,” David remembered. “… It was very damaging to his business, and he had an extremely unhappy experience—just the time, the wear and tear, the mental strain on him.” Fred’s legal war especially affected Bill, Charles, and David, and the brothers each took different lessons from it.

  Based on their father’s experience, Charles and David, who initiated their share of lawsuits over the years, nevertheless came to view litigation as a last resort, a necessary evil. According to Charles, Fred’s advice to his sons, after prevailing over Universal, was, “Never sue. The lawyers get a third, the government gets a third, and you get your business destroyed.” Bill Koch took away a different lesson: He would grow up to see litigation as a weapon of righteous retribution. In their father’s stand, the brothers saw a man of iron will and concrete principle who wouldn’t be cowed or coerced, who wouldn’t back down in the face of a just fight. Each of the brothers, in his own way, internalized these values. As they grew up, the brothers recognized these same traits at work in their father’s crusade against the spread of communism.

  The last place Fred Koch expected to be on his thirtieth birthday was deep in the Russian Caucasus in the company of a diminutive and joyless Bolshevik. But the toll that the Universal Oil Products battle took on Winkler-Koch’s revenues had pushed Fred and his partner out of the United States and into the welcoming embrace of Josef Stalin’s Soviet Union.

  In the late 1920s, the newly formed U.S.S.R. dispatched scientists and engineers to the United States to search for cracking technology that could aid Stalin’s plans for rapid industrialization. Just a few decades earlier, Czarist Russia had led the world in petroleum production. The empire’s rich oil fields in the Caucasus, along the Caspian and Black Seas, made the Russians such a formidable force that Rockefeller’s Standard Oil had scrambled to establish a network of overseas subsidiaries in a battle for market share.

  The biggest blow to the Russian oil sector was self-inflicted. Over the course of three days in August 1905, on the heels of the first Russian Revolution, oil workers in the Absheron Peninsula of Azerbaijan rioted. They burned more than 1,400 oil derricks, sabotaged well shafts, and mangled drilling equipment. Oil production plummeted. For at least the next decade, Russia’s oil industry limped forward as the U.S. oil sector took off. Then came World War I, and a wave of uprisings in 1917 that ushered in a Bolshevik government, which gradually consolidated the oil industry under state control.

  Revolution and war had decimated the region’s economy, and the Soviet Union’s new communist leaders placed a premium on revitalizing the oil industry to turn around the U.S.S.R.’s economic prospects. The Soviets looked to the West for technology and technical expertise. Sometimes in exchange for oil concessions or royalties, American and European companies began to supply modern drilling equipment. And Western oil field workers and engineers poured into the region to professionalize the Soviet Union’s drilling operations and oversee the construction of pipelines.

  But even as the Soviets revamped oil production sites, modern refining technology remained elusive. The country’s leaders desperately wanted to transition to thermal cracking, but the major American companies, the leaders in this field, were reluctant to provide this technology, especially to a regime with which the United States had severed diplomatic relations.

  Many American companies did business with the Soviet Union during this era, but the subject of trade relations between the countries was controversial and a matter of considerable national debate. During a speech in 1931, Representative Hamilton Fish III, a New York Republican and the grandson of Ulysses Grant’s secretary of state, summed up the opposition to aiding the Soviets for his congressional colleagues on the Ways and Means Committee. “It is plain to the mind of anyone living in a capitalistic country, that what is contemplated is a plan for a great world revolution,” he said. “… That 5-year plan aims at just one thing—the economic ruin of every nation in the world that has not the Soviet form of government, and they contemplate eventually the establishment of the Soviet government in this country and everywhere else.”

  Fred Koch and his partner didn’t have the luxury to worry about Soviet plans for world domination. They needed work, and Koch’s summons to Russia began innocently enough. Visiting the United States in the late 1920s, Alexander Sakhanov, research director of the Soviet oil concern Grozneft, discovered Winkler-Koch. The company did not possess the best or most advanced cracking technology, Sakhanov wrote home in an April 1929 letter, but “its merit consists in extreme simplicity and, as a consequence, cheapness.”

  The year of Sakhanov’s visit, Winkler-Koch signed contracts with Amtorg, the Soviet Union’s U.S.-based trade representative, to design and construct fifteen oil cracking stills in the U.S.S.R. at refineries located in Baku, the capital of Azerbaijan; the Chechen capital of Grozny; the Russian Black Sea port town of Tuapse; Yaroslavl, located 160 miles northeast of Moscow; and other locations. The deal, worth nearly $5 million, also called for the engineers to consult on the construction of dozens more cracking units.

  The Soviets were demanding customers. They requested detailed technical data and specifications, and their deal with Winkler-Koch also required the company to use its contacts to place thirty Soviet engineers at American manufacturing plants and refineries, where they could study their operations during six-month internships. This would later allow the U.S.S.R. to replicate Winkler-Koch’s cracking stills using its own engineers.

  On August 27, 1930, when Fred arrived in Moscow to check on the progress of his engineers, the Soviet government assigned a minder to keep tabs on him during his month-and-a-half-long journey to the refineries in Grozny, Tuapse, Batumi, and other cities where the installation of Winkler-Koch cracking units was under way.

  Jerome Livschitz, who had spent twelve years living in the United States before returning to Russia to take part in the 1917 revolution, inspired fear wherever he went. Along with a near-constant sneer, the little man, with graying hair and a pinched face, wore an ill-fitting suit. What small pleasure Livschitz derived out of life seemed to come from goading Fred about the plans of the communists to infiltrate every aspect of American society. The schools, the churches, the unions, the military, the government—all were communist targets. Just you wait and see, Livschitz taunted, “we will make you rotten to the core.”

  One day, as they convoyed through the Georgian capital of Tblisi, the car carrying Livschitz flipped. Fred and another American engineer rushed to free him from the wreck. Dazed from the crash, the Bolshevik seemed surprised the Americans had come to his aid. “Why did you save my life?” he asked. “We are enemies. I would not have saved yours.” He paused and reflected, momentarily feeling in a charitable mood. “Perhaps when the revolution comes to the U.S.A., and I return there, I will spare your lives.”

  Fred had traveled widely, but he had never seen conditions like the ones he witnessed in the Soviet Union. A deep gloom pervaded the country, and an undercurrent of trepidation pulsed through the populace. He “found it a land of hunger, misery, and terror.” Citizens were allotted a monthly ration of food that was barely enough to subsist on. The government provided coupons redeemable for bland and ill-made clothes, and issued citizens a half-bar of soap each month for washing. Communist informants lurked everywhere. A trip to Siberia—if not a bullet in the head—awaited anyone suspected of disloyalty.

  During his travels, Fred befriended a Russian family who had lived in the United States before returning to their homeland following the
Bolshevik revolution. Their English-speaking children worked as translators for Winkler-Koch’s American engineers. One of them, a daughter named Mary, begged Fred to carry a letter out of the country for her, in order to sneak it past the Soviet censors who monitored the mail. He agreed, but later couldn’t help himself from peeking at the contents: “We are here just like slaves,” Mary had written to a friend. “We cannot do anything we want but we do what they tell us to do.… I cannot write it to you on paper how terrible it is here.”

  In late October 1930, as Fred began his journey home following a round of meetings with Soviet officials in Moscow, Livschitz saw him off at the train station. The communist’s parting words chilled him: “I’ll see you in the United States sooner than you think.” Etched into his mind, this troubling memory visited Fred often in the years ahead, as slowly but surely he saw the plot of communist subversion unfold—just as Livschitz promised it would. To the end of his days, he was deeply haunted by what he’d seen in the Soviet Union and conflicted by the role he and his company had played in empowering the U.S.S.R.

  “I was naïve enough to think in that far away day that I could help the Russian people by what I was doing,” he wrote in a 1964 letter to the editor that ran in The Washington Post. “What I saw in Russia convinced me of the utterly evil nature of communism.… What I saw there convinced me that communism was the most evil force the world has ever seen and I must do everything in my power to fight it, which I have done since that time.”

  CHAPTER THREE

  “The Dead Will Be the Lucky Ones”

  On the morning of December 8, 1958, as a light snow fell in Indianapolis, Fred Koch strode up the walkway to the sprawling brick Tudor home at 3650 Washington Boulevard. Stepping out of the chill and shedding his coat, Fred was greeted by Marguerite Dice, the widow who had volunteered to host the meeting that would mark the birth of the John Birch Society.