Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty (4 page)

Fred viewed Charles early on as the heir to his business empire, and rode him especially hard. Charles grew up with the impression that he was being picked on—and he was. As an eleven-year-old boy, tearfully pleading for his parents to reconsider, Charles was shipped off to the first of several boarding schools, this one in Arizona. “Charles was thrown out into the world at an early age,” said his friend Leslie Rudd, owner of Dean & DeLuca, the chain of gourmet markets, who believes this experience shaped Charles’s life.

As Charles admits, there was little about his teenaged self that suggested he was destined for greatness. He was smart, but with the type of unharnessed intellect that tends to get young men into trouble. Charles acted out, got into fights, stayed out late drinking and sowing wild oats. David has called his older brother a “bad boy who turned good,” and said, “Charles did some awful things as a teenager.” When it came time for high school, his exasperated parents sent him to Culver Military Academy in northern Indiana, whose notable alumni include the late New York Yankees owner George Steinbrenner, actor Hal Holbrook, and Crown Prince Alexander II of Yugoslavia. Charles considered it a prison sentence. The elite military school had a reputation for taking in wild boys and spitting out upright, disciplined men. Charles soon ran afoul of the administration.

On the train ride back to Culver after spring break of his junior year, Charles got busted for drinking beer and was promptly tossed out of school. Asked later how old Fred took the news of his
expulsion, the best Charles could say of his father’s fury was, “I’m still alive.”

David remembered: “Father put the fear of God in him. He said, ‘If you don’t make it, you’ll be worthless. You’ve disappointed me.’ Father was a severe taskmaster. He could do that sort of thing so effectively.” Fred banished Charles to live with family in Texas, where he spent the remainder of the school year working in a grain elevator. It took some begging, but Culver ultimately reinstated Charles, with the proviso that he attend summer school.

“It was a miracle that such a successful businessperson developed from such a rebellious kid,” Harry Litwin, a friend and business partner of Charles’s father, once remarked.

When Charles became Fred Koch’s work-in-progress, he also became a lightning rod for his brother Bill’s jealousy. Being four-and-a-half years older than the twins, Charles was the alpha dog in the house, and he affected each of the twins in different ways. Bill was in some respects the most cerebral of the four Koch brothers, but he was also the most socially awkward and emotionally combustible. “[Bill] was kind of born with a temper,” Bill’s childhood friend, Jay Chapple, said. In his baby book, Mary had scrawled notations including “easily irritable,” “angry,” and “jealous.”

As a young boy, Bill resorted to desperate gambits for attention. “He was perverse,” Charles has said. “I remember when we were little, and the twins were drying off after a shower, and there was a little wall heater there, the kind with the grate and the little holes, and Mother said, ‘Billy, don’t touch that.’ And so Billy put his little bottom up against it and it burned him so bad he looked like a waffle.” On another occasion, when Mary warned her son to take a hog’s nose ring out of his mouth, Bill proceeded to gulp it down, necessitating a trip to the hospital.

Charles viewed Bill as a walking time bomb. “He’d lash out. He
was violent. He’d throw tantrums.” Bill’s volatile emotions made it difficult for him to concentrate in school, and his worried parents eventually sent him to a psychologist, who advised that the only way to help Bill was to remove the source of his smoldering resentment—Charles. “We had to get Charles away because of the terrible jealousy that was consuming Billy,” Mary told
The New York Times
’s Leslie Wayne in a 1986 interview. So off he went to Arizona.

Bill recalled a
Lord of the Flies
–like childhood, in which his parents frequently left him and his brothers in the care of the household help “to grow up amongst ourselves,” while Fred traveled the world tending to his business empire and Mary either accompanied him or was out of the house at cocktail parties or society events. When Fred was home, his emotional distance caused his sons to clamor for attention and approval. As Bill put it, “When you’re one of four kids, the only currency you have is the love of your father, and we all fought for that.”

Bill remembered Charles as a mischievous bully, who perched astride the family storm cellar during backyard games of King of the Hill and gleefully flung him down to the ground whenever he tried to scramble to the top. And Bill has said that his older brother took sadistic pleasure in provoking fights between him and David. Bill nevertheless idolized his older brother, though Charles made it painfully clear that he preferred David’s company.

Bill and David were twins, but David and Charles were natural compatriots. David was self-confident and athletic, with a mild temperament and a contagious laugh. “Charles and David were so much alike, they were always really good friends. And Bill probably felt a little left out,” said their cousin Carol Margaret Allen. “Charles always had quite a following of girls, and so did David. And Bill—I think he would have liked to have had more girls following him. He was not as gregarious and outgoing.”

Bill sprouted up quickly before his body could grow accustomed
to the spurt. Awkward and uncoordinated, he spent his childhood trying to keep up with his brothers and feeling constantly left out by Charles. Bill felt like the family geek. His self-esteem plummeted. “For a long time,” he later reflected, “I didn’t think I was worth shit.”

Though the Kochs exiled Charles to boarding school, the seeds of a bitter sibling rivalry were already sown. Fred did not help the brotherly dynamic. He even encouraged the twins to fight. Home movies, in which the brothers can’t be older than five or six, show Bill and David battering each other wearing puffy boxing gloves the size of each other’s heads. “He wanted his boys to grow up to be men,” said David’s friend John Damgard. “And I think the old man would pit the twins together because they were the same age and he was teaching them techniques in boxing. And that probably started the rivalry.”

Day to day, sometimes hour to hour, David and Bill were either the best of friends or the worst of enemies. The twins did everything together and shared the same tight-knit circle of friends, most of whom played together on the basketball team of Wichita’s Minneha Middle School. One of the brothers’ favorite pastimes was “bushwhacking.” This involved first cajoling Morris, the tough but good-natured property foreman who squired them around Wichita, to drive them up and down the rural roads near the Koch compound after dark. The idea was to search for couples pulled over at secluded make-out spots. When they spotted a parked car, Morris flicked off the lights and crept up on it, as one of the brothers or their friends lit the fuse on a cherry bomb. When they were almost on top of the vehicle, Morris switched on the high beams and out the window the firecracker flew, scaring the bejesus out of their target. Cackling maniacally, the boys peeled off into the night looking for more couples to terrify.

Bill possessed a firecracker-like fuse of his own, and he and
David frequently brawled. A certain antagonism between brothers isn’t uncommon, but the combativeness between the Koch twins was anything but standard. During one bout, Bill bashed his twin over the head with a polo mallet. During another altercation, witnessed by members of the twins’ middle school clique, Bill brandished a butcher knife against his brother and had to be calmly talked down. David still bears a scar from the time Bill pierced him in the back with a ceremonial sword that their father brought back from one of his African adventures.

When it came time for the twins to attend prep school, they had their pick of prestigious institutions. David chose Deerfield Academy, an all-boys boarding school in northwestern Massachusetts that groomed East Coast Brahmins for the Ivy League. He credited the school, where he would go on to distinguish himself on the basketball and track teams, with transforming him “from an unsophisticated country boy into a fairly polished, well informed graduate.”

Bill opted for another path. Of all the schools he could have selected, he chose the alma mater of the older brother he alternately revered and resented. Bill’s choice of the Culver Military Academy alarmed Mary, who later confided to an interviewer that her son had become unhinged in his fixation on Charles.

“You’ve got to talk to a psychiatrist to analyze it,” David would later sigh, reflecting on the Bill-Charles dynamic.

“This was not a lovey-dovey family,” mused a member of the extended family. “This was a family where the father was consumed by his own ambitions. The mother was trapped by her generation and wealth and surrounded by alpha males. And the boys only had each other, but they were so busy in pursuit of their father’s approval that they never noticed what they could do for each other.”

“Everything,” the relative added, “goes back to their childhood. Everything goes back to the love they didn’t get.”

Fred’s business success—both at home and abroad—came at a steep price for the Koch family patriarch and cast long shadows over his sons’ formative years. The innovation that made him rich also invited an onslaught of patent infringement litigation from a company called Universal Oil Products, which was owned by a consortium of major U.S. oil companies, including the remnants of John D. Rockefeller’s Standard Oil. The lawsuits drove him to look abroad for business opportunities, including to Josef Stalin’s U.S.S.R.

When Fred entered the oil business, a new refining process called thermal cracking was sweeping the industry. Standard Oil of Indiana first employed this method commercially in 1913, but it didn’t come into wider use until the 1920s. Prior to its discovery, refineries relied on a simple, but wasteful process for distilling crude oil into gas, fuel oil, kerosene, and other petroleum-based products.

Petroleum consists of a stew of organic compounds that separate at the right boiling point. The lighter, more volatile hydrocarbons (gasoline) vaporize at lower temperatures than the heavier, more stable ones (fuel oil). Before thermal cracking, refineries used a process called straight-run distillation, in which they heated crude oil in metal stills and, as each of the petroleum “fractions” reached their respective boiling points, siphoned off the vapor and
recondensed it. Through this technique, a barrel of crude yielded perhaps 11 percent gasoline.

Refineries could double gas yields—or better—using thermal cracking. By applying the right combination of heat and pressure, the process altered the chemical makeup of petroleum, breaking it into simple molecules and “cracking” heavy hydrocarbons into lighter ones, squeezing more gasoline from each barrel of oil.

Cracked gasoline (the only kind modern consumers know) was initially unpopular with the American public, owing to its yellowish hue and pungent odor, in contrast to the clear and somewhat sweet-smelling product they were used to. But as demand soared, the commercial advantages of the cracked product became impossible to ignore. Before long, oil company chemists, freelance inventors, and amateur tinkerers of all kinds had flooded the U.S. Patent and Trademark Office with patent applications covering every conceivable aspect of the cracking process. By 1926, the government had issued more than 2,500 cracking-related patents.

In the 1920s, cracking technology was largely proprietary, either exclusive to the big oil companies that had been spun off from Standard or available at a steep per-barrel licensing fee. Fred’s company, Winkler-Koch, having developed its own cracking method, had a different business model. It didn’t license its process; it charged clients only for the design and installation of its cracking equipment.

Independent refineries found Winkler-Koch attractive for other reasons, too. When cracking was first introduced, its main drawback was that the process caused a thick film of carbon residue, known as coke, to form in the refining equipment. This forced refineries to shut down regularly in order to chisel the coke from the chambers of their machinery before running another batch of oil. The equipment designed by Fred and his partner, however, could crack the heaviest of hydrocarbons while producing little buildup.

In 1928, Winkler-Koch installed its cracking process at a refinery in Duncan, Oklahoma, owned by Fred’s uncle, L. B. Simmons. And over the next year the orders poured in. Before long, the engineering firm had inked sixteen contracts at refineries across the Midwest, netting a tidy $520,000 profit.

Word of the Winkler-Koch process spread quickly and far. This attracted customers, but also placed Fred’s company on a collision course with the more established players in the refining business.

Chicago-based Universal Oil Products, which had developed a popular cracking method and owned a trove of related patents, spent much of the 1920s suing the nation’s biggest oil companies for pirating its technology. The aggressive company proved such an industry menace that a group of major oil companies ultimately banded together to buy Universal, if only to put a stop to the merciless legal campaign.

During the late 1920s, the name “Winkler-Koch” was on the lips of all the refinery owners in the Southwest, or at least it seemed that way to G. W. Miller, a Universal sales engineer who canvassed Arkansas, Kansas, Louisiana, Oklahoma, and Texas in pursuit of new licensees. Miller would recall that Fred Koch’s company was “conducting a very aggressive, active campaign and sales program, and that was the chief competition during those years.”

Not only was Winkler-Koch courting potential Universal Oil Products licensees, but it had poached at least one existing customer, Arkansas-based Root Refining Company. As Miller worked his territory, he gathered intelligence about his competition’s activities and relayed it back to Universal’s headquarters. The company soon fixed its gaze on its competitor in Wichita.

In early 1929, the oil industry buzzed with rumors that Universal was poised to strike. With the specter of a lawsuit looming, Fred and his partner took preemptive action. On February 25,
1929, they gathered their clients for an emergency meeting at the Winkler-Koch offices in Wichita.

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.