GOVERNMENT: Sin Redefined

In separate complaints the Federal Trade Commission last week tagged Seagrams and Schenley, the nation’s top two distillers, with one of its favorite charges: illegal price-fixing. But FTC’s action was no ordinary move; it introduced an entirely new definition of what is illegal price-fixing.

Up to now the Government and the courts have held that when two or more independent businessmen get together and agree on prices for competing products, they are breaking the law. But in the new case FTC maintained that Seagrams and Schenley had conspired to restrain trade not through price agreements made between the two companies but by pricing, selling and other arrangements made between the subsidiaries within each corporate family. The FTC complaints may have far-reaching effects throughout industry, since many other big U.S. corporations operate through wholly owned subsidiaries.

Hurry-Up Job? Seagrams and Schenley hit right back at FTC’s charges, called them a hurry-up political job to win some election votes. The charges had been drawn up so hastily and sloppily, they said, that the complaints were full of inaccuracies. Items: eight of the 29 Schenley and Seagrams subsidiaries cited by FTC do not even function any more; one of them (Seagrams’ Pharma-Craft Corp.) sells only drugs, hence could not possibly be guilty of price-fixing liquor. FTC also charged that both companies had gobbled up cooperage plants in restraint of trade, whereas the fact is that Seagrams owns only one small cooperage plant and buys most of its barrels on the outside. What made the liquor men maddest was the fact that the charges against both companies were worded almost identically and released to the press simultaneously, thus creating the impression among headline readers that Schenley and Seagrams had conspired together.

Both Seagrams and Schenley could eliminate most of FTC’s case by turning their subsidiaries into corporate divisions. But in the liquor industry there are plenty of good reasons for working through subsidiaries. One is that liquor is sold under so many special, complex and often confusing state laws that minor infractions are almost inevitable. When a subsidiary is found guilty of breaking one of these laws, its particular brand may be temporarily banned from the state. But if the subsidiary were a corporate division, all the products of the entire corporation would be banned. Furthermore, many liquor drinkers prefer what they think are independent brands, in the mistaken belief that only a small distiller can turn out good whisky. (If the subsidiaries were divisions, the parent company’s name would have to be put on the label as well as the subsidiary’s.)

New Weapon. Actually, FTC’s chief motive for the suit apparently had little to do with competition between subsidiaries. What it was really trying to do was fashion a new weapon to use against Fair Trade-pricing, which it has vigorously fought despite the approval of Fair Trade by both the President and Congress (TIME, July 28). To do this, FTC was making use of a little-known decision of the U.S. Supreme Court involving Seagrams early in 1951.

An Indiana drug company had charged that two Seagrams subsidiaries would sell it no liquor, that they would deal only with Indiana wholesalers who agreed to resale prices fixed by Seagrams. All the drug company wanted was a chance to buy some Seagrams liquor without making such an agreement. But the Supreme Court went much further. Not only did it rule that Seagrams should abolish such restrictive practices; it also said that subsidiary corporations have an obligation to compete with one another, even though they may be under the same ownership. Thus, by going after subsidiary-pricing, FTC could also attack Fair Trade-pricing under the antitrust laws.