What began last summer as a routine cola war between the bottlers of Coke and Pepsi has escalated into a multimillion-dollar antitrust case that threatens to prove both embarrasing and costly for the powerful Coca-Cola Co. of Atlanta and its chairman, J. Paul Austin.
The Pepsi people claim Coke is trying to drive them out of the Virginia and Maryland soft-drink market by cutting cola prices, giving away free pop machines and selling soda for less than it costs to produce.
Coke's goal is not only to monopolize the market, the rivals charge, but also to create a lucrative retirement business for Austin to run after he retires as Coca-Cola's chief executive next March.
In a lawsuit filed in Norfolk, Allegheny Pepsi-Cola Bottling Co. accuses Coca-Cola of violating federal antitrust laws, discriminating against some of its own franchise-holders and deceiving its stockholders -- all, allegedly, for Austin's benefit.
The complaint against Coke and its affiliates was filed last week, but Coca-Cola Co.'s offices in Atlanta and Washington have been closed since the day before Thanksgiving, and company officials could not be reached for comment on the case.
The lawsuit claims illegial actions by Coca-Cola and the Richmond-based Mid-Atlantic Bottling Co. have cost Allegheny Pepsi more than $10 million in business. Allegheny claims it is entitled to treble damages -- $30 million -- under federal antitrust laws and in addition has demanded $25 million in punitive damages for alleged violations of Virginia and federal laws.
Allegheny Pepsi is a subsidiary of Allegheny Beverage Corp. of Baltimore and holds the Pepsi franchise for much of Maryland, Virginia, West Virginia and Pennsylvania. Allegheny also bottles and distributes Mountain Dew, Dr. Pepper, Dad's and Frosty root beers, Schweppes mixers and Suburban sodas.
Until two years ago, Allegheny's chief rivals for the local carbonated beverage business were Coca-Cola Bottling Co. of Baltimore, a wholly owned subsidiary of Coca-Cola of Atlanta, and J.E. Crass Bottling Companies, which held the Coke franchise for the District of Columbia and parts of Virgina, Pennsylvania and Ohio.
According to Allegheny's lawsuit, the owners of Crass Decided in 1978 to sell out. They offered the lucrative cola franchise to another company for $100 million and were turned down.
Allegheny claims Crass then began talking to Coca-Cola about consolidating its operations with those of Coca-Cola's own Baltimore subsidiary. The plan was to sell both Crass and Baltimore Coke to a new company, Mid-atlantic Bottling Co., which was controlled by a company called Bottling Management Inc. and run by Frank A. Grisanti and Andrew Galef, both of Richmond.
Mid-Atlantic, Bottling Management, Grisanti and Galef all are defendents in the Allegheny lawsuit, which charges, "Coca-Cola intended to bankroll Mid-Atlantic in an effort to monopolize its market territory and specifically to drive Allegheny from the market."
Allegheny contends Coke's decision to sell the Baltimore bottler was "extraordinary in that Coca-Cola had historicaly adhered to a policy of being reluctant to divest itself of its bottling subsidiaries, especially profitable ones like Baltimore Coke."
During 1979 Coca-Cola spent $65 million to buy back its Atlanta bottling franchise and another $15 million for a 9.5 percent interest in Coca-Cola Bottling Co. of New York. Only last June the company sold $100 million worth of notes to the public to finance acquisitions and expansion.
But instead of acquiring the Crass companies, Coca-Cola decided to "orchestrate" financing so Mid-atlantic Bottling could buy both Crass and Baltimore Coke, Allegheny Beverage lawyers complained.
"Despite the recent rejection of the $100 million price as too high by another potential buyer," Mid-Atlantic agreed to pay "approximately $170-$180 million" for the Crass business, Allegheny claims. At the same time, Coca-Cola agreed to sell Baltimore Coke to Mid-Atlantic for a price Allegheny attorneys describe as "vastly undervalued at $29.5 million."
Coca-Cola got no cash for the sale of its Baltimore bottler, Allegheny says, only a note for 50 million. Mid-Atlantic is paying less than 9 percent a year interest on the note, and does not have to begin repaying the principle until 1990, the lawsuit alleges.
In return for its $50 million IOU, Mid-Atlantic got not only the Baltimore Coke plant, trucks and franchises, but $12 million in cash, Allegheny claims. At the same time Coca-Cola's connections allegedly enabled Mid-atlantic to buy Crass by borrowing $130 million from some insurance companies under terms that require no payments on the principal for eight years.
The Allegheny lawsuit contends Coca-Cola officials tried to keep the entire transaction secret, "fearing embarrassment and outrage from both its shareholders and bottlers because of the improper and illegal acts."
According to Allegheny, Coca-Cola's plan was for the two Richmond businessmen, Grisanti and Galef, to run the new Mid-Atlantic Bottling Co. "for a limited period of time.
"Then J. Paul Austin, chief executive officer of Coca-Cola, would be in a position to take control of this attractive bottling franchise upon his planned retirement as chairman of the board of Coca-Cola in March 1981."
Allegheny officials refused last week to elaborate on their charge that Coca-Cola's actions were for the personal benefit of Austin, a long-time supporter and friend of President Carter.
Although the charge that Coca-Cola was doing a favor for its chairman and keeping information about its operations secret from stockholders could get the giant company in trouble with the Securities and Exchange Commission, the central issue in the Allegheny lawsuit is the more mundane matter of selling soda pop.
With a goal of "creation of an even more dominant franchise for Austin," Coca-Cola and Mid-Atlantic Bottling "have conspired and combined to fix prices" in violation of three federal antitrust laws and a Virginia state statute, the lawsuit contends.
The lawsuit alleges the Coke bottler is illegally slashing its prices, in effect starting a cola war, as part of an illegal effort to monopolize the market.
Mid-Atlantic has cut the wholesale price of a six-pack of Coke in 16-ounce returnable bottles to as little as 80 cents in the Norfolk and Richmond areas, Allegheny claims. That size Coke regularly sells for more than $2 a six-pack in the Washington area. The price cuts have not been passed on to the consumer, Allegheny says, enabling soda-sellers to make windfall profits on their sales of Coke and discouraging them from selling Pepsi.
Allegheny claims Mid-Atlantic has given a special discount of 50 cents a case on Coke to stores that promise to advertise only its brands and has charged some retailers less than others for the same product in violation of federal law. The lawsuit also accuses the Coke bottler of giving free vending machines to some customers and selling some products for less than they cost to produce, a violation of a Virginia antitrust law.
The eight-count lawsuit asks the federal courts to issue an injuntion prohibiting Mid-Atlantic and Coca-Cola from selling products below cost, "engaging in predatory pricing practices" or otherwise attempting "to fix prices, restrain trade and eliminate competition."