The opinion
FORREST CITY GROCERY )
COMPANY, )
)
Plaintiff/Appellant, )
) Appeal No.
) 01-A-01-9505-CH-00198
VS. )
) Davidson Chancery
) No. 93-239-II
TENNESSEE DEPARTMENT OF )
REVENUE, )
)
FILED
Defendant/Appellee. ) Oct. 19, 1995
Cecil Crowson, Jr.
COURT OF APPEALS OF TENNESSEE Appellate Court Clerk
MIDDLE SECTION AT NASHVILLE
APPEALED FROM THE CHANCERY COURT OF DAVIDSON COUNTY
AT NASHVILLE, TENNESSEE
THE HONORABLE C. ALLEN HIGH, CHANCELLOR
JOHN M. FARRIS
E. DEAN WHITE, III
One Commerce Square
Suite 2000
Memphis, Tennessee 38103
Attorneys for Plaintiff/Appellant
CHARLES W. BURSON
Attorney General & Reporter
PERRY ALLAN CRAFT
Deputy Attorney General
ARSHAD (PAKU) KHAN
SEAN P. SCALLY
Assistant Attorneys General
450 James Robertson Parkway
Nashville, Tennessee 37143-0492
Attorneys for Defendant/Appellee
AFFIRMED AND REMANDED
BEN H. CANTRELL, JUDGE
CONCUR:
TODD, P.J., M.S.
KOCH, J.
OPINION
The plaintiff, Forrest City Grocery Company, filed a declaratory judgment
action in the Chancery Court of Davidson County alleging that the Unfair Cigarette
Sales Law violates (1) the Sherman Antitrust Act, and (2) the plaintiff's right to due
process. The chancellor found the issues in favor of the statute and dismissed the
complaint. We affirm.
I.
Forrest City is an Arkansas corporation that sells cigarettes to retailers
in Tennessee. In June of 1992, the Tennessee Department of Revenue served
Forrest City with a summons seeking information regarding the conduct of Forrest
City's wholesale cigarette business. It appears that the Department of Revenue
considered Forrest City's practice of passing cigarette manufacturers' discounts along
to the retailers to be a violation of the Unfair Cigarette Sales Law (UCSL). On January
25, 1993 Forrest City filed a complaint for a declaratory judgment in the Chancery
Court of Davidson County seeking a declaration that the UCSL was unconstitutional
because it violated the Sherman Anti-Trust Act and because it violated Forrest City's
right to due process. The chancellor upheld the Act against both arguments.
II.
Does the UCSL violate the Sherman Act?
The Sherman Anti-Trust Act, 15 U.S.C. §§ 1-7, makes unlawful every
contract, combination or conspiracy "in restraint of trade or commerce among the
several states." Under the Supremacy Clause, Art. 6 § 2 of the United States
Constitution, a state law violating the Sherman Act would be unconstitutional.
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The UCSL makes it unlawful for any retailer or wholesaler to sell
cigarettes below cost, with the intent to injure competitors or destroy or lessen
competition. Tenn. Code Ann. § 47-25-303(a). Evidence of the prohibited act is
prima facie evidence of an intent to injure competitors or destroy substantially or
lessen competition. Tenn. Code Ann. § 47-25-303(b).
"Cost to the wholesaler" is defined in the Act as the "basic cost of
cigarettes" plus the "cost of doing business by the wholesaler." Tenn. Code Ann. §
47-25-302(6). The "basic cost of cigarettes" is defined as the manufacturer's invoice
price without consideration of any discounts whatever, Tenn. Code Ann. § 47-25-
302(1), and the "cost of doing business by the wholesaler" is defined as one and
three-fourths percent (1 3/4%) of the basic cost of cigarettes plus cartage to the retail
outlet (if performed by the wholesaler) of one-half of one percent (1/2%) of the basic
cost. Tenn. Code Ann. §47-25-302(4).
The anti-competitive effect of the UCSL is apparent. The state argues,
however, that the Sherman Act does not apply to state action, relying on what has
become known as the "state action doctrine" first recognized in Parker v. Brown, 317
U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943). In Parker the state of California sought
to restrict competition among raisin growers and maintain prices in the distribution of
their raisins to packing companies. The state accomplished its purpose by an
elaborate scheme requiring the growers to pool all their raisins for grading and
marketing according to criteria calculated to maintain prices. The United States
Supreme Court conceded that the scheme might violate the Sherman Act "if it were
organized and made effective solely by virtue of a contract, combination or conspiracy
of private persons, individual or corporate." 317 U.S. at 350, 63 S.Ct at 313, 87 L.Ed.
at 325. But the Court found no authority in the Sherman Act itself or in its legislative
history to suggest "that its purpose was to restrain a state or its officers or agents from
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activities directed by its legislature." 317 U.S. at 350, 63 S.Ct. at 313, 87 L.Ed. at 326.
The Act is directed against individual and not state action.
In California Liquor Dealers v. Midcal Aluminum, 445 U.S. 97, 100 S.Ct.
937, 63 L.Ed.2d 235 (1980), the Court reviewed a section of the California Business
and Professions Code which required all wine producers, wholesalers, and rectifiers
to file a fair trade contract or a price schedule with the state. If the wine producer did
not set prices through a fair trade contract, wholesalers were required to post a resale
price schedule for that producer's brands. A licensee selling below the established
price faced fines and/or suspension or revocation of the license to sell such products.
The United States Supreme Court held that the California wine pricing
provisions violated the Sherman Act. Finding that the California Act allowed wine
prices to be fixed by private persons and not the state, the Supreme Court held that
the state action immunity recognized in Parker v. Brown did not apply. Quoting from
Parker v. Brown, the Court said "a state does not give immunity to those who violate
the Sherman Act by authorizing them to violate it, or by declaring that their action is
lawful." 445 U.S. at 106, 100 S.Ct. at 943, 63 L.Ed.2d at 243. In rendering its opinion
the Supreme Court said that Parker v. Brown and the cases interpreting it required
two things in order for the state action immunity to apply: (1) the restraint must be
clearly articulated and affirmatively expressed as state policy and (2) the policy must
be actively supervised by the state itself. 445 U.S. at 105, 100 S.Ct. at 943, 63
L.Ed.2d at 243. Later, the Court noted an absence of a "pointed reexamination" of
the program on the part of the state authorities.
Forrest City argues that the state fails the two part test set out in Midcal.
Boiled down to its basics, Forrest City's argument is an attack on minimum markup
statutes per se. If the state does not regulate cigarette prices from the manufacturer
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to the retailer -- or at least monitor the prices all along the delivery chain -- the state
has not met the "active supervision" requirement of the Midcal test.
On the other hand, the Commissioner argues that minimum markup
statutes are per se entitled to the state action exemption. As creatures of the
legislature such statutes result from the purest form of state action. No other agency,
commission, or trade group is delegated the authority to fix prices. Therefore, there
is no requirement of active supervision other than legislative oversight.
Both sides have some support for their arguments. Forrest City cites
Alcoholic Bev. Control Bd. v. Taylor Drug Stores, Inc,, 635 S.W.2d 319 (Ky. 1982),
where the Kentucky Supreme Court held that that state's minimum markup statute
relating to liquor pricing violated the Sherman Act because the state, in the final
analysis, exercised no control over prices. Stating what we believe to be true also in
Tennessee the Taylor court said, "[T]he state participates in fixing prices only to the
extent that it adds statutory minimum markups to prices fixed by private individuals."
See also Miller v. Hedlund, 813 F.2d 1344 (9th Cir. 1987) and Anheuser-Busch v.
Goodman, 745 F.Supp. 1048 (M.D. Pa. 1990).
The Commissioner cites Jetro Cash & Carry Enterprises, Inc. v.
Department of Taxation, 605 N.Y.S. 538 (A.D. 1993), a case from New York involving
cigarette pricing. The statute involved, although not identical, was similar to the
Tennessee statute. In upholding state action immunity the court said,
[O]nce the manufacturer establishes its price, the statutory
scheme defines the price at which cigarettes may be resold,
and it is the statute not the individual parties, that determines
the ultimate resale price. 605 N.Y.S. at 540.
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For the same result, see Morgan v. Division of Liquor Control Conn.,
Dept. of Business Regulation, 664 F.2d 353 (2d Cir. 1981), where the Second Circuit
Court of Appeals specifically found that a minimum markup statute satisfied the active
supervision requirement of the Midcal test.
There are cases from the Supreme Court itself that lend support to the
Commissioner's argument, although the decisions do not involve minimum markup
statutes. In Hoover v. Ronwin, 466 U.S. 558, 104 S.Ct. 1989, 80 L.Ed.2d 590 (1984),
a case involving the Supreme Court of Arizona's requirements for admission to the
bar, the United States Supreme Court discussed the two parts of the Midcal test and
how the test should be applied. The Court said:
"[I]n cases involving the anti-competitive conduct of a
nonsovereign state representative the Court has required a
showing that the conduct is pursuant to a 'clearly articulated
and affirmatively expressed state policy' to replace
competition with regulation . . . . The court also has found the
degree to which the state legislature or supreme court
supervises its representatives to be relevant to the inquiry
. . . . When the conduct is that of the sovereign itself, on the
other hand, the danger of unauthorized restraint of trade
does not arise. Where the conduct at issue is in fact that of
the state legislature or supreme court, we need not address
the issues of 'clear articulation' and 'active supervision.'"
466 U.S. at 569, 104 S.Ct. at 1995, 80 L.Ed.2d at 600.
In Federal Trade Commission v. Ticor Insurance Co., 504 U.S. ___, 112
S.Ct. 2169, 119 L.Ed.2d 410 (1992), a case involving a state's regulation of title
insurance rates, the Court further expanded on the "active supervision" requirement
of the Midcal test and said, "The question is not how well state regulation works but
whether the anti-competitive scheme is the state's own." 504 U.S. at ___, 112 S.Ct.
at 2177, 119 L.Ed.2d at 423.
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Forrest City also relies on a Supreme Court case, 324 Liquor Corp. v.
Duffy, 479 U.S. 335, 107 S.Ct. 720, 93 L.Ed.2d 667 (1987), which struck down the
pricing provisions of New York's Alcoholic Beverage Control Law because the scheme
was not actively supervised by the state. We find, however, that the New York law
was not a markup statute like the UCSL. In fact, the Court noted that the New York
statute was not a minimum markup statute and indicated that such statutes might
pass the Midcal test. The Court cited the Second Circuit's opinion in Morgan as
authority for that position.
Taking into account all these shades of opinion, we are persuaded that
the Midcal test does not apply to anti-competitive price schemes established by the
legislature itself. It is only when the decisions producing anti-competitive results are
delegated to other agencies or individuals that a more rigorous examination of the
state's part in the decisions must be made. Therefore, the UCSL, an anti-competitive
scheme created by the legislature itself, is immune from attack on the ground that it
violates the Sherman Act.
III.
Does the UCSL violate Due Process?
Where the UCSL makes evidence of selling below the statutorily
mandated cost prima facie evidence of the intent to injure competitors, Forrest City
asserts that it unconstitutionally shifts the burden of proof to the defendant in a
criminal prosecution for violating the Act. As established in County Court of Ulster
County, New York v. Allen, 442 U.S. 140, 99 S.Ct. 2213, 60 L.Ed.2d 777 (1979), and
applied in State v. Bryant, 585 S.W.2d 586 (Tenn. 1979), the rule is that the
constitutionality of the statute depends on whether it establishes a "permissive
inference" or a "mandatory presumption." See also Lowe v. State, 805 S.W.2d 368
(Tenn. 1991). If it is a permissive inference, one that allows but does not require the
jury to infer the presumed fact from the proved fact, a jury instruction concerning the
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inference would be error only if under the facts of the case there would be no rational
way the jury could make the connection permitted by the inference.
In Bryant the Court was dealing with a statute making evidence of
entering another's premises in a mask prima facie evidence of an intent to commit a
felony. The court said "prima facie" could mean either a permissive inference or a
mandatory presumption but interpreted the statute liberally in order to preserve its
constitutionality. See State v. Netto, 486 S.W.2d 725 (Tenn. 1972).
Being under the same mandate to preserve the constitutionality of
statutes, we interpret the UCSL as creating a permissive inference rather than a
mandatory presumption. In a criminal prosecution for violating the Act, the Court
could charge the inference if, under the facts of the case, the jury could make the
connection permitted by the inference.
The judgment of the trial court is affirmed and the cause is remanded
to the Chancery Court of Davidson County for any further proceedings that may
become necessay. Tax the costs on appeal to the appellant.
______________________________
BEN H. CANTRELL, JUDGE
CONCUR:
_______________________________
HENRY F. TODD, PRESIDING JUDGE
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_______________________________
WILLIAM C. KOCH, JR., JUDGE
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