Petition — BOHEMIANIAN DISTRIBUTING CO. v. NORMAN WILLIAMS CO. (Nos. 80-1030, 80-1012, 80-1052)

80-1030

No.

JEC

Supreme Court, U.S,

FILED

23 1960

MICHAEL RODAK. JR., CLERK

IN THE

Supreme Court of the United States

OcToOBER TERM, 1989

BOHEMIAN DISTRIBUTING COMPANY,

Petitioner,

V.

NORMAN WILLIAMS COMPANY, et al.,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE COURT OF APPEAL,

THIRD APPELLATE DISTRICT,

OF THE STATE OF CALIFORNIA

FRANK ROTHMAN

CHRISTINA A. SNYDER

WYMAN, BAUTZER, ROTHMAN,

KUCHEL & SILBERT

Two Century Plaza

2049 Century Park East

Los Angeles, California 90067

Attorneys for Petitioner

Of Counsel:

GEORGE MIRON

CarOL S. MENDELSOHN

ee

QUESTIONS PRESENTED

1. Does section 2 of the Twenty-first Amendment, which

grants the States the right to control importation and sale of

liquor and to structure its distribution, authorize California to

enact and enforce a “primary source” law, i.e., a law which

prohibits a licensed importer from importing branded liquor

into California unless authorized to do so by the owner of the

brand?

2. Does California’s primary source law, Assembly Bill

499, conflict with the Sherman Act, even though it does not

require any person to engage in any conduct which would

violate the Sherman Act?

NORMAN WILLIAMS COMPANY, a California

corporation; SCHWAB DISTRIBUTING COMPANY,

Inc., a California corporation, doing

business as GOLD Coast WINES & Spirits;

Lewis-Westco & Co., a California corporation; GREENE

Cat Liquors, INc., a California

corporation; FREDERICA AULDRIDGE, doing

business as SOUTH BAY LiQuoR; RALPH E. PIERCE

and SHARON L. PIERCE, doing business as

TexaS LiquOR House; and WILLIAM A. KIRBY,

Jr., and SHIRLEY D. KirBy, doing business as

HOUSE OF FINE SPIRITS,

Petitioners,

Vs.

BaxTER Rice, DirEcTOR, DEPARTMENT OF ALCOHOLIC

BEVERAGE CONTROL,

Respondent.

WINE & SPIRITS WHOLESALERS OF CALIFORNIA, a California

corporation, and BOHEMIAN DISTRIBUTING COMPANY, a Califor-

nia corporation,

Intervenors.

TABLE OF CONTENTS

PAGE

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CONSTITUTIONAL AND STATUTORY PROVISIONS IN-

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REASONS FOR GRANTING THE WRIT..u00......cccccccccceesceeceeeeee

1. The Writ Should Issue To Correct An Error Of The

California Court Which Denies Citizens Of California A

Federal Constitutional Right To Adopt Legisiation To

Promote Competition Among Different Brands Of Li-

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2. The Writ Should Issue To Correct The Ruling Below

That The Sherman Act Is A Bar To California’s Primary

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ili

TABLE OF AUTHORITIES

CASES

Arizona State Liquor Board of Department of Liquor

Licenses & Control v. Ali, 27 Ariz. App. 16, 550 P.2d 663

SS iic:tsssncditbcccncnieiisualitosassaianatiaspneignaniniaahesmanaintaieiinn

Board of Trade v. United States, 246 U.S. 231 (1918).........

California Retail Liquor Dealers Assn. v. Midcal Alumi-

num, Inc., 445 U.S. 7 (1980)..

Colby Distributing Co., Inc. v. Lennen, 227 Kan. 179, 606

P.2d 102 (1980), appeal dismissed sub nom. Gran?

Billingsley Liquor Co., Inc. v. Lennen, 49 U.S.L.W. 3331

(U.S. Nov. 4, 1980) (No. 80-189) .........cccceceesseecseeesseees

Continental T.V., Inc. v. GTE Sylvania inc., 433 U.S. 36

Giozza v. Tiernan, 148 U.S. 657 (1893 ) .............scssscceseseeeees

Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975) ...........

Joseph E. Seagram & Sons, Inc. v. Hostetter, 384 U.S. 35.

rah. Gemiad, 384 US. 967 ( 1966) ....cccccccssecssosecsssecesseccosesss

Norman Williams Co. v. Rice, 108 Cal. App. 3d 348, 166

Sn SUNG IIE ic sekieeiscnesctstn Sivhcalelestinandicnssaainiiinibenteiapiain

Rice v. Alcoholic Reverage Control Appeals Board, 2\ Cal.

he ee FE FD casiiteanictnicisatiicsvinicinsnssvitenienins

State Board of Equalization v. Young’s Market Co., 229

US. 59, reh. denied, 299 U.S. 623 (1936).......cccceeeseeees

Tokaji v. State Board of Equalization, 20 Cal. App.2d 612,

re FF inrsiinsicaeeniensceontidialnannionnd

UNITED STATES CONSTITUTION

re ME RS nom caceconaseiieneuaieacedenion

PAGE

2.3.4,

7,8,9,

10,11,12

iv

CASES

FEDERAL STATUTES

Sernene Fed, US UTA. F 8 OF BID, cccensvinsacccsecccsssssessscecsosonsanse

STATE STATUTES

Assembly Bill 499 (Stats. 1979, ch. 280, § 1); Cal. Bus. &

Prof. Code § 23672 ( West Supp. 1980) .........cccssseeeseeees

Cal. Bus. & Prof. Code § 23672 ( West) (current \.rsion at

Cal. Bus. & Prof. Code § 23672 ( West Supp. 1980) ........

ee Oe eicseettntetnctcistiencectscneniicennaneion

Cal. Bus. & Prof. Code § 24755 (repealed 1978)................

D.C. Alco. Bev. Control Bd. Regs. tit. 3, ch. I, § 4.1}.

Ss i ON II cass scccacninsinionasnahanpesliteeitinsoeinensdivnes

Mass. Gen. Laws. Ann. ch. 138, §§ 25B, 25C ( West Supp.

Re es Ns i ire OF ee A I stds ccsinernicenssinnectbanmantiiacniinss

Rs SS At se rn I, PD icccchrsavdeniednscnseccheseneneess

Tex. Alco. Bev. Code Ann. tit. 3, § 37.10 ( Vernon ).............

MISCELLANEOUS

Letter from Jack B. Owens, Esq. to the Honorable Lewis F.

RU, rs 0 OO GR, PI Pivcriciintcsrinesinteinasnemenssiciicininbnaron

Letter from Michael Rodak, Jr., Clerk, to Jack B. Owens,

In a III Uh IIIT cin erieseanaceniiicahcatinteniatbiaaeicanaeines

Wine and Spirits Wholesalers of America, Inc., 1976-1979

Cumulative Supplement to the Three-Tier System of

Distribution in the Wine and Spirits Industry ( Novem-

ICIS ENT iiss ie siesta senaecieulah.cdlaainnabicanicndsstmeciviniensaneiiahientiinn

PAGE

2,3,4,

5,7,10,

11,12,13,

14

6,7,9,

11,12,13,

4

No.

IN THE

Supreme Court of the United States

OcTOBER TERM, 1980

BOHEMIAN DISTRIBUTING COMPANY,

Petitioner,

¥.

NORMAN WILLIAMS COMPANY, et al.,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE COURT OF APPEAL,

THIRD APPELLATE DISTRICT,

OF THE STATE OF CALIFORNIA

To the Honorable, the Chief Justice and the Associate

Justices of the Supreme Court of the United States: Your

Petitioner, Bohemian Distributing Company, respectfully prays

for a Writ of Certiorari to the Court of Appeal, Third Appellate

District, of the State of California to review the judgment and

opinion of that court entered on July 17, 1980. Petition for

hearing was denied by the Supreme Court of the State of

California on September 24, 1980.

OPINIONS BELOW

The opinion of the Court of Appeal, Third Apellate

District, of the State of California (Appendix A, infra) is

2

officially reported as Norman Williams Co. v. Rice, 108

Cal.App.3d 348, 166 Cal.Rptr. 563 (1980). The order of the

Supreme Court of the State of California denying petitioner’s

timely petition for hearing has not yet been reported. A copy of

this order is set forth in Appendix B, infra.

JURISDICTION

The judgment of the Court of Appeal, Third Appellate

District, of the State of California was entered on July 17, 1980,

granting the petition for writ of mandate. Thereafter, on

September 24, 1980, the Supreme Court of California denied a

petition for hearing. The jurisdiction of this Court is invoked

under 28 U.S.C. § 1257(3).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

Section 2 of the Twenty-firsts Amendment (U.S. Const.

Amend. XXI § 2) is set forth in Appendix C, infra. Pertinent

portions of the Sherman Act (15 U.S.C. § 1 ef seg.) are set forth

in Appendix D, infra. Pertinent portions of the California

Business and Professions Code, including Assembly Bill 499

(Stats.1979, ch. 280, § 1; Cal. Bus. & Prof. Code § 23672 ( West

Supp. 1980), are set forth in Appendix E, infra. Pertinent

portions of the Oklahoma Statutes (12 Okla. Stat. tit. 37, § 501

et seq.) are set forth in Appendix F, infra. Pertinent portions of

the Kansas Statutes ( Kan. Stat. § 41-101 ef seg.) are set forth in

Appendix G, infra.

STATEMENT

This petition seeks review for the purpose of correcting

significant errors made by the California Court of Appeal in

Norman Williams Co. v. Rice, 108 Cal.App.3d 348, 166 Cal.

Rptr. 563 (1980), wherein the court below held invalid Califor-

nia’s “primary source law,” which, like similar laws in 15 other

states and the District of Columbia, regulates the class of

3

persons who may import branded liquor into the state.1_ The

court below, purportedly relying upon this Court’s recent

decision in California Retail Liquor Dealers Assn. v. Midcal

Aluminum, Inc., 445 U.S. 97 (1980), held that California’s

primary source law, enacted in 1979, conflicts with the Sherman

Act (15 U.S.C. § 1 ef seg.), and that said primary source law is

preempted by federal law. This holding by the court below was

erroneous. If this error is not corrected, citizens of California

will be deprived of their rights under the Twenty-first Amend-

ment to adopt legislation regulating liquor and fostering com-

petition among different brands of liquor sold in California.

Petitioner Bohemian Distributing Company (‘Bohe-

mian” ),2 an intervenor in the proceeding below, here prays that

its petition be granted, and that the decision below be reversed,

based upon two cases decided by this Court within the past

year. The first case, California Retail Liquor Dealers Assn. v.

Midcal Aluminum, Inc., 445 U.S. 97 (1980) (hereafter referred

to as “Midcal”’), decided prior to the case below, affirmed the

California Court of Appeal’s holding to the effect that a state

may not require price-fixing conduct of merchants in interstate

commerce. As shown herein, Midcal nonetheless reserves to the

states their Twenty-first Amendment right to maintain virtually

complete control over whether to permit importation or sale of

liquor and how io structure the liquor distribution system within

the state. The second relevant decision of this Court is Colby

Distributing Co., Inc. v. Lennen, 227 Kan. 179, 606 P.2d 102

(1980), appeal dismissed sub nom. Grant-Billingsley Liquor Co.

v. Lennen, 49 U.S.L.W. 3331 (U.S. Nov. 4, 1980) (No. 80-

189) (hereafter referred to as “Grant-Billingsley”). The Grant-

Billingsley case was decided subsequent to Midcal and the case

below.

In Grant-Billingsley, appellants sought to overturn a

Kansas Supreme Court decision, decided prior to the decisions

in Midcal and in the case below. The Kansas Supreme Court

1 The primary source laws of other states and the District of Columbia

are cited in Appendix H, infra.

2 Petitioner is a licensed importer and wholesaler of distilled spirits in

California.

4

had upheld a statute imposing extensive control over intra-

brand competition, in addition to a primary source requirement

like the one in California. (The Kansas legislation is set forth

in Appendix F, infra.) Kansas, prior to the enactment of the

legislation challenged in the state court, had been an “open

wholesaling” state. The statutory change to a primary source

scheme was expressly enacted to introduce competition into the

state. See discussion in Colby Distributing Co., Inc. v. Lennen,

227 Kan. at 187, 606 P.2d at 103-104. The Kansas Supreme

Court recognized the state’s authority to regulate the importa-

tion and distribution of liquor pursuant to the Twenty-first

Amendment and upheld the validity of the primary source

statute.

As a result of this holding, an appeal was taken by certain

Kansas liquor distributors arguing that those portions of the

Kansas legislation which dealt with the distribution of liquor

(e.g., those permitting exclusive territories) conflicted with the

Sherman Act. In support of their appeal, these liquor dis-

tributors cited the California Court of Appeal’s opinion in the

case below, Norman Williams Co. v. Rice, which had been

decided subsequent to the Kansas Supreme Court’s decision, as

authority for the proposition that there was a conflict between

Kansas’ primary source legislation and the Sherman Act, urging

that, as a consequence, a substantial federal question was

present. This Court summarily rejected appellants’ argument,

concluding that there was “no substantial federal question,”

and thus upholding the validity of the primary source legisla-

tion. Based upon the decisions in Grant-Billingsley and Midcal,

there should be no dispute that the court below erroneously

decided Norman Williams Co. v. Rice wherein California’s

primary source law was held to be invalid.

The pertinent facts as they relate to California’s primary

source law, Assembly Bill 499 (A.B. 499”), Cal. Bus. & Prof.

Code § 23672 ( West Supp. 1980), are as follows: A.B. 499 was

enacted by the California legislature in 1979 to resolve an

ambiguity in California law which resulted from the decision of

the Supreme Court of California in Rice v. Alcoholic Beverage

Control Appeals Board, 21 Cal.3d 431, 579 P.2d 476 (1978).

That decision, which invalidated section 24755 of the California

Business and Professions Code on the ground that the minimum

5

resale price scheme it imposed on the distribution of liquor in

California was in conflict with the Sherman Act, created an

ambiguity in the predecessor-statute of A.B. 499, section 23672

of the California Business and Professions Code, in that section

23672 specifically referred to section 24755.

While section 23672 merely delineated what classes of

liquor licensees were authorized to function as importers of

liquor into California, it defined an “authorized importer” to be

any person designated by “the licensee who filed the minimum

price schedule for such brand pursuant to Section 24755.”

Because section 24755 had been declared to be invalid, Califor-

nia’s Department of Alcoholic Beverage Control claimed it

could not enforce section 23672 following Rice, since it could

not perform legislative functions and interpret who was an

“authorized importer” pursuant to section 23672.

To resolve this issue and to restore its intention that only

certain designated importers have the right to distribute liquor

in California, the California legislature in 1979 adopted a new

law, A.B. 499. A.B. 499 was patterned after similar “primary

source” laws in at least 15 other states and the District of

Columbia. The object of primary source laws—including those

in Kansas and California—is to aid revenue collection, insure

orderly marketing of liquor in the states where enacted and to

promote competition between different brands of liquor by

facilitating agreements between a distiller and its wholesalers

whereby the wholesalers are allocated sales territories for a

particular brand of liquor. Primary source laws thereby limit

the privilege to import a brand of alcoholic beverage to the

owner of the brand or to those who have been designated by

the owner of the brand.3

3 Primary source laws are not related to resale price maintenance laws.

Some jurisdictions, such as the District of Columbia (D.C. Alco. Bev. Control

Bd.. tit. 3, Ch. 1 § 4.11) and Texas (Tex. Alco. Bev. Code Ann. § 37.10

(Vernon) ). have long had primary source laws and no price control laws.

Other jurisdictions, such as Massachusetts (Mass. Gen. Ann. Laws. ch. 138,

§§ 25B. 25C ( West Supp. 1979) ), had resale price maintenance laws, but no

primary source laws. A comparison of primary source laws and price

maintenance laws is set forth in tabular.form in Wine and Spirits Wholesalers

of America, Inc., 1976-1979 Cumulative Supplement to The Three-Tier

System of Distribution in the Wine and Spirits Industry ( November 1979).

6

The 1979 California primary source law, A.B. 499, pro-

vides as follows:

“A licensed importer shall not purchase or accept delivery

of any brand of distilled spirits unless he is designated as

an authorized importer of such brand by the brand owner

or his authorized agent. Such distilled spirits imported into

California shall come to rest at the warehouse of the

licensed importer or an authorized warehouse for the

account of such licensed importer, before sale and delivery

to a retail licensee.”

The instant case arose in the court below because following

the Rice decision in 1978 and before the passage of A.B. 499 in

1979, certain persons, including the petitioners below (here-

inafter sometimes referred to as “Norman Williams Com-

pany”), took advantage of the California Department of

Alcoholic Beverage Control’s refusal after the striking of section

24755 to give meaning to the term “authorized importer” set

forth in the predecessor of A.B. 499. Simply stated, these

persons, including petitioners, began following the decision in

Rice to purchase in Oklahoma and to import into California

brands of liquor which they had not been authorized to import

into California under the statutory scheme which pre-dated the

Rice decision. Norman Williams Company was thus able to

acquire branded liquor from Oklahoma, without regard to the

vertical allocation of sales territories in California by brand

owners, because Oklahoma was one of the two “open whole-

saling” states whose law provides that any distiller who chooses

to sell distilled spirits in Oklahoma must sell to all licensed

Oklahoma wholesalers. (12 Okla. Stat, tit. 37, § 501 ef seq.)

Moreover, Oklahoma law also allows licensed wholesalers to

sell distilled spirits out of Oklahoma to “qualified persons.”

(12 Okla. Stat. tit. 37, § 521, subd. (e)) Thus, any distiller who

wished to sell in Oklahoma could not enter into an enforceable

agreement with its Oklahoma wholesalers whereby the whole-

salers would resell only in Oklahoma. As a result, liquor sold

for delivery in Oklahoma could be and was redirected or

reshipped for sale in California.

7

By its enactment of A.B. 499, California’s legislature

intended to nullify the extraordinary extraterritorial impact that

Oklahoma law had inadvertently effected in California by

virtue of the Rice decision and the actions of California’s

Department of Alcoholic Beverage Control.

As January 1, 1980, the effective date of A.B. 499, ap-

proached, Norman Williams Company brought suit in the

California courts to enjoin the enforcement of A.B. 499,

alleging, among other things, that A.B. 499 conflicted with and

was preempted by the Sherman Act. As shown above, despite

the fact that A.B. 499 is totally different from the resale price

maintenance statute (section 24755) addressed by Rice, the

court below enjoined the enforcement of A.B. 499.

By enjoining enforcement of A.B. 499, the court below

deprived California of the right to regulate liquor within its

boundaries by protecting the effectiveness of the agreements

between a distiller and its wholesalers which allocate territories

for resale in California, a right reserved to the states by the

Twenty-first Amendment and recognized by Midcal. If Califor-

nia cannot exercise the rights denied to it by the court below, an

integral part of its authority under the Twenty-first Amendment

will have been taken away. The same loss will ultimately be

suffered by the 15 other states and the District of Columbia

having primary source statutes. This Court can and should

avoid such a result by issuing the requested writ here and by

reversing the judgment below.

Moreover, as shown above, this case urgently requires

review to resolve the dramatic conflict between the result below

and the decision of this Court to dismiss, for want of a

substantial federal question, the appeal in Grant-Billingsley

where a similar primary source law was placed in issue as

conflicting with the Sherman Act. Given the result in Grant-

Billingsley, it would be entirely anomolous to permit the

California Court of Appeal’s erroneous application of federal

law to stand. Yet, without the granting of the instant writ, this

result would occur. To dismiss the appeal in Grant-Billingsley

for lack of a substantial federal question while refusing to

review the contrary holding of the California court in Norman

Williams Co. v. Rice would leave in doubt and disarray the

regulatory systems and a vast number of commercial relation-

ships in the fifteen other states and the District of Columbia

which have similar primary source laws.

REASONS FOR GRANTING THE WRIT

1. The Writ Should Issue To Correct An Error Of The

California Court Which Denies Citizens Of California A

Federal Constitutional Right To Adopt Legislation To

Promote Competition Among Different Brands of Liquor

Sold In California.

The Twenty-first Amendment provides the states with

virtually unfettered discretion to regulate liquor. This Court has

made plain that “[cJonsideration of any state law regulating

intoxicating beverages must begin with the Twenty-first

Amendment, the second section of which provides that: “The

transportation or importation into any State, Territory, or

possession of the United States for delivery or use therein of

intoxicating liquors in violation of the laws thereof, is hereby

prohibited.” ” Joseph E. Seagram & Sons, Inc. v. Hostetter, 384

U.S. 35, 41-42, reh. denied, 384 U.S. 967 (1966).

It has thus been the traditional view of this Court that the

Twenty-first Amendment reserves in each state the power to

prohibit entirely or limit and regulate the traffic in intoxicating

liquors within the state. State Board of Equalization v. Young’s

Market Co., 299 U.S. 59, reh. denied, 299 U.S. 623 (1936):

Joseph E. Seagram & Sons, Inc. v. Hostetter, 384 U.S. 35, reh.

denied, 384 U.S. 967 (1966). No one has an inherent right to

engage in the sale of intoxicating liquors. Arizona State Liquor

Board of Department of Liquor Licenses & Control v. Ali, 27

Ariz.App. 16, 550 P.2d 663 (1976); Tokaji v. State Board of

Equalization, 20 Cal.App.2d 612, 67 P.2d 1082 (1937). Itisa

privilege granted by the licensing authority and subject to the

state’s police power. Giozza v. Tiernan, 148 U.S. 657 (1893).

These longstanding principles of law have recently been

restated by this Court in Midcal. In Midcal, this Court, while

9

holding that a state may not require price-fixing conduct of

liquor merchants in interstate commerce, left no doubt that

“(t]he Twenty-first Amendment grants the states virtually

complete control over whether to permit the importation or sale

of liquor and how to structure the liquor distribution system.”

(Id. at 110)4

California exercises this authority by use of the three-tier

scheme of liquor distribution system found in many states. The

three tiers referred to are retailing, wholesaling (including

importing) and manufacturing (e.g., distilling). Under the

scheme, a specific license is required for each such activity, and

no one may hold a license to engage in activity at more than

one tier. Cal. Bus. & Prof. Code § 23772 (West Supp. 1980).

The primary source law of California, A.B. 499, is, like that

of Kansas and other states, a vital ingredient of the three-tier

system, particularly in light of the substantial extraterritorial

effect of the liquor law of Oklahoma. The Oklahoma law, as

discussed, makes it possible for persons who have no California

licenses of any kind to sell to California wholesalers liquor that

was putatively ordered for shipment to Oklahoma. As a result,

without the existence of a primary source law, no distiller can

give meaningful assurance to its chosen California wholesalers

that they alone will be its franchisees in California. In short,

Oklahoma law would and does deny to California the right to

have effective vertical allocation of wholesaling territories in

liquor.

If California cannot, by its primary source law, restore to a

brand owner the right to choose to whom it shall distribute and

to enter into territorial allocations with its wholesalers, its rights

under the Twenty-first Amendment will be drastically abridged.

The decision in Midcal demonstrates that in the absence of

active state supervision, liquor laws requiring resale price

maintenance which otherwise might violate the antitrust laws

Counsel for Midcal asked the Court to change the above-quoted

language. (Letter from Jack B. Owens, Esq., to the Honorable Lewis F.

Powell, Jr. (March 10, 1980)) Mr. Owens’ letter contended that the Court

had not intended to reverse broad state powers to structure liquor distribution

except where the states themselves engaged in the liquor business. The Court

declined to make the suggested change. (Letter from Michael Rodak, Jr..

Clerk, to Jack B. Owens, Esq. (March 21, 1980))

10

cannot continue in effect. Nontheless, it is also clear from

Midcal and Grant-Billingsley that this Court did not intend to

emasculate the Twenty-first Amendment where the state’s

exercise of its police power does not conflict with the Sherman

Act and other antitrust laws.

Unlike resale price maintenance laws, primary source laws

do not require conduct which might otherwise have violated the

Sherman Act. Further, there is nothing in the nature of primary

source laws, such as that in California, which shields any

supplier, wholesaler or retailer within the three-tier system from

accountability for conduct which violates the antitrust laws.

As shown above in Grant-Billingsley, the appellants sought

to invalidate the Kansas primary source law, which the Kansas

Supreme Court had upheld as authorized by the Twenty-first

Amendment and as consistent with the Sherman Act. This

Court dismissed the appeal, stating there was no substantial

federal question, even though appellants urged that the holding

of the California Court of Appeal in Norman Williams Co. v.

Rice, to the effect that California’s primary source law was

preempted by the Sherman Act, required reversal of the Kansas

Supreme Court’s decision.

It is obvious from the Kansas Supreme Court’s decision,

when it is read with Midcal, that the court below misapplied

federal law to California’s primary source law. In essence, the

holding of the court below announced the very rule which this

Court expressly declined to make in Midcal: the court below

held that even though California’s primary source law did not

on its face compel a per se violation of the antitrust laws, it

nonetheless was an invalid exercise of the state’s power to

regulate liquor because of its potentially anti-competitive ef-

fects.

However, the court below wrongly concluded that primary

source laws are anti-competitive. In this regard, this Court has

recently recognized that interbrand competition is often fos-

tered by certain vertically-imposed restraints on intrabrand

competition, including the use of vertical allocations of terri-

tories. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36

(1977).5 Similarly, in Kansas, one reason stated by its Supreme

Court for unholding Kansas’ primary source law was that it

fostered interbrand competition. Primary source laws thus play

a vital part in enhancing competition at the manufacturing and

the wholesaling tiers. By fostering vigorous competition at

these tiers, A.B. 499 helps preserve competition at the retail

level, all to the ultimate benefit of the consuming public in

California. It is an important element in structuring a com-

petitive three-tier distribution system and is unquestionably

within the scope of authority guaranteed California by the

Twenty-first Amendment, as interpreted in Midcal. Accord-

ingly, California’s primary source i. w should be upheld and the

judgment below reversed.

Midcal leaves no doubt that the Twenty-first Amendment

grants the states virtually complete control over whether to

permit the importation or sale of liquor and how to structure the

liquor distribution system. Were the court below correct, every

state regulation would run afoul of the Twenty-first Amend-

ment. Thus, for example, each state law requiring the licensing

of persons distributing liquor within the state would run afoul

of the Sherman Act since those failing to obtain licenses could

not distribute liquor, thereby preventing the maximum number

5 In Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977), this

Court observed that competition between different brands of the same

product so substantially protects the interests of consumers that interbrand

competition is the “primary concern of the antitrust laws.” (Jd. at 52 n. 19)

Such interbrand competition, the Court emphasized, is often fostered by

restraints on intrabrand competition, including the use of vertical allocations of

territories. (Jd. at 54-56) Without such vertical arrangements, it is difficult,

often impossible. for a manufacturer to induce its wholesalers to bear the cost

of furnishing special services to its customers because other wholesalers who

do not offer the services and bear the costs will nonetheless reap the benefits,

i.e., will get a “free ride” on the efforts of others (/d. at 55)

Moreover, the Court continued, this vertical allocation of territory is

especially important for small businessmen and new entrants for whom

expensive, nationwide multi-media campaigns are wholly impractical. ( /d. at

55-57) If small manufacturers and newcomers cannot offer local wholesalers

incentives to promote, they simply cannot compete, and the market will be

left to the established manufacturers of high-volume, fast-moving merchan-

dise. Thus. to deny to all manufacturers the opportunity to offer exclusive or

limited territories is not only to narrow the field of competition but to restrict

the role of the small businessman and the new entrant as well.

12

of competitors in the marketplace. This is exactly the opposite

of the rule announced by this Court in Midcal, and it is

therefore respectfully submitted that the court below was

plainly wrong in ignoring the Twenty-first Amendment.

The Kansas law, the California law and the primary source

laws of fourteen other states and the District of Columbia all

have the same object—to promote competition among sellers of

different brands through vertical allocations of territories. Each

state primary source statute derives its authority from the

Twenty-first Amendment. If this Court does not grant the writ

sought herein and correct the error of the California court, there

will undoubtedly be litigation and perhaps conflicting results in

the other fourteen states and the District of Columbia. This

multiplicity of litigation will make effective and consistent state

regulation difficult, introduce enormous uncertainties in busi-

ness expectations and create widespread doubt as to effect of

hundreds of contractual relations between distillers and whole-

salers. Equally important, the citizens of the remaining states

may well lose their federal constitutional right to benefit from

interbrand competition by use of similar primary source laws.

The citizens of each state have the same federal con-

stitutional rights as the citizens of each other state. The Court

should not allow the citizens of any state to lose those rights by

inaction here. If the Court grants the instant writ and takes

action resulting in the reversal of the decision of the California

Court of Appeal, the rights of the citizens of each state to

implement primary source laws through their respective legisla-

tures will be preserved. On the other hand, if this Court should

conclude that California’s Court of Appeal ruled correctly and

that no state has a constitutional right to a primary source law,

then that answer ought to be given once and for all, ending the

uncertainty, doubt and litigation which will ensue if no writ

issues herein.

2. The Writ Should Issue To Correct The Ruling Below

That The Sherman Act Is A Bar To California’s Primary

Source Law.

As shown above, the California Court of Appeal held that

the Sherman Act and A.B. 499 conflicted. The court below

essentially employed the following reasoning: (1) The Sherman

13

Act forbids restrictions on competition; (2) A.B. 499 gives a

brand owner power to restrict competition between wholesalers

of that brand; (3) therefore, A.B. 499 conflicts with the

Sherman Act. Norman Williams Co. v. Rice, 108 Cal.App.3d

348, 355-358, 166 Cal.Rptr. 563, 568-570 (1980).

There are two critical flaws in this logic. Most important,

even if it be assumed that some vertical allocations of territory

made under the authority of A.B. 499 would violate the

Sherman Act, nothing in A.B. 499 immunizes any such alloca-

tion from full scrutiny and sanction under the Sherman Act.

That is, A.B. 499 does not compel any brand owner and its

wholesalers to agree to a restrictive allocation. As discussed, this

Court has made clear that a state law or other action does not

immunize voluntary agreements from the Sherman Act. Gold-

farb v. Virginia State Bar, 421 U.S. 773, 791, reh. denied, 423

U.S. 886 (1975). Therefore, whenever a brand owner chooses

to allocate territories, that allocation will have to conform to the

Sherman Act; if it unreasonably restrains trade, all the Sherman

Act’s sanctions and remedies will be available to government

enforcement authorities and to private parties. In short, A.B.

499 cannot conflict with the Sherman Act because it simply

does not require anyone to engage in any conduct which would

otherwise violate the Sherman Act.

In addition, and equally important, the Sherman Act does

not forbid unreasonable restrictions, and the vertical territorial

allocation of sales territories is a classic example of a restraint

which is forbidden only if unreasonable. Continental T.V., Inc.

v. GTE Sylvania Inc., 433 U.S. 36 (1977). Yet there was no

trial or fact-finding below concerning the reasonableness of the

subject vertical allocations of territory. The California court

simply ruled that A.B. 499 on its face violated the Sherman Act.

Thus, as the court had no foundation for its conclusion that

every vertical allocation of territory permitted under A.B. 499

for the liquor industry in California would necessarily violate

the Sherman Act, this conclusion was unwarranted and un-

founded. Even if A.B. 499 required vertical allocation of

territories, it simply does not follow that, as a matter of law,

such allocations would be unreasonable. Before any such

determination could be made, a court would have to take

14

evidence as to the particular allocations that were required in

order to determine reasonableness in accordance with the “rule

of reason” enunciated in Board of Trade v. United States, 246

U.S. 231, 238 (1918), as recently reaffirmed in Continental

T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 n. 15 (1977).

In sum, A.B. 499 does not require anyone to enter into any

territorial allocations, let alone allocations that would violate

the Sherman Act. Further, even if allocation arrangements

were required, their consistency with the Sherman Act could not

have been properly determined by the California Court of

Appeal except by trial of the reasonableness issue. Accord-

ingly, the conclusion by the California court that the Sherman

Act operates as a bar to A.B. 499 was not only incorrect as a

matter of law but also lacked any foundation in fact.

6 This analysis assumes, for purposes of argument only, that A.B. 499

was in excess of the authority delegated to California under the Twenty-first

Amendment.

15

CONCLUSION

For the foregoing reasons, a Writ of Certiorari should issue

to review the Judgment of the Court of Appeal, Third Appellate

District, of the State of California.

Respectfully submitted,

FRANK ROTHMAN

CHRISTINA A. SNYDER

WYMAN, BAUTZER, ROTHMAN,

KUCHEL & SILBERT

Two Century Plaza

2049 Century Park East

Los Angeles, California 90067

Attorneys for Petitioner

Of Counsel:

GEORGE MIRON

CAROL S. MENDELSOHN