Appendix — Joseph E. Seagram & Sons, Inc. v. Hostetter
Supreme Court brief1966
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SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1965
No. 545
JOSEPH E. SEAGRAM & SONS, INC., ET AL,
APPELLANTS,
Vs.
DONALD 8S. HOSTETTER, ETC., ET AL.
APPEAL FROM THE COURT OF APPEALS OF THE STATE OF NEW YORK
INDEX
Record from the Supreme Court of the State of
New York, County of Albany
Original Print
RR ie rae a ee 1 1
ESR aR ape oe ; 2 3
Order to show cause __. 27 25
Aittachment—Affidavit of Thomas F. Daly,
read in support of motion ; 29 27
Exhibit A—Senate Introductory Ne. 273 ; 38 36
Exhibit B—j.etter from William W. Golub,
Moreland Act Commission, to John J.
Marciii, Chairman, Joint Legislative Com-
mittee for the Study of the Alcoholic
Beverage Control Law, dated March 9,
ee 43 41
Exhibit C— Excerpt from t wanee rit ae min-
utes of public hearing held February
BE Scone ead iehitc ek tet iat eee 47 44
Recorp Press, Printers, NEw York, N. Y., DEcEMBER 10, 1965
ii INDEX
Record from the Supreme Court of the State of
New York, County of Albany—Continued
Order to show cause—Continued
Attachment—Affidavit of Thomas F. Daly,
read in support of motion—Continued
Exhibit D—Study Paper No. 5 entitled Re-
sale Price Maintenance in the Liquor In-
dustry, dated October 28, 1963, with Ap-
pe OF Ts Reta Pte oenene mane
Exhibit E—Report and Recommendations
No. 3 entitled Mandatory Retail Price
Maintenance, dated January 21, 1964,
with Appendices A, B, C,D & EB...
Exhibit F—Press releases of Governor’s
Messages to the Legislature, dated Febru-
ary 10, 1964, and April 16, 1964
Attachment—Affidavit of Frederick J. Lind
ae ee eee
Attachment—Affidavit of Joseph D. Cotler in
I OE TI iiciveipcceticrteterrnntene
Attachment—Affidavit of Raymond Revit in
ON Ae ha cincnchcocttincestesoeticanoonenste
Attachment—Affidavit of Walter J. Devlin in
ett I 6
Attachment—Affidavit of D. L. Street in sup-
I A a ai antec herkdpiieshinceereniicsedsind
Attachment—Affidavit of R. R. Herrmann, Jr.,
in support of motion -
Attachment—Affidavit of Ira R. Schattman,
Jr., in support of motion
Attachment— Affidavit of Frank T. Hyppes iz in
support of motion
Appendix A—Chart showing changes in con-
sumer consumption, New York State
Distilled Spirits, Percentage Change, 1954
vs. 1963
Original Print
55
126
183
194
201
207
213
219
227
236
239
251
53
124
181
249
INDEX lii
Original Print
Record from the Supreme Court of the State of
New York, County of Albany—Continued
Order to show cause—Continued
Attachment—Affidavit of Frank T. Hypps in
support of motion—Continued
Appendix B—List showing comparison of
leading whisky brands, 1954 vs. 1963 ____. 252 250
Appendix C—Report entitled Distilling Com-
panies included in Studies of First Na-
tional City Bank, New York, New York
(Average Annual Percentage Rates of
Net Income after Taxes to Net Assets of
Leading Manufacturing Corporations,
BOE pants acknteitnignadsccceannbea stein 254 252
Appendix D—Reports entitled Annual Sur-
vey of Operations, 1963, prepared by the
School of Commerce and Finance, St.
Louis University, for Wine and Spirits
Wholesalers of America, Ine. for the fol-
lowing locations:
EER Ce Se te Fo Bee 260 258
he Le Car eaen ae a 267 265
SINE apis aii Seihca sca gadoaincnperbicninsaetla clio 275 273
Dene 283 281
DU aS ee as 293 291
Attachment—Affidavit of do Goodman in
support of motion 300 298
Attachment—Affidavit of mere Ww. ‘Mine | in
support of motion, with two Revenue Rul-
ings attached CW ERNE 8, NR aoe loool ae 302 300
Attachment—Affidavit of Ch.ster F. Me-
Namara in support of motion — __- 306 303
Attachment—Affidavit of Charles W. Sand i in
support of motion... 307 305
Attachment—Affidavit of William Steinberg
ng” eal ionete ee 309 306
NIN gh a ee ee ek ve 310 307
INDEX
Original Print
Record from the Supreme Court of the State of
New York, County of Albany—Continued
Defendants’ notice of motion to dismiss motion
for temporary injunction and for a temporary
restraining order pending the hearing and {
determination of the motion for a temporary d
injunction .. saa 312 308 i
Attachment—Affidavit of Ruth Eade ‘Toch
in support of motion eats 313 309
Attachment—Affidavit of William E. Phillips
in support of motion —. . __ 315 311
Affidavit of John F. O’Connell in : opposition to
defendants’ motion to dismiss complaint —. 319 315
I Is 325 320
I Nailed ctctetpcitgudeniirtechcn Iacnipsiiehaeoscttesicrsoysiteeptaioceth 338 332
Judgment we 342 335
Notice of appeal - = 343 336 }
Record from the Saareme ‘Court. of ‘the State of
New York, Appellate Division, Third Judicial
| BRE a ETRE a eT eT 344 337
GIN asc scneccsmcesniiincioinananne 344 337
Order of affirmance and granting leave to appeal
to the Court of Appeals _- < 348 340
Certification pursuant to CPLR, Section 2105. 350 341
Proceedings in the Court of Appeals of the State :
_< jaan an ; 351 342
I I, le nei ipticadices 351 342
RP AEN Pe eT 361 355
I i I sic ahapc en cssinnsnisnsiasninenhcininlsicndl 365 357
Notice of appeal to the Supreme Court of the
United States ae 367 359
Order noting probable jurisdiction = 371 362
IN THE SUPREME COURT
OF THE STATE OF NEW YORK
COUNTY OF ALBANY
Index No. 6127-64
JosePH FE. Seacram & Sons, Inc., THe House or SeacraM,
Inc., StrrzeL-WELLER Distituery, Inc., THe PappineTon
Corporation, Hiram WaLKeER, INcoRPORATED, GOODERHAM
& Worts, Lruitep, Jas. Barctay & Co., Limirep, W. A.
TayLor & Company, Hiram Waker Distrisutors, INc.,
THe American Distitutinc Company, McCormick Dis-
TILLING Company, THE FLEISCHMANN DistILLinG Corpo-
RATION, Mr. Boston Distiuier, Inc., THe Vixine Dis-
TILLERY, Inc., JAMES B. Beam Distitiinc Comrany, JAMES
B. Beam Import Corporation, SCHENLEY INDUSTRIES,
Inc., AFFILIATED DistiLLers Branps Corp., KNICKER-
BOCKER Liquors Corp., Barton DisTiLLinc Company,
Barton Distitters Import Corporation, JuLius WILE
Sons & Company, Inc., Bacarpi Imports, Inc., Austin
NicHots & Company, Inc., Canapa Dry Corporation,
Hevsern, Inc., McKesson & Rospins, Inc., NatTionaL
DiIsTILLERS AND CHEMICAL CorPoRATION, PusBLIcKER Dts-
TILLERS Propucts, Ixc., WayNE Liquor Corp., Brown-
Forman DistILuers Corporation, GLENMORE DISTILLERIES
Company, A. Smita Bowan Distitiery, Inc., “21”
Branps, Inc., Star Hitt Distittinc Company, ScuHier-
FELIN & Company, ALPINE Wine & Liquor Corp., Ben
PrerLow Liquor Corp., Bison Liquor Co., Inc., BLUE
Crest WINE AnD Spirit Corp., Bonny Distrisutine Co.,
Inc., Capita, Distriputors Corp., CarpinaL Distrisu-
tors, Ixc., Cotony Liquor Distrisurors, Inc., DisTiLLEp
Branps, Inc., Eper Bros. Wine & Liquor Corp., ELMira
Topacco Co., Inc., Emprre Liquor Corp., Graves &
Roperrs, Inc., M. Licutman & Co., Inc., Mazor Liquor
Distrisutors, Inc., Monarcn Liquor Corp., MuLLen &
Gunny, Inc., Peertess Importers Corp., Ramapo WINE
& Liquor Corporation, RocHesterR Liquor Corporation,
Roncers Liquor Co., Ixc., S & K Wine & Liquor Corr.,
Stanparp Foop Propucts Corp., Stanparp Wine &
Liquor Co., Inc., Star Lypustries, Inc., UNIversan
Liquor Corp., Plaintiffs,
against
Donatp S. Hostetter, Chairman, Jonn C. Hart, WILLIAM
H. Morcan, Bensamin H. Batcom, Rosert HK. Doyie,
constituting the Stare Liquor AutuHority, and Lovuts J.
LerkowitTz, Attorney Genera! of the State of New York,
Defendants.
Summons—October 29, 1964
To the above named Defendants:
You are hereby Summoned to answer the complaint
this action and to serve a copy of your answer on the
Plaintiffs’ Attorneys within 20 days after the service of
this summons, exclusive of the day of service; and in case
[fol. 2] of your failure to appear or answer, judgment will
be taken against you by default for the relief demanded in
the complaint.
Dated: New York, New York, October 29, 1964.
Lord, Day & Lord, Attorneys for Plaintiffs, Office
and Post Office Address: 25 Broadway, Borough
of Manhattan, City of New York 10004.
EINE PE LE CNN ISS
In THE SupPpREME CouRT OF THE STaTE OF NEw York
County or ALBANY salads
CoMPLAINT
Plaintiffs, complaining of defendants by Lord, Day &
Lord, their attorneys, allege:
For a Separate and Distinct First Cause of Action:
1. Joseph E. Seagram & Sons Ine. is a foreign corpo-
ration organized and existing under the laws of the State
of Indiana, duly qualified to do business in the State of
New York.
2. The House of Seagram, Ine. is a foreign corporation
organized and existing under the laws of the State of
Delaware, duly qualified to do business in the State of New
York.
[fol.3] 3. Stitzel-Weller Distillery is a foreign corpora-
tion organized and existing under the laws of the State of
Kentucky.
4. The Paddington Corporation is a domestic corpora-
tion organized and existing under the laws of the State
of New York.
5. Hiram Walker Incorporated is a foreign corporation
organized and existing under the laws of the State of Dela-
ware, duly qualified to do business in the State of New
York.
6. Gooderham & Worts Limited is a foreign corporation
organized and existing under the laws of the State of
Delaware, duly qualified to do business in the State of
New York.
7. Jas. Barclay & Co., Limited is a foreign corporation
organized and existing under the laws of the State of
Delaware, duly qualified to do business in the State of
New York.
OES SARC OLS RATA
8. W. A. Taylor & Company is a domestic corporation
organized and existing under the laws of the State of
New York.
9. The American Distilling Company is a foreign corpo-
ration organized and existing under the laws of the State
of Maryland, duly qualified to do business in the State of
New York.
10. McCormick Distilling Company is a foreign corpo-
ration organized and existing under the laws of the State
of Missouri.
11. The Fleischmann Distilling Corporation is a do-
mestic corporation organized and existing under the laws
of the State of New York.
[fol.4] 12. Mr. Boston Distiller Inc. is a foreign corpo-
ration organized and existing under the laws of the State
of Massachusetts, duly qualified to do business in the State
of New York.
13. The Viking Distillery, Inc. is a foreign corporation
organized and existing under the laws of the State of »
Georgia.
14. James B. Beam Distilling Company is a foreign
corporation organized and existing under the laws of the
State of Illinois.
15. James B. Beam Import Corporation is a domestic
corporation organized and existing under the laws of the
State of New York.
16. Schenley Industries Inc. is a foreign corporation
organized and existing under the laws of the State of
Delaware, duly qualified to do business in the State of
New York.
17. Affiliated Distillers Brands Corp. is a domestic cor-
poration organized and existing under the laws of the
State of New York.
pictiiaclaialiiaa
5
18. Knickerbocker Liquors Corp. is a domestic corpo-
ration organized and existing under the laws of the State
of New York.
19. Barton Distilling Company is a foreign corporation
organized and existing under the laws of the State of
Delaware.
20. Barton Distillers Import Corporation is a domestic
corporation organized and existing under the laws of the
State of New York.
21. Julius Wile Sons & Company, Ine. is a domestic cor-
poration organized and existing under the laws of the
State of New York.
[fol.5] 22. Bacardi Imports, Ine. is a domestic corpo-
ration organized and existing under the laws of the State
of New York.
23. Austin Nichols & Company, Inc. is a foreign corpo-
ration organized and existing under the laws of the State
of Virginia, duly qualified to do business in the State of
New York.
24. Canada Dry Corporation is a foreign corporation
organized and existing under the laws of the State of
Delaware, duly qualified to do business in the State of
New York.
25. Heublein Inc. is a foreign corporation organized and
existing under the laws of the State of Connecticut, duly
qualified to do business in the State of New York.
26. McKesson & Robbins, Ine. is a foreign corporation
organized and existing under the laws of the State of
Maryland, duly qualified to do business in the State of
New York.
27. National Distillers and Chemical Corporation is a
foreign corporation organized and existing under the laws
of the State of Virginia, duly qualified to do business in
the State of New York.
28. Publicker Distillers Products, Inc. is a foreign cor-
poration organized and existing under the laws of the
State of Delaware, duly qualified to do business in the
State of New York.
29. Brown-Forman Distillers Corporation is a foreign
corporation organized and existing under the laws of the
State of Delaware, duly qualified to do business in the
State of New York.
30. Glenmore Distilleries Company is a foreign corpo-
ration organized and existing under the laws of the State
of Delaware, duly qualified to do business in the State of
New York.
{fol.6] 31. A. Smith Bowman Distillery Ine. is a foreign
corporation organized and existing under the laws of the
State of Virginia.
32. “21” Brands Inc. is a domestic corporation organized
and existing under the laws of the State of New York.
33. Star Hill Distilling Company is a foreign corpora-
tion organized and existing under the laws of the State
of Kentucky, duly qualified to do business in the State of
New York.
34. Schieffelin & Company is a domestic corporation
organized and existing under the laws of the State of New
York.
35. Defendants Donald S. Hostetter, John C. Hart, Wil-
liam H. Morgan, Benjamin H. Balcom and Robert E.
Doyle are commissioners of the State Liquor Authority
duly appointed by the Governor of the State of New York
charged with the responsibility of administering the Al-
coholic Beverage ‘Control Law including the implementa-
tion of said Alcoholic Beverage Control Law by the pro-
mulgation of rules and regulations for the purpose of ef-
fecting said law.
36. Defendant Louis J. Lefkowitz is the Attorney Gen-
eral of the State of New York, the Chief Legal Officer of
7
the State of New York, and as such is charged with the
enforcement of the provisions of the Alcoholic Beverage
Control Law.
37. The above-listed plaintiffs are distillers, importers,
or wholesalers designated as agents of distillers of liquor
which is sold in New York.
38. In an extraordinary session, the Legislature of the
State of New York enacted Chapter 531 of the Laws of
1964 by which it amended the Alcoholic Beverage Con-
trol Law in several respects. (A copy of Chapter 531 here-
[fol. 7] inafter called “The New Act” is attached hereto as
Exhibit “A”. Section references herein are to sections of
Chapter 531. Subdivision and paragraph references bear
identifying labels accorded them as they will appear in
Section 101-b of the Alcoholic Beverage Control Law as
that law has been amended by Chapter 531, but are de-
scribed herein as if subdivisions of the sections of Chapter
531 in order to facilitate reference to Exhibit “A”).
39. Section 101 b-3 of the Alcoholic Beverage Control
Law, as amended by The New Act, requires that for all
brands of liquor or wine sold to or purchased by a whole-
saler in New York, there must be filed with the State
Liquor Authority by:
“(1) the owner of such brand, or (2) a wholesaler
selling such brand and who is designated as agent for
the purpose of filing such schedule if the owner of the
brand is not licensed by the authority, or (3) with
the approval of the authority, by a wholesaler, in the
event that the owner of the brand is unable to file a
schedule or designate an agent for such purpose.”
schedules of prices to wholesalers for such brands. The
Alcoholic Beverage Control Law fails to provide an exact
definition of “the owner of such brand”. Section 101-b of
the Aleoholic Beverage Control Law further requires that
for all brands of liquor or wine sold to or purchased by re-
8
tailers in New York State, a schedule of prices for such
brands must be filed with the State Liquor Authority by
“each manufacturer selling such brand to retailers and by
each wholesaler selling such brand to retailers”. Each
schedule must be filed on or before the tenth day of each
month (see paragraph 4 of Section 7 of The New Act).
The prices and discounts set forth in such schedules be-
come effective on the first day of the calendar month fol-
lowing the filing thereof and shall be in effect for such cal-
endar month.
[fol.8] 40. The New Act in Section 9 (Exhibit “A”, pp.
8-10) significantly expands upon the former requirements
of Section 101-b, subdivision 3, pertaining to the filing of
price schedules, by adding eight entirely new paragraphs
(paragraphs (d) through (k)) to that subdivision.
41. Paragraph (d) of Section 9 of The New Act (Ex-
hibit “A”, p. 8) requires that a brand owner or wholesaler
designated as agent must file an “affirmation” verified by
the brand owner or wholesaler designated as agent, that
the price listed on the schedule of prices to wholesalers
(at which liquor is sold to New York wholesalers) is no
higher than the lowest price at which the same item of
liquor was sold by them or by any “related person” to any
wholesaler, anywhere in any other state of the United
States or in the District of Columbia during the preceding
calendar month.
42. Paragraph (f) of Section 9 of The New Act (Ex-
hibit “A”, p. 9) incorporates an affirmation requirement
similar to that found in paragraph (d), in requiring from
a brand owner or a wholesaler designated as agent, an
affirmation verified by the brand owner or wholesaler des-
ignated as agent that the price at which liquor is sold by
a brand owner, wholesaler designated as agent, or a “re-
lated person” to retailers in New York State is no higher
than the price at which the same item of liquor was sold
to retailers in any other state of the United States (other
9
than “monopoly stetes”, states which themselves or
through state agenci's own and operate retail liquor
stores) or in the District of Columbia during the pre-
ceding calendar month. Paragraph (f) does not specify
who is to file the affirmation.
43. “Related person” is defined in paragraphs (d) and
(f£) of Section 9 of The New Act as:
“any person (1) in the business of which such brand
owner or wholesaler designated as agent has an inter-
[fol.9] est, direct or indirect, by stock or other se-
curity ownership, as lender or lienor, or by interlock-
ing directors of officers, or (2) the exclusive, principal
or substantial business of which is the sale of a brand
or brands of liquor purchased from such brand owner
or wholesaler designated as agent, or (3) which has
an exclusive franchise or contract to sell such brand
or brands.”
44. Paragraph (e) of Section 9 of The New Act (Ex-
hibit “A”, p. 8) imposes an affirmation filing requirement
similar to that found in paragraph (d) but applies it to the
filing of “any other schedule” of prices to wholesalers.
Here the affirmation must be made and verified by the per-
son filing the schedule. Paragraph (e) requires that the
person filing “any other schedule” has not sold at a lower
price in any other state. It does not contain any provi-
sions relative to sales by “related persons”.
45. Paragraph (g) of Section 9 of The New Act (Ex-
hibit “A”, p. 9) follows the form of paragraph (e) in re-
quiring that an affirmation must accompany “any other
schedule” of prices.to retailers. The affirmation must be
made and verified by the person filing the schedule.
46. As paragraphs (e) and (g) are interpreted by
State Liquor Authority Rule 16, 465.7 as amended effective
October 31, 1964, such paragraphs apply only to schedules
of prices for sales to wholesalers and retailers where the
sales are made by persons who are not “related persons”
10
as that term is defined by paragraphs (d) and (f) of Sec-
tion 9 of The New Act.
47. Paragraph (i) of Section 9 of The New Act (Ex-
hibit “A”, pp. 9-10) requires that in determining what is
the lowest price at which an item of liquor was sold in an-
other state, appropriate reductions must be made to in-
clude all discounts, rebates, free goods, allowances and
[fol. 10] other inducements of any kind whatsoever offered
or given to wholesalers or retailers in such other state.
However, in computing the lowest price, reductions need
not be made where price differentials make only due al-
lowance for differences in state gallonage taxes or dif-
ferentials in the actual cost of delivery.
48. The New Act does not include vintners and whole-
salers of wine as persons required to file affirmations and
verifications in accordance with the provisions of para-
graphs (d) through (g) of Section 9 of The New Act.
49. Paragraph 3(c) of Section 7 of The New Act (Ex-
hibit “A”, p. 6) exempts from the filing and affirmation re-
quirements described above a brand of liquor which is
owned exclusively by one retailer and sold at retail within
the state exclusively by such retailer. Such brands are
hereinafter referred to as “private labels”.
50. Paragraph (j) of Section 9 of The New Act (Ex-
hibit “A”, p. 10) makes it a misdemeanor for any person
to make a false statement in any affirmation filed pursu-
ant to the Act. Upon conviction a person may be fined
up to $10,000 and imprisoned for up to a period of six
months.
51. Paragraph 6 of Section 7 of The New Act grants to
the State Liquor Authority the power to cancel, suspend
or revoke a license for failure to comply in any manner
with any of the provisions of Section 101-b as amended by
The New Act. The Author.ty is also permitted by para- |
graph (k) of Section 9 of The New Act to refuse to accept,
for a period not exceeding three calendar months, any af-
11
firmation required to be filed by a person who has been
convicted of making a false statement in any affirmation.
52. Paragraph (h) of Section 9 of The New Act (Ex-
hibit “A”, p. 9) prohibits sales in New York of any brands
for which an affirmation has not been filed.
[fol.11] 53. Section 9 of The New Act violates the Arti-
cles of the Constitution of the State of New York, and the
Articles of the Constitution of the United States, by de-
priving plaintiffs of liberty and property without due proc-
ess of law in that:
(a) Distillers and wholesalers will be severely injured
by being compelled to sell in New York State at artificial
prices, irrespective of marketing conditions, net profit mar-
gins, cost of doing business in New York as compared to
other states, and other factors which distinguish New York
from other markets;
(b) In attempting compliance with the requirements of
Section 9 of The New Act, plaintiffs will be compelled to
reorganize completely their sales methods and accounting
procedures, and/or institute entirely new communication
and price recording machinery ;
(c) The affirmation and verification provisions of Sec-
tion 9 of The New Act, enforced conjunctly with various
price posting requirements in other states. may operate
to permanently prevent distillers and wholesalers desig-
nated as agents from at any time in the future increasing
the price of brands sold by them to the New York whole-
salers and in any event will unjustifiably accord New York
purchasers the benefit of lower prices for two or more
months after a price increase has become effective in other
states. These unreasonable results will be effected even
though, due to increased costs or other factors, there may
be a perfectly justifiable reason to increase the price;
(d) Persons who satisfy the definition of “related per-
son” described in paragraphs (d) and (f) of Section 9 of
The New Act would be disabled from competing with local
—
12
wholesalers in states other than New York and disabled
from competing with distillers and importers who sell
brands not sold in New York State. Non-related local
wholesalers in states other than New York could for any
[fol. 12] competitive reason conduct special local discount
sales campaigns and grant allowances and inducements
without fear that such campaigns might drive down the
price at which the same brand is sold to retailers in New
York State. Distillers and importers selling brands not
sold in New York could, as to those “non-New York
brands”, compete with complete freedom in a non-New
York market. A distiller or importer in that same market
who sells competitive brands which are also sold in New
York would have to consider the effect upon his New York
price before responding to competitive pressures in the non-
New York market. The effect of The New Act upon dis-
tillers, importers and wholesalers outside New York who
nevertheless qualify as “related persons” will be to destroy
or severely hamper their competitive position in their own
local markets even though they may be completely remote
from New York State.
54. Section 9 of The New Act is an arbitrary, capricious
and unreasonable exercise of the state’s police power for
the following reasons:
(a) The term “related person” found in paragraphs (d)
and (f) of Section 9 of The New Act (Exhibit “A”, pp.
8, 9) is so vague that distillers, importers and wholesalers
designated as agents are unable to determine what per-
sons both within and without New York State satisfy this
definition and therefore must be taken into account in fur-
nishing the affirmations required by The New Act:
(b) Even if distillers, importers and wholesalers desig-
nated as agents could determine who is a “related person”
they would have no power to compel such “related person”
to furnish them with information as to the prices at which
they sell their products in states other than New York;
. a
[fol.13] (ce) Paragraph (i) of Section 9 of The New Act
(Exhibit “A”, pp. 9, 10) unreasonably limits price differen-
tials to state “gallonage” taxes or fees. It does not in-
clude differentials for taxes imposed on a “per case basis”.
Nor does it permit differentials based upon a state sales
or gross receipts tax;
(d) It is impossible for many distillers, importers and
wholesalers designated as agents to determine the prices
in any given month at which brands sold by them in New
York are sold to wholesalers throughout the United States
and the District of Columbia;
(e) It is impossible for distillers, importers, wholesalers
designated as agents, or “related persons” to determine the
prices at which brands sold by them in New York are sold
to retailers throughout the United States and the District
of Columbia;
(f) It is impossible for distillers, wholesalers desig-
nated as agents, or “related persons” to determine what
is meant by “rebates, free goods, allowances and induce-
ments of any kind whatsoever” so as to be able to make
appropriate reductions in computing the lowest price for
such items as required by paragraph (i) of Section 9 of
The New Act.
55. Section 9 of The New Act is inconsistent with the
declared policy of the Alcoholic Beverage Control Law as
expressed in Sections 2 and 101 b-1 of that Law (repeated
again in Section 7 of Chapter 531, Exhibit “A”, p. 5), which
Sections declare it to be the policy of the State in enacting
such Law to promote temperance in the consumption of
alcoholic beverages. Section 2 of the Aleoholic Beverage
Control Law further states that these provisions of the
Law are enacted for the protection, health, welfare and
safety of the people of the state. The setting of maximum
prices bears no relationship to this purpose.
[fol.14] 56. Section 9 of The New Act will not serve to
cure the possibility of monopolistic and anti-competitive
14
practices (Exhibit “A”, Section 8, p. 8) at which The New
Act is directed.
57. Section 9 of The New Act contravenes the terms and
policy of the Sherman Act, 15 U.S. C. $1-7.
58. Section 9 of The New Act is in direct conflict with
the Robinson-Patman Act, 15 U. S. C. §13a, $13b, §21a,
in that:
(a) Section 9 establishes price controls upon distillers,
importers and wholesalers designated as agents whether
or not their pricing policies tend to lessen competition,
whereas the Robinson-Patman Act would permit such price
controls only where, without such controls, competition
among distillers, importers and wholesalers designated as
agents would be lessened ;
(b) Section 9 of The New Act fails to permit price dif-
ferentials permitted by the Robinson-Patman Act, such as
an adjustment of price to meet competition and an adjust-
ment of price where there is sufficient cost justification for
such a price;
(c) Section 9 would force distillers, importers and
wholesalers designated as agents, in violation of the
Robinson-Patman Act, to give discounts to purchasers in
New York State although there would be no cost justifica-
tion for such discounts and although such discounts would
not be necessary to meet competition.
59. For the reasons described in paragraphs 57 and 58
above, Section 9 of The New Act directly conflicts with Fed-
eral Antitrust Laws and therefore must yield to the suprem-
acy of such laws as required by Article VI of the Constitu-
tion of the United States.
[fol.15] 60. Section 9 of The New Act violates the Arti-
cles of the Constitution of the United States by interfering
with commerce among the states in that:
(a) The only practical way by which distillers, import-
ers and wholesalers designated as agents can gather and
15
insure the reliability of information necessary to make the
affirmations, is to establish and to control the price at
which their brands are sold in all other states. This the
plaintiffs could not do for in many states they would be
violating the laws of those states and in any event they
would be violating federal antitrust laws;
(b) Section 9 of The New Act is extraterritorial in its
effect in regulating contracts which are made and are to
be executed wholly beyond the boundaries of New York
State;
(c) Section 9 of The New Act attempts to bestow an
economic advantage upon the citizens of the State of New
York at the expense of out-of-state vendors of liquor;
(d) As described in paragraph 53(c) of this complaint,
distillers, importers and wholesalers designated as agents
may be unable at any time to increase the price at which
they sell their brands in New York State and in any event
will be compelled to accord New York purchasers the pre-
existing lower prices for a period of two or more months
after a general price increase goes into effect.
61. Section 9 of The New Act violates the Articles of
the Constitution of the State of New York and the Articles
of the Constitution of the United States by discrimina-
torily imposing maximum price limitations upon sales
made by distillers, importers and wholesalers dealing in
national brands of liquor, while failing to impose such
limitations upon:
[fol.16] (a) sales made by persons dealing in liquor sold
under “private labels”;
(b) sales made by vintners and wholesalers of wine.
62. Paragraph 3.(a) of Section 7 of The New Act re-
quires that no brand of liquor shall be sold to or pur-
chased by a wholesaler irrespective of the place of sale
or delivery unless a schedule as provided in that section
is filed with the State Liquor Authority and is then in
16
effect. Such schedule must contain, among other things,
“the net bottle and case price paid by the seller”.
63. Paragraph 3.(a) of Section 7 of The New Act (Ex-
hibit “A”, p. 6) violates the Articles of the Constitution of
the United States in that:
(a) By requiring schedules for sales “irrespective of the
place of sale or delivery”, paragraph 3.(a) interferes with
commerce among the states and interferes with foreign
commerce by requiring schedules to be filed in New York
State by distillers, importers and wholesalers designated
as agents as to the prices at which they sell brands in any
other state whether or not such distiller also cells such
brands in New York;
(b) By requiring schedules to contain the “net bottle
and case price paid by the seller”, paragraph labeled 3.(a)
deprives plaintiffs of property without due process of law
and is an arbitrary, capricious and unreasonable exercise
of the state’s police power. This requirement of paragraph
3.(a) in no way serves to carry out the policy of the Al-
coholie Beverage Control Law as expressed in Section 2 of
that Law.
For a Separate and Distinct Second Cause of Action:
64. Alpine Wine & Liquor Corp. is a domestic corpora-
tion organized and existing under the laws of the State of
New York.
[fol.17] 65. Ben Perlow Liquor Corp. is a domestic cor-
poration organized and existing under the laws of the State
of New York.
66. Bison Liquor Co., Ine. is a domestic corporation or-
ganized and existing under the laws of the State of New
York.
67. Blue Crest Wine and Spirit Corp. is a domestic
corporation organized and existing under the laws of the
State of New York.
17
68. Bonny Distributing Co., Inc. is a domestic corpora-
tion organized and existing under the laws of the State of
New York.
69. Capital Distributors Corp. is a domestic corporation
organized and existing under the laws of the State of New
York.
70. Cardinal Distributors Ine. is a domestic corporation
organized and existing under the laws of the State of New
York.
71. Colony Liquor Distributors, Inc. is a domestic cor-
poration organized and existing under the laws of the State
of New York.
72. Distilled Brands Ine. is a domestie corporation or-
ganized and existing under the laws of the State of New
York.
73. Eber Bros. Wine & Liquor Corp. is a domestic cor-
poration organized and existing under the laws of the
State of New York.
74. Elmira Tobacco Co., Ine. is a domestic corporation
organized and existing under the laws of the State of New
York.
75. Empire Liquor Corp. is a domestic corporation or-
ganized and existing under the laws of the State of New
York.
[fol.18] 76. Graves & Rodgers, Ine. is a domestic corpo-
ration organized and existing under the laws of the State
of New York.
77. M. Lichtman & Co., Ine. is a domestic corporation
organized and existing under the laws of the State of New
York.
78. Major Liquor Distributors Inc. is a domestie corpo-
ration organized and existing under the laws of the State
of New York.
18
79. Monarch Liquor Corp. is a domestic corporation or-
ganized and existing under the laws of the State of New
York.
80. Mullen & Gunn, Ine. is a domestic corporation or-
ganized and existing under the laws of the State of New
York.
81. Peerless Importers Corp. is a domestic corporation
organized and existing under the laws of the State of New
York.
82. Ramapo Wine & Liyuor Corporation is a domestic
corporation organized and existing under the laws of the
State of New York. :
83. Rodgers Liquor Co., Inc. is a domestic corporation
organized and existing under the laws of the State of New
York.
84. S & K Wine & Liquor Corp. is a domestic corpora-
tion organized and existing under the laws of the State of
New York.
85. Standard Food Products Corp. is a domestic corpo-
ration organized and existing under tke laws of the State
of New York.
[fol.19] 86. Standard Wine & Liquor Co. Ine. is a domes-
tic corporation organized and existing under the laws of
the State of New York.
87. Star Industries Inc. is a domestic corporation or-
ganized and existing under the laws of the State of New
York.
88. Universal Liquor Corp. is a domestic corporation
organized and existing under the laws of the State of New
York.
89. The above plaintiffs listed in paragraphs 64 through
88 are wholesalers selling liquor to retailers within New
York State and may be held to satisfy the definition of
“related persons” in paragraph (f) of The New Act.
19
90. Plaintiff New York wholesalers reallege each and
every allegation contained in paragraphs numbered 35, 36,
38 through 52, 53(a) (b), 54(a) (c), 55, 56, 57, 58(a) (b),
59 and 61 of this complaint with the same force and effect
as if fully set forth herein.
91. Paragraph (f) of Section 9 of The New Act vio-
lates the Articles of the Constitution of the State of New
York and the Articles of the Constitution of the United
States in depriving New York wholesalers of liberty and
property without due process of law in that New York
wholesalers who may be “related persons” will be severely
injured by being compelled to sell to retailers at artificial
prices, irrespective of marketing conditions, net profit
margins, and other factors which distinguish New York
from other markets. In this respect the statute would vest
complete control of New York wholesalers’ prices in the
hands of any one of thousands of wholesalers throughout
the United States.
92. Section 65.7 of Rule 16 of the State Liquor Author-
ity Rules and Regulaticns, as amended effective October
31, 1964, interprets paragraph (f) of Section 9 of The New
[fol. 20] Act as requiring the filing of affirmations of the
“wholesaler to retailer” price only as to sales by those New
York wholesalers who satisfy the definition of “related per-
sons” found in paragraph (f).
_ 93. As Section 65.7 of State Liquor Authority Rule 16
interprets The New Act, New York wholesalers will not
themselves be required to file affirmations, but if they qual-
ify as “related persons” will be prohibited from selling
brands in New York State until the brand owner or agent
has filed an affirmation and furnished them with a copy of
his affirmation.
94. Paragraph (f) of Section 9 of The New Act, for the
following reasons, is an arbitrary, capricious and unrea-
sonable exercise of the state’s police power:
20
(a) Paragraph (f) of Section 9 of The New Act, and
particularly the regulations of the State Liquor Authority
interpreting how that paragraph is to be applied, make a
New York wholesaler’s right to sell at any price he chooses
in New York State dependent upon whether or not he has
satisfied the definition of “related person”. If he is a “re-
lated person”, he will be prohibited from selling until an
affirmation has been filed by the brand owner or wholesaler
designated as agent.
(b) The definition of “related person” in paragraph (f)
of Section 9 of The New Act is so vague that New York
wholesalers are unable to determine if they are “related
persons” within the meaning of The New Act.
(c) New York wholesalers have no power to compel
brand owners or wholesalers designated as agents to file
the required affirmations. If a New York wholesaler is a
“related person” and affirmations pertaining to some
brands are not filed, he will be prohibited from selling
those brands during the period for which such affirmation
would have been in effect.
[fol.21] (d) With insufficient guidance from the defini-
tion of “related person” found in paragraph (f) of Section
9 of The New Act, New York wholesaiers are nevertheless
compelled to determine whether or not they are “related
persons”.
95. A New York wholesaler who is considered to be a
“related person”, as a practical matter, must insure that
the price at which he sells an item of liquor to retailers is
no higher than the price at which a person related to the
brand owner or a wholesaler designated as agent is selling
such item of liquor to retailers in other states. This will
require consultation between the brand owner or whole-
saler designated as agent on the one hand and the whole-
saler who is a “related person” on the other to make the
affirmation required by paragraph (f) of Section 9 of The
New Act which is likely to cause unwitting violations of
21
the laws of New York and of other states and of the federal
antitrust laws.
96. Paragraph (g) of Section 9 of The New Act violates
the Articles of the Constitution of the State of New York
and the Articles of the Constitution of the United States
in that it is so vague and indefinite that plaintiff New
York wholesalers cannot know whether or not they are
required to file affirmations as required by that paragraph.
97. State Liquor Authority Rule 16, §65.7, as amended
effective October 31, 1964, requires only persons who are
not “related persons”, as that term is defined in paragraph
(f) of Section 9 of The New Act, to file affirmations pur-
suant to paragraph (g). Rule 16 also requires that a
“representation” must be given by a person filing an affir-
mation pursuant to paragraph (g) that he is not a “related
person”.
98. If the State Liquor Authority’s interpretation of
paragraph (g) of Section 9 of The New Act is correct, a
[fol. 22] person signing an affirmation pursuant to para-
graph (g) may be criminally prosecuted if he innocently
misdefines his company as not being a “related person”.
For a Separate and Distinct Third Cause of Action:
99. Hiram Walker Distributors Inc. is a domestic cor-
poration organized and existing under the laws of the
State of New York.
100. Julius Wile Sons & Company, Ine. is a domestic
corporation organized and existing under the laws of the
State of New York.
101. The Paddington Corporation is a domestic corpora-
tion organized and existing under the laws of the State of
New York.
102. National Distillers and Chemical Corporation is a
foreign corporation organized and existing under the laws
22
of the State of Virginia, duly qualified to do business in
the State of New York.
103. Knickerbocker Liquors Corp. is a domestic cor-
poration organized and existing under the laws of the State
of New York.
104. Wayne Liquor Corp. is a foreign corporation or-
ganized and existing under the laws of the State of Dela-
ware, duly qualified to do business in the State of New
York.
105. Plaintiffs listed in paragraphs 99, 100, 101, 102,
103 and 104 are persons selling directly to retailers within
New York State in whom a brand owner or wholesaler
designated as agent has an interest, direct or indirect.
These plaintiffs, therefore, are “related persons” within
the definition supplied by paragraph (f) of Section 9 of
The New Act.
[fol. 23] 106. Plaintiff “related person” New York whole-
salers reallege each and every allegation contained in para-
graphs of this complaint numbered 35, 36, 38 through
52, 53(a) (b), 54(a) (ce), 55, 56, 57, 58(a)(b), 59, 61, 91, 92,
93 and 94(a), with the same force and effect as if fully set
forth herein.
107. Paragraph (f) of Section 9 of The New Act violates
the Articles of the Constitution of the State of New York
and the Articles of the Constitution of the United States
in that it deprives the above-described plaintiffs of equal
protection of the laws by imposing maximum price limita-
tion upon sales of certain brands by these “related person”
New York wholesalers while failing to impose similar re-
strictions upon sales of the same brands by “non-related
person” New York wholesalers.
For a Separate and Distinct Fourth Cause of Action:
108. The American Distilling Company, Austin Nichols
& Company, Inc., Bacardi Imports, Inc., Barton Distilling
_—
23
Company, Brown-Forman Distillers Corporation, Canada
Dry Corporation, The Fleischmann Distilling Corporation,
Glenmore Distilleries Company, James B. Beam Distilling
Company, McCormick Distilling Company, Mr. Boston
Distiller, Inc., National Distillers and Chemical Corpora-
tion, Schenley Industries, Inc., Joseph E. Seagram & Sons,
Inc., Star Hill Distilling Company, Stitzel-Weller Dis-
tillery, Inc., W. A. Taylor & Company and “21” Brands,
Inc., are persons who manufacture and bottle liquor, ree-
tify and bottle liquor, or import liquor in bulk from foreign
sources and bottle it domestically.
109. Plaintiffs listed in paragraph 108 above reallege
each and every allegation contained in paragraphs num-
bered 1, 2, 3, 4, 6, 7, 8, 13, 14, 16, 19, 21, 22, 23, 26, 28, 31
through 52 of this complaint with the same force and effect
as if fully set forth herein.
[fol.24] 110. Paragraph 3(a) of Section 7 of The New
Act requires that no brand of liquor shall be sold to or
purchased by a wholesaler unless a schedule as provided in
that section is filed with the State Liquor Authority and
is then in effect. Such schedule must contain among other
things “the net bottle and case price paid by the seller”.
111. Paragraph 3(a) of Section 7 of The New Act vio-
lates the Articles of the Constitution of the State of New
York and the Articles of the Constitution of the United
States in that it arbitrarily, capriciously and unreasonably
requires manufacturers and bottlers of liquor as well as
importers of liquor in bulk to file a bottle and case price
at which they purchased such liquor, when in fact no such
price exists and compliance is therefore impossible.
112. Rule 16, $65.69, of the State Liquor Authority Rules
and Regulations, as amended effective October 31, 1964,
attempts in part to cure the above defect by excluding
manufacturers from those required to furnish the “net
bottle and case price paid by the seller”.
24
113. The State Liquor Authority has no legislative au-
thority to cure the defect of paragraph 3.(a) of Section 7
of The New Act. Manufacturers of liquor and importers
of liquor in bulk may nevertheless be bound by the plain
language of the requirement .of paragraph 3.(a) even
though compliance by them will be impossible.
114. If the plaintiffs described above fail to furnish
their non-existent “net bottle and case price paid by the
seller” for brands which they manufacture or import in
bulk, they will be prohibited by paragraph 3.(a) from sell-
ing those brands in New York State.
Wherefore, plaintiffs state that they have no adequate
remedy at law, and demand judgment against the defend-
ants:
[fol. 25] (a) Decreeing and declaring that the pro-
visions of Section 9 New York Session Laws, 1964,
- Ch. 531, are unconstitutional and void.
(b) Decreeing and declaring that that part of para-
graph 3.(a) of Section 7 New York Session Laws, 1964,
Ch. 531, requiring that the schedules of prices to whole-
salers contain the “net bottle and case price paid by
the seller”, is unconstitutional and void.
(c) Decreeing and declaring that that part of para-
graph 3 (a) of Section 7 New York Session. Laws,
1964, Ch. 531, requiring that “No brand of liquor or
wine shall be sold to or purchased by a wholesaler,
irrespective of the place of sale or delivery, unless a
schedule is filed” is unconstitutional and void insofar
as it may require schedules of prices of sales to whole-
salers in other states than New York.
(d) Enjoining and restraining the defendants and
their successors from imposing any sanctions or penal-
ties for failure to submit the affirmations and verifica-
tions required by Section 9 of Chapter 531 of the Laws
of 1964.
25
(e) Enjoining and restraining the defendaris and
their successors from imposing any sanctions or penal-
ties for failure to file the “net bottle and case price
paid by the seller” and for failure to fle schedules of
prices of sales to wholesalers in states other than
New York as required by Section 7 New York Session
Laws, 1964, Ch. 531.
[fol. 26] (f) Granting such other and further relief
as may be just and proper, together with the costs of
this action.
Lord, Day & Lord, Attorneys for Plaintiffs.
(Verified by Frederick J. Lind, Charles Guttman and
George Goldstein, October 27 and 28, 1964.)
[fol. 27]
In THE SuPREME CouRT OF THE STATE OF New YorkK
County or ALBANY
At Chambers
At a Special Term of the Supreme Court of the State of
New York, held in and for the County of Albany, at the
Court House, Albany, New York, on the 29 day of October,
1964.
Present: Hon. Justice.
OrpeR To SHow CAUSE
Upon reading and filing the annexed affidavit of Thomas
F. Daly, duly sworn to on the 28th day of October, 1964
and the annexed affidavits of Frederick J. Lind, R. R. Herr-
mann, Jr., Joseph D. Cotler, D. L. Street, Raymond Revit,
Walter J. Devlin, Ira R. Schattman, Jr., Frank T. Hypps,
Jack Goodman, Jack W. Marer, Chester F. McNamara,
and Charles W. Sand all duly sworn to and copies of the
summons and complaint hereto attached, let the defend-
iaads
26
ants, Donald S. Hostetter, John C. Hart, William H. Mor-
gan, Benjamin H. Baleom, Robert E. Doyle and Louis J.
Lefkowitz, show cause before one of the justices of this
Court, at a Special Term of this Court, held in and for the
County of Albany, at the Court House, Albany, New York,
on the 13th day of November, 1964, at the opening of court
on that day or as soon thereafter as counsel can be heard,
why an order should not be made and entered herein re-
straining the defendants, Donald S. Hostetter, John C.
Hart, William H. Morgan, Benjamin H. Balcom, Robert E.
Doyle and Louis J. Lefkowitz, pending the determination
of the issues in this action from:
1. Requiring plaintiffs to comply in any manner with
any part of Section 9, New York Session Laws, 1964, Ch.
531;
[fol. 28] 2. Requiring those plaintiffs who sell their
brands of liquor to wholesalers located in other states as
well as to wholesalers in the State of New York to file a
schedule of prices at which such liquor is sold to whole-
salers in states other than New York “irrespective of the
place of sale or delivery” as required by Section 7, New
York Session Laws, 1964, Ch. 531.
3. Requiring plaintiffs to include in their schedule of
prices filed pursuant to Section 101-b of the Alcoholic
Beverage Control Law the “net bottle and case price paid
by the seller” as required by Section 7, New York Session
Laws, 1964, Ch. 531; and it is further
Ordered, that in the meantime and until the hearing and
determination of this motion and the entry of an order
thereon, the defendants, Donald S. Hostetter, John C.
Hart, William H. Morgan, Benjamin H. Balcom, Robert
E. Doyle and Louis J. Lefkowitz be and they are hereby
stayed, enjoined and restrained from:
1. Requiring plaintiffs to comply in any manner with
any part of Section 9, New York Session Laws, 1964, Ch.
531.
27
2. Requiring those plaintiffs who sell their brands of
liquor to wholesalers located in other states as well as to
wholesalers in the State of New York to file a schedule of
prices at which such liquor is sold to wholesalers in states
other than New York “irrespective of the place of sale or
delivery” as required by Section 7, New York Session
Laws, 1964, Ch. 531.
3. Requiring plaintiffs to include in their schedule of
prices filed pursuant to Section 101-h of the Alcoholic Bev-
erage Control Law the “net bottle and case price paid by
the seller” as required by Section 7, New York Session
Laws, 1964, Ch. 531. é
[fol. 29] Sufficient reason appearing therefor, let service
of a copy of this order and the papers upon which it is
based upon the defendants on or before October 30, 1964,
at 4 P.M. be deemed good and sufficient service thereof.
Enter
Russell G. Hunt, J. S. C.
In THE SUPREME CouRT oF THE State or NEw York
County or ALBANY
ArFipavit or Tuomas F’, Daty, Reap 1x Support or Motion
State of New York,
County of New York, ss.:
Thomas F. Daly, being duly sworn, deposes and says:
1. I am a member of the firm of Lord, Day & Lord,
attorneys for the plaintiffs in the action and am fully
familiar with all the facts and circumstances involved in
this proceeding.
2. I make this affidavit in support of an application for
a preliminary injunction and for a temporary restraining
order pending the hearing and determination of the motion
for a temporary injunction.
28
3. The action seeks to have certain parts of Section 7
and the entirety of Section 9 of Chapter 531 of the Laws
of 1964 declared unconstitutional as being violative of the
commerce and supremacy clauses of the Constitution of
[fol. 30] the United States and violative of the due process
and equal protection clauses of the Constitution of the
State of New York and the United States.
4. Subdivisions 3(a) and (b) of Section 101-b of the
Aleoholic Beverage Control Law as amended by Section 7
of Chapter 531 provide for the filing of price schedules
with the State Liquor Authority of all brands sold in New
York to wholesalers or retailers.
~
5. Subdivisions (d) and (f) of Section 9 of Chapter 531
provide that for each brand of liquor sold in New York,
the owner of such brand or the wholesaler designated as
agent must, in addition to the aforesaid price schedules,
also file a verified affirmation that the “bottle and case price
of liquor to wholesalers” (or retailers) “is no higher than
the lowest price at which such item of liquor was sold by
such brand owner, such wholesaler designated as agent or
any related person to any wholesaler” (or retailer) “any-
where in any other state of the United States or the District
of Columbia * * *.”
6. Subdivision (i) of Section 9 of Chapter 531 says that
“in determining the lowest price * * * appropriate reduc-
tions shall be made to reflect all discounts in excess of those
to be in effect under such schedule, and all rebates, free
goods, allowances and other inducements of any kind what-
soever offered or given to any such wholesaler * * * or
retailer * * *.”
7. Subdivision (d) of Section 9 of Chapter 531 defines
“a related person” as “any person (1) in the business of
which such brand owner or wholesaler designated as agent
has an interest, direct or indirect, by stock or other security
ownership, as lender or lienor, or by interlocking directors
or officers, or (2) the exclusive, principal or substantial
29
business of which is the sale of a brand or brands of liquor
purchased from such brand owner or wholesaler designated
[fol. 31] as agent, or (3) which has an exclusive franchise
or contract to sell such brand or brands.”
8. These provisions of Chapter 531 become effective on
October 31, 1964, The State Liquor Authority in imple-
menting the law has recently promulgated, among others,
Rule 16 as amended, which likewise becomes effective on
October 31, 1964, It requires a brand owner, or its desig-
nated wholesale agent, to file the aforesaid duly verified
affirmation by December 1, 1964, showing the lowest price
at which a brand included in the schedule filed pursuant
to subdivisions 3(a) and (b) of Section 101-b was sold
in any other state or in the District of Columbia during
November 1964.
9. As appears from the moving affidavits, if its opera-
tion is not enjoined pending the testing of its constitu-
tionality, the law as implemented by the regulations will
require brand owners, importers and wholesalers who are
designated as agents of brand owners, in many instances
to reorganize entirely their sales and accounting staffs, to
establish price reporting procedures which must be able to
report accurately every price charged for each brand of
liquor during a monthly period, and to install or attempt
to install various other procedures in an effort to ascer-
tain the lowest price at which their brands were sold at
any time anywhere in the United States or the District of
Columbia during the month of November. These proce-
dures will not only be disruptive of the internal struc-
tures of many plaintiffs during the month of November,
which is the start of the high sales Christmas period,
but it will also involve considerable monetary expense in
its initiation. Because of the serious doubts as to the
constitutionality of Section 9 of Chapter 531, plaintiffs
should not be forced to bear this expense and organiza-
tional disruption.
[fol. 32] 10. In addition to being forced to enact severe
internal changes in November 1964, those plaintiffs who
30
must file price affirmations on December 1, 1964 will be
required to institute a completely new system of price
reporting which will involve an unknown number of whole-
salers throughout the United States. These “related per-
son” wholesalers must be contacted and asked to report
to the plaintiffs concerned the lowest price at which they
sold each of the brands of a particular distiller during the
month of November. The expense to plaintiffs in install-
ing this totally new system will be considerable, but they
also face injury in the form of loss of good will of inde-
pendent wholesalers who, for their own business reasons,
do not wish to divulge such information to plaintiffs.
11. As the moving affidavits submitted herein show, the
term “related persons” as defined in Chapter 531 is exceed-
ingly vague and none of the plaintiffs knows to whom it
will apply. Because of this there is a complete lack of
knowledge as to whether or not verified affirmations re-
quired by the Act should be filed with respect to sales
that are made throughout the country to a great number
of wholesalers and retailers.
12. So too, as pointed out in the moving affidavits, a
“related person” may and probably in most cases will be
completely independent of the wholesaler or the brand
owner, neither one of whom will be in a position to com-
pel, short of applying sanctions which would be prohibited
by Federal antitrust legislation, such “related persons” to
disclose to them the lowest price at which he has sold
their brands during a particular month.
13. It will also, in many instances be impossible to as-
certain the lowest price at which a particular brand is sold
in any month because of the vagueness that results from
the language of the statute concerning how the lowest price
for any given brand is to be determined. For instance,
[fol. 33] the phrase “other inducements of any kind whatso-
ever” is, as pointed out in the moving affidavits, completely
meaningless in assisting a brand owner or a wholesaler
designated as agent to arrive at a determination of the
31
price at which a particular brand is sold in any particu-
lar month. There are many practices which are not con-
sidered by the industry to be inducements but rather gen-
eral advertising and promotional expense which the State
Liquor Authority might say are inducements given and
thus must be reflected in the price. As also pointed out
in the moving affidavits, many of these promotions run
for more than a month so that even if their cost was to
be charged against a brand it would not be known until
sometime after the affirmation had to be made what the
actual charge against that brand should have been. For
the many reasons set forth in the papers herein, it is ex-
tremely doubtful whether anyone will be able to devise any
system which could be relied upon by November 1, 1964
or later to tell the person required to verify the affirma-
tion that the information contained upon which he is re-
lying is accurate and that the price quoted is, in fact,
the lowest price at which the brand referred to was sold
during the previous month.
14. As can readily be appreciated, the changes, the work,
the studies and the other moves that will be required in
an attempt to establish the price at which liquor was sold
throughout this country will be extensive, arduous and, in
many instances, futile ones. Furthermore, the gathering
of price information by plaintiffs in order to ascertain their
New York prices calls for private conduct which the
Sherman Act forbids.
15. Accordingly, no matter how extensive or expensive
the efforts of the people concerned may be, it is prob-
lematical whether the information thus obtained will be
reliable. As a result, they will be faced with the choice
[fol. 34] of not selling their brands ix New York or of
asking one of their officials to make a verified affirmation
knowing that he may be asked to verify unreliable or un-
trustworthy facts, thus individually incurring criminal
sanctions while his company may suffer the other penalties
imposed by law (see: Alcoholic Beverage Control Law,
Section 101-b-6; subdivisions [h] and [j] of Section 9 of
Chapter 531).
w —
32
16. Prior to the enactment of Chapter 531, the liquor
industry in the State of New York was the subject of a
Moreland Act Commission study. The aforesaid provi-
sions of Section 9 of Chapter 531 of the Laws of 1964,
to the -onstitutionality of which objections are being made
in this action, were contained in Senate Introductory No.
273 (annexed hereto as Exhibit “A”) introduced by Sena-
tor Zaretzki. At a public hearing held in Albany on
February 26, 1964, before the Joint Legislative Commit-
tee to Study the Alcoholic Beverage Control Law and the
Senate and Assembly Excise Committees, Senator Zaretzki
requested © Honorable Lawrence E. Walsh, Chairman
of the Moy .and Aci Commission, to furnish the Commit-
tees with certain additional information with respect to the
proposals contained in his bill, including the questioned
proposals which were eventually enacted into law. The
Moreland Act Commission, through its special counsel, Wil-
liam W. Golub, gave such information in a letter addressed
to Senator John J. Marchi, a copy of which is annexed
hereto as Exhibit “B.” In that letter Mr. Golub in remark-
ing on what are refer~ed to herein as the constitutionally
objectionable parts of the bill, said:
“There is substantial doubt as to the constitutionality
of the bill amended as indicated above. The distillers
have brought an-action to review the constitutionality
of a similar statute in Kansas. They contend that,
[fol. 35] in the light of the complicated economic is-
sues sought to be dealt with, the statute is too vague
and indefinite to satisfy due process requirements. In
addition, they contend that the statute violates the
commerce clause of the United States constitution be-
cause it is an attempt by one state to control national
pricing. A preliminary injunction restraining the en-
forcement of the statute was granted by a Kansas
court in June 1961 and is still in force.”
The Kansas case referred to is an unreported decision of
the Third Judicial District of Kansas, Topeka, Kansas,
—_
33
rendered May 7, 1964, which held a Kansas maximum
liquor pricing act similar to Section 9 of Chapter 531
unconstitutional because of violations of the commerce, due
process and equal protection clauses of the Constitution
of the United States and the due process and equal pro-
tection clauses of the Constitution of the State of Kansas.
17. The minutes of the aforesaid meeting of February
26th indicate that in response to questioning from Senator
Zaretzki, Judge Walsh indicated his doubts as to the con-
stitutionality of those provisions. He stated:
“Tf the provision were constitutional, if it were en-
forceable, you could save perhaps the distiller’s share
of that. But you couldn’t save the wholesaler’s and
retailer’s share and the consumer still wouldn’t get
his dollar back” (p. 37, Transcript of Minutes of Pub-
lic Hearing).
18. In response to further questioning from Senator
Zaretzki, Judge Walsh made the following additional state-
ment:
“This would be really a hopelessly unenforceable job.
It would mean that the New Yorker is supposed to
run around checking prices in 50 states, and the Anti-
[fol. 36] Trust Division of the Department of Justice
can’t do that, even with the F.B.I. to help them. I think
it would be really a vain effort. I mean the State
Liquor Authority has enough hopeless jobs to do with-
out giving it another one” (p. 38, Transcript of Min-
utes of Public Hearing).
19. Annexed hereto as Exhibit “C” are excerpts of the
pertinent parts of the transcript which Judge Walsh made
in the Stenographer’s Transcript of the Hearing.
20. In connection with this action for a temporary in-
junction, there are also annexed hereto as exhibits the
following:
——_
Exhibit “D’—Study Paper No. 5 entitled Resale
Price Maintenance in the Liquor Industry, dated
Octeber 28, 1963;
Exhibit “E”—Copy of Report and Recommendation
No. 3 entitled Mandatory Resale Price Mainte-
nance, dated January 21, 1964, containing the con-
clusions and recommendations of the Moreland
Act Commission relative to this proceeding ;
Exhibit “F”—Copies of the Governor’s Messages to
to the Legislature dated February 10, 1964, and
April 16, 1964.
21. Former Section 101-c of the Alcoholic Beverage
Control Law, as amended by Chapter 689 of the Laws
of 1950, provided for mandatory resale price maintenance
of liquor at the retail level. The mandatory resale price
was enforced by the State Liquor Authority. In short,
under the prior law, retailers could only sell to the pub-
lie at a price fixed by the distiller, and sales at such fixed
prices were enforced by the New York State Liquor Au-
thority.
22. The Moreland Act Commission arrived at the con-
clusion that this so-called mandatory price maintenance
[fol. 37] resulted in the New York consumer paying ap-
proximately $1.00 more a fifth than generally was paid
elsewhere in the country (see Exhibit “E,” p. 30) and
recommended repeal of the mandatory price fixing provi-
sions. Section 11 of the present law did so. In so doing,
the Legislature said (Section 8 of the present law): “En-
actment of Section 11 of this Act [i.e., the section repeal-
ing the mandatory price maintenance provisions of the
former law] will provide a basis for eliminating such dis-
er mination against and disadvantage of consumers in this
ste te.’ But the Legislature went on to say in Section 8
that the maximum price provisions of Section 9 of Chapter
531 are necessary “In order to forestall possible monopo-
listic and anti-competitive practices designed to frustrate
-
35
the elimination of such rmsd and disadvan-
tage * * * ”
23. In other words, the objectionable features of Chap-
ter 531 of the Laws of 1964 are not designed to correct a
situation which may lead to intemperance or a presently
existing social evil or to presently give the public the bene-
fits of open competition, but rather to forestall possible
monopolistic and anti-competitive practices not presently
in being, but which may occur in the future.
24. It is difficult, therefore, to see how any great in-
jury can be done to the State or to the people thereof
by suspending the operation of those sections of the law
objected to here pending the disposition of this action.
25. For all of the reasons stated in the moving affi-
davits, it is apparent that irreparable injury will be suf-
fered by the plaintiffs if a temporary injunction is not
granted pending the testing of the constitutionality of
those parts of the law which are objected to in this action.
26. For the reasons set forth above, it is respectfully
requested that pending the outcome and determination
of the motion for a temporary injunction, a stay of the
enforcement of the aforesaid provisions also be granted.
[fol. 38] 27. No previous application for the relief sought
herein has been made.
(Sworn to by Thomas F, Daly, October 28, 1964.)
36
Exuisir A, ANNEXED TO Arripavit or THomas F’. Daty
STATE OF NEW YORK
Print. 273 Intro. 273
IN SENATE
(Prefiled)
January 8, 1964
Introduced by Mr. ZaretzKi—read twice and ordered
printed, and when printed to be committed to the Com-
mittee on Excise
AN ACT
To amend the alcoholic beverage control law, in relation
to information to be contained in schedules of prices for
liquor and wine filed with the liquor authority.-
The People of the State of New York, represented m
Senate and Assembly, do enact as follows:
Section 1. Subdivision three of section one hundred
one-b of the alcoholic beverage control law is hereb~
amended by adding thereto a new paragraph, to be para-
graph (f), to read as follows:
[fol.39] (f) No manufacturer or wholesaler may file a
schedule pursuant to this section offering for sale any item
or brand which is offered for sale by such manufacturer or
wholesaler, or subsidiary thereof, in any jurisdiction m any
state of the United States at a price, excluswe of state
taxes, lower than offered in this state for the same period,
except that differentials may be made to allow for differ-
ences in actual costs of shipment f.o.b. place of origmal
warehouse.
37
Manufacturers and wholesalers shall at all times keep
upon their licensed premises a schedule of prices at which
the item or brand is being offered for sale throughout each
of the other states.
§2. This act shall take effect June first, nineteen hundred
sixty-four.
ExPLANATION—Matter in italics is new; matter in brackets
[ ] is old law to be omitted.
STATE OF NEW YORK
Print. 273, 4518 Intro. 273
IN SENATE
(Prefiled)
January 8, 1964
Introduced by Mr. ZarerzKi—read twice and ordered
printed, and when printed to be committed to the Com-
mittee on Excise—committee discharged, bill amended,
ordered reprinted, as amended and recommitted to said
committee
[fol. 40] AN ACT
To amend the alcoholic beverage control law, in relation
to information to be contained in schedules of prices
for liquor and wine filed with the liquor authority.
The People of the State of New York, represented in
Senate and Assembly, do enact as follows:
Section 1. Subdivision three of section one hundred one-b
of the alcoholic beverage control law is hereby amended by
adding thereto a new paragraph, to be paragraph (f), to
read as follows:
38
(f) No manufacturer or wholesaler may file a schedule
pursuant to this section offering for sale any item or brand
which is offered for sale by such manufacturer or whole-
saler, or subsidiary thereof, in any jurisdiction in any
state of the United States at a price, exclusive of state
taxes, lower than offered in this state for the same period,
except that differentials may be made to allow for differ-
ences in actual costs of shipment f.o.b. place of original
warehouse.
Manufacturers and wholesalers shall at all times keep
upon their licensed premises a schedule of prices at which
the item or brand is being offered for sale throughout each
of the other states and shall, from time to time as may be
necessary, file with the liquor authority, under oath, a state-
ment that the price at which each such brand or item is
being offered for sale in this state is as low as the lowest
price at which the same is being offered for sale in any other
state.
The liquor authority shall establish and from time to
time as may be necessary amend schedules establishing
maximum prices at which any item or brand may be sold
or offered for sale in this state at retail, which shall be
sufficient to provide the retailer a reasonable return and
at the same time protect the purchaser against excessive
and unreasonable retail prices.
[fol.41] §2. This act shall take effect June first, nineteen
hundred sixty-four.
ExpLanatTion—Matter in italics is new; matter in brackets
[ ] is old law to be omitted.
39
STATE OF NEW YORK
Print. 273, 4518, 4604 Intro. 273
IN SENATE
(Prefiled)
January 8, 1964
Introduced by Mr. ZarerzKi—read twice and ordered
printed, and when printed to be committed to the Com-
mittee on Excise—committee discharged, bill amended,
ordered reprinted, as amended and recommitted to said
committee—committee discharged, bill amended, ordered
reprinted as amended and recommitted to said committee
‘AN ACT
To amend the alcoholic beverage control law, in relation
to information to be contained in schedules of prices
for liquor and wine filed with the liquor authority.
The People of the State of New York, represented in
Senate and Assembly, do enact as follows:
Section 1. Subdivision three of section one hundred one-b
of the alcoholic beverage control law is hereby amended by
adding thereto a new paragraph, to be paragraph (f), to
read as follows:
[fol.42] (f) No manufacturer or wholesaler may file a
schedule pursuant to this section offering for sale any item
or brand which is offered for sale by such manufacturer
or wholesaler, or subsidiary thereof, in any jurisdiction in
any state of the United States at a price, exclusive of state
taxes, lower than offered in this state for the same period,
except that differentials may be made to allow for differ-
ences in actual costs of shipment f.o.b. place of original
warehouse. In computing prices for any of the purposes of
this subsection, no allowance shall be made for advertising.
40
depletion and promotional allowances or rebates of any
kind whatsoever made to purchasers by the vendor.
Manufacturers and wholesalers shall at all times keep
upon their licensed premises a schedule of prices at which
the item or brand is being offered for sale throughout each
of the other states and shall, from time to time as may be
necessary, file with the liquor authority, under oath, a
statement that the price at which each such brand or items
is being offered for sale in this state is as low as the lowest
price at which the same is being offered for sale im any
other state.
The liquor authority shall establish and from time to
time as may be necessary amend schedules establishing
maximum prices at which any item or brand may be sold
or offered for sale in this state at retail, which shall be
sufficient to provide the retailer a reasonable return and
at the same time protect the purchaser against excessive
and unreasonable retail prices.
§2. This act shall take effect June first, nineteen hundred
sixty-four.
ExpLanation—Matter in italics is new; matter in,brackets
[ ] is old law to be omitted.
41
[fol. 43]
Exuisit B, ANNEXED TO AFFIDAVIT oF THOMAS F. Daty
NEW YORK STATE MORELAND COMMISSION ON
THE ALCOHOLIC BEVERAGE CONTROL LAW
230 Park AVENUE
New York 17, New York
MU 9-4822
March 9, 1964
Hon. John J. Marchi
Chairman, Joint Legislative Committee
for the Study of the Alcoholic Bever-
age Control Law
State Capitol
Albany, New York
Re: S. Int. 273
Dear Senator Marchi:
At the request of the Moreland Commission, I take the
liberty of submitting to you in this letter an analysis of
S. Int. 273. At the hearing before the Joint Committee and
the two Excise Committees on February 26, Senator Zaret-
ski, the introducer of S. Int. 273, raised certain questions
about that bill. Those questions will be considered in this
letter.
S. Int. 273 would require a distiller to sell any brand of
whiskey to his New York wholesalers at the lowest “price”
at which he sells that brand in any other state during the
month in which the sale occurs. The bill is designed to
prevent distillers from discriminating against New York
wholesalers by selling at lower “prices” in other states.
1. The fatal defect of S. Int. 273 is that it leaves the
distillers in complete control of consumer prices. It would
not in any way obligate the distillers to reduce the retail
[fol.44] prices fixed by them. Even if the prices they
42
charge wholesalers were reduced, high retail prices could
continue to be imposed by the distillers. Unless mandatory
resale price maintenance is repealed, lower distiller prices
could merely mean higher profits for wholesalers and re-
tailers with no benefit to consumers.
2. A vital shortcoming of this bill in accomplishing even
its limited objective is its use of the word “price.” It is
established industry practice to interpret the word “price”
to mean invoice price (f.o.b. distillery). “Price” thus means
something altogether different from the distiller’s actual
realization or the wholesaler’s actual cost after giving effect
to the various allowances and other forms of assistance
granted by the distiller to the wholesaler. “Price” or invoice
price is, as the distillers claim, essentially uniform through-
out the country except for a minor reduction to the monop-
oly states. As a result, the bill in its present form would
merely bring distillers’ prices in New York into parity with
their prices in the monopoly states.
3. The experience of the monopoly states, which have
provisions in their contracts with distillers analogous to
S. Int. 273, demonstrates the ineffectiveness of this type
of requirement. The prices charged to monopoly states are
only about 4¢ to 12¢ a fifth below the New York invoice
prices. They do not reflect the lower actual realizations of
the distillers in markets where allowances are granted to
wholesalers.
4. §. Int. 273 might be amended so as to reflect in the
distillers’ “prices” the various types of allowances and
assistance they give wholesalers. In that event, the useful-
ness of the bill would be undermined by the extremely ex-
pensive and complicated enforcement problems it would
. present. The State would be required to engage a large
corps of accountants and lawyers for full-time employment
[fol. 45] in reviewing the books, records, accounts, and
nation-wide transactions of each distiller. This task would
have to be conducted on a regular and continuous basis,
43
and would involve even more complex problems than the
State’s present supervision of utility companies.
Effective enforcement would require a determination of
the amount that each distiller actually realizes from his
sales each month in each of the 49 other states. This would
mean, in the first instance, an analysis of the myriad trans-
actions between each distiller and each of his wholesale
customers. In addition, it would undoubtedly necessitate
the exploration of transactions with other persons, such
as the wholesalers’ salesmen. Many of these others, since
they would be outside of New York, might not be subject to
subpoena. In addition, to determine whether the distillers
were making more money on their New York sales than on
their sales elsewhere, it would be necessary to make detailed
determinations as to their costs and the allocation of those
costs.
It is apparent, therefore, that the enforcement of the law
would lead to a series of involved and expensive adminis-
trative proceedings, not unlike utility rate cases, in which a
morass of data would be presented and extremely complex
issues would have to be resolved. The expense of enforce-
ment would be mammoth and enforcement might well bog
down under its own weight. In addition, because of the
types of issues involved, there would be a tremendous in-
ducement to attempt to corrupt the persons with the deci-
sion-making powers.
5. There is substantial doubt as to the constitutionality
of the bill amended as indicated above. The distillers have
brought an action to review the constitutionality of a simi-
lar statute in Kansas. They contend that, in the light of the
complicated economic issues sought to be dealt with, the
[fol. 46] statute is too vague and indefinite to satisfy due
process requirements. In addition, they contend that the
statute violates the commerce clause of the United States
constitution because it is an attempt by one state to control
national pricing. A preliminary injunction restraining the
enforcement of the statute was granted by a Kansas court
in June 1961 and is still in force.
44
6. If the purpose of this bill is to bring to New Yorkers
the benefits of lower consumer prices, the simplest, most
direct, and the only completely effective way of achieving
this objective is to return to free competition. The ex-
perience in Washington, Chicago, St. Louis, Miami, and
Houston demonstrates that the level of consumer prices
can be brought to more than $1 a fifth below New York
prices where a free market is permitted to reign. None of
these cities has any law resembling S. Int. 273. With free
competition, no such legislation is necessary. A free market
is a built-in regulator of prices. Consumer prices and dis-
tiller prices will both be reduced to their proper economic
levels by the natural regulations of the free market.
Respectfully yours,
WILLIAM W. GOLUB
Copies to: All Members of the Joint Legislative Committee
for the Study of the Alcoholic Beverage Control
Law and of the Senate and Assembly Excise
Committees
[fol. 47]
Exuieir C, Annexep To Arripavit or THomas F. Daty
* * * * * * *
hearings in the ’30’s. In 1948, as I said, Chairman O’Con-
nell and the State Liquor Authority decided to declare an-
other moratorium rather than put up with the charges and
counter-charges that they were being subjected to.
In 1952 the Crime Commission found misconduct and
then Irwin Shapiro at the beginning of the Harriman Ad-
ministration made an investigation. There were fifteen
resignations, many of them after people had claimed the
Fifth Amendment. And now we have District Attorney
Rogan’s investigation.
This led to our appointment as a Commission. And we,
having been introduced into this responsibility because of
pt Cae
45
these charges of corruption, have looked to see whether,
in the law, there was any basis for them. And we have
found the basis, we think, in these subjective standards,
these unworkable and unrealistic provisions which an
agency is directed to enforce when it knows it can’t enforce
them.
And then we have also disclosed, I think, a broader, a
more subtle form of corruption where an agency of essen-
tially honest men are really brainwashed by an industry
and led from the objectives for which they were appointed
and which the law was directed to into new objectives
which are not in the law any more. Now this is a very
subtle thing and the damages that have occurred to this
State as a result of it are significant.
The objective of this law as it is now written is temper-
ance.
That’s the only justification for the law. Well it’s been
an utter failure in that because consumption rates in New
York have gone up along with those of the Nation. They
have paralleled them; indeed of stores, I think, ever since
repeal—about 400 in my recollection.
Q. So perhaps in that one respect the conditions are not
identical. A. Well, we have the same here, of course, now.
[fol.48] Q. But not identical in the sense that we would
not be duplicating the same situation that exists in Wash-
ington if we had on the one hand a doing away with price
maintenance and then unlimited issuance of licenses. A.
Then we would have made both changes, whereas Wash-
ington has only one. On the other hand, in St. Louis,
Missouri you have exactly that situation. Missouri does
have an unlimited number of stores and the freedom from
price restriction.
Q. Now I notice in some of these prices (referring to
the chart)—I just go to Dallas and New York because
they’re next to each other—in some cases if you add the
tax New York comes out cheaper, in other cases there’s
a marked difference and Dallas is considerably cheaper.
A. The interesting thing is between Dallas and Houston.
There is a completely different result.
46
Q. Well we have J & B comes out about even, doesn’t it?
Fleischman is cheaper. We’re not accomplishing anything
here, really.
But I think Dallas is much higher than Houston, for
some reason. A. There may be other factors.
Q. There may be other factors there, that’s right. But
we put both of them in. A. Do you find that in the range
of alcoholic beverages there is a substantial difference on
the price charged by the distillers going into the various
states? And again I am referring to the very probative
point raised by Senator Zaretzki.
Q. I’m sure we have not attempted to find out how the
excess is divided among the distiller, wholesaler and re-
tailer. All we say is that you cannot assume that the dis-
tiller has a uniform price because he has a uniform price
scale. A. This is not to depreciate the work done by Dr.
Wattel, but on the discussion of price and consumption—
and of course you brought out in your report there may be
other answers to this—if his point was valid that price
does affect consumption, there may be other remedies to
meet that situation.
[fol.49] Q. I think Dr. Wattel speaks of consumption in
the matter of sales. But that doesn’t mean there's an in-
crease in consumption. If customers start buying in New
York instead of New Jersey, they aren’t drinking any
more, just buying in New York instead of New Jersey.
And I’m sure that happens in Washington, that people in
the surrounding areas who work in Washington buy in the
Washington stores to save money. A. You don’t think
that the public likes to get a bigger bang for the buck?
Q. The bang seems to be limited by things other than
the buck. You can only take so much of it. A. The
Toronto School of Research has been conducting surveys
that would indicate some relationship between the
income and the incidence of cirrhosis of the liver.
Now just what value this has I don’t know, but in this
connection I was wondering whether Professor Wattel
=— ese ewe Oe ee ea ee ee ee Teen ee
47
did have a control committee to establish the validity
of the system of survey. Now his report states that
Q. The retail price will still be as high as they want to
make it. But wait a minute—I didn’t get that far. My
bill doesn’t—now, you put your finger on what I think is
the nub of the thing. You permit the distiller not only
to charge what he wants to, but you give him the right to
teli the retailer, “You must charge so much.” If you take
that power away from him, and he can’t do that, now can’t
you pass on the saving to the consumer by requiring the
State Liquor Authority to set the mark-up price, a fair
mark-up price to the retailer and to the consumer? Not
the retailer, but the consumer. A. Then what you’d have
to have is an agency like the Public Service Commission
with conduct of rate studies and service studies, and you’d
have a complicated agency to do that which a free market
would do for us for nothing. See, in the case of a public
utility where only one power company can serve an area
efficiently, you need the regulation of a monopoly, but
[fol. 50] when anybody can sell liquor what we can’t un-
derstand is why you need that type of regulation. Let any-
body come in and sell it and sell as cheaply as they can, the
way they do in St. Louis.
Q. I admit there are two ways of doing it: your’s is one
way and I’m trying to find out whether mine is another
way. A. I think that your’s is at most a supplement to
my way, but it would not be a substitute for it.
Q. Well if we compelled the distiller to charge as low a
price as anywhere, and then the State Liquor Authority
fixes a fair mark-up, giving the retailer a living wage, and
still saving the consumer the dollar or two. And I can go
to Bennington, Vermont and save two dollars a bottle.
A. You can get some pretty good bargains if you shop
around the country.
Q. Well I regret to tell my constituents who are here
in large numbers that I buy a lot of liquor in Benning-
ton, Vermont. A. Only in the summertime, Senator.
Q. But the point is that we could save the consumer the
$150,000,000 by making the distiller charge us no more
48
than he does in any other state, and then having the State
Liquor Authority fix a fair mark-up, fair for the con-
sumer, and fair for the retailer. A. If the provision were
constitutional, if it were enforceable, you could save per-
haps the distiller’s share of that. But you couldn’t save
the wholesaler’s and retailer’s share and the consumer still
wouldn’t get his dollar back.
Q. Wait a minute, I’m coming to that. I’ve been talk-
ing about a sale from the distiller to the retailer and then
to the consumer. And now we have an intermediate
group known as wholesalers or distributors. Did your
study show that most of these distributors are owned by
the distillers? A. No. We have not checked into that.
Q. Well, will you make a note of that too? A. You’ve
given us quite a bit of work. May I borrow a pencil, Mr.
Chairman? I don’t think you're going to find in New
[fol.51] York any interlocking ownership. You may find
in other areas that there is that, but as I say we have not
studied it. I wouldn’t want to speculate.
Q. Don’t let’s speculate. I want you to continue for an-
other couple of years, and let’s get to the bottom of this.
We are now agreed that if we fixed a minimum price for
the distiller that they must not charge us more than any-
body else, and if a fair mark-up was made by the State
Liquor Authority on that price to the retailer and the con-
sumer, that we could save the consumer the same $150,-
000,000. A. I don’t think it would ever work as well. You
might save him something, but there’s nothing like a free
market to get prices down to rock bottom.
Q. I don’t know how much freer a market you need than
the entire 50 states of the Union, and the distiller swears
that he’s selling to us at as low a price as he’s selling any-
where else. A. This would be really a hopelessly unen-
forceable job. It would mean that the New Yorker is
supposed to run around checking prices in 50 states, and
the Anti-Trust Division of the Department of Justice can’t
do that, even with the F. B. I. to help them. I think it
would be really a vain effort. I mean the State Liquor
eee
49
Authority has enough hopeless jobs to do without giving
it another one.
Q. Don’t let’s go into that at the moment because there
must be something to this since the distillers are fighting
the Kansas law so hard. If there wasn’t any teeth in it,
they wouldn’t mind. The thing that I want you to study
further, your Commission—I mean, I ask you, please, to
do it—and that is how many intermediate steps are there
in this State between the distiller and the retailer, and
how many mark-ups are there? And do you need it all—
the method of marketing? Who owns the distributors and
the wholesalers?
(fol. 52] By Mr. Ambrose:
Q. Mr. Coyne, before I start, may I compliment you on
a very delightful statement. It was a great piece of litera-
ture. A. Thank you very much.
Q. I would like to ask a couple of questions. Judge
Walsh made reference today to a letter from Mr. Lynn,
General Counsel of Seagram’s in which he made reference
to depletion allowances which are, I gather, allowances
made by distillers to wholesales subsequent to the sale of
the merchandise by the distiller to the wholesaler. In
other words, if he’s got a large—could you explain this,
please, and what effect this may have on the net price
paid over the course of a year? A. Well, I can’t explain
it with any precision. I will give you my impression of
what is meant. Now the prices from distillers to whole-
salers is constant. Now that does not mean that it does
not admit of sales rhythm and imagination in marketing
liquor. Now, as I understand it, within certain confines—
and they’re very small—a supplier will endeavor to estab-
lish a bit of excitement in a certain market. And for that
purpose he may join in a joint promotion with the whole-
saler in that market, and with the result that some deple-
tion allowance, or some credit memorandum will vary the
price for an instant to providing the exciting sales rhythm
that I mentioned. And that may be seen in different mar-
: "7
50
kets, not at the same time. But the whole sum total of
that relationship averages out to a price that is average
across the country. And you are aware, of course, that
why we resist any legal fixing of distiller’s prices, either
by reference to another state or to any other measurement.
That does not mean that distiller’s prices are not con-
stant. Now they are constant for a very good reason. We
have, for example, the State of Pennsylvania which is the
3 largest purchaser of liquor in the world. I think they pur-
chase almost $400,000,000 worth of liquor a year—one
customer. They swing a very big bit of leverage, and you
[fol. 53] cannot be convinced that that Pennsylvania cus-
tomer does not insist on the lowest price that the distiller
offers anywhere in the country. And it’s significant, I
think, the price in Pennsylvania is the same f. o. b. price,
or virtually the same price, as is offered in New York.
So any exercise of imagination by these sales geniuses—
and they are sales geniuses—is in sach a narrow area that
it would even itself off over a period. From the distiller’s
point of view probably by a temporary response, and from
the wholesaler’s point of view by concentrating on “my”
brand this month, and someone else’s brand the next
month. But I have examined with great cynicism this idea
of my own clients when they tell me that they sell with a
constant f. 0. b. price, and I’ve been at it five years. And
about midway at that time I became convinced, and I
reached the conclusion that I was being the cynic, and
strange as it might appear to some segments of the pub-
lic I found the suppliers on the level. I have dealt with
many different business groups in my time, and not only
are they more intractable—and if I seemed to be a little
bit spirited earlier when I said it was not a rash assump-
tion at some point in our professional existence to as-
sume that another group is on the level—gentlemen, I
meant that. And I wish you would take the posture that
I took when I took my job, and I examined the bona fides
of these people one by one. Now, I’m not going to say
that there are not fakers amongst them. But I give you
—_
51
my word, and I say it’s an informed opinion because I’ve
been in law enforcement too, for 23 years, and I think I
can spot crooks and fakers as quick as the next one, and
I’ll tell you—and you have my word for it—that this group
subscribe to ethical standards thai cannot be matched in
any other merchandising group. And I’d be very happy to
elucidate on that some time if you have the time.
[fol. 54] Q. In effect, your coniention, if I understand
you correctly, is that this depleti. ellowance is used in
the same fashion as the post-cti or file-off arrangement is
used. A. That’s as I understand it. I wish I knew more
about that. But let me give you what I think is proof. I
mentioned the State of Pennsylvania. Now the State of
Pennsylvania has a contract which permits them to send
accountants into any supplier’s office—and they do. They
send corps of accountants into supplier’s offices to deter-
mine whether or not they’re getting the best price. And
in fact, if they were not they would have a violation of
contract which would make each supplier restore to the
State of Pennsylvania the difference between that and the
constant price that is serviced elsewhere.
Q. Is it possible, or is it probably, or does it come about
in any way that you’re aware of that the arrangements
whereby retailers in the District of Columbia constantly
sell liquor at loss-leader levels insofar as it may come
about as the result of some malpractices or illegal prac-
tices between the wholesaler and the retailer? A. No, I
think the wholesaler probably doesn’t take the mark-up
such as
52
[fol. 55]
Exurpsit D, ANNEXED To Arripavit oF THomas F. Day
(See opposite) &F
NEW YORK STATE MORELAND COMMISSION
ON THE -
ALCOHOLIC BEVERAGE CONTROL LAY7
Study Paper Number 5
Resale Price Maintenance in the Liquor Industry
October 28, 1963
230 Park Avenue
New York 17, N. Y.
54
(fol. 563
RESALE PRICE MAINTENANCE AND THE
LIQUOR INDUSTRY __ :
Table of Contents
ee cui adudkovetins re dkswenenanas sseneseneeesensense mini
LS No cond dntesedicmedsadbeopesensdeedee idheod
Te. Ces ee eo notecsdensakasendsecevoors PR PAE Se
A. Concentration in Alcoholic Beverage ae paseveks,
B. The Economic Effects of Concentration ........++++: chanee
3 Entry eeeeeeeneeereeeeeeeeeeeeeeeeeeeeee TU PTELITTTTT T
© case gbvatdasetecrdésesrnenss daneadseeus indus
. Costs and Capacity PPTTTTTTTTETI Titi T ieee
4. Brand Choice ......... EE ee Re Ae vn wibvbires ak
ITI. Resare Price MAINTENANCE .....ecccecceccccccscccveece eos 15
Arguments for Fair-Trade .....-+++se+eeeeeeeeeee ‘eevenee 17
. The Case Against Resale Price Maintenance .........++++ a
C. Conclusions About General Resale Price Maintenance ...... 24
IV. Free Versus Farr-Trave 1n Disticrep Spirits ....... te eee tees 25
A. The Changing Business Population ......+.-++eseeeeeeeess a
B. Competition, Trade Practices, and Branded Distilled Spirits 30
V. Tre DEMAND ror DISTILLED SPIRITS ......eeeeeeeeeeeees re dare pe 40
A. Introduction eeeeeeeeeeeeeeeeeeeereeee eeeeeve eeeeveaene eee 40
B. The Market Studies ......cccccccccccccccccccccccsccces 41
C. The Published Data .........ccceceeee eaaae asl oeite « 44
D. Correlation Studies .....ccccccccvcccccccceeccescvcsvess 52
VI. CONCLUSION 2... ccccccccccccccccccccccccccccecesccccsccvces ae
Aprenpix A.—Pennsylvania County Analysis 1959 ......... EA 61
Appznprx B.—Pennsylvania Analysis 1947-1962 ......+eesereeeeeeee
Apramvex C—Control State Analysis, 1960 ........csecccccccccvees 67
‘fol. 57]
Index to Tables
TABLE
a
ee Pe Ine
_—
- 2S
_—
a
Percent of Value of Shipments and Tati poem for by the
ory * acti in Alcoholic nr Production, 1958, ose
SRE EO >i 6enbddseusedvacecénsesinetes 00006049606 0Nb0049 n0n 4%
Acquisition of Companies by the Four Largest Distillers, 19331948
Facilities Operated to Produce Alcohol from Grain and.
Fruit, Selected Fiscal Years, 1934—1962 ..... boda Vu Chets caus
Federal and Average State Tax Rates ......ssscesecceesessesesees
oe Measures of Price Changes, Distilled Spirits Industry, 1947—
TRE cave tivedscctadeesevska kiana dust cckenudssncdndeisdeuse
COSHH HEHEHE SHEE HTH ESE HEHEHE HEHEHE HEHEHE HEE HEHE EE
1962 PTTTT ITIL TTELITTTETT TTT ee Tee Te eee
Number of Brands of Whiskey Types, and Price on Pennsyl-
vania, 1947 and 1962 ...... sadevacddendgenadsbecnssnacdacedeese
. Fees Collected, Price Schedule Posting and Minimum Consumer .
Resale Price Posting and Penalties Imposed for Violations of Mini-
mum Resale Price Regulations, New York State, 1950—1961 ......
. Liquor Price Control Arrangements, License States, October, 1963
Wholesale and Retail Liquor Establishments, United States, New York
State and the District of Columbia, 1948 and 1958 ..........++--.-
Gross Margins, Total Expense, and Net Profit of Liquor Stores, 1950
Retail Prices of Selected Distilled Spirits Brands, Washington, D. C.,
Compared with ee Prices of the Same Brands, New York
State, September, 1 ec evccvcccsevccoccs evewesvercvccsasevoee:
SOSH HSH EES HEHEHE SHEET HEEH EHH EEE HEH HEHEHE ERE EEE
Pe Classes for Neutral Blend Whiskey, New York State, 1963 .
Purchased Beverages (whiskey, rum, gin, ote cordials) Percent-
age of Households Using and Expense per Household .............
. U.S. Non-Farm Households Drinking or Serving Distilled Spirits
Was Fetes Greens, TOGO onc cc ccccccscedsscgesence Kasevveess
U. S. Households Drinking or Serving Distilled Spirits Within Occu-
SURE GHEE, FOOD ce ccccccccvevcvcesteseéecececsstecetsebneees
. U.S. Households Drinking or Serving Distilled Spirits Within Age
NF boven ccaveucsrcseretscncedée $UdSEKCE Rens eesencye
Apparent Consumption of Distilled Spirits, United States, 1950—1953
Whiskey Purchases by Price Class (fifths) Pennsylvania, 1950—1953
. Prices and Market Shares of Selected Distilled Spirits Types, Penn-
Ch: OPEN. cccxnckanehhacsanoeks vehadienantedeess cute
Expenditures for Alcoholic Beverages and Real Disposable Personal -
Suceins, Velted Seaton, 196% 1906 oc ccccvcccccccccuseeseccccese
Expenditures for Wine and Distilled Spirits and Real Personal In-
come, Pennsylvania, 1947—1962 .......ccccccccsccccccsccccceces
Measures of Price Elasticity of Demand for Distilled Spirits ........
agg Sales/Profit Analysis sae 10 per cent Decline in
Price, Different Price Elasticities of Demand; New York, circa 1962
55
56
(fol. 58] oe PREFACE
a} ‘
The New York’ State Moreland Commission on the Alcoholic |
Beverage Control Law commissioned this study in July of this year
as one part of a broad examination of the efficacy and desirability
of maintaining stringent government supervision and protection of
New York’s alcoholic beverage industry and the consumers of its
products. This segment of the investigation is concerned almost
exclusively with the effect of income and price on the demand for
distilled spirits. Insofar as the focus here is economic and hence
Mmited, the reader is referred to the Commission papers which
treat other facets of alcoholic beverage consumption.
Although this paper carries the name of a single author the
counsel of my friends and colleagues is reflected in its pages. I
gratefully acknowledge the help received at various stages of this
project. Thanks go to Dr. Donald J. Dewey (Columbia University)
for his views and comments on the entire manuscript, to Dr. Harvey
J. Levin (Hofstra University) for his suggestions on the paper's
organization and content, to Mrs. Hyman Lichtenstein for aid with
the statistical analysis, to Dr. Richard P. Brief (New York Univer.
sity), and Dr. John E. Ullmann and Dr. Frederic Stuart (both of
Hofstra University) for their comments on the correlations, and to
Dr. Nathan Goldfarb and Mr. Lowry McKee of Hofstra’s Computer
Center for their cooperative efforts which made possible the proces-
sing of the data by computers. Dr. Mark B. Schupack (Brown
University) made constructive suggestions for the strengthening of
_ the analysis. os,
Mrs. Miriam G. Cedarbaum of the Commission’s staff proved to
be a friendly critic; her helpful suggestions contributed much to the
final stages of the work. The Commission’s clerical and professional
staff were most efficient and cooperative at all stages of this under-
taking. ere
My wife’s editorial advice was particularly welcome as was her
patience.. |
In the Jest analysis, however, the shortcomings of this work
remain the sole respons‘bility of the author.
- Harorp L. Warren
Chairman, Division of Business.
. Hoffstra.University
[fol. 59}
I. INTRODUCTION
How much control should New York State exercise over the sale
of alcoholic beverages within its borders? The question, should New |
York State retain mandatory resale price maintenance for the mar-
keting of branded alcoholic beverages is just one aspect of the larger
question. This background paper approaches this latter question by
examining the structure of the alcoholic beverage industry and one
aspect of its marketing arrangements—resale price maintenance. The
distilling industry is the main focus here. Malt beverages are now
sold through grocery stores and are not subject to the more stringent
regulations applicable to distilled and fermented alcoholic beverages.
Their low alcoholic content places them apart. Wines are subject to
- the same regulations that affect the sale of distilled spirits, but since
they are lower in alcoholic content and price they need not be treated
separately here either.
The price controls now in effect on distilled spirits in New York
State can be traced to demands for such controls from industry mem-
. bers in the heat of liquor price wars which developed before World
War II. The State Liquor Authority described the New York City
market in these terms:
“During the last four months of 1940, enitehie market con-
ditions prevailed in the Metropolitan New York area. In their
_ eagerness to ‘corner’ the New York City market, which is
reputed to be the largest local market in the country, some dis-
tillers reduced prices to the point which, according to reports,
was less than‘the cost to the manufacturer. Secret rebates and
‘kick-backs’ were granted. Differentials in prices among buyers
in the same license class were rampant, and the consumer could
purchase liquor from the package store at a price lower than
that which the restaurant or tavern keeper was required to pay
to the wholesaler.”
The Authority blamed the distillers for the unsettled con-
ditions.”
The mandatory resale price mnleinensiait solution in New York -
State seems strange in view of this contention. It handed to the
1940 Report A the New York State Liquor Authority, p. 13.
z Ibid., pp. 14-15.
3. Distillers must file minimum prices for their branded merchandise and the
State Liquor Authority assumes ~ by. responsibility for the policing of those
prices. Under general resale price maintenance, producer sti mini-
= mum prices for his branded merchandise and assumes the burden cons
58
(fol. 60]
distillers, those alleged to have instigated the price wars, the right
to fix prices vertically. The main beneficiaries appear to have been
the New York State retailers, the main victims, the New. York State
consumers,
Distiller prices which were originally set high under the cover
of the mandatory resale price maintenance statute in New York State
have: been altered infrequently.‘ Nor have the major distillers seen
fit to compete actively’ with each other by overt price cutting at the
retail level.’ In the face of such price behavior distiller unit profit
margins probably have declined. Wholesale and retail distributors
meanwhile applied their markup percentages to their invoice costs
which included higher taxes, and in this way protected themselves
somewhat from the pressures exerted by increasing costs.”
The use of the police power of the State to enforce private
decisions of manufacturers seems unnecessarily severe medicine for
a relatively minor ailment. If New York prices must remain high,
the State has ample power to keep them high without delegating
price fixing power to private individuals and without committing
itself to police their decisions. But must prices remain high?
This paper attempts to review the evidence relevant to this ques-
tion. We begin with a review of the structure of the distilled spirits
industry and the relationships between the trade levels.
. Harold L. Wattel, The Whiskey Industry, unpublished doctoral dissertation
available from The New School library, pp. 425-426.
. Competing brands remain within pennies of each other in the major markets.
For example, Seagram’s 7 Crown retails for $4.99, Schenley Reserve for
$4.99, Kinsey Gold for $5.00, G & W 7 Star for $4.99, and Bellow’s Partners
Choice for $4.99 in New York.
. The First National City Bank reports that in —_—t the profit margin on
sales has fallen from a high of 7.2 per cert in 1948 to 3.9 per cent in 1962.
. Wholesaler and retailer margins have also risen. The retailer paid $3.20 per
fifth for Seagram’s 7 Crown in 1950 and sold it for $4.05, a markup of 26.6
per cent. In 1963 he paid $3.82 for the fifth and resold it for $4.99, a markup
of 30.6 per cent. In 1950 the markup amounted to $0.85 and the same
markup in 1963 would have given him an absolute amount of $0.99. However,
with the increased percentage markup his absolute amount is increased to $1.17.
In 1950 the wholesaler operated on a markup of less than 15 per cent for this
brand; today his markup is more than 20 per cent. ‘
(fol. 61]
Il. INDUSTRY STRUCTURE
A. Concentration in Alcoholic Beverage Manufacturing
The manufacture of alcoholic beverages is one of the more highly .
concentrated industries in the nation.
TABLE 1
Percent of Value of Shipments and Employment Accounted for ve the
Largest Companies in Alcoholic Beverage Production,
1958, 1954, and 1947.
1958 1954 1947°
First First First
SIC Nomber Industry 4 8 4 8 4 8
Companies Companies — Companies
(percentages)
2082 Beer and Ale
Value of Shipments 28% 44% 27% 41% 21% 30%
19 30
Employment ..... 24 39 22 35
2084 Wines and Brandy -
Value of Shipments 35 50 38. 4 26 42
Employment ..... 27 37 23 36 N.A. NA.
2085 Distilled Liquor
Value of Shipments 60 77 64 79 75 «8
Employment ..... rn Co. ee ae
© 1950 for employment.
‘Sources: Concentration Ratios in Manufacturing Industry 1958, Report Prepared
by the Bureau of the Census for the Subcommittee on Antitrust and
Poy oad of the Committee on the Judiciary, United States Senate,
ngress, 2nd Session, Washington 1962, pp. 12 and 78.
From Table 1 one can see that the beer, ale, wine and brandy
industries became increasingly concentrated after 1947 when measured
by the value of shipments and employment. In fact, when measured
by employment, concentration in these two industries continued
after 1954. Concentration in distilling, however, decreased in
the two census years since 1947. There are many ‘reasons for
this latter development. At the end of World War II the major
firms had excellent grain allocations, a good hold on cooperage, and
supplies of aged whiskey. With the easing of shortages of these
8. Harold L. Wattel, op. cit., Chapter 3.
60
(fol. 62]
raw materials for bottled liquor production and with brand-taste
shifts, the hold of the “big four” distillers (Distillers Corporation-
Seagrams, National Distillers, Schenley Industries, and Hiram
Walker) on the market was reduced. Distilling, however, remains
more concentrated than the other two segments of the alcoholic
beverage industry.
The three segments of the alcoholic beverage industry accounted
for less than six per cent (5.7 per cent) of the employment in the
Food and Kindred Products Industry and less than ten per cent
(9.5 per cent) of the value added of the Food and Kindred Products
Industry (SIC 20) in 1958.9 Nevertheless, eight of the companies
in alcoholic beverages were among the nation’s 500 leading industrial
corporations in that year.’®
Three of the four maior distillers, National Distillers & Chemical
Corp., Jos. E. Seagram & Sons, Inc. and Schenley Industries, Inc.,
are among the nation’s 500 largest industrial companies, ranking
173, 174, and 268 respectively." The size of the four major firms,
however, may be traced to acquisitions before 1951, as Table 2
illustrates : a
TABLE 2
Acquisitions of Companies by the Four Largest Distillers,
1933-1948
3 Nature ot Facility
Distiller Distillery = © Winery Cooperags Other
3 (Number)
National Distillers ............. 20 1 3 8
Jos. E. Seagram & Sons ......... 15 2 1 6
EE, SxG anda erscocataceces 16 3 2 11
BE WHEE -cexbcccvescscuncs 7 6 2 3
Source: Federal Trade Commission, The Merger Movement, A Summary
Report, 1948.
9. Concentration Ratios in Manufacturing Industry 1958, Report prepared by the
Bureau of the Census for the Subcommittee on Antitrust and Monopoly of
the Committee on the Judiciary, U. S. Senate, 87th Congress, 2nd Session,
Part II, p. 388; and Statistical Abstract of the United States, 1962, pp. 774-5.
10. Mergers and Superconcentration, Acquisitions of 500 Largest Industrial and
50 gest Merchandising Firms, Staff Report of the Select Committee on:
Small Business, House of Representatives, 87th Congress, November 8, 1962.
pp. 46-53.
11. Ibid.
61
(fol. 63]
While many of the pre-World War II and immediate post-World’
War II acquisitions involved facilities intimately related to distillery
operations, at least the more recent acquisitions of one company
reflect efforts by management to diversify. National Distillers
acquired the following firms in the decade 1951-1961: U. S. Indust.ial
Chemicals, Inc., Algonquin Chemical Co., Hegeler Zine Co., Metriectro
Corp., Panhandle Eastern Pipe Line Co., Kordite Corp., “'extron,
Inc., Mallory-Sharon Metal Corp., Federal Chemical Co., Inc., Minne- —
sota Liquid Fertilizer Co., Wisconsin Farmnco Service Co-operative,
Inc. and Bridgeport Brass Co. In fact, the company is now known
as National Distillers and Chemical Corporation, a change from the
earlier National Distillers Products Corporation.”
While there is considerable criticism of concentration ratios
based on corporate or industry data rather than product data, such -
criticism is less valid for the alcoholic beverage industries and for
the distilled spirits industry, in particular. Competition in these
industries is limited to their own products. While distilled spirits _
do compete with the lower alcoholic content and lower cost products, —
eg., beers and wines, and to a very minor degree, non-alcoholic
beverages,’* the industry agrees that interbrand competition within
distilled spirits types and inter-type competition, e.g., gin ~ersus .
vodka, is the type of competition which concerns ‘the individ: a: com-
pany."
B. The Economic Effects of Concentration
When a significant proportion of an industry’s employment or
shipments is in the hands of a few firms (the four largest firms in
distilled spirits were responsible for 60 per cent of the shipments
and 57 per cent of the employment in 1958), economists expect that
it will have certain characteristics. For example, an economist .
expects to find the following: 1. It is difficult for new firms to enter
that industry either because of natural or manmade barriers. 2.
Prices in that industry are likely to be relatively high and stable,
especially in comparison to commodities traded on organized
exchanges, because a community of interest tends to be recognized.
3. Competition may be intense between the industry leaders but will
12. Mergers and Superconcentration, op. cit., p. 126. .
13. Harold L. Wattel, op. cit., Chapter 4.
14. Ibid.
an
62
(fol. 64]
probably be in the form of sales promotion rather than price promo-
tion. 4. Costs may be high in the industry and it may be afflicted
with much excess capacity. 5. There will be a great variety of
product types in the industry.
This is not an inaccurate picture of the distilled spirits industry,
although some of the elements must be qualified.
1. Entry
In the matter of entry, there are many barriers in the form of
brand names which have consumer acceptance, capital expenditures,
working capital for the large promotional expenditures required,
and the like. Fifteen years ago, warborn shortages of grain and
cooperage would have created difficulties for the new firm; they cre-
ated problems for the old. Today, these are all in good supply.
Aged whiskey is also in good supply, so these can no longer be con-
sidered as keeping new firms from the industry. Nevertheless, there
has been a steady attrition of plants and firms from the industry,
although some of this occurred through mergers. Census data show
a decline in the number of companies from 144 in 1947 to 98 in 1954
to 88 in 1958.5 According to the Alcohol and Tobacco Tax Division,
production facilities increased in the pre-war period and declined in
the post-war period.
TABLE 3
Facilities Operated to Produce Beverage Alcohol from
Grain and Fruit,* Selected Fiscal Years,
1934-1962 _ ;
BN ease crccnsst 170
ea scevsiavi 311
since ahracees 282
EAR IRI 333
er ep eee anor 239
aoe vconki ces 188
ees canara: 170
* Does not include facilities for rectifying distilled spirits.
Source: U.S. Treasury Department, Alcohol and Tobacco Summary Statistics,
Fiscal Year 1962, Publication 67 (1961), p. 23.
15. 1958 Census of Manufacturers, MC58(2)-20G, Beverages, pp. 4-5.
63
(fol. 65]
There has been no major new firm in the industry since World
War II and no major firm has disappeared except through mergers."
As noted above, the industry is heavily concentrated, with four firms
accounting for 60 per cent of ee in 1958, a the first 20 firms,
94 per cent.
,
2. Prices
Prices have remained relatively stable except for tax changes in
the post-war period. These are summarized next in terms of rates
(State: per wine gallon and Federal: per proof gallon). . sade
TABLE 4
Federal and Average State Tax Rates
Average State Tax Federal Tax Per Tax
Per Fifth of Fifth of 86° Combined - Index
Year Distilled Spirits” Distilled Spirits Amount 1947100
OS oe en cna $0.30 $1.55 $1.85 100
BG i aa indo svcd a Le 1.86 101
| RR Rae 32 1.55 1.87 oe a
ESR ala ease 32 1.55 1.87 101
ge SNPS apa 31 ay 2.12 ° 115 —
Ta ea ere 31 - 181 " 212 115
NS akc dnis cienin’ ses a 1.81 . :; 115
OO os dates oe 2 aan 1.81 1h, a |
Ea Ee 33 1.81 26° oe
| SS a 33 1.81 2.14 (116
at og ae SS 1.81 ; 116
Be cnc sae 33 1.81: ies: 116
| ea | 1.81 2.16 ae
acd vien deck 35 1.81 2.16 oo?
cere ctxesnes ; 1.81 2.18 118
i crs wii 37 1.81 28 118
* New York State tax ‘te remained at $1.50 per wine gallon since May 1939.
Source: 1962, sg Institute, Detitied Spirits Annual . Statistical Review,
P.
To place this data in context, it may be pointed out that ne
1947 and 1962 the Consumers Price Index rose 35.5 per cent for all |
items. For food there was a 27.4 per cent increase. According to :
the data in Table 5, the retail price of whiskey rose some 9.8 per cent _
since the introduction of the index in 1953.
6. U. S. Treasury, Alcohol and Tobacco Tax Division.
64
[{fol. 66]
TABLE 5
Selected | Measures of Price Changes, Distilled Spirits —
1947-1962
1 2 3 spe 5 6 1 8 5
Index
of
Index Prices
Whole- Price of of 10 Price
Sale of Price Best of Whole-
Hd Sea- Offerings Sell Sea- Whole- Sale
, 7 Retall in ers, oat sale Price
Botid. rown Price Penn- Penn- rown Price Index
in Index syl- syl- Penn- Index ome
Bond Penn- ber | vania vania syl- Strts. ends
1957-9 1957; 1957-9 1957-9 vanla 1957-9 1957-9
1958 ... 100.0 32.95 99.6 1000 99.5
1959 ... 100.0 3295 1009 1004 1002
1960 ... 100.0 32.95 1024 103.8 1042
1961 ... 100.0 32.95 103.0 1038 1042
1962 ... 100.0 32.95 103.3 105.1 103.8 4.74 99.7 1002
Sources: ‘Columns 2, 4, 8 and 9: U.S. Bureau of Labor Statistics
7: Annual Statistical Reports of Pennsylvania’
Liquor Control Board
5 and 6: Calculated by Author from Annual Statistical ©
Reports of Pennsylvania Liquor Control
Board.
3(1947-1956): Estimated by author.
3(1957-1962): Information supplied to Moreland Commission.
Averages, unfortunately, hide many things. After World War U,
consumers generally purchased the most readily available whisky,
the neutral blend. Distillers had bottled and marketed this product
as a way of overcoming the shortage of aged whiskies which had
resulted from the production hiatus during World War IL. Before
that war, neutral blends accounted for less than 40 per cent of the.
whisky market” By 1946, this figure had increased to 87.9 per
17. ~— Spirits Institute, Disiitled S, pits Annual Statistical Report, 1962,
p. 27. 7 a
(fol. 67]
cent."* As aged whiskies became available, consumers shifted slowly
but steadily away from neutral blends,’® as the next table shows:
TABLE 6
Spirit Blends Bottled as Per Cent of Total Whisky Bottled,
1947-1962
Year Bottled Bottled of Total
pr (million Wine gallons)
a ee 157.3 135.9 86.4%
DE - diunkb ode kes be coween 136.4 - 92.1 67.5
DT Ciesncve wanweenenan 134.6 69.6 51.7
ES aGhbwCecas Casus vack 150.5 73.2 48.6
Source: Distilled Spirits Institute, Distilled Spirits Annual Statistical
Review, 1962, p. 27.
The shrinking market for neutral blends and relatively stable
market for American whisky in general should have lowered the
prices of neutral blends. Yet, viewing the leading neutral blend
brands of the major distillers for the years 1947 to 1962, it would
seem that prices at retail or at the distillery have not reflected aa a
pressure. .
TABLE 7
Fifth Prices, Leading Distillers’
Spirit Blends, Pennsylvania, 1947-1962
Seagram's Sheniey Bellows Pt. —
7 Crown Reserve : Chsice GW 7 Star
eta 4.01 4.01 4.27 poi
eri use a 4.03 4.01 4.00 i
ta ERE: 4.03 4.02 4.00 ea
oa 4.03 4.02 4.00 4.04 |
negro: 4.46 4.45 4.43 4.49
Oe 4.46 4.45 443 4.48
ss oe a: 4.46 4.45 4.43 4.48
| ES eee 4.46 4.45 4.43 4.48
ee a ce 4.46 4.45 4.43 4.48
SEGRE SR a a OE 4.46 4.45 4.43 4.48
Beng ER eae 4.57 4.56 4.57 4.59
ME stuebsecece wees 4.57 4.56 4.57 4.59
gee 4.58 4.56 4.57 4.59
eh Rare 4.77 4.75 4.75 4.77
ANG aan 4.74 4.74 475 - 497
Ee oc icc wen « 4.74 4.74 475 477
Source: Annual Reports of the Pennsylvania Liquor Control Board.
18. Ibid.
19, Since the distilled spirits market is in a sense a custom market, data for bottled
spirits reflect closely consumer purchases.
66
(fol. 68]
Wholesalers and retailers are willing for the most part to limit |
price competition to the distillers. They have been in the forefront
of the drive in this nation for the enactment of resale price mainte.
nance laws. The Federal Trade Commission granis them a place
second only to druggists in this endeavor. Retailers through their
associations have threatened boycotts and have engaged in boycotts
in an effort to have distillers fair-trade their liquors wherever pos-
sible. Once brands are fair-traded, distributors urge distillers to
allow larger and larger margins for them.”
Some distillers are lukewarm to fair-trade, others support it by
word and deed.* Seagram, for example, has tended to be one of the
staunchest supporters of resale price maintenance. It has issued
such pro-fair-trade pamphlets as Seagram Puts it in Writing and
Your Stake in Fair Trade aimed at convincing wholesalers and
retailers of the community of interest in resale price maintenance,
In each, the company is pledged to a cians enforcement program
on behalf of its brands.
Before leaving the price issue, it should be noted that the stability
that distillers desire and attempt to maintain results also in price
matching. The major distillers market a full line of distilled spirits
in price “lines.” Consumers seldom find any price advantage” in
choosing one distiller’s product over another within the price line.”
Those outside of the Big Four do maintain a differential in many
cases,* but they do so to overcome the brand consciousness of the
average consumer. Because of the use of holding companies by dis-
stillers, consumers seldom know the parent company whose product
they select.
Advertising, of course, is employed to enhance a brand’s unique-
ness, and in this, distiller advertising is not really different from
that of any other industry. It also attempts to promote sales, to
create consumer loyalty for a brand or distiller, and to create a
product image which will result in the consumer’s paying a price for
the product which will more than reimburse the distiller for the
advertising.
20. Federal Trade eceitedia, Report on Resale Price Maintenance (1945),
Chapter 8.
21. Ibid.
22. Beverage Media, August, 1963, passim and The Liquor Handbook 1963,
pp. 174-210.
23. Harold L. Wattel, op. cit., Chapter 4.
24. Beverage Media, August, 1963, passim.
67
[fol. 69]
If it is successful, it presents a barrier to the entry of the new firm
which does not have the resources to carry on a major advertising
campaign.
3. Costs and Capacity
Cost movements are difficult to judge because there is little
published information about them. The Census of Manufacturers
for 1954 indicates that payroll and material costs constituted about
63 per cent of the value: of shipments, and for 1958 indicates a
similar percentage. Apparently, the industry was not subject to
inflationary cost increases that it was not able to recoup in one
way or another. But there have not been important price increases
in the industry; one may reason, then, that costs have not risen
significantly in the industry. In the period around 1952-1953, a 100°
gallon of spirits cost between $1.00 and $1.25 to produce; when aged,
bottled, promoted, and marketed, the costs of the gallon ran to about
$3.10.% Whether these costs were excessive is difficult to say. The
industry is composed of a variety of plants; some produce spirits
in the most efficient methods possible, others take pride in “old-
fashioned” costly methods. During World War IL, spirits were pur-
chased by the federal government at prices ranging from $0.48 to
$1.46 per 190° gallon.” Costs of production of three large distillers
ran from $0.69 to $1.36.” It is probably correct to assume as wide
a variability in costs of whisky production today. But this is a con-
sumer oriented industry where tastes, custom and status tend to play
an important part in shaping prices rather than costs.”
Excess capacity is another matter. The industry has been
plagued with excess capacity throughout the post-war period, al-
though production has been on the rise in recent years. In 1944 and
1945, the industry produced more than 1.1 billion proof gallons of
distilled spirits and whisky; a post-war record was set in 1951 with
846 million proof gallons of spirits and whisky. In fiscal year 1962,
only 810 million proof gallons were produced, four per cent below the
1951 peak and 31 per cent below the 1945 post-repeal peak. In 1952,
only 522 million gallons were produced, far below the industry’s
25. Harold L. Wattel, of. cit., pp. 486-504.
26. Ibid., p. 491.
27. Ibid.
28. Harold L. Wattel, op. cit., Chs. 4-6.
29. U.S. Treasury, Alcohol and Tobacco Summary Statistics, Fiseal Year 1962,
Publication ion 67 (1962), p. 23 p. 23.
68
[fol. 70]
potential. Apparently, the industry has been able to live with its
excess capacity. Perhaps more troublesome have been inventories,
Inventories of distilled spirits at one time had to be tax paid after
eight years and represented a threat to the profitability of any firm
that had aged whiskies which could not be absorbed by the market.
Around 1950 and 1951, these mounted to perilous heights, over one
billion gallons; these were drawn down persistently until 1957, when
they were permitted to mount again. In 1959, Congress extended
the eight year rule to 20. Inventories again stand at the one billion
gallon level. The largest portion of the present inventory produced
in any one year is attributable to 1960, With the many variables
operative, it is not easy to discern the impact of inventories and
excess capacity on the industry. It is true, nevertheless, that in the
early 1950’s, holders of large inventories, Schenley and National, had
lower profit margins than usual. ;
4. Brand Choice
Consumers of distilled spirits are not handicapped by a dearth
of choice. Their problem is inadequate preparation for the plethora
of products they meet in the market. Not only does each major
distiller maintain a full line of distilled spirit types, but each mar-
kets products in most of the price lines which exist for those types.
In addition, subsidiaries also market a variety of types and brands.
The information that follows substantiates this point.
TABLE 8
Number of Brands of Whisky Types, and Price Ranges,
Pennsylvania, 1947 and 1962
= 1962
Number of Nomber of
Brands ennehptees) cars res) Brands cites pres) catth Ln
Bourbon B. in B. ...... 15 $4.23 $7.30 19 $4.50 $8.70
SME svkeeveeess a > 3.63 6.03 50 3.75 8.99
Tis ME seccessscceces 3 3.71 5.93 7 4.00 4.75
Se RE ee udaue eens 6 2.90 3.73 1 py | py
Ry WEE bocceccceccs _ co —_ 1 4; 4
WH ccccccccccececs — aoe a 5 4.72 7.49
Blend of St. Whisky ... 8 4.18 6.57 4 4.61 5.19
Blended Whisky ....... 107 3.00 4.53 59 3.50 5.46
Blended Scotch Type ... 5 2.50 4.68 1 4.55 4.55
COE. Sb vaddsveve ces 6 5.59 5.99 10 4.78 6.78
DE csueberennwese cee 4 5.69 7.54 2 6.44 8.09
PE Senaedp eevee een 42 5.90 8.25 45 5.30 16.61
: 3.00 3.74 — _— =
[fol. 71]
It would be surprising if consumers wended a rational way
through this forest of competing types and brands. While “de
gustibus non est disputandum,” it is also probably true that palates
are not designed to differentiate between the subtle differences that
exist between many of these brands.
70
| fol. 72)
lI. RESALE PRICE MAINTENANCE
Resale price maintenance “* * * is a system of pricing a trade.
marked, branded or otherwise identified product for resale in which,
pursuant to laws legalizing such arrangements, the manufacturer,
producer or brand owner, or his authorized agent, factor or whole.
sale distributor, prescribes by contract the minimum price of the
resale price at which such product may be sold at wholesale, and
the producer or manufacturer and his factors or wholesalers prescribe
the minimum price or the resale price at which such a product may
be sold at retail, in the specified State, or in a specified portion
thereof, with the effect of legally binding all other distributors in
the specified area to conform to such prices.”™ In effect, resale price
maintenance is a system of vertical price fixing. In the United
States, this type of price fixing has been specifically exempted from
the Sherman Antitrust Act and the Federal Trade Commission Act
by the Miller-Tydings Act of 1937. This enabling amendment per.
mitted the various states to enact resale price maintenance laws
sanctioning fair-trade within their borders.
The law and the practices to which it has given rise have been
subject to legal controversy since its inception. Landmarks in the
legislative-judicial history of resale price maintenance include the
Old Dearborn Distributing Company v. Seagram Distillers Corpora
tion, 299 U. S. 183 (1936),** Sunbeam Corporation v. Wentling, 185
F. 2d 903 (1950),** Schwegmann Brothers v. Calvert Distillers Cor-
poration, 341 U. S. 384 (1951), the McGuire Act, 15 U.S.C. 45
(1952), and General Electric Co. v. Masters Mailorder Co. of Wash
ington, D. C., Inc., 122 F. Supp. 797 (D. C. N. Y., 1957).”
The law of resale price maintenance is not easily summarized.
As of 1962, 22 states had fair trade laws including provisions for
30. res of the Federal Trade Commission on Resale Price Maintenance
_ (1945), pp. xxvi-xxvii.
31. Sanctioned state enacted resale price maintenance laws.
32. Upheld right of seller within one state to sell below fair-traded price to out-ol-
state buyers.
33. Invalidated use of “nonsigner” clauses in resale price maintenance contracts.
Note: A nonsigner clause when legal binds distributors who have not
—— contracted to observe minimum established prices to do so. The
ational Wholesale Druggists maintain that the nonsigner clause is the only
— method of enforcing resale price maintenance contracts. The
ational Wholesale Druggists’ Association, The Basis and Development of
Fair Trade, Third Edition, March, 1955, Foreword.
34. Sanctioned use of nonsigner clauses in resale price maintenance contracts.
35. Permitted a reseller in a non-fair-trade state to sell fair-traded items in
fair-trade state at any price.
71
(fol. 73)
the use of the nonsigner clause, 19 states had fair trade laws but
the nonsigner clause was not sanctioned, and 8 states either had no
fair trade laws or the laws had been declared illegal.* There is no
federal resale price maintenance law, although there have been
repeated attempts to secure such legislation. The most recent
attempts have come under the guise of bills purportedly interested
in stabilizing product quality.”
In 1935, New York enacted a general fair trade law which author-
izes brand owners to fix resale prices and bring private law suits
against willful violators (General Business Law, Art. 24-a, Laws
1935). This law, popularly known as the Feld-Crawford Act still
applies to products other than alcoholic beverages. As to liquor or
wine, however, since 1950, section 101-c of the A.B.C. Law has
required brand owners to file minimum consumer resale prices with
the S.L.A.; and has prohibited package store licensees, on pain of sus-
pension or revocation of their licenses to sell liquor or wine for less
than the minimum consumer resale price filed by the brand owner.
The pressure for resale price maintenance laws has come pri-
marily from retail groups, small drug and liquor retailers ir. particu-
lar. This is not to imply that manufacturers are not interested in
resale price maintenance. Some are strong advocates of fair-trade
while others who are lukewarm support it under pressure applied ’
by distributors. Nevertheless, small retailers are more interested in
the high markups sanctioned by resale price maintenance as a basis"
for profits than are manufacturers who are more disposed to look
to larger volume as a source of profits.”
Economists have repeatedly and at great length analyzed the
effect of resale price maintenance on the economy.” All emphasize
36. Committee on Interstate and Foreign Commerce, 88th Ist Session,
Hearings on HR 3669, April-May, 9963, p. 81, hereafter 1 erred to as CIFC,
1963 Hearings on Quality Stabilization.
37. Ibid. and CIFC, Sot Boule, H on H.J.. Res. 636,
637, 639, and H. 10335, , 10517, "11227, 11 and 11778. The
latter will er be ~~ ny to as CIFC, 1962" Hearings on Quality and
Price Stabilization.
38. FR. Cibs5) of the Federal Trade Commission on Resale Price Maintenance,
pp. LIV ff
39, E. T. Grether, Price Control Under Fair Trade es (1939).
Recent texts with discussions include Vernon A. Mund, Government
and Business, 3rd Edition (1960); and Leonard W. Weiss, Economics and
American Industry. In addition there have been many articles on -
blem. The structure of the next section is suggested by the Mund
72
(fol. 74]
the effects of fair-tzade on: 1. the level of prices, 2. protection of
brand names, 3. trade practices, 4. productive efficiency, and 5. com-
petition. A summary of arguments for and against resale price
maintenance follows. The reader interested in any of these as pre.
sented by the participants is referred to the many federal hearings
on resale price maintenance and quality stabilization.“
A. Arguments for Fair-Trade
1. Effect on Prices
Resale price maintenance is designed to foster prices which pro-
vide adequate margins at all distribution levels and which remain fairly
stable through time. Proponents claim that extremely low and
extremely high prices disappear with the advent of resale price
maintenance. Survey data are submitted which show that specitic
branded products in particular markets covered by resale price main-
tenance rose less in the postwar inflation than did those same branded
products in open markets; in some instances, advocates report, fair.
traded products were actually priced below the same branded products
in the open market. Storewide margins under fair-trade are held to be
the same or below those stores not operating under resale price
maintenance.“
40. CIFC, Hearings on Fair Trade 1958, Quality and Price Stabilization i962
and Quality Stabilization 1963.
41. One of the more complete cases including much of the statistical evidence
favorable to the fair-trade case was made by Maurice Mermey, Director of
the Bureau for the Advancement of YS: Retailing (formerly the
Bureau of Education on Fair Trade). See CIFC, Hearings on Quality
Stabilization, April-May, 1963, pp. 144-170. His statistical evidence includes
the following studies:
McKesson & Robbins (1939-47) Drugs and toiletries:
Prices increased 24.8 per cent in fair-trade area in period against 412
per cent for products in non-fair-trade area. (p. 158)
A. C. Nielson & Co. (1949, 1951, and 1958) Name brand drugs:
“, . . the weighted average prices in the non-fair-trade area were not
lower than those in the fair-trade area .. .” (p. 154)
Department of Labor (1947-1958) Consumer Price Index:
“. .. prescriptions and drugs (usually fair traded items wherever possible)
increased less than the general price level of other items in the medical
care basket.” (p. 155)
Ostlund-Vicklund Study (1930's) Drugs:
“., . the advent of fair trade in the United States did not increase the
retail prices of leading drugstore products.” (p. 155)
Nationa! Association of Chain Drug Stores MN pnegnarh, Drugs:
“.,. fair traded drugstore products held the price line better than non-
/
hes)
(fol. 75]
As applied to the sale of liquor, it is specially argued that mini-
mum resale prices discourage excessive consumption. Thus, even if
fair trade keeps prices high, its proponents in the liquor industry
argue that high prices are a socially beneficial curb on consumption.
2. Brand Name Protection
Many of the pricing practices held inimical to small business,
according to them, involve the “misuse” of established branded mer-
chandise to attract customers. Producers maintain that when their
products are “footballed,” that is, subject to “excessive” competitive
fair-traded drugstore products and very much better than prices
generally.” (p. 155)
Salt Lake Hardware Co., Salt Lake City, Utah (1942-1960) Hardware:
. almost 90 percent of such items (hardware) are not fair traded at
the wholesale level; yet they show a slightly higher percentage of price
increase, 1959 over 1948, than the remaining items which have been fair
traded at the wholesale level.” (p. 157)
Union Underwear Co., Inc. (1948-1958) Underwear: :
Only one price increase in period for list of eight. In list of poe items
sold by company there was only one price increase, three price decreases
and two prices remained unchanged. Purpose: to show price stability
of fair trade items. (p. 158)
Corning Glass Works (1948-1959) Glassware:
This company reported a price increase of 23.8 per cent for a list of 26
items it usually fair-trades. Purpose: to show price stability. (p. 158)
McGraw-Edison Co. (1947-1959) Toasters:
“It is apparent in looking at the pricing trend of the 1B14 toaster that,
during the fair trade years of 1949 through 1957, this toaster was slightly
increased in price and then reduced—with the result that it is evident
the prices of this toaster did not increase while it was fair traded. How-
ever, when fair trade was removed in February 1958 the prices on this
toaster moved forward—and I believe that this has been typical of the
prices on many other competitive electric housewares.” (p. 159)
Parker Pen Co. (1949-1958) Fountain Pens:
Price data submitted for period 1949-1958 indicated that for six models
of pens there were one increase, three no changes, and two decreases in
the period. Purpose: to show price stability. (p. 159)
A critical review of fair-trade price surveys is found in Marvin Frankel’s
“The Effect of Fair Trade: Fact and Fiction in the Statistical Findings,”
Journal of Business, July, 1955, pp. 182-194. The Ostlund and Vicklund
Study, for example, is one that comes under fire.
—
74
(fol. 76]
pricing at the retail level, some retailers will give up the line and
consumers will lose confidence in the quality of the product.*
3. Trade Practices
$mall independent retailers need protection against unfair
practices of larger diversified retailers, it is contended. The latter
businesses, it is held, are known to engage in trade practices inimical
to the small businessman, such as loss-leader seliing, bait advertising,
and predatory price cutting. Independent businessmen who attempt
to match these practices find, according to their spokesmen, that their
markup: and profits disappear.
4. Effect on Productive Efficiency
Here the proponents’ case rests on the stability that arises out
of successfully applied fair-trade. The orderliness, in a sense, is
defined in terms of maintaining the classic pattern of distribution
with adequate markups at all levels of trade so that at least the
present business population may not decline. Profit margins, how-
ever, would not be set so high as to allow any increase in inefficiency
since there would always be pressure from cross product competition
to maintain efficiency. Another element in this case is that resale
price maintenance laws in maintaining the classic pattern of distri-
bution prevent concentration in distribution.“*
42. In a letter to the Committee holding hearings on Quality and Price Stabiliza- -
tion in 1962, the vice president of P. H. Hanes Knitting Co. reported on the
experienc’ of his company.
“In November of 1947, one of the leading Fifth Avenue stores cut their
prices on these garments (sleeping garments for children) to substantially
below the nationally advertised price. Other stores in competition with
it felt impelled to mect this store’s price, and threatened to drop our
brand completely. In fact, a number of them did drop our line and
replaced it with other brands.
“* 7 *
“Over the intervening years we have gradually won back most of the
outlets that had dropped our brand because ‘Hanes’ was competing with —
‘Hanes’ from store to store. The damage to our brand name had run
so deep, however, that two outlets declined to restore our brand into
their stores until 1961, 14 years after the uneconomic price war. In the
interim consumers could not purchase our excellent” values from these
stores.” (CIFC, Hearings on Quality and Price Stabilization, June
1962, p. 423.)
43. Typical testimony in this regard may be found in CIFC, Hearings on Fair
Trade, April-May, 1958, p. 97.
44, The Retail Jewelers of America testified that, “. . . unless we take steps to
give some degrce of protection to small individual retailers, we are going to
have power of retail distribution so concentrated in this country that we will
have effective monopolies such as . . . in certain South American countries.”
CIFC, Hecrings on Quality and Price Stabilization, June, 1962, p. 222, and,
Ibid., pp. 25 and 110. :
15
(fol. 77]
5. Impact on Competition
Proponents maintain that competition is not impaired by fair-
trade laws. They contend that price competition continues between
manufacturers for branded items and further that brauded products
continue to be price competitive with private label products. The |
level of prices, it is asserted, has to be sufficiently low to assure
general consumer acceptance of branded merchandise.“
B. The Case Against Resale Price Maintenance
1: Effect on Prices
Despite’ the many conflicting surveys through which economists
have had to thread their way, they conclude that prices in populous
fair-trade areas of branded merchandise are higher than in similar
areas outside the reach of resale price maintenance. Most economists
agree that oligopoly breeds stable prices. Hence, it may actually be
true that prices of fair-traded products have increased less in the
post-war inflation than non-fair traded products. It may also be true —
that prices of fair-traded products in areas ‘vith resale price mainte-
nance laws increased less than those same products’in areas not
covered by such laws. However, increasing prices presumably have
a function in a private enterprise economy: they are relied upon to
provide growing profits to attract new producers to a field and to
encourage producers to expand their output. In this way, the economy
adjusts to shortages of goods, and any interference with independent
decisions of businessmen which bring about such adjustments has
serious social costs.
The interest of retailers and wholesalers in resale price mainte-
nance is not limited to their willingness to help manufacturers main-
tain a brand-price identity. They have an important interest in the
level of prices existing at their trade levels. A large markup provides
a profitable operation at a lower volume than would a low markup.
Price uniformity throughout a level of trade also tends to freeze
the structure of distribution at that trade level. Wholesalers and
retailers protest that resale price maintenance does not result in a
price level higher than would exist without it. If this were so, their
support for resale price is clearly illogical.“
45. Representative statements on these points are found in CIFC, Hearings on
Quality Stabilization, me 168 and 111 and CIFC, Hearings on Quality
and Price Stabilization, 1962, p. 18. = :
46. Vernon Mund, op. cit., p. 421.
76
(fol. 78]
_ Much evidence has been introduced through the years to shoy |
that prices under resale price maintenance are higher and more stab),
than those without such protection.“ In the matter of price stability [
both sides agree.
2. Protection of Brand Names
The nation’s laws provide the manufacturer with protectin f
against infringement, or fraudulent use of his trademark. Shouli §
the brand owner receive additional protection in the private market!
There is no justification for it, say the opponents of resale pric
maintenance.
It is true that branded merchandise retailed at low profit margins
may be discontinued by high profit margin stores. The manufacture
is then faced with a distribution decision. One can hardly argu,
they hold, that this is the type of decision he should not face. Th
quality of the manufacturer’s product coupled with its price should
be the factors that determine the degree of consumer acceptance he
obtains for it.*
47. Federal Trade Commission Report on Resale Price Maintenance, im, and
CIFC, Hearings on Quality and Price Stabilization, June, 1962, contain
great deal of this type of evidence. In the latter, a study by the Justice Depart
ment is found on pp. 234-5. Examples from the drug field are found m
. 264-70 and in the CIFC, Hearings on Quality Stabilization, April-Mcy,
1963, on pages 211-21. :
48. In this context one witness offered the following:
“The majority of manufacturers in the United States are opposed to fixing
of prices for brokers, distributors, wholesalers, and retailers. Many/of —
the manufacturers’ representatives have indicated that they would prefer
not to have to enforce a price for these distributive levels and it has
been more or less proven that when fair trade or price fixing by manv-
facturers was enforceable in 45 States only 10 percent of the Nation's
retail sales volume was price fixed. Therefore, by volume, 90 percent of [
_ brokers, distributors, wholesalers, and retailers determined their own
rices as indicative by economic necessity. Fixing of distributive prices
- manufacturers is not necessary for protection of trademarks. Free f
competitive pricing, not price fixing, creates greater volume. ‘
“In that ——- we mention Libby, Carnation, Kellogg, Del Monte [|
and many other famous brands which have never been price fixed by the f
manufacturer in the distributive system. :
“The aforementioned famous brands refute other allegations in the quality
stabilization bill that manufacturers price fixing is desirable. It is our |
opinion that these brands compete in esteem with any brands in the |
marketplace and they have never been protected by any price main-
tenance.” IJbid., pp. 270-1. ces
77
(fol. 79] |
3. Unfair Practices
Certain practices are undoubtedly inimical to the profits of other °
_retailers and to other manufacturers. These include sales by manu-
facturers to retailers at prices which “discriminate” on the basis of
geography, of order size, etc. (The term “discriminate” as used
here implies the charging of different prices to various buyers for
the same goods without a corresponding difference in quality, service, -
or terms of sale.) Some retail trade practices also are inimical to
other retailers and perhaps to manufacturers.. These include sales ~
of merchandise at prices which do not cover invoice costs plus mini- .
- mum operating costs of efficient retailers for the purpose of driving —
competitors from the market. Another is loss-leader selling whereby |
a retailer sporadically prices a popular item below invoice costs plus |
‘minimum operating costs of efficient retailers for the purpose of. _
expanding his market. This latter type of pricing (loss-leader :
selling), if it.is concentrated consistently on a specific branded ‘tem, —
may cause competing retailers to drop that item and thereby foreclose ©
certain outlets to the manufacturer. Another type of price cutting ~
is the reduction of customary markups at retail. Marketing efficien-
cies may allow profitable markups which fall below those set by the
manufacturer. Sporadic loss leader selling and the use of lower but
profitable mark-ups can hardly be classed as “unfair.” Since they
reflect pricing decisions by those closest to the level of trade for
‘which they apply, they can only be considered healthy for @ private
enterprise system.
Price cutting which is continuous and results in prices which do .
not cover invoice and operating costs of efficient retailers may be
considered “unfair.” The question remains whether it is desirable
to grant to manufacturers, who are private individuals, the legis-
lative right. to conspire to fix prices vertically. There are remedies
which are less sweeping and oppressive.
“Bait” and misleading advertising are retail practices usually
cited as justifying resale price maintenance laws. These, too, may
harm retailers and manufacturers, but, say opponents of fair-trade,
they should and can be dealt with through other types of legislation —
and administrative arrangements, such as prolfibition of sale below
cost. .
The independent retailer should not be deprived of his right to
determine his own margins and prices. It should also be remembered
ee Vernon Mund, op. cit., p. 138. ’
78
[fol. 80]
that resale price maintenance laws, especially mandatory laws, usually
bring with them increased governmental activity in the private
market.”
4 Productive Efficiency
Proponents of resale price maintenance tend to ai on two sets
of businesses: producers with high priced branded merchandise and
| small retailers. Their case ignores the possibility that the manufac.
turer may not know the best markup policies for all levels of trade;
further, they ignore a basic tenet of the American private enterprise
system, namely, that profits are to be a reward for innovational
efficiency. Some retailers are more efficient than others; the more
efficient may wish to pass along cost savings to their customers and
consequently enlarge their markets. Under resale price maintenance,
they cannot do so. Inefficient and high cost distributors are permitted
to stay in business. This results in a poor allocation of. resources
within the economy and shifts income from consumers to business.
men who do not merit it.™
5. Maintenance of Competition nips Apiaciny
Opponents of resale price maintenance say that it veheon the
’. number of pricing decisions in the economy by allowing the manv-
* facturer to establish prices vertically through all levels of trade and,
in a very real sense, horizontally through the distribution levels.
Wholesalers and retailers of price-fixed merchandise, then, cannot
compete with one another on the basis of price. __
To those skeptics who reply that if price competition is desired,
it remains at the manufacturing level, producer versus producer, the
answer must be that, unfortunately, too many of America’s manu-
facturing industries are oligopolies, that is, dominated by a few firms
. responsible for the bulk of the output and employment in the industry.
Those firms recognizing a community of interest tend to avoid price
competition in favor of nonprice competition. The end result is price
stability at some high level which does not reflect the varying efi-
ciencies of businessmen.™ :
50. See, CIFC, Hearings on Quality and Price Stabilisation, June, 1962, pp. 232-3
for an example of testimony on these points.
51. See, CIFC, Hearings on Quality and Price Stabilisation, June, 1962, pp. 382-3.
52. CIFC, Hearings on Quality Stabilization, April-May, 1963, p. 209 for repre-
sentative testimony on these points. _
79
[fol. 81]
C. Conclusions About General Resale Price Maintenance
Many economists recommend that resale price legislation be
repealed. They are joined in this conclusion by the Report of the
Attorney General’s National Committee to Study the Antitrust Laws® -
and British Board of Trade.
These conclusions rest on evidence which suggests that resale —
price maintenance leads to generally higher prices, a dampening of —
retail and wholesale efficiency, excessive distribution capacity, a high
level of costly competitive devices, a costly system of price policing,
an increase in the importance of private label merchandise, and lower
levels of output and employment than are possible without it.
The next section of this paper considers the effect of resale price
maintenance in the liquor industry. “ ;
53. Report of the Attorney General's National Counts to Study the “Antitrust
Laws, March 31, 1955, p. 154.
54, British Board of Trade, Repor: of the Ci ommities on Resale Price Maintenance,
June, 1949 (Cmd. 7696), 1 PP 33-4 and its A Statement on Resale Price
Maintenonce, me 1951 (Cmd. 8274), p. 11. ‘sin ;
80
(fol. 82]
IV. FREE VERSUS FAIR-TRADE IN DISTILLED SPIRITS
Resale price maintenance works best for products which are
highly advertised, nonperishable, widely distributed, relatively low
priced, and’ not highly stylized or seasonal.* The effectiveness of
fair-trade is enhanced when “* * * manufacturers of brands which
are close substitutes collectively desire to maintain resale prices and
* * * organized retailers of the few leading brands, which account
for most of the business, cooperate in establishing and policing resale
price arrangements.”** Distilled spirits and the distilled spirits indus.
try respectively, seem to meet these tests.
Distilled spirits are highly advertised. Distillers spent more
than $100 million for advertising in the major media in 1962, approxi-
mately one half of the total for all alcoholic beverages.” This sum
represented 1.72 per cent of consumer expenditures for distilled
spirits or some 40 cents per gallon of distilled spirits consumed.”
Distilled spirits are nonperishable. When bottled, distill
spirits will last indefinitely. When aging in barrels the quality is
subject to change but the consumer is accustomed to equating the
aged product with quality. On the other hand, the distiller is not
_ permitted to age his products beyond 20 years without payment. of
the federal tax. The distiller is faced also with the problem of
evaporation during aging. At the moment the last two factors are
not considered troublesome by the industry.
The “fifth” of distilled spirits can be considered relatively low
priced and hence a prime subject for resale price maintenance. A
“case” sale, of course, represents an outlay of some $50 or more and
may be subject to “discounting.” Voluntary™ resale price mainte-
nance tends to break down faster than mandatory™ resale price
55. Vernon Mund, op. cit., p. 411.
56. Ibid., p. 412.
57. The Liquor Handbook, 1962, pp, 174-210.
58. Calculated by author.
59. The relationship between aging and “quality” of whisky is not well established.
At least one major distiller has gone on record that American whisky deteri-
orates in quality after four to six years in the barrel. For a lengthier dis-
cussion see Harold L. Wattel, The Whisky Industry, Setepemacn doctoral
dissertation, New School, pp. 20-26, 35-36, oo 202-343
60. Harr ongg prices established by manufacturer for all trade levels and policed
im.
61. Minimum prices established by manufacturer for all trade levels but policed
by the State.
4
(fol. 83]
maintenance; nevertheless there is price shading even under the latter :
scheme.™
There are seasonal variations in the consumption of distilled
spirits by types but bottled spirits held from one season to the next
would not affect consumer choice even if he were able to detect this.
Many distillers allege that they are strong supporters of resale
price maintenance for their products and wholesale and retail liquor
dealers are on record in support of this type of price control for the
products they sell. Since price cutting under resale price mainte-
nance does occur it means that some businessmen at one or all, of. *-
the trade levels seek a market advantage by deviating from the sug-
gested prices of the distiller. To the extent that some states are
willing to cooperate with the industry to police the minimum prices,
the efficacy of resale price maintenance is enhanced. In few fields
outside of liquor does one find this type of industry-government coop-
eration to maintain prices. It is not by chance that many of the
significant judicial decisions on resale price maintenance have resulted
from litigation involving distillers.* In 1945, the Federal Trade
Commission concluded that, “While the operation of Federal and
State fair-trade laws has not proved.as successful in the liquor busi-
ness as had been hoped by its proponents, they have undoubtedly, -
had considerable restraining influence on price competition within
the liquor industry."= =
New York State has had mandatory resale price maintenance for.
liquors since April 15, 1950. Under it, brand owners must list mini- .
mum prices with the State Liquor Authority which'the latter polices.
Manufacturers, wholesalers, and retailers pay a fee to defray the
expenses of administering the regulation. Violators are subject to
penalties ranging from license suspension to license revocation.”
See Table 9 for a record of the fees collected and penalties meted out
since the law’s inception.
62. we —— 9 for a list or violations of minimum resale provisions of New York
tate law.
63. There are analogous situations in farm products.
64. See. eg., Old Dearborn Distributing Co. v. Seagram-Distillers Corporation,
299 U. S. 183 (1936), Schwegmann Bros., et al. v. Calvert Distillers Corpora-
tion, 341 U. S. 384 (1951), and Kiefer-Stewart Co. v. Joseph E. Seagram
& Sons, Inc., 340 U. S. 211 (1949). ,
65. oun of the Federal Trade Commission on Resale Price Maintenance
(1945), p. 406.
66. Laws of New York, Chapter 689, _, 101-C.
82.
(fol. 84]
TABLE 9
Fees Collected, Price Schedule Posting* and Minimum Consumer Resale
Price Posting** and Penalties Imposed for Violations of Minimum
Resale Price Regulations,t New York State, 1950-1961
Violations of
Consumer Regulation
* for which Licenses were
Minimum Consumer . Revoked, Cancelled of
Price Schedule Retail Price Suspended
Listing Fees Listing Fees sie
c Notice of Viole
Year Number Amount Number Amount se: tion Only:
OD «cts OES $74,600 6,995 $89,450 147
1951 .... 348 72,250 5,253 67,990 | 314
. er 70,250 5,246 67,400 . ai 9 244
re 69,250 §,212 © 66,530 10 190
1954 .... 330 70,300 5,256 67,270 12 . 139.
1935 .... 305 65950 — §,190 65,540 14 - 94
1956 .... 300 65,550 5,204 65,860 aay 68
| ere 67,700 5,118 64,870 eee 34
1958 .... 290 66,250 5,172 64,790 15 29
1959 .... 291 67,550 5,183 64,450 30 32
We ’.s0« BS 65,350 - 5,100 63,440 BS «i.
1961 .... 277 65,450 ~ 5,118 63,700 19 11
* To be filed by manufacturers and wholesalers pursuant to section 101-b of the
Alcoholic Beverage Control Law. The stated purpose of the section is to
promote temperance by eliminating price discrimination.
** To be filed by manufacturers and wholesalers pursuant to section 101-c of the
Alcoholic Beverage Control Law. The stated purpose of the section is to
promot: temperance by eliminating price wars. ~
T Schedule of penalties for violation of miniraum price regulations is found in
section i91-c part 7 as follows: ;
First offense—not exceeding ten days suspension of license. _
Second offense—not exceeding thirty days suspension of license.
Third offense—license may be suspended, cancelled or revoked.
In addition the penal sum of the bond filed by the licensee may be recovered
by the Authority.
Source: Annual Reports of New York State Liquor Authority
At the present time the majority of liquor markets are subject
to compulsory resale price maintenance. Of the 33 “license” sub-.
divisions of the nation, 17 have compulsory resale price maintenance,
while five have no fair-trade for liquors at all. Table 10 contains
the information by state.
yi,
[fol. 85]
TABLE 10
Liquor Price Control Arrangements,
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