Opinion
Argued February 7, 1985
Decided April 2, 1985
Appeal from the Appellate Division of the Supreme Court in the Second Judicial Department.
Appeal from the Appellate Division of the Supreme Court in the First Judicial Department, Arthur E. Blyn, J.
Robert Abrams, Attorney-General ( August L. Fietkau, Robert Hermann, Peter H. Schiff, Frederick K. Mehlman and Richard G. Liskov of counsel), for appellant in the first above-entitled matter.
Seymour Howard for respondent in the first above-entitled matter. Victor Feingold for Wine, Liquor Distillery Workers Union Local 1, AFL-CIO and others, amici curiae in the first above-entitled matter.
Martin P. Mehler for Metropolitan Package Store Association, Inc., and others, amici curiae in the first above-entitled matter.
Lawrence Kill, Steven M. Pesner, Daniel N. Sang, Scott B. Schreiber, Lee H. Karlin, Michael Whiteman and Anthony A. Dean for Peerless Importers, Inc., and others, amici curiae in the first above-entitled matter. Robert Abrams, Attorney-General ( August L. Fietkau, Robert Hermann, Peter H. Schiff, Richard G. Liskov and Robert S. Hammer of counsel), for appellants in the second above-entitled matter.
Seymour Howard for respondent in the second above-entitled matter.
Section 101-bb of the Alcoholic Beverage Control Law prohibits the retail sale of liquor for off-premises consumption at less than "cost" — the price per bottle offered by a wholesaler to a retailer plus a 12% mark-up on that price. Petitioners, retail liquor store licensees, concede that they have sold liquor below this statutory "cost", but contend that section 101-bb sanctions retail price maintenance in violation of the Sherman Antitrust Act ( 15 U.S.C. § 1 et seq.). They contend, therefore, that respondent's charges and findings of guilt based on these sales should be annulled as unlawful. The Appellate Divisions reviewing these proceedings agreed and, in each case, rejected respondent's contentions that the statute was protected by the State action exception to antitrust enforcement under Parker v Brown ( 317 U.S. 341) or by application of the 21st Amendment. Subsidiary issues are also involved. In J.A.J. Liq. Store, the court construed the scope of the prohibition on engaging in another business on licensed premises set forth in Alcoholic Beverage Control Law § 63 (4) and found no substantial evidence petitioner had violated it and in 324 Liq. Corp., the court reviewed the validity and potential anticompetitive effect of Bulletin 471 and invalidated it. We hold that section 101-bb is a proper exercise of the State's power under the 21st Amendment which does not conflict with the Sherman Act and that in J.A.J. Liq. Store there was no substantial evidence of a violation of section 63 (4) and we therefore modify the judgment of the Appellate Division, Second Department. We reverse the order of the Appellate Division, First Department, in 324 Liq. Corp.
I
J.A.J. LIQUOR STOREPetitioner J.A.J. Liquor, Inc., is a licensed retailer of liquor for off-premises consumption in Hicksville, New York. On February 20, 1980 respondent State Liquor Authority, the agency responsible for administering the Alcoholic Beverage Control Law, instituted a proceeding to cancel or revoke petitioner's license based on the following two charges: first, that petitioner violated Alcoholic Beverage Control Law § 63 (4) by engaging in another business on the licensed premises and second, that on January 25, 1980 petitioner violated Alcoholic Beverage Control Law § 101-bb (2) by selling alcoholic beverages below cost to a State Liquor Authority investigator. Petitioner pleaded not guilty and a statutory hearing was held before a hearing officer designated by respondent.
The evidence adduced at the hearing indicated that respondent's investigators went to petitioner's premises on the date alleged and purchased a bottle of Johnny Walker Red Label Scotch Whiskey for $9.50 together with a bottle of Bacardi Rum for $6.09. At the time of the sale, the minimum resale price for those products established pursuant to section 101-bb was $9.99 and $6.36, respectively. The evidence supporting the charged violation of Alcoholic Beverage Control Law § 63 (4) was that petitioner sold a stuffed animal to the investigators with a bottle of Black and White Scotch for $18. Petitioner's president testified that he sold the liquor and stuffed animal as a gift package; that he purchased the stuffed animals for $8 each; that the retail price of the liquor was $8.99; and, that he paid an additional sum for wrapping paper and bow which accompanied the gift package. He further testified that he had never sold any of the animals separately and would never do so.
Respondent adopted the findings of the hearing officer, sustained the charges and assessed a penalty of a $2,000 fine and 20 days deferred suspension. Petitioner then instituted an article 78 proceeding contending that respondent's determination concerning the sales of liquor below cost was unlawful because Alcoholic Beverage Control Law § 101-bb violates the Sherman Antitrust Act and that the determination that it had unlawfully engaged in another business was not supported by substantial evidence. The Appellate Division, Second Department, granted the petition, annulled respondent's determination and dismissed the charges. It found that the statutory minimum pricing scheme for liquor embodied in Alcoholic Beverage Control Law § 101-bb was virtually indistinguishable from the parallel retail price maintenance sections for wine invalidated in California Liq. Dealers v Midcal Aluminum ( 445 U.S. 97, 102) and Matter of Mezzetti Assoc. v State Liq. Auth. ( 51 N.Y.2d 761). Following the Midcal reasoning, the court concluded that the regulation of liquor sales under section 101-bb is not immune from antitrust legislation under Parker v Brown ( 317 U.S. 341, supra) and that the 21st Amendment does not shield the State from the antitrust laws. The court also ruled that respondent's determination that petitioner violated Alcoholic Beverage Control Law § 63 (4) by engaging in another business on the licensed premises was not supported by substantial evidence.
324 LIQUOR CORP.
Petitioner 324 Liquor Corp. was also charged by respondent with violating Alcoholic Beverage Control Law § 101-bb arising from the sale of liquor for off-premises consumption at a price less than cost. A statutory hearing was convened at which the parties stipulated that a Liquor Authority investigator purchased two bottles of liquor at petitioner's premises, a 1.75 liter bottle of Chatham Gin for $9.45 and a 1.75 liter bottle of Smirnoff's Vodka, 80 proof, for $11.59, at a time when the minimum consumer retail price was $9.65 for Chatham Gin and $11.89 for Smirnoff's Vodka. Respondent sustained the charge and imposed a penalty of 10 days suspension plus a $1,000 bond forfeiture. Petitioner then commenced an article 78 proceeding to review and annul respondent's determination on the ground that the minimum retail pricing scheme for liquor violates the antitrust laws. Petitioner also contended that respondent acted ultra vires in promulgating its rule 16 (9 N.Y.CRR 65.4), which requires that the price per bottle must exceed the price per case in which it is contained by $1.92 divided by the number of bottles in the case, because it lacks the statutory authority to compel wholesalers to add any amount to their prices. Further, petitioner maintains that respondent exceeded its statutory powers by issuing Bulletin 471. That Bulletin permits wholesalers to "post-off" or reduce the legal case price in any month without fully passing through the "post-off" to the consumer on the bottle price. Thus, petitioner alleges that Bulletin 471 allows wholesalers to offer quantity discounts for the benefit of the retailer in excess of those permitted by Alcoholic Beverage Control Law § 101-b. Special Term rejected each of petitioner's claims and dismissed the petition. The Appellate Division, First Department, reversed and annulled respondent's determination, ruling that section 101-bb was a price maintenance scheme which violated the Sherman Antitrust Act. It further held that Bulletin 471 improperly granted wholesalers the authority to determine if price reductions made during "post-off" periods should be passed through on single bottle prices and thereby encouraged private price maintenance. The court did not reach the issue of whether respondent acted ultra vires in promulgating rule 16.
On these appeals, respondent State Liquor Authority contends that Alcoholic Beverage Control Law § 101-bb does not violate the Sherman Act because the antitrust law condemns concerted action in the nature of "contract[s], combination[s] * * * or conspirac[ies]" which unreasonably restrain trade ( 15 U.S.C. § 1), not minimum mark-up price provisions of State law which do not compel anticompetitive activity. Alternatively, respondent maintains that this issue is not determinative because section 101-bb is exempt from challenge under the "State action" immunity doctrine enunciated in Parker v Brown ( 317 U.S. 341, supra), and that it is otherwise protected under the 21st Amendment.
II
The statutory provision in issue on this appeal was originally enacted in 1964 as part of a sweeping revision of our liquor laws based upon recommendations made by a specially appointed Moreland Commission. These statutes attempt to balance price protection for consumers on the one hand and to prevent retail licensees from obtaining unfair advantage over their competitors on the other. The consumers are protected by price affirmation and posting requirements intended to keep New York's prices in line with those of other States. Small retailers are protected by regulations governing minimum pricing, wholesale discounts and other means of obtaining competitive advantage so that the large dealers may not drive the small ones out of business. Thus, at the initial stage in the distribution process, manufacturers and distillers are required to file monthly schedules with the Liquor Authority which include their prices to wholesalers. Each manufacturer or distiller must file with the schedules an affirmation stating that the prices charged are no higher than the lowest prices charged wholesalers in any other State (Alcoholic Beverage Control Law § 101-b [a], [d]; see, Seagram Sons v Hostetter, 384 U.S. 35, affg 16 N.Y.2d 47 [requirement that liquor prices to domestic wholesalers be as low as prices offered elsewhere in the country held not to violate the Supremacy Clause or to conflict with the Sherman Act or the Robinson-Patman Act]; Matter of Brown-Forman Distillers Corp. v State Liq. Auth., 64 N.Y.2d 479 [decided herewith]). Thereafter, the wholesaler is free to fix the prices of the brands without statutory control, but it must also file schedules with the Liquor Authority each month which set forth its "case" and "bottle" price to retailers for all brands it markets (Alcoholic Beverage Control Law § 101-b [b]). Within 10 days after the filing, the Authority must make the schedules or a composite of them available for inspection by other licensees and within three days after the date provided for such inspection, a wholesaler may amend its filed schedule for sales to retailers in order to meet lower competing prices and discounts "provided such amended prices are not lower and discounts are not greater than those to be met" (Alcoholic Beverage Control Law § 101-b). This is a constitutionally permissible price-posting statute which does not authorize anyone to determine prices which bind others in violation of the Sherman Antitrust Act ( see, Matter of Admiral Wine Liq. Co. v State Liq. Auth., 61 N.Y.2d 858; Battipaglia v New York State Liq. Auth., 745 F.2d 166 [2d Cir, Sept. 21, 1984], cert denied ___ US ___, 105 S Ct 1393).
Exercising its statutory authority to reduce prices to meet competition ( see, § 101-b [4]), respondent also has issued Bulletin 471 which permits wholesalers to temporarily "post-off" on, or reduce, the case price. They may also "post-off" on the bottle price at the previous list price or at a price which is proportionately equivalent to the reduction in the case price. At the end of the "post-off" period, the wholesaler may return to but not exceed the "legal" maximum price reflected in the schedule filed with respondent.
Finally, section 101-bb, the section challenged on this appeal, provides for a legal minimum retail price. It prohibits retailers selling for off-premises consumption from selling below "cost". The cost or legal minimum retail price, however, is the "bottle price" filed by the wholesaler in the month the retailer makes a sale plus 12% of that "bottle price", a constant which reflects "the average minimum overhead necessarily incurred in connection with the sale by the retailer of such item of liquor" (Alcoholic Beverage Control Law § 101-bb [2] [b]). Section 101-bb (3) permits retailers to charge less than cost, however, after obtaining prior written permission from the Liquor Authority and after establishing good cause for doing so. This section was designed to protect small retailers from unfair competition ( see, Alcoholic Beverage Control Law § 101-bb [1]).
The section states:
"2. No licensee authorized to sell liquor at retail for off-premises consumption shall sell, offer to sell, solicit an order for or advertise any item of liquor at a price which is less than cost. As used in this section, the term:
"(a) 'liquor' shall mean liquor bearing a brand or trade name, and of like age and quality, which has been duly registered with and approved by the liquor authority pursuant to section 107A of this chapter, and
"(b) 'cost' shall mean the price of such item of liquor to the retailer plus twelve percentum of such price, which is declared as a matter of legislative determination to represent the average minimum overhead necessarily incurred in connection with the sale by the retailer of such item of liquor. As used in this paragraph (b) the term 'price' shall mean the bottle price to retailers, before any discounts, contained in the applicable schedule filed with the liquor authority pursuant to section one hundred one-b of this chapter by a manufacturer or wholesaler from whom the retailer purchases liquor and which is in effect at the time the retailer sells or offers to sell such item of liquor; except, that where no applicable schedule is in effect the bottle price of the item of liquor shall be computed as the appropriate fraction of the case price of such item, before any discounts, most recently invoiced to the retailer."
Petitioners specifically challenge the validity of section 101-bb but the implications of this litigation are much broader than the attempt to invalidate that section. If they are successful liquor prices will be deregulated and other statutory provisions designed to protect small retailers from unfair competition such as those specifying the maximum discounts permitted by law (§ 101-bb [2] [b]), prohibiting wholesalers from granting discriminatory discounts, prohibiting wholesalers from granting free merchandise or other inducements (§ 101-b [2] [b]; cf. Matter of Brown-Forman Distillers Corp. v State Liq. Auth., 64 N.Y.2d 479 [decided herewith], supra), and provisions limiting the credit period afforded to retailers by wholesalers (§ 101-a [2]) will lose much of their force.
III
Turning to the merits of the appeals, a preliminary determination must be made whether "State action" immunity or the 21st Amendment insulates section 101-bb from challenge under the antitrust laws. If either doctrine applies, the State enactment must be sustained and it is unnecessary to determine whether section 101-bb violates the antitrust laws.
A. State action Immunity under Parker v Brown Parker v Brown ( 317 U.S. 341, supra) involved an antitrust challenge to a California statute authorizing collective raisin marketing programs which eliminated pricing competition among producers. In upholding the marketing program, the Supreme Court noted that the challenged restraint derived from statutory command, not from any agreement among private persons, and it held that the Federal antitrust laws do not prohibit a State "as sovereign" from imposing certain anticompetitive restraints "as an act of government" ( id., at p 352). Two standards must be met before this State action immunity attaches: first, the challenged restraint must be "'one clearly articulated and affirmatively expressed as state policy'"; and second, the policy must be "actively supervised" by the State itself ( see, California Liq. Dealers v Midcal Aluminum, 445 U.S. 97, 105, supra). The Appellate Divisions held the immunity inapplicable in the appeals before us because the statutory scheme which permitted liquor prices to be set by wholesalers without any control by the State did not satisfy the active supervision requirement. We agree with those rulings.
In Midcal ( supra), the Supreme Court reviewed a challenge to California's system of resale price maintenance for wine. Under the California statutory scheme, wine producers, wholesalers or rectifiers were required to file fair trade contracts or price schedules with the State, and no licensed wine merchant was allowed to sell wine to a retailer at a price other than that set forth in the filed contract or schedule (Cal Bus Prof Code Ann §§ 24862, 24866). The prices were set in the first instance by the producers, wholesalers or rectifiers, and the State exercised no regulatory control over them. In applying the Parker criteria, the court found that although the requirement that the restraint be expressed as State policy was satisfied by the statutes themselves, the second requirement of the test had not because the State merely authorized price setting without exercising control or review over the prices established ( California Liq. Dealers v Midcal Aluminum, supra, at pp 105-106). Having determined that no State action antitrust immunity was available, the court held that California's wine pricing system constituted resale price maintenance which violated the Sherman Antitrust Act ( id., at p 103).
New York's pricing system for liquor similarly satisfies the first requirement of the test because the State policy of promoting the orderly distribution of liquor is "clearly articulated and affirmatively expressed" in the statute itself (Alcoholic Beverage Control Law § 101-bb [1]). As with California, however, New York does not actively supervise resale prices under its system of price maintenance. Liquor prices are set by the wholesalers and the State has no power to change the prices or review their reasonableness.
To contrast Connecticut's liquor price maintenance system has been held immune from the Sherman Act under the State action doctrine ( Morgan v Division of Liq. Control, 664 F.2d 353, affg 512 F. Supp. 936). Unlike contrast to the California and New York statutes, the Connecticut statute creates a tripartite pricing system by which the manufacturer or out-of-State shipper unilaterally establishes and files its offering price but the State then regulates the mark-ups allowed to the wholesaler and to the retailer. The wholesaler's prices cannot be less than its "cost", which is defined as actual cost from the manufacturer and such charges as transportation, insurance and a minimum mark-up of 11% on hard liquor, 20% on beer, 20% on wine not bottled in Connecticut, and 36% on wine bottled in Connecticut (Conn Gen Stat §§ 30-68, 30-68e, 30-68j), and retailers may not sell below their "cost", which is defined as the retailer's "bottle price" from the wholesaler plus a mark-up of 21.5% on spirits, 28% on cordials, 23% on beer, and 33.3% on wine (Conn Gen Stat §§ 30-68b, 30-68j). Although the manufacturer's prices are uncontrolled, the Morgan court found Parker's active supervision requirement satisfied by the Connecticut statute because the State participated in the anticompetitive activity by strictly regulating the "cost" at which both the wholesaler and the retailer could mark-up and sell their products.
B. Twenty-First Amendment
Section 1 of the 21st Amendment repealed the 18th Amendment's prohibition on the manufacture, sale or transportation of liquor. Section 2 provides that: "The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." The amendment, by its terms, gives the States broad regulatory powers over liquor traffic within their territories and that control "logically entails considerable regulatory power not strictly limited to importing and transporting alcohol" ( California Liq. Dealers v Midcal Aluminum, 445 U.S. 97, 107, supra; California v LaRue, 409 U.S. 109; Seagram Sons v Hostetter, 384 U.S. 35, 42, supra; United States v Frankfort Distilleries, 324 U.S. 293, 299). Because the States have the power to prohibit absolutely the manufacture, sale or possession of intoxicants within their borders, they may permit those acts only under carefully prescribed conditions. "The greater power includes the less[er]" ( Ziffrin, Inc. v Reeves, 308 U.S. 132, 138). Notwithstanding the "wide latitude" granted them by the 21st Amendment, however, important Federal interests have survived its ratification ( Seagram Sons v Hostetter, supra, at p 42). Specifically, Congress has retained authority to regulate interstate commerce in liquor under the Commerce Clause ( see, Bacchus Imports v Dias, 468 US ___, ___, 82 L ed 2d 200, 211-212; Hostetter v Idlewild Liq. Corp., 377 U.S. 324, 332), and that Commerce Clause authority may also be exercised by enforcement of the antitrust laws ( California Liq. Dealers v Midcal Aluminum, supra). There is no bright line dividing the areas of State and Federal primacy, "[b]oth the Twenty-first Amendment and the Commerce Clause are parts of the same Constitution. Like other provisions of the Constitution, each must be considered in the light of the other, and in the context of the issues and interests at stake in any concrete case" ( Hostetter v Idlewild Liq. Corp., 337 US, at p 332, supra). The court must analyze "'whether the interests implicated by a state regulation are so closely related to the powers reserved by the Twenty-first Amendment that the regulation may prevail'" notwithstanding a conflict between its provisions and Federal policies ( Bacchus Imports v Dias, supra, at p ___, at p 212, quoting Capital Cities Cable v Crisp, 467 US ___, 81 L ed 2d 580).
This interest analysis was applied in California Liq. Dealers v Midcal Aluminum ( supra), and by the California Supreme Court in Rice v Alcoholic Beverage Control Appeals Bd. ( 21 Cal.3d 431, 579 P.2d 476). In Rice, the California court invalidated a statute establishing resale price arrangements for distilled spirits as in violation of the Sherman Antitrust Act, holding that neither the State action exception nor the 21st Amendment provided a basis to uphold that State's fair trade laws. (Significantly, the California statutes do prohibit sales below cost [ see, 21 Cal.3d 431, at p 458, 579 P.2d, at p 494]). In applying interest analysis to determine the applicability of the 21st Amendment, it ruled that the stated purposes of California's liquor price maintenance laws were to promote temperance and orderly market conditions. Reviewing the evidence offered in support of these aims, the court concluded that the law had no impact on temperance and that it adversely affected market conditions. It based its decision in part on a report of the California Senate Committee which stated that the price maintenance system "has resulted in the elimination of any semblance of competition within the industry" resulting in higher retail prices (1 Sen Select Comm Rep on Laws Relating to Alcoholic Beverages, at 9 [1974]). Thus, the court held that the asserted State interests were not furthered by California liquor price maintenance laws and, in contrast, that the Federal policy of promoting competition which underlies the Sherman Act was clearly violated ( see, Northern Pac. Ry. Co. v United States, 356 U.S. 1, 4-5). Balancing the strong Federal policy against the weakly supported State interests, the court concluded that the Federal interest predominated and that the 21st Amendment did not bar application of the Sherman Act.
In Midcal, the Supreme Court relied upon the California court's decision in Rice and found that the 21st Amendment did not bar application of the antitrust laws to California's wine industry. It explicitly refrained from deciding "whether the legitimate state interests in temperance and the protection of small retailers ever could prevail against the undoubted federal interest in a competitive economy" (445 US, at pp 113-114; see also, United States v Frankfort Distilleries, 324 U.S. 293, 299, supra [in which defendants were convicted of illegal price fixing under the Sherman Act because there was no regulatory State act which conflicted with the Federal statute], and esp concurring opn of Frankfurter, J., at pp 300-303).
New York's experience in regulating alcoholic beverages has been markedly different from that of California. The legislative history of section 101-bb forcefully demonstrates that an important reason for its enactment and amendment to its present form was to protect small retailers and the number of retail liquor outlets selling for off-premises consumption. The statute was first enacted following widespread charges of corruption and abuse which prompted a Moreland Commission investigation into irregularities in the administration of New York's Alcoholic Beverage Control laws. At the conclusion of its investigation, the Commission published five Study Papers in which it proposed extensive revision of the existing statutes. The Commission's major findings were that New York consumers suffered from serious price discrimination when compared to liquor consumers in other States and that a severe lack of competition existed in the New York retail market. It proposed that changes be made in the method of regulating retail prices, that more retail licenses be issued for off-premises consumption, that artificial restrictions on the location and transfer of licensed retail stores be eliminated and that inhibiting restrictions on their operation be reduced (for a general background of this history and of the Commission's findings and recommendations see, Seagram Sons v State Liq. Auth., 16 N.Y.2d 47, affd 384 U.S. 35, supra; Matter of Hub Wine Liq. Co. v State Liq. Auth., 16 N.Y.2d 112; Matter of Great E. Liq. Corp. v State Liq. Auth., 30 A.D.2d 307, 309, affd 25 N.Y.2d 525; Moreland Commission Report, 1964 N.Y. Legis Ann, at 484-489; Statement by Governor Rockefeller on April 12, 1964, 1964 N.Y. Legis Ann, at 403-408). Paradoxically, the principal purposes of the legislation resulting from these proposals and which is now challenged on antitrust grounds were the same as those underlying the Sherman Act — to promote market competition and protect consumers.
Section 101-bb (L 1964, ch 531) was enacted as a result of these proposals. It expressed the legislative determination that "the declared policy of the state" was to regulate and control the manufacture, sale and distribution of liquor within the state and to "eliminate retail sales of liquor at less than cost" (Alcoholic Beverage Control Law § 101-bb [1]). The validity of the statute was affirmed by this court and by the Supreme Court ( Seagram Sons v Hostetter, 16 N.Y.2d 47, affd 384 U.S. 35, supra).
By 1971 it had become apparent that further amendment was needed to protect small retailers because hundreds of package stores were being forced out of business by the predatory pricing practices of large discount dealers ( see, 1971 N.Y. Legis Ann, at 80-82; cf. Safeway Stores v Oklahoma Grocers, 360 U.S. 334; Nebbia v New York, 291 U.S. 502). The Excise Committee of the New York Senate investigated the situation and found that after the 1964 revisions there was an inordinate and continuing emphasis on price cutting and price promotions in the industry, that the continued employment of "lossleader" selling had resulted in a rapidly accelerating concentration of volume in the hands of a relatively few stores, and that this concentration interfered with the attainment of "normal" competition and threatened the survival of the entire retail economy of the liquor industry. The Committee's Final Report stated: "Since it seems patent that the mass of small retailers are unable to compete with the large volume outlets that have emerged, most appear doomed barring the adoption of some formula that will permit the co-existence of both types of outlets. This leaves New York's consumers facing the future prospect of being relatively poorly served only by mass merchandisers" (NY State Legis, Senate Excise Committee, Final Report of the Senate Excise Committee, April 5, 1971, at 29-30, as quoted in House of Spirits v Doyle, 72 Misc.2d 1036, 1040). Although these practices produced temporary price reductions to the consumer, but the benefits could prove transitory, threatening to drive small retailers out of business and consolidating control of the market in the hands of a relatively few mass distributors who could then dictate prices to the ultimate injury of consumers and market competition generally.
The Legislature responded to this threatened danger by enacting the minimum mark-up amendment to section 101-bb (L 1971, ch 191). It was expressly designed to preserve competition in New York's retail liquor industry by stabilizing the retail market and protecting the economic position of small liquor retailers. We approved the amendment and recognized the important public policy which prompted it when we affirmed House of Spirits v Doyle ( 72 Misc.2d 1036, affd 43 A.D.2d 880, affd 36 N.Y.2d 815). There have been criticisms of the statute since 1971 and efforts to repeal it, as the dissent notes, but the Legislature has refused to do so and indeed has considered amendments seeking to increase the permitted minimum mark-up ( see, 1984 N.Y. Legis Record and Index, S 6541).
This history demonstrates New York's commitment to protect its small retailers and the investigative determinations upon which the statutes intended to do so are premised. Having experienced problems in the intrastate retail liquor market, the Legislature exercised its powers under the 21st Amendment to correct them. The statute in question responds to this perceived State interest and is thus distinguishable from the California statutes considered in the Rice and Midcal decisions. Additionally, we note that New York's history and experience have dictated that if the consumer of alcoholic beverages in this State is to be protected from inflated prices and to enjoy the benefits to be derived from market competition, then the regulatory provisions in section 101-bb and related sections best serve that purpose. Inasmuch as those charged with enacting and enforcing the laws in this area of State responsibility have identified the statute as embodying an important public policy that policy should prevail over the generalized concerns of the Sherman Antitrust Act ( see, Battipaglia v New York State Liq. Auth., 745 F.2d 166, 178-179 [2d Cir, Sept. 21, 1984], cert denied ___ US ___, 105 S Ct 1393, supra).
On the important matter of price regulation, the Commission noted that under the former statute the manufacturer was permitted to fix the price of liquor and the retailer could not sell it for less (Alcoholic Beverage Control Law former § 101-c). The assumption behind this law was that high prices promoted temperance. The Commission's studies led it to believe, however, that the assumed favorable relation of high-priced liquor to temperance did not exist (Moreland Commn Report No. 1, at 3, 17). The principal benefit from the statutory price provision went to the liquor interests who, after setting their own prices, had them enforced by State investigators. This regulation, the Commission said, served only "to insure the profit margins of the various segments of the industry" (Report No. 3, at 19). Moreover, the Commission found gross price discrimination against the New York consumer by the industry. Indeed, it found that the retail price for a fifth of a well-known brand of liquor was lower in Washington, D.C. than the wholesale price in New York ( see, Report No. 3, at 5, 6). "For almost every fifth of whiskey that he buys", the Report stated, "the New York consumer pays from 50 cents to $1.50 more than the price at which it is available in at least seven freer price markets" ( id., at 3).
Matter of Mezzetti Assoc. v State Liq. Auth. ( 51 N.Y.2d 761, supra), which invalidated parallel pricing provisions for wine (Alcoholic Beverage Control Law § 101-bbb) does not require a different result. New York has historically regulated traffic in distilled spirits strictly. Implicit in the brief Mezzetti decision, however, was a recognition that the degree of protection New York has accorded its wine industry is not significantly different from that in California as reviewed in the Midcal decision. Thus, all liquor distillers and manufacturers must meet statutory affirmation requirements and file price schedules (Alcoholic Beverage Control Law § 101-b [d]), but wine dealers need not file affirmations and they are permitted exceptions to the price schedule requirements (Alcoholic Beverage Control Law § 101-bbb [3] [d]). Wineries may sell wine at retail at any time (9 N.Y.CRR 63.6), they may sell in bulk to persons outside the State (Alcoholic Beverage Control Law § 77) and they may manufacture other products and carry on other related business on the licensed premises (Alcoholic Beverage Control Law § 77). Indeed, New York recently enacted legislation permitting wine products to be sold in grocery stores (L 1984, ch 502) and broadly expanding the retail sale privileges accorded wineries (L 1984, chs 500-505). Liquor stores enjoy none of these advantages, which evidence a clear recognition by the Legislature that the need to protect wine sellers from unfair competition does not require the intensive regulation and control requirements that the liquor industry generally requires. Indeed, one of the principal arguments in support of the newly enacted wine-marketing bills was that the industry needed economic encouragement through greater deregulation if it was to survive ( see, Governor's Memorandum, 1984 McKinney's Session Laws of NY, at 3607).
Accordingly, we conclude not only that the State interest in protecting retailers which underlies our statutes is of sufficient magnitude to override the Federal policy expressed in the antitrust laws, but also that the State policy of regulating prices to protect consumers and maintain extensive retail outlets is consistent with the Federal statutes. We hold, therefore, that the 21st Amendment shields the State from the provisions of the Sherman Antitrust Act and in view of our holding, that portion of respondent's determination in each case which found petitioners to have violated section 101-bb must be reinstated.
IV
In J.A.J. Liq. Store, the Appellate Division concluded that respondent's determination that petitioner had engaged in another business on the licensed premises was not supported by substantial evidence. We agree with that portion of the Appellate Division's decision.
Alcoholic Beverage Control Law § 63 (4) provides that "[n]o licensee under this section shall be engaged in any other business on the licensed premises." The statute is intended to prohibit a separate profit generating business. Thus, in Matter of Anchor Liqs. v State Liq. Auth. ( 31 A.D.2d 812), the court held that there was substantial evidence of a violation of the statute because petitioner ran a complete catering service on the licensed premises. The uncontroverted evidence in this proceeding established that petitioner was not engaged in the business of selling stuffed animals because the animals were sold only as part of gift packages of liquor and the sale of the animals themselves did not generate a profit.
V
In 324 Liq. Corp., the First Department viewed State Liquor Authority Bulletin 471 as giving wholesalers the power to set minimum mark-ups above 12% and it invalidated section 101-bb partially because of that finding. The court also held Bulletin 471 was invalid because its provisions exceeded respondent's authority.
Preliminarily, the Appellate Division erred in using the purported anticompetitive effect of Bulletin 471 as a basis for invalidating section 101-bb. Constitutional problems created by a regulation should be resolved by invalidation of the regulation alone, not invalidation of both the statute and regulation ( cf. Loretto v Teleprompter Manhattan CATV Corp., 58 N.Y.2d 143, 154) In addition, the Bulletin is a proper exercise of the Liquor Authority's rule-making power under Alcoholic Beverage Control Law § 101-b (3) (b) and Alcoholic Beverage Control Law § 101-b (4).
Bulletin 471 allows individual wholesalers to decide whether to "post-off" reductions on case prices accompanied by corresponding reductions in bottle prices. In some situations, the wholesaler may choose to grant a smaller price reduction on the bottle price, or no reduction at all. This practice is consistent with Alcoholic Beverage Control Law § 101-b (3) which does not mandate any price ratio between scheduled case and bottle prices.
The Appellate Division concluded that the Bulletin is invalid, in part, because it permits a "post-off" on a case which is not followed by an equivalent "post-off" on a bottle price with the result that a retailer may charge a mark-up in excess of 12%. Bulletin 471 does not authorize such a practice. In reselling a bottle of liquor which was purchased by the retailer as part of a full case, the minimum mark-up price is derived from the statute by referring to the scheduled bottle price and adding 12%, rather than by dividing the case price by the number of bottles in the case and then adding 12% to each bottle to be individually resold. As a result, the "post-off" price of a bottle of liquor is the governing figure, not the case price. A retailer pays the scheduled post-off price regardless of the number of cases or bottles purchased.
Accordingly, in Matter of J.A.J. Liq. Store v State Liq. Auth., the judgment of the Appellate Division should be modified, with costs to appellant, and the matter remitted to Supreme Court, Nassau County, with directions to remand to the State Liquor Authority for further proceedings in accordance with this decision and, as so modified, the order is affirmed.
In Matter of 324 Liq. Corp. v McLaughlin, the order of the Appellate Division is reversed, with costs, and judgment of Supreme Court, New York County, reinstated.
Chief Judge WACHTLER and Judges MEYER and LYNCH concur with Judge SIMONS; Judge JASEN concurs in a separate opinion; Judge KAYE dissents and votes to affirm in another opinion; Judge ALEXANDER taking no part.
Designated pursuant to N Y Constitution, article VI, § 2.
Matter of J.A.J. Liq. Store v New York State Liq. Auth.: Judgment modified, etc.
Matter of 324 Liq. Corp. v McLaughlin: Order reversed, etc.
While I agree with the majority that the 21st Amendment shields the challenged regulatory scheme from antitrust liability ( Battipaglia v New York State Liq. Auth., 745 F.2d 166, 168-170, affg 583 F. Supp. 8, cert denied ___ US ___, 105 S Ct 1393), I concur in reversing the order of the Appellate Division upon two additional grounds. I believe that the State activity in controlling the sale of alcoholic beverages does not contravene Federal antitrust policy, and is, in any event, immunized from antitrust liability by the state action doctrine.
The threshold question is whether New York's liquor price maintenance program violates the Sherman Antitrust Act ( 15 U.S.C. § 1). ( California Liq. Dealers v Midcal Aluminum, 445 U.S. 97, 102.) The Sherman Act provides, in pertinent part, that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal". ( 15 U.S.C. § 1.) Section 1 of the Sherman Act is directed only at joint action and does not proscribe independent business actions and decisions. ( Modern Home Inst. v Hartford Acc. Indem. Co., 513 F.2d 102, 108-109.) The statute embraces a fundamental distinction between concerted and independent action. ( Copperweld Corp. v Independence Tube Corp., 467 US ___, 104 S Ct 2731, 2740.) Unlike the California statute in Midcal, the New York regulatory scheme does not authorize or compel private parties to enter contracts or combinations in restraint of trade, nor does it condone agreements between independent businessmen. ( Morgan v Division of Liq. Control, 664 F.2d 353, 355, affg sub nom. Serlin Wine Spirit Merchants v Healy, 512 F. Supp. 936; see, Fuchs Sugars Syrups v Armstar Corp., 602 F.2d 1025, 1029, cert denied 444 U.S. 917.) A wholesaler may freely set prices under the New York regulatory system; his conduct is strictly unilateral. The language of the Sherman Act should not be extended to preempt a system of state regulation where the challenged conduct involves a matter of special state interest (US Const 21st amend), and there is no agreement or joint action in restraint of trade at issue.
Other courts have recognized that antitrust liability for minimum mark-up statutes does not attach where the statutes do not immunize or implement agreements to restrain trade. ( See, e.g., Fisher Foods v Ohio Dept. of Liq. Control, 555 F. Supp. 641; Little Rock School Dist. v Borden, Inc., 1980-2 Trade Cas [CCH], ¶ 63,493 [ED Ark, Aug. 5, 1980]; Cochran Co. v Comptroller, 292 Md. 3, 437 A.2d 194; Walker v Bruno's, Inc., 650 S.W.2d 357 [Tenn].)
The Supreme Court has traditionally been hesitant to apply the Sherman Act in a manner which would defeat the policy of a State. ( United States v Frankfort Distilleries, 324 U.S. 293, 299 [Black, J.].) This is especially true in the field of liquor control within state borders, where the 21st Amendment, as a matter of constitutional law, accords state regulation of alcoholic beverages a preferred status. ( United States v Frankfort Distilleries, 324 U.S. 293, 300-301, supra [Frankfurter, J., concurring].) Programs of state regulation, such as the challenged liquor pricing scheme, whose anticompetitive efforts are felt wholly within the enacting states, should be beyond the reach of the Sherman Act. ( See, Easterbrook, The Court and the Economic System, 98 Harv L Rev 4, 51, n 120; Easterbrook, Antitrust and Economics of Federalism, 26 J L Econ 23.) The statute's wholly intrastate character virtually eliminates any conflict with the antitrust laws enacted on authority of the Commerce Clause ( Serlin Wine Spirit Merchants v Healy, 512 F. Supp. 936, 943, affd sub nom. Morgan v Division of Liq. Control, 664 F.2d 353, supra; cf. Battipaglia v New York State Liq. Auth., 745 F.2d 166, 172, n 9, cert denied ___ US ___, 105 S Ct 1393, supra).
Moreover, the aim of the antitrust laws, the maximization of consumer welfare, is not hindered by New York's liquor pricing scheme. As aptly demonstrated by the majority (at pp 513-514), the scheme protects consumer interests by avoiding an integrated system of liquor distribution. Economic liberty in New York's liquor industry is of paramount state concern, and New York's system of regulation is not to be preempted by the Federal antitrust laws simply because it might hypothetically have an anticompetitive effect. ( Rice v Williams Co., 458 U.S. 654, 659.) This State's regulatory scheme may be easily reconciled with section 1 of the Sherman Act ( 15 U.S.C. § 1; cf. Matter of Admiral Wine Liq. Co. v State Liq. Auth., 61 N.Y.2d 858, modfg 89 A.D.2d 522), by recognizing that: the regulatory scheme is of a clear intrastate character, no question of joint action in restraint of trade is involved, the distribution of alcoholic beverages has been constitutionally denominated a matter of proper concern for the States, and New York's liquor pricing scheme is congruous with the Federal policy favoring competition. Thus, Federal antitrust policy has not realistically been contravened by New York's regulation of liquor prices.
See, Posner, Antitrust Laws: An Economic Perspective, at 8, 18-20; Bork, The Antitrust Paradox: A Policy at War With Itself, at 81; 1 Areeda Turner, Antitrust Law, at ¶¶ 103-105.)
In the event that the operation of New York's liquor pricing system is thought to implicate Federal antitrust interests, the "state action" doctrine immunizes this State's scheme from antitrust liability. ( Parker v Brown, 317 U.S. 341; see also, Olsen v Smith, 195 U.S. 332.) Application of the state action exemption is contingent upon satisfaction of the two-part standard set forth in California Liq. Dealers v Midcal Aluminum ( 445 U.S. 97, 105, supra): "First, the challenged restraint must be 'one clearly articulated and affirmatively expressed as state policy'; second, the policy must be 'actively supervised' by the State itself. City of Lafayette v Louisiana Power Light Co., 435 U.S. 389, 410 (1978) (opinion of Brennan, J.) [n omitted]." Inasmuch as there is no question that this challenged liquor pricing scheme represents a clearly articulated and affirmatively expressed State policy, I turn to the question whether there has been active State supervision of the pricing scheme. Under Midcal, simply authorizing price setting and enforcing the prices established by private parties are insufficient state acts to confer Parker immunity. Rather, the Supreme Court establishes the following state actions which may be deemed indicia of active state supervision: price establishment, review of the reasonableness of the price schedules, regulation of the terms of fair trade contracts, the monitoring of market conditions, or any pointed reexamination of the program. ( Midcal, supra, at pp 105-106.)
The Supreme Court's clear articulation and active supervision test is intended to prevent the "casting * * * [of] a gauzy cloak of state involvement over what is essentially a private price-fixing arrangement". ( Midcal, supra, at p 106; see also, Serlin Wine Spirit Merchants v Healy, 512 F. Supp. 936, 941-942, n 15, affd sub nom. Morgan v Division of Liq. Control, 664 F.2d 353, supra.) The test was borne of "the widespread perception that resourceful lawyers and ambitious state officials had built on the precepts of Parker so creatively that large and important areas of each state's economy were alleged to be protected from antitrust scrutiny by what must have seemed in some cases to be a rather flimsy veil of state action". (Shenefield, The Parker v Brown State Action Doctrine and The New Federalism of Antitrust, 51 Antitrust LJ 337, 340.) The posture of the instant appeals before this court is markedly different than the typical controversies in which private parties seek to invoke Parker immunity. Here, we are not presented with an attempt by a private party to seek safe harbor within the state action exemption. Rather, antitrust immunity is sought to be invoked by an instrumentality of the State on behalf of private entities, which has acted in a sovereign capacity, pursuant to clear legislative command. I submit that within the context of this action, the concerns sought to be remedied by the Midcal test are simply not present. The second test of Midcal has, in any event, been met by the State Liquor Authority's active supervision of the pricing scheme.
The case of Morgan v Division of Liq. Control ( supra) is instructive as to the resolution of the question whether there has been active state supervision of the challenged program. Of critical importance in the Second Circuit's determination that Connecticut's statutory regulation of the price of alcoholic beverages was actively supervised by that State was the fact that Connecticut established a minimum mark-up upon each type of alcoholic beverage offered for sale. ( Morgan v Division of Liq. Control, 664 F.2d 353, 355-356, supra.) In New York, a closely analogous statutory mark-up is directly imposed by the State. Off-premises retailers are generally not authorized to sell liquor at a price which is less than "cost" (Alcoholic Beverage Control Law § 101-bb [2].) "Cost" is defined as "the price of such item of liquor to the retailer plus twelve percentum of such price, which is declared as a matter of legislative determination to represent the average minimum overhead necessarily incurred in connection with the sale by the retailer of such item of liquor." (Alcoholic Beverage Control Law § 101-bb [2] [b] [emphasis added].)
It has been said that a state sales-below-cost statute, which mandates minimum mark-ups, constitutes adequate supervision by the state, since the provision "not only reflects a legislative judgment that retailers should be required to charge certain minimum prices, but reflects a judgment as to what those prices should be." (Posner, The Proper Relationship Between State Regulation and the Federal Antitrust Laws, 49 N.Y.U L Rev 693, 722.) The 12% mark-up, as well as the requirement that manufacturers or distillers may only sell at prices which are no higher than the lowest prices charged wholesalers in any other state (Alcoholic Beverage Control Law § 101-b), represent legislative policy determinations to displace unfettered competition at two critical stages of the distributive chain. Such restrictions constitute active state supervision.
The Supreme Court has held that active state supervision may be established if the state "monitor[s] market conditions" or engages in any "pointed reexamination" of the pricing program. ( California Liq. Dealers v Midcal Aluminum, 445 U.S. 97, 106, supra.) In order to closely tailor the regulatory scheme to changing market conditions, the State Liquor Authority has conducted careful reexaminations of the price maintenance program. For example, Bulletin 471, which has been challenged and upheld on the instant appeal (majority opn, at pp 522-523), advises wholesalers that "there developed a situation during post-off periods which resulted in what became known as a 'two bottle' price. The Authority has recognized this as undesirable, if not illegal". This policy statement manifestly demonstrates that the Authority both "monitor[s] market conditions" and engages in "pointed reexamination", thus satisfying the Midcal requirement of active state supervision. Moreover, the Authority is authorized to respond to market forces in individual cases where wholesalers or retailers are aggrieved. Alcoholic Beverage Control Law § 101-b (3) (b) provides that a wholesaler may pass through increased costs of labor or other operating costs on the written permission of the Authority, for good cause shown and for reasons not inconsistent with the Alcoholic Beverage Control Law. Also, wholesalers may be relieved of selling at the posted price if the prior written permission of the Authority, upon good cause shown, is secured. (Alcoholic Beverage Control Law § 101-b [b].) A retailer may offer to sell liquor at a price less than cost provided that prior written permission therefor is granted by the Authority for good cause shown and for reasons not inconsistent with the Alcoholic Beverage Control Law and under such terms and conditions as the Authority deems necessary. (Alcoholic Beverage Control Law § 101-bb [3].) The State Liquor Authority may determine the continued desirability of certain proscriptions as applied to the industry at large, or in individual cases involving hardships upon retailers and wholesalers. Such determinations, which respond to changing market conditions, are strong evidence of continuing regulatory supervision of the liquor pricing scheme. ( See, Morgan, Antitrust and State Regulation: Standards of Immunity After Midcal, 35 Ark L Rev 453, 470.)
Another indicia of active state supervision is evidence that the Legislature has frequently debated the merits of the pricing system. ( Morgan v Division of Liq. Control, 664 F.2d 353, 355, supra.) It cannot be seriously disputed that the legislative branch has periodically conducted a "pointed reexamination" of the challenged program. ( California Liq. Dealers v Midcal Aluminum, 445 U.S. 97, 106, supra.) As well established by the majority (at pp 518-520), New York's pervasive regulation of the distribution of alcoholic beverages is the result of extensive legislative hearings during the last two decades. ( See, House of Spirits v Doyle, 72 Misc.2d 1036, affd 43 A.D.2d 880, affd 36 N.Y.2d 815, supra.) Indeed, the liquor pricing program of this State remains a subject of substantial controversy in the New York State Legislature. ( See, e.g., Vol 1, 1985 N.Y. Legis Digest, A 5151; 1984 N.Y. Legis Record and Index, S 6541; Page, Antitrust, Federalism, and the Regulatory Process: A Reconstruction and Critique of the State Action Exemption After Midcal Aluminum, 61 BU L Rev 1099, 1136, n 210.) There can be no question that the challenged program has historically and periodically been subjected to pointed reexamination by means of official, legislative oversight.
Based upon the 12% minimum mark-up imposed upon the price of liquor to be sold by the retailer, the monitoring of market conditions affecting the liquor industry and individuals, the pointed reexamination of the pricing scheme by the executive and legislative branches, and the substantial legislative debate upon the pricing scheme, I would hold that there exists continuous and active state supervision of the regulatory scheme so as to confer antitrust immunity.
I would affirm the Appellate Division orders for the reasons stated by Justice Lawrence J. Bracken ( 102 A.D.2d 240) and Justice E. Leo Milonas ( 102 A.D.2d 607).
The 21st Amendment does not vest States with unlimited power to regulate alcoholic beverages in disregard of Federal law. Rather, when such regulation is challenged we must make a "pragmatic effort to harmonize state and federal powers" ( California Liq. Dealers v Midcal Aluminum, 445 U.S. 97, 109), and to determine "whether the interests implicated by a state regulation are so closely related to the powers reserved by the Twenty-first Amendment that the regulation may prevail, notwithstanding that its requirements directly conflict with express federal policies" ( Capital Cities Cable v Crisp, 467 US ___, 104 S Ct 2694, 2708). The question, then, is whether New York can continue a system of resale price maintenance for alcoholic beverages, when price-fixing is condemned as a per se violation of the Sherman Act ( see, e.g., Monsanto Co. v Spray-Rite Serv. Corp., 465 U.S. 752, 104 S Ct 1464, 1469-1470).
Implicit in any analysis of State regulation under the 21st Amendment is an assumption that the State policy supporting its regulation is not illusory. Neither of the two policies declared to support the scheme of resale price maintenance — the promotion of temperance and the maintenance of an orderly market for alcoholic beverages — has substantial basis. The Moreland Commission concluded that "[n]either temperance nor respect for law is promoted by the artificially maintained high prices that sacrifice the interest of the consumer to the benefit of the liquor industry" (Moreland Commission Report and Recommendations No. 3, at 1). Even if the pricing scheme could be upheld as furthering a State policy to protect small retailers against unfair competition, it goes well beyond, and by fixing minimum resale prices effectively and unnecessarily forecloses all competition. Predatory pricing drives, followed by oligopolistic market conduct, are not an inevitable consequence of free competition in alcoholic beverages or any other industry, as evidenced by the many retail businesses in which large chains and small proprietorships exist side by side. With the full panoply of antitrust and other laws at their disposal, New Yorkers are hardly powerless to deal with unfair competition.
I note in addition that repeated dissatisfaction has been expressed with the compulsory resale price maintenance scheme today upheld by this court. The Moreland Commission itself recommended in 1964 the repeal of provisions requiring minimum consumer resale prices (Moreland Commission Report and Recommendations No. 3, at 30). More recently, a Senate Committee recommended "the repeal of all controls on the price of alcoholic beverages (other than the requirement that manufacturers charge New Yorkers no more than their lowest price in all other states)" because such "controls unreasonably interfere with the proper and economic functioning of the alcoholic beverage industry." (Recommendation of the Senate Standing Committee on Investigations and Taxation for Revisions of Alcoholic Beverage Control Law, at 7 [June 25, 1981].)