noting that "[t]he central issue" on appeal is whether "the focus of the investigation is . . . beyond the scope of the Attorney-General's investigative powers"Summary of this case from James v. IFINEX Inc.
Argued January 6, 1988
Decided February 11, 1988
Appeal from the Appellate Division of the Supreme Court in the First Judicial Department, Hortense W. Gabel, J.
Robert Abrams, Attorney-General (Alan Pfeffer, O. Peter Sherwood, Lloyd Constantine, Katherine L. Frank, Elizabeth M. O'Neill, Richard M. Weinberg and Alice McInerney of counsel), for appellant.
Thomas H. Milch, Jerome I. Chapman, Wayne C. Holcombe, David Rees Davies, Adeeb Fadil, Terrence Sheehy, Peter Moll, Roxann Henry, William Pelster, David Elkind, David Beckwith, Michael Fischer, Gary Hoppe, Eugene D'Ablemont, Robert Getman, Robert Crotty, Ernest Gellhorn, Adrian Wager-Zito, Hugh Latimer, Robert Skitol, Richard Nash, Henry B. Gutman, Douglas Richards, Richard C. Stein and Matthew Feigenbaum for respondents.
The petitioners — four brewers, several beer wholesalers and a beer wholesalers' trade association — brought these proceedings to quash subpoenas duces tecum and interrogatories served upon them by the Attorney-General pursuant to an investigation into marketing practices in the beer industry which the Attorney-General alleges may violate the State's antitrust laws. The central issue posed by this appeal, here by leave of the Appellate Division, is whether that court properly granted the applications on the ground that the focus of the investigation is an activity which is per se legal under State law and therefore beyond the scope of the Attorney-General's investigatory powers.
The Appellate Division also certified the following question: "Was the order of this Court, which reversed the six judgments (denominated orders) of the Supreme Court, properly made?" Because the order appealed from finally determines these special proceedings (see, Matter of Abrams [Anonymous], 62 N.Y.2d 183, 192), the certified question was unnecessary and need not be answered.
We hold that General Business Law § 343 authorizes the Attorney-General to investigate the practice in question and that it was error, therefore, to quash the subpoenas and interrogatories.
I.The subpoenas and interrogatories now challenged were issued to the petitioners beginning in May 1985 as part of an investigation by the Attorney-General into the pervasive use in the beer industry of exclusive territorial distributorships. The Attorney-General alleges — and petitioners do not dispute for purposes of these proceedings — that since 1982 brewers and wholesaler distributors have entered into agreements establishing exclusive territorial rights to sell each brewer's products to retail outlets. According to the Attorney-General, under this scheme, the brewer agrees to sell its products to only one designated wholesaler in a given territory and that wholesaler, in turn, agrees not to sell the brewer's products outside that territory or to anyone inside the territory who would resell the products elsewhere. The aim of these agreements, allegedly, is to eliminate intrabrand competition by "transshippers", independent wholesalers who, prior to the advent of these agreements, could buy beer from a franchised wholesaler in one territory and sell it in another territory, in competition with another franchised wholesaler.
The parties agree that, to the extent that this arrangement results in a restraint of trade, it is a "vertical" restraint — that is, one imposed by an agreement between noncompetitors who occupy different levels in the distribution chain — as opposed to a "horizontal" restraint, which results from an agreement among competitors at the same level of distribution. The Attorney-General contends that, although such vertical restraints are not per se illegal under New York's antitrust law (the Donnelly Act; General Business Law § 340 et seq.), they may be found to be illegal if, under all the circumstances, they impose an unreasonable restraint on competition. Petitioners concede that the "rule of reason" analysis urged by the Attorney-General would be employed to determine if the practice violates Federal antitrust law (see, e.g., Continental T.V. v GTE Sylvania, 433 U.S. 36), but they argue that the courts of this State have ruled that such vertical restraints are per se legal under the Donnelly Act. Accordingly, they conclude, the Attorney-General lacks authority to conduct an investigation designed to facilitate a rule of reason analysis of the brewing industry practice.
An application to quash a subpoena should be granted "[o]nly where the futility of the process to uncover anything legitimate is inevitable or obvious" (Matter of Edge Ho Holding Corp., 256 N.Y. 374, 382) or where the information sought is "`utterly irrelevant to any proper inquiry'" (Matter of La Belle Creole Intl., S.A. v Attorney-General of State of N.Y., 10 N.Y.2d 192, 196, quoting Matter of Dairymen's League Coop. Assn. v Murtagh, 274 App. Div. 591, 595, affd 299 N.Y. 634). In defending his inquiry, the Attorney-General enjoys a presumption that he is acting in good faith (Matter of Ryan v Lefkowitz, 26 A.D.2d 604, affd 18 N.Y.2d 977) and must show only that the materials sought bear "a reasonable relation to the subject matter under investigation and to the public purpose to be achieved" (Carlisle v Bennett, 268 N.Y. 212, 217; see also, Virag v Hynes, 54 N.Y.2d 437, 442; Matter of Goldin v Greenberg, 49 N.Y.2d 566, 572; Matter of La Belle Creole Intl., S.A. v Attorney-General of State of N.Y., supra, at 196).
Thus, the precise question presented by these proceedings is brought into focus. The question is not whether all vertical restraints of this type should, in the context of these proceedings, be declared legal per se or, on the other hand, subject to a rule of reason analysis. Instead, the question is whether the Attorney-General has authority under the Donnelly Act to issue the subpoenas and interrogatories challenged here, a question which must be answered in the affirmative unless the legality of the brewers' marketing practice is so well established, either by the plain language of the statute or by existing judicial interpretation, as to be free from doubt. If the legality of the brewing industry's vertical restraints is arguable, then the subpoenas issued pursuant to the Attorney-General's broad powers to investigate possible violations of the Donnelly Act (see, General Business Law § 343) must be sustained (see, Matter of Nicholson v State Commn. on Judicial Conduct, 50 N.Y.2d 597, 610-611).
Pertinent language from General Business Law § 343, the provision which confers investigatory powers on the Attorney-General, illustrates the broad scope of that authority. The statute authorizes an investigation "[w]henever it shall appear to the attorney general * * * that any person or persons, partnership, corporation, company, trust or association shall have engaged in or engages in or is about to engage in any act or practice by this article [the Donnelly Act] prohibited or declared to be illegal, or * * * has assisted or participated in any plan, scheme, agreement or combination of the nature described herein, or whenever he believes it to be in the public interest that an investigation be made". That such an investigation may include the use of subpoenas and interrogatories is not disputed here.
Petitioners effectively concede as much, because the focus of their argument is not that we should announce a rule of per se legality, but rather that such a rule has already been established by "seven decades of unanimous precedent" and that the Legislature has acquiesced in such an interpretation of the Donnelly Act by failing to amend the statute to overrule those decisions. We conclude, however, that the cases cited by petitioners do not conclusively establish, either singly or in combination, a rule of per se legality for vertical territorial arrangements. Nor does the statutory language foreclose the Attorney-General's position that such arrangements, if shown to result in an unreasonable restraint of trade under the circumstances, are prohibited.
The Donnelly Act declares, among other things, that "[e]very contract, agreement, arrangement or combination whereby * * * [c]ompetition or the free exercise of any activity in the conduct of any business, trade or commerce or in the furnishing of any service in this state is or may be restrained [is] against public policy, illegal and void" (General Business Law § 340). This language is clearly broad enough, on its face, to encompass the vertical restraints in issue. There is no dispute for present purposes that the target of the Attorney-General's investigation — exclusive territorial distributorships — restricts intrabrand competition in the beer industry.
We recognize that neither the Donnelly Act nor the Sherman Act, after which it was modeled, has been interpreted as prohibiting every agreement that has the effect of restraining trade, no matter how minimal. Instead, as construed by State and Federal courts, the antitrust laws prohibit only "unreasonable" restraints on trade (see, Northern Pac. Ry. Co. v United States, 356 U.S. 1, 5; Atkin v Union Processing Corp., 90 A.D.2d 332, affd 59 N.Y.2d 919, cert denied 465 U.S. 1038). Even in light of this general judicial gloss, however, the statutory language easily accommodates the Attorney-General's position that petitioners' practice may be prohibited if it can be shown to be unreasonable.
Thus, the dissent's major premise — that the Donnelly Act does not expressly declare the brewers' practice to be illegal — is flawed. The Act, by its very broad terms, declares all restraints on trade to be illegal; it is only by judicial interpretation that some practices have been held to be outside the act's scope. And, as noted above (supra, at 332, n 2), the Attorney-General's investigatory powers are equally broad. Thus, our decision to allow this investigation to proceed does not, as the dissent suggests, depend on the kind of extrapolation of legislative intent that we resisted in CPC Intl. v McKesson Corp. ( 70 N.Y.2d 268).
Petitioners' efforts to extract a rule of per se legality from the case law dealing with vertical territorial arrangements are unavailing for several reasons. First, the issue of per se legality of all vertical territorial arrangements was not presented in the cases cited by petitioners. In Dawn to Dusk v Brunckhorst Co. ( 23 A.D.2d 780 [2d Dept]), Stemmerman v Kelly ( 150 App. Div. 735 [1st Dept], judgment after remand affd no opn 163 App. Div. 892, affd no opn 220 N.Y. 756), and Revlon Prods. Corp. v Bernstein ( 204 Misc. 80, affd no opn 285 App. Div. 1139 [1st Dept]), the issue before the courts was the legality, under specific circumstances, of specific arrangements. The courts decided no more than that those arrangements did not constitute unreasonable restraints of trade.
For example, in Stemmerman (supra), the Appellate Division held that the trial court had erred in declaring the contract void without allowing the plaintiff to introduce proof tending to show the limited impact of the territorial restriction on the asphalt market — evidence relevant to a rule of reason analysis. Thus, the decision did not establish a rule of per se legality; it simply rejected the trial court's rule of per se illegality. The Revlon Prods. (supra) decision is open to a similar interpretation (see, Robinson, Restraints on Trade and the Orderly Marketing of Goods, 45 Cornell LQ 254, 261, n 32; 263, n 40) and, in any event, was colored by the defendant's concession that the restriction in question did not restrain trade (see, 204 Misc, at 81, supra).
In addition, this court, the final arbiter of questions of State law, did not issue or pass directly upon any of the decisions cited for the proposition advanced by petitioners. Nor do these isolated decisions from two judicial departments represent the kind of unanimous judgment of the intermediate appellate courts deserving of similar weight (cf., Matter of Knight-Ridder Broadcasting v Greenberg, 70 N.Y.2d 151). Thus, even if the cited decisions unequivocally supported petitioners' contention, we would not be persuaded that legislative inaction should be interpreted as acquiescence (see, Matter of Hellerstein v Assessor of Town of Islip, 37 N.Y.2d 1, 9-10).
Finally, such a tenuous inference is even less compelling in this case, because it would result in an interpretation of the Donnelly Act at odds with the settled interpretation of its Federal counterpart. Although we do not move in lockstep with the Federal courts in our interpretation of antitrust law (see, People v Roth, 52 N.Y.2d 440), the Donnelly Act — often called a "Little Sherman Act" — should generally be construed in light of Federal precedent and given a different interpretation only where State policy, differences in the statutory language or the legislative history justify such a result (see, State of New York v Mobil Oil Corp., 38 N.Y.2d 460, 463; Matter of Aimcee Wholesale Corp. [Tomar Prods.], 21 N.Y.2d 621, 626; Givens, Practice Commentaries, McKinney's Cons Laws of NY, Book 19, General Business Law § 340, 1988 Cum Ann Pocket Part, at 182). Thus, we should not be eager to find that a contrary State rule has been established by a combination of equivocal pronouncements from the lower courts and legislative inaction in response to such decisions.
We conclude, therefore, that no rule of per se legality must inexorably be gleaned from the case law or the statutory language. In the absence of such a rule, we hold that the Attorney-General is authorized to conduct an investigation to test the legality of petitioners' practices. In addition, we find no merit to petitioners' alternative argument that the subpoenas must be quashed because the Attorney-General has commenced a civil action in Federal court, charging them with violations of the Sherman and Donnelly Acts. Section 343 specifically provides that the Attorney-General's subpoena power does not abate by reason of any action or proceeding brought by him (see, Matter of Grandview Dairy v Lefkowitz, 76 A.D.2d 776, 777; State of New York v Mobil Oil Corp., 40 A.D.2d 369, affd 33 N.Y.2d 627).
Accordingly, the order of the Appellate Division should be reversed and the judgments of Supreme Court reinstated.
Judges SIMONS, ALEXANDER, TITONE and HANCOCK, JR., concur with Chief Judge WACHTLER; Judge BELLACOSA dissents and votes to affirm in a separate opinion; Judge KAYE taking no part.
Order reversed, with costs, and the judgments of Supreme Court, New York County, reinstated. Certified question not answered as unnecessary.
I vote to affirm. The investigatory and enforcement powers of the Attorney-General under the Donnelly Act should not be expanded by judicial construction to include vertical restraints, as that is a policy choice and authorization uniquely reserved to the legislative branch (compare, Boreali v Axelrod, 71 N.Y.2d 1).
The Donnelly Act (General Business Law § 340 et seq.) does not expressly declare illegal or prohibit vertical restraint agreements establishing exclusive territorial distributorships between noncompetitors in different positions in the distribution chain, nor does it vest authority in the Attorney-General to investigate and prosecute such commercial arrangements. The courts of this State have never, up to now, found such a prohibition or power even by implication in the provisions of the act. Indeed, the opposite has prevailed over many years. Moreover, the Legislature has evidenced its acquiescence in these decisions by repeatedly refusing to adopt legislation sought by the Attorney-General restricting vertical restraints and granting that office such enforcement powers. Most pertinently, the Legislature has even specifically refused to adopt legislation prohibiting vertical distribution agreements between brewers and beer wholesalers.
The determination of the issue as to whether the Attorney-General has the authority to issue the subpoenas and interrogatories which respondents seek to quash necessarily hinges upon whether vertical restraint agreements creating exclusive territorial distributorships are prohibited or illegal under the Donnelly Act, not whether the legality of such arrangements is "arguable", as suggested by the majority. Such a tenuous predicate for the issuance of formal, duplicative and burdensome investigatory process by the chief law enforcement officer of the State should not be countenanced by this court.
General Business Law § 340, "[t]he determinative provision of the Donnelly Act" (State of New York v Mobil Oil Corp., 38 N.Y.2d 460, 462), provides that "[e]very contract, agreement, arrangement or combination whereby * * * [a] monopoly * * * is or may be established or maintained, or whereby [c]ompetition * * * is or may be restrained * * * is hereby declared to be against public policy, illegal, and void". The act authorizes the Attorney-General to bring actions "to restrain and prevent the doing in this state of any act herein declared to be illegal" or prohibited (General Business Law § 342). In the performance of these enforcement responsibilities, the Attorney-General is empowered to investigate any person or business enterprise who is or is about to be engaged in any act "by this article prohibited or declared to be illegal"; who "assisted or participated" in any such act; or "whenever he believes it to be in the public interest that an investigation be made" (General Business Law § 343). The investigation provisions of section 343 do not create new categories of illegal or prohibited acts, but merely provide when and how an investigation should be effectuated.
In Marsich v Eastman Kodak Co. ( 244 App. Div. 295, affd 269 N.Y. 621), this court affirmed a decision upholding the right of a producer and its dealers to refuse to sell their product to one who violated a price scale established by the producer. The court distinguished that situation from one where the agreement was between several manufacturers or producers which would be covered under General Business Law § 340. It stated that "[t]he soundness of the economic theories embodied in such a statute is a legislative question, and the courts may not obtrude their economic theories into a statute under the guise of interpreting it" (id., at 296 [emphasis supplied]). Similarly, in Stemmerman v Kelly ( 150 App. Div. 735, affd 220 N.Y. 756), we affirmed a decision upholding a vertical restraint agreement establishing a sole source distributorship within an exclusive territory. The court there noted that "there may lawfully be a partial restraint of trade, sufficient to protect the interests of a party and not so great as to interfere with the interests of the public" (id., at 738; see also, Alexander's Dept. Stores v Ohrbach's, Inc., 266 App. Div. 535, appeal dismissed 291 N.Y. 707).
The most direct and recent pronouncement on the legal propriety under State law of vertical restraint agreements concerning exclusive territorial distributorships arose in Dawn to Dusk v Brunckhorst Co. ( 23 A.D.2d 780). The manufacturer's exclusive distributor and the exclusive subdistributor within a designated area refused to sell to the plaintiff because the latter refused to deal solely through the subdistributor. Relying upon General Business Law § 340, the court noted that "[n]ot every agreement or combination which is in restraint of trade is proscribed by the statute" (id., at 781), and specifically held "[a]n agreement or arrangement among parties in a vertical relationship, which restricts the territory within which the buyer, here the defendant jobber Vaccaro, may resell the goods in question does not violate section 340 of the General Business Law" (id., at 781 [citations omitted]).
Against the backdrop and long history of the statute and cases interpreting it, the court now discerns an implied power for the Attorney-General to investigate and litigate against vertical restraints. Recently, we rejected just such an analysis seeking to create by implication a private action under the Martin Act (see, CPC Intl. v McKesson Corp., 70 N.Y.2d 268, 276-277). In direct contradiction of our past opinions on the Donnelly Act that a "ruling of a Federal court interpreting a Federal statute has no direct bearing upon a State court's analysis of an analogous provision enacted by the State Legislature" (People v Roth, 52 N.Y.2d 440, 447; see also, State of New York v Mobil Oil Corp., 38 N.Y.2d 460, 463, supra; and Marsich v Eastman Kodak Co., 244 App. Div. 295, affd 269 N.Y. 621, supra), the majority relies upon Federal court precedents interpreting the Sherman Antitrust Act and borrows their "rule of reason" analysis from that quite different and explicit statute. Surely, had the New York State Legislature deemed that our State court "decisions gave to the statute [Donnelly Act] a meaning or scope different from that [originally] intended, it would have amended the statute as to give it the effect intended", especially since it was specifically importuned to do so (Marsich v Eastman Kodak Co., 244 App. Div. 295, 297, affd 269 N.Y. 621, supra). In fact, the Attorney-General has made the effort to align the requirements of the Donnelly Act with those of the Sherman Antitrust Act and "has sought to obtain procedural tools comparable to those available under federal law" because of "the absence of a state per se rule and * * * vertical restraints" (Givens, Practice Commentaries, McKinney's Cons Laws of NY, Book 19, General Business Law § 340, 1988 Cum Ann Pocket Part, at 187). He is even in this very matter litigating the same subject under Federal law in the Federal courts.
At least seven recent bills would, in varying degrees, have restructured the Donnelly Act (see, Bill No. S. 8399 [introduced 1986]; Bill No. A. 5835 [introduced 1985]; Bill No. A. 1876 [introduced 1985]; Bill No. S. 420 [introduced 1985]; Bill No. A. 6055 [introduced 1984]; Bill No. S. 5121 [introduced 1984]; and Bill No. S. 1591 [introduced 1984]). New and modified provisions directly relevant to this case would have mandated that State courts "give due consideration and great weight" to the Federal courts' interpretations of Federal antitrust statutes specifically including the Sherman and Clayton Antitrust Acts, and "to the per se doctrine to restraints of trade" (see, e.g., Bill No. S. 8399 [introduced 1986]). Other changes would have provided the Attorney-General greater investigatory and enforcement powers and would have made it a specific violation to allocate customers or markets functionally or geographically. Five bills directly and particularly regulating vertical restraints in the malt beverage industry, explicitly declaring such agreements unlawful and empowering the Attorney-General to investigate and litigate such restraints, were rejected (Bill No. A. 5754 [introduced 1985]; Bill No. A. 4077 [introduced 1985]; Bill No. S. 2325 [introduced 1985]; Bill No. A. 4284 [introduced 1983]; Bill No. S. 2668 [introduced 1983]).
All extant judicial construction of General Business Law § 340 refused to prohibit vertical restraint agreements; yet, the Legislature on no less than 12 occasions refused to change that and rejected bills to give the Attorney-General the very power now conferred.
In Matter of Knight-Ridder Broadcasting v Greenberg ( 70 N.Y.2d 151), this court used the unanimity of precedents in all four Appellate Divisions construing the Shield Law statute (Civil Rights Law § 79-h) as protecting only confidential news sources, coupled with subsequent failed legislative efforts to amend the statute to broaden the privilege, as "compellingly persuasive evidence" (id., at 159) that the Legislature did not intend that such a broad privilege should exist. The court said that legislative history must be "reviewed in light of the existing decisional law which the Legislature is presumed to be familiar with and to the extent it left it unchanged, that it accepted" that decisional law (id., at 157, citing Arbegast v Board of Educ., 65 N.Y.2d 161, 169; Hammelburger v Foursome Inn Corp., 54 N.Y.2d 580, 588; Engle v Talarico, 33 N.Y.2d 237, 242). Building on this reasoning, in Boreali v Axelrod ( 71 N.Y.2d 1, supra) the court relied, in part, upon negative legislative history, resulting from some 40 failed efforts to expand the prohibitions against smoking in public places (see, Public Health Law art 13-E), as evidence that the New York Public Health Council had exceeded the scope of its broad authority to protect the public health by promulgating regulations limiting smoking in certain public places.
If the executive branch, under the separation doctrine, must respect the legislative branch prerogatives and history in a particular area, so must the judicial branch. Conflicting and selective applications of recently announced principles by this court do not well serve the judicial process and its purposes. I would affirm and quash the subpoenas.