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SCHENLEY INDUS. v. N. J. WINE & SPIRIT WHOLESALERS

August 9, 1967

SCHENLEY INDUSTRIES, INC., Schenley Distillers, Inc., and Affiliated Distillers Brands Corp., Plaintiffs,
v.
N. J. WINE & SPIRIT WHOLESALERS ASSOCIATION et al., Defendants



The opinion of the court was delivered by: COOLAHAN

 I.

 This is an action for injunctive relief and damages under the Sherman and Clayton Acts, 15 U.S.C. §§ 1, 2, 15 and 26. Venue lies since each defendant is an inhabitant or is found in the District of New Jersey. 15 U.S.C. § 15.

 The plaintiffs are Schenley Industries, Inc., a Delaware Corporation engaged in distilling, blending, importing and distributing alcoholic beverages, and two of its wholly owned subsidiaries, Schenley Distillers, Inc., also a Delaware Corporation, and Affiliated Distillers Brands Corp. ["Affiliated"], a New York Corporation.

 The defendants are the New Jersey Wine & Spirits Wholesalers Association ["Association"]; twenty-seven corporate members of the Association, all wholesalers of wine and distilled spirits in New Jersey [sometimes referred to as "defendant Wholesalers"]; thirty individuals who are principal officers or stockholders, or both, of the various defendant Wholesalers; and Mr. Milton H. Cooper, the Executive Director of the Association. Each of the individuals is alleged to have participated, for at least the last four years, in the adoption and execution of Association policies.

 The production, importation and distribution of alcoholic beverages in which plaintiffs are collectively engaged constitute "commerce" within the meaning of the antitrust laws; this is not disputed.

 Schenley [Unless otherwise noted "Schenley" is hereafter used to refer to all three plaintiffs collectively] charges that defendants have unlawfully restrained this commerce by dominating the wholesale of liquor in New Jersey. The complaint alleges that they conspired to and have fixed prices and profit margins at the wholesale level; attempted to and have monopolized the wholesale of liquor in this State; and have restrained Schenley's effort to promote competition in the industry.

 The thrust of Schenley's grievance is twofold: First, it claims that through the Association machinery the defendants maintained unreasonably high profit margins by coercing individual wholesalers to reject pricing proposals suggested by Schenley. This was accompanied by an agreement among wholesalers handling Schenley products to restrict its market share by favoring competing products in their sales efforts.

 Second, Schenley's attempt to circumvent the defendants by selling directly to retailers under Affiliated's wholesale license was unlawfully prevented by concerted lobbying on behalf of two recently enacted New Jersey statutes which preclude distiller-controlled companies from direct distribution to retailers in the State. Schenley also alleges improper attempts to influence decisions of the Division of Alcoholic Beverage Control, New Jersey Department of Law and Public Safety [hereafter referred to, and commonly known as, the "A.B.C."].

 For convenience, I refer to the alleged attempts to influence the New Jersey Legislature and the A.B.C. as the "lobbying charges"; the remaining grievances in the complaint are denominated the "price fixing charges."

 Defendants move for dismissal on the ground that, apart from whether plaintiffs can sustain their charges, both the alleged lobbying and the alleged price-fixing are protected from action under the antitrust laws; the former by recent Supreme Court interpretation of the Sherman Act, and the latter because it is sanctioned under New Jersey's comprehensive regulation of liquor pursuant to its power under the Twenty-first Amendment to the United States Constitution.

 II.

 The necessary Background to the issues thus joined includes New Jersey's powers under that Amendment vis-a-vis the antitrust laws; the statutes and regulations enacted by New Jersey to control the sale of liquor and the underlying policy they reflect; and the history of Schenley's conflict with the Association.

 The long evolution of Federal and State regulation of liquor need not be repeated here, except to emphasize that the Twenty-first Amendment cedes vast plenary powers to the States, under which they can either exclude liquor entirely from their territory or stringently regulate such liquor as is permitted to be manufactured within or brought into their domain. See my opinion in Epstein v. Lordi, 261 F. Supp. 921, passim (D.N.J., three Judge court, 1966) "Note, The Evolving Scope of State Power under the Twenty-first Amendment", 19 Rutgers L.Rev. 759 (1965). Moreover where New Jersey's power under the Amendment attaches to liquor for distribution or use within the State, it operates to the exclusion of conflicting Federal statutes under the Commerce Clause. Epstein v. Lordi, supra. See p. 9, infra.

 In 1933 New Jersey enacted the Alcoholic Beverage Control Law, N.J.S.A. 33:1-1 et seq., establishing the Department of Alcoholic Beverage Control. *fn1" The framework provided by this statute, as amended, makes New Jersey a so-called "Open State", in which liquor is sold to the public through private channels that are in turn regulated by State agencies. That is, unlike some of her sister States which conduct the wholesale and retail of liquor as a State monopoly, *fn2" New Jersey has chosen to achieve the desired degree of control over distribution and sales through supervision of private enterprise by the A.B.C.

 Much of the regulation involves detailed supervision of wholesale and retail operations which do not concern us; the New Jersey pricing system does. This system has undergone considerable evolution since its inception, but operates today essentially as follows.

 The manufacturer (distiller, importer, or national distributor) must periodically list, or "post", with the A.B.C. the price at which it will sell each item to wholesalers for that period. Once posted, the prices are binding and must be uniform for all wholesalers without discrimination. In addition, it posts a second set of prices, which are the minimum resale prices to the consumer. This resale price list is distributed to all retailers by the A.B.C. which enforces compliance.

 Third, wholesalers must file the price at which they will sell each item to retailers. They too must sell at the posted price to all retailers without discrimination. In the case of wholesale prices, however, there is a further procedure. *fn3" The Regulations provide a brief inspection period after the wholesale prices are initially posted, in which wholesalers can examine all posted prices and raise or lower their own to meet competing prices. Once adjusted, the new prices then become binding and must be offered to all retailers alike. N.J.A.B.C. Regulations 30, 34. *fn4"

 To review, it should be clear that by fixing both the consumer and the manufacturer's price, the distiller sets the outer limits within which a wholesaler can establish his profit margin. Once the producer has set those two prices, the wholesaler's determination of the price charged retailers not only sets his own profit margin, but also, in conjunction with the consumer price, sets the retailer's profit margin as well.

 III.

 Although some semantical confusion has crept into the arguments, the basic nature of Schenley's grievance is readily comprehensible in terms of business realities without Talmudic exegesis of the pleadings.

 Schenley is dissatisfied with its share of the New Jersey market. It feels that its competitive efforts are hindered by inflexible maintenance of unreasonably high wholesale profit margins. It has proposed to individual wholesalers that they decrease their profit margin on certain Schenley items, thereby partially absorbing a proposed decrease in the ultimate consumer price, which would also be shouldered by Schenley at the manufacturer's price level. Presumably, both Schenley and the wholesaler would realize net benefits from increased volume, notwithstanding the decrease in their respective profit margins. *fn5"

 This elementary review helps put the charges and counter-charges in context. I deem Schenley's complaint to be that when Affiliated has proposed such mutual reductions in profit margin at the manufacturer and the wholesale price levels, some individual wholesalers have been amenable to the suggestion. But such tentative receptions of the possibility have been cancelled thereafter, Schenley claims, because the projected pricing framework was then rejected by the Association as a ...


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