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Affiliated Distillers Brands Corp. v. Sills

Decided: August 1, 1969.

AFFILIATED DISTILLERS BRANDS CORP., A CORPORATION OF THE STATE OF NEW YORK, PLAINTIFF,
v.
ARTHUR J. SILLS, ATTORNEY GENERAL OF THE STATE OF NEW JERSEY, AND JOSEPH P. LORDI, DIRECTOR OF THE DIVISION OF ALCOHOLIC BEVERAGE CONTROL OF THE DEPARTMENT OF LAW AND PUBLIC SAFETY OF NEW JERSEY, DEFENDANTS



Herbert, J.s.c.

Herbert

[106 NJSuper Page 459] Plaintiff is a wholly-owned subsidiary of Schenley Industries, Inc., a Delaware corporation which,

through other wholly-owned subsidiaries, has been engaged for a good many years in the business of distilling, blending, bottling, importing and marketing distilled spirits and wines. Schenley products have been distributed and sold in New Jersey under various brand names, with plaintiff serving as the agency for distribution. It holds a plenary wholesale license issued to it by the Director of the Division of Alcoholic Beverage Control under the authority granted by N.J.S.A. 33:1-11, subsection 1. At all times pertinent to this case plaintiff has held such a New Jersey license.

The complaint is in two counts. The first of these seeks a judgment declaring chapters 58 and 59 of the Laws of 1966 void on various grounds. N.J.S.A. 33:1-43; N.J.S.A. 33:1-93.6 through 93.11. The second count is an alternative to the first: if chapter 58 of the Laws of 1966 is held to be valid, then the plaintiff seeks a declaratory judgment that chapter 58 does not apply to it or that it comes within the exception provided by the statute. Plaintiff's attacks upon the validity of chapters 58 and 59 are for the most part based upon specific provisions of the United States and New Jersey Constitutions. Insofar as necessary, plaintiff's grounds of attack will be mentioned in the discussion which follows.

Plaintiff's activities are not limited to New Jersey. It is the marketing unit of Schenley Industries and sells Schenley products throughout the United States. In 1964 plaintiff's management became particularly concerned with what appeared to be a deteriorating position in the New Jersey market. From a starting point in 1946, when Schenley sales represented about 22% of the total in this State, the Schenley position had changed to approximately 6% of the New Jersey market. Except for sales of products known by private brands, it had been plaintiff's practice to sell only to jobbers in New Jersey who in turn would sell Schenley products to retailers. The jobbers with whom plaintiff dealt were carrying, for sale to retailers, brands of other producers as well as those of Schenley. After a survey plaintiff's management

concluded that a concentration of sales effort on retailers, for the benefit of Schenley brands, was needed if Schenley was to get a larger share of the available business, and that the way to get this concentration was for plaintiff to begin to sell directly to retailers. The decision was reached early in the year 1966. Mr. Feldman, who was executive vice-president and then president of plaintiff during this period, testified that the plan to have plaintiff sell to retailers included continuation of the practice of selling Schenley brands to jobbers and did not include any thought of cutting prices.

To carry out its plan plaintiff rented a warehouse containing approximately 60,000 square feet of space; it also employed a sales manager and interviewed various applicants for office positions. It entered into a trucking contract to provide for the delivery of products from the warehouse to retailers. Plaintiff required no supplementary license, because its then existing plenary wholesale license authorized sales directly to retailers. However, plaintiff did, on April 1, 1966, file with the Division of Alcoholic Beverage Control a list of prices at which products would be offered for sale to retailers. The New Jersey Wine and Spirit Wholesalers Association, which by this time had learned of plaintiff's plans, promptly objected to plaintiff's filing on the ground that the regular filing date for the second quarter of the year had passed and that plaintiff's list did not qualify for interim filing under a regulation permitting such procedure for brands "not previously available." The Director upheld the objections of the Association and so informed plaintiff by letter dated May 5, 1966. Plaintiff now points out that the Director had shortly before accepted interim price lists from three holders of new plenary wholesale licenses, thus authorizing them to begin selling wholesaler-to-retailer during the course of a calendar quarter. These instances involved Fine Wines Unlimited of Union, New Jersey, May 15, 1964; Cathay Corporation of Jersey City, August 25, 1965, and Banner Liquor Co. of Perth Amboy, January 17, 1966. However,

this action is not an appeal from the Director's ruling of May 5, 1966 against interim filing by plaintiff as a preliminary to the start of the wholesaler-retailer business which it had otherwise made ready for, and I see no particular legal significance in the apparent discrimination except that if the success of the Association in objecting to plaintiff's interim filing be added to what the Association was accomplishing elsewhere, the rulings for Fine Wines, Cathay and Banner may be something more than a suggestion of the Association's power.

The Director's decision to reject plaintiff's wholesaler-to-retailer price lists for the second quarter of 1966 was only a temporary victory for the Association. The Director went on to point out in his letter of May 5 that the last day for filing prices for the third quarter would be May 20 and if proper schedules were received from the plaintiff by that date, sales to retailers might be made during the third quarter. Facing the prospect of competition from plaintiff to start at an early date, the Association took prompt and vigorous action to block plaintiff from using the wholesale-retail authorization contained in its plenary wholesale license. Mr. Cooper, executive director of the Association and a member of the bar, drafted two statutes, apparently with some assistance from other attorneys; and one of these was designed to block plaintiff from selling directly to retailers. Drafts were read to representatives of the Association members at a meeting on March 30, 1966. The minutes show that after the reading the executive director "was instructed to immediately take whatever steps are necessary to have the bills introduced with the fullest possible support by the Administration and Legislature."

Then, on April 7, 1966, there was another meeting of the Association and expenditures were authorized, the minutes reading as follows:

"The Executive Director reported that Schenley Industries through its subsidiary Affiliated Brands was going into the wholesale business in New Jersey in competition with its existing distributors

and that the A.B.C. Director informed Schenley he would give permission to file prices as of May 15, 1966. After a full and lengthy discussion, the following motion was duly made, seconded and unanimously carried; that the Executive Director of this Association has full authority to take whatever steps are necessary to protect the interests of members of this Association against Affiliated Brands' activities and do whatever is necessary to prevent, if possible, Affiliated Brands from becoming a wholesaler selling Schenley products directly to retailers and to spend whatever sums are necessary to accomplish this purpose including legal fees for Counsel who may be retained by the Executive Director to represent the Association; further, the Executive Director is authorized to pay to Herman Kluxen whatever travel expenses may be incurred by him in his capacity as Public Relations representative of the Association."

By April 13, 1966 the Association's plans for legislation had become very specific. This is shown by comparing a resolution adopted by the Association on that date with the text of the bills which became Chapters 58 and 59 of the Laws of 1966. The resolution reads:

"Upon motion duly made, seconded and unanimously carried the Executive Director was voted a committee of one to act with full and complete authority in any proper and legal manner whatsoever on behalf of the Association or its individual members and to expend whatever monies might be necessary for the purpose of protecting the interests of the Association or its individual members by reason of a distiller operating its own wholesale house in New Jersey in competition with members of this Association by seeking legislation which would not permit a distiller, rectifier, blender, winery or importer from [ sic ] having any interest whatsoever in a wholesale house in New Jersey unless on July 1, 1965 and thereafter such wholesaler filed and published in the official and complete wholesale price list brands of alcoholic beverages pursuant to Rules 2 and 3 of Regulations 34; and also, an amendment to R.S. 33:1-43 which would not require the distiller, rectifier, blender, winery or importer to sell to any wholesaler and at the same time protect those wholesalers on a line or lines from being arbitrarily removed."

On April 18, 1966 Senate Bills 356 and 357 were introduced jointly by the minority leader and majority leader of the Senate. Neither bill had a preamble, "a time-honored legislative prefatory device explanatory of the reasons for the

law and the objects in view." Jamouneau v. Harner , 16 N.J. 500, 516 (1954). They both passed in the Senate on May 2, 1966, were passed by the Assembly on May 23, 1966 and signed by the Governor on June 2. No public hearings were held by either house. These bills became respectively chapters 58 and 59 of the Laws of 1966. After chapter 58 became law on June 2 the Director of the Division of Alcoholic Beverage Control notified plaintiff:

"As a result of the enactment of Chapter 58 of the Laws of 1966, you may not sell to retailers alcoholic beverages, other than malt alcoholic beverage, and accordingly, your listings will not be included in the Wholesale Price List effective July 1, 1966."

In form chapter 58 of the Laws of 1966 inserted two new paragraphs into Title 33, chapter 1, section 43 of the Revised Statutes. Before the passage of chapter 58, section 43 generally speaking, prohibited any manufacturer or wholesaler of alcoholic beverages from participating directly or indirectly in the retailing of alcoholic beverages and also prohibited a retailer from being, either directly or indirectly, a manufacturer or wholesaler. One of the new paragraphs added by chapter 58 of the Laws of 1966 (and the one drafted to keep plaintiff from using its license for the purpose of selling at wholesale to retailers) reads as follows:

"It shall be unlawful for any owner, part owner, stockholder or officer or director of any corporation, or any other person or corporation whatsoever interested in any way whatsoever in any winery, distillery, or rectifying and blending plant, to conduct, own either whole or in part, or be directly or indirectly interested in the business of any licensee for the sale at wholesale to licensed retailers in New Jersey of any alcoholic beverages, other than malt alcoholic beverages, and such interest shall include any payments or delivery of money or property by way of loan or otherwise accompanied by an agreement to sell the product of said winery, distillery or rectifying and blending plant; except that the foregoing shall not apply in the case of a licensee for the sale at wholesale who on July 1, 1965, and thereafter until the effective date of this act, shall have filed for publication by the Division of Alcoholic Beverage Control price listings for brands of alcoholic beverages pursuant to the rules and regulations of the Division of Alcoholic Beverage Control."

This is a penal statute. Unless it is invalid, as plaintiff argues, the unlawfulness which it defines would be subject to the punishment provided by R.S. 33:1-51, that is to say, a fine of $50 to $250 or imprisonment for 10 to 90 days, or both. The penal nature of the act is mentioned here because it may bring into play principles of strict construction for which our courts have expressed approval in a large number of cases. 25 New Jersey Digest, Statutes , 241, p. 236 et seq.

Plaintiff argues that the legislation under attack was clearly and exclusively designed and promoted for the benefit of the members of New Jersey Wine and Spirit Wholesalers Association, and invalid for lack of a sufficient public purpose or as private legislation. In weighing the contentions made along this line, some findings about the Association and its activities in support of the bill are called for.

During 1966 the Association had the names of 26 companies on its membership list. The membership was drawn from "independent" wholesalers licensed by the State of New Jersey, the word "independent," according to Cooper's testimony, indicating a licensee with no tie by way of a proprietary interest with a source of supply to wholesalers. The members pay substantial dues, the total in 1966 being $114,882.22. That total was based upon a rate equal to 1/2 of 1% of the total of gallonage tax (N.J.S.A. 54:43-1) paid to New Jersey on distilled spirits by the particular member. The Association maintains a permanent office. Cooper is president, treasurer and executive director at a salary of $25,000. He and two women, who do secretarial work, are the regular staff of the office. For some years, including 1966, the Association has employed William G. Hetherington & Company, specialists in public relations. For this service an annual retainer of $7,500 was paid. Kluxen, whose name has already been mentioned, was the legislative consultant, or lobbyist, for the Association. He was being compensated by the Association at the rate of $16,000 in 1966 and more recently his pay has been raised to $20,000.

Though the Association listed 26 members in 1966, that number is misleading. Various licensees who are members are tied in common ownerships with other members and in some cases with holders of plenary wholesale licenses who are not members. There are the following combinations within the Association:

(1) Galsworthy -- Fleming & Mc Caig -- Crest

(2) Reinfeld -- Majestic

(3) F & A Distributing Co. -- Merchants -- Gillhaus

(4) J & J Distributing Co. -- Dorchester

(5) Federal (Jersey City) -- Federal (Pleasantville) -- Gateway

(6) Garden State -- Crown

(7) Jersey National (Paterson) -- Jersey National (Camden) -- Phillipsburg Beverage Co.

In addition, in a number of cases the owner of one of the named groups also owns one or more nonmember holders of a plenary wholesale license. For example, Flaggstaff, a member, owns Banner, which is not a member.

If each of the combinations named above were treated as a single member, the Association would have a total of only 15. Nevertheless, the members of the Association in 1966 had approximately 83% of the wholesaler-retailer market in New Jersey for alcoholic beverages other than beer. The grand total of gallonage tax paid to the state was $27,549,552 and the members of the Association paid of this total $22,996,101 while the nonmember wholesale licensees were paying only $4,553,451. And an even more striking economic concentration exists; the seven groups of tied-together wholesale licensees listed above paid a little more than 66% of the grand total of all taxes paid by all licensees on alcoholic beverages other than beer. The figures of the Beverage Tax Bureau show that in 1966 14,671, 889 gallons of liquor were sold to retailers in New Jersey. Also, that 8,310,192 gallons of wine, 741,034 gallons of vermouth and 491,928 gallons of sparkling wine were sold. The total of gallons for the year, excluding beer, was 24,218,043. Although taxes paid are not a precise indicator

of the number of gallons sold, since the tax rate on vermouth and wines is lower than on liquors, still the statistical data in evidence is adequate to show that the members of the Association marketed about 83% of this total, or approximately 19,300,000 gallons in 1966.

The official New Jersey book of listed wholesale prices, effective as of January 1, 1969, contains the price quotation of 60 licensed wholesalers of alcoholic beverages (other than beer) who are offering products to retailers. Included are 25 licensees which were members of the Association in 1966. Of the remaining 35, a total of 15 have only wines and vermouth listed for sale, and a number of others have very short lists of distillery products. Both in number of licenses held and volume of business done the members of the New Jersey Wine and Spirit Wholesalers Association dominate the New Jersey market for distilled liquors at the wholesaler-retailer level.

Returning to the legislation, an active publicity compaign was carried on during the short time between introduction and final passage. Newspaper articles placed in evidence show that the measures were very specifically described as containing a bar to Schenley's going into the business of selling directly to retailers. A memorandum from Cooper to Hetherington & Company, the firm in charge of public relations for the Association, shows how directly aimed at Schenley was the effort to promote support for the Association's point of view. It reads in part as follows:

"Senate Bill No. 356

"This bill would prevent any distiller, rectifier, blender or winery from having any interest whatsoever in any manner in a wholesale business selling alcoholic beverages which they make to retailers. (You will note that brewers are not affected.) This bill is designed to prevent the current attempt of Schenley Industries to go into the wholesale business through its wholly owned subsidiary, Affiliated Brands, which has held a wholesale license for years but has never sold directly to retailers. There are currently, and have been ...


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