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613 Corp. v. State

Decided: May 30, 1986.


On appeal from Final Decision of the Division of the State Lottery.

Antell, Shebell and Muir. The majority opinion of the court was delivered by Shebell, J.A.D. Muir, J.s.c. (temporarily assigned), dissenting.


[210 NJSuper Page 488] Petitioners-Appellants, three corporations operating adult bookstores, appeal from the Final Decision of the Acting Director

of the State Lottery Commission denying their requests to be licensed as lottery ticket agents.

On September 20, 1983, 613 Corporation, 73 North Corporation and Review Trading Company each made a written request for application for licensure. Review's previous application had been denied because of a sufficiency of existing agents in its area. By letter dated November 30, 1983, 613 Corporation and 73 North were informed by the Commission that they were ineligible due to a sufficiency of existing agents. On December 15, 1983, Review was informed that no further action would be taken on its previous denial. On January 10, 1984, counsel for all three applicants requested a hearing to determine the validity of the reasons posited by the Commission for the denials. The matter was transferred to the Office of Administrative Law.

The Administrative Law Judge issued an Initial Decision which affirmed the Lottery's decision. He found however, that the requests were denied solely because of the nature of the petitioners' businesses and that the Lottery had tentatively formulated a policy to deny applications on this ground. He discounted the Commission's contention that the denials were based solely on the ground of sufficiency of existing agents in proximity to each petitioner. He nevertheless upheld the denials, concluding that the Lottery could refuse to license adult bookstores and did not have to first promulgate rules in this instance to address what was in his view a relatively novel question.

The Commission filed exceptions to these findings, contending that sufficiency was the sole ground for the rejections and, although disclaimed as a basis in these cases, that it could refuse to grant licenses based on the nature of the enterprise. The Acting Director adopted these exceptions. He found proximity to have been the sole reason for the denials and accepted the determination that the Lottery could refuse to license based upon the nature of business conducted.

Appellants contend that the Acting Director's final decision amounts to rulemaking in violation of the Administrative Procedure Act (APA) (N.J.S.A. 52:14B-1 et seq.), that the phrase "sufficiency of existing licenses" contained in N.J.S.A. 5:9-8(e) requires additional standards and that the denial of their application requests violated their constitutional rights.

We reverse and remand. The record will not support a finding that sufficiency was the sole reason for denial of these application requests. In addition, we disagree with the Acting Director's holding that rulemaking in accordance with the Administrative Procedure Act is not required. Our conclusions are based upon the full record, on which we now elaborate further.


The three appellants are situated in what Ms. Judith Berry, Lottery Deputy Director of Marketing, termed urban areas. Review and 73 North are located in Pennsauken; 613 Corporation in Mt. Ephraim. These adult bookstores are each on major thoroughfares.

Appellants' September, 1983, requests for applications were forwarded by Ms. Berry to Acting District Manager John Gray. On October 21, 1983 Gray submitted a memorandum to Berry informing her that he had spoken to Field Representative Tom Phelan concerning the applicants and noting Review's previous disapproval. His reference to petitioner's business therein stated

Each of the above locations are large x-rated book stores in our area.

Berry instructed Gray to personally visit the premises. This was unusual as Gray admittedly did not ordinarily make field investigations. He and Phelan visited each location on October 28, 1983. The District Manager photographed the exterior of each bookstore although this too was "not [a] standard procedure." He himself labelled it "highly unusual" and could recall doing so only once before in his 14 years with the Lottery.

That same day he signed agent disapproval forms for each petitioner and attached the photographs.

The forms instruct the investigator to "provide all marketing location data and a map covering your reasons for rejection." Gray drew no map for any location and gave the identical comment for each:

This is a large adult entertainment center -- x-rated video movies with 18 girls on premises -- Nude shows -- p/o 3-store operation covered by different corporations with same corporate officer . . .

On Review's disapproval he added:

Orig. disapproval dated 1/25/83 -- revisited area with S.F.R. T. Phelan on 10/28/83 -- no visible change in operation.

Review's original disapproval indicated the presence of one established agent within a one-quarter mile proximity. While Phelan stated that Review would not increase ticket sales because "anybody stopping here would be going in the store for specific purposes," he noted that Review averaged 5,000 customers per week. He remarked

This is the largest x rated book store in Camden County. While store is busy, they charge admission to the store. They appeal to a narrow band of general public. Most customers would have other items competing for impulse purchases . . . (emphasis in the original)

Gray's function as District Manager was to gather marketing information and to make recommendations as to particular applicants. In making sufficiency recommendations he used such criteria as proximity to existing agents, sales records of those agents, the nature of a given "area," traffic flow, accessibility and parking availability. This, however, is done without written guidelines or empirical studies to provide structure to such evaluations. The lottery issued a single page guide to licensing and field procedure, but Gray had never seen it. The word "area" is not defined nor are there any set distance, demographic or marketing formulae applied in the process. Recommendations are made based upon a representative's subjective evaluation of the assigned territory. As Gray put it, agent approvals or disapprovals are basically "gut reactions" made on a case by case basis.

Any information relevant to the grounds for a denial is to be included in the disapproval form. While it was customary to briefly state the nature of an applicant's business on the form, Gray felt it necessary in these cases to elaborate by including details as to the types of entertainment offered and by encircling the "x".

Also on the 28th, Gray received a call from John Marjarwitz, Deputy Director of Security for the Lottery. Marjarwitz's role in the process was to notify prospective applicants of the decision made by the Deputy Director of Marketing -- Ms. Berry. He advised Gray to refer all further contact or information relating to petitioners directly to his office. The Deputy Director memorialized this call by writing "10/28/83 -- advised J.G. not to evaluate" on his copy of Gray's October 21 memorandum. The District Manager stated that this was unusual in that Marjarwitz had never previously made such a request.

Upon receiving these disapprovals, Ms. Berry telephoned Gray on November 3, 1983 and requested more information than the type of business conducted. She claimed to have been informed at that time of a sufficiency of agents in the areas of each bookstore. Although she denied the requests "as per above" referring to Gray's descriptions, she testified that the decision was based solely upon his sufficiency representations. Gray could recall no specific details of that conversation other than the Deputy's request for further information. Berry then submitted her disapprovals to Marjarwitz noting that she was

Ms. Berry testified as the authoritative witness for the Lottery; hers was the final word on the application process. She has had no training or experience in wholesale or retail marketing. Like the District Office, she relied on no marketing-related studies or agency-promulgated standards in reaching her decision. She had no idea of the exact number of nearby agents, their sales averages or the municipal averages for each

application before her. She described sufficiency as a "wholly subjective determination."

At one point in the administrative proceedings, she admitted to making her decision based upon both Gray's unmemorialized representations and the nature of the businesses. However, at the second day of testimony, after having an opportunity to consult counsel, she retracted this admission and denied basing her "per above" rejections on any ground other than proximity. She stated the requested supplementation was to substantiate her prior denial and explained that proximity should be a representative's primary concern. "[I]n hindsight" she considered Gray's original omission of proximity data to be "odd" for a man as experienced as he.

On November 4, 1983 Gray submitted the supplemental disapprovals to Marjarwitz. Berry asserted she reviewed these forms although she did not sign them. Letters were then sent informing petitioners of their rejection.

At the hearing, Berry was questioned extensively on the hand-drawn maps submitted in the supplemental disapprovals. The map for Review indicated three liquor store-agents in some proximity. Review is located on the east bound side of Admiral Wilson Boulevard, a divided highway. One agent was a half-mile west on the same side. Another was located across the road. The third was on a side street which underpassed the Boulevard. There was no information provided as to traffic lights, signs or accessibility between the locations.

73 North is situated on Route 73, with two agents in proximity. One agent, one-quarter mile distant, was located on Route 130 north of its underpass with Route 73. The other agent was located one-eighth mile on the same side of the highway; however, it was contained inside an enclosed market. Again, no further traffic or access information could be discerned.

613 Corporation, on Black Horse Pike, is in proximity to five agents, ranging from one-quarter to three-quarters of a mile in

distance. Three agents were in different municipalities, and only one was located on the Pike, and then on the opposite side.

None of these maps detailed what structures were between the applicants and existing agents. The maps contained agent and municipal sales averages. However, Berry could not state what weight was given to these figures, which did "not go directly" to her determination. She acknowledged they had no independent significance unless accompanied by further data. She never explained how sales figures of other area agents factored in. While proximity is the prevailing factor, she noted that accessibility is important. Commenting on these maps she felt they were not as complete as they should have been.

Of 43 applications made during the same time period in petitioners' general area 38 were for new agents. Two were denied for security reasons and two for proximity. 34 were successful applications; of these 28 had three existing agents in some proximity, and five had at least five nearby. None were involved in the sale or showing of sexually explicit material.

Berry emphatically denied any policy to exclude from licensure enterprises such as those conducted by petitioners. However, she contended that if proximity were to be disallowed as grounds for their rejection, it would be within her prerogative to deny based on the nature of the business. Berry contended that the Lottery is itself a controversial enterprise subject to "moral" opposition. The Lottery considers adult bookstores controversial since they offend a segment of the populace and are constantly "in the headlines" and "before the courts." She asserted:

For us to offer for sale lottery tickets as an enterprise of the State of New Jersey benefitting education and institutions and establishments whose principle business it is to offer for sale or viewing sexually explicit materials would be simply of such controversy that it would not be in the best interest of the State of New Jersey, nor the Lottery.

The Deputy offered no evidence to show the deleterious effect licensing of adult bookstores would have on ticket sales. She concluded it was within the admittedly-subjective judgment of

the agency to have such a policy aimed at preventing potentially sensitive alignments. She did not view the liquor trade as controversial, despite objection to liquor sales from a segment of the population.

The parties stipulated to evidence of the earlier revocation of a license issued to one John Valentino. One of the reasons given therefor was his addition of sexually explicit material to his inventory. The Lottery determined that such would offend people and reflect upon the moral character of the agent and its own integrity.


Agency determinations will not be disturbed unless the findings could not have been reasonably reached on sufficient credible evidence considering the proofs as a whole, giving due regard to the agency's expertise where such is a relevant factor. Mayflower Securities v. Bureau of Securities, 64 N.J. 85, 92-93 (1973); Close v. Kordulak Bros., 44 N.J. 589, 599 (1965). The appellate tribunal must, however, make more than a perfunctory review; if there exists in the reviewing mind a definite conviction that the determination below went so wide of the mark that a mistake must have been made, the record can be appraised as if the matter were being decided at its inception. Mayflower Securities, 64 N.J. at 93; State v. Johnson, 42 N.J. 146, 161-162 (1964). This sense of "wrongness" arises in several ways, among which are the lack of inherently-credible supporting evidence, the obvious overlooking or underevaluation of crucial evidence or a clearly unjust result. 42 N.J. at 162.

The Director's determination overlooks the significance of both the documentary evidence and the contradictions in Ms. Berry's testimony as to the grounds for her decision. The sequence of events strongly suggests that the decisions to reject were finalized at a point in time when the only ...

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