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Schenley Affiliated Brands Corp. v. Kirby
Citations: 21 Cal. App. 3d 177; 98 Cal. Rptr. 609; 21 Cal. App. 2d 177; 1971 Cal. App. LEXIS 1063Docket: Civ. 12893
Court: California Court of Appeal; November 15, 1971; California; State Appellate Court
Petitioners, a coalition of liquor distillers and wholesalers, seek either a writ to prevent the Director of Alcoholic Beverage Control from enforcing amended regulation rule 100 or to compel the superior court to adjudicate a related lawsuit. The California Grocers Association supports this petition, representing 5,800 retail stores. A temporary order has been issued staying enforcement of the regulation, which was amended on December 10, 1970, to limit wholesalers' discount options from a base single-case price. Petitioners contest the validity of the discount restrictions, arguing that the amended rule exceeds statutory authority and was improperly enacted. The court reviews the substantive validity of the regulation under established legal principles, which protect the regulation with a presumption of regularity. The inquiry focuses on whether the regulation alters or expands the agency's statutory powers. Key statutory provisions include: Section 24749, which aims to eliminate price wars; Section 24755, mandating producers to post minimum retail prices; Section 24756, requiring adherence to posted wholesale prices; Section 24757, granting the department authority to adopt necessary rules; Section 25503(e), prohibiting price discrimination among retailers; and Section 25750, which provides general rule-making authority. The court recognizes the constitutionality of statutes that require retailers to adhere to manufacturers' posted consumer prices. The legal document references two cases, Wilke, Holzheiser, Inc. v. Dept. of Alcoholic Bev. Control and Allied Properties v. Dept. of Alcoholic Beverage Control, to establish the context of a dispute regarding wholesale pricing practices in the alcoholic beverage industry. The parties involved have chosen not to engage in constitutional arguments, accepting the validity of section 24756, which mandates adherence to posted wholesale prices. The market consists of three types of retailers: large multi-store dealers, single-outlet liquor stores, and taverns. Wholesalers have developed various discount practices tailored to these retailers' needs, including quantity discounts for single items and assortment discounts for small retailers and taverns. The amendments in dispute are part of subdivision (f) of rule 100, which includes provisions allowing quantity discounts on multiple cases and introduces new restrictions. Specifically, subdivision (f)(3) prohibits multiple discounts for the same quantity of a single item while allowing discounts on assortments of different brands. Subdivision (f)(4) requires that assortment discounts cannot be contingent on specific items, and subdivisions (f)(5) through (f)(8) aim to ensure wholesalers fully disclose their available discounts to retailers. Petitioners argue that the new rules undermine traditional assortment discounts, favor large retailers who purchase single brands in bulk, and disadvantage smaller retailers and taverns. They contend that the prohibition of separate discount rates based on bottle sizes and the inability to condition assortments on designated brands hinder producers' ability to promote certain products, including lesser-known brands and larger bottle sizes. The department aims to simplify discount practices by addressing the complexity of discount schedules from wholesalers, which can be excessively lengthy and confusing for retailers. For instance, some schedules span 44, 35, and 28 pages, leading to situations where retailers are unaware of better discount options based on their purchase quantities. Retailers often find themselves compelled to order less popular brands to access discounts on popular items, while sales representatives may selectively present discount information to favored retailers. The department's justification for amending rule 100 centers on simplifying discount postings to a single net price for specified products while allowing varied items in an order. However, there is inconsistency in the department’s interpretation, with the Attorney General asserting that only the unit discount is being eliminated, while the court aligns with petitioners’ view that the new rule restricts sellers to a single discount rate per quantity of a specific item. The prohibition of multiple discount rates for a single distilled spirits brand exceeds the department's authority under section 24756, which mandates price postings by producers without granting the department power to veto those prices. This section allows producers to determine their prices, unlike the regulations for wine and beer, which impose limits on wholesale discounts. The department references section 24749, which supports certain restrictions to ensure orderly marketing and prevent price wars, but this section does not independently empower the department to regulate distilled spirits discounts. Moreover, section 24757 allows for rules implementing specific sections but does not extend to section 24749. In Schenley Industries, Inc. v. Munro (1965), the Court of Appeal invalidated an earlier version of rule 100 that limited quantity discounts to actual marketing cost savings, stating that the Legislature did not grant authority for such restrictions on distilled spirits discounts. The court found that the regulation exceeded the scope authorized by the Legislature, labeling the attempt to enforce a single discount rate as invalid. Although the parties debated whether this constituted price-fixing, the court's comment regarding price-fixing was deemed unnecessary for its conclusion. The California Supreme Court later disapproved of this view, clarifying that administrative restrictions on quantity discounts do not equate to price-fixing and do not require support from a specific price-fixing statute. The distinction between price-fixing and the regulation of prices set by producers was emphasized, with the court maintaining that prohibiting producers from altering their wholesale prices is not aligned with the statutory framework. The inquiry should focus on whether the regulation supports a statutory objective, particularly section 24756, which allows producers to set their own prices. The regulation in question does not fall under the state's welfare-and-morals clause and lacks authorization from section 25750. Additionally, subdivision (f)(4) of amended rule 100 would prohibit discounts tied to seller-fixed brand assortments, which is relevant to section 25503(e) that forbids price discrimination among retailers under similar conditions. Section 25503, subdivision (e) parallels the federal Robinson-Patman Act, highlighting the complexities of price discrimination adjudications. It establishes a strong presumption of regularity regarding the prohibition of unit discounts, which petitioners failed to rebut. They did not demonstrate that unit discounts fall outside the scope of this section or that the department lacks authority to prohibit them. The unit discount is described in the context of marketing regulation as a 'tie-in sale,' where a seller offers a discount on one product contingent upon the purchase of others. However, this practice is characterized as optional and noncoercive, providing an economic incentive rather than forcing retailers into a tie-in arrangement. Nonetheless, pricing strategies may create competitive disparities, as powerful buyers could exploit available discounts, leading to 'secondary-line' injuries to less powerful competitors. Petitioners acknowledged that certain whiskey brands have established significant consumer demand, enabling distillers to leverage this demand for the sale of other products. Petitioners argue that unit discounts incentivize retailers to promote lesser-known brands, allegedly fostering fair competition. However, this claim overlooks the unit discount's discriminatory effects on retailers. Retailer #1, able to manage slow-selling Brands B and C, benefits from higher markups on the fast-selling Brand A compared to Retailer #2, who lacks the capacity to stock those slower-moving items. Retailer #2 faces pressure to purchase Brand A at the lowest price, causing financial strain due to capital being tied up in less popular products. The distiller's control over wholesale and retail pricing allows them to manage markups, which leads to unequal economic advantages for different retailers. California law, specifically Section 25503, subdivision (e), prohibits both direct and indirect price discrimination, mandating equality among retailers purchasing under similar terms. However, the practical application of the unit discount does not achieve true equality, as it varies based on each retailer’s economic situation. The law aims to ensure fair competitive opportunities among retailers with varying capabilities. The department's rule 100(f)(4) is seen as a means to prevent indirect discrimination based on retailers' ability to manage inventory, and the petitioners have not successfully challenged this rule’s validity. Additionally, petitioners contend that the Department of Alcoholic Beverage Control's adoption procedures for regulations were misleading and violated the Administrative Procedure Act. The Act mandates public notice and hearings prior to regulatory changes, requiring at least 30 days' notice with relevant information about proposed actions, as well as opportunities for public input during hearings. Petitioners argue the department's notice of hearing was insufficient and misleading, claiming the final regulation significantly diverged from what was originally described. The department's notice, issued on September 18, 1969, outlined proposed changes to departmental rules, including amendments to Rule 100 regarding quantity discounts and the definition of assorted cases. A draft amendment accompanied the notice, detailing acceptable discount types, specifically naming seven permissible categories, including line and brand discounts, and stating these were the only acceptable filings. Petitioners assert that the draft did not indicate the ultimate decision, which limited producers to one discount rate per quantity of a specific item. The Attorney General contends that petitioners waived any notice deficiencies by participating in the hearing, referencing Stoumen v. Munro. However, the Attorney General acknowledged the Department of Alcoholic Beverage Control did not record the hearing or establish a documentary record, preventing the court from evaluating hearing proceedings, thus rendering the waiver claim inadmissible. The document also discusses Government Code section 11424, subdivision (c), which requires publication of the proposed rule's terms or an informative summary, paralleling the federal Administrative Procedure Act, which allows for broader notice. The legal interpretation hinges on whether section 11424 confines the agency to the published proposal or permits regulations that differ in substance but relate to the issues raised. The intent of this legislation aims to ensure that those affected by new rules have a reasonable opportunity to express their views prior to implementation. A participatory process begins with a notice that raises awareness about the proposed action, fulfilling the requirement of section 11424, subdivision (c) by providing a draft or summary. This notice allows affected parties to prepare for the upcoming hearing, which assesses the proposal's pros and cons, facilitates public feedback, and enables counterproposals. Regulatory agencies often struggle to predict the real-world effects of proposals, and the hearing not only encourages public input but also informs the agency's decision-making. One key objective is for the agency to potentially adopt a regulation that differs from the initial proposal, reflecting the influence of the hearing. Fairness is a statutory requirement; affected interests cannot claim unfairness if the agency considers new information leading to a different regulation on the same subject. Restricting the agency to its pre-hearing proposal would undermine the hearing's purpose and could result in unnecessarily prolonged procedures. In this instance, the Department of Alcoholic Beverage Control provided adequate public notice regarding a proposed amendment to rule 100, which pertained to discounts available to retailers. The notice effectively informed stakeholders of the proposed changes. The adopted amendment related directly to the subject raised in the notice, thereby complying with section 11424, subdivision (c). Additionally, a procedural challenge was raised regarding the emergency adoption process under the Administrative Procedure Act. Following a hearing on October 22, 1969, the department filed an amended rule on November 12, 1970. After receiving complaints from a few licensees about ambiguities in the rule, the department redrafted and filed an emergency version on December 10, 1970, which is the version under review. Government Code sections 11421, subdivision (b), and 11422, subdivision (c) allow state agencies to adopt emergency regulations with or without prior notice and hearing, provided they justify the necessity for immediate action to protect public health, safety, or welfare. Emergency enactments not preceded by a noticed hearing are limited to a 120-day effective period unless post-adoptive notice and a hearing are provided, along with a certificate of compliance. In this case, the department's December 10, 1970 filing included a finding of emergency, and since a hearing was held before the November 12, 1970 filing, it complied with the Administrative Procedure Act's notice and hearing requirements. Petitioners argued that the emergency action was inconsistent with the Act, referencing the case California Assn. of Nursing Homes etc. Inc. v. Williams, which noted potential abuse of emergency powers when used habitually without genuine need. However, the agency's determination of an emergency due to confusing regulation drafts was found to be within its discretion. Regarding judicial review, petitioners initially sought to stop the Department of Alcoholic Beverage Control from enforcing rule 100, but the superior court declined, citing Business and Professions Code section 23090.5, which limits judicial review of the department's decisions to appellate courts and prevents challenges via superior court actions. The petitioners then pursued a mandate proceeding, arguing that section 23090.5 should apply only to adversarial proceedings with a hearing transcript. They asserted that the rule-making process, lacking a hearing record, should allow for proof of adverse effects only in superior court. However, previous cases affirmed that section 23090.5 applies to the department's administrative actions and does not restrict only to quasi-judicial acts. The court viewed this statutory restriction as a valid enactment in line with state constitutional provisions. Superior court jurisdiction is explicitly excluded from reviewing the rules, orders, and decisions made by the department, with such quasi-judicial actions being subject to review by the Alcoholic Beverage Control Appeals Board under California Constitution Article XX, Section 22. The review of these actions is governed by Business and Professions Code Section 23090, not Section 23090.5, the latter being intended for appellate court challenges to liquor control agency regulations. Although Government Code Section 11440 allows for superior court declaratory relief concerning regulations under the Administrative Procedure Act, it is limited and superseded by Section 23090.5. Petitioners argue that their access to courts is unconstitutionally obstructed, hinging on two assumptions: (1) that parties with standing are entitled to a de novo hearing with the ability to present new evidence, and (2) that being confined to appellate court review via original writ actions restricts this right. The first assumption is deemed unfounded, rendering the second assumption unnecessary for exploration. Judicial review of administrative rule-making is typically limited to assessing whether the agency's actions were arbitrary, capricious, or unsupported by evidence, with evidentiary inquiries reserved for the agency itself. Therefore, parties cannot claim deprivation if review is restricted to appellate writ proceedings, as all courts are barred from introducing new evidence. However, the case at hand deviates from this general principle because the administrative agency failed to record its hearing, leaving the reviewing court without a transcript. This absence of a hearing record obstructs judicial review based on evidentiary support. The presumption of regularity in administrative rule-making cannot compensate for the lack of a record, especially when the validity of the agency's action depends on factual evidence. Previous cases, such as Rivera v. Division of Industrial Welfare and California Assn. of Nursing Homes v. Williams, highlighted the necessity of an evidentiary record for judicial review, underscoring that without such a record, a reviewing court cannot affirm or deny the existence of evidentiary support, nor can it invalidate agency actions based on evidence not considered by the agency itself. Quasi-legislative activities can be categorized into trial-type hearings, which require adjudicative facts relevant to the parties, and argument-type hearings, which address legislative facts that inform legal and policy decisions. The court differentiates between 'private facts' necessary for fairness and 'public conditions' accessible for investigation, emphasizing the absence of a strict rule governing the necessity of an evidentiary record for regulations. An agency's decision to forgo an administrative record risks rendering its action unreviewable, particularly when judicial review is tied to established evidentiary principles. The validity of rule 100 does not hinge on specific evidentiary facts but rather on its alignment with statutes based on undisputed facts. Judicial review focuses on legal questions, allowing the court to invoke the principle excluding de novo evidentiary inquiries consistently. Section 23090.5, which limits the review of quasi-judicial actions of the liquor control agency, was upheld as the burden on access to the courts was not unreasonable. The petitioners' constitutional claims were dismissed. The issue of severability was not discussed by the parties, but rule 100 contains a severability clause stating that the invalidity of any part does not affect the remainder. Established guidelines for partially invalid statutes indicate that partial invalidity does not nullify the entire regulation if severability was intended. The court found the prohibition of multiple discount rates in subdivision (f)(3) invalid but severable, allowing the remainder of the rule to stand. The liquor control agency's selective prohibition of unit discounts raises questions about its intent and practicality, particularly in relation to other established discount practices. The severability clause, often a standard provision, lacks persuasive weight for two reasons: first, subdivision (f)(4) explicitly links unit discounts to assortment discounts as "authorized and limited" by subdivision (f)(3), indicating a cohesive purpose that contradicts the clause; second, California's liquor marketing environment is complex, where prohibiting one activity could inadvertently affect others, necessitating thorough consideration before implementing regulations. The court asserts it lacks the expertise to evaluate the implications of such a selective prohibition, leading to the decision to nullify this prohibition while allowing the agency the option to re-enact it later. The court also distinguishes between the problematic subdivisions (f)(3) and (f)(4) and the more straightforward subdivisions (f)(5) through (f)(8), which can function independently. A peremptory writ of mandate is issued to restrain the enforcement of subdivisions (f)(3) and (f)(4), with a stay on enforcement being lifted upon issuance of this writ. The opinions of Judges Janes and Pierce are noted, alongside the denial of rehearing and Supreme Court review. The excerpt includes a detailed reference to the relevant subsections of rule 100, defining quantity and assortment discounts. The State's policy mandates the regulation of the manufacture, sale, and distribution of alcoholic beverages to promote temperance and compliance with the law. To prevent disruptive price wars that encourage excessive consumption, specific restrictions and regulations on the sale of alcoholic beverages are established. Distilled spirits manufacturers, brandy manufacturers, rectifiers, and wholesalers must file and maintain a price list with the department, detailing retail prices. Domestic brandy cannot be combined with other distilled spirits for quantity discounts, while imported brandy may only be combined with duty-paid imported distilled spirits. Sales must adhere to the filed price list. The department is empowered to adopt necessary rules for enforcing these regulations. Section 25503 prohibits manufacturers and related parties from discriminating in pricing among retailers in the same area under similar circumstances. Government Code section 11424 outlines requirements for proposing, amending, or repealing regulations, including public notice and a summary of the proposed actions. The Attorney General's response confirms that the three licensees involved are petitioners in the lawsuit, and since the emergency action will be upheld, issues of waiver or estoppel need not be addressed. The department's emergency declaration indicates that the previously established rule lacked clarity, and the newly attached rule aims to provide clearer guidance for industry licensees. The regulation regarding the posting of prices is crucial for licensees across the industry, necessitating a clear understanding of its implications. This regulation has been adopted as an emergency measure effective December 14, 1970, based on the urgency of public welfare. According to Business and Professions Code section 23090.5, only the Supreme Court and specified courts of appeal have jurisdiction to review decisions made by the department, with a writ of mandate being the appropriate recourse in specific cases. Additionally, section 23090 requires parties affected by the Alcoholic Beverage Control Appeals Board's orders to seek review from the Supreme Court or courts of appeal. Article VI, section 10 of the state constitution grants original jurisdiction in habeas corpus and extraordinary relief proceedings to the Supreme Court, courts of appeal, and superior courts, which have broad jurisdiction over causes unless otherwise specified by statute. The historical development of these judicial review principles is discussed in works by Jaffe, covering various aspects of judicial authority and review.