Court: Montana Supreme Court; May 16, 2018; Montana; State Supreme Court
Justice Laurie McKinnon authored the court's opinion regarding a class action lawsuit initiated by four liquor store owners—Duane C. Kohoutek, Inc., Bucher Sales, LLC, Nobles, Inc., and Spirits Plus, LLC—seeking declaratory and injunctive relief against the Montana Department of Revenue (DOR) in the Eighth Judicial District Court, Cascade County. The case centered on a statutory scheme governing liquor sales in Montana, specifically a discount mechanism known as the weighted average discount ratio (WADR), which was in effect from 1995 to 2016.
The DOR managed sales from a state-owned liquor warehouse to certified liquor stores, which could only purchase from this warehouse. Agency Liquor Stores received three discounts, including the WADR, which was based on 1994 sales data for unbroken cases. Storeowners claimed economic harm due to the outdated data used for WADR calculations, arguing that it unfairly compensated some storeowners while disadvantaging others based on their sales volume. They contended that the WADR violated their rights to substantive due process and equal protection, constituted an illegal taking, and resulted in DOR's unjust enrichment.
The District Court found the WADR constitutional upon its enactment but ruled that its reliance on stale 1994 data began infringing on Storeowners' rights in 1998 and led to DOR's unjust enrichment, although it did not qualify as an illegal taking. Both parties appealed. The court ultimately reversed the District Court's judgment, asserting the WADR was constitutional, and identified key issues regarding the substantive due process and equal protection claims. The historical context noted that after the repeal of Prohibition in 1933, Montana established a monopoly on liquor sales, with the first statutory Case Discount introduced in 1975 requiring a 5% discount for case lot purchases, ensuring full reimbursement for State liquor stores.
Between 1975 and 1995, Montana's Legislature privatized liquor store ownership while maintaining state control over the Liquor Warehouse. The purchase price for liquor was set at the posted price minus a commission rate that incorporated three statutory discounts: a commission rate discount, a sales volume discount, and the Weighted Average Discount Ratio (WADR). House Bill 574, enacted in 1995, amended the Montana Alcoholic Beverage Code by changing references from "state liquor stores" to "agency liquor stores" and restricting the Case Discount to Licensees. The Case Discount was increased from 5% to 8%, and the statute governing WADR was revised to reflect that the agency liquor store's purchase price would be determined by the department's posted price minus the agency's commission rate and WADR. WADR for agency liquor stores or employee-operated state liquor stores was calculated based on fiscal year 1994 sales data. After House Bill 574, the Case Discount mandated an 8% reduction for liquor sold in unbroken case lots to licensees. An exhibit attached to the Fiscal Note of House Bill 574, prepared by Mick Robinson, outlined that post-privatization commission rates would be derived from the posted retail price rather than the price after discounts. An example illustrated that an agent with a 10% commission would purchase liquor at a significant discount, and if sales patterns matched those of fiscal year 1994, the discounts would effectively balance out.
After 1995, the Montana Legislature revisited the Wholesale Alcohol Distribution Regulation (WADR) and the Case Discount multiple times, notably modifying the Case Discount in 2013 by eliminating references to the Department of Revenue (DOR) regarding reductions for quantity sales of liquor. Specifically, the law mandated an 8% reduction off the posted price for liquor sold in unbroken case lots. In 2007, an attempt was made to amend the WADR and ensure DOR reimbursements to Agency Liquor Stores for actual Case Discounts, but the proposed bill failed in committee.
In February 2014, liquor store franchisees (Storeowners) filed a complaint for declaratory and injunctive relief, alleging undercompensation by the State for case-lot liquor sales. They claimed DOR's reimbursement calculations were based on outdated sales data from 1994, leading to significant losses. The District Court certified a class of Storeowners who had provided greater discounts than reimbursed by the State.
In October 2014, the Storeowners sought partial summary judgment on constitutional claims. The DOR later attempted to introduce a statute of limitations defense, which was denied. The District Court determined that the WADR's intent was to fully reimburse liquor store owners for mandated discounts and found that the application of the WADR violated the class members' equal protection and due process rights under the Montana Constitution. However, it rejected claims of unconstitutional taking of property. The court ruled that reliance on 1994 sales data became unconstitutional starting July 1, 1998, resulting in a damages award of $14,836,178.22. Additionally, the court found DOR unjustly enriched and added attorney fees and interest, totaling $8,718,803.88 and $11,320,233.43, respectively. Both parties subsequently appealed, and oral arguments were held on February 7, 2018.
The court employs plenary review for constitutional issues, holding that statutes are presumed constitutional unless proven otherwise by the challenger. The burden of proof lies with the party claiming unconstitutionality, which must be established beyond a reasonable doubt. The central complaint from Storeowners is that changes in liquor sales since 1994, with some stores selling more unbroken cases and others less, have adversely affected their profits. They argue that the Department of Revenue (DOR) failed to adequately reimburse them for costs associated with the Case Discount mandated by the Wholesale Alcohol Distribution Regulation (WADR). Storeowners claim the WADR infringes on their rights to substantive due process and equal protection, seeking affirmation of the District Court's ruling that it is unconstitutional.
In assessing the substantive due process claim, the court notes that no fundamental rights are at stake, thus applying a rational basis review. This analysis evaluates whether the WADR is related to a legitimate government concern and whether the legislative means are reasonably connected to the intended outcome. It is acknowledged that the legislative policy underpinning the Montana Alcoholic Beverage Code aims to ensure comprehensive regulatory control over liquor sales for public health and safety, a point both DOR and Storeowners agree on.
The excerpt analyzes the purpose and rationality of the WADR (Wine and Distilled Liquor Discount Reimbursement) in relation to its legislative intent. There is disagreement between the parties regarding the objective of the WADR, specifically whether it aimed to fully reimburse Agency Liquor Stores for providing Case Discounts or merely to offset some costs. The Department of Revenue (DOR) argues that the District Court misinterpreted legislative history, asserting that the WADR was designed for partial reimbursement rather than full reimbursement. DOR also contends that the District Court wrongly applied a changed-circumstances test, claiming that the WADR was rational when enacted and should not be judged otherwise.
In assessing the WADR's purpose, the plain language of the statute does not support the claim of full reimbursement, and the legislative history reflects a preference for partial offsets, evidenced by previous legislative attempts and changes that did not establish full reimbursement. The Court notes that while legislative purpose may not be explicitly stated, it can be inferred, and DOR’s interpretation aligns with the notion that the WADR was meant to offset costs incurred by liquor stores. The legislative history indicates a compromise among various stakeholders during liquor privatization, suggesting that the intent behind House Bill 574 was complex and subject to debate. Overall, the Court's task is to clarify the purpose of the WADR and verify its rational relationship to that purpose.
When the Legislature considered House Bill 574, it acknowledged that the Wholesale Average Discount Rate (WADR) would not fully reimburse Agency Liquor Stores for the costs associated with providing the Case Discount. Bea Lunda from Agency 29 proposed an amendment to address this issue, highlighting that agents could potentially sell inventory at a significantly reduced commission. She emphasized that the WADR should ensure that savings passed to licensees do not come at the agents' expense. Mick Robinson, in support of the bill, noted that if sales remained constant, the costs of discounts would balance out, but he did not imply that sales would not change. This legislative history indicates a clear understanding that the WADR was not designed to fully reimburse stores for the Case Discount.
The Legislature's revisions aimed at privatizing liquor stores marked a shift from historically providing full reimbursements. Prior to 1995, the Department of Revenue (DOR) reimbursed state liquor stores entirely for Case Discounts. However, during the privatization effort, the Legislature altered the Case Discount, restricting it to licensees and increasing it from 5% to 8%. The WADR was introduced as a new mechanism relating to the Case Discount, linking it to the stores' sales data from 1994 and indicating a move away from full reimbursement.
The legislative intent reflects a strategy to use the WADR to offset costs associated with the Case Discount rather than providing complete reimbursement. The statutory language supports this interpretation, as it does not indicate that full reimbursement was intended. The court acknowledges that the determination of legislative objectives is better suited for the legislature, and it refrains from questioning the prudence of legislative decisions. The conclusion drawn is that the WADR was established to facilitate the privatization of liquor stores by offsetting some or all costs related to the Case Discount, rather than ensuring full reimbursement for Agency Liquor Stores.
The analysis focuses on the constitutionality of the WADR in relation to its intended purpose and the principles of due process. A statute deemed unreasonable, arbitrary, or capricious fails to align with a legitimate government interest, whereas a statute that is rationally related to legislative goals does not infringe upon due process rights. The District Court found the WADR unconstitutional, drawing from United States v. Carolene Products Co. to emphasize that the rational basis review should assess the government's current enforcement actions rather than the original legislative intent. The court noted that a law could be deemed unconstitutional if its factual premises have changed and its enforcement is seen as unreasonable. The District Court acknowledged that the Supreme Court has shifted focus from evaluating the rationality of a law's enactment to assessing its legitimacy during enforcement. However, the court concluded that the WADR had outlived its intended purpose and imposed unintended burdens. It clarified that Montana's legal precedent does not adopt the changed-circumstances doctrine from Carolene Products, emphasizing the need to assess a statute's rational basis based on the circumstances at the time of enactment. The court reiterated that it does not second guess legislative decisions but instead focuses on legislative intent and public policy considerations at the time of a statute's passage.
The District Court found the WADR (Wholesale Alcohol Discount Regulation) irrational as it did not achieve full reimbursement for Storeowners regarding the Case Discount. However, the WADR's actual purpose was to offset some or all costs of providing this discount, which it consistently accomplished from its enactment in 1995 until its repeal in 2016. The court concluded that the WADR was rationally related to its intended purpose and was a legislative tool for privatizing liquor stores in Montana. Consequently, the District Court erred in claiming the WADR violated Storeowners' rights to substantive due process.
Regarding equal protection rights, the Storeowners cited Montana Department of Revenue v. Barron and Montana Department of Revenue v. Sheehy to argue that the WADR was unconstitutional. In Barron, the court found that a statute adjusting property values resulted in disproportionate tax burdens and failed to equalize appraisal values, thus violating equal protection. Sheehy echoed this conclusion based on Barron's findings. Both cases highlighted that the adjustments exacerbated existing inequalities without a proper equal protection analysis.
Barron and Sheehy are deemed inapplicable to the current case as Storeowners do not claim that the difference between the Wholesale Alcohol Discount Rate (WADR) and the Case Discount should be treated as a tax. Storeowners argue that their profits have declined due to increased sales of unbroken cases since 1994, resulting in greater Case Discounts. However, they retain the ability to sell liquor from broken cases at any price without offering the Case Discount, differentiating their situation from the tax distinctions in Barron and Sheehy, which involved a disproportionate tax burden.
The court follows a three-step process to evaluate equal protection claims: identifying the classes involved, determining the appropriate level of scrutiny for the legislation, and applying that scrutiny. The first step assesses whether the state has created classifications affecting similarly situated groups unequally. Storeowners contend that the WADR's reliance on 1994 sales data has resulted in the creation of two classes: an undercompensated class, comprising those who provided more Case Discounts post-1994, and an overcompensated class, those who provided fewer. The Department of Revenue (DOR) argues that the WADR uniformly applied to all Agency Liquor Stores, with classification outcomes depending on independent business decisions.
For class action purposes, the District Court certified Storeowners as a class of liquor store owners who provided statutory discounts greater than the reimbursements received from the state. It identified a second class of liquor stores that received reimbursements for discounts not given, specifically those that sold more case lots in 1994 than currently. The court emphasized that the discriminatory factor is the 1994 sales data, establishing that both classes are similarly situated since their reimbursements are based on the same formula.
Identifying a similarly situated class aims to isolate the factor allegedly subject to discrimination, which in this case is the WADR's reliance on 1994 sales data. However, the groups are not equivalent in all relevant respects due to variations in the impact of this data on compensation for Agency Liquor Stores, which depended on their sales performance post-1994. The distinction arises from each store's independent business decisions affecting their unbroken case sales, leading to fundamental differences that undermine claims of equal protection. Consequently, Storeowners did not demonstrate that they belong to similarly situated classes, resulting in a failure to prove an equal protection violation. The District Court's conclusion that the WADR violated these rights was incorrect.
The WADR, as defined in the repealed statute 16-2-101(2)(b)(ii)(B), was rationally related to the legislative aim of offsetting costs incurred by Agency Liquor Stores for providing case discounts. The statute's language and legislative history do not support Storeowners' assertion that full reimbursement was intended. The varying outcomes of sales growth or decline are attributed to individual business choices, further establishing dissimilarity among classes for equal protection analysis. Therefore, the WADR did not infringe upon Storeowners' rights to substantive due process or equal protection and was constitutional within Montana's statutory framework for privatizing liquor stores.
The District Court's judgment is reversed, and the appeal pertains solely to the repealed WADR, following prior legislative amendments in 2015 that altered discount structures. The case was bifurcated to separate constitutional claims from damages, and documentation from the Liquor Control Division clarified the WADR's purpose as offsetting costs for providing discounts to licensees purchasing unbroken cases.
