Eby-Brown Company, LLC v. Wisconsin Department of Agriculture, Trade and Consumer Protection and Its Secretary, James Harsdorf

Citation: 295 F.3d 749Docket: 01-4304

Court: Court of Appeals for the Seventh Circuit; August 12, 2002; Federal Appellate Court

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Eby-Brown Company LLC, a wholesale distributor of tobacco products, appeals a district court's summary judgment that upheld a Wisconsin statute prohibiting unfair pricing, claiming it violates constitutional equal protection, due process, and commerce clauses. Eby-Brown, a permit holder allowed to affix revenue stamps on cigarette packages, contends that competitive pricing on tobacco is vital for its business with retailers and multi-retailers. Wisconsin's Unfair Sales Act aims to prevent sales below cost to maintain fair pricing policies among dealers. The Act distinguishes between cigarette wholesalers and other wholesalers, imposing stricter pricing rules on those selling tobacco, such as prohibiting permit holders from deducting trade discounts when calculating their minimum sale price. Additionally, all tobacco wholesalers must include a three percent mark-up for business costs in their pricing, a requirement not applicable to wholesalers of other products. The court affirmed the district court's decision, supporting the statute's constitutionality.

Eby-Brown engaged in a program with tobacco manufacturers, utilizing an electronic fund transfer system that provided discounts of 2.0% to 3.5% off invoice prices. Eby-Brown sought to incorporate these discounts when calculating its 'cost to wholesaler' for sales to Wisconsin retailers. Since January 1994, over one hundred complaints have been lodged against distributors for selling tobacco at prohibited prices. Consequently, Eby-Brown filed a lawsuit against Wisconsin, claiming the Act violated its rights to equal protection and substantive due process, as it specifically barred licensed cigarette wholesalers from deducting trade discounts and mandated a cost markup only for tobacco, liquor, and gasoline wholesalers. Eby-Brown also alleged the Act interfered with interstate commerce.

Following initial proceedings, the district court ruled in favor of Wisconsin, asserting a rational basis for the Act's enactment and concluding it did not violate Eby-Brown's constitutional rights or impose an undue burden on interstate commerce. Eby-Brown appealed this decision. In reviewing the summary judgment, the court noted that Eby-Brown's claims primarily pertained to equal protection rather than substantive due process, as the equal protection clause specifically addresses government actions regarding unequal treatment. The court indicated that Eby-Brown's substantive due process claims would be considered separately.

Scrutiny of Eby-Brown's allegations under equal protection and substantive due process clauses involves assessing whether the state legislation affects a fundamental right or targets a suspect class. If neither is identified, a rational basis test is applied to determine constitutionality. This test upholds legislative enactments if they bear a rational relation to a legitimate governmental interest, and courts refrain from invalidating laws based on perceived imprudence unless there is clear animosity toward a group or infringement of a fundamental right.

Eby-Brown concedes it does not belong to a suspect class, thus the rational basis test is applied to its equal protection claims. The analysis concludes that Wisconsin acted rationally in restricting licensed tobacco wholesalers from deducting 'trade discounts' when calculating 'costs to wholesaler,' unlike other wholesalers. Although the rationale behind this distinction may be questioned, it remains valid if a reasonable hypothesis supports it. The state could reasonably conclude that allowing trade discounts for licensed wholesalers might enable them to manipulate prices and gain an unfair advantage over competitors. The differentiation between licensed wholesalers and unlicensed jobbers is also deemed rational, as licensed wholesalers have direct ties to manufacturers and could potentially leverage trade discounts to distort market pricing, whereas jobbers, who cannot sell untaxed cigarettes, lack the capacity to do so effectively.

Eby-Brown's claims of unequal treatment fail under the rational basis test. The company argues that the 'cost of doing business' mark-up required for wholesalers of gasoline, tobacco, and alcohol violates equal protection. However, the state of Wisconsin is justified in distinguishing these heavily regulated and potentially dangerous products from others, as the mark-up may discourage improper practices in warehousing and insurance.

Eby-Brown also concedes that its substantive due process claims should be evaluated under the same deferential standard. It contends that the prohibition on wholesalers deducting manufacturers' discounts from their 'cost to wholesaler' figure is arbitrary and irrational, as is the refusal to allow deductions for rebates from electronic payment programs. Eby-Brown claims these measures turn the Act into a price-fixing mechanism, but the state could have valid reasons for these provisions. 

For the exclusion of manufacturers' discounts, Wisconsin may believe these discounts could unfairly lower prices, giving some wholesalers an advantage. The complexity of such discounts might also hinder effective enforcement of the Act, justifying their exclusion. Regarding electronic payment discounts, the state could view these as akin to cash discounts, which are not permitted as they are considered part of financing terms rather than price reductions. This rationale suggests that the state's approach to these discount practices is reasonable and supports the Act's objectives.

Eby-Brown argues that the Wisconsin Unfair Sales Act violates the commerce clause by imposing unfair burdens on interstate commerce. The commerce clause grants Congress the authority to regulate interstate commerce and establishes a dormant limitation on state legislation that affects this commerce. States are prohibited from enacting laws that discriminate against or burden interstate commerce, as established in case law.

To determine if a state law violates the dormant commerce clause, courts assess whether the regulation differentially treats in-state versus out-of-state interests. Non-discriminatory state laws with incidental effects on interstate commerce are valid unless the burden on commerce is excessive compared to local benefits.

The Act applies equally to in-state and out-of-state cigarette wholesalers and does not link Wisconsin prices to out-of-state prices, which distinguishes it from invalidated regulations. Eby-Brown's claim that the Act complicates its business operations does not constitute a violation of interstate commerce principles. The analysis concludes that Eby-Brown has not shown that the Act discriminates against out-of-state interests or excessively burdens interstate commerce. Therefore, the court affirms the district court's decision that the Act does not violate the Constitution.