Auen v. Alcoholic Beverages Div.

• Citation: 679 N.W.2d 586
• Decision Date: 12 May 2004
• Docket Number: No. 02-1762.,02-1762.
• Parties: Dave AUEN and Ike Auen Distributing Company, Inc., Duncan Cameron and Bill Wallace and Vanguard Distributing Corporation, Mark Doll and Doll Distributing Company, Scott Doll and Western Iowa Wine, Joanie Heimsoth and Dick Postels and Grinnell Beverage Company, Ron Kirchhoff and Kirchhoff Distributing Company, Inc., Charley Whittenburg Distributing, Inc., Wholesale Beer Distributors Association, and Sheila Douglas, Executive Director, Iowa Wholesale Beer Distributors, Appellants, v. ALCOHOLIC BEVERAGES DIVISION OF THE IOWA DEPARTMENT OF COMMERCE, Appellee.
• Court: Iowa Supreme Court

679 N.W.2d 586

Dave AUEN and Ike Auen Distributing Company, Inc., Duncan Cameron and Bill Wallace and Vanguard Distributing Corporation, Mark Doll and Doll Distributing Company, Scott Doll and Western Iowa Wine, Joanie Heimsoth and Dick Postels and Grinnell Beverage Company, Ron Kirchhoff and Kirchhoff Distributing Company, Inc., Charley Whittenburg Distributing, Inc., Wholesale Beer Distributors Association, and Sheila Douglas, Executive Director, Iowa Wholesale Beer Distributors, Appellants, v. ALCOHOLIC BEVERAGES DIVISION OF THE IOWA DEPARTMENT OF COMMERCE, Appellee.

No. 02-1762.

Supreme Court of Iowa.

May 12, 2004.

David L. Brown of Hansen, McClintock & Riley, Des Moines, for appellants.

Thomas J. Miller, Attorney General, Julie Pottorff, Deputy Attorney General, and John R. Lundquist, Assistant Attorney General, for appellee.

WIGGINS, Justice.

The appellant, Iowa Wholesale Beer Distributors Association, is an association of more than forty beer distributors located in the State of Iowa. Appellant, Sheila Douglas, is Iowa Wholesale Beer Distributors Association's executive director. The remaining appellants are Iowa wholesale beer distributors. (We will refer to all of the appellants as "Wholesalers.") The Wholesalers sought judicial review of amended Iowa Administrative Code rule 185—16.2(2) (2000) issued by the Alcoholic Beverages Division of the Iowa Department of Commerce (ABD). The purpose of the amended rule was to further define the phrase "directly or indirectly be interested in the ownership" contained in Iowa Code section 123.45 (2001).¹ The Wholesalers claim the ABD did not have authority to issue amended rule 185—16.2(2), and if it did, the amended rule is inconsistent with the language and intent of Iowa Code section 123.45. The district court upheld the ABD's exercise of its rulemaking power. Because we disagree with the district court, we reverse its decision and hold the amended rule is an illogical interpretation of section 123.45.

I. Background Facts and Proceedings.

Iowa Code section 123.45 provides in pertinent part:

A person engaged in the business of manufacturing, bottling, or wholesaling alcoholic beverages, wine, or beer, or any jobber, representative, broker, employee, or agent of such a person, shall not ... directly or indirectly be interested in the ownership, conduct, or operation of the business of another licensee or permittee authorized under this chapter to sell at retail, nor hold a retail liquor control license or retail wine or beer permit.

Iowa Code § 123.45.

The original rule promulgated by the ABD to implement section 123.45 provided:

185—16.2(123) Interest in a retail establishment.

16.2(1) An industry member is prohibited, directly or indirectly, from:

a. Acquiring or holding a partial or complete ownership interest in a retail establishment.

b. Acquiring or holding an interest in the real or personal property owned, occupied or used by the retailer in the conduct of the retail establishment.

c. Acquiring a mortgage on the real or personal property owned by the retailer.

d. Guaranteeing any loan or paying a financial obligation of the retailer, including, but not limited to, personal loans, home mortgages, car loans, operating capital obligations, or utilities.

e. Providing financial, legal, administrative or other assistance to a retailer to obtain a license or permit.

Iowa Admin. Code r. 185—16.2(1).

In August 2000, the ABD filed a notice of intended action indicating its intent to amend Iowa Administrative Code rule 185—16.2 to define "interest in the ownership" as contained in Iowa Code section 123.45 more narrowly and exclude remote corporate connections that do not affect the retail business directly or indirectly. In its notice, the ABD stated:

Over the past five years, numerous jurisdictions have examined this issue under similar statutory provisions and concluded that the corporate connection of a manufacturer, bottler, or wholesaler may be so remote that rigid application of the statutory prohibition to an applicant for a license or permit is unreasonable.

A public hearing was held to comment on the proposed rule in August 2000. Additional comments were taken at an administrative rules review committee meeting in September 2000. As a result of these meetings and comments, the proposed rule read as follows:

16.2(2) For the purposes of this rule, a subsidiary or an affiliate of an industry member shall not be considered to have any interest in the ownership, conduct or operation of a retailer provided all of the following conditions are satisfied:

a. The industry member and the retail establishment do not share any common officers or directors.

b. The industry member does not control the retail establishment.

c. The industry member is not involved, directly or indirectly, in the operation of the retail establishment.

d. The retail establishment is free from control or interference by the industry member with respect to the retailer's ability to make choices as to the types, brands and quantities of alcoholic beverages purchased and sold.

e. The retail establishment sells brands of alcoholic beverages that are produced or distributed by competing industry members with no preference given to the industry member that holds a financial interest in the retailer.

f. There is no exclusion, in whole or in part, of alcoholic beverages sold or offered for sale by competing industry members that constitutes a substantial impairment of commerce.

g. The retail establishment shall not purchase more than 20 percent of the total annual liquor sales, 20 percent of the total annual wine sales, and 20 percent of the total annual beer sales (measured by gallons) from the industry member.

h. The primary business of the retail establishment is not the sale of alcoholic beverages.

i. All purchases of alcoholic beverages by the retail establishment are made pursuant to Iowa's three-tier system as provided for in Iowa Code chapter 123.

16.2(3) A retail establishment shall file verification with the alcoholic beverages division that it is in compliance with the conditions set forth in this rule upon application, renewal or request of the agency.

16.2(4) This rule is not subject to waiver or variance in specific circumstances.

This rule is intended to implement Iowa Code sections 123.45 and 123.186.

Iowa Admin. Code r. 185—16.2(2), (3), (4).

In November 2000, the final amended rule was submitted to the administrative rules review committee, where a member of the committee made a motion to file an objection to the ABD's revised rule on the grounds the rule exceeded the authority delegated to the ABD. On a vote of five votes in favor of the objection and five votes opposing the objection, the motion to file the objection to the rule failed to pass by operation of law. The amended rule interpreting Iowa Code section 123.45 became effective in December 2000.

The Wholesalers filed a petition for judicial review challenging the amended rule. In October 2002, the district court upheld the amendment as a valid exercise of the ABD's rulemaking authority. The Wholesalers appeal.

II. Issues.

We must decide whether the ABD had authority to issue amended rule 185—16.2, and if it did, whether the ABD's interpretation of Iowa Code section 123.45 complies with the provisions contained in section 17A.19(10) of the Iowa Administrative Procedure Act.

III. Standard of Review.

The Iowa Administrative Procedure Act, Iowa Code chapter 17A, governs the standards under which we review the district court's decisions on judicial review of agency action. Locate.Plus.Com, Inc. v. Iowa Dep't of Transp., 650 N.W.2d 609, 612 (Iowa 2002). "The agency decision itself is reviewed under the standards set forth in section 17A.19(10)." Mosher v. Dep't of Inspections & Appeals, 671 N.W.2d 501, 508 (Iowa 2003). If the agency action affects the substantial rights of the person seeking judicial review and the agency's conduct meets one of the enumerated provisions contained in Iowa Code section 17A.19(10), the court shall reverse, modify, or grant other appropriate relief from the agency's action. Iowa Code § 17A.19(10).

We must apply the standards set forth in section 17A.19(10) and determine whether our application of those standards produce the same result as reached by the district court. Mosher, 671 N.W.2d at 508. The first standard upon which the Wholesalers challenge the agency action is on the ground that the promulgation of the amended rule by the ABD was beyond the authority delegated to the agency by any provision of law. Iowa Code § 17A.19(10)(b).

Alternatively, the Wholesalers claim that even if the ABD had authority to issue the amended rule, the ABD based the amended rule on an erroneous interpretation of the law. Iowa Code § 17A.19(10)(c), (l). If the legislature has not clearly vested the interpretation of the statute at issue with the agency, we are free to substitute our judgment de novo for the agency's interpretation and determine if the interpretation is erroneous. Iowa Code § 17A.19(10)(c); Arthur E. Bonfield, Amendments to Iowa Administrative Procedure Act, Report on Selected Provisions to Iowa State Bar Association and Iowa State Government 62 (1998). If, however, the legislature has clearly vested the interpretation of the statute at issue with the agency, we will only reverse the agency's interpretation if it is "based upon an irrational, illogical, or wholly unjustifiable" interpretation of the statute at issue. Iowa Code § 17A.19(10)(l). Neither party claims if we find that one of the provisions in section 17A.19(10) has been met, that the action of the ABD does not affect the substantial rights of the Wholesalers.

IV. Authority of ABD to Issue Amended Rule 185—16(2).

"An agency shall have only that authority or discretion delegated to or conferred upon the agency by law and shall not expand or enlarge its authority or discretion beyond the powers delegated to or...