Continental Distilling Corporation v. Humphrey

• Decision Date: 24 November 1954
• Docket Number: No. 11933.,11933.
• Citation: 220 F.2d 367,95 US App. DC 104
• Parties: CONTINENTAL DISTILLING CORPORATION, Appellant, v. George M. HUMPHREY et al., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

95 US App. DC 104, 220 F.2d 367 (1954)

CONTINENTAL DISTILLING CORPORATION, Appellant, v. George M. HUMPHREY et al., Appellees.

No. 11933.

United States Court of Appeals District of Columbia Circuit.

Argued October 5, 1954.

Decided November 24, 1954.

Mr. F. Joseph Donohue, Washington, D. C., with whom Mr. Abraham S. Goldstein, Washington, D. C., was on the brief, for appellant.

Mr. Frank H. Strickler, Asst. U. S. Atty., Washington, D. C., with whom Messrs. Leo A. Rover, U. S. Atty., Oliver Gasch, Principal Asst. U. S. Atty., Lewis A. Carroll, Asst. U. S. Atty., and Wallace A. Russell, Atty., Alcohol and Tobacco Tax Legal Division, Office of the Chief Counsel, Internal Revenue Service, Washington, D. C., were on the brief, for appellees.

Mr. William J. Peck, Asst. U. S. Atty., Washington, D. C., at the time the record was filed, also entered an appearance for appellees.

Mr. Frederic P. Lee, Washington, D. C., filed a brief on behalf of Anderson County Distilling Co., Inc., and 24 other distilling companies as amici curiae, urging affirmance.

Before EDGERTON, FAHY and WASHINGTON, Circuit Judges.

FAHY, Circuit Judge.

On September 19, 1952, Dwight E. Avis, as head of the Alcohol and Tobacco Tax Division of the Bureau of Internal Revenue and one of the defendants, who are hereinafter referred to as appellees,¹ notified the Continental Distilling Corporation, plaintiff, referred to as Continental,² that certain whisky marketed by it should be labeled to show that it had been stored in reused cooperage. Continental sued in the United States District Court for a judicial declaration of invalidity of this ruling and for appropriate injunctive relief. The appeal is from the court's order dismissing the complaint on appellees' motion that it failed to state a claim upon which relief could be granted.

The governing statute is the Federal Alcohol Administration Act, 49 Stat. 977, as amended, 27 U.S.C.A. § 201 et seq. Reading § 205 with § 205(e) it is unlawful for any person engaged in business as a distiller,

"To sell or ship or deliver for sale or shipment, or otherwise introduce in interstate or foreign commerce * * * any distilled spirits * * unless such products are bottled, packaged, and labeled in conformity with such regulations, to be prescribed by the Secretary of the Treasury, with respect to * * * labeling * * * (1) as will prohibit deception of the consumer with respect to such products or the quantity thereof and as will prohibit, irrespective of falsity, such statements relating to age, manufacturing processes, analyses, guarantees, and scientific or irrelevant matters as the Secretary of the Treasury finds to be likely to mislead the consumer; (2) as will provide the consumer with adequate information as to the identity and quality of the products * * *; (4) as will prohibit statements on the label that are disparaging of a competitor\'s products or are false, misleading, obscene, or indecent * * *." § 205(e).

The complaint alleges that Continental began manufacturing the whisky in 1945 and stored it in barrels which had lost their char by prior use. On November 23, 1948, Avis' predecessor had advised Continental that containers could show the age of the whisky when it was used in blends, without reference to reused cooperage. On May 3, 1949, and again with an immaterial change on August 1, 1949, the Alcohol Tax Unit had approved a label for the whisky as "Embassy Club" with the legend "This Whisky is 4 Years Old". Continental decided, however, to mature it for two more years and delayed marketing it until August 1951. Large sums were expended in a successful marketing campaign, after which, the complaint continues, the 1952 ruling was made, irreparably injuring the whisky's marketability.

The regulation relied upon by appellees is the last unnumbered paragraph of Section 39(a) of Regulations No. 5 adopted March 2, 1938, 3 Fed.Reg. 486, 27 CFR § 5.39 (1949). It reads as follows:

"Notwithstanding the foregoing provisions of this paragraph, in the case of whisky (as defined in § 5.21 (b), Class 2),³ produced in the United States on and after March 1, 1938, and stored in reused cooperage, there shall be stated in lieu of the words `* * * is ____ (years and/or months) old\', the words `* * * stored ____ (years and/or months) in reused cooperage\', and in lieu of the words `* * * stored ____ (years and/or months) or more old\', the words `* * * stored ____ (years and/or months) or more in reused cooperage\'."

First. The complaint alleges that this regulation, interpreted to require "Embassy Club" to be labeled as having been stored in reused cooperage is invalid because the notice of hearing which preceded its promulgation did not inform interested parties that whisky produced at a proof in excess of 160° and stored in reused cooperage would be affected.⁴ We think this contention unavailable to Continental. No problem with respect to "Embassy Club" was alive when the regulation was adopted March 2, 1938. The whisky was not even manufactured until 1945. When Continental then began its manufacture and in 1949 first applied for approval of a label there is no indication it was not fully aware of the regulation, which plainly gave notice of its possible application to this whisky. In these circumstances Continental makes no case of lack of notice. We do not imply, however, that the notice was insufficient. It stated a purpose of the hearing to be to amend regulations to authorize certain "American type" whiskies, which do not include "Embassy Club", to carry labels claiming age for their period of storage in used containers; but the notice also forecasts amendments to create a standard of identity for "light-bodied" whiskies, which do include "Embassy Club", to permit their storage in secondhand containers and to claim age for the full period of such storage, 2 Fed.Reg. 2080 (1937). If the adequacy of the notice were before us it might well be held to have raised generally the subject of claims of age for whiskies stored in secondhand containers.

Second. It is urged that in prohibiting Continental from claiming age and requiring instead that it disclose the period of the whisky's storage in reused cooperage appellees have misinterpreted their own regulations. The argument is that "age" is defined in Article I(j) of Regulations No. 5 to include storage in oak barrels, that "Embassy Club" was so stored, from which it follows that "age" may be stated on its label.⁵ The premise does not support the conclusion. Even were we to agree that "age" includes by definition the keeping of whisky of this type in reused oak barrels appellees would not thereby be precluded from requiring the label to indicate the manner of its aging.

Third. Continental also contends that the application to it of the reused cooperage regulation is not within the purposes of the Act to prevent consumer deception as set forth in § 205(e), supra, and constitutes discriminatory treatment of an arbitrary and capricious character without rational relation to those purposes. The bare allegation of paragraph 23 of the complaint that an interpretation of the regulation which prohibits "Embassy Club" from bearing the age statement is inconsistent with the statutory purposes is too general to sustain plaintiff's burden. See Pacific States Box & Basket Co. v. White, 296 U.S. 176, 184-186, 56 S.Ct. 159, 80 L.Ed. 138.⁶ We turn to paragraph 25. It alleges that the regulation so interpreted has no rational relation to the statutory purpose "of preventing, inter alia, deception as to quality"; that the whisky is at least equal in quality to whisky which is not required to bear a statement that makes it unmarketable; and that such discriminatory treatment of Continental and its products, having no rational relation to the statutory purpose, is arbitrary, capricious and in excess of statutory authority. Since the prevention of consumer deception is not limited in § 205(e) to matters having to do with quality paragraph 25 of the complaint, if it stood alone, would hardly state a cause of action on the theory of absence of relation of the regulation to the full purposes of the statute. But when we read paragraph 25 with paragraphs 24 and 26 the charges of arbitrary discrimination cannot be put aside. Paragraph 24 states that appellees by their administrative interpretation permit corn whisky stored in reused cooperage to claim age on its label without mention of such cooperage, and that Continental's whisky, similarly entitled to claim age, stands upon the same footing with respect to the last unnumbered paragraph of Section 39(a). And paragraph 26 alleges that appellees have not found it necessary or proper to require a reused cooperage statement in order to provide adequate information as to the quality of whisky of Canadian producers who are allowed to market in the United States a product similar to Continental's free of the reused cooperage regulation, notwithstanding it is aged in such cooperage.

Applying the general rule often enunciated that the allegations of a complaint admitted by a motion to dismiss are to be...