Duane C. Kohoutek, Inc. v. State

Decision Date16 May 2018
Docket NumberDA 17-0131
Citation391 Mont. 345,2018 MT 123,417 P.3d 1105
Parties DUANE C. KOHOUTEK, INC., a Montana Corporation, Bucher Sales, LLC, a Montana Limited Liability Company, Nobles, Inc., a Montana Corporation, and Spirits Plus, LLC, a Montana Limited Liability Company, individually and on behalf of others similarly situated, Plaintiffs and Appellees, v. STATE of Montana, DEPARTMENT OF REVENUE, Defendant and Appellant.
CourtMontana Supreme Court

For Appellant: Daniel J. Whyte, Teresa G. Whitney (argued), Dave Burleigh, Special Assistant Attorneys General, Helena, Montana

For Appellees: Jonathan McDonald (argued), McDonald Law Office, PLLC, Helena, Montana, Michael J. George, Michael J. George, P.C., Great Falls, Montana

Justice Laurie McKinnon delivered the Opinion of the Court.

¶ 1 Four liquor store owners, Duane C. Kohoutek, Inc., Bucher Sales, LLC, Nobles, Inc., and Spirits Plus, LLC, (together Storeowners) certified as a class representing similarly situated liquor store owners, sought declaratory and injunctive relief from actions of the State of Montana, Department of Revenue (DOR) in Montana’s Eighth Judicial District Court, Cascade County.

¶ 2 Various statutes govern liquor sales in Montana and are administered by DOR. The statute at issue in these proceedings was effective between 1995 and 2016. Pursuant to the statutory scheme, all liquor sales originated in the State-owned, central liquor warehouse (Liquor Warehouse). DOR then sold liquor to certified liquor stores (Agency Liquor Stores). Agency Liquor Stores could only purchase liquor from the Liquor Warehouse and the Liquor Warehouse sold only to Agency Liquor Stores. DOR provided Agency Liquor Stores with three discounts, collectively known as the commission rate, on their purchase of liquor from the Liquor Warehouse. One of those discounts was the weighted average discount ratio (WADR), codified in § 16-2-101(2)(b)(ii)(B), MCA (repealed 2016). Agency Liquor Stores then, in turn, sold the liquor to individual retail customers as well as to licensed taverns and bars (Licensees). When Agency Liquor Stores sold whole or unbroken cases of liquor, also known as case lots, to Licensees, § 16-2-201(1), MCA, required them to provide a separate discount (Case Discount).

¶ 3 In 2014, Storeowners filed suit challenging the constitutionality of the WADR. Storeowners argued they suffered economic injury because the WADR used 1994 unbroken-case-sales data to formulate its discount and apply it against their purchase price, while Storeowners’ current sales data differed depending on actual Case Discounts given. Storeowners contended the WADR’s effect was "capricious in paying some storeowners more in reimbursements than discounts made" and stores that sold more unbroken cases after 1994 were unable to realize as great a profit as stores that sold the same or fewer unbroken cases. Storeowners specifically claimed that the WADR should have fully reimbursed them for the cost of providing the Case Discount to Licensees. Accordingly, Storeowners argued the WADR violated their rights to substantive due process and equal protection, constituted an illegal taking, and resulted in DOR’s unjust enrichment.

¶ 4 The District Court concluded that the WADR was constitutional when it was enacted in 1995, but its reliance on 1994 sales data became stale and violated Storeowners’ rights to substantive due process and equal protection beginning in 1998. The District Court also concluded the WADR resulted in DOR’s unjust enrichment, but did not constitute an illegal taking. Both DOR and Storeowners appeal from the District Court’s decisions. We conclude the statute was constitutional and reverse the District Court’s judgment.

¶ 5 We restate the dispositive issues on appeal as:

1. Whether the District Court erred in determining the WADR violated Storeowners’ rights to substantive due process.
2. Whether the District Court erred in determining the WADR violated Storeowners’ rights to equal protection.
Legislative History

¶ 6 After the United States Congress repealed prohibition in 1933, the State of Montana began closely regulating liquor sales within the State. U.S. Const. amend. XVIII, repealed by U.S. Const. amend. XXI. From 1933 to 1995, the State maintained a monopoly on the public’s access to liquor through its ownership of the Liquor Warehouse and liquor stores throughout the State. In 1975, the Legislature provided a statutory Case Discount for the first time, requiring State liquor stores to provide a 5% discount "to any person purchasing liquor in case lots." 1975 Mont. Laws 650. Section 4-2-201, RCM (1975), specifically required the discount "shall be made by the department" so that State liquor stores providing the 5% discount on unbroken cases were fully reimbursed.

¶ 7 Between 1975 and 1995, the Legislature privatized ownership of liquor stores while retaining State ownership of the Liquor Warehouse. The ultimate purchase price of liquor from the Liquor Warehouse was the posted price less the commission rate. The commission rate included three statutory discounts: a commission rate discount, a sales volume discount, and the WADR. See §§ 16-2-101(2)(b)(ii)(B) ; 16-2-101(4)(a)(i)(A)-(B); 16-2-101(4)(a)(ii)(A)-(B), MCA (2013).1 To complete the privatization process, House Bill 574, proposed in 1995, made a variety of changes to the Montana Alcoholic Beverage Code (Title 16, chapters 1-4, 6, MCA). Relevant here, House Bill 574 transferred references to ownership of liquor stores by replacing "state liquor stores" with "agency liquor stores," and limited the Case Discount’s availability to Licensees. 1995 Mont. Laws 2715-21. The Legislature increased the Case Discount from 5% to 8% and substantially revised § 16-2-101, MCA, by adding the WADR. 1995 Mont. Laws 2715-21. The statute setting forth the WADR provided:

The agency liquor store’s purchase price is the department’s posted price less the agency liquor store’s commission rate in the state agency franchise agreement and less the agency liquor store’s weighted average discount ratio. For purposes of this subsection (2)(b)(ii)(B), for agency liquor stores or employee-operated state liquor stores that were operating June 30, 1994, the weighted average discount ratio is the ratio between an agency liquor store’s or the employee-operated state liquor store’s full case discount sales divided by the agency liquor store’s or employee-operated state liquor store’s gross sales, based on fiscal year 1994 reported sales, times the state discount rate for case lot sales, as provided in 16-2-201, divided by the state discount rate for full case lot sales in effect on June 30, 1994.

Section 16-2-101(2)(b)(ii)(B), MCA (1995). Following passage of House Bill 574, the Case Discount provided, in relevant part:

Reduction for quantity sales of liquor. (1) Reduction of 8% of the posted price of liquor sold at the agency liquor store must be made by the department for sales to any licensee purchasing liquor in unbroken case lots.

Section 16-2-201(1), MCA (1995).

¶ 8 Mick Robinson, Director of DOR, prepared an exhibit attached to House Bill 574’s Fiscal Note. It described a change House Bill 574 made to Agency Liquor Store’s commission rates. After privatization, a store’s commission rate would be based on "the posted retail price of liquor" instead of "the price after full case discounts are applied." House Business and Labor Committee Hearing, Exhibit 1 (March 2, 1995). The exhibit included an example:

The price of liquor purchased from the state warehouse will be reduced by the commission rate ... which is the difference between the agent’s purchase price and the posted price. For example, an agent with a 10% commission will purchase a 12–bottle case of liquor that sells at a state posted retail price of $10 per bottle for $108 from the state warehouse; the sale of each bottle of liquor will produce a $1 commission.

House Business and Labor Committee Hearing, Exhibit 1 (March 2, 1995). Further, the exhibit stated, "if the agent makes full case sales to licensees in the same proportion that occurred in [fiscal year 1994], the cost of discounts will be a wash." House Business and Labor Committee Hearing, Exhibit 1 (March 2, 1995).

¶ 9 After 1995, the Legislature revisited the WADR and the Case Discount. See 1997 Mont. Laws 168; 2001 Mont. Laws 2493-94; 2007 Mont. Laws 125-26; 2013 Mont. Laws 17; 2015 Mont. Laws 1581-85. The Legislature modified the Case Discount in 2013, removing any reference to DOR:

Reduction for quantity sales of liquor.(1) Reduction A reduction of 8% of the posted price of liquor sold at the an agency liquor store must be made by the departmentfor sales of liquor to any a licensee purchasing liquor in unbroken case lots.

2013 Mont. Laws 17 (added text underlined and deleted text stricken). Further, prior to its repeal in 2016, legislators in 2007 attempted to remove the WADR and amend the Case Discount by adding a sentence directly requiring DOR to reimburse Agency Liquor Stores based on their actual Case Discounts. The proposed bill died in standing committee. HB 173, 60th Leg. (Mont. 2007).

Procedural Posture

¶ 10 In February 2014, Storeowners filed a complaint seeking declaratory, injunctive, and class-wide relief "on behalf of Montana liquor store franchisees who have been programmatically undercompensated by the State for the sale of case-lots of liquor to state liquor licensees." In their complaint, Storeowners described how DOR "reimbursed [them] for ... mandated discounts based not on the actual discounts given, but upon a ratio of case-lot sales to licensees2 to overall sales made by each store in fiscal year 1994" resulting "in a significant cumulative loss to certain agency liquor store franchisees." The parties jointly moved for class certification. In its certification order, the District Court defined the class as: "Owners of Montana liquor stores which...

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