Eby-Brown Co. v. Wisconsin Dept. of Agr.
| Decision Date | 20 November 2001 |
| Docket Number | No. 00-C-0718-C.,00-C-0718-C. |
| Citation | 213 F.Supp.2d 993 |
| Parties | EBY-BROWN COMPANY LLC, Plaintiff, v. WISCONSIN DEPARTMENT OF AGRICULTURE, TRADE AND CONSUMER PROTECTION and its Secretary, James Harsdorf, Defendants. |
| Court | U.S. District Court — Western District of Wisconsin |
David J. Cannon, Milwaukee, WI, for plaintiff.
Stephen J. Nicks, Assistant Attorney General, Madison, WI, for Brancel, Ben, Wisconsin Department of Agriculture, Trade and Consumer Protection, Stephen A. Ditullio Dewitt, Ross & Stevens, Madison, WI, Wisconsin Association of Distributors, Inc.
This is a civil action for declaratory and injunctive relief. Plaintiff Eby-Brown Company LLC, a wholesale, licensed distributor of tobacco products, challenges Wisconsin's Unfair Sales Act, Wis.Stat. § 100.30, which regulates the minimum price distributors and retailers can charge for products, including cigarettes. Plaintiff is seeking a declaration that the Act violates its rights to equal protection and substantive due process and the commerce clause. In addition, plaintiff seeks to enjoin defendants Wisconsin Department of Agriculture, Trade and Consumer Protection and its secretary, James Harsdorf, from enforcing the Act. Subject matter jurisdiction is present under 28 U.S.C. § 1331.
Presently before this court are plaintiff's and defendants' cross-motions for summary judgment. Because I find that the Act does not violate plaintiff's rights to equal protection or substantive due process or the commerce clause, I will grant defendants' motion for summary judgment and deny plaintiff's motion for summary judgment.
From the findings of fact proposed by the parties and from the record, I find the following material facts are undisputed.
Plaintiff Eby-Brown Company LLC is a Delaware company engaged in the wholesale distribution of tobacco products, food products and sundry items. Defendant Wisconsin Department of Agriculture, Trade and Consumer Protection is the entity authorized to enforce the provisions of the Unfair Sales Act pursuant to Wis.Stat. § 93.07. Defendant James Harsdorf is the current secretary of the Wisconsin Department of Agriculture, Trade and Consumer Protection and is responsible for enforcing the Act.
Plaintiff is a licensed cigarette distributor and has done business in Wisconsin since before 1980. In 1999, plaintiff opened a distribution center in Eau Claire, Wisconsin, from which it distributes most of its products in Wisconsin. As part of its business, plaintiff sells to a broad class of customers, including individual retailers, retailers that have combined gas stations and convenience stores, national chain drug stores and national chain grocery stores.
On February 10, 1998, defendants advised plaintiff that they had received a complaint alleging that plaintiff was violating Wisconsin's Unfair Sales Act by selling cigarettes below cost and that defendants were going to commence an investigation, pursue the complaint and enforce the Act against plaintiff. Defendants usually initiate Unfair Sales Act investigations after receiving a written complaint. Since January 1, 1994, defendants has received 143 written complaints alleging sales of tobacco products below either "cost to retailer" or "cost to wholesaler." Thirty complaints were closed after finding no violations; 32 resulted in defendants' issuing warning letters; three resulted in defendants' issuing special orders pursuant to Wis.Stat. § 100.20(3); four were referred to district attorneys for prosecution; 10 are currently in the final stages of investigation and being prepared for recommendations by staff for legal action; and 13 are currently in a preliminary investigative stage.
The policy behind the Unfair Sales Act, Wis.Stat. § 100.30(I), is stated as follows:
Policy. The practice of selling certain items of merchandise below cost in order to attract patronage is generally a form of deceptive advertising and an unfair method of competition in commerce. Such practice causes commercial dislocations misleads the consumer, works back against the farmer, directly burdens and obstructs commerce, and diverts business from dealers who maintain a fair price policy. Bankruptcies among merchants who fail because of the competition of those who use such methods result in unemployment, disruption of leases, and nonpayment of taxes and loans, and contribute to an inevitable train of undesirable consequences, including economic depression.
Under the Act, there are essentially two types of cigarette wholesalers: permit holders and jobbers. Plaintiff is a permit holder, also known as a licensed cigarette distributor, because it is allowed to affix tax revenue stamps to cigarette packages. Wis.Stat. § 139.30(3). Jobbers, on the other hand, must purchase tobacco products from a permit holder. Wis.Stat. § 139.30(6). Generally, jobbers service low-volume retail accounts, while permit holders service higher volume accounts. In addition, the Act creates a cigarette wholesaler known as a "multiple retailer," which is defined as "any person who acquires stamped cigarettes from manufacturers or permittees, stores them and sells them to consumers through 10 or more retail outlets which he or she owns and operates within or without this state." Wis.Stat. § 139.30(8). Plaintiff does not know of any Wisconsin multiple retailer who maintains a separate central warehouse to store cigarettes sold to it and who then delivers those cigarettes to its various retail outlets. All of the multiple retailers to whom plaintiff sells cigarettes have plaintiff deliver the cigarettes directly to each retail outlet, who then stores the cigarettes on site at each retail outlet.
When plaintiff and all other cigarette distributors purchase directly from cigarette manufacturers, they are given what the manufacturers refer to as "cash discounts" and "trade discounts." Cash and trade discounts reduce the cost of acquiring cigarettes from a manufacturer.
The Act provides that with respect to the sale of cigarettes, liquor or other tobacco products, the "cost to wholesaler" is, in part, invoice cost less all trade discounts except customary discounts for cash. Wis. Stat § 100.30(2). This section also provides that for a licensed cigarette distributor or a multiple retailer, the "cost to wholesaler" is, in part, the cost charged by the cigarette manufacturer, disregarding any manufacturer's discount or any cash discount. Id. In other words, the Act does not allow the deduction of trade discounts when determining "cost to wholesaler" for sales by a licensed cigarette distributor or multiple retailer, but does allow trade discounts for all products other than cigarettes. Defendants have never tried to enforce the Act or validate compliance by using any other definition of "costs" other than "costs to retailer" or "costs to wholesaler" as those terms are defined in Wis. Stat. § 100.30(2).
In any sale in which the seller is not a licensed cigarette distributor, the Act allows a below-cost sale if that selling price is set in good faith to meet the existing selling price of a competitor on the basis of evidence in possession of the retailer or wholesaler in the form of an advertisement, proof of sale or receipted purchaser. Wis.Stat. § 100.30(6)(c).
The Act prohibits both in-state and out-of-state cigarette wholesalers from increasing their market share by selling cigarettes at a price that is lower than the statutory definition of cost to wholesaler. However, by administrative rule, certain allowances, other than cash discounts, may be used by distributors in justifying a lower "cost to wholesaler." For example, in 1988, defendants enacted stamping discount regulations, Wis.Admin.Code § ATCP 105.08(3)(b), an administrative rule under the Unfair Sales Act, which reads as follows:
To the extent provided under this paragraph allowances and the state stamping discount under s. 139.32(5), Stats., may be deducted from the cost of doing business. If an allowance or the state stamping discount is so used it shall offset expenses incurred when performing the service or providing the item of value; customary discounts for cash payment shall offset interest expenses and other bank charges. These offsets may not exceed the amount of expense incurred for performing the service or providing the item of value that is allocated to cigarettes and other tobacco products.
Generally, a cigarette wholesaler that wishes to increase its market share must do so by providing higher quality service to its customers rather than by selling below the Act's definition of cost.
Section 100.30(3) of the Act prohibits loss leaders:
Illegality of loss leaders. Any sale of any item of merchandise either by a ... wholesaler ... at less than cost as defined in this section with the intent or effect of inducing the purchase of other merchandise or of unfairly diverting trade from a competitor, impairs and prevents fair competition, injures public welfare and is unfair competition and contrary to public policy and the policy of this section. Such sales are prohibited. Evidence of the sale of any item of merchandise by any ... wholesaler ... at less than cost as defined in this section shall be prima facie evidence of intent or effect to induce the purchase of other merchandise, or to unfairly divert trade from a competitor, or to otherwise injure a competitor.
Profit margins in tobacco distribution are low in comparison to other products, hovering at approximately 2.9%. In the 12-month period ending November 2000, plaintiff sold approximately $100 million worth of cigarettes in Wisconsin calculated on the basis of manufacturer's list price. Plaintiff sells to many large national chain retailers and these companies insist on uniform cigarette pricing, subject only to state variations on the basis of tax revenue stamps.
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