Foremost Sales Promotions, Inc. v. DIRECTOR, BUREAU OF ALCOHOL, 82 C 4354.

• Citation: 642 F. Supp. 1025
• Decision Date: 29 August 1986
• Docket Number: No. 82 C 4354.,82 C 4354.
• Parties: FOREMOST SALES PROMOTIONS, INC., an Illinois corporation, Plaintiff, v. DIRECTOR, BUREAU OF ALCOHOL, TOBACCO AND FIREARMS, an agency of the United States Department of the Treasury; Internal Revenue Service; David R. Chupp; and Midwest Regional Regulatory Administrator, Defendants.
• Court: U.S. District Court — Northern District of Illinois

642 F. Supp. 1025

FOREMOST SALES PROMOTIONS, INC., an Illinois corporation, Plaintiff, v. DIRECTOR, BUREAU OF ALCOHOL, TOBACCO AND FIREARMS, an agency of the United States Department of the Treasury; Internal Revenue Service; David R. Chupp; and Midwest Regional Regulatory Administrator, Defendants.

No. 82 C 4354.

United States District Court, N.D. Illinois, E.D.

August 29, 1986.

Jay L. Schultz, Allen H. Schultz, Schultz & Schultz, Chicago, Ill., for plaintiff.

Steven A. Miller, Asst. U.S. Atty., Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

BRIAN BARNETT DUFF, District Judge.

Plaintiff Foremost Sales Promotions, Inc. ("Foremost") sues for a judgment declaring its right to continue in business in the face of a challenge by the defendant Director of the Bureau of Alcohol, Tobacco and Firearms ("ATF").

ATF regulates, under the Federal Alcohol Administration Act, 27 U.S.C. § 201 et seq. ("FAA Act"), distillers, rectifiers, producers and importers of spirits, wine and malt beverages ("suppliers"). The Act does not give ATF jurisdiction over retailers or promoters of alcoholic beverages.

ATF indirectly challenged Foremost's business practices when it prosecuted Hiram Walker Distributing Company ("HWDC")¹ for doing business with Foremost. ATF charged Walker with violating provisions of the FAA Act which prohibit suppliers from inducing retailers to sell their products exclusively through commercial bribery or through the establishment of a "tied house" arrangement such as would allow the supplier to exercise monopolistic control over the retailer. 27 U.S.C. § 205(b) and (c).²

FACTS

1. Foremost Sales Promotions, Inc.

Foremost was incorporated under the laws of Illinois on October 13, 1949. On November 16, 1978, the Illinois Attorney General ruled that Foremost conducts business as a "franchisor". Since that time, Foremost has operated a franchise division that does business with retail liquor stores and a marketing division that does business with suppliers. For the fiscal year October 1, 1980 to September 30, 1981, Foremost's income was $765,000 from the franchise division and $270,000 from the marketing division.

Foremost maintains two checking accounts: a franchise account and a general account. Only income derived from franchise fees is deposited in the franchise account. All other income is deposited in the general account. The franchise account is used only for expenses relating to advertising and the general account is used to pay all other expenses including salaries for Foremost's 15 employees. Foremost transfers money from the franchise account to the general account as needed to meet expenses.

The franchise agreement governs Foremost's relationship with its 70 franchisees³ and requires Foremost to perform two obligations: 1) Foremost must permit the franchisee to operate under the service mark "Foremost Liquor Store" or "Foremost Liquors"; and 2) Foremost must publish advertising carrying the names and addresses of the franchisees at least once a week in a major Chicago newspaper. In return, the franchisee agrees to be listed as a Foremost Liquor Store in the telephone directory and to pay an annual fee — $11,140 for a Chicago franchise, $11,400 for a Miami franchise, and $9,840 for a franchise in Sarasota, Florida. The franchisee also agrees to use the Foremost mark in any advertising it may do on its own. Such advertising may not be placed in any newspaper in which the weekly Foremost advertising is running.

Foremost also does business with suppliers of alcoholic beverages. Suppliers pay Foremost a subscription fee and Foremost agrees to include their product in Foremost advertising and to provide various promotional services such as booking suppliers' displays in retail stores, distributing coupons for the suppliers' products, and creating holiday packages that include the suppliers' product. The subscription fee may be $450 per week, $750 per month, or $1,000 per month, depending on the services that Foremost agrees to provide. In their depositions, representatives of certain suppliers testified that after they terminated their agreement with Foremost, their products no longer appeared, or appeared infrequently, in Foremost advertising.

The link between the suppliers and the retailers is the weekly newspaper advertisement which Foremost is obligated to prepare under the franchise agreement and which serves as the site for ads that Foremost places on behalf of suppliers. When Foremost prepares the ads, it assigns a discount price for the advertised products that is determined by the retailer's cost per bottle based on the purchase of a single case. A week or two before the ads run, Foremost sends the retailers notice of the items that will be advertised and their discounted price. The retailers then stock up on those products so that they can meet the increased demand created by the advertising.

In their depositions, Foremost retailers testified that Foremost ads increase the demand for advertised products; sales for these items are double and triple the sales of the same products when they are not featured in Foremost advertising. While the retailers are not obligated under the franchise agreement to carry the advertised brands or to sell them at the advertised price, it is clear from the deposition testimony that they are required to do so in order to satisfy their customers.

The evidence does not show that sales of unadvertised items decline when a competing product is featured in Foremost inventory. In his deposition, Kevin R. Zee, the manager of a Foremost retail liquor store, states at page 24: "I do not reduce inventory of an item just because ... another item is advertised, because the item that is not advertised will still continue to sell at its regular price."

2. ATF Investigation

On December 17, 1979, ATF began its investigation of Hiram Walker Distributing Company's relationship with Foremost. After the investigation, ATF concluded that HWDC violated the tied house and commercial bribery prohibitions, 27 U.S.C. § 205(b) and (c). ATF notified HWDC of its conclusions on September 10, 1981. On September 18, ATF completed their formal report and recommended substantial penalties against HWDC for commercial bribery violations and further recommended that those penalties be publicized to deter similar violations.

HWDC representatives met with ATF officials to present their case and to discuss settlement on September 24, 1981. Irving Robbins, Chairman of the Board and founder of Foremost, states in his affidavit that ATF never notified him of the HWDC investigation. Prior to the settlement, HWDC advised him of their intent to settle and to agree with ATF not to do business with Foremost. Foremost asked HWDC to ask ATF if it could be present at the September 24, 1981 meeting. Foremost's request was denied.

In December, 1981, HWDC and ATF agreed to a settlement which provided for HWDC to pay a $20,000 fine and to discontinue its business with Foremost. On January 22, 1982, ATF issued a press release which stated in part as follows:

The Bureau of Alcohol, Tobacco and Firemarms (ATF) has accepted $20,000 from the Hiram Walker Distributing Co.—a wholesale liquor dealer in Des Plaines, Illinois—to settle alleged violations of the trade practices provisions of the Federal Alcohol Administration Act (FAA).

ATF charged the wholesaler with "tied house" violations and commercial bribery for making payments to Foremost Sales Promotions, Inc., a Chicago-based company which represents a number of retail liquor dealers in Illinois. The payments, which were for advertising the Foremost retailers in local newspapers, resulted in the retailers' purchase of Hiram Walker Distributing Co. products over the products of competitive wholesalers.

As a consequence of the ATF investigation and the publicity surrounding it, many suppliers no longer do business with Foremost.

DISCUSSION

The cross motions for summary judgment raise two issues: 1) whether Foremost has standing; and 2) whether suppliers violate the FAA Act when they do business with Foremost.

1. Standing

There are two requirements for standing. The first, a constitutional limitation on jurisdiction, requires an injury-infact which will establish a case or controversy. The second, a judicial rule of selfrestraint, requires the court to consider "whether the interest sought to be protected by the complainant is arguably within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question." Data Processing Service v. Camp, 397 U.S. 150, 153, 90 S.Ct. 827, 829, 25 L.Ed.2d 184 (1969). Defendants do not contest plaintiff's injury-infact, but argue that plaintiff is not within the zone of interests protected by the FAA Act.

The interests asserted by Foremost are, however, arguably within the zone of interests regulated by the FAA Act. While Foremost is not directly regulated under the statute, it is within the zone of interests since it does business with those who are directly regulated. In Cotovsky-Kaplan Physical Therapy Assoc. Ltd. v. United States, 507 F.2d 1363, 1367 (7th Cir. 1975), the court stated that:

If, pursuant to what it perceives to be its statutory authority, a government agency regulates the contractual relationships between a regulated party and an unregulated party, the latter as well as the former may have interests that are arguably within the regulated zone for purposes of testing standing, and for this purpose a total prohibition is a form of regulation.

507 F.2d 1363, 1367 (7th Cir.1975).

ATF's regulation of HWDC consequentially regulates and in fact prohibits Foremost's business with suppliers. ATF charged HWDC with violating the statute by making payments to...