May's Drug Stores v. State Tax Commission

• Decision Date: 12 December 1950
• Docket Number: No. 47696,47696
• Citation: 45 N.W.2d 245,242 Iowa 319
• Parties: MAY'S DRUG STORES, Inc. v. STATE TAX COMMISSION et al.
• Court: Iowa Supreme Court

Page 245

45 N.W.2d 245

242 Iowa 319

MAY'S DRUG STORES, Inc. v. STATE TAX COMMISSION et al.

No. 47696.

Supreme Court of Iowa.

Dec. 12, 1950.

Rehearing Denied Feb. 9, 1951.

Robert L. Larson, Atty. Gen. of Iowa, Henry W. Wormley, Asst. Atty. Gen. of Iowa, Don G. Mullan, of Odebolt, William W. Crissman, County Atty. of Linn County, Codar Rapids, and Clewell & Cooney, of Dubuque, for appellants.

A. W. Bass, of Cedar Rapids, and Harold B. Claypool, of Williamsburg, for appellee.

MULRONEY, Justice.

In this declaratory judgment action there is presented the question of the constitutionality of the Iowa Unfair Cigarette Sales Act, Chapter 226, Laws of the 53d G.A., now Chapter 551A, Code 1950, I.C.A. Some pleading questions were raised and are here argued. We have examined them but do not feel they present a barrier to our reaching the main question as to the constitutionality of the act. Because of the importance of the matter to the public the pleading questions will be passed and we will take up the question of the validity of the statute.

The act in question forbids the sale of cigarettes by a retailer or wholesaler at less than cost. The plaintiff, May's Drug Stores, Inc. of Cedar Rapids is engaged in the business of selling cigarettes at wholesale and retail. In its petition it claims the right to sell cigarettes at less than cost to it and the petition asserts the act in its penal and enforcement provisions is violative of Section 1, Article I of the Constitution of Iowa, I.C.A., and the due process clauses of the federal and state constitutions. The prayer is for a declaration that the act is unconstitutional

The state tax commission, charged under the act with much of the duty of enforcement, and the other law enforcing officers who are named defendants, filed an answer admitting a controversy exists between plaintiff and defendants and, in substance, allege the act when properly construed is constitutional. The trial court treated the issue as one of law, raised by the pleadings. There was some evidence tending to show the tax and license revenues of the state from the sale of cigarettes have been increasing during the past several years. The trial court viewed this evidence as of very slight, if any, importance and on the law issue raised he held the statute unconstitutional. Defendants appeal.

I. No one at this date questions the right of the legislature to enact measures, under its police power, that are designed to prohibit acts which threaten free competition. In 1912 Judge Evans, speaking for this court in State v. Fairmont Creamery Co., 153 Iowa 702, 133 N.W. 895, 898, 42 L.R.A., N.S., 821, said: 'One of the great legislative problems of the day is to protect fair competition * * *.'

Such topics as Fair Trade, Unfair Discrimination, and Unfair Competition, will be found in the codes of all but three or four states and in the code of the United States. Under these topics will be found a wealth of laws, all expressive of the legislative thought that our economy is built upon trade; that free competition is the life of trade; and that which threatens its existence, or tends to create a monopoly should be prohibited in the interest of public welfare. Many of these laws made that inevitable trip through the courts and, whether their validity was sustained or not, the courts always recognized that the promotion of free competition was a proper legislative endeavor under the police power. Just a few quotations will suffice to show the attitude of the courts on the general power of law-making bodies to enact measures to keep competition free.

'That the prevention of monopolies and the fostering of free, open and fair competition and the prohibition of unfair trade practices is in the public welfare is obvious, and requires no citation of authority.' Wholesale Tobacco Dealers Bureau v. Nat'l Candy & Tobacco Co., 11 Cal.2d 634, 82 P.2d 3, 10, 118 A.L.R. 486.

'Exhibited is a clear legislative intent to prevent the destruction of local produce dealers through unfair discrimination by competitors more amply buttressed with capital. Monopolies gained through the misuse of an economic advantage to the direct injury of small merchants and the ultimate injury of producing and consuming classes are to be forestalled. That the police power of the state may be exerted to this end is not to be doubted.' State v. Lanesboro Produce & Hatchery Co., 221 Minn. 246, 21 N.W.2d 792, 794, 163 A.L.R. 1108.

'We have no hesitancy in holding that, generically, legislation prohibiting unfair competition and preventing acts which stifle competition, is well within the surveyed limits of the police power.' People v. Kahn, 19 Cal.App.2d Supp. 758, 60 P.2d 596, 599.

'Legislation to foster free competition and to prevent monopolies is quite uniformly sustained.' Rust v. Griggs, 172 Tenn. 565, 113 S.W.2d 733, 735.

II. With the premise accepted that it is in the interest of general welfare to protect free competition, the court's only inquiry is whether the measure adopted bears a reasonable relation to the legislative purpose of protecting free competition and is not arbitrary or discriminatory. Nebbia v. People of State of New York, 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940, 89 A.L.R. 1469.

That this law, prohibiting sales of cigarettes below cost, embodies a widespread conviction that such sales are destructive of free competition, appears from the fact that about thirty states have enacted such laws. 118 A.L.R. 506; Com. of Pennsylvania v. Zasloff, 338 Pa. 457, 13 A.2d 67, 128 A.L.R. 1126; 30 Minn. Law Review 559; Blum v. Engelman, 190 Md. 109, 57 A.2d 421. The text writer in 118 A.L.R., at page 508, states: 'Thus far the courts have agreed that statutory provisions prohibiting sales below cost, where enacted for the purpose of preventing monopolies and fostering fair competition, have a constitutional object within the police power of the state to preserve and promote the general welfare.'

In Serrer v. Cigarette Service Co., 148 Ohio St. 519, 76 N.E.2d 91, 93, the supreme court of Ohio found it necessary to hold Ohio's Unfair Cigarette Sales Act, Gen. Code, § 6402-10 et seq., unconstitutional but, in the opinion Judge Zimmerman of that court observed that, 'in this day and age (1947) it can hardly be urged that legislative bodies in the exercise of the police power may not, in the public interest and in the promotion of economic stability, prohibit sales at below cost * * *.'

III. Courts generally have recognized that one of the revealed purposes of legislation prohibiting sales below cost is to save the small independent merchant who cannot afford to sell below cost and is unable to compete with stores that do. With the small independent merchant driven from the field the way is open for the establishment of a monopoly.

In Carroll v. Schwartz, 127 Tenn. 126, 14 A.2d 754, 756 the court said: 'It is possible, unless restrained by law, for a powerful merchandiser with large resources to continue to sell at a loss in a community and thereby drive weaker competitors out of the market, establish a monopoly, and mulct the public.'

This throught runs through most all of the opinions involving statutes prohibiting sales below cost. The California Supreme Court in Wholesale Tobacco Dealers Bureau v. National Candy & Tobacco Co., 11 Cal.2d 634, 82 P.2d 3, 13, 118 A.L.R. 486, saw some other objections to sales below cost, the opinion stating: 'The use of 'loss leaders' for the purpose of injuring a competitor has been condemned by many economists. It has been urged that their use is injurious to the consumer in that the losses so sustained will either have to be made up by higher prices charged on other commodities, or by the enforcing of various economies such as the lowering of wages, discharge of employees, lowering of rents, depressing the wholesale prices, etc. It has many time been urged that such practices are destructive of competition and tend to create monopolies.'

In State v. Langley, 53 Wyo. 332, 84 P.2d 767, 774, the Wyoming Supreme Court, in upholding the constitutionality of that state's law prohibiting sales below cost said: 'Great aggregations of wealth control much of the merchandising field of today. It is not necessary to say that that is an evil. We may even admit that it is a benefit. At the same time we still have with us the independent merchants. They, too, of course, are subject to the prohibition of the statute, but it was probably intended mainly for their benefit. They have hitherto been considered as part of the 'back-bone' of every community, radiating their influence throughout the length and breadth of the state, maintaining, not alone fair competition, but adding to, and upholding the moral fibre of the communites, upon which, in the long run, the existence of the commonwealth depends. The legislature has the right, we think, to give them a fair chance in the field of competition; to give them a chance to remain a pillar of support, thus at the same time giving an opportunity for the maintenance of individualism, still of importance in our day, and which, except for such legislation, might be entirely crushed.' See also Rust v. Griggs, 172 Tenn. 565, 113 S.W.2d 733; Associated Merchants of Montana v. Ormesher, 107 Mont. 530, 86 P.2d 1031.

The basic theory on which such legislation as is here involved rests, was long ago announced by the legislature of this state. In 1906 the Iowa legislature, for reasons which we presume were sufficient, passed its first 'Unfair discrimination' Act. Chapter 169, Acts of the 31st G.A. The act prohibited certain business practices of distributors of petroleum products. It branded as unfair and made criminal the act of such a distributor in selling at a lower price in one community than it sold in another for the purpose of driving a competitor out of business. The historical background of an oil company that once dominated that industry is well known....