Rocky Mountain Wholesale Co. v. Ponca Wholesale Mercantile Co.

• Decision Date: 08 February 1961
• Docket Number: No. 6781,6781
• Citation: 360 P.2d 643,68 N.M. 228,1961 NMSC 15
• Parties: ROCKY MOUNTAIN WHOLESALE COMPANY, Inc., a corporation, Plaintiff-Appellee, v. PONCA WHOLESALE MERCANTILE COMPANY, a corporation, Defendant-Appellant.
• Court: New Mexico Supreme Court

Page 643

360 P.2d 643

68 N.M. 228

ROCKY MOUNTAIN WHOLESALE COMPANY, Inc., a corporation, Plaintiff-Appellee, v. PONCA WHOLESALE MERCANTILE COMPANY, a corporation,

Defendant-Appellant.

No. 6781.

Supreme Court of New Mexico.

Feb. 8, 1961.

Rehearing Denied April 12, 1961.

Iden & Johnson, Albuquerque, for appellant.

Louis C. Lujan, Albuquerque, for appellee.

NOBLE, Justice.

This appeal results from a judgment permanently enjoining and restraining appellant from selling cigarettes at less than 'cost to wholesaler' as defined in Sec. 49-3-2(i), N.M.S.A. 1953 Comp. and from violating the New Mexico Cigarette Fair Trade Act. The case was tried to the court without a jury.

The New Mexico Cigarette Fair Trade Act (Secs. 49-3-1 to 49-3-14 N.M.S.A. 1953 Comp.) makes it unlawful for any retailer or wholesaler 'with intent to injure competitors or to destroy or substantially lessen competition, to advertise, offer for sale, or sell at retail or wholesale, cigarettes at less than cost to such retailer or wholesaler, as the case may be, as defined in this act.'

The statute defines 'cost to wholesaler' as:

'(i) (1) 'Cost to wholesaler' shall mean the basic cost of the cigarettes involved to the wholesaler plus the cost of doing business by the wholesaler, and must include, without limitation, labor costs (including salaries of executives and officers), rent, depreciation, selling costs, maintenance of equipment, delivery costs, all types of licenses, taxes, insurance and advertising. (2) In the absence of proof of a lesser or higher cost of doing business by the wholesaler making the sale, the cost of doing business by the wholesaler shall be presumed to be two per centum (2%) of the basic cost of the said cigarettes to the wholesaler, plus cartage to the retail outlet, if performed or paid for by the wholesaler, which cartage cost, in the absence of a proof of a lesser or higher cost, shall be presumed to be three-fourths of one per centum (3/4 of 1%) of the basic cost of the said cigarettes to the wholesaler.'

It is further provided that any person injured by any violation may maintain an action for injunctive relief.

Appellant's challenge to the act is that it violates Article II, Secs. 4 and 18 of the New Mexico Constitution and the 14th Amendment to the Constitution of the United States. The first attack is that it is an unreasonable and arbitrary interference with private property rights; that it has no reasonable or substantial relation to the public morals, safety or general welfare; and that it is not within the proper exercise of the police power of the state. We cannot share appellant's view.

That the New Mexico act has as its purpose the prevention of monopolies and the prohibition of acts which threaten free competition is scarcely open to question. This is not a price fixing act but one which only prohibits the sale of cigarettes at below cost. While the statute sets forth a formula which shall be considered as the cost of doing business in the absence of proof of a greater or less cost to an individual wholesaler or retailer, it, nevertheless, makes provision whereby any wholesaler or retailer by any accepted accounting procedure may establish that his cost of doing business is greater or less than the statutory formula. Certain exceptions to the prohibition against sales below cost are provided, such as the right to sell below cost in good faith to meet competition and others which need not be discussed here, since no contention is made that any sale complained of comes within any of the specified exceptions.

We think it has been firmly established that a state is free to adopt an economic policy that may reasonably de deemed to promote the public welfare and may enforce that policy by appropriate legislation without violation of the due process clause so long as such legislation has a reasonable relation to a proper legislative purpose and is neither arbitrary nor discriminatory. Nebbia v. People of State of New York, 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940.

'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 further citation of authority.' Wholesale Tobacco Dealers Bureau of Southern California v. Nat. Candy & Tobacco Co., 11 Cal.2d 634, 82 P.2d 3, at page 10, 118 A.L.R. 486.

We think it would serve no useful purpose to quote at length from the many decided cases sustaining the constitutionality of acts similar to the one under attack here. In May's Drug Stores v. State Tax Commission, 242 Iowa 319, 45 N.W.2d 245, 247 it was said:

'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.'

A great many of the decisions of the Supreme Court of the United States and of the several states sustaining such legislative acts, are collected, quoted from and cited in Wholesale Tobacco Dealers Bureau of Southern California v. Nat. Candy & Tobacco Co., supra.

That there is a general feeling that sales below cost substantially lessen free competition is attested by the fact that at least thirty-one states have enacted statutes proscribing sales below costs and that the courts of most such states have agreed that legislation prohibiting below cost sales and having as their purpose the prevention of monopolies and the destruction or substantial lessening of competition are within the police power of the state to promote the general welfare. The following courts, among others, have sustained such legislation against constitutional attack. May's Drug Stores v. State Tax Commission, supra; Wholesale Tobacco Dealers Bureau of Southern California v. Nat. Candy & Tobacco Co., supra; State v. Walgreen Drug Co., 57 Ariz. 308, 113 P.2d 650; Carroll v. Schwartz, 127 Conn. 126, 14 A.2d 754; State of Kansas v. Consumers Warehouse Market, Inc., 183 Kan. 502, 329 P.2d 638; Moore v. Northern Kentucky Independent Food Dealers Ass'n, 286 Ky. 24, 149 S.W.2d 755; Fournier v. Troianello, 332 Mass. 636, 127 N.E.2d 167; McElhone v. Geror, 207 Minn. 580, 292 N.W. 414; Associated Merchants of Montana v. Ormesher, 107 Mont. 530, 86 P.2d 1031; Hill v. Kusy, 150 Neb. 653, 35 N.W.2d 594; McIntire v. Borofsky, 95 N.H. 174, 59 A.2d 471.

The decisions cited by appellant as supporting its position that such acts are not properly within the state's police power are not applicable to the statute now being considered. They are, for the most part, cases dealing with non-signer clauses where the legislatures have prohibited the sale of trade-marked or patented merchandise at below the retail price fixed by the manufacturer. It must be realized that the statute under consideration does not regulate or fix the price of cigarettes, but only prohibits sales below cost with intent to injure competitors or lessen competition. The distinction between the two types of legislation was pointed out in Wholesale Tobacco Dealers Bureau of Southern California v. Nat. Candy & Tobacco Co., supra, where it was said:

'We believe that these cases clearly establish the constitutionality of the statute here under attack. The statute must be held to be a reasonable attempt upon the part of the state to accomplish a valid object. It must be borne in mind that this statute does not regulate the selling of commodities--it is the predatory trade practice of selling below cost with intent to injure competitors which the legislature on reasonable grounds has determined is vicious and unfair that is prohibited. Such determination is clearly within the legislative power.'

Likewise our decision in Skaggs Drug Center v. General Electric Co., 63 N.M. 215, 315 P.2d 967, is neither in point nor controlling on the issues here since it was restricted to a non-signer clause in our Fair Trade Act, N.M.S.A. 1953 Comp. Sec. 49-2-1 et seq.

We conclude that the statute under attack must be held to be a reasonable attempt by the state, in the interest of the general welfare to protect free competition and bears a reasonable relation to the legislative purpose. As was said in May's Drug Stores v. State Tax Commission, supra:

'In concluding that the legislature has the power to act on the subject matter of sales below cost and their impact on free competition we of course make no determination as to the wisdom of such laws. That is an economic question which this court is not free to decide.'

Our next inquiry is whether the act is arbitrary and discriminatory.

The trial court found that both appellant and appellee are distributors or wholesalers of cigarettes and other merchandise and that appellant has been selling to Furr's Supermarkets, Safeway Stores Inc., Food Mart and Tootie's Cashway Supermarkets cigarettes at six cents per carton below 'cost to wholesaler' as defined by the statute. No evidence was offered that appellant's 'cost to wholesaler' is less than the statutory formula. The trial court also found that appellee has lost customers, profits and sales by reason of appellant's conduct and that in making such sales appellant has violated the New Mexico Cigarette Fair Trade Act. The court found that each of these stores are retailers, and it is conceded that each of them have the privilege of buying direct from the manufacturer.

But we are told that because the act permits one wholesaler to sell to another wholesaler below cost but denies such wholesaler the right to sell below cost to a retailer privileged to buy direct from the manufacturer, the act is arbitrary and discriminatory. The effect, appellant contends, is to prevent sales by wholesalers to direct buying retailers unless such sales can to made below cost to the wholesaler.

The statute, however, specifically provides that a direct buying retailer must include in his retail price, the basic cost of the cigarettes and both 'cost to wholesaler' and 'cost to...