Sperry & Hutchinson Co. v. Hoegh, No. 48475

• Court: United States State Supreme Court of Iowa
• Writing for the Court: MULRONEY; GARFIELD; GARFIELD
• Citation: 65 N.W.2d 410,246 Iowa 9
• Docket Number: No. 48475
• Decision Date: 26 July 1954
• Parties: SPERRY & HUTCHINSON CO. v. HOEGH, Atty. Gen. et al.

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65 N.W.2d 410 246 Iowa 9 SPERRY & HUTCHINSON CO.
v.
HOEGH, Atty. Gen. et al. No. 48475. Supreme Court of Iowa. July 26, 1954.
Rehearing Denied Oct. 22, 1954.

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[246 Iowa 10] Leo A. Hoegh, Atty. Gen., Kent Emery, Asst. Atty. Gen., for appellants.

Brody, Parker, Miller, Roberts & Thoma, and Emmert, James, Lindgren & Eller, Des Moines, for appellee.

Holliday, Miller, Myers, Stewart & McDowell, Des Moines, for Iowa Pharmaceutical Ass'n, Iowa Retail Hardware [246 Iowa 11] Ass'n, Iowa Retail Food Dealers Ass'n, and Iowa Retail Jewelers Ass'n, amicus curiae.

Ambramson & Myers, Des Moines, Matthew J. Levitt, Minneapolis, Minn., for amicus curiae.

MULRONEY, Justice.

The central question presented by this appeal is the constitutionality of the gift enterprise statutes, Sections 553.15 to 553.18, Code 1950, I.C.A., as applied to plaintiff's trading stamp business. Section 553.15, Code 1950, I.C.A., prohibits all 'gift enterprises, as hereinafter defined' and Section 553.16, Code 1950, I.C.A., defines the term 'gift enterprise', in one of the longest sentences in the code, filled with abundant legal phraseology, to mean a scheme whereby a seller of merchandise would issue trading stamps to purchasers redeemable by someone other than the seller. ¹ Section 553.17 provides for misdemeanor punishment for participants in or advertisers of the gift enterprise and the next section states the term 'person' may be construed to mean 'firm or corporation.'

There is a short argument in appellee's brief that its operation was not a gift enterprise because its operation does not involve a gift, but rather a fixed obligation incurred in advance of the delivery of merchandise to the stamp saver. There is no merit in the argument. The legislature

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chose to cast its prohibition in the form of a definition statute by calling something a gift which in common understanding would not be a gift, but this is a proper and not uncommon way to legislate a prohibition and the statutory definition is controlling. The trial court held [246 Iowa 12] plaintiff's operation was 'squarely within the terms of the statutory definition' and we agree with this conclusion. The trial court went on to hold that the statute, Section 553.16, Code 1950, I.C.A., was unconstitutional because it violated sections 6 and 9, Article I of the Iowa Constitution, I.C.A., and the Fourteenth Amendment to the Constitution of the United States. The defendants appeal.

A statement of the facts appearing in the evidence is necessary to an understanding of the contentions made. Both parties called a number of witnesses and introduced many exhibits. Officers and employees of the plaintiff corporation and many of its licensees testified as to the general methods and extent of the company's operations. Plaintiff, a New Jersey corporation is authorized to do business in Iowa, and in 46 other states, and is presently doing business in forty-two states. It has done business in Iowa since 1909 and now has license contracts with more than a thousand retail merchants located in seventy-nine counties in this state.

Mechanically, plaintiff's plan works as follows: Plaintiff enters into a license agreement with retailers authorizing them to use its 'Co-operative Cash Discount System.' Plaintiff furnishes the licensee with S & H Green Trading Stamps at the rate of fourteen or fifteen dollars for a pad of five thousand stamps and the licensee issues stamps to his customers at the rate of one stamp for each ten cents paid in cash or before the 15th of the next month after a retail purchase. The retail purchaser pastes the stamps in a book provided by plaintiff, and when the book is filled (1200 stamps) he takes it or sends it to one of plaintiff's redemption stations and exchanges it for merchandise. The evidence shows the merchandise in the redemption station is given an average retail price in terms of stamps, to give an average redemption value of $2.50 to a stamp book. Plaintiff purnishes its licensees with advertising material which they can use to show they use its plan, and catalogs which contain pictures and descriptions of merchandise for which the stamps can be redeemed, to be distributed without charge to the licensee's customers. Plaintiff has ten redemption stations in Iowa and three more were in the process of construction at the time of trial.

It was plaintiff's theory developed by its evidence that its plan was in practice a method of giving the familiar discount of [246 Iowa 13] about 2% for cash purchases or payment made within a normal discount period. The arithmetic of this theory is that a filled stamp book represents $120.00 of purchases and the book has $2.50 redemption value, which is 2.08% of $120.00. The testimony recites the advantages that accrue to a retail merchant of cash over credit transactions, about which there can be little argument, such as, (1) reduction of collection costs and bookkeeping expenses, (2) reduction of delivery expenses as cash is usually a carry business, (3) reduction of bad debt losses, (4) the saving of interest charges for capital borrowing, and (5) the merchant is able to take advantage of discounts available on wholesale purchases. Since some of plaintiff's licensees were engaged in a strictly cash business before adopting the system it was part of plaintiff's theory that the system gave them a promotion device which would reward their customers, in competition with other promotion devices (mostly drawings for prizes) quite prevalent in some industries. However it fairly appears from all of the testimony that one of the principal benefits to be derived by the merchant by adopting plaintiff's system is the increase in volume of business (ranging from 25 to 40 percent under plaintiff's evidence) and the resulting increase in net profits for the increased volume causes little if any increase in fixed expenses.

The record shows plaintiff usually licenses merchants within specified areas (about 5 blocks) engaged in different types of businesses but there are four or five other

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stamp companies doing business similar to, and presumably in competition with, plaintiff in this state. One such company, the Gold Bond Stamp Company, has filed an amicus curiae brief on the side of the appellee in this case.

The evidence introduced by defendants was mainly directed to show plaintiff's system was not a 'discount for cash' plan. Retailers testified as to the normal net profit in a cash business said to be about 2% in the food business, and the system therefore results in increasing the cost to the consumer, for the licensee who, prior to licensing was doing a strictly cash business in competition with other cash businesses, must increase his sale price to cover the cost of the stamps. In general it can be said defendants' evidence was designed to show, and did show, beyond a [246 Iowa 14] shadow of a doubt that plaintiff's system, by whatever name it is called, is a clear violation of the gift enterprise statutes.

I. The trial court held the system was a cash discount plan. There is much support for this holding. In Food and Grocery Bureau of Southern California v. Garfield, 20 Cal.2d 228, 125 P.2d 3, 6 (decided 1942) the opinion states:

'It is well settled by the decisions of this court, as well as those in other jurisdictions, that the practice of merchants in issuing trading stamps with the purchase of articles is merely a method of discounting bills in consideration for the immediate payment of cash. Ex parte Drexel, 147 Cal. 763, 82 P. 429, 2 L.R.A.,N.S., 588, 3 Ann. Cas. 878; Ex parte West, 147 Cal. 774, 82 P. 434; Ex parte Hutchinson, C.C., 137 F. 950; Sperry & Hutchinson Co. v. Temple, C.C., 137 F. 992; Lawton v. Stewart Dry Goods Co., 197 Ky. 394, 247 S.W. 14, 26 A.L.R. 686; Hewin v. City of Atlanta, 121 Ga. 723, 49 S.E. 765, 67 L.R.A. 795, 2 Ann. Cas. 296; Sperry & Hutchinson Co. v. McBride, 307 Mass. 408, 30 N.E.2d 269, 131 A.L.R. 1254; Winston v. Beeson, 135 N.C. 271, 47 S.E. 457, 65 L.R.A. 167; State v. Lothrops-Farnham Co., 84 N.H. 322, 150 A. 551; State v. Holtgreve, 58 Utah 563, 200 P. 894, 26 A.L.R. 696.'

In Sperry & Hutchinson Co. v. Hudson, 190 Or. 458, 226 P.2d 501, 504 (decided 1951) the opinion states:

'In the operation of plaintiff's system, merchandise sold to cash customers is at the regular, established retail prices, the purchaser paying for each article of merchandise the same price required to be paid by those buying on credit. Of course, the primart purpose of this discount system is to encourage cash transactions. It is unnecessary to detail the many advantages accruing to the merchant from cash dealings. To give a discount for cash payments is a long-established mercantile practice. The manufacturer allows such discount to the jobber and wholesaler, and the jobber and wholesaler, to the retailer. To pass this on to the customer of the retailer is but providing a benefit to him who, in the last analysis, pays all bills.'

In Sperry & Hutchinson Co. v. Margetts, 15 N.J. 203, 104 A.2d 310, 311, the opinion states:

'Plaintiff's 'cooperative discount system' is in aid of what has come to be the normal cash discount and the only practical means to that end where there are intermittent purchases in small [246 Iowa 15] lots. Sperry & Hutchinson Co. v. McBride, 307 Mass. 408, 30 N.E.2d 269, 131 A.L.R. 1254 (Sup.Jud.Ct.1940). Not long after the inception of the device, it was judicially assessed as 'merely one way of discounting bills in consideration for immediate payment in cash, which is a common practice of merchants, and is doubtless a popular method, and advantageous to all concerned, and it is not obnoxious to public policy.' Ex parte Hutchinson, 137 F. 949 (C.C.D.Wash.1904). Although the business is now countrywide, there has been no change in mode or method that has materially altered this concept.'

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Many more cases could be cited but the above are...