UNITED BEV. CO. v. INDIANA ALCOHOLIC BEV. COM'N, S 82-476.

• Court: United States District Courts. 7th Circuit. United States District Court of Northern District of Indiana
• Writing for the Court: SHARP
• Citation: 566 F. Supp. 650
• Parties: UNITED BEVERAGE COMPANY OF SOUTH BEND, INC., and National Beer Wholesalers Association, Inc., Plaintiffs, v. INDIANA ALCOHOLIC BEVERAGE COMMISSION, Harry K. Wick, N. Kay Wood, James Courtney and Adolphus Vandeveer, Defendants.
• Docket Number: No. S 82-476.,S 82-476.
• Decision Date: 21 June 1983

566 F. Supp. 650

UNITED BEVERAGE COMPANY OF SOUTH BEND, INC., and National Beer Wholesalers Association, Inc., Plaintiffs,
v.
INDIANA ALCOHOLIC BEVERAGE COMMISSION, Harry K. Wick, N. Kay Wood, James Courtney and Adolphus Vandeveer, Defendants.

No. S 82-476.

United States District Court, N.D. Indiana, South Bend Division.

June 21, 1983.

566 F. Supp. 651

George Herendeen, South Bend, Ind., Howard L. Bernstein, Mitchell Gerson, Washington, D.C., for plaintiffs.

Linley E. Pearson, Atty. Gen. of Ind., Indianapolis, Ind., for defendants.

MEMORANDUM AND ORDER

SHARP, Chief Judge.

I.

Subject matter jurisdiction here is alleged to be federal question jurisdiction under 28 U.S.C. §§ 1331 and 1343(3) and (4). The original complaint in this case was filed on the 20th day of October, 1982. An amended complaint was filed on November 12, 1982 which continued to assert claims under 42 U.S.C. §§ 1981 and 1983 and request relief under 28 U.S.C. §§ 2201 and 2202. (Since there is no possible arguable basis for these plaintiffs to be eligible for any relief under 42 U.S.C. § 1981, the claims based on that section were denied in open court on January 28, 1983). The amended complaint continues to assert that Rule 28 of the Indiana Alcoholic Beverage Commission is violative of both the Due Process and Equal Protection Clauses of the Fourteenth Amendment¹ of the Constitution of the United States, as well as Article I, § 10, Clause 1.² It also asserts that Rule 28 is violative of the Due Process and Equal Protection Clauses of the Constitution of the State of Indiana³ and is also violative of Article IV, § 1 thereof.⁴

On February 7, 1983 the plaintiffs filed a Motion for Summary Judgment with elaborate attachments, affidavits and briefs. On April 28, 1983, the defendants filed a Motion for Summary Judgment. Hearing and oral argument on cross-motions for summary judgment was held in open court on the 13th day of May, 1983, and the parties were given until the 6th day of June, 1983 to file any and all supplemental briefs, which has now been done. The cross-motions for summary judgment are now ripe for ruling.

The parties have been given precise deadlines for filing final briefs and have complied

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with same. See Indiana Port Commission v. Bethlehem Steel Corp., 702 F.2d 107 (7th Cir.1983)

II.

The subject of this action, Rule 28 of the Indiana Alcoholic Beverage Commission, was duly promulgated and became effective on March 16, 1979. The rule provides:

It shall be unlawful for any person engaged in business as a distiller, brewer, rectifier, vintner, or other producer, importer, or as a wholesaler of liquor, wine, beer or malt beverages, directly or indirectly, or through an affiliate to:

(1) Exclusive Outlet — Require by agreement or otherwise any permittee authorized to purchase alcoholic beverages from him to purchase any such products from him to the exclusion in whole or in part, of liquor, wine, beer or malt beverages sold or offered for sale by other persons.

(2) "Tying" Alcoholic Beverages — Induce any permittee engaged in the sale of liquor, wine, beer or malt beverages to purchase any such products from such person to the exclusion, in whole or in part, of liquor, wine, beer or malt beverages sold or offered for sale by other persons by requiring the purchaser to take and dispose of a certain quantity or quota of such products.

(3) Product Distribution — Restrict by agreement or otherwise, the sale or resale of liquor, wine, beer or malt beverages to a given geographical area or to permittees, who are otherwise entitled to buy, within a given geographical area. This section shall not be deemed to prohibit the designation of an "area of primary responsibility", however, efforts to restrict sales to only the designated area of primary responsibility are deemed to be prohibited.

Plaintiffs' attack on Rule 28 is directed toward subsection 3 of the rule, which section prohibits the restriction of geographic areas and customers in agreements between and among brewers and wholesalers.

The issue of exclusive territories for Indiana beer wholesalers has been the focus of a great deal of legislation and litigation since the passage of the Twenty-first Amendment in 1933. Indiana's original alcoholic beverage act was enacted in 1933. The act did not create an alcoholic beverage commission, but rather an "excise director" charged with administering the act. The number of beer wholesalers was limited by quota and the excise director had absolute discretion in the issuance and revocation of the permits. (1933 Ind.Acts, Ch. 80, Sec. 6, p. 492). Under the original act, a beer wholesaler was prohibited from selling his products outside a territory consisting of his own county and the surrounding counties. (Id., Section 8(a), p. 499). In 1935 the Indiana Alcoholic Beverage Commission was created. (1935 Ind.Acts, Ch. 226, Sec. 5, p. 1064). Again, under the 1935 Act, beer wholesalers were granted specific geographic territories. (Id., Sec. 9, p. 1090).

In 1939 the state legislature discarded the existing quota system, along with geographic territories, and removed the Commission's discretion to deny a license to a qualified applicant. (1939 Ind.Acts, Ch. 29, Sec. 2, p. 86). Eventually, franchise relationships developed between brewers and wholesalers. These agreements typically gave wholesalers the exclusive right to sell the brewer's products within a certain geographic territory, usually a county. In 1965, a quota system for beer wholesalers was reinstated. (1965 Ind.Acts, Ch. 258, Sec. 1, p. 639).

In 1967, the Supreme Court of the United States decided United States v. Arnold Schwinn and Company, 388 U.S. 365, 87 S.Ct. 1856, 1865, 18 L.Ed.2d 1249 (1967), holding that any restriction imposed by a manufacturer on the customers or geographic territories of its dealers and distributors was per se illegal under Section 1 of the Sherman Act, 15 U.S.C. § 1. This decision rendered void any exclusive franchise relationships entered into by beer wholesalers in Indiana.

Wholesalers were then free to enter into open competition with each other. Whether

566 F. Supp. 653

there actually was any competition between Indiana beer wholesalers in the period following the Schwinn decision is the subject of two related lawsuits currently pending before this court in Lafayette, Indiana. In those actions, Arth Main Street Drugs, Inc., et al. v. Beer Distributors of Indiana, Inc., et al., No. F 77-73 (N.D.Ind., filed July 13, 1977); and Tippecanoe Beverage, Inc. v. Beer Distributors of Indiana, Inc., et al., No. F 77-72 (N.D.Ind., filed July 13, 1977), several retail liquor stores allege that existing beer wholesalers acted pursuant to a "gentlemen's agreement" whereby each wholesaler restricted his sales to retailers and dealers located within his particular county of operation. (Those cases are set for trial before Judge Michael S. Kanne this summer.)

In or around 1974 certain wholesalers began to offer price discounts to retailers who purchased beer from the wholesalers' docks. These retailers would use their own trucks to pick up beer directly from the wholesaler's dock. As a result, wholesaler who did not practice "dockselling" noticed declining sales.

Three years later, in the case of Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977) the Supreme Court overruled the per se rule of Schwinn with respect to vertical territorial restraints and reverted to the rule of reason standard of Northern Pac. R. Co. v. United States, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958) and White Motor Co. v. United States, 372 U.S. 253, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963). Under the rule of reason, the court must ascertain the facts peculiar to the particular business in making its determination regarding the legality of the challenged conduct. Justice Brandeis described the standard as follows:

Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences.

Chicago Board of Trade v. United States, 246 U.S. 231, 238, 38 S.Ct. 242, 244, 62 L.Ed. 683 (1918)

In GTE Sylvania, the Court noted that, as a general rule, vertical restrictions reduce intrabrand competition while promoting interbrand competition. The court declined to hold that such restrictions generally have a pernicious effect on competition or that they lack any redeeming virtue. However, the Court specifically left open the possibility that "particular applications of vertical restrictions might justify per se prohibition under Northern Pac. R. Co." 433 U.S. at 58, 97 S.Ct. at 2561.

Shortly after the Supreme Court's decision in GTE Sylvania, the Indiana Alcoholic Beverage Commission promulgated Rule 28. In order to understand the significance of Rule 28, some of its legislative background must be understood.

The advent of retail hauling and transshipping brought about efforts within the Indiana General Assembly to change the law to provide for exclusive territories for beer wholesalers. The first of these proposals sought to establish geographic territories for all Indiana...