RICE v. NORMAN WILLIAMS CO.
Legal provision: Sherman
ORAL ARGUMENT OF JOHN R. McDONOUGH, ESQ. ON BEHALF OF PETITIONERS BOHEMIAN DISTRIBUTING COMPANY AND WINE & SPIRITS WHOLESALERS OF CALIFORNIA
Chief Justice Burger: We will hear arguments first this morning in Rice against Williams Company and the consolidated cases.
Mr. McDonough, you may proceed whenever you're ready.
Mr. McDonough: Mr. Chief Justice, may it please the Court:
The California statute at issue in today's proceeding is Section 23672 of the California Business and Professions Code.
"A licensed importer shall not purchase or accept delivery of any brand of distilled spirits unless he is designated as an authorized importer of such brand by the brand owner or his authorized agent."
The parties have referred to this statute and I will refer to it in argument as the California designation statute.
The judgment below ordered Respondent Rice, who is the Director of the California Department of Alcoholic Beverage Control, to refrain from enforcing the designation statute, this determination based upon the Court of Appeals' judgment that the statute is invalid under the Sherman Act.
The court did not quite say that the statute was being held invalid per se, but that indeed was the thrust of the opinion and that could only have been the basis of the judgment, because there was no factual record before the Court of Appeals of California pertaining to the effect of the statute on either intrabrand competition in the sale of distilled spirits in California or interbrand competition, and indeed because by virtue of various stays that were ordered during the course of the proceedings below, the statute never did go into effect for practical purposes.
Now, the case was necessarily decided under the supremacy clause of the United States Constitution, although that constitutional provision was not mentioned in the Court of Appeals' opinion.
This of course cannot be a preemption case in the true sense under the supremacy clause, because it has long been decided that the Sherman Act does not preempt for exclusive federal regulation economic matters and affairs of the several states.
From Parker v. Brown to the New Motor Vehicle Board case, it is clear that the states may regulate economic enterprise.
So this can only be then adjudged as a case in which it is contended that the designation statute conflicts with the Sherman Act in such a fashion as to be invalid under the supremacy clause.
This Court has often said and held, and we have quoted those opinions in our brief, that every effort should be made in adjudging a conflict or claim to conflict case under the supremacy clause to interpret the two statutes in such fashion in relation to each other as to avoid a conflict between the federal and state law.
The court below did not mention those cases, nor did the court proceed in accordance with their teaching.
There is no conflict between the designation statute and the Sherman Act, for the Sherman Act surely does not require that every California wholesalers of distilled spirits have the right to vend every brand of distilled spirits that is manufactured in the land and sold in California.
The Sherman Act does not lay any universal compulsion on everyone to deal with everyone else.
Nor does the Sherman Act impose any restraint on every device, agreement, or statute which may impose some limitation on intrabrand competition.
Indeed, the court so held even with respect to private arrangements imposing limitations on intrabrand competition in the GTE-Sylvania case, where the Court held that such restraints must be adjudged under the rule of reason rather than on the basis of holding a statute or a practice per se in violation of the Sherman Act.
The Court of Appeals did not apply the rule of reason in adjudging the validity of the designation statute.
Indeed, the court could not have done so because there was no factual record before the court with respect to the factors that would be relevant to a rule of reason analysis or determination of the validity of the statute.
The statute was struck down without regard, for example, to the market share of any distiller who might in the future decline to designate any particular wholesaler, without regard to whether in the facts of a particular case there was a large amount of intrabrand competition because the particular distiller had elected to appoint a substantial number of wholesaler.
There was no consideration of what the interbrand competition situation might be.
So the case was not adjudged under the rule of reason.
Now, we think that the California designation statute cannot be held to be in conflict with the Sherman Act for two individual, separate and sufficient reasons: The first, because it does not involve or contemplate or provide for, authorize or purport to immunize any combination or contract or conspiracy by anybody to do anything; and because it does not compel or authorize or immunize any particular restraints on intrabrand competition that might be established by any particular pattern of designations and non-designations by any particular brand owner.
Each of those we think is a sufficient reason.
Ever since Parker against Brown it has been clear, of course, that the mere fact that a legislature enacts a statute does not violate the Sherman Act.
The question of violation can only come up if the statute authorizes some conduct by private individuals which may violate the Sherman Act or which does.
It is the statute here that precludes the importation of non-designated brands.
The statute operates, as of course many statutes do, by reference to private conduct which may have preceded it and made it effective.
Unidentified Justice: Mr. McDonough, can I ask you a question there?
I think we've recently been advised that Oklahoma has finally decided the effect of its own statute is to prevent the import... the export of these products to California.
Does the case have much continuing significance as a practical manner?
Mr. McDonough: Yes, I think it does, Your Honor, for several reasons.
First, what the Oklahoma Supreme Court decided was that there was no requirement that an Oklahoma... that a brand owner sell to an Oklahoma distributor for sale outside the state.
That appears... that appears to leave it open to brand owners now to impose contractual limitations on Oklahoma wholesalers.
Whether those can be effectively enforced is not clear.
The lawyers who have been involved in that case are not at all clear what remedies would be available to a brand owner who imposed that limitation if it were not observed.
Second, Your Honor--
Unidentified Justice: Well, wouldn't they have the remedy of just refusing to continue to deal with that wholesaler?
Mr. McDonough: --Well, I think it's not at all clear, because of the fact that Oklahoma is an open wholesaling state, until we get a specific case in which such a limitation is imposed and violated, the thing is taken to court and there's been a discontinuance.
The second thing is that in the briefs of the Respondents they have assured the Court that there are sources of supply available to them from various sources outside the state and that this is a situation in which they can obtain the liquor and sell it.
This is what I understand their representation to the Court to be.
Unidentified Justice: Is that a post-Oklahoma decision representation?
Mr. McDonough: Yes, Your Honor, it is.
Unidentified Justice: I see.
Mr. McDonough: Finally, Your Honor, I think that California is entitled to have this statute on its books in any event, because there have been at least two situations in the recent past where there were open wholesaling states, Minnesota first, now Oklahoma, in which there was an opportunity to sell outside the state.
It's not clear whether and when some other state may go to an open wholesaling law and permit sales outside the state.
So it would appear that California would be entitled to have the statute on its books against the possibility.
I think it is the case that at the moment we can suppose the Oklahoma connection is not quite as alive and well as it once was, but I don't think it's disappeared, particularly in light of the representations of the Respondents.
Unidentified Justice: Would the volume of such sales have any relevance?
Assuming you're correct, that there should not have been an invalidation on a more or less per se basis, one of your arguments at least is that maybe there should be sort of a rule of reason analysis.
If that approach were taken... although I understand you go beyond that in your argument... if that approach were taken, would the volume of this kind of... these sales be relevant?
Mr. McDonough: Yes, I would think it would, Your Honor, in connection with any individualized case.
We have to suppose a particular case in which a particular California wholesaler would seek an opportunity to vend a particular brand, in which opportunity was denied him, and then the question would come up as to what effect this particular set of facts had had upon competition in the sale of distilled spirits in California.
The market share of the distiller would be relevant, one would think.
the amount of intrabrand competition, the volume of sales; if it were a de minimis volume, it probably wouldn't raise the question.
But I think the question is still there, because again one of the situations in which this kind of statute and the kind of vertical arrangement that is necessary or desirable, at least from the point of view of the Petitioners and many commentators, is a situation where someone is trying to introduce a new brand into the state and wants to, in order to make that introduction most effective, to have his wholesaling in the hands of a relatively small number of people who will have the incentive to promote it.
So again, in that situation it may be that the volume involved is relatively small, but the justification for the restraint on interbrand competition would be at its maximum.
Unidentified Justice: Could I ask, I take it your position is, though, that even if on a rule of reason analysis you would conclude that, absent his designation law, there was a violation of the Sherman Act, that even so the law would protect it from attack under the Sherman Act?
Mr. McDonough: No, no, not at all, Your Honor.
Our view is exactly the--
Unidentified Justice: Oh, really?
So that if absent this law this would be a violation of the Sherman Act you would say that the law could not... the California law could not immunize it?
Mr. McDonough: --Exactly, exactly.
If the situation were one, for example, where the Department of Justice thought it appropriate to--
Unidentified Justice: Well, do you think that's the situation of the amicus brief filed by the Department here?
Mr. McDonough: --Yes, it's my understanding that that indeed is the thrust, the precise thrust of the amicus brief.
The Department's brief argues for the validity of the designation statute on the understanding that it does not purport to immunize any conduct that would otherwise violate the Sherman Act from being adjudged in such violation.
And it is indeed, that is the basis upon which we think the statute clearly does not offend the Sherman Act.
It is as though... and every state statute must be enacted as though it said, and this one certainly does say that, subject to whatever restrictions the Sherman Act may otherwise place on interbrand competition or on restrictions of interbrand competition, the statute undertakes to support.
Unidentified Justice: So this conduct is not protected under the Parker against Brown analysis for any reason?
Mr. McDonough: Well, Your Honor, that's not the... we have made a separate argument under Parker against Brown.
We have further made a separate argument--
Unidentified Justice: Well, if you've made a separate argument under that, why wouldn't... aren't you arguing then, that your conduct is just immune from Sherman Act liability?
Mr. McDonough: --All right, Your Honor, I understand the point you're making.
We have also made a separate argument under the Twenty-First Amendment.
Unidentified Justice: I understand that, too.
Mr. McDonough: All right.
Now what I'm addressing at this moment is, independently of whether those arguments prevail or do not prevail, and assuming that they do not and that this Court were then nevertheless to reverse this particular case on the ground that there is... that the case has to be adjudged under the rule of reason and we fail to prevail on our other grounds, then in that event the statute would not immunize the conduct from inquiry under--
Unidentified Justice: My question, my first question, was whether you weren't submitting that, however violative of the Sherman Act your conduct might otherwise be, this law protects you from Sherman Act liability on the Parker v. Brown basis.
Mr. McDonough: --We have made both of those arguments.
Unidentified Justice: Yes, yes.
Mr. McDonough: You're quite right, Your Honor.
But independently of those, we think the statute... if those arguments do not prevail with the Court and if the situation is one where the Court says that the statute is not valid under those provisions, then we say it's still valid under the Sherman Act because it does not seek to immunize the conduct of individuals that otherwise would be in violation of the Sherman Act.
Your Honor, I believe I'll reserve the balance of my time for rebuttal.
Chief Justice Burger: Very well.
ORAL ARGUMENT OF GEORGE J. ROTH, ESQ. ON BEHALF OF PETITIONER BAXTER RICE
Mr. Roth: Mr. Chief Justice, may it please the Court:
I'm here today on behalf of the states that regulate the industry.
My colleagues on the intervening side and on the Respondent side represent the members of the industry that are really fighting about how to allocate markets.
And we're here hoping to preserve our right to regulate markets.
The states are very worried because of the import of the Court of Appeals' decision that's before us today.
They're worried because if you read that it's very easy to get the impression that if any state liquor statute affects competition in some material way, automatically you must say, let's start with the Sherman Act.
We believe that the Court has told us for some 45 years, starting with the Young's Market case and going through all of the cases... Ziffrin, Seagram's, McKittrick, and Midcal... that where we have a pure importation situation, or in Midcal they talk about the structure of the distribution system, that then we look to see first if the Twenty-First Amendment applies.
And I think it's important as to where you start, because if you start with the Sherman Act you possibly and very readily come to a different conclusion.
If you start with the Twenty-First Amendment, then you say that the burden is on the people attacking the statute, because they have to show that the Twenty-First Amendment has not granted this power over importation to the state.
If you start with the Sherman Act, the state has to come in, it's a negative kind of a thing, and say, well, the Sherman Act doesn't cover us because.
And so the states feel that we don't want you to change the law, we don't want you to do anything except tell us that what we think you've told us for 45 years is still the law, that we're in a pure importation case, we have the right to regulate the industry.
Now, if you look at the Midcal case upon which the present case was based by the Court of Appeals, you can see a great difference.
The Midcal case had no concern whatever with importation.
The Midcal case was a retail price maintenance case and the goods were in the retailer's store before you could have the impact of the statute.
In California, the wholesaler in the very statute we're talking about, or the importer, must bring the goods to rest.
It's the second sentence of that particular section that the court said wasn't relevant.
But they have to bring the goods to rest in the state.
So that by the time in Midcal you get to the price-fixing law you have nothing whatsoever to do with importation at all.
And the other thing I would like to mention, Your Honors, is that the briefs both of the Respondent and the Solicitor seem to infer that there's very meager evidence of any state purpose, and I must confess that when I first got this case and looked at it, I looked at this statute and I tried to find legislative history.
Your Honors well know that when you're dealing with state legislative history it's a difficult problem to find anything except most of the time mere supposition.
But then... I guess it's serendipity of some kind of another... I started to read the statute again and I started to read the other night the whole Alcoholic Beverage Control Act, and it suddenly dawned on me that there is a specific purpose.
Now, one of the purpose we've discussed is the preservation of the three-tier structure of the distribution system, and I want to go into that.
But Your Honors, the first section of the Alcoholic Beverage Act is Section 23001, and it says:
"This division is an exercise of the police powers of the state for the protection of the safety, welfare, health, peace and morals of the state, to eliminate the evils of unlicensed and unlawful manufacture, selling and disposing of alcoholic beverages, and to promote temperance in the use and consumption of alcoholic beverages."
Then it goes on to say:
"It is hereby declared that the subject matter of this division involves in the highest degree the economic, social and moral well-being and safety of the state and all of its people."
"All provisions of this division shall be liberally construed for the accomplishment of these purposes."
And that's why you can't find any legislative intent for the particular statute that amends another statute.
The new statute puts the existence of the factual situation right back where it was before the old Rice case in California.
And as a consequence the state then comes up and has purpose.
The state has... one of the purposes is the regulation of people dealing with the liquor business, and if we may look at that for a minute.
We have in Oklahoma or some other state a wholesaler or a jobber; we have no control over him.
Respondents tell us that the brand owner has totally divested title and sold it to this particular person in Oklahoma, to use that example, and all he has is the shipping certificate.
He spends $50 for it.
Now, he's not somebody we've investigated thoroughly.
He's not somebody who has a tremendous investment in his business.
And supposing, just for an example, that Oklahoma wholesaler were to come into California or some of the other states that have similar laws and were to give free goods to the retailer.
It's the Oklahoma wholesaler.
Or suppose the Oklahoma wholesaler were to come in and stock the shelves of the retailer.
These things are prohibited under California law and in the law of many of the states.
And yet, the state would have no way to go and discipline that Oklahoma personage or that Oklahoma business.
So we have the right and we're looking for the right to continue the regulation in that aspect.
This Court I don't think... I mean, the court below said they couldn't find any reason for temperance, and they assumed that was the only reason for a liquor regulation statute.
I can't find any.
I don't think this statute has anything to do with temperance.
I don't think it has to do with public welfare and morals.
But it has to do with economic well-being of the people of the state because of the fact that in some way you can argue it helps the state control the revenue that it gets from the liquor tax.
Unidentified Justice: May I ask you, with respect to the words "licensed importer" in the statute--
Mr. Roth: Yes, Your Honor.
Unidentified Justice: --do those words just refer to wholesalers or do they include retailers?
Mr. Roth: No.
Retailers... you see, in California there's this specific division.
The wholesaler cannot own a retailer license.
The brand owner cannot own a retail outlet.
Unidentified Justice: Well, does that mean a licensed importer must be a wholesaler?
Mr. Roth: A licensed importer must be a wholesaler in California, yes, Your Honor.
And supposing again that the Oklahoma connection man owned a retail store in California.
He'd be violating our law very specifically, but we would have no way to go against him, because he didn't have a license, all he had was a shipping permit, that we could cancel, I suppose.
Unidentified Justice: Well, are these sales by the Oklahoma wholesalers made to retailers or wholesalers?
Mr. Roth: No, they must be made to wholesalers, Your Honor.
The retailers have to buy from California wholesalers.
Unidentified Justice: No, I mean assume the statute... what's happening today--
Mr. Roth: Yes.
Unidentified Justice: --without this, when the statute is not in effect, to whom are the Oklahoma wholesalers selling?
Mr. Roth: They're selling to California wholesalers, Your Honor.
Unidentified Justice: Well, aren't all the California wholesalers regulated by the state?
Mr. Roth: Yes.
Unidentified Justice: So I don't understand... you were explaining the state purpose was to prevent sales by the Oklahoma wholesalers to California retailers.
Mr. Roth: --No, to California wholesalers, Your Honor.
But you see--
Unidentified Justice: Well then, how does your free goods example fit?
Mr. Roth: --Let me go into it a little bit.
It's a little complex unless you're in the business, I think.
And that is this: that under our law the brand owner or the wholesaler is not permitted to do anything for the retailer, in effect.
And here we have an outside Oklahoma wholesaler, who is outside the chain of existence of the regular chain.
There's nothing to prevent him from coming in and doing those things for the retailer that the California wholesaler is prohibited from doing or that the brand owner is prohibited from doing, because we can't reach him, we can't go after him.
He's over here.
Unidentified Justice: When he comes into California you can reach him.
Mr. Roth: He doesn't come, Your Honor.
He sells his goods in Oklahoma to a California wholesaler.
If he comes in and stocks the shelves, we can't stop him.
We can just possibly revoke his permit.
But he is not a licensee of the Department.
Unidentified Justice: No, but you regulate all his customers.
Mr. Roth: We regulate his customers, that's true.
But suppose we want to go against the person.
I mean, if the brand owner or the California wholesaler were to come in and give free goods, for example, to a retailer, we could go in and we could discipline him and take his license away, and he's got a tremendous investment in it.
Unidentified Justice: Well, just so I understand your argument, your point is that your discovery of the other evening about the real purpose of this statute was it was to prevent the Oklahoma wholesaler from giving free goods to California retailers?
Mr. Roth: That's not the only thing.
Unidentified Justice: That kind of thing.
Mr. Roth: Those types of things.
Unidentified Justice: Is there any evidence that this has ever happened?
Mr. Roth: I have none, Your Honor, I don't know of any.
But the point is that we're all in a hypothetical situation, because these people are attacking the Act on the face of the Act.
There's no evidence whatsoever.
In the court below a motion was made to strike a lot of this evidence and the court said, we don't have to honor the motion or even discuss it because we're not going to look at the evidence, we're not going to consider it.
Unidentified Justice: A California wholesaler is free, as I understand it, to sell to any California retailer.
Mr. Roth: That is correct, Your Honor.
Unidentified Justice: So there is full horizontal competition among retailers?
Mr. Roth: Yes, Your Honor.
I have nothing... Your Honor?
Unidentified Justice: Do you think the California wholesaler is free to... I suppose he is as far as the law is concerned, the statute is concerned... to sell outside the state.
Mr. Roth: We don't prevent him if some other state doesn't prevent him, Your Honor.
That's not a California problem, and we have no way of preventing him from selling outside the state.
Unidentified Justice: And... well, what do you mean, you have no way?
Mr. Roth: Well, I mean we don't have any grounds for disciplining him, let's put it that way.
I don't know of any prohibition.
Unidentified Justice: Well, aren't you free to impose, under more recent cases, aren't you free to impose some territorial restraints on your wholesalers?
Mr. Roth: I think we can.
Unidentified Justice: Reasonable ones.
Mr. Roth: I think we can.
Unidentified Justice: You think you probably could impose a restraint on your wholesalers not to sell outside of California?
Mr. Roth: I have some question about that, Your Honor.
I don't know if we could.
I really do not know.
I hadn't thought about it and I do not know the answer.
But I know this, that--
Unidentified Justice: Well, what you're saying, then, is that even aside from the Oklahoma law, even if there was no Oklahoma law, you would have some doubt that you could discipline your Oklahoma wholesalers for selling to somebody in California.
Mr. Roth: --I believe that's true--
Unidentified Justice: Well, if you have doubt about that, you'll certainly be getting an awful lot of help you didn't have from this California law.
Mr. Roth: --Well, the purpose of our law is to make certain that the Oklahoma people don't come in.
Unidentified Justice: Exactly.
So that the California law is giving you something you couldn't otherwise do to an Oklahoma wholesaler; is that right or not?
Mr. Roth: No.
It's something we do to our own wholesalers, but all we can do is--
Unidentified Justice: You just told me you had some doubt that you could keep one of your wholesalers from selling outside the state of--
Mr. Roth: --One of our wholesalers from selling in another state, yes.
Unidentified Justice: --Yes.
Mr. Roth: That's correct.
Unidentified Justice: So you would have some doubt that you could keep an Oklahoma... or you have some doubt that you could keep a wholesaler in Utah from selling to a wholesaler in California.
Mr. Roth: No, no, I have no doubt.
If our statute says so and our statute is correct--
Unidentified Justice: I don't... well, never mind.
Mr. Roth: --Well, all right.
I have nothing further, Your Honors.
Chief Justice Burger: Mr. Weickhardt.
ORAL ARGUMENT OF GEORGE G. WEICKHARDT, ESQ. ON BEHALF OF RESPONDENTS
Mr. Weickhardt: Mr. Chief Justice and may it please the Court.
What is fundamentally wrong with this statute is that it authorizes private parties to prohibit otherwise legal interstate commerce which would exist in a free market.
Under this private system of regulation, a distiller may prevent interstate movement of goods which he originally and voluntarily sold without any restrictions on resale as to customer or territory.
Now, the Respondents are fully licensed by the State of California to import liquor.
They purchase liquor in Oklahoma from Oklahoma jobbers who obtain this liquor from the distillers without any restrictions on resale.
The liquor is resold by the jobbers to the California wholesalers, also without restriction.
Now, both the California wholesalers, the Respondents here, and the Oklahoma jobbers observe all applicable state and federal regulations as to the interstate movement of this liquor.
In California, the Respondent wholesalers compete with wholesalers who purchase directly from the distiller... these are the so-called franchise wholesalers... except the Respondents sell to California retailers for less than the franchise wholesalers because they charge a lower markup.
Now, the designation procedure at issue here works like this.
If the distiller agrees to designate his franchisees to import but nobody else, then all non-designated importers are prohibited from importing that brand.
So to recapitulate, the distiller may prohibit trade in goods which were not purchased directly from the distiller, but were purchased from a third party without any restriction on resale, goods which have become the full legal property of the Respondent and which in all previous sales, these goods have been sold without restriction.
Now, this designation procedure is a violation of the Sherman Act--
Unidentified Justice: Well, what conduct of the distiller really violates the Sherman Act?
He designates a... one importer for his brand in California.
Now, isn't that... so far there's nothing illegal about that, is there?
He designates one and he refuses to designate anybody else.
Suppose the state law authorizes him to do that.
There's nothing wrong with that, is there, if that's as far as it goes.
Mr. Weickhardt: --The violation is the exclusion of the Respondents.
The conduct which he does, the only conduct which the statute requires, is for him to agree to designate a particular wholesaler.
Unidentified Justice: All right, all he does is designate one wholesaler.
And everybody else applies to him; he says, sorry, I only have one wholesaler in the whole state.
Now, does that violate the Sherman Act?
Mr. Weickhardt: Yes, because this statute gives that--
Unidentified Justice: I'm not asking about this statute.
I'm just saying, in the first place, all the state authorizes him to do is to designate licensees in the state.
So far isn't... that doesn't violate the Sherman Act, does it?
Mr. Weickhardt: --Just that agreement itself would be innocuous if it were not that the statute--
Unidentified Justice: He designates one and he refuses to designate anybody else.
Mr. Weickhardt: --Yes.
Now, that agreement alone would be innocuous but--
Unidentified Justice: Agreement?
There's no agreement.
There's just that he designates one and refuses to designate others.
That's not an agreement.
Mr. Weickhardt: --Well, I assume that he's not designating someone who is unwilling to serve as an importer.
Unidentified Justice: Oh, sure.
Mr. Weickhardt: I think the Court--
Unidentified Justice: He serves as an importer.
But there's no agreement between the two that he won't designate anybody else.
He just doesn't designate anybody else.
Mr. Weickhardt: --Yes, but the statute here gives the agreement to designate that effect.
If he agrees--
Unidentified Justice: I know, but the state law just comes along and says, anybody who isn't designated as an importer by the distiller may not import that brand.
That's what it says.
That's all it says.
And the state liquor control people suddenly find somebody who isn't designated importing that brand, and they prosecute him.
Now, is that a violation of the Sherman Act?
Mr. Weickhardt: --I believe the violation here is the exclusion of someone--
Unidentified Justice: The importer... the distiller doesn't do anything but designate one licensee in the whole state.
That's all he does.
Mr. Weickhardt: --Well, the result of that conduct under the statute is that people who can get these goods elsewhere free of restriction are thereby prohibited.
Unidentified Justice: That's the statute that does that.
Mr. Weickhardt: Well, I don't think you can say that the statute does the restriction, because the statute is not self-actuating.
Basically what happens under the statute is that only those importers who are authorized by the distiller may import.
It's not substantially different from a statute that would say that he can agree to import some and prohibit others from importing.
Unidentified Justice: What if the distiller found that a non-designated wholesaler was in fact getting a-hold of some of the distiller's products from another wholesaler out of state, and the distiller simply sued the out-of-state wholesaler for a breach of a private agreement between them that the out-of-state wholesaler wouldn't sell to people in California.
Would that be a violation?
Simply a state court action on contract; would that be a violation of the antitrust laws?
Mr. Weickhardt: Well, certainly the question demonstrates that the distiller can... does have a remedy for that particular problem.
If one of his franchisees is selling to a non-designated wholesaler, he's certainly free under the Sylvania case to refuse to deal with that franchise wholesaler further.
He has a remedy there.
Unidentified Justice: That wouldn't violate the antitrust laws.
Why does the state statute that simply really authorizes that sort of a thing and says, you won't be prosecuted under state law, it's no violation of state law to do this, why is that any different?
Mr. Weickhardt: The difference is that this state statute essentially delegates the power to decide who can import to private parties without supervision.
Unidentified Justice: They could easily have... they probably did have that power without the statute, didn't they?
Mr. Weickhardt: Yes, but they did without... they could not without this statute keep out goods that they let out of their franchise system.
You see, the problem here is that the distillers are voluntarily selling goods outside their franchise system without any territorial restrictions.
And what they're saying under this statute is, I want a second bite at the apple to stop these goods from coming into California.
Now, they don't need that because they can impose those restrictions by private contractual means, Sylvania restrictions, in the original deals what they make with the wholesalers that they sell to throughout the United States.
Unidentified Justice: But they can't in Oklahoma.
Mr. Weickhardt: They can in Oklahoma now, because--
Unidentified Justice: Well, now, but they couldn't--
Mr. Weickhardt: --since the Central Liquor decision, which was decided after this case was taken, it is legal for distillers to impose Sylvania restrictions in Oklahoma.
Now, since the Central Liquor case was decided, most distillers have imposed those restrictions.
Some have not, even though they have the right to do so under Oklahoma law.
But if they have not imposed those restrictions, they are voluntarily and with full knowledge and consent selling those goods to an Oklahoma jobber with knowledge that they will be exported to California.
Unidentified Justice: --You want to say that these distillers... the distiller by designating one importer in California is violating the antitrust law because the state has passed a statute.
Mr. Weickhardt: Well, what I'm saying is that what the statute does is it gives that designation the effect, the legal effect of excluding everybody else, including people who could operate in a free market.
Unidentified Justice: Why do you hang that on the... why do you blame the distillers for that law?
All they're doing is what otherwise would be legal, designating one importer.
Mr. Weickhardt: It would otherwise--
Unidentified Justice: The state comes along and says, no one else may import.
Mr. Weickhardt: --It would otherwise be legal.
Without this statute, of course, people who existed in the free market such as the Respondents could continue to trade.
But what the statute does is say, if you agree to designate that one wholesaler, then everyone else is excluded.
It gives... the statute gives exclusionary effect to that designation and thereby excludes people who would be operating in a free market.
Now, the... it's been argued here that there is essentially only a unilateral act by the distiller, that the designation process is not an agreement or conspiracy.
But the operation of the restraint requires more than a unilateral action, because to make the restrictive scheme work the distiller has to agree to authorize his franchisees to import.
So the designation agreement is an essential part of the restrictive scheme here.
Unidentified Justice: How do we know that without any record, when the statute's simply being challenged on its face?
Mr. Weickhardt: Well, I think, as I said earlier, I think it's safe to presume that the distiller is not going to designate people who are unwilling to sell his product.
He's certainly going to designate people that he thinks are willing to promote the product, willing to serve as his wholesalers in the state.
Now, I think the argument that there is not a per se violation here has largely hinged on the contention that this statute somehow facilitates Sylvania type restrictions and it therefore has pro-competitive benefits.
Now, there's no basis for saying this as to the California-Oklahoma trade after the Central Liquor case.
The Central Liquor case says that... decided by the Oklahoma Supreme Court in February of this year... says that the distiller may refuse to sell in Oklahoma to a jobber if the goods are destined for out of state.
Now, most brand owners have imposed these restrictions.
Some have not.
But it's clear today that you don't need a California statute to impose Sylvania restrictions in Oklahoma.
You can do that by private contractual devices there.
It's unnecessary, the statute is unnecessary, to effectuate any vertical restrictions.
The argument that the statute somehow facilitated Sylvania restrictions was only applicable in the period prior to the Central Liquor case, when Oklahoma law prohibited distillers from imposing vertical restrictions on resale in that state.
So after the Central Liquor case, the liquor industry is like any other industry.
Sylvania restrictions may be imposed by private contractual devices, and no statutory enabling act is necessary to do that.
The issue here, therefore, is not whether the statute is necessary to facilitate Sylvania, but it is whether once having sold the good without restriction in Olkahoma or elsewhere, the distiller may reassert control over the goods in the hands of a subsequent purchaser who purchased them without restriction.
And at this point the distiller has transferred all property and contractual rights in the goods, and the subsequent purchaser has full title to the goods and has obtained them without restriction.
And nonetheless, the distiller, although he could have originally imposed these restrictions in Oklahoma and didn't, wants a second bite at the apple.
And it's just not necessary to effectuate any vertical restrictions on distribution.
Now, theoretically there is no difference, because the Respondents purchased these goods without restriction, there's no difference between these goods, between the distiller restricting trade in these goods and goods which were manufactured by some other distiller.
In fact, if this Court accepts a restriction, a reassertion of control over goods that were originally sold without restriction, there is nothing to prevent the distiller from reasserting control, even when the goods are in the hands of a consumer.
Now, you might say that the Respondents here are like the consumer in the Sylvania case.
Sylvania put restrictions on Continental T.V., and that was all right, but when Continental T.V. sold the television to the consumer, it sold the television... it sells the television without restriction, and there's nothing in Sylvania that says, that keeps that consumer now from taking that television to Nevada and selling it to somebody else.
If you get it without restriction, there's no argument for the reassertion of such control by the manufacturer.
Unidentified Justice: I don't understand your argument.
How does the manufacturer reassert control?
Say he sells to the Oklahoma wholesaler and the Oklahoma wholesaler sells it to somebody else?
The manufacturer doesn't know anything about it, does he?
Mr. Weickhardt: He reasserts the--
Unidentified Justice: He violates the... he may violate this statute or if the statute is bad... I don't understand your saying the manufacturer reasserts control.
Mr. Weickhardt: --Yes.
Unidentified Justice: It sounds like you are rearguing the Schwinn case.
Mr. Weickhardt: He reasserts control in this sense, that he originally sold the goods without any restrictions on resale--
Unidentified Justice: Right.
Mr. Weickhardt: --He said he sold them under conditions where the jobber to whom he sold could resell in any territory--
Unidentified Justice: Sell them in California, right.
Mr. Weickhardt: --and to any person, and yet when a subsequent purchaser who has received the goods without restriction tries to move them in interstate commerce, the distiller comes back and says I'm sorry, I want to reneg on my original bargain.
Unidentified Justice: No, the distiller hasn't done anything.
The California Liquor Authority has said you have got to pay the statutory penalty.
Mr. Weickhardt: Well, I don't see why it's the California Liquor Authority.
The California Liquor Authority has confided that decision as to whether those goods can move in interstate commerce totally to the discretion of a private party, namely, to the distiller, by action of designation agreements.
Unidentified Justice: Well, they've said if you sell, if Oklahoma wholesaler sells to an undesignated wholesaler in California, it violates the California statute.
But how is that imposing a restriction by the... how is the distiller imposing a restriction?
Mr. Weickhardt: Because the distiller is--
Unidentified Justice: By failure to designate.
Mr. Weickhardt: --The distiller is the one given the power under this statute to prevent that interstate transaction.
Unidentified Justice: Well, he doesn't have power to prevent it.
He has the power to authorize it.
He can decline to--
Mr. Weickhardt: Yes, but the power to authorize is the power to prevent.
This statute is really no different from a statute that says the distiller may prohibit interstate transactions.
If he can authorize them, he also has the subsellenial power to prohibit them.
Unidentified Justice: --Would it be unlawful for the distiller to enter in an agreement with... let's take the one example that Justice White put... one California wholesaler, and say the designation is tantamount to an agreement that says I won't sell to anybody else who sells to any of your competitors?
Would that violate the Sherman Act?
Mr. Weickhardt: As long as there were people like the Respondents who had goods that they had obtained without restriction in interstate commerce, they were thereby--
Unidentified Justice: Well but the term of the agreement is that there won't be any such people.
The distiller says to the wholesaler, I will designate you as my exclusive California wholesaler and I agree that I will not sell to anyone who sells into California in competition with you, and he does that voluntarily.
He stops selling in Oklahoma entirely if there are people like that.
Would that be unlawful?
That is my question.
Mr. Weickhardt: --Well, that restriction would probably be judged under a rule of reason, but I don't think that's what's happening here.
If there is not an agreement between the distiller and the authorized wholesaler in that example--
Unidentified Justice: Well, then who is your agreement with?
Mr. Weickhardt: --that the distiller won't sell to someone else, the issue here is not whether the distiller will refuse to deal with someone else, the issue is whether he can prevent trade and goods which are moving in commerce and which were originally sold without restriction.
It is a restriction on a third party that is not in privity with either--
Unidentified Justice: Well, you don't contend, then, that in effect what we have is an agreement between the distiller and the designated wholesaler to interfere with the trade of others.
Mr. Weickhardt: --That's right.
Unidentified Justice: You don't contend that.
That's not your theory.
Mr. Weickhardt: --We have two... we have two competing chains of distribution here.
Unidentified Justice: I understand.
Mr. Weickhardt: A distiller is selling to his franchise wholesaler, and an Oklahoma jobber is soiling to the Respondents, and the restrictions are not running vertically here.
You are allowing one chain to reach out across the chains of distribution and block trade between the other chain.
Unidentified Justice: May I respectfully suggest that you don't have anything because you don't have a record.
I come back to Justice Rehnquist's point.
You keep telling us all of this, this law has never been enforced, and there's no record.
Mr. Weickhardt: Well, the fact is that--
Unidentified Justice: The fact... well, point to the fact in the record.
Mr. Weickhardt: --The fact, there is the fact in the record that each of the Respondents applied for designation prior to the effective date of the statute, and that was alleged in the original petition.
They were uniformly denied designation.
So it was clear at the time that the California Court of Appeal decided this case--
Unidentified Justice: Wasn't that stayed?
Mr. Weickhardt: --that all of the Respondents would be excluded.
Unidentified Justice: Wasn't that stayed?
Mr. Weickhardt: Pardon?
That statute was stayed, yes.
Unidentified Justice: So it has never been enforced.
Mr. Weickhardt: Yes, but if it was enforced, if it had been enforced at that time, it would have been--
Unidentified Justice: How do we get jurisdiction over if?
Mr. Weickhardt: --Over whom?
Unidentified Justice: If, if, if something is done.
We get jurisdiction after it's done, don't we?
Mr. Weickhardt: Well, if you can decide, as I contend, that the statutory... that the designation procedure inherently involves a per se violation of the Sherman Act, you don't need a record, and I think that that's obvious that that's what it does.
It's obvious that it excludes people who operate... who can freely operate in interstate commerce.
Unidentified Justice: Are you going to get to the 21st Amendment?
Mr. Weickhardt: --Yes.
This is not a 21st Amendment case.
Under Midcal, the 21st Amendment will not save a statute like this from preemption unless the state has a valid regulatory purpose which outweighs the interference with free competition guaranteed by the Sherman Act.
Now, here, the California State Court, which is the legitimate arbiter of California's regulatory interests, has decided that there is no valid state interest which is served by this statute.
Now, in the Midcal case, this Court said that it well give great weight to the findings of the state court as to what the state's regulatory interest is, and here the state courts have said that there is none.
Now, the Petitioners, however, would ask this Court to foist upon the State of California some regulatory purpose which its own courts could not discern.
Now, we heard a new purpose of all the many that were contrived to try to justify this statute, we heard a new purpose here today that the state has no control over the Oklahoma jobber, that if he violates the law there is nothing you can do about it.
Well, there's another California statute that was passed at the same time as this one that requires any out-of-state shipper of alcoholic beverages, distillers, Oklahoma jobbers, anyone who sends goods for importation into California must obtain an out-of-state snipper's license from California.
He must submit his records to the State of California for review and control.
And in fact, the state can, if he does not follow the laws of the state, the state can revoke that out-of-state shipper's license.
And if it can be said that the state has no control over the Oklahoma jobber, as Mr. Roth argued, certainly the state has no control over any of the distillers who sell to California either, and there is no--
Unidentified Justice: Do you think the California legislature and the California Governor just passed and signed this bill in a fit of absent-mindedness?
Mr. Weickhardt: --I don't understand your question, Mr. Justice.
Unidentified Justice: Well, what do you think their purpose was?
Mr. Weickhardt: I think that the purpose... I think it's special interest legislation that was designed to eliminate the importers from--
Unidentified Justice: But still, all legislation, all legislation is special interest legislation.
I mean, some parties win in the legislature, some parties lose.
Mr. Weickhardt: --Yes, but there's no regulatory purpose that's been identified for this statute.
I think all of them that have been advanced were after-the-fact contrivances, and they were all rejected by the state court.
If anything, the... and of course, the Director of California Alcoholic Beverage Control never sponsored or supported the passage of this statute.
It is a statute that simply doesn't serve any valid regulatory purpose.
Unidentified Justice: But Counsel, he did read the statute itself.
Is that true, what he read?
The statute said it was enacted pursuant to their police power, and then spelled it out.
Mr. Weickhardt: Yes, but what--
Unidentified Justice: Didn't it?
Mr. Weickhardt: --It--
Unidentified Justice: All I'm questioning here is because you said there was nothing.
Mr. Weickhardt: --Yes.
I think, Mr. Justice Marshall--
Unidentified Justice: You wouldn't call that nothing, would you?
Mr. Weickhardt: --it's a meaningless statement to say that something serves the police power unless you can identify how.
Unidentified Justice: They did in what he read, they did identify it.
Mr. Weickhardt: But I still don't understand what regulatory interest is served.
I think he mentioned that somehow the statute helps to monitor imports, audit taxes.
That purpose was argued to the state court and rejected.
It's clear that this statute does not speak to any such information.
The statute simply says that the distiller can prohibit someone from importing.
The statute doesn't require any reports, it doesn't require any inspections.
There's no way that it's going to generate any information.
And this argument that the statute somehow promotes the three-tier system is also clearly fallacious.
The three-tier system is essentially a requirement that the distilling, wholesaling and retailing layers be separately owned.
And this statute, the state court found in its opinion, is counterproductive to the purposes of the three-tier system because it authorizes the distillers to exert more control over the wholesaling layer.
One other thing--
Unidentified Justice: Well, that's the statutory purpose, isn't it?
The statutory purpose is to enable the distiller to control the vertical line of distribution of his own product more effectively than he could do by private contract.
Mr. Weickhardt: --Well he doesn't need it, he doesn't need it to control the distribution of his own product because he can do that by private contractual means under the Sylvania decision.
Unidentified Justice: Well, I say he apparently can do it more effectively with the state behind him than he can do it by just private agreement.
Now the question is whether that is all right or not.
Mr. Weickhardt: Well, even if, even if--
Unidentified Justice: And that's what you are complaining about, is that he's able to control it more effectively and your people can't get in.
Mr. Weickhardt: --Even if we concede that the statute serves some of these grand promotion purposes which the Petitioners argue, they say that the statute will guarantee higher prices in California and thereby allow the franchise wholesalers to advertise the brands more, and that will strengthen interbrand competition--
Unidentified Justice: It serves precisely the same purpose as a resale price maintenance scheme serves, effectively, too.
I think that's the purpose that the distillers would attempt to serve with the statute.
They would attempt to eliminate the discounts.
That's probably why the statute was passed in the first place, because it's clear that the Respondents were the discounters in the market, and they sell this liquor... the difference at the retail level is about a dollar a bottle, and that liquor would stay out, and there wouldn't be any price... there would be much less price competition if this statute were in force.
But I wanted to say, Mr. Justice Stevens, that even if we concede that the statute has all of these grand promotional purposes, that it will help the distillers to finance more advertising in California, the State of California has absolutely no regulatory interest in that.
The interest of the state, as found by the court below, was the promotion of temperance.
The state does not have an interest in more advertising of liquor that will increase consumption.
Now, if the Court does not agree with me that the statute is inconsistent with the Sherman Act but believes that the statute is unfair in its operation, I would commend to the Court the other grounds on which this statute was attacked below, first, that it violates due process of law.
This statute in essence sets up a second tier of licensing over and above that of the state.
You must not only have a state's license to import liquor; you must also get a license from private parties.
In effect, the statute gives private parties a virtual veto over the state's licensing process.
Now, the statute does so with no due process.
There is obviously no due process in this statute.
The statute provides no standards or criteria for its own administration.
It provides for no review or appeal to the state from an aggrieved importer who is refused designation.
It is quote obvious that the state will totally unsupervise these designations that are made by the distillers.
And in this Court's 1973 decision in Gibson v. Berryhill, it was also found to be a violation of due process to confide the licensing procedure to private members of the industry who were interested in it.
This statute clearly interferes with property rights of the Respondents.
It prohibits them from freely disposing of property to which they have full legal title and which they purchased without restrictions.
So there is clearly a violation of due process.
There's also a violation of equal protection of the laws because this statute discriminates between two groups, those who are designated and those who are not.
Both groups are fully licensed by the state to import, so from the state's point of view, they are functionally indistinguishable.
Both groups meet all of the minimum regulatory criteria for the importing of liquor into the state, and yet one group can import and the other can't by virtue of the discretion of a private party.
Now, the state court below has already found that there is no regulatory purpose to justify the statute, none.
So on that basis this court can find that the statute fails to pass constitutional muster even under the rational basis test for equal protection.
Now, what we are saying here is that we would like the free market to work in the liquor industry.
We want to let Adam Smith into the liquor industry.
This statute is in essence fair trade through the back door.
In the initial denial of designations to the Respondents it was apparent that it would be used to eliminate discounters from the market.
The Oklahoma-California trade is exactly the way the free enterprise system is supposed to work.
Where one seller in a local market is overcharging and someone else can bring in goods from another market and distribute them more efficiently and at a lower cost, he should be allowed to compete.
The statute deprives the California consumers of this benefit of the free enterprise system, and moreover, the state court has already found that the State of California has absolutely no regulatory interest in this statute.
Chief Justice Burger: Do you have anything further, Mr. McDonough?
Mr. McDonough: If I may, just one moment, Your Honor.
Chief Justice Burger: You have two minutes remaining.
ORAL ARGUMENT OF JOHN R. MC DONOUGH, ESQ. ON BEHALF OF PETITIONERS -- REBUTTAL
Mr. McDonough: Thank you, sir.
The contention is made that the state court found that this statute has no regulatory purpose.
I think that goes beyond what the Court of Appeal did say in California.
The Court did indicate we are not persuaded, the Court said, that the asserted purposes are necessarily accomplished by the statute.
The fact of the matter is that the statute obviously serves the purpose of giving governmental support to the vertical allocation of markets.
It also does protect California's three-tier system of liquor importation and marketing.
There is a tier of the distiller who sells to the wholesaler, the wholesaler who sells to the retailer.
All of that is very carefully regulated.
The Oklahoma connection, or any other out-of-state source, brings in a fourth tier.
California is entitled to preserve the three-tier system.
We think the statute falls clearly within the area indicated in Mr. Justice Powell's decision in Midcal of a statute that regulates both importation and the structure of the industry, and therefore, that you don't get to a weighing test in a 21st Amendment analysis of this statute.
But if you do, let me make the suggestion that the court below did the weighing in this fashion.
On the one hand, on the federal side, the Court put the entire weight of the majesty of the Sherman Act as a charter of economic freedom, and on the other hand put a modestly weighted amount of state interest.
That really, I think, is not what one does or ought to do and what this Court ought to do in the weighing analysis if you get to it.
What you have to do is compare the impairment of the federal Sherman Act interest on the one hand with whatever state values are served on the other.
And in this kind of a statute where we are dealing with a statute that give some collateral support to vertical allocation which has been held in GTE Sylvania not to violate the Sherman Act, we are obviously not dealing with a heavy impairment of any Sherman Act interest.
If there is an interest to be put on the federal side, it is a relatively light one.
And that is the analysis, it seems to me, their must be made, not put the whole Sherman Act on one side and state interest on the other, but how much does it impair any Sherman Act values here, and how many state interests are served there.
Both questions are federal questions.
Both questions are for this Court to resolve, and they should be resolved, we think, by adjusting the balance in favor of the statute if you get to the weighing analysis.