Canada Dry Ginger Ale, Inc. v. F & a Distributing Co.

147 A.2d 15, 28 N.J. 444, 1958 N.J. LEXIS 176

• Court: Supreme Court of New Jersey
• Decided: December 15, 1958
• Status: Published

Opinions

The opinion of the court was delivered by

Proctor, J.

This is an appeal by Canada Dry Ginger Ale, Inc., under B. B. 4:88—8, from an order of the Director of the Division of Alcoholic Beverage Control granting relief on three separate petitions filed pursuant to N. J. S. A. 33:1-93.1 et seq. This section of the Alcoholic Beverage Law, N. J. S. A. 33 :1-1 et seq., prohibits a distiller of alcoholic liquors from arbitrarily refusing to sell to any licensed wholesaler. The petitioners, E & A Distributing Co., Gillhaus Beverage Co., Inc., and Merchants Wine and Liquor Co., are duly licensed New Jersey wholesalers of alcoholic liquors. Canada Dry is engaged in the manufacture, distilling and importing of nationally advertised brands of alcoholic liquors. Each petition sought the same relief under the statute, alleging that the refusal of Canada Dry to sell its products to the petitioner was “arbitrary, unreasonable and discriminatory.” The issue being the same in each case, the hearer consolidated the three petitions by consent and after a hearing filed a single report in which he concluded that the petitioners had established that the action of Canada Dry was arbitrary and discriminatory. Exceptions to the hearer’s report were filed with the Director by Canada Dry and also by Joseph E. Seagrams & Sons, Inc., which had been permitted to intervene. The Director accepted the recommendation of the hearer and entered an order directing Canada Dry to “sell and continue to sell to each of the three petitioners alcoholic beverages on terms usually and normally required by respondent [Canada Dry].” We certified Canada Dry’s appeal on our own motion prior to its consideration by the Appellate Division.

The present case arises from Canada Dry’s decision to reduce the number of its New Jersey wholesale distributors from 11 to 5. The petitioners were among the six eliminated. Complete lines of Canada Dry products have been carried by E & A Distributing Co. for over SO years, by Gillhaus Beverage Co., Inc. since 1955, and by Merchants Wine and Liquor Co. since 1953. No written contracts were entered into between the petitioners and the company, and so far as it appears there were no territorial restrictions within the State in which Canada Dry products might be sold by any of the original 11 wholesalers.

In 1956 Paul J. Burnside was advanced by Canada Dry to the position of national sales manager. He informed Alfred P. LaPorte, Canada Dry’s Eastern Division sales manager, that the company was displeased with the sale of its products, particularly non-scotch items, in New Jersey and he asked him to survey the market and submit recommendations to improve the situation. Accordingly, LaPorte visited each of the 11 wholesalers a number of times and discussed with them future plans regarding advertising and increased sales crews. Thereafter, he recommended to Burnside “for the betterment of our brand” a reduction of Canada Dry’s New Jersey wholesalers from 11 to 5. It was LaPorte’s belief that the reduction would increase sales by concentrating distribution outlets and that “the remaining five would have a great deal more interest in our line and would do a much better selling job on our items.” Such procedure had been successful in other major United States markets. He also specified his choice of the five wholesalers who should be retained. In explaining how he made this selection he stated:

“A. It was a very difficult decision but in making the decision I felt, just through my experience in the business, of the type of organization that we would retain would be types that seemed to show aggressiveness in the few conferences that I had with them, that had an ample selling force in order to sell our line. Those were factors that I took into consideration.”

He later testified:

“Q. Now I am asking you specifically, what factors entered into your determination to retain these five and to drop these six?

A. Well, the factors as outlined before, consideration of other lines within the houses, the sales force, the aggressiveness, my reaction to the aggressiveness of their sales force, the attitude of their executives towards discussions of advertising and sales potential for our brands. All of this together made me consider this move.”

Past sales were considered but more emphasis was placed on the future potential. LaPorte admitted on cross-examination that no wholesaler had shown a greater increase in purchases of non-scotch items than the petitioner E & A Distributing Co. Canada Dry was selling all the scotch items it was able to allocate to New Jersey.

Burnside agreed with LaPorte that the reduction in the number of wholesalers from 11 to 5 should be made because “we are just cutting the pie in too many pieces.” As to the specific wholesalers to be dropped and the others to be retained, Burnside said:

“A. Well, we considered several factors. One was our relationship with the five jobbers we proposed to retain; we also considered their sales executives, their sales personnel and feeling of these people towards our organization; the other competitive brands which they carry.

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A. We picked the wholesalers that we thought we could work best with and I might say at this time, as an example, if we had eleven applicants for a position and we picked five, that doesn’t mean the other six are not any good. But in our opinion and our considered judgment we felt that the five we selected could do the best job for our company.”

He further testified:

“Q. Do I understand, Mr. Burnside, then that you used no standard in determining which of these wholesalers were going to be continued and which were going to be dropped?

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A. We don’t have any chart or there is no particular standard that you can set for determining which distributor you may retain in a given market.

Q. Now, in reaching this conclusion, Mr. Burnside, were there any requirements that you set up which the wholesalers were to meet in order to be retained?

A. No.”

After Burnside reached his decision he discussed it with his superior, John W. Red, Jr., a vice-president of the company, who agreed with the reasons listed by LaPorte and Burnside for their selection of the five wholesalers. He testified:

“Q. Will you give me those reasons that were listed?

A. Well, there are a number of them which I have touched on, Mr. Green. One is the attitude of the organizations themselves as indicated to our men; the attitude of the management of the organization ; the number of competitive lines; the number of salesmen; the general aggressiveness of the organization; our opinion, our considered business judgment of their ability to do a good job on the Canada Dry line; their general interest in being a Canada Dry distributor.”

On March 14, 1957 LaPorte advised petitioners that they were being discontinued as distributors as of May 1st. The only reason given was that throughout the country the company was reducing the number of its distributors and that it was for the best interest of the company to reduce the number in New Jersey from 11 to 5. The petitioners’ ability to pay for any merchandise was not questioned. On April 11 this decision was confirmed by a letter from Burnside. Subsequent discussions between the parties concerning a reconsideration proved fruitless.

The hearer determined that Canada Dry’s method of selecting the retained wholesalers was “arbitrary and discriminatory.” He rejected the argument that the selection was not arbitrary because it resulted from sound business judgment. The Director concurred, holding that Canada Dry’s “refusal to continue to sell its nationally advertised products to the petitioners, while continuing to sell such products to other wholesalers similarly situated, was without reasonable or adequate cause and constituted arbitrary discrimination within the meaning of the statute.”

The statute here involved was added by chapter 264 of the Laws of 1942 (N. J. S. A. 33:1-93.1 to 93.5), as a supplement to the Alcoholic Beverage Law, N. J. S. A. 33 :1-1 et seq., and provides as follows:

“1. There shall be no discrimination in the sale of alcoholic liquors by distillers, importers, and rectifiers of nationally advertised brands of alcoholic liquors to duly licensed wholesalers of alcoholic liquors in this State.

2. In the event any distiller, importer, or rectifier shall refuse to sell to any individual wholesaler any amount of alcoholic liquor or comply with the provisions of this act, then the wholesaler shall petition the Commissioner of Alcoholic Beverage Control setting forth the facts and demanding a hearing thereon to determine whether such refusal to sell is arbitrary or not.

3. If the Commissioner of Alcoholic Beverage Control is satisfied with the ability of the wholesaler to pay for such merchandise as ordered, he shall order the distiller, importer, or rectifier to complete said sale of alcoholic liquor to the wholesaler.

4. In the event the distiller, importer, or rectifier refuses to complete the sale or comply with the terms of the order of the Commissioner, the Commissioner shall issue an order to every licensed wholesaler prohibiting the purchase by such wholesaler of any alcoholic liquor product of the said distiller, importer or rectifier directly or indirectly until there is strict compliance by the distiller, importer, or rectifier with the order of the Commissioner of Alcoholic Beverage Control.

5. The State Commissioner of Alcoholic Beverage Control shall adopt and promulgate such rules and regulations as may be necessary to carry out and insure compliance with the provisions of this act.”

The title of Commissioner was changed to Director by L. 1948, c. 439, § 16, p. 1712 (N. J. S. A. 52:175-16).

The above act has been the subject of only one judicial decision. Hoffman v. Hock, 8 N. J. 397 (1952). In that case a distiller, who was also a licensed wholesaler in this State, determined to sell directly to retailers in the northern part of the State, thereby eliminating the wholesalers in that section with whom it had previously dealt. It continued to operate through wholesalers in the southern and western parts of the State. One of the wholesalers who had been eliminated presented two orders for specified quantities of liquor with the distiller. Upon the latter’s refusal to fill the orders, the wholesaler instituted a proceeding before the Director for a determination as to whether the aforesaid refusal was arbitrary within the intendment of the statute. This court, in affirming the Director’s denial of the petition, held that the statute did not intend that the ability of the wholesaler to pay is the sole test to determine whether or not a refusal to sell is arbitrary and discriminatory. It further held that the statute does not prohibit a distiller from selling its products directly to retailers if its business policy so dictates, provided it is licensed to do so; that such policy is not discriminatory within the intendment of the statute as all wholesalers similarly situated are treated alike. Justice Ackerson speaking for the court said:

“® ® * what is prohibited by this legislation is an act of arbitrary discrimination between wholesalers by a distiller in the sale of a nationally advertised product and that in order to grant the relief provided for the Director not only must find that the complaining wholesaler or distributor is able to pay for the product ordered but that the distiller’s refusal to sell to him is discriminatory and arbitrary, and the inquiry must be limited solely to such considerations.

The apparent scope of the statute in question is to be found in section 1 thereof which bars ‘discrimination in the sale of alcoholic liquors by distillers, * * * of nationally advertised brands’ thereof ‘to duly licensed wholesalers of alcoholic liquors * * Thus it is still open to the distiller to sell directly to retail dealers if licensed so to do. It may, of course, sell indirectly through the medium of duly licensed wholesalers, if it so chooses, but in the latter event it may not discriminate between such wholesalers.” 8 N. J. at pages 408-409.

The court found no arbitrary discrimination in the retention by the distiller of its wholesalers in the southern and western parts of the State. It said:

“The fact that the distiller * ® * still operates through wholesalers in southern and western parts of the State, whose authorizations are limited to such areas, does not make its action with respect to the crowded northern counties, where retailers are closer together and more easily reached, an arbitrary or unfair discrimination against its former distributors in such counties whose authorizations had been confined thereto.” Id., 8 N. J. at page 410.

Canada Dry on this appeal initially asserts that the Director erroneously placed the burden of proof upon it rather than upon the petitioners, who normally must bear that burden in an administrative proceeding. It further contends that there was no proof that the petitioners were better qualified than the five wholesalers who were retained. These arguments proceed from the following statements of the Director:

“I have carefully examined the entire record herein and I am unable to find any justification for respondent’s action concerning the three petitioners. If respondent’s action is based on fair and adequate cause, it is not reflected m the record.

* * * the petitioners have been shown to be in a position in no way different from the wholesalers retained by the respondent.”

Canada Dry has not been obliged to show anything beyond what the statute requires. Petitioners have shown that Canada Dry has refused to deal further with them while continuing to sell to other wholesalers. Canada Dry is in a far better position than the petitioners to know why this action was taken. It is reasonable to require it to come forward with an explanation and factual statement so that the Director may effectively fulfill his statutory duty and determine whether the refusal to sell was the result of a decision fairly arrived at or was arbitrary within the statutory prohibition. This is the only feasible manner in which the statutory hearing can be conducted. See 9 Wigmore, Evidence (3d ed. 1940), § 2486; Swain v. Neeld, 28 N. J. 60, 65 (1958); Ocean County National Bank v. Stillwell, 123 N. J. Eq. 337, 343 (E. & A. 1938). In order to prevail it was not necessary for the petitioners to show that they were superior to the retained wholesalers. The statute contemplates that those in similar positions are entitled to similar treatment.

Canada Dry next contends that: “Accepting arguendo the Director’s basic finding that the three petitioners were as equally qualified as the retained wholesalers, his ultimate finding that Canada Dry’s selection of the five retained wholesalers was arbitrary and discriminatory deprives Canada Dry, without due process of law, of its inherent right to manage its own business.” Reliance is placed upon a number of cases under the Sherman Anti-Trust Act, 15 U. S. C. A. § 1 et seq., upholding a manufacturer’s right to select among distributors of his particular product. See e. g., United States v. Colgate & Co., 250 U. S. 300, 39 S. Ct. 465, 63 L. Ed. 992 (1919); Packard Motor Car Co. v. Webster Motor Car Co., 100 U. S. App. D. C. 161, 243 F. 2d 418 (D. C. Cir. 1957). These cases do not apply to the present situation. Our Appellate Division in Eskridge v. Division of Alcoholic Beverage Control, 30 N. J. Super. 472, 474 (App. Div. 1954) appropriately stated that:

“* * * there is no common, inherent, natural or constitutional right to engage in the business of selling liquor. The power of the State over the sale of intoxicating beverages is plenary. ‘It is a subject by itself, to the treatment of which all the analogies of the law appropriate to other topics cannot be applied.’ Paul v. Gloucester County, 50 N. J. L. 585, 595 (E. & A. 1888).”

The inherent social dangers of the liquor industry are evident and the State may rightly prohibit the business entirety or permit it to continue under very severe restrictions. X-L Liquors, Inc., v. Taylor, 17 N. J. 444, 449 (1955); Ziffrin, Inc., v. Reeves, 308 U. S. 132, 60 S. Ct. 163, 84 L. Ed. 128, 129 (1939). The statute in the present case, N. J. S. A. 33:1-93.1 to 93.5, is one section of the comprehensive control which the State exercises over all phases of the liquor industry. The correctness of the Director’s decision must be determined from an inquiry directed to whether he has correctly ascertained the legislative intent embodied in this statute and has accordingly applied it to the record before him. If the Director has done this, the fact that his decision restricts Canada Dry’s management prerogative in some degree does not deprive it of any constitutionally protected right.

The ultimate goal sought to be attained by the statute in question, as in the entire scheme of liquor legislation, is the protection of the public through the promotion of temperance and elimination of the racketeer and bootlegger. N. J. S. A. 33 :l-3. In order to accomplish this purpose the statute seeks to achieve as far as necessary the independence of wholesalers from distillers. A wholesaler dependent upon a distiller for a supply of sought-after merchandise might be tempted to comply with the non-legitimate desires of the distiller if the latter were free to discontinue the supply at will. Eor the purpose of strengthening the wholesaler’s resistance if confronted with a distiller’s wish to over-stimulate sales and thus negate the public policy in favor of temperance or a desire to engage in other prohibited acts, e. g., tie-in sales, the statute seeks to prevent the distiller from arbitrarily closing the source of supply to a wholesaler. To effectuate this end, both the statute and the authority delegated by it to the Director will be liberally construed. See Butler Oak Tavern v. Division of Alcoholic Beverage Control, 20 N. J. 373, 384 (1956); 3 Sutherland, Statutory Construction (3d ed. 1943), § 7203. The act itself dictates such a construction. N. J. S. A. 33 :l-73.

Section 2 of the statute gives the Director authority to determine whether a refusal by a distiller to sell to a wholesaler is arbitrary or not. Implicit therein is a recognition that there is an area in which a distiller may justifiably refuse to sell to a wholesaler even though the latter is financially responsible. Canada Dry’s initial decision to reduce its number of wholesalers within the State does not in itself contravene the statute. While the Director is not authorized to command a distiller to distribute his product to every wholesaler who desires to purchase it, the Director is empowered to determine whether a reasonable method has been employed by a distiller in the selection of wholesalers with whom he will or will not deal. Hoffman v. Hock, supra. Whether such a reasonable method has been employed by Canada Dry in implementing its decision to reduce the number of its wholesalers was the precise issue for the Director’s determination, subject, of course, to judicial review. If the selection of the five wholesalers to be retained was determined on a rational basis, consistent with the overall policy of the Alcoholic Beverage Law, the petitioners’ claims cannot be sustained.

The Director concluded that the record fails to disclose that the petitioners stand in any different position than the five wholesalers who have been retained, and that in the absence of any justification for the distinction which Canada Dry has made, the selection must be viewed as arbitrary and prohibited by the statute. “ ‘Arbitrary’ means ‘[djepending on will or discretion,’ that is, not governed by any fixed rules or standards.” Paul v. Board of Zoning Appeals, 142 Conn. 40, 110 A. 2d 619, 621 (Sup. Ct. Err. 1955); see also State v. Then, 114 N. J. L. 413, 418-419 (Sup. Ct. 1935). The executives of Canada Dry who testified, repeatedly asserted that the individual selections were the result of a good faith business decision and as such could not be viewed as arbitrary. We have no reason to doubt their credibility. But an individual’s bona fide business policy in the field of liquor traffic must yield to the policy of the State. Quill v. Mayor, etc., of Hoboken, 21 N. J. 574 (1956). Clearly, a business policy which results in arbitrary discrimination would be violative of the statute. In order to effectuate the statutory provisions, lack of arbitrariness must appear from the whole record. There must be a showing that the selection of certain wholesalers to the exclusion of others was made on the basis of a standard reasonably related to the legitimate business goal sought to be achieved and not conducive to the evils which the act is designed to prevent. This standard must be of such a tangible or objective nature as will enable the Director to determine from the proofs whether its application to the wholesalers in question could reasonably result in the distinction which a distiller has made. The Hoffman case, supra, serves 'to illustrate one such standard, i. e., territorial location of wholesalers. Of course, there are other objective factors wherein a proper distinction may be made. Their sufficiency in each case is to be determined in the first instance by the Director. We realize that some subjective considerations enter into all business decisions. But if the statute is to have any meaning they alone cannot be considered as a sufficient basis for a distiller’s severance of his business relations with certain wholesalers while he continues to operate through others.

Canada Dry has set forth the factors which it considered in making its selection. Some of these were, as characterized by the Director, “subjective factors of nebulous quality.” There were others, i. e., the number of competitive lines, the number of salesmen and past sales, that were of an objective nature. Their application could have been demonstrated. However, Canada Dry made no attempt to document its objective criteria and there is nothing in the record to show that the five wholesalers who have been retained can be distinguished on the basis of these criteria from the petitioners. To sanction different treatment to wholesalers similarly situated would tend to engender those evils which the statute seeks to prevent. On the present record we cannot say that the Director erred. Appellant’s showing failed to reveal in depth the underlying facts from which the Director could evaluate the reasonableness of the appellant’s actions, including the basis of selection, in the light of the statutory policy described above. We frankly appreciate that the statute immediately involved is not as explicit as it might be. To guide distillers the Director might well adopt implementing regulations at an early date which would delineate the grounds and the nature of the showing required. In these circumstances we reserve to appellant leave to apply to the Director for a rehearing at which time it may adduce srreh additional testimony as may be relevant in view of this opinion. The decision of the Director is therefore affirmed, without prejudice to such application for rehearing.