FILED

Oct. 19, 1995

Cecil Crowson, Jr.

Appellate Court Clerk

FORREST CITY GROCERY )

COMPANY, )

)

Plaintiff/Appellant, )

) Appeal No.

) 01-A-01-9505-CH-00198

VS. )

) Davidson Chancery

) No. 93-239-II

TENNESSEE DEPARTMENT OF )

REVENUE, )

)

Defendant/Appellee. )

COURT OF APPEALS OF TENNESSEE

MIDDLE SECTION AT NASHVILLE

APPEALED FROM THE CHANCERY COURT OF DAVIDSON COUNTY

AT NASHVILLE, TENNESSEE

THE HONORABLE C. ALLEN HIGH, CHANCELLOR

JOHN M. FARRIS

E. DEAN WHITE, III

One Commerce Square

Suite 2000

Memphis, Tennessee 38103

Attorneys for Plaintiff/Appellant

CHARLES W. BURSON

Attorney General & Reporter

PERRY ALLAN CRAFT

Deputy Attorney General

ARSHAD (PAKU) KHAN

SEAN P. SCALLY

Assistant Attorneys General

450 James Robertson Parkway

Nashville, Tennessee 37143-0492

Attorneys for Defendant/Appellee

AFFIRMED AND REMANDED

BEN H. CANTRELL, JUDGE

CONCUR:

TODD, P.J., M.S.

KOCH, J.
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O P I N I O N

The plaintiff, Forrest City Grocery Company, filed a declaratory judgment

action in the Chancery Court of Davidson County alleging that the Unfair Cigarette

Sales Law violates (1) the Sherman Antitrust Act, and (2) the plaintiff's right to due

process. The chancellor found the issues in favor of the statute and dismissed the

complaint. We affirm.

I.

Forrest City is an Arkansas corporation that sells cigarettes to retailers

in Tennessee. In June of 1992, the Tennessee Department of Revenue served

Forrest City with a summons seeking information regarding the conduct of Forrest

City's wholesale cigarette business. It appears that the Department of Revenue

considered Forrest City's practice of passing cigarette manufacturers' discounts along

to the retailers to be a violation of the Unfair Cigarette Sales Law (UCSL). On January

25, 1993 Forrest City filed a complaint for a declaratory judgment in the Chancery

Court of Davidson County seeking a declaration that the UCSL was unconstitutional

because it violated the Sherman Anti-Trust Act and because it violated Forrest City's

right to due process. The chancellor upheld the Act against both arguments.

II.

Does the UCSL violate the Sherman Act?

The Sherman Anti-Trust Act, 15 U.S.C. §§ 1-7, makes unlawful every

contract, combination or conspiracy "in restraint of trade or commerce among the

several states." Under the Supremacy Clause, Art. 6 § 2 of the United States

Constitution, a state law violating the Sherman Act would be unconstitutional.
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The UCSL makes it unlawful for any retailer or wholesaler to sell

cigarettes below cost, with the intent to injure competitors or destroy or lessen

competition. Tenn. Code Ann. § 47-25-303(a). Evidence of the prohibited act is

prima facie evidence of an intent to injure competitors or destroy substantially or

lessen competition. Tenn. Code Ann. § 47-25-303(b).

"Cost to the wholesaler" is defined in the Act as the "basic cost of

cigarettes" plus the "cost of doing business by the wholesaler." Tenn. Code Ann. §

47-25-302(6). The "basic cost of cigarettes" is defined as the manufacturer's invoice

price without consideration of any discounts whatever, Tenn. Code Ann. § 47-25-

302(1), and the "cost of doing business by the wholesaler" is defined as one and

three-fourths percent (1 3/4%) of the basic cost of cigarettes plus cartage to the retail

outlet (if performed by the wholesaler) of one-half of one percent (1/2%) of the basic

cost. Tenn. Code Ann. §47-25-302(4).

The anti-competitive effect of the UCSL is apparent. The state argues,

however, that the Sherman Act does not apply to state action, relying on what has

become known as the "state action doctrine" first recognized in Parker v. Brown, 317

U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943). In Parker the state of California sought

to restrict competition among raisin growers and maintain prices in the distribution of

their raisins to packing companies. The state accomplished its purpose by an

elaborate scheme requiring the growers to pool all their raisins for grading and

marketing according to criteria calculated to maintain prices. The United States

Supreme Court conceded that the scheme might violate the Sherman Act "if it were

organized and made effective solely by virtue of a contract, combination or conspiracy

of private persons, individual or corporate." 317 U.S. at 350, 63 S.Ct at 313, 87 L.Ed.

at 325. But the Court found no authority in the Sherman Act itself or in its legislative

history to suggest "that its purpose was to restrain a state or its officers or agents from
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activities directed by its legislature." 317 U.S. at 350, 63 S.Ct. at 313, 87 L.Ed. at 326.

The Act is directed against individual and not state action.

In California Liquor Dealers v. Midcal Aluminum, 445 U.S. 97, 100 S.Ct.

937, 63 L.Ed.2d 235 (1980), the Court reviewed a section of the California Business

and Professions Code which required all wine producers, wholesalers, and rectifiers

to file a fair trade contract or a price schedule with the state. If the wine producer did

not set prices through a fair trade contract, wholesalers were required to post a resale

price schedule for that producer's brands. A licensee selling below the established

price faced fines and/or suspension or revocation of the license to sell such products.

The United States Supreme Court held that the California wine pricing

provisions violated the Sherman Act. Finding that the California Act allowed wine

prices to be fixed by private persons and not the state, the Supreme Court held that

the state action immunity recognized in Parker v. Brown did not apply. Quoting from

Parker v. Brown, the Court said "a state does not give immunity to those who violate

the Sherman Act by authorizing them to violate it, or by declaring that their action is

lawful." 445 U.S. at 106, 100 S.Ct. at 943, 63 L.Ed.2d at 243. In rendering its opinion

the Supreme Court said that Parker v. Brown and the cases interpreting it required

two things in order for the state action immunity to apply: (1) the restraint must be

clearly articulated and affirmatively expressed as state policy and (2) the policy must

be actively supervised by the state itself. 445 U.S. at 105, 100 S.Ct. at 943, 63

L.Ed.2d at 243. Later, the Court noted an absence of a "pointed reexamination" of

the program on the part of the state authorities.

Forrest City argues that the state fails the two part test set out in Midcal.

Boiled down to its basics, Forrest City's argument is an attack on minimum markup

statutes per se. If the state does not regulate cigarette prices from the manufacturer
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to the retailer -- or at least monitor the prices all along the delivery chain -- the state

has not met the "active supervision" requirement of the Midcal test.

On the other hand, the Commissioner argues that minimum markup

statutes are per se entitled to the state action exemption. As creatures of the

legislature such statutes result from the purest form of state action. No other agency,

commission, or trade group is delegated the authority to fix prices. Therefore, there

is no requirement of active supervision other than legislative oversight.

Both sides have some support for their arguments. Forrest City cites

Alcoholic Bev. Control Bd. v. Taylor Drug Stores, Inc,, 635 S.W.2d 319 (Ky. 1982),

where the Kentucky Supreme Court held that that state's minimum markup statute

relating to liquor pricing violated the Sherman Act because the state, in the final

analysis, exercised no control over prices. Stating what we believe to be true also in

Tennessee the Taylor court said, "[T]he state participates in fixing prices only to the

extent that it adds statutory minimum markups to prices fixed by private individuals."

See also Miller v. Hedlund, 813 F.2d 1344 (9th Cir. 1987) and Anheuser-Busch v.

Goodman, 745 F.Supp. 1048 (M.D. Pa. 1990).

The Commissioner cites Jetro Cash & Carry Enterprises, Inc. v.

Department of Taxation, 605 N.Y.S. 538 (A.D. 1993), a case from New York involving

cigarette pricing. The statute involved, although not identical, was similar to the

Tennessee statute. In upholding state action immunity the court said,

[O]nce the manufacturer establishes its price, the statutory

scheme defines the price at which cigarettes may be resold,

and it is the statute not the individual parties, that determines

the ultimate resale price. 605 N.Y.S. at 540.
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For the same result, see Morgan v. Division of Liquor Control Conn.,

Dept. of Business Regulation, 664 F.2d 353 (2d Cir. 1981), where the Second Circuit

Court of Appeals specifically found that a minimum markup statute satisfied the active

supervision requirement of the Midcal test.

There are cases from the Supreme Court itself that lend support to the

Commissioner's argument, although the decisions do not involve minimum markup

statutes. In Hoover v. Ronwin, 466 U.S. 558, 104 S.Ct. 1989, 80 L.Ed.2d 590 (1984),

a case involving the Supreme Court of Arizona's requirements for admission to the

bar, the United States Supreme Court discussed the two parts of the Midcal test and

how the test should be applied. The Court said:

"[I]n cases involving the anti-competitive conduct of a

nonsovereign state representative the Court has required a

showing that the conduct is pursuant to a 'clearly articulated

and affirmatively expressed state policy' to replace

competition with regulation . . . . The court also has found the

degree to which the state legislature or supreme court

supervises its representatives to be relevant to the inquiry

. . . . When the conduct is that of the sovereign itself, on the

other hand, the danger of unauthorized restraint of trade

does not arise. Where the conduct at issue is in fact that of

the state legislature or supreme court, we need not address

the issues of 'clear articulation' and 'active supervision.'"

466 U.S. at 569, 104 S.Ct. at 1995, 80 L.Ed.2d at 600.

In Federal Trade Commission v. Ticor Insurance Co., 504 U.S. ___, 112

S.Ct. 2169, 119 L.Ed.2d 410 (1992), a case involving a state's regulation of title

insurance rates, the Court further expanded on the "active supervision" requirement

of the Midcal test and said, "The question is not how well state regulation works but

whether the anti-competitive scheme is the state's own." 504 U.S. at ___, 112 S.Ct.

at 2177, 119 L.Ed.2d at 423.
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Forrest City also relies on a Supreme Court case, 324 Liquor Corp. v.

Duffy, 479 U.S. 335, 107 S.Ct. 720, 93 L.Ed.2d 667 (1987), which struck down the

pricing provisions of New York's Alcoholic Beverage Control Law because the scheme

was not actively supervised by the state. We find, however, that the New York law

was not a markup statute like the UCSL. In fact, the Court noted that the New York

statute was not a minimum markup statute and indicated that such statutes might

pass the Midcal test. The Court cited the Second Circuit's opinion in Morgan as

authority for that position.

Taking into account all these shades of opinion, we are persuaded that

the Midcal test does not apply to anti-competitive price schemes established by the

legislature itself. It is only when the decisions producing anti-competitive results are

delegated to other agencies or individuals that a more rigorous examination of the

state's part in the decisions must be made. Therefore, the UCSL, an anti-competitive

scheme created by the legislature itself, is immune from attack on the ground that it

violates the Sherman Act.

III.

Does the UCSL violate Due Process?

Where the UCSL makes evidence of selling below the statutorily

mandated cost prima facie evidence of the intent to injure competitors, Forrest City

asserts that it unconstitutionally shifts the burden of proof to the defendant in a

criminal prosecution for violating the Act. As established in County Court of Ulster

County, New York v. Allen, 442 U.S. 140, 99 S.Ct. 2213, 60 L.Ed.2d 777 (1979), and

applied in State v. Bryant, 585 S.W.2d 586 (Tenn. 1979), the rule is that the

constitutionality of the statute depends on whether it establishes a "permissive

inference" or a "mandatory presumption." See also Lowe v. State, 805 S.W.2d 368

(Tenn. 1991). If it is a permissive inference, one that allows but does not require the

jury to infer the presumed fact from the proved fact, a jury instruction concerning the
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inference would be error only if under the facts of the case there would be no rational

way the jury could make the connection permitted by the inference.

In Bryant the Court was dealing with a statute making evidence of

entering another's premises in a mask prima facie evidence of an intent to commit a

felony. The court said "prima facie" could mean either a permissive inference or a

mandatory presumption but interpreted the statute liberally in order to preserve its

constitutionality. See State v. Netto, 486 S.W.2d 725 (Tenn. 1972).

Being under the same mandate to preserve the constitutionality of

statutes, we interpret the UCSL as creating a permissive inference rather than a

mandatory presumption. In a criminal prosecution for violating the Act, the Court

could charge the inference if, under the facts of the case, the jury could make the

connection permitted by the inference.

The judgment of the trial court is affirmed and the cause is remanded

to the Chancery Court of Davidson County for any further proceedings that may

become necessay. Tax the costs on appeal to the appellant.

______________________________

BEN H. CANTRELL, JUDGE

CONCUR:

_______________________________

HENRY F. TODD, PRESIDING JUDGE
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_______________________________

WILLIAM C. KOCH, JR., JUDGE