# FILED Oct. 19, 1995 Cecil Crowson, Jr . Appellate Court Clerk FORREST CITY GROCE RY ) 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 APPE ALS OF TENNESSEE MIDDLE SEC TION AT NASHVILLE
APPEALE D FRO M THE C HANC ERY C OURT O F DAVI DSON COUN TY AT NASHVILLE, TENN ESSEE THE HONORABLE C. ALLEN HI GH, CHANC ELLOR

JOHN M. FARRIS E. DEAN WHITE, III One Commerce Square Suite 2000 Memphis, Tennessee 38103 Attorneys for Plaintiff/Appella nt CHARLES W. BURSON Attorney Gen eral & Repor ter PERRY ALLAN CRAFT Deputy Attor ney General ARSHAD (PA KU) KHAN SEAN P. SCALLY Assistant Att orneys Gener al 450 James Roberts on Parkway Nashvil le, Tennessee 37143- 0492 Attorneys for Defendant/Appellee

AFFIRMED AND REMAN DED

BEN H. CAN TRELL, JUDGE CONCUR: TODD, P.J., M .S. KOCH, J.- 2 - 

## O P I N I O N

The plaintif f, Forrest City Grocery Company, filed a decl aratory judgmen t action in the Chancer

y Court of Davidson C ounty alleg ing that t he Unfair Cig arette Sales Law violates (1) the Sherman Antitrust Act, and (2) the plaint iff's r ight to due process. The cha ncell or found the is sues i n favor of the s tatuteand di smi s sed the compla int. We affirm

.
I.

Forrest City i s an Arkansas corporation that sells cigarettes to retailers in Tenn esse e. I n Jun e of 1 992, t he Tennessee Department of Revenue ser

ved Forrest City with a summons seeking information regarding the condu ct of Forrest City's wholesale ci garette business. It appears that the D epartment of Reven ue considered Forrest City's practice of passing c igarette manufactu rers' dis counts along to the retailer

s to be a vi olation of the Unfair Cigarett e Sales Law

(UCSL). On January 25, 1993 Forrest City fil ed a compl aint for a declaratory judgment in the Cha ncery Court of Davidson County seek ing a declar ation that the U CSL was unconstitutional because it violated the Sherman Anti-Trust Act an d because it violated Forrest City's right to due process. The chancellor uph eld the Act against both argument s.

II. Does the UCSL violate the Sherman Act?

The Sherman Anti-Tr ust Act, 15 U.S.C. §§ 1-7, makes unlawfu l every contract, co mbination or con spiracy "in restrai nt of trade or commerce among the s everal states." Under the Supremacy

Clause, Art . 6 § 2 of the Unite d State s Constitution, a state law violating the Sherman Act would be un constitutional.- 3 - The UCSL make s it unlawful for any retailer or wholesaler to sell cigarettes

below cost, with t he intent to inj ure competitors or destroy

or lessen competition. Tenn. Code Ann. § 4 7-25-303(a). Evidence of the proh ibited act is prima facie evidenc e of an intent to inj ure competitors or destroy

sub stantiall y or lessen competition. Te nn. Code Ann. § 47-25-30 3(b).

"Cost to the whol esaler" is d efined in the Act as the "basic cost of cigarettes" plus the "cost of doing busines s by the wholes aler." Tenn. Code Ann. § 47-25-302(6). The "basic cost of cigarettes" is defined as the man ufacturer's invoice pric e without consideration of any discounts w hatever, Tenn. C ode Ann. § 47-25 - 302(1), and t he "cost o f doing business by the w holesaler" i s defined as one and three-fourthspercent (1 3/ 4%) of the basic cost

of cigarettes

plus cartag e 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 effe ct of the UCSL is apparent. The state argues, however, that the Sherman Act do es not apply to state action, relyingon what has becomeknown as t he "state action doctrine" first recogniz ed in Parke r v. B rown , 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943)

. In Parker the state of Cali fornia sought to restrict

competition among raisin g rowers and maintain pri ces in the distribution of theirraisin s to packing companies. The stat e accomplished i ts purpose by an elaborate sch eme requ iri ng t he g rowersto po ol a ll t heir rai sin s fo r gradin g and marketing according to criter ia calculate d to maint ain prices . The United Stat es Supreme Court conceded that the sc heme mightviolate t he Sherman Act "if it were organiz ed and made effe ctive solely by vir tue of a contract, com bination or conspiracy of private persons, indi vidual or corporate." 317 U.S. at 350, 63 S.Ct at 313, 87 L.Ed. at 325. But t he Co urt f oun d no a utho rity in the S herm an Ac t itse lf or in its legisl ative historyto suggest "that its pur pose was to restrain a state or its officers or agent s from- 4 -

activiti es directed by

its legi slature." 317 U .S. at 350, 63 S.C t. at 313, 87 L.Ed. at 326. The Act is directed against individ ual 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), theCourt reviewed a section of the California Busine ss and Professions C ode 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 p roducer's br ands. A lice nsee sellingbelow the e stablished price faced fines and /or suspension or revocation of the license to sell such products.

The United States Supreme Cou rt held that the California wine pri cing provisi ons violated the Sherman Act. Fin ding that the Califor nia Act allow ed wine prices to be fixed by

private persons and not the state, the Supreme Cour t held that the state action immunity recogniz ed in Parke r v. B rown did not apply. Quoting from Parker v. Brown, the Court sai d "a state does not giv e immunity to those who v iolate the Sherman Act by

authorizi ng them to viol ate it, or by declaring that their ac

tion is lawful." 445 U.S. at 106, 100 S.Ct. at 943, 63 L.Ed.2d at 243. In render ing its op inion the Supreme Court s aid that Par ker v. Br own and the cases i nterpreting it requi red two things in order for the state action immuni ty to apply: (1 ) the restr aint must be clearlyarticulated and affirmatively expressed as state policy and (2) the policy must be activel y superv ised by the state itself. 4 45 U.S. at 105, 100S .Ct. at 943, 6 3 L.Ed.2d at 243. Later, the Court noted a n absence of a "pointed reexaminati on" of the program on the part of the state authorities.

Forrest City ar

gues that the state fails the tw o part test set

out in Midcal

. Boile d down to i ts basics, F orrest Ci ty's arg ument is an attack on minimum markup statutes per se . If the state does not regulatecigarett e pricesfrom the manufacturer- 5 -

to the retailer -- or at least monitor the prices all along the delivery chain -- the state has not met the "acti ve superv ision" req uirement of the Midcal test.

On the other hand, th e Commissioner argue s th at minimum markup statutes are per se entitled to the state act ion exemption. As creatures o f th e legislature such statutes result from the pur est form of state action. No ot her a genc y, commission, or trade g roup is deleg ated the authorit yto fix prices. Therefore, there is no requi rement of active supervi sion other than legislat ive oversight.

Both sides have some su p port for their arguments. F orrest Ci ty cites Alc oholic

Bev. Control Bd. v. Taylor Drug Stores, Inc, , 635 S.W .2d 319 (K y. 1982) , where the Kentucky

Supreme Court h eld tha t t hat state's mini mum markup statute relating to liquor

pricing violated the Sherman Act because the state, i n the final analysis, exercis ed no control ov er prices. Stating w hat we beli eve to be true also in Tennessee the Taylor

court said, "[T]he stat e participate s in fixin g pricesonly to the extentthat it adds statutory minimum markups to prices fixed by priv

ate indivi duals." See also Miller v

. Hedlund

, 81 3 F.2d 1344 (9th C ir. 1987) and Anheuser-Busch v. Goodman , 745 F.Supp. 1048 (M.D. Pa. 19 90).

The Commi ssio ner cites Jetro Cash & Carry Enterprises, Inc. v. Department

of Taxation , 605 N.Y.S. 538 (A.D. 1993) , a case from New York inv olving cigar ette pricing . The statute inv olved, alt hough not identi cal, was similar to th e Tennessee statute. I n upholding state action immuni ty the cour t said,
[O]nce the manufacturer est ablishes its price, th e statutory schemedefines the price at which cigarettes may be resol d, and it is the statute not the indi vidual parties, that determines the ultimate res ale price. 605 N.Y.S. at 540.- 6 - For the same result , see Morgan v. Di vision of Li

quor C ontrol Conn., Dept. of Business

Regulation , 664 F.2d 353 (2d Cir. 1981), where the Secon d Circuit Court of Appeals specifically found that a min imum mark up st atut e sat isfi ed th e act ive supervis ion requir

ement of the Midcal

test.

There are cases from the Supreme Court itse lf that lend suppor t to the Commissioner's argument, alt h ough the decis ions do not inv olve minimum mar kup statutes. In Hoover v. Ronwin , 466 U.S. 558, 104 S.Ct. 19 89, 80 L.Ed.2d 590 (1984), a cas e involv ing the Supreme Court of Ariz ona's requi rements for admiss ion to th e bar, the U nite d Sta tes S upre me Co urt d iscu ssed the t wo parts of the Midcal test and how the test

should be appli ed. The Court sai d:
"[I]n cases involving the anti-competi tive cond uct of a nonsove reign state repres entative the Court has re quired a showing that the conduct is pur suant to a 'cl early ar

ticulated 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 supervis es its representati ves to be relevant to the inquiry

. . . . Whe n the conduct is that of the sover eign itsel f, on the other hand, the danger

of unau thoriz ed restraint of trade does notarise. W here the conduct at i ssue is in fact that of the state legislature or supreme cour t, we need not address the issues of 'clear articulation' and 'active supervision.'" 466 U.S. at 569, 10 4 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.2 d 410 (1992), a case involving a state's regulation of title insurance rates, the C ourt further ex panded on the "active supervi sion" requirement of the Midcal

test and said, "The question i s not how well state r egulation works but whether the anti-competitive scheme is the state's ow n." 504 U.S. at _ __, 112 S.Ct. at 2177, 119 L.Ed.2d at 423.- 7 - Forrest City al so relies o n a Supreme Court case, 324 Liquor Corp. v. Duffy , 479 U.S. 335, 107 S. Ct. 720, 93 L.Ed.2d 667 (1987), w hich struck down the pricing provisi ons of New York's Alcoholic Beverage C ontrol Law becaus e the s cheme was not actively superv ised by the stat e. We find, however, that the New York law was not a mar kup statute like the UC SL. In fact, the Court noted th at the New York statute was not a mi nimum mar kup statute and i ndicated that suc h statutes mig ht pass the Midcal

test. The Court cited the Secon d Circuit ' s opinion in Morgan as authority for that position

.

Taking into account al l these shades of opinion, we are persuaded that the Midcal

test does not a pply t o ant i-com peti tive price schemes established by

the legislature itself. It

is only when the decisions producing anti-compe titive results are delegated to other agenc ies or indi viduals t hat a more rigor ous examinati on of the state's part in the decisi ons must be made. There fore, the UCSL, an an ti-co mpe titive scheme created by the leg islature i tself, is immune from attack on the ground that it violates the Sherman Act. III.

Does the U CSL vi olate Due Process?

W here the UCSL make s e vidence of selling below the statutorily mandated cost prima f acie evide nce of the intent to i njure competitor s, Forrest

City asserts t hat it unconsti tutionally shifts the burden of proof to the defendant i n a criminal prosecution for violati ng the Act. As establishe d in Co unty Court of Ulster County, New

York v. Al

len , 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), t he rule is t hat the constitutional ity

of the statute depends on wheth erit est abli shes a "pe rmis sive inference" or

a "mandatory presumption." See also Lowe v. St ate , 805 S.W.2d 368 (Tenn. 1991). If it is a permissive inference, one tha t allows but does not require the juryto infer the pres umed fact from the proved fact, a jury i nstruction concerning the- 8 -

inference would be er ror only if under the facts of the case there would be no rati onal way the jury coul d make the connecti on permitted by the inference.

In Bryant

the Court was dealing w ith a stat ute making ev idence of entering another's premises in a maskprima facie ev idence of an intent t o commit a fel ony. The court said "prima fac ie" cou ld mean either a permissive inferen ce or a mandatory presumption but interprete d the statute liberally in order to pres erve its constitutional ity. See State v. Net to , 486 S.W .2d 725 (Tenn. 197 2).
Being under the same mandate to preserve the constituti onality o f statutes, we inte rpre t the UCSL as creating a permissive inference rather than a mandatory presumption. In a criminal prosecut ion for viola ting the Act, the Court could charge the i nference if, under the facts of the case, the j ury could make the connection permi tted by the i nference.

The judgment of the tr ial court i s affirmed and the cause is remanded to the C han cery Cour

t of Davidson C ounty for any further proceedi ngs that may become necessay . Tax the costs on appeal to th e appellant.

_________________

___ _________

_ BEN H. CAN TRELL, JUDGE

CONCUR:

_______________________________ HENRY F . TODD, PRESID ING JUDGE- 9 -

_______________________________ WILLIAM C. KOCH, JR., J UDGE