McLane Southern, Inc. v. Charlie Davis, Director of the Arkansas Tobacco Control Board, and the Arkansas Tobacco Control Board, and Warren Wholesale Company, Inc., Tom Fitts Tobacco Company, Inc., Douglas Companies, Inc., Glidewell Distributing Company, Inc., Southern Wholesale, Inc., Ritchie Grocer Company, Inc., Northwest Tobacco and Candy Company, Merritt Wholesale Distributor, Inc., and Warehouse Distributing, Inc.
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SUPREME COURT OF ARKANSAS
No.
05-990
MCLANE SOUTHERN, INC.,
APPELLANT,
VS.
CHARLIE DAVIS, DIRECTOR OF THE
ARKANSAS TOBACCO CONTROL
BOARD , A N D THE ARKANSAS
TOBACCO CONTROL BOARD,
APPELLEES,
WARREN WHOLESALE CO., INC.,
TOM FITTS TOBACCO CO., INC.,
DO U GLAS CO M PAN IES, INC.,
GLIDEWELL DISTRIBUTING CO.,
INC., SOUTHERN WHOLESALE, INC.,
R IT C H IE G R O C ER CO ., IN C .,
NORTHW EST TOBACCO AND
CANDY CO., MERRITT WHOLESALE
DISTRIBUTOR,
INC.,
AND
WAREHOUSE DISTRIBUTING, INC.,
INTERVENORS,
1.
Opinion Delivered April
13, 2006
APPEAL FR O M THE PU LASKI
COUNTY CIRCUIT COURT,
NO. CV 2003-7958,
HON. JAMES MAXWELL MOODY,
JR., JUDGE,
AFFIRMED.
CONSTITUTIONAL LAW – UNFAIR CIGARETTE SALES ACT – AMENDED ACT WAS NOT
UNCONSTITUTIONAL.
– The amendments contained in Act 627 of 2003, which
amended the Unfair Cigarette Sales Act, did not change the supreme court’s
conclusion that the Unfair Cigarette Sales Act, on its face, afforded appellant due
process; the supreme court found that a rational basis existed for each of the
amendments and that none of the amendments caused the Act to be unconstitutional.
2.
CONSTITUTIONAL LAW – UNFAIR CIGARETTE SALES ACT – RATIONAL BASIS FOUND
FOR AMENDMENT TO THE PRESUMED COST OF DOING BUSINESS .
– The supreme
court found that there was a rational basis for the legislature’s amendment of the
presumed cost of doing business from an effective rate of two-and-three-fourth’s
percent to four percent, as the legislature could have concluded that market conditions
had changed since 1951, supporting an increase in the cost of doing business, or the
legislature could have reviewed the statutes of other states and determined that four
percent was a more appropriate amount; either was a rational basis supporting an
increase in the presumed cost.
3.
CONSTITUTIONAL
LAW
– ARK. CODE ANN. § 4-75-702(5)(B) (SUPP. 2005) –
CHANGES TO THE STATUTE DID NOT CAUSE IT TO BE UNCONSTITUTIONAL. – Where
the amendment to Ark. Code Ann. § 4-75-702(5)(B) (Supp. 2005), merely clarified
to which state agency and generally what type of proof a wholesaler must file with that
agency in order to make a below-cost sale of cigarettes, and where the amendment
changed the percentage from two-and-three-quarters percent to four percent, the
changes did not cause the provision to be unconstitutional.
4.
CONSTITUTIONAL
LAW
– ARK. CODE ANN. § 4-75-708(E) (SUPP . 2005) –
REBATE PROVISIONS WERE FOUND CONSTITUTIONAL.
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ANTI-
– The supreme court
05-990
concluded that because rebates on cigarettes made it more difficult to enforce and
administer the Unfair Cigarette Sales Act, the legislature may have decided to prohibit
them; thus, the supreme court concluded that the anti-rebate provisions found in Ark.
Code Ann. § 4-75-708(e) (Supp. 2005), were constitutional.
5.
APPEAL & ERROR – FAILURE TO CHALLENGE CONSTITUTIONALITY OF REGULATION
RENDERED ARGUMENT IRRELEVANT TO THE APPEAL. – Appellant’s argument that the
circuit court erred in failing to consider how the Unfair Cigarette Sales Act and
Regulation 15 together denied due process was irrelevant to the appeal, where
appellant did not challenge the constitutionality of Regulation 15, where the supreme
court had previously held that a regulation, however flawed, could not render a statute
under which it was promulgated unconstitutional, and where the supreme court did
not consider arguments made for the first time on appeal.
Appeal from Pulaski Circuit Court; James Maxwell Moody, Jr., Judge; affirmed.
Williams & Anderson PLC, by: Peter G. Kumpe, Jess Askew III, and Georgia Robinette, for
appellant.
Mike Beebe, Att’y Gen., by: C. Joseph Cordi, Jr., and Arnold M. Jochums, Ass’t Att’ys
Gen., for appellees.
Lax, Vaughan, Fortson, McKenzie & Rowe, P.A., by: Grant E. Fortson and Roger D.
Rowe, for appellee intervenors.
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JIM GUNTER , Justice.
McLane Southern, Inc. (“McLane”), a Mississippi corporation licensed to do business
in Arkansas, is a cigarette wholesaler. On July 17, 2003, McLane filed a complaint against the
Arkansas Tobacco Control Board (the “Board”), requesting the circuit court to declare the
Unfair Cigarette Sales Act, as amended by Act 627 of 2003 (the“Act”),1 unconstitutional under
the due-process clauses of the Arkansas and United States Constitutions. McLane also requested
the court to enjoin the Board from enforcing the Act against it during the pendency of the
lawsuit. The circuit court allowed a group of Arkansas cigarette wholesalers to intervene, and
a bench trial was held. The circuit court dismissed the complaint, holding that the Act was not
unconstitutional. We affirm.
The Act has been in existence since 1951. In 1998, we rejected a facial challenge to the
Act, holding that it did not violate due process in McLane Co., Inc. v. Weiss, 332 Ark. 284, 965
S.W.2d 109 (1998) (“McLane I”).2 The plaintiff in McLane I was McLane Company, Inc., of
which McLane is a wholly owned subsidiary. In 2003, the legislature amended certain
provisions of the Act. 3 It is principally the amended statutory provisions that McLane is
challenging in this case.
McLane’s first argument to the circuit court was that the changes to the definitions of
cost and the increased presumptive cost of doing business in the Act, coupled with the
1
Ark. Code. Ann. § 4-75-701 et seq. (Repl. 2001 and Supp. 2005).
2
See also McLane v. Davis, 353 Ark. 539, 110 S.W.3d 251 (2003) (“McLane II”)
(holding that a regulation under the Act was arbitrary, ultra vires, and thus unenforceable).
3
Act 627 of 2003.
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presumption of predatory intent arising from sales below cost, were irrational, causing the Act
to be an unconstitutional violation of article 2, section 8 of the Arkansas Constitution and the
Fourteenth Amendment of the United States Constitution. Second, McLane argued that the
presumption of predatory intent arising from the mere existence of a rebate unconstitutionally
extended beyond the reasonably permissible goals of the statutory scheme. The circuit court
rejected both of these claims, finding a rational basis for the amendments to the Act, and ruling
that the changes made by Act 627 did not render the amended provisions of the Act
unconstitutional. The circuit court also found that a rational basis existed for the anti-rebating
provision, and therefore it was not unconstitutional. McLane filed this appeal.
We review questions of statutory interpretation de novo. Landers v. Jameson, 355 Ark.
163, 132 S.W.3d 741 (2003). All statutes are presumed constitutional, and if it is possible to
construe a statute so as to pass constitutional muster, this court will do so. McLane I, 332 Ark.
At 297, 965 S.W.2d at 114. This statute falls within the General Assembly’s police powers to
regulate an industry of general public interest. See Ports Petroleum Co., Inc. v. Tucker, 323 Ark.
680, 687, 916 S.W.2d 749, 753 (1996). Therefore, we apply a rational-basis standard to review
its constitutionality. See Ports Petroleum Co., supra; McLane I, supra; Landers, supra. In applying
the rational-basis standard, we have stated that,
[i]t is not our role to discover the actual basis for the legislation. We merely
consider whether there is any rational basis which demonstrates the possibility
of a deliberate nexus with state objectives so that the legislation is not the product
of arbitrary and capricious government purposes. If we determine that any rational
basis exists, the statute will withstand constitutional challenge.
Landers, 355 Ark. at 176, 132 S.W.2d at 749-50 (quoting Jegley v. Picado, 349 Ark. 600, 634,
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80 S.W.3d 332, 351 (2002) (emphasis in original)).
We turn to McLane’s first argument. McLane argues that the circuit court erred in
holding that the presumption of predatory intent arising from a below-cost sale is constitutional
because the definitions of cost in the Act are not a fair prediction of actual cost. Specifically,
McLane claims that the 2003 amendments to the cost definitions are arbitrary, capricious, and
unrelated to a wholesaler’s true cost.
The Act prohibits a wholesaler “with intent to injure competitors or destroy or
substantially lessen competition” to sell cigarettes “at less than cost to the wholesaler[.]” Ark.
Code Ann. § 4-75-708(a) (Supp. 2005). A wholesaler’s sale at less than cost constitutes prima
facie evidence of predatory intent. Ark. Code Ann. § 4-75-708(e) (Supp. 2005). The cost to
the wholesaler is the “basic cost of cigarettes” plus the “cost of doing business.” Ark. Code
Ann. § 4-75-702(5)(A) (Supp. 2005).
We note that we have already determined in McLane I that the presumption of
predatory intent on the basis of a wholesaler’s sale below cost under the Act before the
amendment was not a violation of the constitution. We stated that under the “rational
connection test,” there must be a rational connection between the fact proved – in this case,
a below-cost sale – and the fact presumed – that is, predatory intent. Id. at 297, 965 S.W.2d
at 114. We concluded in McLane I that “the statutory scheme under the Unfair Cigarette Sales
Act provides for the rational connection between the presumed cost-of-doing business and
minimizing-price amounts in the Act . . . and the presumed fact of predatory intent provided.”
Id. Therefore, we entertain McLane’s argument only with regard to the changes made to the
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Act by Act 627 of 2003. The question is, considering those changes, is there still a rational
connection between a below-cost sale and predatory intent.
Act 627 of 2003 altered the cost to the wholesaler in two ways. First, it changed the
definition of “basic cost of cigarettes” by using gross-invoice cost, instead of invoice cost, and
excluding a deduction for trade discounts received by the wholesaler from the manufacturers.
Second, it increased the presumed “cost of doing business” from two percent (2%) plus cartage,
presumed to be three-fourths of one percent (.75%), for a total of two and three-fourths
percent (2.75%) to four percent (4%) of the basic cost of the cigarettes to the wholesaler. See
Ark. Code Ann. § 4-75-702(1) and (5)(B) (Supp. 2005).
McLane argues that these two changes make the statutory presumption of predatory
intent arising from below-cost sales under Ark. Code Ann. § 4-75-708(e) arbitrary and
capricious and therefore unconstitutional. Finally, McLane claims that our decision in McLane
I upheld the constitutionality of this scheme in large measure because of the exceptions to the
rule allowing the wholesaler the right to establish a lower or higher minimum price. Now,
McLane argues, the Act requires the wholesaler to file with the Board and prove its cost of
doing business before it sells its product below the statutory floor of 4%. McLane claims that this
change, in addition to the increased presumptive cost of doing business, eliminates the
protections we determined were significant in McLane I.
First, we set forth our conclusions in McLane I supporting our finding that there was a
rational connection between a below-cost sale and predatory intent.
The Act does not make all below-cost sales of cigarettes unlawful, but instead
exempts (1) isolated transactions not made in the usual course of business, (2)
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clearance sales for discontinued items, (3) sales of imperfect or damaged items,
(4) sales related to the liquidation of a business, or (5) sales made by a fiduciary
acting under the order or direction of a court. See § 4-75-703(1)-(5). In
addition, § 4-75-704 exempts sales below cost made to meet a competitor's
prices. We believe the Intervenors are arguably correct in stating that, once the
foregoing exempted sales are removed from consideration, it is rational to
conclude that it is more likely than not that other below-cost sales are made for
improper purposes.
Id. at 297, 965 S.W.2d at 114. Act 627 of 2003 did not change any of these findings. In finding
that there were other reasons supporting the Act’s presumed-minimum-price amounts in
McLane I, we found it significant that a wholesaler “has a right under the Act . . . to submit to
the Director a request to charge a lesser price[.]” Id. We noted that McLane had submitted
such a request and obtained approval to charge less. We also recognized that the approval had
been challenged and enjoined, but, in spite of this, found that the Act, on its face, afforded due
process and was constitutional. Id.
The amendments to the Act by Act 627 do not change our conclusion that the Act, on
its face, affords McLane due process. We find that a rational basis exists for each of the
amendments, and that none of the amendments cause the Act to be unconstitutional. With
regard to the exclusion of trade discounts from the definition of “basic cost of cigarettes,” the
emergency clause of Act 627 states that “confusion has arisen as to the proper application of
the Unfair Cigarette Sales Act in light of certain promotional activities of cigarette
manufacturers . . . .” The legislature could have determined that the exclusion of trade
discounts from the definition of the basic cost of cigarettes might promote a more efficient
administration of the Act. This reason provides a rational basis. The party challenging
legislation has the burden of proving that the act is not rationally related to achieving any
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legitimate objective of state government under any reasonably conceivable state of facts.
Arkansas Hosp. Ass’n v. Ark. State Bd. of Pharmacy, 297 Ark. 454, 763 S.W.2d 73 (1989).
McLane has failed to do this.
We also find that there is a rational basis for the legislature’s amendment of the
presumed cost of doing business from an effective rate of two-and-three-fourth’s percent
(2.75%) to four percent (4%). The presumed cost of doing business in the Act has not changed
since 1951, the year the Unfair Cigarette Sales Act was enacted. The legislature could have
concluded that market conditions have changed since 1951, supporting an increase in the cost
of doing business. The legislature may have reviewed the statutes of other states and
determined that four percent (4%) was a more appropriate amount. See, e.g., Ind. Code Ann.
§ 24-3-2-2 (4.5% including cartage); Pa. Stat. Ann. tit. 72 § 202-A (4%); Mont. Code Ann.
§ 16-10-103 (5.75% including cartage); Neb. Rev. Stat. § 59-1505 (4.75% including cartage);
S.D. Codified Laws § 37-10-10 (5.5% including cartage). Either is a rational basis supporting
an increase in the presumed cost.
Finally, we address McLane’s argument that the new Act requires the wholesaler to file
with the Board to prove that its cost of doing business is lower than 4% before selling below
the statutory floor. Specifically, Ark. Code Ann. § 4-75-702(5)(B) states that
[i]n the absence of the filing with the board of proof satisfactory to the board of a lesser
or higher cost of doing business by the wholesale dealer making the sale, the cost
of doing business by the wholesale dealer shall be presumed to be four percent
(4%) of the basic cost of the cigarettes to the wholesale dealer . . . .
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Id. (emphasis added). In addition to changing the percentage from two-and-three-quarters
percent (2.75%) to four percent (4%), the italicized portions were added by Act 627. This
amendment merely clarifies where and generally what type of proof a wholesaler must file in
order to make a below-cost sale. These changes do not cause this provision to be
unconstitutional.
First, proof was required before the 2003 amendment. Before 2003, the proof was
reviewed by the Department of Finance and Administration, rather than by the Board. The
legislature could have determined that the Board was more knowledgeable about the matters
concerned than DFA, and therefore a more appropriate avenue for review. Second, the new
language in the statute simply clarifies that the proof, already required by the Act before the
amendment, should be filed with the Board. It does not change what we stated in McLane I
that “a wholesaler, who had a desire to charge a lesser price for cigarettes, has a right under the
Act and Regulation to submit to the Director a request to charge a lesser price . . . .” McLane
I, 332 Ark. at 298, 965 S.W.2d at 114. The legislature may have determined that such proof
should be filed before any sales to provide for more efficient regulation. These are rational bases
for the amendment. Finally, these changes do not change the basis of our holding in McLane
I that the Act is constitutional.
McLane’s second point on appeal is that the circuit court erred in finding the anti-rebate
provisions of the Act found in Ark. Code Ann. § 4-75-708(e) constitutional. McLane argues
that they are unconstitutional because there is no rational connection between the giving of
a rebate and the presumption of predatory intent. Appellees argue that this court’s reasoning
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in McLane I finding that the presumption of predatory intent based on below-cost sales was
constitutional supports the constitutionality of the presumption of predatory intent arising from
rebates. We agree.
First, the exceptions found in Ark. Code Ann. § 4-75-703 apply to rebates as well as
to sales below cost. Second, wholesalers may sell below the statutory minimum by offering
proof that their cost of doing business is less than the statutory minimum. Finally, there is a
rational basis to support the legislature’s prohibition against rebates. Testimony at trial
established that rebates are often secret, which makes it difficult for the Board to determine
whether rebates have been given, causing sales to be below cost. Because rebates make it more
difficult to enforce and administer the Act, the legislature may have decided to prohibit them.
Thus, we conclude that the anti-rebate provisions found in Ark. Code Ann. § 4-75-708(e) are
constitutional.
Finally, McLane argues that the circuit court erred in failing to consider how the Act
and Regulation 15 together deny due process. Appellees argue that McLane made only a facial
challenge to the statute below and specifically did not challenge Regulation 15. Indeed, in his
opening argument to the circuit court, McLane’s attorney stated: “Regulation 15 is not being
challenged in this proceeding. We’re focusing on the statute.” Comments throughout the
hearing confirmed this position. McLane admitted that it was challenging this regulation in
another lawsuit. As McLane is not challenging the constitutionality of the regulation, it is
irrelevant to this appeal. This court has held that a regulation, however flawed, cannot render
a statute under which it is promulgated unconstitutional. See, e.g., Yamaha Motor Corp. v.
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Richard’s Yamaha, 344 Ark. 44, 38 S.W.3d 356 (2001). Also, it is well settled that we do not
consider arguments made for the first time on appeal. Castaneda v. Progressive Classic Ins. Co.,
357 Ark. 345, 353, 166 S.W.3d 556, 562 (2004).
For the foregoing reasons, we find that the Unfair Cigarette Sales Act, as amended by
Act 627 of 2003, is not unconstitutional under the due-process clauses of the Arkansas and
United States Constitutions. We therefore affirm the decision of the circuit court.
Affirmed.
C ORBIN , J., not participating.
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