Opinion
Nos. 557006 557007.
1946-05-6
SERRER v. CIGARETTE SERVICE CO. SAME v. PRICE.
Jones, Day, Cockley & Reavis, of Cleveland (Earl W. LeFever, of Cleveland, of counsel), for plaintiff. Halle, Haber, Berick & McNulty, of Cleveland (Morris Berick, of Cleveland, of counsel), for defendants.
Suits by Walter G. Serrer, an individual doing business as H. H. Serrer & Son, against the Cigarette Service Company, an Ohio corporation, and against Philip F. Price, etc., to restrain the defendants from selling cigarettes at less than cost to the wholesaler. The cases were consolidated and tried together.
Decree dismissing petitions.
Judgment affirmed in 74 N.E.2d 853.Jones, Day, Cockley & Reavis, of Cleveland (Earl W. LeFever, of Cleveland, of counsel), for plaintiff. Halle, Haber, Berick & McNulty, of Cleveland (Morris Berick, of Cleveland, of counsel), for defendants.
CHARLES J. McNAMEE, Judge.
The above styled suits for injunctive relief are brought under favor of the Unfair Cigarette Sales Act (6402-10, G.C., to 6402-21 G.C., both inclusive). They involve substantially the same parties and identical issues and were consolidated and tried together.
Plaintiff seeks to restrain the defendants, as wholesalers, from selling cigarettes at less than ‘cost to the wholesaler’ as defined by 6402-11 G.C., with intent to injure competitors, destroy substantially, or lessen competition.
Plaintiff and defendants are competitive wholesalers of multiple products including cigarettes. The principal place of business of the defendant The Cigarette Service Company is located at 13200 Woodworth Road, East Cleveland, Ohio. This defendant also does business under the fictitious, or trade, name of Archwood Tobacco Company at 3754 West 25th Street, Cleveland, Ohio. Defendant Philip Price is president and treasurer of The Cigarette Service Company, and excepting the shares necessary to qualify others as directors of the corporation, is the owner of all of its capital stock. Defendant Price as an individual also does business under the trade name of the Moreland Tobacco Company at 11514 Buckeye Road, Cleveland, Ohio.
Although defendants deliver cigarettes and extend credit to some of their customers, they are primarily cash and carry wholesalers; that is, retail customer procure cigarettes from defendants at their respective places of business and pay cash therefor at the time purchases are made. Plaintiff does some cash and carry business but his business consists principally of sales obtained through the solicitation of salesmen. Plaintiff also has a delivery service and extends credit to most of his retail customers.
Six popular brands of cigarettes are sold by the manufacturers to wholesalers within the state of Ohio at a list price of $6.81 per thousand, less a 10% trade discount and a further discount of 2% for cash upon payment within ten days. The cigarettes are packed in cartons containing 200 cigarettes consisting of 10 packages of 20 cigarettes each. Wholesalers are required by law to affix excise tax stamps to all packages of cigarettes sold by them at a cost of 95 cents per thousand, or 19 cents per carton of cigarettes.
It is disclosed by the evidence that all wholesalers in Cuyahoga County, except defendants and The Weideman Company, sell cigarettes to retailers at the price of $1.45 per carton. The Weideman Company charges $1.47 per carton, and since November 1, 1945, defendants have advertised, offered for sale and sold cigarettes on a cash and carry basis at a price of $1.42 per carton. They also sold and continues to sell cigarettes delivered at a price of $1.43 per carton. On three different occasions since November 1, 1945, defendants have mailed cards to retail dealers in Cuyahoga County advertising popular brands of cigarettes at $1.42 per carton.
Plaintiff alleges that defendants have advertised, offered to sell and sold cigarettes at less than ‘cost to the wholesaler’ with intent to injure competitors, destroy substantially and lessen competition, and further alleges that he has been injured by such advertising and selling of cigarettes below the statutory cost.
Defendants deny these allegations, and in their separate answers attack the constitutionality of the Unfair Cigarette Sales Act.
The issues are aptly stated by plaintiff in his brief as follows:
‘1. Did the defendants advertise, offer to sell or sell any cigarettes at wholesale at less than ‘cost to the wholesaler’ within the meaning of the quoted words as determined by G.C. Sec. 6402-11(c) of the Act?
‘2. If the above question is answered affirmatively, then did the defendants so do with intent to injure competitors, destroy substantially, or lessen, competition?
‘3. Has plaintiff been injured by such acts of defendants?
‘4. Is any portion of the Act which is necessary to support an order for the requested injunctive relief against defendants unconstitutional in any of the respects alleged in defendants' answers?’
Section 6402-12, G.C., reads in part:
‘(a) It shall be unlawful for * * * any wholesaler, with intent to injure competitors, destroy substantially or lessen competition,to advertise, offer to sell or sell at wholesale cigarettes at less than cost to the wholesaler and such * * * wholesaler shall be guilty of a misdemeanor and punishable, by a fine of not more than five hundred dollars.’
‘Cost to the wholesaler’ is defined by Section 6402-11(c), G.C., as follows:
‘(c) The term ‘cost to the wholesaler’ shall mean the invoice cost of the cigarettes to the wholesaler, or the replacement cost of the cigarettes to the wholesaler within thirty days prior to the date of sale, in the quantity last purchased, whichever is lower; less all trade discounts except customary discounts for cash; to which shall be added a wholesaler's mark-up to cover in part the cost of doing busines, which wholesaler's mark-up, in the absence of proof of a lesser cost of doing business by the said wholesaler as evidenced by the standards and methods of accounting regularly employed by him in his allocation of overhead costs and expenses, paid or incurred, including without limitation, labor, salaries of executives and officers, rent, depreciation, selling costs, maintenance of equipment, delivery, delivery costs, all types of licenses, taxes, insurance and advertising, shall be two per centum of said invoice cost of the cigarettes to the wholesaler, or of the replacement cost of the cigarettes to the wholesaler within thirty days prior to the date of sale in the quantity last purchased, whichever is lower, less all trade discounts except customary discounts for cash.'
Except in those cases where a wholesaler's cost of doing business is less than the specified 2% mark up, the statutory formula for determining cost to the wholesaler is-invoice price, less trade discount, plus 2% mark up. Under the evidence in this case statutory cost per carton of cigarettes is $1.4403 computed as follows:
$6.81 invoice cost per 1000 cigarettes, or 5 cartons
$6.81 minus 10% trade discount equals $6.129
$6.129 plus 2% mark up equals $6.25158 $6.25158 plus .95¢ tax stamps equals $7.20158
$7.20158 divided by 5 cartons equals $1.4403 per carton
Defendants made no attempt to prove that their cost of doing business is less than the 2% statutory mark up. Nor did they submit any evidence from which their correct percentage of cost above invoice price might be determined. Defendants merely argue against the correctness of the computations of their costs whch were submitted by plaintiff. Not only did plaintiff submit an audit of his own books disclosing his per carton cost of doing business, but he produced facts and figures from the books and records of defendants covering most of the principal items of the latters' selling costs as well. This evidence established with satisfactory accuracy that defendants' cost of doing business is substantially in excess of the statutory 2%. Indeed the analyses of defendants' costs which were made by plaintiff demonstrate that the actual cost of cigarettes sold by defendants after deducting a 2% cash discount on all purchases is equal to if not slightly in excess of the sale price of $1.42 per carton. Upon this state of the record it is indisputable that defendants' cash and carry price of $1.42 per carton and their delivered price of $1.43 per carton are less than ‘cost to the wholesaler’ as defined by 6402-11(c), G.C.
Section 6402-12(b), G.C. reads:
‘Evidence of advertisement, offering to sell or sale of cigarettes by any * * * wholesaler at less than cost to him, shall be prima facie evidence of intent to injure competitors, destroy substantially or lessen competition.’
Under the evidence in this case it is unnecessary to apply the foregoing statutory rule to determine whether defendants were motivated by the intent denounced by the statute in selling cigarettes below ‘cost to wholesaler.’ Adequate proof of such intent appears independently of the statutory permissible inference.
Intent is a subjective fact seldom susceptible of proof by direct evidence. Ordinarily it must be ascertained by a consideration of the objective facts and the inferences fairly to be drawn therefrom. In this case clear evidence of defendants' unlawfulintent is found in the express declarations of defendant Philip Price, who is also the controlling officer and stockholder of the Cigarette Service Company. In November, 1945, J. G. Ollendorf, Secretary of the Ohio State Association of Tobacco Distributors, called upon Price and endeavored ‘in the name of fair competition’ to persuade the latter to discontinue the policy of advertising cigarettes at a price of $1.42 per carton. As testified by Ollendorf, Price expressed himself on this subject as follows:
‘Q. What was said? A. Mr. Price informed me that he was determined that he was going to run his business as he saw fit, that he intended to continue this price until the end of the year. And then he was very much exercised, however
‘Q. Just what was said? A. Sir?
‘Q. Just what was said. A. He said that he was exercised because Mr. Serrer had been selling merchandise to a, what he described as a pup who had now grown up to be a dog, but he was not going to permit the dog to bite him. And I asked him what he meant, and he advised me that Mr. Serrer had disposed of cigarette vending machines to a party by the name of Golden. He had previously asked Mr. Price for a purchase price on these machines, but he didn't sell them to Mr. Price, he sold them to Mr. Golden, and now Mr. Golden had purchased a jobbing place, a wholesale distributing place, on Woodland Avenue, and he wasn't going to permit him to become a real competitor of his.’
Price did not deny making the statements attributed to him, but sought shelter from their damaging effect in his asserted failure of memory. Although Ollendorf also testified that members of Price's family were present at the time this conversation took place, they did not appear as witnesses.
No interpretation of the quoted testimony is necessary to demonstrate defendant's intent to injure a specifically designated competitor and to lessen competition. Defendants assert that their purpose in cutting the price to $1.42 per carton was to retain their own customers who requested a price reduction to enable them to meet retail chain store competition. Defendants likewise disclaim any intent to infringe upon the business of their competitors but established facts demonstrate the contrary to be true. Defendants' action in advertising the reduced price by mailing cards to retail dealers whose names were selected indiscriminately from the classified section of the telephone book spells out a definite purpose to extend sales efforts beyond the limited objective of retaining old customers. By this procedure defendants conducted a canvass of the wider area of the general retail trade which was designed manifestly to procure business from the customers of other wholesalers. Necessarily there was implicit in this policy the intent to injure competitors.
In Dikeou v. Food Distributors Ass'n, 1940, 107 Colo. 38, 108 P.2d 529, at pages 533, 534, the court said:
‘* * * Defendants' intent also is evidenced by their actions in calling on firms in the retail trade at the time the reduction was made, which they had not previously, or for some time prior thereto, called upon, and which were not their regular customers, and distributing to them literature calling attention to this reduction.’
Reference has been made hereinbefore to the fact that the price of $1.42 per carton is equal to if not less than defendant's actual selling cost determined by deducting the statutory non allowable item of 2% cash discount. Plaintiff's computations in this regard disclose that defendant's actual cost exceeds the sale price of $1.42 by a trifling fraction of one cent per carton. Although there is excluded from plaintiff's computation several items of defendants' overhead expense, his determination of defendants' actual cost is based in part upon assumptions as to the proportion of defendants' total overhead properly allocable to sale of cigarettes. For this reason it will be addumed that defendants' actual cost is no greater than the sale price of $1.42 per carton. Upon this hypothesis defendants' cash and carry sales at $1.42 per carton yield no profit and are more than 2 cents below ‘cost to the wholesaler,’ as defined by statute.
Merchants engage in business for the primary purpose of making profits. Unless necessitous circumstances require it, they do not knowingly forego them. It does not appear that defendants were pressed by importunate creditors nor compelled by other circumstances to embark upon a policy of non profit sales. The sale of commodities at actual cost, or less, would not under the ordinary canons of proof, alone, be sufficient to establish guilty intent. But defendants' sales at actual cost, considered in connection with Ollendorf's testimony and defendants' program of advertising the reduced price to the general trade, is not without significance on this issue of intent. The Court is of the opinion and holds that the weight of the evidence establishes defendants' wrongful intent.
Section 6402-20, General Code, reads:
‘(a) Any person injured by any violation of this act, * * * may maintain an action in any court of equitable jurisdiction to prevent, restrain or enjoin such violation. If in such action a violation of this act shall be established, the court shall enjoin and restrain or otherwise prohibit such violation and in addition thereto shall assess in favor of the plaintiff and against the defendant the costs of the suit. In such action it shall not be necessary that actual damages to the plaintiff be alleged or proved, but where alleged and proved the plaintiff in said action, in addition to such injunctive relief and costs of suit, shall be entitled to recover from the defendant the amount of actual damages sustained by the plaintiff.’
While the evidence discloses no serious damage to plaintiff as a consequence of defendants' conduct in selling cigarettes below ‘cost to the wholesaler,’ proof of some injury to plaintiff is established. It appears that after defendants mailed the cards advertising the reduced price of cigarettes, salesmen of the plaintiff were required to intensify their sales efforts and spend longer periods of time with each customer. As a result these salesmen called on a lesser number of customers each day. It further appears that some of plaintiff's customers reduced the volume of their purchases of cigarettes and that two of plaintiff's customers ceased buying cigarettes from him after being advised of defendants' reduced price. This is sufficient to qualify plaintiff as a suitor under the statute. Surely the Legislature did not contemplate that one injuriously affected by sales below costs must await serious and substantial damage before seeking redress. If it be assumed that the Unfair Cigarette Sales Act is constitutional in all respects the Court would be required to grant the requested injunctive relief.
Before proceeding to an examination of the several objections to the constitutionality of the Act, it may be remarked that defendants raise no question as to the basic purposes thereof being within the police power of the State. The overwhelming weight of authority from other jurisdictions upholds the power of the State to enact laws prohibiting the sales of commodities below cost.
In Wholesale Tobacco Dealers Bureau v. National Candy & Tobacco Co., 1938, 11 Cal.2d 634, 82 P.2d 3, 9, 4, 118 A.L.R. 486, wherein the constitutionality of the California act was challenged, the court said that this purpose ‘* * * is well within the state's police power cannot be seriously doubted. It has now become firmly established that the police power of the state extends not only to the preservation of the public health, safety and morals, but also extends to the preservation and promotion of the public welfare. In recent years the state, in promoting and advancing the general welfare of its citizens, has frequently and properly used this power to promote the general prosperity of the state by the regulation of economic conditions. This apparent extension of the police power is in fact no extension at all. The police power has not expanded. Its proper exercise has always been and still is confined to regulation in the public welfare, and has always been and still is subject to the standard of reasonableness in its relation to that interest. However, changed social, political and economic conditions have enlarged the filed of conduct which may properly be subjected to regulation in order that the general welfare may be adequately protected. The proper application of the power cannot be measured by past precedents-the test is, of course, present day conditions. These principles have frequently been enunciated by this court and by the Supreme Court of the United States. * * *’
Again, on page 646 of 11 Cal.2d, on page 10 of 82 P.2d, on page 494 of the opinion as reported in 118 A.L.R., the court made the following statement:
‘With these cases, and many others that could be cited, in mind, it is obvious that the object of the present statute is within the state's police power. That the prevention of monopolies and the fostering of free, open and fair competition and the prohibition of unfair trade practices is in the public welfare is obvious, and requires no further citation of authority. * * *’
Similar expressions are to be found in many other cases upholding this type of legislation. See People v. Payless Drug Co., 25 Cal.2d 108, 153 P.2d 9;State v. Sears, 4 Wash.2d 200, 103 P.2d 337;Rust v. Griggs, 172 Tenn. 565, 113 S.W.2d 733;State v. Langley, 53 Wyo. 332, 84 P.2d 767;Associated Merchants, etc., v. Ormesher, 107 Mont. 530, 86 P.2d 1031.
By 1940 twenty-five states had enacted laws prohibiting sale of commodities below cost. Great impetus to state action in this regard was given by the enactment by Congress of the Robinson-Patman Act in 1936, 15 U.S.C.A. §§ 13, 13a, 13b, 21a. At an earlier day in our history such laws might have been frowned upon by the courts. In recent years, however, they have been accepted as a proper attempt to regulate intrastate commerce in the interest of fair competition and to prevent monopolies. Arguments as to the wisdom of the economic policy expressed therein are not considered by the courts. Classical economists may inveigh against this so-called revival of the polity of the ancient regime. Others may advocate the further extension of regulation as necessary to the maintenance of our complex economy, but all such arguments must be addressed to the law making bodies; that will not be heard in the forum of the courts. The judicial viewpoint in this regard is well expressed in Old Dearborn Distilling Co. v. Seagram-Distillers Corp., 299 U.S. 183, 57 S.Ct. 139, 145, 81 L.Ed. 109, 106 A.L.R. 1476, as follows:
‘There is a great body of fact and opinion tending to show that price cutting by retail dealers is not only injurious to the good will and business of the producer and distributor of identified goods, but injurious to the general public as well. The evidence to that effect is voluminous; but it would serve no useful purpose to review the evidence or to enlarge further upon the subject. True, there is evidence, opinion and argument to the contrary; but it does not concern us to determine where the weight lies. We need say no more than that the question may be regarded as fairly open to differences of opinion. The legislation here in question proceeds upon the former and not the latter view; and the legislative determination in that respect, in the circumstances here disclosed, is conclusive so far as this court is concerned. Where the question of what the facts established is a fairly-debatable one, we accept and carry into effect the opinion of the Legislature.’
Defendants claim that the Act offends against the due process clause because it contains no preamble or other statement of purposes and objectives. This contention merits little comment. While such a statement of reasons is to be desired and frequently is an aid to judicial interpretation and determination it is not essential. The presence of a purpose clause cannot render constitutional a law which is invalid, nor does its absence invalidate a law otherwise in harmony with constitutional requirements.
There are no issues in this case involving the alleged vague and uncertain terms complained of by defendants, such as ‘methods of accounting regularly employed by him in his allocation of overhead costs,’ or the term ‘competitor’ as used in the Act. Nor is the language ‘the normal, customary and prevailing terms on discounts in connection with sales of a similar nature’ as found in the Act related to any issue. The same may be said of the phrase ‘outside the ordinary channel of trade’ and the term ‘established cost survey for the trade area.’
Defendants' contention that 6402-12(b), G.C., prescribes an unconstitutional rule of evidence cannot be considered. For the reasons hereinbefore indicated this rule was not resorted to in determining defendants' intent. The contention in this regard therefore is not predicated upon an issue in this case. The Court cannot decide constitutional questions upon hypothetical issues. Wholesale Tobacco Dealers Bureau v. National Candy & Tobacco Co., supra.
Defendants claim that the limitation of the Unfair Cigarette Sales Act to the single commodity of cigarettes violates the equal protection and uniformity requirement of the Constitution. Where the Legislature concludes that competition in a particular business requires regulation in the public interest, it may enact laws to prevent threatened evils. The courts cannot set aside such legislation merely because of its limited application to one business.
In 118 A.L.R. 506, 507, the following appears:
‘Some states have prohibited sales below cost in a particular business. See, for instance, The Connecticut Retail Drug Control Act, Louisiana Retail Drug Control Act * * * Michigan Fair Trade Act for Bakery and Petroleum Industries, * * *.’
In Miami Laundry Co. v. Florida Dry Cleaning & Laundry Board, 134 Fla. 1, 183 So. 759, 119 A.L.R. 956, an act regulating the dry cleaning and laundry business was upheld. The objection on this ground is not well taken.
Defendants' further claims that the Act discriminates against licensed vendors and that it does not operate uniformly throughout the state are not supported by reason or authority and must be rejected.
In asserting that the Act discriminates in favor of Service, Credit and Delivery Wholesalers as against Cash and Carry Wholesalers, defendants present a question that merits close examination. A consideration of this contention also requires an examination of the claims of discrimination between trade and cash discounts. Both of these factors are embraced within the statutory definition of ‘cost to wholesaler.’ Concededly a Cash and Carry Wholesaler's cost of doing business is less than that of a Service Wholesaler. This differential in cost enables a Cash and Carry Wholesaler, in the absence of statutory regulation, to undersell a Service Wholesaler who employs salesmen, delivers merchandise and extends credit. Where commodities of standard quality, such as leading brands of cigarettes, are the subject of competition a service wholesaler relies upon the appeal of service for the procurement of business. His competitive advantage in this regard is equalized by a cash and carry wholesaler's ability to sell at a lesser price. A regulatory statute which operates unfairly to disturb this balance is unreasonable and discriminatory.
The Unfair Cigarette Sales Act prohibits sales of cigarettes at less than ‘cost to the wholesaler’ and prescribes a method of fixing the wholesaler's minimum sales price. The statutory formula for determining ‘cost to the wholesaler’ provides for no upward adjustment of the minimum sales price where the cost of doing business exceeds the prescribed mark up. A service wholesaler whose overhead expense greatly exceeds the statutory mark up nevertheless may sell at the same minimum price as a wholesaler whose cost is no greater than 2%. A cash and carry wholesaler who achieves the difficult if not unattainable result of operating at an overhead expense of less than 2% may lower his minimum price. In such event a higher cost wholesaler may also reduce his minimum price to the same figure. Section 6402-15, G.C., provides in part:
‘Any * * * wholesaler, may advertise, offer to sell or sell cigarettes at a price made in good faith to meet the prices of a competitor who is selling the same article at cost to him as a wholesaler * * *.’
Thus, higher cost service wholesalers are placed on a parity with low cost cash and carry wholesalers in the important matter of a legal minimum sales price. The natural competitive advantage resulting from lower prices, based upon lower costs, is destroyed.
The specified mark up of 2% is not a true presumptive cost of doing business. By the terms of the statute the mark up is presumptively only a part of the wholesaler's actual cost. The pertinent provisions of 6402-11, G.C., reads:
‘* * * to which shall be added a wholesaler's mark-up to cover in part the cost of doing business, which wholesaler's mark-up, in the absence of proof of a lesser cost of doing business by the said wholesaler as evidenced by the standards and methods of accounting regularly employed by him * * * shall be two per centum of said invoice cost of the cigarettes to the wholesaler * * * less all trade discounts except customary discounts for cash.’ (Italics supplied.)
The unreasonableness of the foregoing formula appears in bold relief when it is considered that although the specified mark up is inadequate to cover actual cost, nevertheless it constitutes the maximum mark up required by the statute. Regardless of how much higher a wholesaler's actual cost may be, he is not required to increase his mark up to correpond thereto. This maximum mark up of 2% is disproportionately lower than actual maximum costs of Service Wholesalers and it bears no true relation to the average cost of all wholesalers. This is exemplified by the evidence and other data submitted to the Court.
Plaintiff's cost of doing business as a service wholesaler is .044 cents per carton or 3.6% above the cost of goods purchased. According to the United States Census of Business (1940) Wholesale Trade 1939, Vol. 2, wholesale tobacco dealers in the Cleveland district reported overall costs of doing business as 3.8%. Such of these dealers as itemized their costs reported a total cost of 4.1%. On the other hand, there is no marked disparity between the 2% mark up and the average costs of cash and carry dealers. Plaintiff's costs on a cash and carry basis determined by eliminating sales and delivery costs from the above overall figure is a little less than 2.2%. By deducting the same items from the overall costs of the wholesalers who reported itemized costs to the United States Census Bureau, the cost of doing business by these wholesalers on a cash and carry basis equals approximately 2.3%. As nearly as they may be determined defendants' costs as cash and carry dealers are about 2.4%. Thus on the basis of available information service wholesalers' average costs are almost double the prescribed mark up while the average costs of cash and carry Dealers are only slightly above the designated 2%.
It is implied in the statutory formula for determining costs that the prescribed 2% mark up is prima facie evidence of the minimum cost of doing business. This is the effect of the clause ‘in the absence of proof of a lesser cost of doing business.’ The statutory definition of cost, by implication, also presumes conclusively that the 2% mark up is the maximum cost of doing business. This is so, because of the absence of any provision for increasing the mark up upon proof of a higher cost of doing business. In this latter respect the statutory definition of cost being at substantial variance with the known or ascertainable facts is unreasonable and arbitrary. In view of the slender margin of profit in the wholesale cigarette business a slight difference in the per carton selling costs is important. This differential has a material relationship to the lower per carton price at which Cash and Carry Wholesalers fairly and profitably can sell cigarettes.
The prescribed 2% mark up represents a standard of economical operation attainable only by cash and carry dealers. The necessary additional costs of service wholesalers renders it impossible for them to do business on a cost basis commensurate with the statutory mark up. It is interesting to note that in 1938 when all costs presumably were lower it was stipulated in Wholesale Tobacco Dealers Bureau v. National Candy & Tobacco Co., supra [11 Cal.2d 634, 82 P.2d 7], that ‘the lowest possible cost of doing business is 3 per cent above net costs.’ The differentials in cost of the two classes of wholesalers in question are ignored by the statute with the result that instead of minimum prices fairly based upon different costs the same minimum price is available to cash and carry and service wholesalers alike.
In Florida Dry Cleaning & Laundry Board v. Everglades Laundry, 137 Fla. 290, 188 So. 380, 382, the Supreme Court of Florida had before it among other issues the question of the reasonableness of prices fixed by an administrative board charged with the duty of enforcing a statute regulatinglaundries. It was urged in that case that prices fixed by the board were favorable to laundries engaged in the delivery business but detrimental to those engaged in a cash and carry business. In passing upon this question the court said:
‘There is a distinct difference between delivery and the cash and carry aspect of the laundry and dry cleaning business. The manner and cost of administration in each is materially different and those who prefer to patronize the cash and carry business are entitled to the advantage of this difference. In fixing a schedule of prices, it is the duty of the Board in the interest of the public to take into consideration these elements and establish a differential in charges between the two methods accordingly. If they fail in this, they may be required by the law as here quoted, to do so.’
If it be reasonable to require an administrative board to recognize the differences in cost between cash and carry and service laundries, it would seem that the same rule of reasonableness would require the Legislature in defining ‘cost to the wholesaler’ to take into consideration differences in cost between different classes of wholesalers.
In Great Atlantic & Pacific Tea Co. v. Ervin, D.C., 23 F.Supp. 70, 78, the court, in commenting upon price differentials based upon differences in costs, made the following statement:
‘Differentials in prices justified by the differences in selling costs at different stores have not heretofore been considered as iniquitous, wrongful, or unfair, nor as having any tendency to destroy competition or to foster monopoly. In fact such price differentials have been regarded as beneficial to the public and not harmful to any one, and, even though they may affect competition, they cannot be considered as the evil which the Legislature was seeking to stamp out. The effect upon competition of differences in prices honestly based on differences in selling costs is the normal and natural result of fair competition between merchants whose overhead expenses differ. This type of competition is to be encouraged in the public interest, rather than restrained.’
The Ohio statute discourages lower prices based upon lower costs and fosters unfair competition between high and low cost wholesalers.
Plaintiff cites and relies upon Fredricks v. Burnquist, 207 Minn. 590, 292 N.W. 420, wherein the court overruled the contention that the Minnesota statute failed properly to note the distinction between cash and carry establishments and those furnishing delivery and other services. In rejecting the claim that the statute was discriminatory in the respect indicated, the Minnesota court said:
‘Sufficient answer is furnished by the act itself in the exemption * * * of sales made by any merchant ‘in an endeavor made in good faith to meet the local prices of a competitor * * * in the same locality or trade area.’'
The Minnesota act in question defines costs as embracing the elements of actual outlay for goods and the expense of doing business. McElhone v. Geror, 207 Minn. 580, 292 N.W. 414, at page 418. In the Ohio act the prescribed mark up is not added to the actual outlay for goods. Cash discounts are excluded as deductible items from the costs of goods purchased and excepting cases where actual cost is less than 2%, the expense of doing business is not the factor which determines costs under the Ohio act. Consequently the provision in the act here under consideration that a wholesaler may reduce his prices to meet those of a competitor ‘who is selling the same article at cost to him as a wholesaler,’ affords no relief to a cash and carry wholesaler. Where a service wholesaler sells below statutory cost a cash and carry dealer may sell at the same reduced price but not at a lower price.
While the Legislature may have the power to regulate a business in the interest of fair competition, the means employed to accomplish this purpose must not be oppressive, unreasonable or discriminatory. The regulatory provisions of law must operate uniformly and fairly upon all those amenable thereto. The employment of artificial or arbitrary standards which ignore essential differences in the cost of doing business offend against the due process clause and deny the equal protection of the laws.
The Court is of the opinion, and therefore holds, that the provisions of the Unfair Cigarette Sales Act which prescribe a method of determining minimum sales prices that fail to recognize cost differentials between cash and carry wholesalers and service wholesalers are unreasonable and discriminatory.
Where a statute defining cost to the wholesaler provides that ‘in the absence of proof of a lesser cost of doing business' a mark up of 2% shall be added to invoice price less trade discounts, but contains no requirement that said mark up shall be increased upon proof of a higher cost than 2%, and the average costs of wholesalers are substantially in excess of the prescribed mark up such definition is discriminatory because it permits wholesalers whose costs exceed the specified mark up to establish minimum sales prices on a parity with those whose costs are no greater than 2%.
The comment on the statutory exclusion of cash discounts which follows is limited to a consideration of that provision as it appears in the section of the Unfair Cigarette Sales Act defining ‘cost to the wholesaler.’
There is a division of opinion amongst accountants whether cash discounts should be considered as earned income or treated as a deduction from cost. Plaintiff argues that it lies within the competence of the Legislature to resolve this dispute by adopting the policy of excluding cash discounts as an element of cost. Whether this policy is so unrelated to fact and experience as to preclude its acceptance by the law-making body need not be determined. It is urged that such a policy establishes a parity in the matter of determining costs between wholesalers who do not discount their bills and those who do; that the exclusion of a cash discount as a deductible item of cost fairly confines cost computations to those factors of overhead, selling and other expenses which truly represent the actual cost of operating a business. Conceding that these claims are not without merit when related to a statutory definition of cost, which requires that the actual cost of doing business be added to the invoice price less trade discounts, it does not follow that they are valid when applied to the statutory definition of cost here under consideration.
The Unfair Cigarette Sales Act expressly excepts cash discounts from the formula for determining cost, but this exclusion of cash discounts is in fact and effect no exclusion at all. The act prescribes a mark up of 2% to cover in part the cost of doing business; as hereinbefore noted, this mark up is inadequate to cover wholesalers' average costs, but it nevertheless governs minimum prices. Those wholesalers whose costs exceed 2% cannot sell at the minimum price without sustaining loss, unless they resort to the cash discount as a deduction from cost. To illustrate, plaintiff's selling cost, determined by adding 3.6% to the invoice price less trade discounts, is $1.459 per carton of cigarettes. The prevailing price in this district is $1.45 per carton. Statutory cost on the basis of a 2% mark up is $1.4403 per carton. Manifestly plaintiff cannot sell at either the current price or at or near the statutory cost without suffering loss unless he deducts the cash discount from his cost of doing business. Where this is done his cost of $1.459 is reduced to $1.435 per carton, which is below both current selling price and statutory cost.
Cash and carry dealers whose costs are slightly above 2% mark up are likewise forced to resort to the deduction of cash discounts in order to avoid loss at the available minimum sales price. Only those wholesalers, if any, whose costs are 2% or less can disregard the cash discounts and sell without loss at a minumum price equal to the statutory cost.
In those cases, if any, where wholesalers' costs are less than 2%, the actual cost of doing business is the factor that determines statutory cost and minimum prices. In all other cases the 2% mark up controls and in such cases the excluded item of cash discounts is an equally important factor, because wholesalers who discount their bills may deduct cash discounts from the cost of operation. Selling costs of wholesalers who fail to discount their bills necessarily are higher than costs of wholesalers who take cash discounts. The former of course cannot deduct cash discounts from operating costs.
These results would not follow under a definition of cost that prescribed a mark up commensurate with actual operating cost to be added to invoice price less trade discounts. Under such a formula, lower operating costs would warrant lower prices, and, conversely, higher operating costs would require higher minimum prices. Differentials in cost would be given effect and the item of cash discounts would be truly excluded as a deductible item from operating cost. Under such a cost formula each wholesaler's costs of operation would determine his legal minimum price. Economy of operation alone would justify lower minimum prices than competitors. Ability to operate with greater economy would determine the right to sell at lower prices. But under the definition of cost here considered where statutory cost is inflexibly fixed at the same amount for all wholesalers whose costs exceed 2%, ability to sell at the available minimum price is determined by the deduction of cash discounts. While the statutory definition of cost to the wholesaler is not effective to preclude the deduction of cash discounts from operating costs by high cost wholesalers to permit them to meet the available minimum price, it does prohibit lower cost wholesalers from reducing the minimum price by deducting cash discounts from the cost of operation.
The Court is of the opinion and therefore holds that the statutory provision excluding cash discounts as the deductible items of cost considered in relation to the other factors for determining ‘cost to the wholesaler’ is arbitrary and unreasonable.
No determination is made as to the validity of a provision excluding cash discounts as an element of cost in a statutory definition that prescribes a mark up commensurate with the actual cost of doing business. Attention is directed to the definition of ‘cost to the retailer’ as set forth in Section 6402-11(b), G.C., which provides that ‘in the absence of proof of a lesser or higher cost of doing business * * * the cost * * * to the retailer shall be presumed to be six per centum of the invoice cost of the cigarettes * * * less all trade discounts except customary discounts for cash.’ (Italics ours.)
The validity of this latter section is not before the Court, but it may not be inappropriate to remark that unlike the definition of ‘cost to the wholesaler’ the statutory presumptive mark up does not cover a retailers' cost except in cases where the actual cost of doing business is undeterminable or equal to 6%. In all other cases a retailer's mark up corresponds to the actual cost of doing business whether it be higher or less than the presumptive 6%.
In a supplemental memoranda received since the foregoing was written, plaintiff suggests that defendants may and ought to be restrained from selling cigarettes at $1.42 per carton. It is urged that the evidence tends to show that this price is less than defendants' actual cost including cash discounts; that the Court can so mould a decree as to prohibit sales at the above price but permit defendants to sell below statutory cost at a price that will preserve their differential in costs. These suggestions cannot be entertained. The statute prohibits sales below ‘cost to the wholesaler’ as defined by the act. If the definition of ‘cost to the wholesaler’ be unconstitutional in the respects indicated, there remains no statutory sanction for a decree such as plaintiff suggests. The statute does not prohibit sales at less than actual cost and the Court cannot authorize sales at less than ‘cost to the wholesaler’ as defined by the act. Such an order would be inconsistent with the determinations hereinbefore made, and would run afoul of the statutory rule of evidence which regards sales at less than ‘cost to the wholesaler’ as prima facie evidence of wrongful intent.
The cash and carry method of doing business has long been recognized as legitimate and not inimical to fair competition. Cash and carry dealers with their limited service and lower prices serve a useful purpose in our economy. They offer a retailer lower prices based fairly upon lower costs. This ability to sell at lower prices is a legitimate and valuable competitive asset that cannot be taken from a cash and carry dealer unless the public welfare imperatively demands it. In the final analysislegislative interference with an unhampered competitive system finds its sanction in the promotion of the economic good of society under due process of law. Where the requirements of due process are not met, statutory regulation of business rests upon legislative caprice. Such legislation cannot be permitted to stand.
For the foregoing reasons the Court is of the opinion that the definition of ‘cost of the wholesaler,’ in the respects indicated, is violative of the ‘due process' and ‘equal protection of the laws' provisions of the 14th Amendment to the United States Constitution; although such action has no real or substantial relation to the public welfare the definition of ‘cost to the wholesaler’ also contravenes Article I, Section 19 of the Ohio Constitution by divesting defendants of property rights inherent in the cash and carry method of doing business. The petitions of plaintiffs in each case will be dismissed at plaintiff's costs. O.S.J. A decree may be drawn in accordance with the foregoing with exceptions to all parties on rulings adverse to them.