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KENDALL-JACKSON WINERY, LTD. v. BRANSON
January 3, 2000
KENDALL-JACKSON WINERY, LTD., PLAINTIFF,
LEONARD L. BRANSON, ET AL., DEFENDANTS. JIM BEAM BRANDS CO, A DELAWARE CORPORATION, D/B/A PEAK WINES INTERNATIONAL, PLAINTIFF, V. LEONARD L. BRANSON, ET AL., DEFENDANTS. SUTTER HOME WINERY, INC., PLAINTIFF, V. LEONARD L. BRANSON, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Gottschall, District Judge.
MEMORANDUM OPINION AND ORDER
The plaintiffs in these three related actions are suppliers of
wine. They claim that the recently passed Illinois Wine and
Spirits Industry Fair Dealing Act, 1999 Public Act 91-2
[hereinafter "the Fair Dealing Act" or "the Act"], is
unconstitutional as violative of the Contracts and dormant
Commerce Clauses of the United States Constitution. The
defendants are the members of the Illinois Liquor Control
Commission and three wholesale distributors of alcoholic
beverages. Prior to the filing of this action, each of the
distributors had filed a petition before the Commission against
one of the suppliers, charging that the supplier had violated the
Fair Dealing Act. The plaintiffs in this action have moved to
enjoin the proceedings before the Commission and have requested a
declaration that the Fair Dealing Act is unconstitutional. The
defendants have moved to dismiss this action, arguing that
because of the pending proceedings before the Commission, this
court should abstain from hearing the plaintiffs' constitutional
challenge to the Fair Dealing Act. For the reasons set forth
below, the defendants' motions to dismiss are denied and the
plaintiffs' motions for a preliminary injunction are granted.
Plaintiff Kendall-Jackson is a winery based in Santa Rosa,
California. In approximately December 1995, Kendall-Jackson
selected Judge & Dolph to be the distributor of Kendall-Jackson's
wines in northern Illinois. Judge & Dolph is an Illinois liquor
distributorship owned by the defendant Wirtz Corporation. There
is no written distributorship agreement between Kendall-Jackson
and Judge & Dolph. Since early 1996, Judge & Dolph has acted as
Kendall-Jackson's distributor in northern Illinois.
On April 22, 1999, Kendall-Jackson sent a letter to Judge &
Dolph, stating that Kendall-Jackson would be terminating its
distribution agreement with Judge & Dolph in 30 days.
Kendall-Jackson claimed that it was terminating the agreement
because of unsatisfactory performance by Judge & Dolph.
On May 21, 1999, the Illinois Wine and Spirits Industry Fair
Dealing Act of 1999 was signed into law and immediately became
effective. Pursuant to Section 35 of the Act, Judge & Dolph filed
a petition for relief with the Illinois Liquor Control
Commission. Judge & Dolph requested that the Commission find that
Kendall-Jackson had violated Section 35(b) of the Act, which
provides that a supplier may not terminate a distribution
agreement "except by acting in good faith in all aspects of the
relationship, without discrimination or coercion, and not in
retaliation or as a result of the distributor's exercise of its
right to petition the General Assembly" for passage of a bill.
Judge & Dolph alleged in its petition that its performance was
not deficient and that the real reason for the termination was
Judge & Dolph's lobbying on behalf of the Act. Judge & Dolph also
requested the Commission enter an order requiring Kendall-Jackson
to continue providing products to Judge & Dolph until the dispute
is resolved by a final order. Finally, Judge & Dolph requested
that the Commission prohibit Kendall-Jackson from providing
products to anyone else for distribution in the area served by
Judge & Dolph until the dispute is resolved by a final order.
On June 2, 1999, the Commission found that the petition by
Judge & Dolph "establishes a prima facie case that there was an
improper termination of the distributorship relationship" under
Section 35(b). The Commission issued an order requiring
Kendall-Jackson to "continue providing the product or products alleged to
have been withdrawn in violation of the Fair Dealing Act to the
Petitioner at prices and quantities in effect under the prior
distributorship relationship . . . during the pendency of this
matter and until such time as the Commission has entered its
final order. . . ." The Commission did not bar Kendall-Jackson
from providing products to other distributors in the area served
by Judge & Dolph. Judge & Dolph's petition to the Commission was
not verified or certified nor was it accompanied by any
affidavits. The Commission did not provide Kendall-Jackson with
notice that it was considering Judge & Dolph's petition and did
not conduct a hearing.
On June 9, 1999, Kendall-Jackson filed this action, requesting
that this court enjoin enforcement of the Fair Dealing Act
against Kendall-Jackson and declare the Act unconstitutional.
Kendall-Jackson claims that the Act violates the Contracts Clause
of the U.S. Constitution by substantially impairing
Kendall-Jackson's contractual rights. Kendall-Jackson also claims that
the Act violates the dormant Commerce Clause of the U.S.
Constitution by discriminating against out-of-state wineries.
Finally, Kendall-Jackson seeks a declaration that its termination
of its distribution agreement with Judge & Dolph is effective and
Plaintiff Jim Beam Brands Co. is the parent corporation for
Peak Wines International. Peak is a winery and a California
corporation with its principal place of business in Geyersville,
California. Defendant Pacific Wine Company is a distributor in
Illinois. In 1993, Peak and Pacific entered into an agreement
under which Pacific became the exclusive distributor of Peak's
wines in Illinois. Jim Beam acquired Peak in June 1998.
The bill that later became the Fair Dealing Act was passed by
the Illinois Senate on May 14, 1999. On May 17, 1999, Peak
informed Pacific orally and in writing that Peak was terminating
Pacific's exclusive distributorship rights with respect to all
Peak brands. As noted above, the Fair Dealing Act was signed into
law on May 21, 1999, four days after Jim Beam/Peak informed
Pacific that it was terminating the distribution agreement.
On May 28, 1999, Pacific filed a petition with the Illinois
Liquor Control Commission, alleging that Peak and Jim Beam
violated Section 35 of the Fair Dealing Act when the distribution
agreement was terminated. The petition was not verified or
certified. On June 2, 1999, in response to Pacific's request, the
Commission issued an order requiring Jim Beam/Peak to continue
providing products to Pacific until the Commission issues a final
order resolving the dispute. Jim Beam/Peak was not given notice
or the opportunity to respond before the Commission issued its
order. Although Pacific also requested that the Commission issue
an order prohibiting Jim Beam/Peak from distributing products to
other distributors in Pacific's distribution area, the Commission
did not issue such an order.
Like plaintiff Kendall-Jackson, Jim Beam/Peak has filed an
action claiming that the Fair Dealing Act is unconstitutional.
The action filed by Jim Beam/Peak was reassigned to this court
pursuant to Local General Rule 2.31.
Plaintiff Sutter Home Winery is based in St. Helena,
California. Defendant RJ Distributing Co. is a Peoria-based
wholesale distributor of wines and spirits. On October 6, 1993,
Sutter Home and RJ entered into a written distribution agreement.
The agreement was valid through June 30, 1994, and was renewed
thereafter for a period of six months or one year in each year
from 1994 to 1998. The agreement permitted Sutter Home to
terminate the agreement if, among other things, there was a
change of ownership or management of RJ or if RJ attempted to
assign its rights or obligations under the agreement. RJ agreed
to provide at least 15 days prior notice of any contemplated
change of ownership or management or of any attempted assignment.
In a May 7, 1999 letter to its "Dear Valued Customers, "RJ
announced that "RJ Distributing Company's wine division has
joined with Pacific Wine & Spirits from Chicago to create a new
company called R.J. Pacific." The May 7 letter, which was sent on
the letterhead of R.J. Pacific L.L.C. and signed by Robert
Jockisch, the president and chief executive officer of RJ,
attached a listing of wines available to retailers from the newly
formed company, including each of the Sutter Home products RJ was
to distribute under RJ's distributorship agreement with Sutter
On or about May 14, 1999, Sutter Home learned of RJ's May 7,
1999 letter. In a May 18, 1999 letter, Sutter Home informed RJ
We were told that you changed the ownership or management of
your company, or assigned your rights or obligations under your
Sutter Home and Montevina agreements with us. Such actions
rendered our agreements void.
In any event, as you know, our agreements expire by their own
terms on June 30, 1999. We will not be renewing the agreements
upon that expiration.
On May 28, 1999, RJ filed a petition with the Illinois Liquor
Control Commission, requesting a finding that Sutter Home
violated Section 35 of the Fair Dealing Act by failing to renew
the distribution agreement. The petition included an affidavit
from Jockisch averring that the information in the petition was
correct. RJ also requested that the Commission issue an order
requiring Sutter Home to continue providing products to RJ during
the pendency of the dispute. Finally, RJ asked the Commission to
issue an order prohibiting Sutter Home from providing products to
any other distributor in RJ's sales territory.
On June 2, 1999, the Commission issued an order directing
Sutter Home to continue providing products to RJ until the
Commission issues a final order resolving the dispute. The
Commission did not provide Sutter Home with notice or an
opportunity to be heard before issuing the June 2, 1999 order.
The Commission did not prohibit Sutter Home from providing
products to other distributors in RJ's sales territory.
Like plaintiffs Kendall-Jackson and Jim Beam, Sutter Home filed
an action in federal court claiming that the Fair Dealing Act is
D. The Illinois Wine and Spirits Industry Fair Dealing Act
The Act was signed into law on May 21, 1999. Its declared
purpose is "to promote the public's interest in fair, efficient,
and competitive distribution of wine and liquor products." Sec.
10(a)(ii). The Act regulates agreements between distributors and
suppliers of liquor. The Act does not apply to agreements between
a distributor and a supplier when the supplier is "an Illinois
winery" or is a "winery that has annual case sales in the State
of Illinois less than or equal to 10,000 cases per year."
The Illinois Liquor Control Commission has the general
authority to administer laws regulating liquor. For example, the
Commission has responsibility for issuing licenses to
manufacturers and retailers of alcohol and has the authority to
revoke or suspend such licenses. See 235 ILCS 5/3-12. Illinois
has adopted the "three-tier" system of liquor distribution, in
which there are (1) suppliers or manufacturers, (2) wholesale
distributors and (3) retailers. See 235 ILCS 5/1-1 et seq.
Manufacturers/suppliers are required to register with the
Commission the names of the distributors who have been authorized
to sell the manufacturer's products at wholesale. 235 ILCS 5/6-9.
Sections 15 through 30 of the Act apply only to agreements
between suppliers and distributors entered into or renewed after
the effective date of the Act. Section 15 provides that a
supplier may not "cancel, fail to renew, otherwise terminate, or
alter on a discriminatory basis an agreement" without good cause.
Section 20 requires a supplier to provide written notice of the
supplier's intent to cancel, not renew, otherwise terminate, or
alter a distribution agreement. The notice must be sent 90 days
before the supplier cancels, fails to renew, otherwise terminates
or alters the agreement. The notice must include a statement of
reasons "including all data and documentation necessary to fully
apprise the distributor of the reasons for the action" and must
give the distributor "60 days in which to rectify any claimed
deficiency. If the deficiency is rectified within 60 days, the
notice shall be void."
Section 35 "applies to all agreements between a distributor and
a supplier (other than agreements with an Illinois winery or a
winery that has annual case sales in the State of Illinois less
than or equal to 10,000 cases per year) whether those agreements
were entered into before or after the effective date of this
Act." Section 35 of the Act purportedly "clarifies existing
rights and obligations and establishes remedial procedures
applicable to registrations under Section 6-9 of the Liquor
Control Act of 1934."
Section 35(b) provides that "[u]nder existing Illinois common
and statutory law, suppliers, other than (i) Illinois wineries or
(ii) wineries that have annual case sales in the State of
Illinois less than or equal to 10,000 cases per year, . . . have
an obligation to act in good faith in all aspects of the
registration and distributorship relationship. . . . Under the
existing obligation to act in good faith, no registration or
obligation to register under Section 6-9 may be terminated nor
may a supplier . . . fail to renew or extend a product, name,
brand, registration, or an agreement with a distributor except by
acting in good faith in all aspects of the relationship, without
discrimination or coercion, and not in retaliation or as a result
of the distributor's exercise of its right to petition the
General Assembly, the Congress, or any other unit or form of
government for any purpose, to any end, or for or against any
proposition, provision, amendment, bill, resolution, judgment,
decision, rule, regulation, or interpretation."
Section 35(c)(1) gives the Illinois Liquor Commission the
power to prohibit or suspend any supplier from selling its
products in Illinois if the supplier is found to have "flagrantly
or repeatedly violated" Section 35. Section 35(c)(2) grants the
Commission the authority to order the supplier "to continue
providing products to a distributor at prices and quantities in
effect for the distributorship prior to any termination or
failure to renew that becomes the subject of a dispute or
administrative proceedings under this Section until the matters
in dispute are determined by an order which is final and
non-reviewable" Section 35(e) specifies that orders entered under
Section 35 are "deemed orders as to which an emergency exists."
Under Section 35(d), any aggrieved party may apply to the
Commission for a finding that another party has violated this
section and request relief. The Act does not specify what process
the Commission must employ to reach such a finding. The Act also
does not specify what evidence a petitioner must provide in order
to obtain preliminary or permanent relief.*fn1
Section 35(e) specifies that orders entered by the Commission
under this section are reviewable by the Circuit Court under the
terms of the Administrative Review Law. On review, the findings
and conclusions of the Commission are prima facie true and
correct. However, non-final orders, such as those here requiring
the suppliers to continue providing products to the distributors
pending a final order by the Commission, are not reviewable.
Section 35(f) provides that "[n]o court shall enter a stay,
restraining order, injunction, mandamus, or other order that has
the effect of suspending, delaying, modifying,
or overturning a Commission finding or determination under this
Section before a full hearing and final decision on the merits of
the Commission ruling, finding, or order."
The Act contains a severability clause, which provides that
"[i]f any provision or interpretation of this Act, or the
application of such interpretation or provision to any
distributorship, is held invalid, the application of the Act to
persons or circumstances other than those as to which it is held
invalid shall not be affected thereby." Section 10(e).
The Illinois Liquor Control Commission has issued emergency
rules, pursuant to ILCS 100/5-45, governing disputes under the
Fair Dealing Act. The rules went into effect on July 13, 1999,
after the petitions in each of the instant cases was filed with
Among other things, the emergency rules require a petition for
relief to include a "detailed statement of the facts and
circumstances giving rise to the allegations of violation of the
Fair Dealing Act." 11 Ill. Admin. Code 100.400(a)(6), reprinted
at Illinois Register, 23 Ill. Reg. 8687. The emergency rules
require that a petition be certified. 11 Ill. Admin. Code 100.400
(g)(15). The emergency rules permit the respondent to file a
motion "directed to the adequacy or sufficiency of the
application" within 14 days after the respondent is served with
the petition. 11 Ill. Admin. Code 400(d). The rules also allow
for motions or petitions to "vacate, alter or otherwise modify
orders entered by the Commission." Id.
Under the emergency rules, when a petitioner requests
preliminary relief, such as an order requiring the respondent to
continue providing products pending a final decision on the
merits, the respondent must receive notice that the petitioner is
requesting such relief. 11 Ill. Admin. Code 100.400(e). The
respondent has 7 days to file a response to the request for
preliminary relief. Id. "The party moving the Commission for the
entry of a preliminary order shall have the burden of
establishing the entitlement to relief, unless the Fair Dealing
Act provides to the contrary." Id. The rules permit a preliminary
order establishing the status quo (i.e., requiring a supplier to
continue providing products to a distributor) without notice to
the supplier/respondent only if "it clearly appears from the
facts shown by verified application or by affidavit if by
supplemental request (motion, petition) that immediate and
irreparable harm, damage or loss will result to the movant before
notice can be served and a hearing on the application can be
had." Id. The emergency rules also provide for discovery. See
Ill. Admin. Code 100.400(f).
The plaintiffs argue that the Fair Dealing Act is
unconstitutional. They argue that Section 35 violates the
Contracts Clause of the United States Constitution, art. I, sec.
10. As noted above, Section 35(b) purports to clarify existing
law. However, plaintiffs claim that by requiring suppliers who
were in agreements before the effective date of the Act to act in
good faith in terminating or declining to renew such agreements,
by requiring them to act without "discrimination or coercion" and
by prohibiting them from acting in retaliation for a
distributor's petitioning the government, Section 35
substantially impairs their contractual rights in violation of
the Contracts Clause. They also claim that Section 35 impairs
their contractual rights by authorizing the Commission to issue
nonreviewable orders requiring them to continue providing
products to the distributors until the dispute is resolved by a
final order of the Commission. In addition, they argue that the
Fair Dealing Act discriminates against out-of-state suppliers, in
violation of the dormant Commerce Clause, U.S. Const. art. I,
sec. 8, cl. 3, by specifically excepting Illinois wineries from
the provisions of the Act.
I. The Motions to Dismiss under Federal Abstention
The Supreme Court has stated that "[a]bstention from the
exercise of federal jurisdiction is the exception, not the rule."
Colorado River Water Conservation Dist. v. United States,
424 U.S. 800, 813, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). "Abstention
rarely should be invoked, because the federal courts have a
`virtually unflagging obligation . . . to exercise the
jurisdiction given them.'" Ankenbrandt v. Richards, 504 U.S. 689,
705, 112 S.Ct. 2206, 119 L.Ed.2d 468 (1992) (quoting Colorado
River, 424 U.S. at 817, 96 S.Ct. 1236). The court addresses each
of the abstention doctrines below.
In Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669
(1971), the Supreme Court held that a federal court should not
enjoin a pending state criminal proceeding unless an injunction
is necessary to prevent great and immediate irreparable injury.
The Court held that federal courts should refrain from
interfering with state criminal prosecutions because of "the
notion of `comity,' that is, a proper respect for state
functions." Id. at 44, 91 S.Ct. 746. The Court has noted that in
circumstances when abstention would otherwise be required, there
are narrow exceptions to the Younger rule, such as when the
prosecution is the result of bad faith and harassment or when a
statute is "flagrantly and patently violative of express
constitutional prohibitions." Id. at 53-54, 91 S.Ct. 746.
Although Younger involved a pending state criminal prosecution,
the Younger abstention doctrine has been expanded to apply to
other pending state proceedings. In Huffman v. Pursue, Ltd.,
420 U.S. 592, 95 S.Ct. 1200, 43 L.Ed.2d 482 (1975), the state of Ohio
successfully brought a civil action in state court to close a
theater for one year. The state relied on a nuisance statute
providing that a place exhibiting obscene films is a nuisance and
may be closed for one year. The theater owner brought an action
in federal court, seeking to have the state court judgment
enjoined. The Supreme Court found that the same federalism
concerns raised in Younger required abstention in Huffman, noting
that the civil proceeding under the nuisance statute is "more
akin to a criminal prosecution than are most civil cases. . . .
and is in aid of and closely related to criminal statutes which
prohibit the dissemination of obscene materials." Huffman, 420
U.S. at 604, 95 S.Ct. 1200.
Although Huffman suggested that Younger abstention in civil
proceedings might be limited to civil proceedings that are
similar or closely related to criminal proceedings, the Supreme
Court rejected such a limitation in Juidice v. Vail,
430 U.S. 327, 97 S.Ct. 1211, 51 L.Ed.2d 376 (1977). In Juidice, a creditor
obtained a default judgment in state court against Vail. Vail
failed to satisfy the judgment, and when Vail failed to respond
to a subpoena and appear at a deposition, a state court judge
issued an order to show cause why Vail should not be punished for
contempt. Vail brought an action in federal court seeking to
enjoin New York's statutory contempt procedures. In finding that
the lower federal court should have abstained, the Supreme Court
held that "[w]hether disobedience of a court-sanctioned subpoena,
and the resulting process leading to a finding of contempt of
court, is labeled civil, quasi-criminal, or criminal in nature,
we think the salient fact is that federal court interference with
the State's contempt process is `an offense to the State's
interest . . . likely to be every bit as great as it would be
were this a criminal proceeding.'" Id. at 334, 97 S.Ct. 1211
(quoting Huffman, 420 U.S. at 604, 95 S.Ct. 1200).
In subsequent cases, the Supreme Court has found that Younger
abstention should apply in other civil proceedings. In Trainor v.
Hernandez, 431 U.S. 434, 97 S.Ct. 1911, 52 L.Ed.2d 486 (1977),
the state of Illinois had brought a civil action to recover
welfare payments that allegedly had been obtained through fraud.
Simultaneously, the state obtained a writ attaching money in a
credit union belonging to the welfare recipients. The recipients
brought an action in federal. court challenging the Illinois
attachment procedures. The Supreme Court held that the lower
federal court should have abstained. The Court noted that "the
State was a party to the suit in its role of administering its
public assistance programs" and concluded that "the principles of
Younger and ...