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KENDALL-JACKSON WINERY, LTD. v. BRANSON

January 3, 2000

KENDALL-JACKSON WINERY, LTD., PLAINTIFF,
V.
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.

BACKGROUND

A. No. 99 C 3813

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 lawful.

B. No. 99 C 4312

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.

C. No. 99 C 4998

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 Home.

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 that

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 unconstitutional.

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."

In certain circumstances, the supplier is not required to provide notice 90 days in advance of taking action. A supplier does not have to supply any advance notice if the action is taken because of (1) the distributor's assignment for the benefit of creditors, or similar disposition, of substantially all of the assets of the distributor's business; (2) the insolvency of the distributor or the institution of bankruptcy proceedings by or against the distributor; (3) the dissolution or liquidation of the distributor; or (4) the distributor's conviction of, or plea of guilty or no contest to, a charge of violating a law or regulation in this State that materially and adversely affects the ability of either party to continue to sell wine or liquor in the State, or the revocation or suspension of a license or permit to sell wine or liquor in this State. Section 15(c). A supplier need provide only 10 days advance notice if the cancellation, nonrenewal, termination or alteration is based upon (1) the failure of the distributor to pay any account when due; or (2) bad faith in the performance of the distributorship agreement. Section 15(d). Section 25 authorizes parties to a distributorship agreement to bring actions for damages and injunctive relief based upon violations of the Act.

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 the Commission.

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).

DISCUSSION

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 Doctrines

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.

A. Younger Abstention

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 ...


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