Grocery Supply Company v. Arkansas Tobacco Control Board

ARKANSAS COURT OF APPEALS
NOT DESIGNATED FOR PUBLICATION

DIVISION IV

GROCERY SUPPLY COMPANY

APPELLANT

V.

ARKANSAS TOBACCO CONTROL BOARD

APPELLEE

CA04-954

April 27, 2005

APPEAL FROM THE PULASKI COUNTY CIRCUIT COURT

[NO. CV 00-5767]

HON. CHRISTOPHER CHARLES PIAZZA

CIRCUIT JUDGE

AFFIRMED

Josephine Linker Hart, Judge

Grocery Supply Company (hereinafter "GSC") appeals from a decision of Arkansas Tobacco Control Board (hereinafter "the Board") finding that GSC had given its customers unlawful rebates on cigarettes. Based upon this finding, the Board imposed a $500 fine and suspended GSC's Retail Cigarette/Tobacco Permit and license for fourteen days. On appeal, GSC argues that: 1) the Board's decision was arbitrary, capricious, characterized by abuse of discretion, contrary to law and not otherwise supported by substantial evidence of record; 2) Arkansas Code Annotated section 4-75-708 is an unconstitutionally vague and ambiguous statute that reposes unregulated and undefined discretion in an administrative agency; 3) the Board ignored the provisions of Arkansas Code Annotated section 4-57-704, which are in conflict with section 4-75-708 (a) and (b); and 4) the Board's decision was based on an erroneous finding that GSC sold cigarettes below the "minimum price," which was established by the Board without any legal basis. We affirm.

GSC is a wholesale distributor of tobacco products, health and beauty aids, candy, snacks, and other miscellaneous grocery items. Its primary customers are convenience stores. In 1997, GSC developed a marketing plan called the "Arkansas Incentive Rebate Program," which it believed would help keep it competitive and at the same time comply with Arkansas's Unfair Cigarette Sales Act, codified at Arkansas Code Annotated section 4-75-701 et seq. The act prohibits wholesale distributers of cigarettes from offering a "rebate" or "concession" to its customers that would have the effect of selling cigarettes below the cost to the wholesaler. Ark. Code Ann. § 4-75-708.

The rebates were calculated according to a formula that used that portion of GSC's invoice not attributed to cigarettes and multiplied it by a "multiplier" that was established by the type of store and the total dollar amount of the invoice. The total on the invoice included cigarettes, if the customer purchased them from GSC. The customer then received a "rebate" in that amount off of its invoice.1

On May 18, 2000, a hearing was held before the Board. Maurice Gilmore, an auditor for the Board, testified that when he conducted an audit of GSC for the period of July 1, 1997, to September 30, 1999, he found violations of the Unfair Cigarette Sales Act. He opined that GSC's incentive program constituted an unlawful rebate or concession, because cigarette sales determine the size of the multiplier in the rebate equation. Gilmore further testified that GSC sold cigarettes at "the minimum price."2 On cross examination, Gilmore stated that he recalled a 1997 meeting held by Jimmy Furr, who at that time was director of the Board, in which he discussed the requirements of Arkansas's Unfair Cigarette Sales Act as it pertained to rebates.

Rick Gempko, division manager of the Paducah, Kentucky division of GSC's parent company, testified that he developed the Arkansas Incentive Program in October 1997. According to Gempko, he contacted former director Jimmy Furr by telephone, and it was Furr's opinion that the program did not violate Arkansas's Unfair Cigarette Sales Act and that "nothing needed to be done" to bring the rebate program into compliance with the statute. However, Gempko admitted that he did not write a letter confirming the conversation. Gempko also testified that a customer did not need to buy cigarettes to qualify for a rebate and that he could have designed the rebate program to exclude cigarette sales altogether, but included them in establishing the multiplier for convenience. Gempko claimed that the purpose of the rebate was to increase sales of non-cigarette items. He admitted, however, that the higher the percentage of non-cigarette items that a customer purchased, the lower the percentage of the rebate would be. Gempko noted that the dollar amount of cigarette sales had increased in Arkansas, but he ascribed it to the "astronomical" increase in prices, not an increase in the sale of unit volume.

Joe Glover, a twenty-year employee of GSC, testified that he currently served in a corporate position doing work on cost control and analysis. He confirmed Gempko's assessment that the increase in GSC's "dollar sales" of cigarettes was attributable to the increase in the cost, but conceded that cigarette sales in large retailers like Wal-Mart had become less convenient and that Target had discontinued cigarette sales altogether. According to Glover, the rebate program had not been as successful as GSC had hoped, and that GSC had a net loss of seventeen customers. Glover echoed Gempko's contention that including cigarette sales in the calculation of the rebate was "mainly for convenience," and that the "intent was not to say cigarettes was a qualifier at all."

Raymond Scroggins testified that he was one of two GSC salespersons operating in Arkansas. He asserted that his company had difficulty competing because his competitors offered "underground" rebates, often based on credits for "damaged merchandise" or free cigarettes and free candy. Scroggins also claimed that he spoke with Jimmy Furr concerning GSC's rebate program and that he satisfied the former director's concerns about the program by telling Furr that they did not give rebates on cigarettes. According to Scroggins, "Most of our customers buy at the minimum price and most of them are on our rebate program." He estimated that 120 of his 154 store customers were on the rebate program.

Larry Kerns, president and chief operating officer of GSC, testified that his company would not intentionally do anything that was unlawful. He stated that twenty-five percent of GSC's customers did not buy cigarettes from the company, and "probably half of them" get a rebate based on the rebate program. Kerns asserted that he did not feel that GSC was in "violation" of Arkansas's Unfair Cigarette Sales Act, that the plan was devised to "try to meet competition in the state within the law,"and that the plan "hasn't worked very well as far as increasing carton sales or increasing our business." He pointed to the fact that GSC had sixteen fewer customers since they implemented the program and claimed that GSC's "carton sales are relatively flat." Kerns admitted that "cigarettes are calculated in the first calculation and . . . they could influence the discount." However, he stated that cigarettes "don't necessarily have to and don't always" affect the total rebate. Kerns also testified that GSC had paid cigarette rebates in the past, but had discontinued the practice after a discussion with Furr and the Board.

The hearing concluded with the testimony of Greg Sled, an auditor and investigator with the Board, who had assisted Gilmore with the audit of GSC. He asserted that he contacted Furr regarding GSC's contention that Furr had previously approved the rebate program, and Furr stated that he did not recall having a conversation with Gempko or anyone else at GSC. Sled also testified that he "pulled five stores" to see how the rebates were calculated, but he was unable to determine how they were calculated.

After the hearing, the Board found that GSC had violated Arkansas's Unfair Cigarette Sales Act. It found that "the larger the store's purchase of cigarettes, the higher the amount of the rebate due to a higher number that will be applied as the multiplier." It also specifically found the testimony of Gempko in which he alleged that former Director Furr had approved the rebate program was "incredible." The decision of the Board was reviewed in Pulaski County Circuit Court and affirmed.

We first consider the scope of our review. Although decisions of an administrative agency may be reviewed in circuit court, when a party appeals the sufficiency of the evidence supporting a decision of an administrative agency, this court reviews the decision of the agency rather than the decision of the circuit court. H.T. Hackney, Co. v. Davis, 353 Ark. 797, 120 S.W.3d 79 (2003). However, where the appeal concerns the constitutionality of a statute, this court reviews the decision of the circuit court. Arkansas Tobacco Control Bd. v. Sitton, ___ Ark. ___, ___ S.W.3d ___ (May 6, 2004).

GSC first argues that the Board's decision was arbitrary, capricious, characterized by abuse of discretion, contrary to law and not otherwise supported by substantial evidence of record. It asserts that the finding that testimony concerning former director Furr's approval of the rebate program was not credible is wrong. GSC also contends that there was "overwhelming testimony of all concerned" that its rebate program did not base the rebates on cigarette sales, that a retailer did not have to purchase cigarettes to receive a rebate, and that the rebates were based solely on products other than cigarettes, and therefore the Board "arbitrarily" concluded that GSC gave illegal rebates. We find this argument unpersuasive.

In the first place, GSC appears to misapprehend the nature of our review. Our review of administrative decisions is limited in scope, and the decision will be upheld if it is supported by substantial evidence and is not arbitrary, capricious, or characterized by an abuse of discretion. Williams v. Arkansas State Bd. of Physical Therapy, 353 Ark. 778, 120 S.W.3d 581 (2003). We will not reverse the Board's decision if there is any substantial evidence to support it. Id. Substantial evidence is evidence that is valid, legal, and persuasive and that a reasonable mind might accept to support a conclusion and force the mind to pass beyond speculation and conjecture. Id. The question is not whether the testimony would have supported a contrary finding, but whether it would support the finding that was made. Id. It is the prerogative of the Board to believe or disbelieve any witness and to decide what weight to accord the evidence. Id. Under this standard of review, we do not revisit a specific determination of credibility and therefore, whether or not former director Furr approved of the rebate program is entitled to no consideration on appeal.

Secondly, GSC's argument seems to mischaracterize the evidence in this case; we do not believe that there was "overwhelming testimony of all concerned" that its rebate program did not base the rebates on cigarette sales. As we noted above, Larry Kerns, president and chief operating officer of GSC, admitted that "cigarettes are calculated in the first calculation and . . . they could influence the discount." It is of no moment that customers who do not purchase cigarettes from GSC also receive rebates. By offering the rebate to customers who decline to purchase cigarettes, GSC has not lessened the discount on non-tobacco products by those customers who do purchase cigarettes. Furthermore, we believe the link between certain rebates and cigarettes was established by the testimony of GSC division manager Rick Gempko, who admitted that the higher the percentage of non-cigarette items that a customer purchased, the lower the percentage of the rebate would be. Accordingly, we believe that the above-cited testimony establishes a positive correlation between cigarette sales and the amount of the rebate. In our view, this constitutes substantial evidence that the rebates that were given to GSC's customers were sufficiently tied to cigarette sales so as to make them unlawful under Arkansas's Unfair Cigarette Sales Act.

GSC next argues that Arkansas Code Annotated section 4-75-708 is an unconstitutionally vague and ambiguous statute which reposes unregulated and undefined discretion in an administrative agency, and therefore the circuit court erred in failing to reverse the decision of the Board. The circuit court did not reach this argument because it was not presented to the Board. We similarly hold that GSC is barred from raising this issue on appeal to this court. See Arkansas Tobacco Control Bd. v. Sitton, supra.

GSC next argues that the Board's decision was arbitrary, capricious, and characterized by abuse of discretion because the Board ignored the provisions of Arkansas Code Annotated section 4-75-7043, which are in conflict with section 4-75-708 (a) and (b). GSC asserts that section 4-75-704 allows it to sell cigarettes at a price made in good faith to "meet the price of a competitor," even if the sales price is below the "minimum price." It contends that it presented testimony that it implemented the rebate program to be "competitive across the board with their competitors," and its salesman, Raymond Scroggins, stated in essence that the rebates were necessary to meet its competitors' practice of giving customers credit for "damaged merchandise" and free candy and free cigarettes. GSC argues that it "reasonably believed" that section 4-75-704 gave them "some amount of lawful leeway to price their cigarettes at a price made in good faith to meet competition." For this reason it is asserted by GSC that section 4-75-704 and section 4-75-708 are irreconcilable.

We acknowledge that in its opening statement to the Board GSC did mention section 4-75-704 and 4-75-708. However, it did not assert that the sections conflicted, but rather that section 4-75-704 gave them the right to set a price in good faith in order to "meet the price of a competitor." Moreover, we cannot find that GSC even so much as mentioned both statutes to the circuit court, much less that it argued, as it does now, that there is an "irreconcilable" conflict. Furthermore, it was not ruled upon by the Board or the circuit court. It is well settled that we will not address an argument raised for the first time on appeal. Technical Servs. of Ark., Inc. v. Pledger, 320 Ark. 333, 896 S.W.2d 433 (1995). Even if we were to reach this argument, we would find no merit in it. There is a fundamental tenet of statutory construction that requires appellate courts to construe legislative actsrelating to the same subject or having the same purpose in harmony if possible. See Reed v. State, 330 Ark. 645, 957 S.W.2d 174 (1997); Seward v. Bud Avants Co., 65 Ark. App. 88, 985 S.W.2d 332 (1999). We agree that section 4-75-704 contemplates a wholesaler being able to adjust its prices to meet competition, however, we do not believe that the statute grants the wholesaler carte blanche to resort to illegal rebates, however cleverly disguised. A different section of Arkansas's Unfair Cigarette Sales Act, section 4-75-711, expressly provides for procedures to adjust the cost element of the minimum price. We believe that this section provides the lawful basis for GSC to meet the price of its competition.

Finally, GSC argues that the Board's decision was based on an erroneous finding that GSC sold cigarettes below the "minimum price," which was established by the Board without any legal basis. It contends that the Board relied on Regulation 1988-2 to set the minimum price even after the supreme court declared the regulation unconstitutional. This argument is also unavailing.

In the first place, this argument is raised for the first time on appeal, and we will therefore not address it. Technical Servs. of Ark., Inc. v. Pledger, supra. Secondly, we note that GSC's own employee Scroggins testified that "most of our customers buy at the minimum price." Under our standard of review, this testimony alone would constitute substantial evidence to support the finding that GSC sold cigarettes at the minimum price. Finally, and most importantly, GSC's violation of Arkansas's Unfair Cigarette Sales Act was premised on section 4-75-708(e), which states in pertinent part, "Evidence of . . . any offer of a rebate in price or the giving of a rebate in price . . . in connection with the sale of cigarettes . . . shall be prima facie evidence of intent to injure competitors and destroy or substantially lesson competition." In essence, this subparagraph prohibits the giving of a rebate, irrespective of whether or not the minimum price is implicated.

Affirmed.

Robbins and Griffen, JJ., agree.

1 An example from GSC's rebate program brochure took a $1,250 invoice for a "plan A" store that was 50% cigarettes, and less than 35% non-cigarette tobacco, candy/gum, and groceries.

2 Arkansas Code Annotated section 4-75-702(5)(A) (Repl. 2001) provides the means for establishing the "minimum price" that a wholesaler may charge for cigarettes. It defines the "cost to wholesaler" as: the basic cost of the cigarettes involved to the wholesaler plus the cost of doing business by the wholesaler as evidenced by the standards and methods of accounting regularly employed by him or her and must include, without limitation, labor costs, including salaries of executives and officers, rent, depreciation, selling costs, maintenance of equipment, delivery costs, all types of licenses, taxes, insurance, and advertising.

Subparagraph (B) of this section, states that, absent proof to the contrary, the cost of doing business by the wholesaler "shall be presumed to be two percent (2%) of the basic cost of the cigarettes to the wholesale dealer, plus cartage to the retail outlet." This subparagraph also provides that, absent proof to the contrary, cartage to the retail outlet is "presumed to be three-fourths of one percent (0.75%) of the basic cost of the cigarettes to the wholesale dealer."

3 In pertinent part, section 4-75-704 provides:

(a)(1) Any wholesaler may advertise, offer to sell, or sell cigarettes at a price made in good faith to meet the price of a competitor who is rendering the same type of service and is selling the same article at cost to the competing wholesaler as defined by this subchapter.

(2) Any retailer may advertise, offer to sell, or sell cigarettes at aprice made in good faith to meet the price of a competitor who is selling the same article at cost to the competing retailer as defined in this subchapter.

. . .

(c) In the absence of proof of the actual cost to the competing wholesaler or to the competing retailer, as the case may be, the cost may be presumed to be the lowest cost to wholesalers or the lowest cost to retailers, as the case may be, within the same trading area as determined by a cost survey made pursuant to § 4-75-711(b).