State Ex Rel. North Carolina Milk Commission v. National Food Stores, Inc. , 270 N.C. 323 ( 1967 )

154 S.E.2d 548 (1967) 270 N.C. 323

STATE of North Carolina on relation of the NORTH CAROLINA MILK COMMISSION
v.
NATIONAL FOOD STORES, INCORPORATED, a North Carolina Corporation.

No. 847.

Supreme Court of North Carolina.

May 24, 1967.

Morgan, Byerly, Post & Keziah, High Point, for defendant appellant.

Holding, Harris, Poe & Cheshire, Raleigh, for plaintiff appellee.

LAKE, Justice.

The act creating the Milk Commission was first before this Court in State ex rel. North Carolina Milk Commission v. Galloway, 249 N.C. 658, 107 S.E.2d 631, in which an order of the Commission fixing a uniform hauling charge to the producer by the processor for the transportation of milk from the farm to the processing plant was sustained. Parker, J., now C. J., speaking for the Court, said:

"The considerations which impelled the General Assembly to adopt the Act are found in its preamble on page 1323, Acts of 1953. * * * Among the facts set forth in the preamble to the Act are these: ``Milk is a primary and necessary food for the children and adult population of the State. * * * [I]t is necessary to suppress unfair, unjust and destructive trade practices which are now being carried on in the production, marketing and distribution of milk and which tends to create a hazardous and dangerous condition with reference to the health and welfare of the people of the State.' Other facts stated in the preamble, as well as the Act itself, make it plain that the General Assembly was also concerned with suppressing unfair and destructive trade practices, and with stabilizing the milk industry, so as to enable the producers to secure a fair price for their milk. These recitals in the preamble set the framework for the legislation." (Emphasis added.)

Since Nebbia v. People of State of New York, 291 U.S. 502, 54 S. Ct. 505, 78 L. Ed. 940, it has been recognized that the Fourteenth Amendment to the Constitution of the United States does not forbid a state to confer upon an administrative agency the power to fix minimum and maximum retail prices to be charged for the sale of milk in grocery stores to consumers for the purpose of assuring the steady flow of an adequate supply of clean, wholesome milk from the producing farms to the consumer. In that case, Mr. Justice Roberts, speaking for the Court, said:

"Under our form of government the use of property and the making of contracts are normally matters of private and not of public concern. The general rule is that both shall be free of governmental interference. But neither property rights nor contract rights are absolute; for government cannot exist if the citizen may at will use his property to the detriment of his fellows, or exercise his freedom of contract to work them harm. * * *

"So far as the requirement of due process is concerned, and in the absence of other constitutional restriction, a state is free to adopt whatever economic policy may reasonably be deemed to promote public welfare, and to enforce that policy by legislation adapted to its purpose. The courts are without authority either to declare such policy, or, when it is declared by the legislature, to override it. * * * And it is equally clear that if the legislative policy be to curb unrestrained and harmful competition by measures which are not arbitrary or discriminatory it does not lie with the courts to determine that the rule is unwise. * * *

"The Constitution does not secure to anyone liberty to conduct his business in such fashion as to inflict injury upon the public at large, or upon any substantial group of the people. Price control, like any other form of regulation, is unconstitutional only if arbitrary, discriminatory, or demonstrably irrelevant to the policy the Legislature is free to adopt, and hence an unnecessary and unwarranted interference with individual liberty."

State ex rel. North Carolina Milk Commission v. Galloway, supra, establishes that neither Article I, § 7, nor Article I, § 17, of the Constitution of North Carolina, forbids the Legislature of this State to confer upon the Milk Commission authority to fix a uniform rate for the transportation of milk from the farm to the processing plant so as to enable the producers of milk to secure a fair price for their product. This Court there recognized the relation between such transportation charge and the assurance to the producers of milk of a fair price for that which they sell. It also recognized, as the Supreme Court of the United States had done in Nebbia v. People of State of New York, supra, that the Legislature might reasonably conclude that the maintenance of a fair price to the producer of milk is necessary to the assurance of an adequate supply of milk produced, transported and marketed under sanitary conditions. The constitutionality of the entire Milk Commission Act was not before this Court in the Galloway case, supra, and has never been determined by this Court. It is not before us in the present case.

The act must be construed in the light of its objective, which the Galloway case, supra, states. It empowers the Commission "[t]o investigate all matters pertaining to the production, processing, storage, distribution, and sale of milk for consumption," and "[t]o supervise and regulate the transportation, processing, storage, distribution, delivery and sale of milk for consumption." G.S. § 106-266.8(2) (3). The Commission has not determined that conditions surrounding the production and marketing of milk in this State require a fixing of the price to be charged by a retail grocery store for the sale of milk to consumers in order to accomplish the purposes for which the act was adopted. The Commission has not undertaken to fix the price to be charged in such a sale. Consequently, its authority to do so is not now before us. The affidavit of Honorable James A. Graham, Commissioner of Agriculture, offered in evidence by the plaintiff, states, "[T]he North Carolina Milk Commission sets minimum prices to be paid to dairy farmers for their milk, but does not establish prices at any other level."

The question before us requires the construction of G.S. § 106-266.21, which provides:

"The sale of milk by any distributor or producer-distributor or retailer below cost for the purpose of injuring, harassing or destroying competition is hereby prohibited. At any hearing or trial on a complaint under this section, evidence of sale of milk by a distributor or subdistributor or retailer below cost shall constitute prima facie evidence of the violation or violations alleged, and the burden of rebutting the prima facie case thus made, by showing that the same was justified in that it was not, in fact, made below cost or that it was not for the purpose of injuring, harassing or destroying competition, shall be upon the person charged with a violation of this section. * * * The prima facie case of a violation of this section, made by proof of sale below cost, may be rebutted by proof of any of the following facts * * *."

The provision in this section of the act that the statutory prima facie case of violation may be rebutted by proof of specified circumstances, none of which applies to the present case, does not mean that these are the only circumstances which may be relied upon to rebut such prima facie proof of violation. See State ex rel. North Carolina Milk Commission v. Dagenhardt, 261 N.C. 281, 134 S.E.2d 361. To construe the statute otherwise would raise a serious question as to its constitutionality and it is well settled that a statute will not be construed so as to raise such question if a different construction, which will avoid the question of constitutionality, is reasonable. State v. Barber, 180 N.C. 711, 104 S.E. 760; National Labor Relations Board v. Jones & Laughlin Steel Corp., 301 U.S. 1, 57 S. Ct. 615, 81 L. Ed. 893, 108 A.L.R. 1352, 1361; Crowell v. Benson, 285 U.S. 22, 52 S. Ct. 285, 76 L. Ed. 598; Fed. Trade Comm. v. Amer. Tobacco Co., 264 U.S. 298, 44 S. Ct. 336, 68 L. Ed. 696, 32 A.L.R. 786; Re Keenan, 310 Mass. 166, 37 N.E.2d 516, 137 A.L.R. 766, 773; 16 Am.Jur.2d, Constitutional Law, § 146; 16 C.J.S. Constitutional Law § 98b.

It is well settled in this State that it is within the power of the Legislature to change the rules of evidence and, within constitutional limits, to provide that the proof of one fact shall be deemed prima facie evidence of a second fact. Lower Creek Drainage Commissioners v. Mitchell, 170 N.C. 324, 87 S.E. 112; State v. Dowdy, 145 N.C. 432, 58 S.E. 1002; State v. Barrett, 138 N.C. 630, 50 S.E. 506, 1 L.R.A., N.S., 626. Notwithstanding the contrary opinion of Professor Wigmore, set forth at length in the Barrett case, supra, it is now also well established in this State, and in other jurisdictions, that the exercise of such power by the Legislature is subject to the limitation that there must be such relation between the two facts in human experience that proof of the first may reasonably be deemed some evidence of the existence of the second. Lower Creek Drainage Commissioners v. Mitchell, supra; State v. Dowdy, supra; Tot v. United States, 319 U.S. 463, 63 S. Ct. 1241, 87 L. Ed. 1519; Bandini Petroleum Co. v. Superior Court, 284 U.S. 8, 52 S. Ct. 103, 76 L. Ed. 136, 78 A.L.R. 826; Mobile, J. & K.C.R.R. v. Turnipseed, 219 U.S. 35, 43, 31 S. Ct. 136, 55 L. Ed. 78; People v. Pay Less Drug Store, 25 Cal. 2d 108, 153 P.2d 9; State v. Kelly, 218 Minn. 247, 15 N.W.2d 554; Anno., 162 A.L.R. 495, 505; 29 Am.Jur.2d, Evidence, § 10. There are many circumstances in addition to those specified in the above statute, which would tend to disprove an intent to injure, harass or destroy competition by a sale of an article at less than its cost to the seller. To deprive the seller of the right to disprove the intent which is part of the conduct forbidden by the statute, by proof of such other circumstances, would raise grave doubt as to the constitutionality of the provision as an arbitrary interference with the liberty of contract. See 29 Am.Jur.2d, Evidence, § 11. We, therefore, hold that one charged, either in a civil or in a criminal proceeding, with the violation of G.S. § 106-266.21 may rebut the statutory prima facie case, resulting from proof of a sale of milk at less than cost, by proof of any fact from which absence of the evil intent may be rationally inferred.

As this Court noted in State ex rel. North Carolina Milk Commission v. Galloway, supra, the purpose of the act creating the Milk Commission was to protect the public interest in a sufficient, regularly flowing supply of wholesome milk and, to that end, to provide a fair price to the milk producer for his product. G.S. § 106-266.21, though added to the original act by an amendment at a subsequent session, must be construed in the light of that purpose.

While the cardinal principle of statutory construction is that the words of the statute must be given the meaning which will carry out the intent of the Legislature, that intent must be found from the language of the act, its legislative history and the circumstances surrounding its adoption which throw light upon the evil sought to be remedied. Testimony, even by members of the Legislature which adopted the statute, as to its purpose and the construction intended to be given by the Legislature to its terms, is not competent evidence upon which the court can make its determination as to the meaning of the statutory provision. D & W, Inc. v. City of Charlotte, 268 N.C. 577, 151 S.E.2d 241; Goins v. Trustees Indian Training School, 169 N.C. 736, 86 S.E. 629. Consequently, the affidavits introduced by the plaintiff, purporting to show that it was the purpose of the Legislature to prevent the use of milk by grocery stores as a "loss leader," were not competent for that purpose and must be disregarded.

It is obvious, from the reading of this act in its entirety, that the Milk Commission was not established as an agency to regulate competition among retail grocery stores per se. The Commission was established as a State agency to protect the interest of the public in a regularly flowing supply of wholesome milk and is authorized, for that purpose, and that purpose only, to regulate, under proper circumstances and to a proper degree, the price of milk. It is the destruction of competition in the handling of milk, not in the grocery business generally, which G.S. § 106-266.21 was designed to prevent. The Milk Commission is not to be deemed a legislatively appointed guardian for the retail grocery business. G.S. § 106-266.21, which is part of the Milk Commission Act, is not to be given a construction leading to such result.

The conduct prohibited by G.S. § 106-266.21 is the sale of milk, as defined in G.S. § 106-266.6, below cost, as defined in G.S. § 106-266.21, coupled with the purpose on the part of the seller to injure, harass or destroy competition in the marketing of milk. The evil motive or purpose is an essential element of the offense, as truly as is the sale of milk below cost. There is no violation of this statute unless both elements concur. By virtue of the statute, evidence of the sale below cost is evidence of the wrongful purpose, but it is evidence only. Standing alone, it permits but does not compel a finding of the necessary motive or purpose. State ex rel. North Carolina Milk Commission v. Dagenhardt, supra; State v. Wilkerson, 164 N.C. 431, 79 S.E. 888. It cannot be said that there is no rational basis for inferring the existence of a purpose to injure, harass or destroy competition in the marketing of milk from a sale of milk below the cost thereof to the seller. Thus, the statute making proof of such sale prima facie evidence of such purpose is not beyond the constitutional power of the Legislature. The statute does not, however, make a sale of milk below cost in and of itself a violation of the law.

The very purpose and nature of competition involves the intent to attract to one's self customers who might otherwise trade with a rival producer or seller. All successful competition necessarily harasses to some degree others engaged in the same business activity in the same territory. Our economic system is built upon the theory that this is a desirable spur to better service and lower cost to the consumer. The results achieved through long adherence to this system indicate it has merit exceeding that of a system controlled by either a private monopoly or a governmental administrator. The purpose required to establish a violation of G.S. § 106-266.21 is more than a mere intent to attract customers from those who are actual or potential customers of a rival. The intent or purpose required to show a violation of this statute is a malevolent purpose to eliminate a rival or so hamper him as to achieve, or approach, a monopoly and thus control prices to the harm of the public after the rival is eliminated or crippled. Unquestionably, trade practices, including price cutting, designed to accomplish such an end may be forbidden by statute. Bennett v. Southern R.R., 211 N.C. 474, 191 S.E. 240; State v. Atlantic Ice & Coal Co., 210 N.C. 742, 188 S.E. 412; Manning v. Atlantic & Y. R.R., 188 N.C. 648, 125 S.E. 555.

Many states have enacted statutes forbidding, as unfair competition, the sale of any merchandise at less than cost with the intent thereby to induce the purchase of other merchandise or to divert trade from a competitor. The Supreme Court of the United States has sustained such legislation. Safeway Stores, Inc. v. Oklahoma Retail Grocers, 360 U.S. 334, 79 S. Ct. 1196, 3 L. Ed. 2d 1280. See also: Old Dearborn Distributing Co. v. Seagram-Distillers Corp., 299 U.S. 183, 57 S. Ct. 139, 81 L. Ed. 109; Wholesale Tobacco Dealers B., etc. v. National Candy & T. Co., 11 Cal. 2d 634, 82 P.2d 3; Anno., 118 A.L.R. 506. In the Safeway Stores case, Mr. Justice Frankfurter, speaking for the Court, said:

"One of the chief aims of state laws prohibiting sales below cost was to put an end to ``loss-leader' selling. The selling of selected goods at a loss in order to lure customers into the store is deemed not only a destructive means of competition; it also plays on the gullibility of customers by leading them to expect what generally is not true, namely, that a store which offers such an amazing bargain is full of other such bargains."

In Wholesale Tobacco Dealers B., etc. v. National Candy & T. Co., supra, Chief Justice Waste, speaking for the Supreme Court of California, said:

"The use of ``loss leaders' for the purpose of injuring a competitor has been condemned by many economists. It has been urged that their use is injurious to the consumer in that the losses so sustained will either have to be made up by higher prices charged on other commodities, or by the enforcing of various economies, such as the lowering of wages, discharge of employees, lowering of rents, depressing the wholesale prices, etc. It has many times been urged that such practices are destructive of competition and tend to create monopolies."

In Old Dearborn Distributing Co. v. Seagram-Distillers Corp., supra, Mr. Justice Sutherland, speaking for the Court, in sustaining the right of a state to enact "fair trade" legislation, said:

"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; * * *. 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."

The North Carolina Legislature, on the contrary, has not seen fit to adopt as the policy of this State the prohibition of the sale of any merchandise below cost as a "loss leader" to attract customers to the store of the seller in the hope that they will buy there other commodities in sufficient volume to enable the seller to overcome the loss incurred in the sale of the article used as a "loss leader." This determination by the Legislature is also conclusive upon the courts. Thus, the use of "loss leaders" as a competitive device in the retail grocery business generally is not unlawful and may not be restrained, in the absence of a contract permitted under the Fair Trade Act such as was sustained in Lilly & Co. v. Saunders, 216 N.C. 163, 4 S.E.2d 528, 125 A.L.R. 1308.

G.S. § 106-266.15 provides that in the event of violation of any provision of the Milk Commission Act, the Commission may apply to the courts "for relief by injunction, if necessary, to protect the public interest without being compelled to allege or prove that any adequate remedy at law does not exist." (Emphasis added.)

The public interest sought to be protected by G.S. § 106-266.21 is the public's interest in the regular flow of an adequate supply of wholesome milk from the producer to the consumer, not a possible public interest in the protection of retail grocery stores from the use by other retail grocery stores of milk as a "loss leader." Since the Commission, under its statutory authority, has fixed the minimum price to be paid to the producer by the distributor, a circumstance which was not present in Nebbia v. People of State of New York, supra (see dissenting opinion by Mr. Justice McReynolds, 291 U.S. 539, 544, 54 S. Ct. 517, 519, 89 A.L.R. 1484, 1487), there is no reasonable basis for a finding by the courts that a sale of milk by a retail grocery store at less than the cost of the milk to it will endanger the public's interest in an adequate flow of wholesome milk, nothing else appearing.

Upon a demurrer for failure to state a cause of action, a complaint must be liberally construed in favor of the pleader. Patterson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 266 N.C. 489, 146 S.E.2d 390; Beacon Homes, Inc. v. Holt, 266 N.C. 467, 146 S.E.2d 434; Hall v. Coble Dairies, 234 N.C. 206, 67 S.E.2d 63, 29 A.L.R. 2d 682; Wells v. Wells, 227 N.C. 614, 44 S.E.2d 31, 1 A.L.R. 2d 905; Hearn v. Erlanger Mills, Inc., 219 N.C. 623, 14 S.E.2d 675. So construed, we find in this complaint an allegation of a sale of milk below cost for the purpose of destroying competition in the sale of milk. While the allegation that the issuance of an injunction is necessary in order to protect "the public interest," standing alone, is a mere conclusion of the pleader, it may be inferred from the preceding allegation as to the purpose to destroy competition in the sale of milk that the public interest alleged to require injunctive relief is the public's interest in monopoly free marketing of milk. We also interpret the allegation in the complaint that the defendant sold "milk" to mean it sold milk as defined in the highly restrictive definition contained in G.S. § 106-266.6. We, therefore, hold that the demurrer ore tenus to the complaint was properly overruled.

Upon an appeal from an order granting an interlocutory injunction, this Court is not bound by the findings of fact made by the court below, but may review and weigh the evidence and find the facts for itself. State ex rel. North Carolina Milk Commission v. Dagenhardt, supra.

The plaintiff's own evidence is not sufficient to support a finding that the sales of milk by the defendant were for the purpose of destroying competition in the marketing of milk. Milk was but one of many items listed in the newspaper advertisement published by the defendant and introduced in evidence by the plaintiff. Presumably, the price therein specified for each article named was such as to be attractive to the housewife. The advertisement specifically states that only one half-gallon of milk was to be sold at this price to a customer. This is not the action of one seeking to drive competitors from the milk business. The plaintiff's evidence also shows that while the defendant increased its sales of milk by 10,000 half-gallons for the two days in which the below cost selling took place, its principal competitors' aggregate sales declined only about 700 half-gallons for the two day period. It would appear that the primary effect of the defendant's action upon the flow of milk was to increase the consumption of milk, not to divert the milk business from rival stores. This is not contrary to the public interest in the maintenance of an adequate supply of wholesome milk. There is no evidence from any competing seller of milk that he was injured, harassed or eliminated from competition for the milk market or would be so affected by the further sales of milk by the defendant at less than the cost thereof to the defendant.

The defendant's evidence, which is uncontradicted, is that there is no competition between retail grocery stores and other types of distributors of milk. The defendant's evidence is that the use of milk as a "loss leader" is an accepted merchandising practice among retail grocery stores and is not for the purpose of injuring, harassing or destroying competition among other supermarkets and retail grocery stores. Fifteen competing merchants stated in their affidavits, introduced by the defendant, that they had not been injured by the advertisement and sales in question.

We think that the record leads inescapably to the conclusion that the purpose of the defendant in selling milk below cost was not to monopolize the business of selling milk in grocery stores, or elsewhere, but was to attract customers to its stores in the hope that they would purchase there other items in sufficient volume to yield the defendant a profit from its entire operation. Since this is not a violation of G.S. § 106-266.21, it was error to issue the injunction and the judgment so doing is hereby

Reversed.