Local liquor stores sue state over unfair compensation

A group of liquor store owners filed a class action lawsuit against the state of Montana, and a judicial order issued Wednesday partially sides with the plaintiffs.

They argue a formula devised by the state to compensate them for a mandatory discount provided to liquor licensees is unconstitutional.

The formula, a part of statute adopted during the 1995 legislation that privatized liquor stores, uses several factors including the discount rate sales from 1994 and is known as the weighted average discount ratio. The formula has not been updated since that time, and stores are reimbursed the same amount each year despite their actual discounted case liquor sales.

Mark Kohoutek, who owns the state liquor store on 20th Street South in Great Falls, is a plaintiff in the suit. He said the weighted average discount ratio calculated in 1995 for his store was 2.5 percent of his total sales.

"I'm selling a lot more cases than I did in 1994," he said.

Kahoutek estimates he now sells about 5 percent in discounted liquor, so he effectively loses 2.5 percent in sales because the formula is outdated.

In the judicial order by District Judge Greg Pinski, the court granted portions of the plaintiffs' motion for partial summary judgment. A summary judgment is a decision made by the court using relevant case material without conducting a jury trial.

According to the order, both parties agree the statute relates to a legitimate government concern, however, the use of 1995 data no longer makes sense.The order states the plaintiffs argue the statute containing the reimbursement formula is unconstitutional on three grounds. Pinski ruled in their favor on two of the three. He ruled the statute violates substantive due process, which boils down to saying the law is unjust.

"The irrational and arbitrary use of 1994 sales data to set reimbursements cannot withstand constitutional scrutiny," Pinski said in his order.

The plaintiffs also argued the statute creates two classes of liquor store owners — those who sell more or less product than they did in 1994. They say the classes do not receive the same treatment because some stores are undercompensated and others are reimbursed for more discounted cases than they sold.

"The state never achieves its intended result of reimbursing liquor store owners for the actual case lot," Pinski said in the ruling.

Pinski also ruled the claims made by the plaintiffs are not barred by statute of limitations, as the state claims. He also denied the state's motion to file an amended answer to the original argument because its defense has been waived by that decision.

According to the order, the state asserts the statute and formula is an exercise of the state's police power to regulate liquor. Pinski wrote in the order that this case "has nothing to do with the manufacture, sale, importation and distribution of alcoholic beverages to the general public."

The order also says the state argues there is no equal protection violation because the stores are differently situated, but Pinski writes the mandatory nature of the discount "undermines its entire argument."

Kohoutek says he is satisfied with the decision, however the process is not over. He explained testing the constitutionality of the statute was the first step in the process. Damages will have to be determined and the state can appeal.

Pinski wrote in his conclusion, "a law, once reasonable, may impose burdens and resulting consequences that the legislature never intended."

Duane C. Kohoutek Inc., Bucher Sales LLC, Nobles Inc. and Spirits Plus LLC are named as the plaintiffs in the case.

Legislature tackling formula

The Legislature is taking action regarding the 1994 data, according to a bill that has been sent from the Senate to the House. A first reading of SB 193 was scheduled in the House on Wednesday. The bill, in its current state, strikes the language in the statute regarding the 1994 data being used in the weighted average discount ratio.

The bill includes a new section that calls for new rates, effective in Feb. 2016, based on the previous year's commission rate as part of a new formula. According to the bill, that formula will change in 2017 and again in 2018 with mandates to use current sales data.

SB 193 is scheduled to be heard in the House Business and Labor Committee on Wednesday.

Reach Tribune Staff Writer Andrea Fisher-Nitschke at 791-6527.

Follow her on Twitter @GFTrib_Andrea.