Myong Nam Kim v. Board of Liquor License Commissioners for Baltimore City (App. Ct. Md.)

Filed: June 29, 2022

Holding: A Maryland statute that allowed certain beer, wine, and liquor license holders in a certain area of a legislative district to exchange their licenses for other licenses under certain circumstances and restricted the hours of operation for certain licensees in a separate area of the same legislative district did not violate the one subject requirement in Article III, § 29 of the Maryland Constitution and was not shown to violate equal protection as guaranteed by the Fourteenth Amendment to the United States Constitution and Article 24 of the Maryland Constitution.

Opinion by: Judge Donald E. Beachley

Summary: Three Class B-D-7 beer, wine, and liquor license holders (the “Licensees”) in Baltimore City (the “City”) were cited for violating a statute that (i) allowed Class B beer, wine, and liquor license holders in a certain area of the City to exchange their licenses for Class B-D-7 licenses, provided that the license holder executed a memorandum of understanding with a local community association; and (ii) restricted the hours of operation for Class B-D-7 licenses in a separate area of City where the Licensees where located.  The Licensees challenged their citations before the Board of Liquor License Commissioners for Baltimore City (the “Board”), arguing that the statute was unconstitutional because (i) it violated Article III, § 29 of the Maryland Constitution, which requires that all laws enacted embrace but a “single subject” and; (ii) it violated equal protection as guaranteed by the Fourteenth Amendment to the United States Constitution and Article 24 of the Maryland Constitution, because the law improperly targeted African Americans because the restriction of operating hours impacted a predominantly African American community.  The Board held that the statute did not violate the single subject requirement and that the Licensees did not produce evidence to support their equal protection claim.  The Licensees appealed the Board’s decisions to the Circuit Court for Baltimore City.  The Circuit Court affirmed the Board’s decision with respect to the single subject holding but reversed the Board’s decision with respect to the equal protection holding.  On appeal from the Circuit Court, the Court of Special Appeals affirmed the Board’s original decisions.

Analysis: The Court of Special Appeals began its analysis by discussing the rationale underlying the single subject provision.  First, it “prevent[s] members of the legislature from either selfishly or surreptitiously inserting unnecessary provisions which, standing alone, would likely not receive sufficient support to pass.”  Second, it preserves the integrity of the governor’s veto power by preventing “a practice under which the legislature could include in a single act matters important to the people and desired by the Governor and other matters opposed by the Governor or harmful to the welfare of the state, with the result that in order to obtain the constructive or desired matter the Governor had to accept the unwanted portion.”  The Court then noted its historically deferential approach to evaluating whether legislation violated the single subject rule, noting that a statute violates the single subject requirement only when the statute involves “two distinct and incongruous subjects” but that “a statute’s constitutionality may be upheld if the act’s subjects are ‘germane’ to one another, meaning that they have a ‘connection and interdependence’.” The Court further noted that “[i]f several sections of the law refer to and are germane to the same subject-matter, which is described in its title, it is considered as embracing but a single subject, and as satisfying the requirements of the Constitution in this respect.”  Applying these concepts, the Court held that, although the statute accomplished two separate things, the statute clearly referred to and were germane to the same subject matter—the overall regulation of alcohol in the City—and the statute thus did not violate the single subject requirement.  Additionally, the Court found that the legislative history showed that the two components of the statute were not put together in a way that implicated the underlying rationale for the requirement.

Next, the Court of Special Appeals addressed the Licensee’s argument that the statute failed the “strict scrutiny” test and thus violated equal protection as guaranteed by the United States and Maryland Constitutions.  The Court noted that the strict scrutiny test applies when evaluating a statute that “‘creates a distinction based upon clearly suspect criteria (such as race, gender, religion, or national origin), or when it infringes on a ‘fundamental’ right.’”  The Court then noted that the strict scrutiny test “will invalidate a statute … unless it ‘is necessary to promote a compelling governmental interest.’”  Finding that the statute is facially neutral, the Court held that the Licensees had the burden of establishing that a discriminatory purpose was a motivating factor in enacting the statute.  In reviewing the record, the Court found that the Licensees relied only on legislative history materials concerning the statute and Census data showing that the areas of the City affected by the operating restrictions were all approximately 90% African American but that contiguous areas of the City unaffected by the statute were closer to 5% African American.  Based on the record, the Court of Special Appeals held that “The Licensees failed to meet their burden. Their reliance on the legislative history materials concerning Chapter 389, as well as the Census data showing the racial distribution of different neighborhoods in Baltimore City simply show, at most, a racially disparate impact. That evidence does not, however, demonstrate the discriminatory intent or purpose necessary to support strict scrutiny review for equal protection purposes. In fact, our thorough review of the record in this case, including all of the legislative history materials available from the General Assembly, reveals that the sponsors and supporters of Chapter 389 were solely focused on curtailing crime in the region—not on discriminating against a suspect class.”

The full opinion is available in PDF.

Pizza di Joey, LLC and Madame BBQ, LLC v. Mayor and City Council of Baltimore, 470 Md. 308 (Ct. of Appeals)

Filed: August 17, 2020

Holding: The City 300-foot rule that prohibits food trucks from operating within three hundred feet of a brick and mortar restaurant that serves food similar to the food truck is not unconstitutional under Article 24 of the Maryland Constitution, and is not void for vagueness because, though there was a lack of guiding standards for enforcement, there are circumstances where the ordinance would be constitutional.

Opinion by: Judge Jonathan Biran

Summary: Two food truck operators (the “Food Trucks”) filed suit against the Mayor and City Council of Baltimore (the “City”) in the Circuit Court for Baltimore City, seeking a declaration that a provision of the City’s vending ordinance restricting food trucks from parking within 300 feet of a brick-and-mortar restaurant that primarily sells the same type of food (the “300-foot rule” or the “Rule”), deprives them of equal protection and substantive due process of law in violation of Article 24 of the Maryland Declaration of Rights.  After taking evidence, the Circuit Court held that the 300-foot rule does not violate Article 24’s equal protection and substantive due process requirements.  However, the Circuit Court sua sponte enjoined the City from enforcing the 300-foot rule, concluding that the Rule is impermissibly vague, notwithstanding that the Food Trucks had affirmatively waived the vagueness claim.  On appeal, the Court of Special Appeals ruled in favor of the City, finding that (i) the 300-foot rule does not violate Article 24’s equal protection and substantive due process requirements, (ii) the Food Trucks had not preserved a vagueness claim for appellate review, and (iii) any claim for vagueness failed on the merits.  On appeal, the Court of Appeals affirmed the Court of Special Appeals.

Analysis: The Court of Appeals began its analysis by determining whether the Food Trucks had standing to assert their substantive due process and equal protection claims, noting that “[u]nder Maryland common law, standing to bring a judicial action generally depends on whether one is aggrieved, which means whether a plaintiff has an interest such that he or she is personally and specifically affected in a way different from the public generally.”  The Court held that the Food Trucks had standing to challenge the Rule’s constitutionality because the record established, among other things, that (i) they paid for and received mobile vendor licenses; (ii) they would have operated in various commercial districts in the City of Baltimore but for the Rule and would have received substantial benefit from operating in those districts; and (iii) they altered their business plans as a result of the Rule.

Next, the Court of Appeals addressed the appropriate level of review for the constitutionality of the Rule and found that the deferential “rational basis” test was appropriate because it did not involve a “clearly suspect” criteria or infringe on a “fundamental” or “important personal” right.  The Court of Appeals then held that the Rule satisfied the rational basis review because “the restriction on the locations where the Food Trucks may operate are not arbitrary, oppressive, or unreasonable. To the contrary, the Rule directly furthers the City’s conception of what is necessary for its general welfare.”  The Court further held that the Rule would satisfy the more demanding “heightened rational basis” standard of review because the Rule “bears a ‘real and substantial relation’ to the legitimate interest the City has in ensuring the vibrancy of its commercial districts and, thereby, promoting the general welfare.  Among other things, the Court noted that the Rule avoided the “‘free rider’ problem posed by food trucks siphoning business from brick-and-mortar restaurants after those restaurants have invested their resources and become semi-permanent members of the neighborhoods in which they are based.”

Finally, the Court of Appeals addressed the claim that the Rule is void for vagueness.  The Court noted that the Circuit Court erred by invalidating the 300-foot rule based on a vagueness claim because the Food Trucks had affirmatively waived the claim.  However, because of that error, the Court concluded that it had authority to address the merits of the question.  First, the Court of Appeals held that the Rule was subject to a facial vagueness challenge because there was a lack of guiding standards regarding enforcement, such that “there is a high risk that authorities necessarily will enforce the law arbitrarily.”  Next, the Court noted that, “in order to prevail on a facial vagueness claim, the person challenging the statute must show that there is no set of circumstances under which the statute would be constitutional.”  Applying this standard, the Court held that the Rule was not unconstitutionally vague because there were obvious circumstances under which the statute would be constitutional (e.g., Pizza di Joey parking its food truck within 300 feet of a brick-and-mortar pizzeria).  The Court further held that the phrases used in the Rule, such as “primarily engaged in” and “same type”, are not vague because while not defined in the ordinance, they are common and have generally accepted meanings.

The full opinion is available in PDF.

ConAgra Foods RDM v. Comptroller

ConAgra Foods RDM v. Comptroller (Ct. of Special Appeals)

Filed: June 27, 2019

Opinion by: Judges Woodward, Arthur and Leahy

Holding:

Foreign intellectual property holding company subsidiaries of corporations doing business in Maryland have no economic substance and are taxable separately from the parent.

Facts:

ConAgra is a processed food conglomerate that sold products in Maryland from 1996 through 2003, filed tax returns in Maryland and paid income tax.  One of its subsidiaries, Brands, was formed for the sole purpose of serving as an intellectual property holding company.  Brands licensed the trademarks to ConAgra and received royalties, and paid royalties back to the parent.

In 2007, the Comptroller of Maryland issued a Notice and Demand to File Maryland Corporation Income Tax Returns for 1996 through 2003 as well as a Notice of Assessment totaling $2,768,588 in back taxes, interest and penalties.  The Maryland Tax Court upheld the Comptroller’s assessment because Brands lacked “economic substance” as a separate business entity, which satisfied the U.S. Constitution requirements of “minimum contacts” and “nexus”. 

Analysis:

To meet U.S. Constitutional standards, the government’s tax collection procedures must provide taxpayers with “fair warning” to satisfy the Due Process Clause of the U.S. Constitution.  Under the Mobil Oil standard there must be a minimal connection between the interstate activities and the taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise.  Mobil Oil Corp. v. Comm’r of Taxes of Vermont, 445 U.S. 425 (1980).  The Commerce Clause is designed to prevent States from engaging in economic discrimination, and requires that a tax (1) apply to an activity with a substantial nexus with the taxing State, (2) be fairly apportioned, (3) not discriminate against interstate commerce, and (4) be fairly related to the services the State provides.  Philadelphia v. New Jersey, 437 U.S. 617.

These criteria have been implemented by the Court of Special Appeals in several cases, and the Court agreed with the Maryland Tax Court in this case after reviewing the standards from Gore Enter. Holdings, Inc. v. Comptroller, 437 Md. 492 (2013) and Comptroller v. SYL, Inc., 375 Md. 78 (2003) as well as Comptroller v. Armco Exp. Sales Corp., 82 Md. App. 429 (1990).  In Gore, Gore assigned all of its patents and certain other assets to the wholly owned subsidiary in exchange for the subsidiary’s entire stock.  The four factors in Gore that helped the Court determine if the wholly owned foreign subsidiary lacked economic substance and was consequently subject to income tax in Maryland were:  1. How dependent the subsidiary is on the parent for its income; 2. Whether there is a circular flow of money between the two companies; 3. How much the subsidiary relies on the parent for its core functions and services;  4. Whether the subsidiary engages in substantive activity that is in any meaningful way separate from the parent.  Also, in SYL, the Court of Appeals adopted the Armco reasoning and found that sheltering income from state taxation was the predominant reason for the creation of SYL.

Here, Brands was dependent on ConAgra for the “vast majority” of its income, there was a circular flow of money between the companies, Brands relied on the parent for its core functions, and it did not have any meaningful substantive activity separate from ConAgra.

Separately, the Court also approved the State’s blended apportionment formula to determine Brands’ taxable income as an altered formula is permitted by Tax General Article 10-402(d) to clearly reflect income.  Here, the popular 3-factor apportionment formula based on property, payroll and sales would have yielded an apportionment factor of zero.  The blended formula accounted for ConAgra taking deductions for the royalty expenses.

The full opinion is available PDF.

Nefedro v. Montgomery County (Ct. of Appeals)

Filed: June 10, 2010

Opinion by Judge Clayton Green, Jr.

Held: Montgomery County's ordinance that prohibits the acceptance of payment for fortunetelling ("Fortunetelling Ordinance") violates the First Amendment of the U.S. Constitution because it is regulates noncommercial protected speech and it is not narrowly tailored to promote a compelling Government interest.

Facts: Nick Nefedro wanted to open a fortunetelling business in Montgomery County. Nefedro filed suit in Circuit Court for Montgomery County after he alleged he was denied a business license from the Montgomery County Licensing Department because of the Fortunetelling Ordinance. The Circuit Court granted the County summary judgment and concluded that the Fortunetelling Ordinance was constitutional. Nefedro appealed to the Court of Special Appeals and the Court of Appeals issued a writ of certiorari.

Analysis: As an initial matter, the Court concluded that Nefedro had standing to bring the constitutional challenge because he was adversely affected by the Fortunetelling Ordinance considering he intended to open a fortunetelling business and would be subject to penalties under the Fortunetelling Ordinance if he did so.

Next, the Court decided whether the Ordinance violated the First Amendment. The Court agreed with Nefedro that the Ordinance violates Nefedro's right to freedom of speech under the First Amendment because it regulates speech and that regulation violates the First Amendment. The Court disagreed with the County's analysis that the Ordinance only regulates conduct, not speech, because it prohibits the payment of money for fortunetelling services, not fortunetelling itself, and therefore does not implicate the First Amendment. Citing to the Supreme Court and various state courts, the Court found that this was not a meaningful distinction. The Court explained that the County imposes a burden on speech when protected speech is made punishable for the exchange of payment.

The Court also refused to accept the County's assertion that fortunetelling is "inherently fraudulent" and therefore should not receive First Amendment protection. While the Court agreed that the First Amendment does not protect fraudulent statements, the Court was not convinced that fortunetelling always involves fraud. The Court noted that fortunetelling provides benefits to recipients, in the form of entertainment or information.

Further, the Court did not accept the County's argument that the Ordinance regulates commercial speech, which receives less scrutiny than laws restricting noncommercial speech. Speech is not commercial simply because it has an economic motivation. Because the purpose of fortunetelling is to provide a benefit to the recipient in the form of entertainment or information, it is not solely related to the economic interests of the speaker.

Lastly, the statute does not pass muster under the First Amendment for being "narrowly tailored to promote a compelling Government interest" because a less restrictive alternative would serve the Government's purpose. The Government's stated interest in the Ordinance was to combat fraud that apparently ensues from fortunetelling. The Court reasoned that a less restrictive, effective means of combating fraud would be to make fraud illegal, and Montgomery County and the state of Maryland already have such laws.

The full opinion is available in pdf.