A federal district court's recent decision has the Washington wine and beer distribution system in turmoil.
In Costco Wholesale Corp. v. Hoen, Costco challenged numerous Washington statutes and regulations that govern the sale and distribution of beer and wine.1 Raising antitrust and constitutional issues, Costco's claims fell into two basic categories: (1) an assault on Washington's three-tiered distribution system, and (2) a challenge to the regulatory schemes that impose restraints of trade.
Three-Tiered Distribution System
Washington created a three-tiered system to regulate the sale and distribution of alcoholic beverages. The "three tiers" refer to: (1) the producer; (2) the distributor or wholesaler; and (3) the retailer. As a general matter, Washing-ton law prohibits producers from selling their products directly to retailers. Instead, their products must pass through a separate distributor or wholesaler.
Former RCW ¤¤ 66.24.170 and 66.24.240 provided exceptions to this rule for wineries and breweries that manufacture products in the state. Discussing the licensing of "domestic" wineries, former RCW ¤ 66.24.170(3) provided that "[a]ny domestic winery licensed under this section may also act as a distributor and/or retailer of wine of its own production." Former RCW ¤ 66.24.240(2) provided a similar exception for breweries: "Any domestic brewery . . . licensed under this section may also act as a distributor and/or retailer for beer of its own production."
In essence then, Washington's system allowed domestic wineries and breweries to self-distribute products directly to retailers. In contrast, out-of-state beer and wine producers could only sell their products through a distributor, who then sold the products to a retailer.
Defending the three-tiered system, the Liquor Control Board (LCB) argued that the statutes advanced legitimate local purposes that could not be adequately served by reasonable nondiscriminatory alternatives. Specifically, the LCB asserted that the statutes facilitated tax collection and the orderly distribution of alcohol.2
Applying the recent U.S. Supreme Court decision in Granholm v. Heald,3 the federal district court rejected the LCB's arguments, holding that Washington's distribution scheme violated the Commerce Clause:
[I]t is readily apparent that Washington law discriminates against out-of-state beer and wine producers and prevents them from competing on equal terms with in-state producers. Washington law subjects out-of-state wineries and breweries, but not in-state producers, to the added costs and burdens of selling their products through a separate wholesaler under the three-tier system. Under Granholm, such discrimination against out-of-state producers is not consistent with the Commerce Clause.4
Turning to the remedy, the court withdrew the privilege of self-distribution from domestic producers. The court stayed entry of the judgment until this April, however, allowing the Washington Legislature to remedy the constitutional infirmity. Effective April 14, the Legislature extended the direct sales privilege to out-of-state retailers.5
Regulatory Scheme
In addition to the constitutional challenge, Costco claimed that the Sherman Act pre-empted various Washington policies as impermissible restraints of trade. Its antitrust claims were directed at Washington statutes and regulations that:
- Prohibit volume discounts on the sale of beer and wine;6
- Require distributors to sell beer and wine at a uniform price to all retailers;7
- Prohibit retailers from buying beer and wine on credit;8
- Require manufacturers and distributors to post beer and wine prices with the LCB, such that no sales are permissible at different prices;9
- Require beer and wine prices to be posted well in advance of their effective dates and be held for a full month;10
- Prohibit a retailer from receiving beer and wine at its own warehouse or from bonded warehouses to transfer to its various licensed locations;11
- Require a 10 percent minimum mark-up on beer and wine prices from manufacturer to wholesaler and from wholesaler to retailer;12 and
- Require distributors to sell at "delivered" pricing, even if the retailer pays the freight or picks up the goods.13
After a motion for summary judgment, the court ruled that Washington's policies were irreconcilably in conflict with federal antitrust law.14 And while the LCB claimed that Washington enjoyed state antitrust immunity, the court rejected this argument, finding that Washington did not "actively supervise" the price-setting activities.15
The only remaining question, then, was whether the 21st Amendment provided a valid defense against the antitrust violation.
This March, the court held a bench trial on this issue. Repealing Prohibition, the 21st Amendment provides, in relevant part: "The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."16
As noted by the Supreme Court, the "Twenty-first Amendment grants the States virtually complete control over. . . how to structure the liquor distribution system."17 Under the 21st Amendment then, the states have broad power to regulate alcohol products to advance certain "core interests," such as promoting temperance, ensuring orderly market conditions and raising revenue.
The LCB argued that Washington's policies effectively advanced these three "core interests," thus providing a valid defense under the 21st Amendment. The court disagreed, holding that the challenged policies were generally not effective in promoting the state's core interests.18 To the extent the restraints were minimally effective, the state's interests did not trump the federal interest in promoting competition. Accordingly, the 21st Amendment did not provide a valid defense to the antitrust violations.
Where To From Here?
The Costco case will require substantial changes to Washington's regulatory system for beer and wine. At present, the LCB is accepting public comment on the proposed changes.
Further, this case has significant consequences for the application of antitrust law to liquor regulation. Recently, the LCB announced that it will appeal this matter to the Ninth Circuit. Given the consequences of this case, the losing party is likely to the appeal to the Supreme Court.
Until then, pour yourself a glass of Washington Syrah and enjoy the ride.
Emily Harris Gant is an associate at Ogden Murphy Wallace, P.L.L.C., where her practice includes hospitality matters. This article is a brief outline of a complex subject, and is not a substitute for legal advice. You can reach Gant at 206-447-7204 or egant@omwlaw.com.
1 See 407 F. Supp. 2d 1234 (W.D. Wash. 2005); 407 F. Supp. 2d 1247 (W.D. Wash. 2005); 2006 WL 1075218 (W.D. Wash. 2006).
2 407 F. Supp. 2d at 1252-54.
3 544 U.S. 460, 125 S. Ct. 1885, 161 L.Ed.2d 796 (2005).
4 407 F. Supp. 2d at 1251.
5 See 2006 Wash. Sess. Laws. 302. This legislation included a "sunset" provision, stating that most provisions will expire by June 30, 2008, unless renewed.
6 RCW ¤¤ 66.28.180(2)(d) and (3)(b); WAC 314-12-140(3).
7 WAC 314-20-100(2), (4) and (5); WAC 314-24-190(2), (4) and (5).
8 WAC 314.13.015; RCW ¤ 66.28.010; WAC 314-20-090; WAC 314-12-140(3).
9 RCW ¤¤ 66.28.180(2)-(3).
10 WAC 314-20-100(2); WAC 314-24-190(2).
11 RCW ¤ 66.28.180(2)(h)(ii).
12 RCW ¤ 66.28.180(2)(d) and (3)(b).
13 RCW ¤ 66.28.180(2)(h)(ii). Costco also challenged RCW ¤ 66.28.070, which prohibits retailers from selling beer and wine to other licensed retailers. The court dismissed this claim, determining that it constituted a unilateral restraint of trade. 2006 WL 1075218 at *1.
14 407 F. Supp. 2d at 1242. After the bench trial, the court determined that the "central warehousing" ban was impermissible. 2006 WL 1075218 at *11.
15 407 F. Supp. 2d at 1244.
16 Const. Amend. XXI.
17 California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 105, 100 S. Ct. 937, 63 L.Ed.2d 233 (1980).
18 2006 WL 1075218 at *1.
