Corporate & Securities Law

The Fourth Circuit Court of Appeals Upholds Most of the State of Washington's Regulations on the Sales of Alcoholic Beverages

By Sheppard Mullin Richter Hampton, LLP

On January 28, 2008, the Fourth Circuit Court of Appeals reversed a federal district court decision that had struck down most of the regulations on the sales of alcoholic beverages imposed by the State of Washington in Costco Wholesale Corp. v. Maleng et al., 06-35538,06-35542, 06-35543 (January 29, 2008).  As a result, regulations that Costco Wholesale Corporation alleged were in violation of federal antitrust laws, by limiting competition and causing retailers to charge higher prices, remain intact.

Since the repeal of Prohibition in 1935, the State of Washington's "three-tier" system of manufacturers, distributors, and retailers, prohibits retailers in Washington such as Costco from purchasing alcohol products directly from manufacturers, forcing them instead to purchase from distributors, and prohibiting them from purchasing alcoholic beverages from out-of-state wineries and breweries.

In 2004, Costco filed suit against the Washington State Liquor Control Board, and others, including the then Attorney General of the State of Washington, challenging the following nine restraints on the purchase and sale of alcoholic beverages.

1.  A “price posting” requirement, which requires beer and wine distributors to publicly post wholesale prices.

2.  A "hold" requirement, which requires beer and wine manufacturers and distributors to adhere to their posted prices for at least 30 days.  Together, the first and second challenged restraints are known as the "post-and-hold" restraints.

3.  A “uniform pricing rule”, which requires each brewery and winery to sell alcoholic products at the same price to every distributor. Distributors must also sell products to every retailer at the same price they have posted.

4.  A minimum mark-up provision, which requires distributors and suppliers to price their products at no less than 10% above acquisition costs.

5.  A ban on providing discounts based on volume purchases.

6.  A ban on sales of beer and wine on credit.

7.  A "delivered price" requirement, which requires distributors to sell beer and wine at the same price regardless of whether the retailer pays for freight.

8.  A ban on central warehousing of alcohol products by retailers.

9.  A ban on retailer-to-retailer sales of beer and wine.

A federal district court in Seattle granted summary judgment in favor of Costco, and held that eight of the nine challenged restraints irreconcilably conflict with the Sherman Act provisions of the federal antitrust laws.  The only restraint upheld by the district court was the restraint against retailer-to-retailer sales.  After a trial on defendants' defenses under the Twenty-first Amendment, which provides the states with wide latitude to regulate alcohol sales, the district court ruled that the State of Washington's interests could not prevail over the antitrust laws interests' in promoting competition.  Defendants appealed.

The appeals court affirmed the district court’s rulings that the State of Washington's post-and-hold pricing system was a non-unilateral "hybrid" restraint that was preempted by the antitrust laws, and constituted a per se violation of those laws because it facilitated horizontal collusion among market participants.  The court also affirmed the decision to reject defendants' arguments that its restraints were effective in promoting temperance under the Twenty-first Amendment.

However, based on the principle that the state is immune from antitrust liability when the state unilaterally imposes restraints on competition, except in certain circumstances when those regulations allow market participants to dictate market conditions, the circuit court reversed many of the district court's determinations.  Specifically, the appeals court upheld the State of Washington's regulations requiring uniform pricing, a 10% minimum mark-up, and delivered pricing, as well as the regulations prohibiting volume discounts, credit sales, and central warehousing. 

The court held that each of the foregoing restrictions should be viewed independently of the invalid post-and-hold requirements under the regulation’s severability provision, and that each is a unilateral restraint that is therefore immune from antitrust liability. The court noted that the fact that wholesalers simply comply with rules set by the state (such as those that forbid discounts or credit, or require a minimum mark-up) is not tantamount to an improper “meeting of the minds” among competitors, and any anticompetitive effect is not the result of any concerted action among competitors.  Based on the foregoing, the court held that each of the foregoing restraints is a unilateral restraint that is not preempted by the antitrust laws.

Authored by:

Daniel L. Brown

(212) 332-3879

dbrown@sheppardmullin.com

Full post as published by Antitrust Blog Review on March 12, 2008 (boomark / email).