You asked for a summary of Costco v. Hoen, in which a federal district court considered whether certain state liquor laws that were pre-empted by the federal Sherman Act could be valid exercises of state authority under the 21^st Amendment (Slip Copy, 2006 WL 1075218 (W. D. Wash. )).

SUMMARY

A federal district court in Washington found that several provisions of the state's liquor control act and its implementing regulations that were pre-empted by the federal Sherman Act were not protected as a state's legitimate exercise of powers granted under the 21^st Amendment. The court enjoined the state from enforcing them, but stayed its order until May 2007 to give the state legislature time to react.

The pre-empted provisions (1) require manufacturers and distributors to post their prices with the state liquor board and to hold them for one month, (2) require distributors to charge every retailer the same price for their products, (3) ban distributors from selling to retailers on credit, (4) ban volume sales, (5) require distributors to sell at a “delivered price” even if the retailer picked up the product or paid freight costs, (6) ban retailers from storing beer and wine at a central warehouse, and (7) require manufacturers and distributors to mark up their products by at least 10%.

The court upheld the provision prohibiting retailers from selling to other retailers.

ISSUE

Costco challenged several economic restraints contained within Washington's Liquor Control Act and its implementing regulations, claiming that they are in irreconcilable conflict with the federal Sherman Act. In an earlier order (407 F. Supp. 2d 1234), the court agreed and set this hearing to determine whether the restraints are nonetheless a valid exercise of state power under the 21^st Amendment. Under the Sherman Act, courts may preempt a state law if it conflicts with federal antitrust policy. The 21^st Amendment, on the other hand, prohibits transporting liquor into a state in violation of its laws.

The court used a three-part analysis. First, the court examined the expressed state interest and its closeness to those protected by the 21^st Amendment. Second, the court examined whether, and to what extent, the regulatory scheme served its stated purpose. Third, it balanced the state's interest against the federal interest in promoting competition. “The Supreme Court,” the court wrote, “has identified several “core concerns” of the states under the Twenty-First Amendment, including promoting temperance, ensuring orderly market conditions, and raising revenue. ”

FACTS

Costco challenged the following nine economic restraints in state law.

1. Manufacturers and distributors must post their prices with the Liquor Control Board.

2. Manufacturers and distributors must hold their prices for a full month.

3. Manufacturers and distributors must charge the same price to all their customers.

4. Distributors may not sell on credit.

5. Distributors may not offer volume discounts.

6. Distributors must sell at the same “delivered” price, even if the retailer pays the freight or picks up the goods itself.

7. Retailers may not establish a central warehouse.

8. Manufacturers and distributors each must mark up their products by at least 10%.

9. Retailers may not sell to other retailers.

Washington operates state liquor stores to sell all types of liquor (spirits, beer, and wine) and also establishes a three-tier system for beer and wine sales. Under it, manufacturers may sell only to distributors who may only sell to retailers. Costco's challenge was directed at the state's three-tier beer and wine marketing system.

In the earlier phase of the case, the court held that the law allowing in-state beer and wine manufacturers to sell directly to retailers, while not extending the same privilege to their out-of-state counterparts, violated the commerce clause. The court stayed its order to allow the state legislature to remedy the matter. It responded by extending the right to deliver to retailers to out-of-state concerns, but it included a two-year sunset provision. The court considered the testimony and evidence offered about the state's three core concerns: temperance, orderly market conditions, and raising revenue.

Temperance

Washington's law does not use “temperance” or define it, so the court used the definition in Black's Law Dictionary, which defines it as the restrained or moderate indulgence in alcohol. The court wrote that the parties stipulated that “on average, prices of beer and wine in Washington are somewhat higher than they would be in absence of the restraints. ” It noted that (1) the amount of the increase was not established, (2) the higher average was not the result on higher prices for all retailers, (3) some retailers in remote locations pay less than they would without the restraints, and (4) other retailers pay more. The court did not find that a system that raised prices for some retailers and lowered them for others promoted temperance. Further, even if the court did find that the policies promoted temperance, it found that the state's interest in promoting temperance did not outweigh the federal interest in promoting competition.

Orderly Market Conditions

The court noted that Washington law states the intent “to promote the public's interest in fostering the orderly and responsible distribution of malt beverages and wine…. ” (RCW § 66. 28. 180(1)). It found that the defendants did not provide “a clear or consistent definition of the terms “orderly marketing” or “orderly distribution. ” It found that a three-tier marketing system does not require posting and holding prices; uniform prices charged to all retailers; delivered pricing; minimum mark-ups; or bans on credit sales, volume discounts, or central warehousing. The effect of the restraints is to lower the prices charged to smaller and more remote retailers and to raise the prices charged to larger and more economically-efficient retailers. Finally, the court found that, to the extent that the challenged restraints do promote the state's interest in “orderly market conditions,” the state's interests are outweighed by the federal interest in promoting competition.

Raising Revenue

The court considered the state's third core concern, raising revenue. It found that the challenged restraints, viewed separately or collectively, do not promote the state's interest. If the state wished to promote temperance by raising prices, the court wrote, it could do so by raising taxes and thereby increasing revenue.

CONCLUSION

The court concluded that the Washington ban on retailers selling to other retailers is a unilateral restraint that is not in conflict with the Sherman Act and upheld it. A “unilateral restraint” is one that is imposed unilaterally by the state and does not grant a degree of private regulatory power to private concerns. The court had previously determined that al the other challenged restraints were in conflict with the Sherman Act.

The court enjoined the state from enforcing all of the challenged restraints except the ban on retailer-to-retailer sales.

The judgment has been stayed until May 2007 to give the state legislature time to pass legislation (Slip Copy, 2006 WL 2645183 (W. D. Wash. ).

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