Appeals Court Reverses Washington Costco Decision

According to a breaking news press release I received from the National Beer Wholesalers Association (NBWA), the Ninth Circuit Court of Appeals has reached a verdict in the lower court’s earlier decision in Costco v. Hoen (Washington State Liquor Control Board), reversing a majority of it, which, according to the NBWA, “thereby affirm[s] the right of the states to regulate alcohol under the 21st Amendment – a system that works to protect the citizens of each state. While NBWA is still reviewing the totality of the Court’s opinion, it appears that state regulation has been validated.”

Disappointingly, the Seattle Post-Intelligencer‘s report on this begins with the following loaded sentence. “A federal appeals court Tuesday dealt Costco Wholesale Corp. a setback on whether the giant warehouse club operator could lower prices of beer and wine for its customers.” I realize that was in the business section, but so much for impartiality. Swallowing Costco’s propaganda entirely, to say they sued the state so they could lower prices to consumers is at best not telling the whole story and at worst and out and out fabrication.

Of the nine laws and regulations Costco claimed restricted competitive practices, U.S. District Court Judge Marsha Pechman agreed and ruled over a year ago in their favor. Today’s appeals ruling reversed eight of those, with the exception of the post-and-hold requirement. It appears likely that it may now be appealed to the Supreme Court. According to the PI, “The 9th Circuit Court of Appeals said the state Liquor Control Board could prohibit discounts, ban central warehousing of beer and wine by retailers, require wholesale distributors to charge uniform prices to all retailers and require a 10 percent markup. The state had said if Costco won it could put into question the systems other states use to control alcohol consumption and safeguard the collection of taxes. At least 30 other states or jurisdictions had filed briefs in support of Washington.”

Reuters, on the other hand, more even-handedly stated that Costco “lost a bid on Tuesday to overturn Washington state liquor rules that control pricing and discounts.”

The Seattle Times and the Wall Street Journal have also now weighed in with stories of their own.

From the Wall Street Journal:

Costco’s 2006 triumph attracted a lot of attention because it suggested that major changes might be in store for the nation’s complex system of regulating alcohol sales. Changes in Washington state could have a ripple effect, because most states have similar laws.

Costco is challenging a regulatory architecture that dates to the repeal of Prohibition and was designed partly to discourage overconsumption of alcohol. Makers of alcoholic beverages sell to a distributor, which marks up the price and trucks it to a bar, restaurant or store, which then sells it to a consumer.

Costco is deciding whether to appeal the ruling. “We are pleased that the central part of the anticompetitive restraints provisions was struck down,” said David Burman, a Seattle-based lawyer handling the case for Costco, referring to the “post and hold” provisions. “It will be good for Costco members and other consumers.”

Seventeen other states have post-and-hold laws, Mr. Burman said. He added that he thinks Washington lawmakers “will likely” consider overturning other provisions.

Washington alcohol regulators may appeal the part of the ruling favoring Costco. “The state got a pretty good deal. It has to decide whether it can live with a regulatory scheme that sort of has one component plucked out and thrown away,” said Richard Blau, a lawyer who specializes in alcohol law with GrayRobinson, a Florida law firm. Regulators could leave it up to state lawmakers to address that aspect of the court’s decision.

The other reason that this so-called “regulatory architecture” was partly created, in addition to discouraging overconsumption, is to level the playing field among different sizes of businesses so that advantages were not given to larger businesses by virtue of their superior bargaining position and resources to make larger buys. That was the real reason Costco went after these laws, not because they were concerned that their customers might be paying too much for the beer and wine they sold. You’d have to be pretty blind to reality to swallow that one as their motivation, yet in mainstream media story after story that continues to be the reason stated.

 

Comments

  1. Jim Randell says

    Hi J

    This is an interesting topic, particularly to me as a WA resident. I for one buy the Costco claim that prices would be lowered; I know it’s all theory until proven in practice, which, alas it appears won’t happen. I also believe that the less that Nanny Washington State controls the better for its residents’ pocketbooks generally.

    The WA state liquor stores have a monopoly and manage it as well as they manage the problem plagued ferry system. Those stores feature all too little choice vs the retailers in CA for example; same with their beer selections there, though, to be fair, they have no monopoly on beer sales- thankfully.

    I doubt that the structure of alcohol sales significantly affects alcohol consumption; again, a matter of opinion only. I can see how that structure, however, presents a barrier to entry for smaller operations, be they sellers or brewers of beer, so I for one would like WA out of the alky biz.

  2. California Pete says

    I’m less concerned about the motivations of the various parties–is the NBWA’s statement that the post-Prohibition regulations “protect the citizens of each state” any less selfishly profit-minded that Costco’s?–than with whatever the ultimate impacts are for both beer consumers and producers. I know there are a lot of truly wonderful people in the wholesale distribution business and that brewers and drinkers owe them a lot of gratitude. But I also know the Byzantine state-by-state alcohol laws do much to limit consumer choice/access to different products, while at the same time skimming some of the profits off the brewers’ bottom lines. If the selfish motives of retailers–even giant ones like Costco–means more variety for me and/or more revenue for the brewers, then I’m all for it. (Not that you’d EVER see me step foot in a Wal-Mart, and I’ll always support my local, independent liquor store and bar.)

  3. says

    Pete,

    You’re absolutely correct that the NBWA is as selfishly profit-minded as Costco, or indeed any large corporation. It’s actually rare that I agree with the NBWA on much of anything, but in this instance I do believe it’s better to have some regulations in place rather than none. What Costco was — is — trying to do is dismantle the three-tier system, not for the consumer’s benefit, but for their own. So while I don’t think the three-tier system is flawless (it’s clearly not) it does at least accomplish some of its goals, the most important of which in my opinion is that by not allowing big companies huge advantages over small ones it has the effect of letting the little guys flourish (or at least doesn’t as quickly doom them to extinction). If the Costco ruling had stood, I can pretty much guarantee it would not have meant more variety of beer in the marketplace or more profits going directly to brewers. The fact alone that Costco’s trying to sell their actions by repeating over and over again that it’s to lower the price of beer and wine should tell you all you need to know. I do think that changes are necessary to almost every state’s liquor laws and I’d be all for reform of three-tier system. But I continue think it’s a grave mistake to just throw them all and see what happens.

  4. says

    Jim,

    Thanks for your thoughts. One point I’d like to clarify, though. You mention that Washington stores have less beer selection than California stores, but that’s not the fault of three-tier system because California also has a three-tier system that is at least somewhat similar to your own state’s. I think you’re right about state liquor stores, though. I grew up in Pennsylvania, which also has state stores, and they’re mis-managed abominations. Again, I would argue for reform over throwing the baby out with the bathwater, which is what I believe Costco was trying to do.

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