USA: Beer and wine distribution trial goes on

Costco Wholesale Corp. won a battle against the Washington State Liquor Control Board, when U.S. District Judge Marsha Pechman ruled Washington's three-tier system for distributing beer and wine breaks federal antitrust law, CSnews announced on January 5.

Pechman stated in the report that Washington state law improperly requires that producers and distributors of beer and wine mark up prices at least 10 % above cost.She explained, "Costco has demonstrated that Washington's posting, holding, minimum markup, delivered pricing, uniform pricing, ban on volume discounts, and ban on credit sale requirements are irreconcilably in conflict with federal antitrust law."

Pechman agreed with the Issaquah, in a separate ruling on Costco's case, that the state law that allows in-state beer and wine producers to ship directly to retailers but prohibits out-of-state producers from doing so, violates the U.S. Constitution's Commerce Clause. While neither of these rulings will immediately change the way beer and wine is sold in the state, Pechman's decisions set in motion a chain of events that both Costco and the Liquor Control Board think could lower beer and wine prices for consumers in Washington -- pending a March trial and the Legislature's upcoming January session.

In her ruling, Pechman said that the Constitution requires in-state and out-of-state producers to have equal distribution rights in order to give the Legislature time to act. She gave lawmakers until April 14 to either allow all producers of wine and beer -- whether in state or out -- to distribute their own products to retailers, or to prohibit any of them from doing so.

However, Pechman also explained that "even if the challenged restraints are irreconcilably in conflict with the Sherman Act ... and not subject to antitrust immunity, they may nonetheless be shielded by the 21st Amendment to the United States Constitution," according to the Seattle-Post Intelligencer .

That means that the state can argue in March that Washington's beer and wine distribution system is defensible under the 21st Amendment, which repealed Prohibition but granted states the right to control alcohol importation.

Assistant Attorney General David Hankins, who was arguing the case on behalf of the Liquor Control Board, said in the report that Washington law protects its citizens from the danger of alcoholism and other abuse by keeping prices higher than the market would dictate.

But John Sullivan, the associate general counsel for Costco Wholesale Corp., argued that consumers are harmed under the current system, with fewer options.

"We hope to offer relief to the consumers through better value and more choices in purchasing beer and wine," Sullivan told the Seattle-Post Intelligencer . "That relief would expand the competitive options of Washington wineries and breweries as they become extensive drivers of the Washington state economy."

The Liquor Control Board's co-defendant, the Washington Beer & Wine Wholesalers Association, has said that removing the mandatory 10 % markup for both producers and distributors would limit choice for both consumers and producers by running small wineries, breweries and distributors out of business.

But if the system is to be changed, both the Liquor Control Board and the wholesalers association advocate forbidding both in-state and out-of-state producers from shipping directly to retailers, according to the report.

Tim Hightower, president of the Washington Wine Institute, believes new laws could send some small wineries out of business. The lobbying group for state wineries has calculated that the vast majority of the Washington's 385 wineries produce less than 2,000 cases a year -- too small to catch the attention of a member of the distribution system, according to the report.

As for the distributors, they stand mostly to gain business if the Legislature eliminates all self-distribution, but would lose some if all producers gain the right to self-distribution. One small distributor specializing in higher-end wines wasn't sure how the situation would affect his business.

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