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Washington Appeals Costco Victory in Case Over Wine Distribution

Consumers will have to wait to see if the lawsuit results in lower retail prices for wine

Eric Arnold
Posted: May 5, 2006

Less than two weeks after a federal judge ruled in favor of Costco in a lawsuit the company filed against Washington, the state liquor control board has announced that it plans to appeal the decision. Therefore, the state's wine lovers are not likely to see any changes in price or selection at the giant retailer anytime soon.

In the month-long trial, Costco argued that Washington's liquor regulations violated the antitrust Sherman Act. The state, in partnership with the wholesalers association, countered that the system operates fairly under the 21st Amendment, which grants states the power to regulate sales of alcohol within their borders.

"Basically, we don't think that the judge properly balanced the state's right to govern the sale and distribution of alcohol under the 21st Amendment," said Bob Burdick, communications director for the liquor board, explaining why it chose to appeal rather than change the rules.

Specifically under dispute were regulations that required both distributors and retailers to mark up prices at least 10 percent and post those prices in advance with the state; prevented distributors from offering volume discounts to retailers; and prohibited retailers from buying wine and beer on credit and storing those products at a central warehouse. The judge ultimately ruled that those laws create an environment hostile to competition and that the 21st Amendment is not a license to violate the Sherman Act.

"I think the state might well have asked themselves some pointed questions about whether it's worth the trouble," said Corbin Houchins, a Seattle attorney who works for the law firm Graham & Dunn and specializes in alcoholic-beverage law. "It's hard to see a broad 21st Amendment privilege to violate the Sherman Act." He added that the U.S. Supreme Court once called Sherman the "Magna Carta of our economic freedom."

As such, he's not optimistic about the state's chances. Yet he noted, "I don't think any lawyer wants to say that a party has no chance, because sometimes appellate courts are as surprising as juries."

Burdick noted that the state isn't charging forward blindly. Early this year, the Washington legislature passed a bill that formed an independent task force, of which the liquor control board is one of the members, to examine the state's three-tier system. "They're examining virtually every aspect of the system in this task force. What are the state's policies of regulating beer and wine and what are the best methods of achieving those goals? The task force could come up with recommendations for changes or no recommendations for changes. We don't know," Burdick said. The report is due in December.

The wholesalers have yet to announce whether they also plan to appeal the judge's ruling. During the trial, the defense team split its argument in two, with the state addressing 21st Amendment issues and the wholesalers handling the antitrust portion. As such, the state's appeal only addresses the 21st Amendment portions of the final ruling.

Regardless of whether the wholesalers jump in, Houchins said that if Costco's first-round victory survives the appeals process, it will be about two years before consumers begin to see changes in price or selection.

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