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Costco Sues Washington State Over Alcohol Distribution System

Warehouse club wants quantity discounts, direct-from-winery purchasing; cost savings could be passed on to consumers.

Nick Fauchald
Posted: March 5, 2004

Costco Wholesale Corp., the chain of warehouse clubs that has become the nation's largest wine retailer, is challenging the alcohol distribution system in its home state of Washington.

In a lawsuit filed Feb. 20, Costco claims Washington's current regulations on alcohol sales violate fair trade law. Among other objections, the suit challenges laws that prohibit out-of-state wineries and breweries from distributing directly to retailers in the state. Currently, only Washington-based wineries have this privilege.

"These statutes unlawfully discriminate against out-of-state wineries and brewers and against those seeking to deal with such businesses in violation of the Commerce Clause [of the U.S. Constitution]," the lawsuit stated. That argument is similar to those made in cases filed around the country challenging state bans on winery-to-consumer wine shipments.

Defendants named in the complaint include members of the Washington State Liquor Control Board and state Attorney General Christine Gregoire.

Both the Liquor Control Board and Costco declined to comment on pending litigation.

If Costco gets its way, it could negotiate better prices and receive discounts for bulk purchases -- savings it could pass on to customers.

The suit also objects to state laws that require distributors to apply the established minimum markups and to post prices in advance, and that prohibit distributors from offering quantity discounts to retailers and selling wine on credit. Washington does not have to follow these restrictions for its own state-operated liquor stores.

In the lawsuit filing, Costco said it doesn't want to do away with distributors, only "to subject them to market forces."

In a statement issued after the lawsuit, the Washington liquor board defended its three-tier system (from producer to wholesaler to retailer), citing the special circumstances warranted by alcohol sales: "The 21st Amendment reaffirms that alcohol is not just another commodity like potato chips and that its sale and distribution should occur in a fair and orderly marketplace to discourage overconsumption and protect public safety."

However, opponents of the current liquor laws say the state should play by its own rules. "The state of Washington is our regulator and our competitor," said Michael Teer, owner of Pike & Western Wine Shop in Seattle. "It doesn't follow the regulations it makes everyone else follow."

Washington winemakers are divided on the issue, said Steven Burns, executive director of the Washington Wine Commission. "[The lawsuit] is so complex that, at this early stage, it's almost impossible for our industry to have a complete opinion of it -- you can support parts of it and be scared of parts of it."

One group that is clearly opposed to Costco's plan are wholesalers and distributors, who fear an end to the three-tier system.

In a statement responding to the lawsuit, Phil Wayt, executive director of the Washington Beer and Wine Wholesalers Association, said: "If Costco is successful in tearing down the existing state-created system for alcohol distribution, any business would be able to claim it should be allowed to distribute alcohol outside of the state's existing control system. Such a dangerous precedent would threaten local communities … all 50 states have some version of regulated and accountable system of safeguards to ensure a proper chain of custody for alcohol products."

Juanita Duggan, president and CEO of the Wine and Spirits Wholesalers of America, said she feels wine consumers are well-served by the current distribution system. She noted that state regulations on alcohol sales are intended to safeguard the public, and that wholesalers efficiently bring thousands of brands from around the world to retailers of all sizes. "Costco's end-run around the Washington State legislature, liquor control board and public will, through a self-serving lawsuit, is yet another example of this big box retailer's mentality of putting soaring profits ahead of sound public policy," she said.

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