Monday, February 04, 2008

Bulk of Washington Beer, Wine Regulations Survive Antitrust Challenge

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A Washington State regulation for alcoholic beverages, which required that wholesalers post their prices and adhere to those prices for at least 30 days (“post-and-hold” pricing system), was a per se violation of the Sherman Act, which was not saved by operation of the state’s powers under the Twenty-First Amendment to the U.S. Constitution, the U.S. Court of Appeals in San Francisco has ruled. However, the bulk of the state's beer and wine regulations were considered unilateral restraints imposed by the state and not subject to Sherman Act preemption.

Costco Wholesale Corporation, operator of an international chain of membership warehouses, filed suit against the Washington State Liquor Control Board and others, arguing that the “regulations restrict many of [Costco’s] efficient and competitive practices as to wine and beer suppliers and create or facilitate agreement among distributors and among wineries and brewers (manufacturers) in restraint of competition.”

The federal district court in Seattle had held that Costco was entitled to summary judgment on its antitrust claims (2006-1 Trade Cases ¶75,250). It concluded that a majority of the regulations violated the antitrust laws and could not be upheld as a valid exercise of the state's powers under the Twenty-First Amendment. The appellate court affirmed in part and reversed in part the lower court's ruling.

“Post-and-Hold” Pricing System

The appellate court upheld a determination that Washington's post-and-hold pricing system was a hybrid restraint subject to condemnation under the antitrust laws. The pricing system could facilitate horizontal collusion among market participants. Although each wholesaler was only required to adhere to its own posted price and was not compelled to follow others’ pricing decisions, the logical result of the restraints was a less competitive market. The adherence requirement effectively removes a market uncertainty by making pricing behavior transparent and discouraging variance, the court explained.

While the state’s interest in temperance was a valid and important interest under the Twenty-First Amendment, the state failed to demonstrate that its restraints were effective in promoting temperance. Thus, the state’s interests did not outweigh the federal interest in promoting competition under the Sherman Act.

Ban on Retailer-to-Retailer Sales

Washington State’s ban on sales of beer and wine by retailers to other retailers was a unilateral restraint of trade imposed by the state that was not subject to preemption by the Sherman Act, according to the court. It was not a hybrid restraint, as the complaining warehouse club chain operator argued. The ban neither licensed nor commanded a private restraint.

Ban on Central Warehousing Systems

Regulations that disallowed a central warehousing system for alcohol distribution amounted to a unilateral restraint imposed by the state, it was held. Under the central warehousing system, a grocery chain or large retailer like Costco bought goods in large lots from manufacturers and suppliers, which were delivered to a central warehouse for later delivery to individual retail stores. It was not a hybrid restraint subject to condemnation. The state simply displaced entirely a method of storing goods, in the court's view.

Other Unilateral Restraints

In the absence of the invalid post-and-hold requirement, a ban on volume discounts, delivered pricing, and credit sales (as well as regulations requiring uniform pricing and a 10-percent mark-up) would all be considered unilateral restraints imposed by the state and not subject to Sherman Act preemption, the court also ruled. Any anticompetitive effect arising out of these restraints was the result of the sovereign’s command. There was no “meeting of the minds” to determine how much discounts would be, whether territorial variations in price would be allowed, or whether credit might be extended over a certain period of time.

Moreover, Washington’s 10% mark-up did not grant to private parties a means to control pricing decisions of other firms. Instead, the Washington statute merely required a mechanical calculation, requiring that a wholesaler mark its prices at least 10% higher than its costs for the product. Similarly, that the uniform price requirement allowed manufacturers and distributors the discretion to set their own price, which they then had to apply uniformly, did not render the uniform price rule a hybrid restraint in the absence of the post-and-hold requirement.

Horizontal Price Collusion

The grant of discretion did not facilitate horizontal price collusion. Because the legislature would have enacted these regulations even it had been aware of the invalidity of the post-and-hold system, these valid provisions could be severed from the invalid provision under the regulation’s severability provision.

The January 29, 2008, decision in Costco Wholesale Corp. v. Maleng, No. 06-35538, will appear at 2008-1 Trade Cases ¶75,621.

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