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Saturday, April 22, 2006 - Page updated at 12:00 AM

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Prices for beer and wine may fall in state

Seattle Times retail reporter

The middleman is gone, and Washington consumers may pay less for wine and beer because of it.

A federal judge on Friday all but dismantled the state's three-tier system that governs the sale and distribution of wine and beer and artificially inflates prices — ruling that state interests do not trump federal law.

U.S. District Court Judge Marsha Pechman ordered the state Liquor Control Board to stop enforcing key parts of its regulatory system, such as requiring distributors to mark up prices 10 percent. But Pechman stayed her ruling for 30 days to give defendants time for appeal.

A spokesman for the state said the Liquor Control Board will study the decision over the weekend and meet on Monday to decide whether to appeal. The ruling was delivered just before 5 p.m. Friday.

"My guess is the lion's share [of the savings] can be passed back to the consumer," said Jim Sinegal, chief executive of Issaquah-based Costco Wholesale.

Costco sued the state Liquor Control Board in February 2004, charging that its regulatory system was anticompetitive and violated the federal Sherman Antitrust Act — enacted in 1890 as the government's first action to limit monopolies.

Costco said when filing the suit that it did not seek to dismantle the regulatory system, but rather subject wine and beer to the same free-market forces that determine the sale price for other products, from couches to tires.

Dismantling state's system for sale and distribution of wine and beer


A federal judge Friday ordered the state Liquor Control Board to stop policies that:

Require beer and wine makers — and distributors that sell their products — to disclose prices to the board and keep them stable for 30 days.

Require beer and wine distributors to sell their products to every retailer at the same price.

Require retailers to pay cash, not use credit, for beer and wine.

Ban volume discounts for sales of beer and wine.

Require distributors to sell beer and wine at the same "delivered" price to all retailers, even if the retailer picks up the order.

Prohibit retailers from storing beer and wine at a central warehouse or from operating a warehouse that includes wine — as well as restrictions that would limit the output of wine from a central warehouse operated by a retailer.

Impose mandatory 10 percent mark-ups on the sale of wine and beer by producers and distributors that sell their products.

Source: U.S. District Court Judge Marsha Pechman's ruling on Costco Wholesale Corp. v. Washington Liquor Control Board

Pechman agreed with Costco in December, ruling that the system violated federal antitrust law.

The aim of the trial, held in late March, was to determine whether the state was shielded by the 21st Amendment, which ended Prohibition in 1933, despite the violation.

The judge's answer on Friday was no.

"If the state desires to promote temperance by artificially increasing beer and wine prices, the state could readily achieve that goal in a manner that does not run afoul of the Sherman Act," Pechman wrote.

The 21st Amendment granted each state broad power to control the sale of alcoholic beverages within its borders.

Washington state set up a three-tier system, injecting a middleman into the process — thus raising prices — to prevent overconsumption and block any one entity from monopolizing the system from beginning to end.

Under the system, wineries and breweries (the first tier) were required to sell their products to distributors or wholesalers (the second tier). The distributors or wholesalers then sold those products to retailers (the third tier).

That system remained in place for nearly 73 years, with one caveat: In-state wine and beer producers were allowed to bypass the middleman, while out-of-state wine and beer producers were not.

Pechman concluded in December that this disparity violated the U.S. Constitution's commerce clause, which defines the balance of power between the federal government and individual states.

To abide by the ruling, the state Legislature passed a bill that extended the same privileges to out-of-state producers, under orders from the judge to level the playing field.

But the bill included a "sunset" provision that required the Legislature to act in the future to preserve the law. The court Friday delivered a final judgment on this part of the case, meaning the state cannot return to the uneven playing field.

The judge did away with many other restraints. They include:

• A minimum mark-up policy that required the producers that make beer and wine, and the distributors that sell the products to retailers, to each mark up their products by at least 10 percent.

• A ban on volume discounts for superbuyers, such as Costco.

• A ban on allowing distributors to extend credit to retailers.

In filing the suit, Costco made the first significant challenge to the system. While other retailers have challenged parts of the regulatory systems in other states, Costco is the first to challenge the system as a whole.

The state had argued its three-tier system met several core concerns that allowed it to remain protected by the 21st Amendment — that its laws promoted moderate consumption, efficient revenue collection and an orderly market.

But Pechman wrote that the state's argument didn't hold up because the state did not seek to prevent the overconsumption of alcohol by promoting abstention or by reducing overall consumption of beer and wine.

"Indeed, the state actively promotes its domestic beer and wine industries and seeks to serve overall lawful demand for beer and wine."

The judge upheld the state's ban on one retailer selling to another. This will prevent Costco and other large retailers from acting as distributors in Washington.

The ruling should have the largest impact on wine and beer distributors.

Most large wine and beer producers have said they would continue to use distributors — whatever the ruling — because they are of a scale and size that prohibit them from delivering products themselves.

A spokesman for the Washington Beer and Wine Wholesalers Association, a co-defendant in the case, could not be reached for comment.

The judge said the Legislature should design regulations that are consistent with federal law.

"The court urges the Legislature to do so with dispatch," Pechman wrote.

Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com

Copyright © 2006 The Seattle Times Company

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