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SEATLLE -- 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, according to a report in the Seattle-Post Intelligencer .
Pechman said in the report that Washington state law improperly requires that producers and distributors of beer and wine mark up prices at least 10 percent 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."
In a separate ruling on Costco's case, Pechman agreed with the Issaquah, Wash.-based Costco’s claim 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, the Seattle-Post Intelligencer reported.
While neither of the 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 stated 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can argue in March that Washington's beer and wine distribution system is defensible under the 21st Amendment, which repealed Prohibition but granted states the right to control alcohol importation.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 percent 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 worried as small Washington producers are, some larger ones are unfazed.
"If everyone had to use distributors, that wouldn't affect our business at all," said Kirk Kauhane, head of sales and marketing for Washington Wine and Beverage Co., a large producer.
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, Seattle-Post Intelligencer reported.
"It could be very threatening, though I am not sure how it would all play out," Michael Waissman, owner of C + G Wines, a Portland-based distribution company with a Seattle office and warehouse, told the newspaper. "Because of the expensive costs of shipping wines, and billing terms, I don't know if it would be cost-effective for the producers to be paying ground freight or UPS ... it's hundreds of times more expensive than using trucking companies or water freight through us."