Costco Suite Moves Forward

In what is without doubt the most closely watched legal issue in the industry, Washington state defended itself in federal court against Costco Wholesale Corp., which seeks to overturn many of the state regulations governing the distribution of beer and wine. The state used the argument that Washington’s current system promotes higher prices and with them, temperance.

Using the 21st Amendment — which repealed Prohibition in 1933 and gave states the right to control distribution of alcohol within their borders — as the core of their defense, the state attorneys also sought to portray the three-tiered system as a balanced approach to collecting taxes and maintaining regulatory order in the marketplace.

The 70-plus-year-old system, said Assistant Attorney General Martha Lantz, is ingenious for balancing availability and price while deterring alcohol abuse.

Costco’s argument is that the state’s intent in creating the system was not to place heavy restraints on the sale of beer and wine, but rather on hard liquor.

Using documents from the Liquor Control Board’s early years, Costco said beer and wine were meant to be widely promoted as diluted alternatives to the heavier intoxicants popular during Prohibition.

With respect to spirits, Washington is a closed state, meaning only the state’s stores can sell them; however, private sector retailers can sell beer and wine, making Washington an open state for those products, Costco said.

As further evidence for that, Costco’s attorney, David Burman of Perkins Coie in Seattle, referenced the recent legislation that opened up direct distribution to retailers by out-of-state beer and wine producers, to match the privilege that in-state producers already had.

Washington consumers, meanwhile, can receive direct shipments from both in-state and out-of-state producers.

The main reason that the state inserted distributors between manufacturers and retailers was to prevent the corruption of brewer-controlled saloons in a time where availability of beer was limited, subjecting consumers to the whims of the producers, Costco said.

Currently, Washington state regulations include a ban on high-volume discounts and credit sales, a mandatory 10 percent markup from producer to distributor and distributor to retailer, a ban on central warehousing (deliveries must be made to the stores, rather than a retailer’s warehouse), and prices posted simultaneously, must remain in place for 30 days and are the same for every retailer.