The Ninth Circuit Court of Appeals has ruled that, with two exceptions, Washington State’s three-tier alcohol distribution system does not violate federal anti-trust. The decision is a dramatic reversal of U.S. District Court Judge Martha Perchman’s April 2006 opinion holding that nine of Washington State’s restraints on alcohol distribution violated federal law.

The Ninth Circuit’s decision is the latest development in Costco Wholesale Corporation’s lawsuit against the Washington State Liquor Control Board. In the lawsuit, closely followed by small retailers across the country, Costco argued (and the lower court agreed) the following seven regulations on beer and wine are anti-competitive and in violation of the Sherman Anti-Trust act:

•Uniform pricing (manufacturers must offer uniform prices to distributors, distributors must offer uniform prices to retailers)
•Minimum mark-up (selling price at least 10 percent over acquisition costs)
•Ban on quantity discounts (no price break for volume purchase)
•Ban on credit (no distributor sales on credit to retailers)
•Delivered pricing (price to retailer includes cost of delivery, even if delivery declined)
•Ban on central warehousing (delivery is to licensed retail location only)
•Ban on retail to retail sales (retailers cannot sell to other retailers)

The Ninth Circuit Court of Appeals rejected the lower court’s contention the foregoing regulations violated the Sherman Trust Act. The court reasoned that while these state laws may have an anti-competitive effect, the effect results from legislative choice and not from collusion or private action.

While upholding the vast majority of Washington’s alcohol distribution laws, the Ninth Circuit Court did agree with the lower court that Washington’s laws requiring alcohol distributors to record their wholesale prices with the state liquor board and to hold those prices for at least 30-days did violate the Sherman Anti-Trust Act. The court found these later regulations were “hybrid” legislative restraints on competition in the sense that these laws, unlike the laws that were upheld, provide opportunities for private parties to collude and take private actions that stifle competition.

The ruling in this case is very significant for small retailers because it affirms the legality of uniform pricing laws. The removal of uniform pricing laws, and other protections the three-tier system affords, would allow Costco and other large retailers to obtain volume discounts that would not be made similarly available to small retailers. While the decision may be appealed to the U.S. Supreme Court, it is unknown whether the Supreme Court would accept the case.