Costco Wholesale Corp. v. Maleng

Decision Date29 January 2008
Docket NumberNo. 06-35542.,No. 06-35538.,No. 06-35543.,06-35538.,06-35542.,06-35543.
Citation522 F.3d 874
PartiesCOSTCO WHOLESALE CORPORATION, a Washington corporation, Plaintiff-Appellee, v. Norm MALENG, Defendant, Washington Beer & Wine Wholesalers Association, Defendant-Intervenor, and Roger Hoen; Vera Ing; Merritt D. Long, in their official capacities as members of the Washington State Liquor Control Board, Defendants-Appellants. Costco Wholesale Corporation, a Washington corporation, Plaintiff-Appellee, v. Norm Maleng; Roger Hoen; Vera Ing; Merritt D. Long, in their official capacities as members of the Washington State Liquor Control Board, Defendants, and Washington Beer & Wine Wholesalers Association, Defendant-Intervenor-Appellant. Costco Wholesale Corporation, a Washington corporation, Plaintiff-Appellant, v. Norm Maleng, Defendant, and Roger Hoen; Vera Ing; Merritt D. Long, in their official capacities as members of the Washington State Liquor Control Board, Defendants-Appellees, Washington Beer & Wine Wholesalers Association, Defendant-Intervenor-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

David J. Burman, Perkins Coie, LLP, Seattle, WA, argued the cause and filed briefs on behalf of Costco Wholesale Corporation. Also on the briefs were Michael Sandler, Shyla R. Alfonso, Kenneth Morissette Jr., and Jeffrey M. Hanson.

Martha P. Lantz, Assistant Attorney General, State of Washington, Tumwater, WA, argued the cause and filed briefs on behalf of Roger Hoen, et al. and the State of Washington. Also on the briefs were Rob McKenna, Attorney General, State of Washington, and David M. Hankins, Assistant Attorney General, State of Washington.

John C. Guadnola, Malanca, Peterson & Daheim LLP, Tacoma, WA, argued the cause and filed briefs on behalf of the defendant-intervenors, Washington Beer and Wine Wholesalers Association. Also on the briefs were J. Bradley Buckhalter, Andrea H. McNeely and Paul R. Romain.

Amicus Curiae Briefs were filed by:

Korean-American Grocers Ass'n (In support of Appellants): John D. Wilson & Alfred E. Donohue, Seattle, WA.

Washington Food Industry & Northwest Grocery Ass'n (In support of Appellee): Daniel A. Malone, Tacoma, WA.

American Beverage Licensees Ass'n (In support of Appellants): Anthony S. Kogut, East Lansing, MI.

The State of Oregon (In support of Appellants): Hardy Myers, Attorney General, State of Oregon, Mary H. Williams, Solicitor General, State of Oregon & Paul L. Smith, Assistant Attorney General, State of Oregon, Salem, OR.

The Beer Institute (In support of Appellants): Arthur J. Decelle, Washington, DC, Anne Kimball & Sarah Olson, Chicago, IL, and Christopher W. Tompkins, Seattle, WA.

Washington Restaurant Ass'n (In support of Appellee): Peter Danelo & Justo Gonzales, Seattle, WA.

National Alcohol Beverage Control Ass'n Inc. (In support of Appellants): James M. Goldberg, Washington, DC.

National Beer Wholesalers Ass'n & Wine and Spirits Wholesalers of America (In support of Appellants): Michael Madigan & Katherine Becker, Minneapolis, MN.

The State of Ohio and 22 other states (In support of Appellants): Jim Petro, Attorney General, State of Ohio, Peter M. Thomas, Senior Deputy Attorney General, State of Ohio & Todd R. Marti, Assistant Solicitor, State of Ohio, Columbus, OH.

Appeals from the United States District Court for the Western District of Washington; Marsha J. Pechman, District Judge, Presiding. D.C. No. CV-04-00360-MJP.

Before: DIARMUID F. O'SCANNLAIN, A. WALLACE TASHIMA, and MARSHA S. BERZON, Circuit Judges.

ORDER

The opinion filed on January 29, 2008 is amended as follows:

At Slip Op. p. 1426, line 5-9, replace See RCW 66.28.090. That section provides: "If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected." Id. > with See RCW 66.98.020, 080, and 090. &gt At Slip Op. p. 1426, line 12-13, replace the State's intent > with <"may provide the assurance" of such desire. McGowan v. State, 60 P.3d 67, 75 (2002). >

The panel has unanimously voted to deny the petitions for rehearing and rehearing en banc. The full court has been advised of the petition for rehearing en banc and no judge has requested a vote on whether to rehear the matter en banc. Fed. R.App. P. 35.

The petitions for rehearing and rehearing en banc are DENIED.

No further petitions shall be entertained.

OPINION

O'SCANNLAIN, Circuit Judge:

In these consolidated appeals, we must decide whether certain restrictions imposed by the State of Washington on the sale of wine and beer are preempted by federal antitrust laws. If the challenged restraints are subject to federal preemption, we must then decide whether they might be otherwise saved by operation of the State's powers under Section 2 of the Twenty-first Amendment to the United States Constitution.

I
A

In early 1933, the Twenty-first Amendment to the Constitution was passed in Congress.1 It was then ratified by convention in 36 states and went into effect in December 1933, ending this country's experiment with Prohibition. Importantly, the Twenty-first Amendment not only repealed the Eighteenth Amendment to the Constitution,2 but it also, in Section 2, provided that "[t]he transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."

The states took up the regulation of intoxicating beverages by adopting varying regulatory schemes. In Washington, a special session of the legislature was convened to craft a system for the regulation of alcohol and, eventually, the Steele Act was passed in 1934. The Steele Act created what can best be described as a "mixed" form of regulation in which the State retained exclusive control over the sale of packaged spirits through state and contract stores, but regulated the sale of beer and wine through a three-tier system that separates manufacturers from retailers.3

To oversee the alcoholic beverage industry, the State created the Washington State Liquor Control Board ("LCB"). The organizing statute of the LCB provides:

There shall be a board, known as the "Washington state liquor control board," consisting of three members, to be appointed by the governor, with the consent of the senate, who shall each be paid an annual salary to be fixed by the governor in accordance with the provisions of Revised Code of Washington ("RCW") 43.03.040. The governor may, in his discretion, appoint one of the members as chairman of the board, and a majority of the members shall constitute a quorum of the board.

RCW 66.08.012. Roger Hoen, Vera Ing and Merritt Long, who are named as parties in this suit, were the members of the LCB at the time this suit was initiated.4

B

Costco Wholesale Corporation ("Costco") operates an international chain of membership warehouses. It began operations in 1983 in Seattle, Washington. As of its most recent annual filing with the Securities and Exchange Commission, Costco counted 50,400,000 total cardholders. Costco Wholesale Corp., Annual Report (Form 10-K), at 6 (Oct. 25, 2007).

Costco's warehouse businesses are "based on the concept that offering [its] members very low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover." Id. at 3. Costco's business model also relies upon "operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities." Id. These operating efficiencies enable Costco to achieve profitability despite low gross margins.

On February 20, 2004, Costco filed a complaint against the LCB; members of the LCB in their official capacity (Hoen, Ing and Long); Norm Maleng, then-King County Prosecuting Attorney; and Christine Gregoire, then-Attorney General of Washington.5 The complaint alleged that certain laws and regulations enforced by the State on the sale of beer and wine "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 complaint also alleged that the State of Washington has no clearly articulated or affirmatively expressed policy of eliminating competition in liquor sales and that the LCB does not monitor market conditions or the competitiveness or reasonableness of prices. As such, the complaint alleged that the challenged laws and regulations were restraints of trade preempted by Section 1 of the Sherman Act, 15 U.S.C. § 1.

C

Costco's antitrust lawsuit challenged nine specific restraints on the sale and distribution of wine and beer in the State of Washington. These restraints are primarily found in RCW 66.28.180, RCW 66.28.185, RCW 66.28.070, and in several implementing regulations.

The first restraint is known as the "uniform pricing rule." Under RCW 66.28.180(3)(b), each brewery and winery must sell a particular product at the same price to every distributor. Distributors in turn must sell their beer and wine products to every retailer at the same price they have posted. RCW 66.28.180(2)(c). See also RCW 66.28.170 ("It is unlawful for a manufacturer of wine or malt beverages holding a certificate of approval issued under RCW 66.24.270 or 66.24.206 or the manufacturer's authorized representative, a brewery, or a domestic winery to discriminate in price in selling to any purchaser for resale in the state of Washington.").

The second restraint is known as the "price posting" requirement. According to this requirement, "[e]very beer or wine distributor shall file with the board at its office in Olympia a price...

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