Wash. Rest. Ass'n v. Wash. State Liquor & Cannabis Bd.

• Decision Date: 26 August 2019
• Docket Number: No. 79644-5-I,79644-5-I
• Citation: 448 P.3d 140
• Court: Washington Court of Appeals
• Parties: WASHINGTON RESTAURANT ASSOCIATION, a Washington non-profit organization; Northwest Grocery Association, a non-profit organization; Costco Wholesale Corporation, a Washington corporation; and Washington Lodging Association, a Washington non-profit organization, Appellants, v. WASHINGTON STATE LIQUOR AND CANNABIS BOARD, a state agency, Respondent.

448 P.3d 140

WASHINGTON RESTAURANT ASSOCIATION, a Washington non-profit organization; Northwest Grocery Association, a non-profit organization; Costco Wholesale Corporation, a Washington corporation; and Washington Lodging Association, a Washington non-profit organization, Appellants,

v.WASHINGTON STATE LIQUOR AND CANNABIS BOARD, a state agency, Respondent.

No. 79644-5-I

Court of Appeals of Washington, Division 1.

FILED: August 26, 2019

David John Burman, Perkins Coie LLP, 1201 3rd Ave. Ste. 4900, Seattle, WA, 98101-3095, Ulrike Buschbacher Connelly, Perkins Coie LLP, 1201 3rd Ave. Ste. 4900, Seattle, WA, 98101-3099, for Appellant(s).

Mary Maureen Tennyson, Washington Atty. General, 1125 Washington St. Se., P.o. Box 40110, Olympia, WA, 98504-0110, for Respondent(s).

PUBLISHED OPINION

Dwyer, J. ¶1 Following the enactment of Initiative 1183¹ (I-1183), best known for ending the state monopoly on the sale of spirits, the Washington State Liquor and Cannabis Board (the Board) promulgated new rules, set forth in WAC 314-23-060 through WAC 314-23-085, pertaining to the pricing of wine and spirits. Displeased with these rules and believing them to be directly contrary to RCW 66.28.170, which, as amended by I-1183, permits certain price differentials in the sale of wine and spirits, the Washington Restaurant Association, the Northwest Grocery Association, Costco Wholesale Corporation, and the Washington Lodging Association (collectively Costco) sought judicial review of WAC 314-23-065 through WAC 314-23-085. The superior court rejected Costco’s challenge to the new rules.

¶2 Costco appeals, asserting that the Board exceeded its authority by promulgating rules contrary to RCW 66.28.170 and that the rules are arbitrary and capricious. We conclude that the Board exceeded its authority when it promulgated WAC 314-23-065, WAC 314-23-080, and WAC 314-23-085 because these rules expressly prohibit pricing differentials in the sale of wine and spirits that are authorized by RCW 66.28.170. However, Costco does not establish the invalidity of WAC 314-23-070 and WAC 314-23-075. Accordingly, we affirm in part and reverse in part.

I

¶3 I-1183 "dramatically changed the State’s approach to regulating the distribution and sale of liquor in Washington." Wash. Ass’n for Substance Abuse & Violence Prevention v. State, 174 Wash.2d 642, 649, 278 P.3d 632 (2012). I-1183 removed the government from the business of distributing and selling liquor, redirecting the State’s focus to "the more appropriate government role of enforcing liquor laws and protecting public health and safety concerning all alcoholic beverages." LAWS OF 2012, ch. 2, § 101 (2)(b). I-1183 also modified RCW 66.28.170² by legalizing "[p]rice differentials for sales of spirits or wine based upon competitive conditions, costs of servicing a purchaser’s account, efficiencies in handling goods, or other bona fide business factors, to the extent the differentials are not unlawful under trade regulation laws applicable to goods of all kinds."³ LAWS OF 2012, ch. 2, § 119; see also RCW 66.28.170 ; former RCW 66.28.170 ( LAWS OF 2004, ch. 160, § 17).

¶4 Following the passage of I-1183, the Board received a petition for rule making from the Washington Liquor Store Association seeking clarification as to which price differentials were authorized by RCW 66.28.170. The Board informed stakeholders of its intent to promulgate rules to clarify which price differentials were permissible under RCW 66.28.170 and invited comment. Following an extensive rule-making process involving numerous proposed draft rules and seven hearings held over the course of three years, the Board filed a Concise Explanatory Statement⁴ (CES) and adopted a final version of the new pricing rules, set forth in WAC 314-23-060 through WAC 314-23-085. However, the day before the rules went into effect, the Board stayed the enforcement of the last sentence of WAC 314-23-085 and then removed it.⁵ WSR 16-19-105. The remaining rules went into effect on October 22, 2015.

¶5 Meanwhile, unsatisfied with the new rules, Costco filed a petition for judicial review in Thurston County Superior Court, requesting that the court declare WAC 314-23-065,⁶ WAC 314-23-070,⁷ WAC 314-23-075,⁸ WAC 314-23-080,⁹ and WAC 314-23-085¹⁰ invalid. ¹¹

Costco made the following assertions pertinent to this appeal: (1) that the new pricing rules conflicted with RCW 66.28.170, (2) that the Board had exceeded its authority in promulgating the pricing rules, and (3) that the rules were arbitrary and capricious. The superior court rejected Costco’s arguments, concluding that the pricing rules did not conflict with RCW 66.28.170, that the Board did not exceed its authority by promulgating the rules, and that the rules are not arbitrary and capricious. Costco appealed to Division-Two, which transferred the matter to us for decision.

II

¶6 Costco’s primary contention on appeal is that the challenged rules conflict with RCW 66.28.170 and therefore exceed the scope of the agency’s rulemaking authority. Specifically, Costco asserts that RCW 66.28.170 is unambiguous, that the challenged rules prohibit pricing practices expressly authorized by the statute, and that the Board therefore lacks the authority to promulgate the challenged rules. In response, the Board asserts that it has the authority to interpret RCW 66.28.170 because it is ambiguous, that the rules do not conflict with the statute, and that it has the authority to promulgate the challenged pricing rules as part of its broad authority to regulate the sale of liquor and wine. Costco’s contention presents the following issues: (1) whether the Board retains any authority after the enactment of I-1183 to promulgate rules relating to the pricing of wine and spirits, (2) whether RCW 66.28.170 is ambiguous, and (3) whether the challenged pricing rules conflict with RCW 66.28.170.

A

¶7 The Washington Administrative Procedure Act (APA)¹² governs the applicable standard of review of a challenge to an agency rule. Ass’n of Wash. Spirits & Wine Distribs. v. Wash. State Liquor Control Bd., 182 Wash.2d 342, 350, 340 P.3d 849 (2015). We review the validity of an agency rule de novo. Wash. State Hosp. Ass’n v. Dep’t of Health, 183 Wash.2d 590, 595, 353 P.3d 1285 (2015).

¶8 Agency rules are presumed valid. St. Francis Extended Health Care v. Dep’t of Soc. & Health Servs., 115 Wash.2d 690, 702, 801 P.2d 212 (1990). "The burden of overcoming this presumption rests on the challenger, and judicial review will be limited to a determination of whether the regulation in question is reasonably consistent with the statute being implemented." St. Francis, 115 Wash.2d at 702, 801 P.2d 212.

¶9 An agency rule is invalid only if it "(1) violates constitutional provisions, (2) exceeds the agency’s statutory rule-making authority, (3) is arbitrary and capricious in that it could not have been the product of a rational decision-maker, or (4) was adopted without complying with statutory rule-making procedures."

Ass’n of Wash. Spirits, 182 Wash.2d at 350, 340 P.3d 849 (citing RCW 34.05.570(2)(c) ). The extent of an agency’s rule-making authority is a question of law reviewed de novo. Ass’n of Wash. Spirits, 182 Wash.2d at 350, 340 P.3d 849.

¶10 Agencies lack the authority to " ‘amend or change legislative enactments.’ " Dep’t of Ecology v. Campbell & Gwinn, LLC, 146 Wash.2d 1, 19, 43 P.3d 4 (2002) (quoting Dep’t of Ecology v. Theodoratus, 135 Wash.2d 582, 600, 957 P.2d 1241 (1998) ). Thus, "rules that are inconsistent with the statutes they implement are invalid." Bostain v. Food Express, Inc., 159 Wash.2d 700, 715, 153 P.3d 846 (2007). "A rule that conflicts with a statute is beyond an agency’s authority. Invalidation of the rule is the proper remedy." Devine v. Dep’t of Licensing, 126 Wash. App. 941, 956, 110 P.3d 237 (2005) (citing H & H P’ship v. Dep’t of Ecology, 115 Wash. App. 164, 170, 62 P.3d 510 (2003) ).

B

¶11 We first consider whether the Board has the authority to promulgate any rules relating to the pricing of wine and spirits. Costco asserts that I-1183 stripped the Board of its power to regulate the price of wine and spirits because it removed the Board’s general grant of authority to regulate the liquor market that had been set forth in former RCW 66.08.030.¹³ Absent that general authority, Costco asserts, the Board is left with only the specific grants of authority set forth in RCW 66.08.030, which do not include an explicit grant of authority to regulate the price of wine and spirits. In response, the Board asserts that it retains broad authority to regulate the price of wine and spirits as part of its authority pursuant to RCW 66.08.030(12), which states that the Board may enact rules "[p]rescribing the conditions, accommodations, and qualifications requisite for the obtaining of licenses to sell beer, wines, and spirits, and regulating the sale of beer, wines, and spirits thereunder," and RCW 66.28.320, which states that the Board may enact rules "necessary to carry out the purposes and provisions of" chapter 66.28 RCW. The Board has the better argument.

¶12 It is well settled that an agency has "no inherent powers, but only such as have been expressly granted to it by the legislature or have, by implication, been conferred upon it as necessarily incident to the exercise of those powers expressly granted." State ex rel. Pub. Util. Dist. No. 1 of Okanogan County v. Dep’t of Pub. Serv., 21 Wash.2d 201, 209, 150 P.2d 709 (1944) (citing Wishkah Boom Co. v. Greenwood Timber Co., 88 Wash. 568, 153 P. 367 (1915) ).

¶13 Prior to the passage of I-1183, RCW 66.28.320 authorized the Board to adopt any rules necessary to carry out the purposes of all of the provisions of chapter 66.28 RCW. LAWS OF 2009, ch. 506, § 9. This authority was not eliminated by I-1183 and is therefore retained by the Board. See Pub. Util. Dist. No. 2 of Pac. County v. Comcast of Wash. IV, Inc., 184 Wash. App. 24, 60, 336 P.3d 65 (2014) ("Each PUD commission retains...