Tea Leaves & One Fact

Lee Pender | March 18, 2007

Some historians say the origin of foretelling the future from tea leaves is an ancient Greek practice of reading wine sediment patterns in the drinking vessels.

Wine-related or not, the lawyer’s pastime of seeking clues to future judicial decisions from what judges say during oral argument is about equally reliable. Nonetheless, it’s difficult to resist a comment or two, following the hearing of the Costco appeal in the Ninth Circuit.

First, the hard news: The Ninth Circuit Court of Appeals granted a stay of the trial court’s judgment that significant chunks of Washington liquor law are invalid, pending rendition of the appellate ruling. Because the case has already been argued and has priority status, the Ninth Circuit stay will not keep those rulings in limbo very long, although a further appeal to the Supreme Court could extend it.

The background: The appellate issues in Costco are based on antitrust law, not directly on the Commerce Clause. Thus, the questions raised will be resolved in the light of Sherman Act cases, not Granholm (except as to what that case may have to say about 21st Amendment defenses generally). Of those questions, the most important is to what extent price-affecting rules that would be clearly illegal under the Sherman Act if adopted by collusion among private parties are also Sherman Act violations when imposed on the private parties by state law, with no evidence of collusion. That question divides into three categories of conduct, one in which the state makes and enforces a price rule but leaves it to the private parties (in this case, wholesalers) to say what a price that will be held for a specified time is to be (e.g., price posting), another in which the rules simply eliminate a form of competition (such as quantity discounts), without inviting the private parties to set a specific price, but facilitate anticompetitive conduct in the first category, and a third, in which the rule is just a rule, and any anticompetitive result from obeying it is unrelated to category one. The trial judge found price posting, quantity discounts, uniform pricing to all retailers, prohibition of charging separately for goods and delivery, and prohibition of taking delivery at retailer warehouses for sub-distribution to individual stores all illegal, both as a group (readily understandable) and individually (a somewhat avant-garde view); she put the prohibition on retailers selling to retailers in the third category and did not rule that part of the law invalid.

Now the speculation. Although the Washington price posting law had recently been changed in an effort to reduce its antitrust vulnerability, the judges seemed reluctant to accept it as significantly different from the Oregon law previously struck down by the same court (though not the same judges) and appeared to accept the reasoning of a subsequent case on Maryland price posting, relied on by the Costco trial judge. The “post-and-hold” part of Washington’s price posting law still looks dead. The same statutory scheme also forbids quantity discounts and requires that the same delivery-included price be charged to all retailers, but the judges appeared receptive to the possibility that without post-and-hold, those restrictions might be OK –in effect, move from category two to category three. On the other hand, they could defer to the trial judge’s implicit determination that the legislature’s integrating them into the price posting system meant they were intended to be part of it, and therefore stand or fall with post-and-hold. Jump ball; my guess is they will affirm the trial court, but may provide some guidance to the legislature on what parts of the law could be reenacted. No perceptible clues appeared on central warehousing, which is the most creative part of the trial court judgment. Net impression: The judges aren’t convinced the Sherman Act condemns non-price rules that aren’t clearly ancillary to price rules, might reverse on central warehousing, and almost certainly won’t reverse on retailer-to-retailer sales. On the 21st Amendment, this panel seems as puzzled as nearly every other court before which a state has claimed the defense as to what it would look like if proven. Prediction: They won’t declare the 21st Amendment snipe hunt over, but won’t report seeing a snipe, either. More significantly, they appeared to doubt it would add anything to the existing immunity defense that applies to state action generally, not just liquor. That defense applies both to states acting unilaterally in their sovereign capacities and to hybrid systems like price posting, in which states and individuals play roles, but in the latter case requires a degree of state supervision the trial court found lacking. The appellate panel did not seem inclined to question her finding on that point or to accept the state’s contention that Costco had the burden of proving inadequate supervision. Thus, the big imponderable remains not whether there is immunity for antitrust violations, but how much of Washington law is an antitrust violation in the first place.