Dulling the Cutting Edge

Lee Pender | January 30, 2008

Yesterday’s decision of the Ninth Circuit Court of Appeals rejected almost everything about the trial court’s decision in Costco Wholesale Corp. v. Hoen that was innovative under federal antitrust law, turning the case into an expression of conservative deference to state law.

Appellate judges did not even throw Costco the scrap of a favorable word about the Granholm portion of the judgment, on which the state had already acquiesced by changing its statutory scheme to eliminate discrimination against out-of-state manufacturers. A small mitigating factor for trade in wine is that the Ninth Circuit did not attempt to expand the effect of the 21st Amendment , leaving in place both the district judge’s definition of the supposed Section 2 defense and her finding that it had not been proved.

The immediate effect of the decision, once a mandate is issued to the district court, will be threefold: (1) Washington will have to stop requiring suppliers to post prices and hold them unchanged for 30 days without actively supervising them for reasonableness, a practice the court agreed constitutes a per se violation of federal antitrust law. (2) The state may nevertheless enforce other restraints that have operated as part of the price posting scheme, i.e., the bans on quantity discounts and credit, the minimum 10% markup and the requirement that suppliers charge all retailers in the state the same price, irrespective of the point of delivery. (3) The state may also continue the two challenged restraints of trade operating only indirectly on price, the bans on central warehousing and on sales between retailers. It seems likely the mandate will take effect in due course, as there is no reason to expect the Court of Appeals to entertain a request for rehearing, and the odds are against the Supreme Court’s accepting the case for review, should a party attempt to appeal.

Practical compliance with the opinion will raise interesting administrative issues on which the Court of Appeals offered no guidance. The first unanswered question is, assuming the state wishes to retain the allowed price restraints, how it could operate a price posting system without the illegal “hold” requirement? Would some hold period significantly shorter than 30 days be legal? If not, how could one administer an instantly revisable posting? If there is can be no mandated time period for holding a price, can a uniform price rule apply to any transactions that are not exactly contemporaneous? Assuming posting is out for practical reasons, liquor price law enforcement would be mostly on the same footing as enforcement of trade laws generally, requiring investigation and often relying on competitor’s complaints, a scenario that invites cost-benefit analysis of interfering in a marketplace that is already regulated under general antitrust and fair competition laws.

All those uncertainties arise at a time when the Washington State Liquor Control Board is considering freer trade policies and some wholesalers are becoming less ardent in their support of post-and-hold price restraints. The state legislature is in a short session currently, with relatively little opportunity for profound and controversial changes in a major regulatory scheme, but the anomalies created by the Costco case suggest an attempt at a legislative fix, possibly including consideration of jettisoning the posting-related laws the Court of Appeals said the state could keep.