Costco loses effort to overturn state liquor laws

In a blow to retail giant Costco, a three-judge Court of Appeals panel in San Francisco Tuesday upheld key parts of a statewide system for regulating beer and wine sales.

Costco, which owns and operates two dozen warehouse-club stores in Washington, sued the state's Liquor Control Board in February 2004, arguing that the system was anti-competitive and violated a federal law designed to limit monopolies. It won an earlier round in federal court more than two years ago.

Today a panel of the 9th U.S. Circuit Court of Appeals said the Liquor Control Board could keep a ban on high-volume discounts to beer and wine retailers — a possible boon to Costco's much smaller competitors. It also upheld rules requiring distributors to make deliveries to each store rather than a central warehouse.

But it agreed with Issaquah-based Costco on one matter: Beer and wine prices should not have to be posted publicly and remain in place for 30 days, as the state now requires, the panel said.

The so-called post-and-hold rule is "highly likely to facilitiate horizontal collusion among market participants," the panel wrote. "When firms in a market are able to coordinate their pricing and production activities, they can increase their collective profits and reduce consumer welfare."

A year after Prohibition was repealed in 1933, Washington's legislature gave the state exclusive control over packaged liquor sales but agreed to regulate beer and wine sales through a three-tier system separating manufacturers, distributors and retailers. The state also introduced other controls to prevent overconsumption by artificially inflating prices.

Ruling in Costco's lawsuit in April 2006, U.S. District Court Judge Marsha Pechman said the state's interests do not trump federal law — and ordered the state to stop enforcing key parts of the system.

But the decision was stayed while the 9th Circuit considered the state's appeal.

Tuesday's decision "affirms the state's three-tier system," said Liquor Control Board spokesman Brian Smith.

He stopped short of declaring victory, however, noting that Costco has two weeks to file an appeal with the 9th Circuit Court, or it could appeal all the way to the U.S. Supreme Court within 90 days. Smith said the board's lawyers were still reviewing the decision Tuesday and had no comment on what they might do next.

"I don't think it's over yet," he said.

Information previously published in the Seattle Times was used in this story.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com