Roll out the barrel. In what is a probably the most important victory to date for three-tier advocates, control state advocates, regulators, small retailers, and distributors, the Ninth Circuit Court of Appeals has reversed key elements of the lower District Court decision, handing distributors a legal victory in an important case. The Costco v. Hoen (Washington State Liquor Control Board) case has been winding through the courts for over four years now, and most of the news coming out of Washington before now has been bad for distributors.
Recall that back in April of 2006, District Court Judge Marsha Pechman ruled that the state of Washington’s core concerns of temperance and orderly markets under the 21st Amendment did not save its laws from federal antitrust scrutiny from the Sherman Act. Judge Pechman struck down most of the provisions in Washington state alcohol law, including many that are shared with other states.
In a rare demonstration of self-limiting of court powers, the Ninth Circuit Court writes that just because there may be another way to serve the temperance and orderly market concerns of the state, like Judge Pechman’s suggestion of raising excise taxes, it’s not really a federal court’s business to legislate from the bench. Writes the court:
“The district court’s suggestion that the State should serve its interest in some other way [like raising excise taxes] disparages the policy choices that Section 2 of the Twenty-first Amendment commits to the states. There doubtless are varying reasons why the State has not opted for an excise tax, and as a federal court, we are not authorized to look behind the regulation to decide whether such policy reasons are sufficiently compelling.”
Regulators and control state execs from many other states, as well as distributors and wineries, have been watching this case closely. An adverse decision in the Ninth Circuit Court could have had a rippling effect on state alcohol laws in that Circuit, which include California, Oregon, Washington, Arizona, Montana, Idaho, Nevada, Alaska, Hawaii, Guam and the Northern Mariana Islands. Boy, I bet alcohol regulators on the Mariana Islands are breathing easier tonight.
Nobody knew how the three judge panel of the Ninth Circuit Court would rule, and many were concerned that an unfavorable ruling would dismantle three-tier laws in about half of the other states (however, we did write back in March of last year: “The judges seemed sympathetic to the 21st Amendment concerns, but not sold on Washington State’s post-and-hold law.” That turned out right). This high court decision reverses many of the lower court’s arguments.
The Ninth Circuit said that, rather than bundling all of Washington State’s alcohol laws together as one scheme that “conspired” together to restrain trade, the court should look at each law separately. Costco’s antitrust complaints focused on nine key aspects of the law: uniform pricing for all distributors, required price posting, required price holding for 30 days, minimum 10% markup, ban on quantity discounts, ban on credit, required same delivered pricing for all accounts regardless of who provides freight, ban on retailer central warehousing, and finally, the last restraint and the only one held up by Judge Pechman’s District court, is the prohibition on retailers from reselling alcohol to each other.
POST AND HOLD IS GONE. In a ruling that relied heavily upon friends of the court amicus briefings, the Ninth Circuit upheld the District Court’s ruling allowing prohibition of retailer-to-retailer sales, and upheld the lower court’s ruling banning price posting and holding, but struck down all the rest. That means that Washington’s alcohol code is now considered constitutional under the 21st Amendment with the exception of post-and-hold, and does not fall under Sherman act scrutiny.
The 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.”
About 16 other states have post-and-hold provisions, where distributors must post their pricing in advance and not change them for a set period of time.
The concluding ruling reads:
“We reverse the judgment of the district court insofar as it held that most of Washington’s restraints on the sale of beer and wine were hybrid restraints subject to preemption under the Sherman Act. We affirm the district court’s rejection of Costco’s challenge to the retailer-to-retailer sales ban. We also affirm its conclusion that under our precedents, the post-and-hold scheme is a hybrid restraint of trade that is not saved by the state immunity doctrine of the Twenty-first Amendment.
The state of Washington is still mulling over the decision and has yet to decided whether to appeal the striking down of their price post-and-hold law.
Costco attorneys are similarly waiting to decide whether to appeal in what has been a mostly disastrous ruling for them. They have two weeks to appeal back to the 9th Circuit, or they have 90 days to appeal to the Supreme Court.
Indeed, the decision in this case from a high level federal court provides an important precedent in language and arguments for future courts to consider. And remember that this is now the second federal circuit court to rule favorably for wholesalers and regulators. Recall that the First Circuit handed down a decision in October backing up Maine’s alcohol laws which require face-to-face transactions and bans on direct shipping based on volume caps.
When contacted by BBD, NBWA president Craig Purser said that this indeed was a “great victory”, but warned that the game is far from over. “It could be appealed, and we also have about 25 other legal challenges in other states, among them the retailer actions. We still have lots of work to do.”
In a written statement, Craig said: “Alcohol is different from toothpaste and chewing gum, and it should be regulated differently. This ruling upholds the right of states to set alcohol policy as their citizens see fit. America’s beer distributors will continue to support state-based alcohol regulation.”
ARE MORE BREWER MEGA-DEALS COMING? INBEV AND SABMILLER?
Now that Scottish & Newcastle is being split up by the bigs, financial types are again turning their gaze to the remaining large brewers and wondering, aloud, when and where will be the next brewer deal? Reuters reports yesterday that “InBev could hold the key to any further big deals in the global beer market, with links to Anheuser-Busch and SABMiller often hinted at after Scottish & Newcastle (S&N) succumbed to a takeover.”
The report cites high commodity costs and slow growth as the catalyst to get the next big deal done. Keep in mind, also, that A-B’s stock price is near its 52 week low. But “with most of world’s top ten brewers controlled by families or blocks of shareholders, deals are difficult to predict and the only certainty was the demise of S&N as it had the only true open share register among the top ten brewers.”
“Analysts say St Louis-based Anheuser will come under pressure as its two biggest U.S. domestic competitors SABMiller and MolsonCoors move closer to forming a U.S. joint venture — so the Budweiser-brewer may turn to InBev,” writes Reuters.
Not sure if I buy this. What on earth could InBev do to help A-B fight MillerCoors? A-B already sells InBev in the US. InBev already sells Bud in Canada. I think this is just another instance of wishful thinking on the part of bankers. But then the report gets really wacky:
“They [they being unnamed analysts] say an InBev-SABMiller deal, linking the world’s two top brewers, is more of a wildcard move but cannot be ruled out as both are consummate deal-makers and they have grown rapidly over the last decade, and a deal like this would mirror an earlier mooted Interbrew-SAB linkup in 2001. Both deals would entail little overlap and hence few anti-trust obstacles to block their path, but with minimal overlaps there could be limited cost savings — diluting the financial case behind a linkup.”
“A possible InBev-SABMiller deal is more intriguing, based on combining better regional scale and reduced regional competition, while only a few markets such as the Czech Republic and Hungary would present any regulatory hurdles. A deal would give the combined company virtual control of South America, plus increased share in Russia and China, while InBev’s western Europe businesses and SABMiller’s central European operations would give increased scale.”
Again, wishful thinking. It could certainly happen, although the shareholder structures are so complex between the two companies that it would be a spaghetti mess. We’ll see.
“The world is my lobster.”
-Henry J. Tillman
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