Costco Wholesale v. Hoen

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
COSTCO WHOLESALE CORPORATION, 
a Washington corporation,
Plaintiff-Appellee,
v.
NORM MALENG,
Defendant,
WASHINGTON BEER & WINE No. 06-35538
WHOLESALERS ASSOCIATION,
Defendant-Intervenor,
 D.C. No.
CV-04-00360-MJP
and
ROGER HOEN; VERA ING; MERRITT
D. LONG, in their official
capacities as members of the
Washington State Liquor Control
Board,
Defendants-Appellants.

1383
1384 COSTCO WHOLESALE CORP. v. HOEN
COSTCO WHOLESALE CORPORATION, 
a Washington corporation,
Plaintiff-Appellee,
v.
NORM MALENG; ROGER HOEN; VERA
ING; MERRITT D. LONG, in their
official capacities as members of No. 06-35542
the Washington State Liquor  D.C. No.
Control Board, CV-04-00360-MJP
Defendants,
and
WASHINGTON BEER & WINE
WHOLESALERS ASSOCIATION,
Defendant-Intervenor-
Appellant.

COSTCO WHOLESALE CORP. v. HOEN 1385
COSTCO WHOLESALE CORPORATION, 
a Washington corporation,
Plaintiff-Appellant,
v.
NORM MALENG,
Defendant,
and No. 06-35543
ROGER HOEN; VERA ING; MERRITT
D. LONG, in their official  D.C. No.
CV-04-00360-MJP
capacities as members of the OPINION
Washington State Liquor Control
Board,
Defendants-Appellees,
WASHINGTON BEER & WINE
WHOLESALERS ASSOCIATION,
Defendant-Intervenor-
Appellee.

Appeals from the United States District Court
for the Western District of Washington
Marsha J. Pechman, District Judge, Presiding
Argued and Submitted
March 8, 2007—Seattle, Washington
Filed January 29, 2008
Before: Diarmuid F. O’Scannlain, A. Wallace Tashima, and
Marsha S. Berzon, Circuit Judges.
Opinion by Judge O’Scannlain
COSTCO WHOLESALE CORP. v. HOEN 1389
COUNSEL
David J. Burman, Perkins Coie, LLP, Seattle, Washington,
argued the cause and filed briefs on behalf of Costco Whole-
sale Corporation. Also on the briefs were Michael Sandler,
Shyla R. Alfonso, Kenneth Morissette Jr., and Jeffrey M.
Hanson.
Martha P. Lantz, Assistant Attorney General, State of Wash-
ington, Tumwater, Washington, argued the cause and filed
briefs on behalf of Roger Hoen, et al. and the State of Wash-
ington. Also on the briefs were Rob McKenna, Attorney Gen-
eral, State of Washington, and David M. Hankins, Assistant
Attorney General, State of Washington.
John C. Guadnola, Malanca, Peterson & Daheim LLP,
Tacoma, Washington, argued the cause and filed briefs on
behalf of the defendant-intervenors, Washington Beer and
Wine Wholesalers Association. Also on the briefs were J.
Bradley Buckhalter, Andrea H. McNeely and Paul R. Romain.
Amicus Curiae Briefs were filed by:
Korean-American Grocers Ass’n (In support of Appellants):
John D. Wilson & Alfred E. Donohue, Seattle, Washington.
Washington Food Industry & Northwest Grocery Ass’n (In
support of Appellee):
Daniel A. Malone, Tacoma, Washington.
1390 COSTCO WHOLESALE CORP. v. HOEN
American Beverage Licensees Ass’n (In support of Appel-
lants):
Anthony S. Kogut, East Lansing, Michigan,
The State of Oregon (In support of Appellants):
Hardy Myers, Attorney General, State of Oregon, Mary H.
Williams, Solicitor General, State of Oregon & Paul L.
Smith, Assistant Attorney General, State of Oregon, Salem,
Oregon.
The Beer Institute (In support of Appellants):
Arthur J. Decelle, Washington, DC, Anne Kimball & Sarah
Olson, Chicago, Illinois, and Christopher W. Tompkins,
Seattle, Washington.
Washington Restaurant Ass’n (In support of Appellee):
Peter Danelo & Justo Gonzales, Seattle, Washington.
National Alcohol Beverage Control Ass’n Inc. (In support of
Appellants):
James M. Goldberg, Washington, DC.
National Beer Wholesalers Ass’n & Wine and Spirits Whole-
salers of America (In support of Appellants):
Michael Madigan & Katherine Becker, Minneapolis, Min-
nesota.
The State of Ohio and 22 other states (In support of Appel-
lants):
Jim Petro, Attorney General, State of Ohio, Peter M.
Thomas, Senior Deputy Attorney General, State of Ohio &
Todd R. Marti, Assistant Solicitor, State of Ohio, Colum-
bus, Ohio.
COSTCO WHOLESALE CORP. v. HOEN 1391
OPINION
O’SCANNLAIN, Circuit Judge:
In these consolidated appeals, we must decide whether cer-
tain restrictions imposed by the State of Washington on the
sale of wine and beer are preempted by federal antitrust laws.
If the challenged restraints are subject to federal preemption,
we must then decide whether they might be otherwise saved
by operation of the State’s powers under Section 2 of the
Twenty-first Amendment to the United States Constitution.
I
A
In early 1933, the Twenty-first Amendment to the Constitu-
tion was passed in Congress.1 It was then ratified by conven-
tion in 36 states and went into effect in December 1933,
ending this country’s experiment with Prohibition. Impor-
tantly, the Twenty-first Amendment not only repealed the
Eighteenth Amendment to the Constitution,2 but it also, in
1
The Twenty-first Amendment provides in full: “Section 1. The eigh-
teenth article of amendment to the Constitution of the United States is
hereby repealed. Section 2. The transportation or importation into any
State, Territory, or possession of the United States for delivery or use
therein of intoxicating liquors, in violation of the laws thereof, is hereby
prohibited. Section 3. This article shall be inoperative unless it shall have
been ratified as an amendment to the Constitution by conventions in the
several States, as provided in the Constitution, within seven years from the
date of the submission hereof to the States by the Congress.” U.S. CONST.
amend. XXI.
2
The Eighteenth Amendment provided: “Section 1. After one year from
the ratification of this article the manufacture, sale, or transportation of
intoxicating liquors within, the importation thereof into, or the exportation
thereof from the United States and all territory subject to the jurisdiction
thereof for beverage purposes is hereby prohibited. Section 2. The Con-
gress and the several States shall have concurrent power to enforce this
1392 COSTCO WHOLESALE CORP. v. HOEN
Section 2, provided that “[t]he transportation or importation
into any State, Territory, or possession of the United States
for delivery or use therein of intoxicating liquors, in violation
of the laws thereof, is hereby prohibited.”
The states took up the regulation of intoxicating beverages
by adopting varying regulatory schemes. In Washington, a
special session of the legislature was convened to craft a sys-
tem for the regulation of alcohol and, eventually, the Steele
Act was passed in 1934. The Steele Act created what can best
be described as a “mixed” form of regulation in which the
State retained exclusive control over the sale of packaged
spirits through state and contract stores, but regulated the sale
of beer and wine through a three-tier system that separates
manufacturers from retailers.3
To oversee the alcoholic beverage industry, the State cre-
ated the Washington State Liquor Control Board (“LCB”).
The organizing statute of the LCB provides:
There shall be a board, known as the “Washington
state liquor control board,” consisting of three mem-
bers, to be appointed by the governor, with the con-
sent of the senate, who shall each be paid an annual
article by appropriate legislation. Section 3. This article shall be inopera-
tive unless it shall have been ratified as an amendment to the Constitution
by the legislatures of the several States, as provided in the Constitution,
within seven years from the date of the submission hereof to the States by
the Congress.” U.S. CONST. amend. XVIII (repealed 1933).
3
As the district court explained, a “three-tier system consists of the fol-
lowing levels: manufacturer, distributor, and retailer. Under a three-tier
system, manufacturers sell products to distributors, who in turn sell the
products to retailers.” Costco Wholesale Corp. v. Hoen, No. C04-360P,
2006 WL 1075218, *3 (W.D. Wash. Apr. 21, 2006). Washington’s “three-
tier” system is no longer a perfect system of tiers because it allows direct
sales to be made to retailers by both in-state and out-of-state manufactur-
ers of beer and wine. See infra n.5.
COSTCO WHOLESALE CORP. v. HOEN 1393
salary to be fixed by the governor in accordance with
the provisions of Revised Code of Washington
(“RCW”) 43.03.040. The governor may, in his dis-
cretion, appoint one of the members as chairman of
the board, and a majority of the members shall con-
stitute a quorum of the board.
RCW 66.08.012. Roger Hoen, Vera Ing and Merritt Long,
who are named as parties in this suit, were the members of the
LCB at the time this suit was initiated.4
B
Costco Wholesale Corporation (“Costco”) operates an
international chain of membership warehouses. It began oper-
ations in 1983 in Seattle, Washington. As of its most recent
annual filing with the Securities and Exchange Commission,
Costco counted 50,400,000 total cardholders. Costco Whole-
sale Corp., Annual Report (Form 10-K), at 6 (Oct. 25, 2007).
Costco’s warehouse businesses are “based on the concept
that offering [its] members very low prices on a limited selec-
tion of nationally branded and selected private-label products
in a wide range of merchandise categories will produce high
sales volumes and rapid inventory turnover.” Id. at 3. Cost-
co’s business model also relies upon “operating efficiencies
achieved by volume purchasing, efficient distribution and
reduced handling of merchandise in no-frills, self-service
warehouse facilities.” Id. These operating efficiencies enable
Costco to achieve profitability despite low gross margins.
On February 20, 2004, Costco filed a complaint against the
LCB; members of the LCB in their official capacity (Hoen,
Ing and Long); Norm Maleng, then-King County Prosecuting
Attorney; and Christine Gregoire, then-Attorney General of
4
Hoen remains a member of the LCB. Lorraine Lee now serves as LCB
Chairman and Ruthann Kurose is the other member.
1394 COSTCO WHOLESALE CORP. v. HOEN
Washington.5 The complaint alleged that certain laws and reg-
ulations enforced by the State on the sale of beer and wine
“restrict many of [Costco’s] efficient and competitive prac-
tices as to wine and beer suppliers and create or facilitate
agreement among distributors and among wineries and brew-
ers (‘manufacturers’) in restraint of competition.” The com-
plaint also alleged that the State of Washington has no clearly
articulated or affirmatively expressed policy of eliminating
competition in liquor sales and that the LCB does not monitor
market conditions or the competitiveness or reasonableness of
prices. As such, the complaint alleged that the challenged
laws and regulations were restraints of trade preempted by
Section 1 of the Sherman Act, 15 U.S.C. § 1.
C
Costco’s antitrust lawsuit challenged nine specific restraints
on the sale and distribution of wine and beer in the State of
Washington. These restraints are primarily found in RCW
66.28.180, RCW 66.28.185, RCW 66.28.070, and in several
implementing regulations.
The first restraint is known as the “uniform pricing rule.”
Under RCW 66.28.180(3)(b), each brewery and winery must
sell a particular product at the same price to every distributor.
Distributors in turn must sell their beer and wine products to
every retailer at the same price they have posted. RCW
66.28.180(2)(c). See also RCW 66.28.170 (“It is unlawful for
a manufacturer of wine or malt beverages holding a certificate
5
Costco’s complaint also initially challenged Washington’s policy of
allowing only in-state beer and wine producers to sell their products
directly to retailers. In its December 21, 2005 Order, the district court
granted partial summary judgment to Costco, ruling that Washington’s
policy violated the Commerce Clause. Subsequent to that ruling, the
Washington Legislature enacted legislation extending the direct sales priv-
ilege to out-of-state producers as well. The Commerce Clause challenge
is not before us and we thus express no views on the district court’s reso-
lution of that matter.
COSTCO WHOLESALE CORP. v. HOEN 1395
of approval issued under RCW 66.24.270 or 66.24.206 or the
manufacturer’s authorized representative, a brewery, or a
domestic winery to discriminate in price in selling to any pur-
chaser for resale in the state of Washington.”).
The second restraint is known as the “price posting”
requirement. According to this requirement, “[e]very beer or
wine distributor shall file with the board at its office in Olym-
pia a price posting showing the wholesale prices at which any
and all brands of beer and wine sold by such beer and/or wine
distributor shall be sold to retailers within the state.” RCW
66.28.180(2)(a). The posted prices are publicly available after
they take effect.
The third restraint is related to posting and is known as the
“hold” requirement: beer and wine manufacturers and distrib-
utors must “hold” to their posted prices for at least 30 days.
See Washington Administrative Code (“WAC”) 314-20-
100(2), (5); WAC 314-24-190(2), (5).
The fourth restraint is a minimum mark-up provision. With
limited exceptions, under RCW 66.28.180(2)(d) and (3)(b),
distributors and suppliers must price their products at no less
than 10% above their acquisition costs. RCW 66.28.180(2)(d)
(“No price may be posted that is below acquisition cost plus
ten percent of acquisition cost. However, the board is empow-
ered to review periodically, as it may deem appropriate, the
amount of the percentage of acquisition cost as a minimum
mark-up over cost and to modify such percentage by rule of
the board, except such percentage shall be not less than ten
percent.”).
The fifth restraint is a ban on providing discounts based
upon the volume of product purchased. See RCW
66.28.180(2)(d) (“Quantity discounts are prohibited.”); RCW
66.28.180(3)(b) (same).
The sixth restraint is a ban on sales of beer and wine on
credit. RCW 66.28.010(1)(a). This rule is implemented by
1396 COSTCO WHOLESALE CORP. v. HOEN
several Washington regulations. See WAC 314-20-090 (“No
beer distributor nor brewer or beer importer holding a beer
distributor’s license shall sell or deliver beer to any retailer
except for cash paid at the time of the delivery thereof: Pro-
vided, That cash may be paid prior to the delivery of beer sold
to any retailer.”); WAC 314-13-015 (delineating the forms of
payment which the LCB will accept as “cash payment”).
The seventh restraint is the “delivered price” requirement.
Under this provision, distributors must sell beer and wine at
the same “delivered” price to all retailers, even if the retailer
pays the freight and picks up the goods itself. See RCW
66.28.180(2)(h)(ii) (“Beer and wine sold as provided in this
section shall be delivered by the distributor or an authorized
employee either to the retailer’s licensed premises or directly
to the retailer at the distributor’s licensed premises . . . A dis-
tributor’s prices to retail licensees shall be the same at both
such places of delivery.”).
The eighth restraint is known as the central warehousing
ban. Washington prohibits retailers from storing or taking
delivery of beer and wine at a central warehouse. See RCW
66.24.185(4) (“Warehousing of wine by any person other than
(a) a licensed domestic winery or a bonded wine warehouse
licensed under the provisions of this section, (b) a licensed
Washington wine distributor, (c) a licensed Washington wine
importer, (d) a wine certificate of approval holder (W7), or (e)
the liquor control board, is prohibited.”).
Finally, the ninth restraint, and the only one upheld by the
district court, is Washington’s prohibition on retailers selling
beer and wine to other retailers. Pursuant to RCW
66.28.070(1), except in limited circumstances, it is “unlawful
for any retail beer or wine licensee to purchase beer or wine,
except from a duly licensed distributor, domestic winery,
domestic brewer, certificate of approval holder with a direct
shipment endorsement, or the [liquor control] board.”
COSTCO WHOLESALE CORP. v. HOEN 1397
D
On July 29, 2004, the LCB moved for judgment on the
pleadings, primarily arguing that the above-mentioned
restraints were not preempted by the Sherman Act because
they were “unilateral” restraints of trade imposed by the State.
The district court, Judge Marsha Pechman presiding, denied
this motion, concluding that the defendants failed to show that
there was no irreconcilable conflict between the challenged
scheme in Washington and the Sherman Act. The district
court further concluded that Washington’s scheme constituted
a hybrid system of regulation.
Thereafter, Costco and the LCB defendants and Defendant-
Intervenor Washington Beer & Wine Wholesalers Association
(“WBWWA”) filed separate motions for summary judgment
on the antitrust claims.6 The district court concluded in its
December 21, 2005 Order that Costco had demonstrated that
Washington’s posting, holding, minimum mark-up, delivered
pricing, uniform pricing, ban on volume discounts, and ban on
credit sale requirements were in irreconcilable in conflict with
federal antitrust law. It also concluded that Washington did
not actively supervise its regulatory scheme within the mean-
ing of California Retail Liquor Dealers Ass’n v. Midcal Alu-
minum, Inc., 445 U.S. 97, 105-06 (1980) (Midcal), because it
neither reviewed resulting prices for reasonableness nor moni-
tored market conditions. As for the retailer-to-retailer sales
ban and central warehousing ban, the district court concluded
that additional supplemental briefing was necessary. Because
of these conclusions, the district court denied the defendants’
motions for summary judgment. The district court also denied
6
The district court granted WBWWA’s motion for leave to intervene in
this litigation on May 21, 2004. The court concluded that the “Association
may intervene as a matter of right under Fed. R. Civ. P. 24(a) because its
members have a protectable interest in this litigation that will be impaired
or impeded if not allowed to intervene, and the government Defendants
may not adequately represent the Association’s interests.”
1398 COSTCO WHOLESALE CORP. v. HOEN
Costco’s motion for summary judgment, however, because it
concluded that, viewing the evidence in the light most favor-
able to the non-moving party, material issues of fact remained
regarding the State’s Twenty-first Amendment defense.
On March 7, 2006, the district court issued a “Supplemen-
tal Order on Summary Judgment Motion Re: Antitrust
Claims.” In that Order, the district court concluded that the
central warehousing ban was a hybrid restraint that was in
irreconcilable conflict with federal antitrust law and not saved
by state action immunity. The district court reserved for trial
the question of whether the ban might be preserved as a valid
exercise of the State’s Twenty-first Amendment power. The
district court also reserved ruling on the retailer-to-retailer
sales ban and directed the parties to respond further to each
other’s arguments in their trial briefs.
The trial on Washington’s Twenty-first Amendment
defense took place in March 2006. Numerous witnesses were
called to testify, including members of the LCB and expert
witnesses such as historian William Rorabaugh and econo-
mists Dr. Frank Chaloupka and Dr. Keith Leffler. The district
court issued its “Findings of Fact and Conclusions of Law” on
April 21, 2006. Costco Wholesale Corp. v. Hoen, No. C04-
360P, 2006 WL 1075218 (W.D. Wash. Apr. 21, 2006) (here-
inafter “Findings of Fact”). The district court found, “[f]or the
most part,” that the policies challenged by Costco were not
effective in advancing the state’s core interests under the
Twenty-first Amendment. Id. at *1. The court found no “per-
suasive evidence that the purpose of any of the challenged
restraints was to promote temperance by raising average beer
and wine prices.” Id. at *5, ¶ 16. In addition, the court was not
persuaded “that the challenged restraints are effective in pro-
moting temperance, whether viewed individually or as a
whole.” Id. at *6, ¶ 18. Although acknowledging that the evi-
dence at trial indicated that Washington has one of the lowest
rates in the country for per capita ethanol consumption, it did
not see any “persuasive evidence that the [sic] Washington’s
COSTCO WHOLESALE CORP. v. HOEN 1399
relatively low rates of ethanol consumption per drinker are
due to any of the challenged restraints, either viewed individ-
ually or as a whole.” Id.7 Finally, the district court determined
that, even if the restraints were effective in raising prices and
promoting temperance in this manner, the State “could readily
achieve that goal in a manner that does not run afoul of the
Sherman Act. Most obviously, the State could adopt higher
excise taxes.” Id. at *7, ¶ 22. Thus, the district court con-
cluded that the State’s interests could not prevail over the fed-
eral interest in promoting competition.
The district court’s determinations that the “hybrid” Wash-
ington restraints were ineffective or only of minimal effec-
tiveness in promoting the State’s interests led to the
conclusion that the restraints were not saved from preemption
by Section 2 of the Twenty-first Amendment and the district
court therefore enjoined the LCB from enforcing the
restraints. Id. at *10.
The LCB defendants and WBWWA filed timely notices of
appeal of the district court’s judgment. In addition, Costco
filed a timely notice of cross-appeal of the district court’s rul-
ing upholding the retailer-to-retailer sales ban.8
II
A
The “threshold question” in this appeal is whether Wash-
ington State’s plan for pricing wine and beer is preempted by
7
In common usage, ethanol is referred to simply as alcohol.
8
The district court subsequently agreed to stay its judgment until May
1, 2007 in order to give the State Legislature “an opportunity to take
action in response to the Court’s ruling.” Costco v. Hoen, No. C04-360P,
2006 WL 2645183 (W.D. Wash. Sept. 14, 2006). After we heard oral
argument, we ordered that the district court’s stay remain in effect “until
further order of this court or until issuance of the mandate.”
1400 COSTCO WHOLESALE CORP. v. HOEN
the Sherman Act. Midcal, 445 U.S. at 102. A party may suc-
cessfully enjoin the enforcement of a state statute only if the
statute on its face irreconcilably conflicts with federal anti-
trust policy. See Rice v. Norman Williams Co., 458 U.S. 654,
659 (1982). In other words, to be struck down, the regulation
or restraint must effect a per se violation of the Sherman Act.
Per se rules of illegality can be invoked only when they apply
to practices “which because of their pernicious effect on com-
petition and lack of any redeeming virtue are conclusively
presumed to be unreasonable and therefore illegal without
elaborate inquiry as to the precise harm they have caused or
the business excuse for their use.” Continental T.V., Inc. v.
GTE Sylvania Inc., 433 U.S. 36, 50 (1977) (internal citations
omitted).
In answering this “threshold” question, we are confronted
immediately with two distinct methodological problems. The
first is whether the challenged restraints are to be analyzed
individually or as a bundle, in other words, as an entire “con-
spiracy”? In addressing this question, we must reconcile two
sometimes competing, but well-settled, legal propositions.
First, when the constitutionality of a state statute is chal-
lenged, principles of state law guide the severability analysis
and we should strike down only those provisions which are
inseparable from the invalid provisions. Tucson Women’s
Clinic v. Eden, 379 F.3d 531, 556-57 (9th Cir. 2004) (citing
Dep’t of Treas. v. Fabe, 508 U.S. 491, 509 n.8 (1993)). Sec-
ond, in the antitrust context, the “character and effect of a
conspiracy are not to be judged by dismembering it and view-
ing its separate parts, but only by looking at it as a whole.”
Continental Ore Co. v. Union Carbide & Carbon Corp., 370
U.S. 690, 699 (1962) (quoting United States v. Patten, 226
U.S. 525, 544 (1913)).
We think that, for reasons to be explained, the issue of sev-
erability in this case is intimately tied to the question of
whether the restraints herein challenged are “hybrid” or “uni-
COSTCO WHOLESALE CORP. v. HOEN 1401
lateral” restraints. We therefore deal with the procedural issue
of severability in resolving the merits of the appeal.
B
The second methodological problem arises because of the
uncertain relationship between the “active supervision”
inquiry under Midcal, 445 U.S. at 105, and the “hybrid/
unilateral” inquiry under Fisher v. City of Berkeley, 475 U.S.
260 (1986). As “state regulatory programs [can] not violate
[the Sherman Act],” we generally must determine whether a
“state’s involvement in [a] price-setting program is sufficient
to establish antitrust immunity.” Midcal, 445 U.S. at 103-04
(citing Parker v. Brown, 317 U.S. 341 (1943)). Midcal, which
provides the framework for evaluating claims of state action
immunity under Parker, articulates a two-part test for immu-
nity to apply. “First, the challenged restraint must be ‘one
clearly articulated and affirmatively expressed as state pol-
icy’; second, the policy must be ‘actively supervised’ by the
State itself.” Midcal, 445 U.S. at 105 (citing City of Lafayette
v. Louisiana Power & Light Co., 435 U.S. 389, 410 (1978)
(opinion of Brennan, J.)).
In Fisher, the Supreme Court introduced a wrinkle to the
Midcal inquiry when it articulated that “[a] restraint imposed
unilaterally by government does not become concerted-action
within the meaning of [§ 1 of the Sherman Act] simply
because it has a coercive effect upon parties who must obey
the law.” 475 U.S. at 267. Thus, Fisher appeared to preempt
application of the preemption inquiry by holding that some
types of regulations are entirely immune from the Midcal
analysis, depending upon whether the restraint can be charac-
terized as a “unilateral” restraint or as a “hybrid” restraint. See
Fisher, 475 U.S. at 267-68 (“Certain restraints may be charac-
terized as ‘hybrid,’ in that nonmarket mechanisms merely
enforce private marketing decisions.”). In Sanders v. Brown,
504 F.3d 903 (9th Cir. 2007), we confirmed that “where the
state, acting as a sovereign, imposes restraints on competi-
1402 COSTCO WHOLESALE CORP. v. HOEN
tion,” the state “is immune from antitrust liability, regardless
of whether the restraint in question would satisfy the Midcal
test.” Id. at 918. Hence, once we determine that a restraint is
unilaterally imposed by the state as sovereign, Parker immu-
nity applies without further inquiry. If the restraint is not uni-
laterally imposed, but rather involves “a state’s decision to let
producers dictate market conditions to others,” it is a hybrid
restraint that is “illegal per se under the Sherman Act.” Id.
Parker immunity applies to the hybrid restraint only if it satis-
fies the two-part Midcal inquiry.
We have previously recognized that the Supreme Court has
not provided clear guidance in defining the relationship
between the “hybrid” restraint inquiry and the Midcal “active
supervision” inquiry. See Snake River Valley Elec. Ass’n v.
PacifiCorp, 238 F.3d 1189, 1192 n.8 (9th Cir. 2001) (“The
Court has not clearly defined the relationship between federal
antitrust preemption of state laws restricting competition and
the state action immunity doctrine.”) (internal citations omit-
ted). In Midcal, the court treated the issues of preemption and
immunity as essentially the same inquiry, whereas in Rice and
Fisher, the court drew a fine line between the inquiries. See
Rice, 458 U.S. at 662 n.9 (“Because of our resolution of the
pre-emption issue, it is not necessary for us to consider
whether the statute may be saved from invalidation under the
doctrine of Parker . . . .”); Fisher, 475 U.S. at 270 (holding
that because the rent controls were not “a per se violation of
§ 1 of the Sherman Act,” the court “need not address whether
. . . they would be exempt under the state-action doctrine from
antitrust scrutiny”); see also PHILLIP AREEDA & HERBERT
HOVENKAMP, ANTITRUST LAW, ¶ 217d (3d ed.) (“Our most
essential point here is that the state action exemption from the
antitrust laws simply expresses the conclusion that certain
state laws are not preempted. The Midcal-Rice-Fisher inquiry
and the Parker inquiry are fundamentally consistent but
sequential.”).
We believe that in this case—and many others—there is
such substantial overlap between the active supervision and
COSTCO WHOLESALE CORP. v. HOEN 1403
hybrid inquiries that they effectively merge. We are not alone
in drawing this conclusion. See Merrick Garland, Antitrust
and State Action: Economic Efficiency and the Political Pro-
cess, 96 YALE L.J. 486, 507 (1986) (“There are signs that the
Fisher court understood the way in which its preemption anal-
ysis collapses into the Midcal test.”); id. at 489 (concluding
that Fisher merely “restat[ed]” Midcal’s basic tenets); Daniel
J. Gifford, The Antitrust State-Action Doctrine After Fisher v.
City of Berkeley, 39 VAND. L. REV. 1257, 1283-84 (1986)
(“The class of restraints deemed hybrid under Fisher ought to
be coextensive with the restraints that cannot pass the Midcal
supervision requirement. No reason exists for construing
Fisher’s hybrid category broadly in order to subject restraints
to evaluation under the Midcal supervision test if those
restraints by nature will pass that test . . . Occam’s razor ought
to dispense with the evaluation of hybrid restraints under Mid-
cal’s supervision requirement.”).
In the case of a facial challenge to a state regulation, we
believe that a determination of whether a restraint is hybrid
will largely answer the question of whether the state actively
supervises the restraint. Until the Supreme Court further clari-
fies this doctrinally confusing area, however, we will follow
the lead of other courts and begin by determining whether the
restraint is hybrid or unilateral. See Freedom Holdings v.
Spitzer, 357 F.3d 205, 223-24 (2d Cir. 2004); TWFS, Inc. v.
Schaefer, 242 F.3d 198, 208-09 (4th Cir. 2001). We will then
consider, out of an abundance of caution, whether there exists
any reason to apply further the state action immunity analysis
of Parker to any restraints deemed to be hybrid in nature.
C
Which leads us to the Fisher inquiry. What precisely does
it mean for a restraint to be hybrid? It has been noted that the
line between a hybrid and unilateral restraint “is extraordinar-
ily elusive.” John E. Lopatka & William H. Page, State Action
and the Meaning of Agreement Under the Sherman Act: An
1404 COSTCO WHOLESALE CORP. v. HOEN
Approach to Hybrid Restraints, 20 YALE J. ON REG. 269, 272
(2003). Although undoubtedly elusive, the line becomes less
hazy by reference to the Supreme Court’s decisions in this
area.
In Fisher, the Court was faced with a city’s rent control
regulations setting maximum rental prices. It found that the
rent control regulation was a classic “unilateral restraint,”
because “[t]he ordinary relationship between the government
and those who must obey its regulatory commands whether
they wish to or not is not enough to establish a conspiracy.”
475 U.S. at 267. It continued:
While the Ordinance does give tenants—certainly a
group of interested private parties—some power to
trigger the enforcement of its provisions, it places
complete control over maximum rent levels exclu-
sively in the hands of the Rent Stabilization Board.
Not just the controls themselves but also the rent
ceilings they mandate have been unilaterally
imposed on the landlords by the city.
Id. at 269 (emphasis added). Thus, because the restraints were
unilaterally imposed, the Court held that the rent control stat-
ute was not in irreconcilable conflict with the Sherman Act,
even though such a maximum pricing scheme might other-
wise be a per se violation.
In reaching this conclusion, the Fisher court distinguished
two prior cases as involving “hybrid restraints.” In Schweg-
mann Bros. v. Calvert Distillers Corp., 341 U.S. 384, 385-87
(1951), a Louisiana statute authorized a distributor to enforce
agreements fixing minimum retail prices not only against par-
ties to such contracts, but also against retailers who sold the
distributor’s products without having agreed to the price
restrictions. The Fisher court noted that,
[U]nder the Louisiana statute, both the selection of
minimum price levels and the exclusive power to
COSTCO WHOLESALE CORP. v. HOEN 1405
enforce those levels were left to the discretion of dis-
tributors. While the petitioner-retailer in that case
may have been legally required to adhere to the
levels so selected, the involvement of his suppliers in
setting those prices made it impossible to character-
ize the regulation as unilateral action by the State of
Louisiana.
475 U.S. at 268.
The Fisher court also recognized that the scheme in Midcal
represented a hybrid restraint. Id. at 268-69. California
required that all wine producers and wholesalers file fair trade
contracts or price schedules with the State. If a wine producer
did not set prices, wholesalers had to post a resale price
schedule for that producer’s brands. No State-licensed wine
merchant could sell wine to a retailer at other than those
prices. Midcal, 445 U.S. at 99. The Midcal court concluded
that the statute was preempted and Parker immunity was not
available, because “[t]he State neither establishes prices nor
reviews the reasonableness of the price schedules; nor does it
regulate the terms of fair trade contracts. The State does not
monitor market conditions or engage in any ‘pointed reexami-
nation’ of the program.” Id. at 105-06. In other words, the
lack of active supervision over private pricing decisions ren-
dered the regulations hybrid restraints.
Finally, in a post-Fisher case, 324 Liquor Corp. v. Duffy,
479 U.S. 335 (1987), the Court dealt with a New York statute
that permitted wholesalers to control the minimum resale
price of liquor charged by retailers. As in Midcal, the court
found the statute preempted even though there were no pri-
vate agreements involved; the court again focused on the fact
that the State authorized vertical price fixing without super-
vising in any meaningful way the amount of those prices. Id.
at 344-45. The scheme in effect delegated a “degree of private
regulatory power” to the private actors. Id. at 345 n.8.
1406 COSTCO WHOLESALE CORP. v. HOEN
[1] The rule to be taken from these cases is that state stat-
utes or local ordinances creating unsupervised private power
in derogation of competition are subject to preemption. See
Freedom Holdings, 357 F.3d at 223 (“Where the anticompeti-
tive effects of a state statute obviate the need for private par-
ties to act on their own to create an anticompetitive scheme,
the statute may be attacked as a ‘hybrid’ restraint on trade.”).
But courts must be careful not to rely upon the presence of
anti-competitive effect alone; a state regulation is not ren-
dered hybrid solely because it produces an effect that could
not be produced by agreement of private parties without vio-
lating the antitrust laws. Mass. Food Ass’n v. Mass. Alcoholic
Beverages Control Comm’n, 197 F.3d 560, 564 (1st Cir.
1999); Fisher, 475 U.S. at 266 (“What distinguishes the oper-
ation of Berkeley’s Ordinance from the activities of a benevo-
lent landlords’ cartel is not that the Ordinance will necessarily
have a different economic effect, but that the rent ceilings
have been unilaterally imposed by government upon landlords
to the exclusion of private control.”) (emphasis added).9 As
Judge Boudin of the First Circuit has artfully noted, “[w]hat
is centrally forbidden is state licensing of arrangements
between private parties that suppress competition—not state
directives that by themselves limit or reduce competition.”
Mass. Food Ass’n, 197 F.3d at 566.
III
A
We first apply these principles to Costco’s cross-appeal of
the district court’s conclusion that the retailer-to-retailer sales
9
Prior to his entering active judicial service, our colleague on the D.C.
Circuit, Judge Merrick Garland, expressed the same idea in an article dis-
cussing the Supreme Court’s state-action antitrust jurisprudence. He
wrote: “The post-Parker cases constitute the Court’s efforts to thread this
needle — an effort to protect true state regulation, even if anticompetitive,
but to bar mere state ‘authorization’ of private anticompetitive conduct.”
Garland, 96 YALE L.J. at 500-01.
COSTCO WHOLESALE CORP. v. HOEN 1407
ban constituted a “unilateral” restraint of trade. With little
analysis, the district court concluded in its April 21, 2006
“Findings of Fact and Conclusion of Law” that this policy
“does not grant a degree of private regulatory power to private
actors,” and thus was a unilateral restraint imposed “purely by
the State.”
[2] We agree with the district court that the ban on sales by
retailers to other retailers is a unilateral restraint of trade that
is not subject to preemption by the Sherman Act. The ban on
sales by retailers to other retail institutions is akin to the rent
control ordinance in Fisher. In Fisher, the city imposed a
restraint on the pricing decisions of landlords by establishing
a maximum rent control ceiling; but the court found the con-
certed action requirement missing because whatever anti-
competitive effect of the Ordinance (and the Court assuredly
recognized there would be one) was the result of the city’s
command, not of private action. In other words, public offi-
cials determined the nature and extent of the resulting con-
sumer injury, with no degree of discretion delegated to private
actors. See Page & Lopatka, 20 YALE J. ON REG. at 272. Simi-
larly here, an anti-competitive effect can surely be hypothe-
sized from the State’s ban on sales of beer and wine to
retailers by other retailers. The ban removes from the market
certain firms or persons who might otherwise compete; with
fewer, and likely larger, horizontal competitors, prices for the
consumer may be higher than they would otherwise be in the
absence of the ban. But the potential anti-competitive effect
is not the result of private pricing or marketing decisions, but
the logical and intended result of the statute itself. See AREEDA
& HOVENKAMP, ¶ 221e4 (“On occasion, the initial legislative
decision may leave nothing further to be decided by the rele-
vant private parties, as well as nothing for the state to super-
vise. In that event, the initial enactment would be a legislative
decision that would itself satisfy the supervision require-
ment.”). No further action is necessary by the private parties
because the anti-competitive nature of this restraint is com-
1408 COSTCO WHOLESALE CORP. v. HOEN
plete upon enactment; the conclusion must follow, therefore,
that the restraint is unilateral.
The First Circuit’s decision in Massachusetts Food Associ-
ation, 197 F.3d at 560, supports this conclusion. In that case,
Massachusetts required retail outlets to be licensed, with each
license embracing only a single location. Massachusetts law
further provided that no firm or person could own more than
three licenses; thus, no firm or person can own more than
three retail liquor stores in the Commonwealth. Id. at 562.
Judge Boudin, writing for the court and rejecting an antitrust
challenge to the statute, noted that “the state has not ordered
or authorized private parties to engage in conduct that, absent
immunity, would even arguably violate the antitrust laws;
there is no private agreement or arrangement between retailers
as to the number of retail outlets and therefore no violation to
be shielded. The state simply insists upon licensing retail
liquor stores—as it does for many businesses or professions—
and limits the number of licenses to three per owner.” Id. at
564.
[2] As with Massachusetts’ limitation on the number of
licenses any one firm can own, Washington’s requirement
that a retailer not sell to other retailers (in other words, that
it choose between being a retailer and a wholesaler) may yield
anti-competitive effects.10 But whatever anti-competitive
effect there is, it is not contingent upon private action, but is
simply part-and-parcel of the state-imposed licensing scheme.
The retailer-to-retailer sales restraint, like the rent control
ordinance in Fisher, is complete upon enactment and does not
delegate any authority to private parties. It therefore lacks the
“concerted action” requirement of Fisher. We agree with the
First Circuit that “unless such a statute licenses or commands
10
We view the ban on retailer sales to other retailers as a fundamental
component of the State’s “unquestionably legitimate” three-tier distribu-
tion system. Granholm v. Heald, 544 U.S. 460, 489 (2005) (internal cita-
tions omitted).
COSTCO WHOLESALE CORP. v. HOEN 1409
a private restraint, this is a matter for the voters and not for
the federal courts—at least so far as the Sherman Act is con-
cerned.” Id. at 565. Because this ban on retailer-to-retailer
sales neither licenses nor commands a private restraint but is
instead a unilaterally imposed restraint of the sovereign, we
agree with the district court’s determination that it is not sub-
ject to preemption.
B
We next consider the district court’s conclusions that the
central warehousing ban (a) should be considered as a compo-
nent of the State’s entire regulatory scheme and (b) is a hybrid
restraint. We disagree with the district court’s conclusions on
both counts.
In a central warehousing system, a grocery chain or large
retailer like Costco buys goods in large lots from manufactur-
ers and suppliers. The goods are delivered to a central ware-
house by the manufacturer or supplier. From there, trucks
belonging to the chain or cooperative haul the goods to indi-
vidual retail stores. Under Washington’s regulations, such a
system is disallowed for alcohol, as beverages may only be
delivered to the retail store where the product will be sold to
the consumer or directly to the retailer at the distributor’s
licensed premises. See RCW 66.28.180(2)(h)(ii).
The district court concluded in its March 7, 2006 supple-
mental order that this restraint was hybrid in nature only
because it refused to consider it apart from the regulatory
scheme as a whole. However, we conclude that the ban on
central warehousing is fundamentally different from the other
challenged restraints. For one thing, the central warehousing
ban does not constitute an “element” of price at the distributor
level and is therefore not subject to the distributor’s discre-
tion. And the restriction does not encourage cartel-like behav-
ior through eliminating pricing uncertainties. As with the rent
control ordinance in Fisher, there is no degree of discretion
1410 COSTCO WHOLESALE CORP. v. HOEN
delegated to private parties by the ban; any anticompetitive
effect is complete once the ban is imposed by the State.11
[4] The error in the district court’s analysis of the central
warehousing ban is that it focused solely on effect. Its reason-
ing was as follows:
Here, the central warehousing ban on its face is
plainly anticompetitive. It serves to increase the
price of beer and wine by prohibiting beer and wine
retailers from engaging in more efficient and cost-
effective distribution practices and reinforces other
policies that the Court has found to be per se
restraints. The LCB Defendants and the WBWWA
do not suggest any pro-competitive rationale for the
central warehousing ban, nor is any apparent. There-
fore, the Court finds that the central warehousing
ban is irreconcilably in conflict with the Sherman
Act.
Costco’s inability “efficiently” to buy in bulk, however, is a
result not of the distributor’s choice or collusion, but of the
sovereign’s command. As with the retailer-to-retailer sales
ban, the State neither commands nor licenses private arrange-
ments; it simply displaces entirely a method of storing goods.12
11
We also believe that the central warehousing ban is akin to a non-price
vertical restraint that would be evaluated under the Rule of Reason. A cen-
tral warehousing system can provide numerous efficiencies for a large
chain: “They pay less for the products than they would if the supplier
made delivery to individual stores. Also, they can consolidate deliveries
from the warehouse to individual stores. Thus, their savings due to buying
in large lots and arranging for central delivery are greater than their added
delivery costs.” First Beverages, Inc. v. Royal Crown Cola Co., 612 F.2d
1164, 1167 (9th Cir. 1980). The central warehousing ban effectively man-
dates where a retailer may store its products; this restraint most resembles
a vertical non-price restraint that would be examined under the Rule of
Reason. See Continental T.V., 433 U.S. at 51 n.8.
12
Further, contrary to Costco’s argument, the warehousing ban is not
akin to an output restraint because, although it lessens the amount a partic-
ular retailer can buy at any one time, it should not decrease total supply
in the end market.
COSTCO WHOLESALE CORP. v. HOEN 1411
The anti-competitive effect is not brought about by collusion
or private action, but by legislative choice.
Indeed, if we were to follow the reasoning of the district
court and look primarily to a regulation’s effect to determine
whether the restraint is unilateral in nature, we would risk
engaging in a kind of Lochner-ian analysis long since discred-
ited. See Mass. Food Ass’n, 197 F.3d at 565 (“To allow fed-
eral judges to decide which of these legislative enactments
should survive and which should be condemned comes close
to reintroducing the kind of judgments that got the Supreme
Court into so much trouble in the Lochner era. The result
might well be more competition and greater consumer wel-
fare. But it would come at the cost of second-guessing the
democratically elected legislature’s decisions about the proper
balance between competition and other social policies that are
commonly reflected in such legislation.”); Garland, 96 YALE
L.J. at 499-500 (explaining that Parker and its progeny grew
out of the Court’s post-Lochner hands-off approach to eco-
nomic regulation). The central warehousing ban may well be
inefficient and it may decrease competition, but the State of
Washington, through its officials, has opted for such ineffi-
ciency. Relief from such choices is properly achieved not
through Sherman Act preemption, but through political will.
[5] In sum, the central warehousing ban is, like the ban on
retailer-to-retailer sales, a unilateral restraint. The district
court erred in not recognizing the nature of this restraint and,
ultimately, in condemning it as a hybrid restraint. The central
warehousing ban is not preempted by § 1 of the Sherman Act.
C
1
We cannot conclude, however, that the nature of the
remaining restraints is equally straight-forward. We begin
with the requirement that wholesalers post their prices and
1412 COSTCO WHOLESALE CORP. v. HOEN
adhere to those prices for at least 30 days (the “post-and-hold”
restraint). We addressed the validity of a nearly identical
scheme in the neighboring state of Oregon in Miller v.
Hedlund, 813 F.2d 1344 (9th Cir. 1987). In that case, a group
of tavern owners and retailers sued the Oregon Liquor Control
Commission (“OLCC”) and several wholesalers of beer and
wine, contending that certain regulations promulgated by the
OLCC had the effect of stabilizing and maintaining the prices
of beer and wine in Oregon. Id. at 1346-47. In particular, the
retailers sought relief from: (1) a state regulation prohibiting
quantity discounts; (2) a requirement that licensees post prices
ten days prior to their effective dates; (3) a requirement that
price decreases generally remain effective after posting for a
period of 180 days for malt beverages and 30 days for wine;
and (4) a requirement that the posted price be the delivered
price regardless of transportation costs. Id. at 1347. We held
on appeal that Oregon’s post-and-hold system and its quantity
discount prohibition were hybrid restraints that violated the
Sherman Act.13
We rejected as an “oversimplifi[cation]” the appellees’
contention that “the wholesalers merely act unilaterally in
response to the requirements of the regulations and that there
is no agreement or concerted activity of any sort among
them.” Id. at 1349. We noted that “[w]hile it is true that there
is no agreement or concerted activity among the wholesalers,
it can not [sic] be ignored that the challenged regulations
facilitate the exchange of price information and require adher-
ence to the publicly posted prices.” Id. Our holding that the
post-and-hold system was a hybrid restraint of trade focused
on the fact that Oregon had set up a scheme in which pricing
information was shared and adhered to, but then “allow[ed]
private parties to set the prices and d[id] not review the rea-
sonableness of those prices.” Id. at 1351. In other words, we
13
The “delivered pricing” restraint was not challenged on appeal and
therefore was not addressed by the Miller court. 813 F.2d at 1348 n.3.
COSTCO WHOLESALE CORP. v. HOEN 1413
determined that Oregon, through non-market mechanisms,
had enforced or facilitated privately-made pricing decisions.14
The Fourth Circuit expressly agreed with our decision in
Miller in holding that Maryland’s post-and-hold system was
a hybrid, per se restraint of trade. TFWS, 242 F.3d at 208-09.
In TFWS, a large liquor retailer brought suit against Mary-
land’s comptroller and other state officials seeking a declara-
tion that the state’s regulatory scheme, which (1) required that
liquor wholesalers post their prices and adhere to them, and
(2) prohibited volume discounts, violated § 1 of the Sherman
Act. Id. at 201-02. After reviewing the Supreme Court’s deci-
sions in Midcal, Fisher and 324 Liquor, the TFWS court con-
cluded that “[t]he post-and-hold system is a classic hybrid
restraint: the State requires wholesalers to set prices and stick
to them, but it does not review those privately set prices for
reasonableness; the wholesalers are thus granted a significant
degree of private regulatory power.” Id. at 209.
The Second Circuit reached a somewhat different conclu-
sion in Battipaglia v. New York State Liquor Authority, 745
F.2d 166 (2d Cir. 1984). At issue in that case was a New York
statute requiring the posting of prices by liquor wholesalers
and adherence to those prices. Judge Friendly, writing for the
majority, concluded that the statute did not conflict with the
Sherman Act and was therefore not preempted. In reaching
that conclusion, he primarily relied upon an antitrust analysis,
reasoning that the restraint was not a per se violation, but
should instead be adjudged under the Rule of Reason. Id. at
174-75. In Judge Friendly’s view, the exchange of pricing
information would only be per se illegal where conscious par-
allelism was observed alongside certain “plus” factors, such
14
It is worth pointing out that our opinion in Miller was withdrawn after
the Supreme Court granted certiorari in 324 Liquor. After 324 Liquor was
decided, we re-filed the original opinion, noting that “324 Liquor Corp.
confirms the reasoning and conclusions set forth in the opinion that was
withdrawn.” 813 F.2d at 1345.
1414 COSTCO WHOLESALE CORP. v. HOEN
as inelastic demand, high market concentration and lack of
product differentiation. Id. at 175.15
But Judge Friendly’s analysis also noted that there was a
serious question as to whether there was an “agreement”
within the meaning of the Sherman Act. Although not decid-
ing the appeal on this basis, he suggested that the better posi-
tion was that no amount of state compulsion should form the
basis of a finding of an agreement. Id. at 173 (noting that
“state compulsion of individual action is the very antithesis of
an agreement, and the argument that an agreement could have
been inferred if the wholesalers had voluntarily done what
they have been compelled to do is simply too ‘iffy’ ”). Judge
Winter in dissent disagreed, noting that the statute effectively
authorized private price fixing arrangements. He also con-
cluded that the statute was not entitled to immunity because
New York does nothing whatsoever to establish the
actual prices charged, review their reasonableness,
monitor market conditions, or engage in reexamina-
tion of the program. As in Midcal, “the national pol-
icy in favor of competition [is] thwarted by casting
. . . a gauzy cloak of state involvement over what is
essentially a private pricefixing arrangement.”
Id. at 180 (Winter, J., dissenting) (quoting Midcal, 445 U.S.
at 106)). A leading treatise on antitrust law suggests that
“[g]iven the great danger that agreements to post and adhere
15
Judge Friendly’s antitrust analysis strangely failed to account for the
New York requirement that posted prices be adhered to by wholesalers. As
Judge Winter pointedly observed in dissent, “the challenged legislation not
only mandates the exchange of price information but also requires adher-
ence to publicly announced prices until thirty days after notice is given of
a new price. A requirement of adherence to announced prices has been
uniformly held illegal without regard to its reasonableness.” Battipaglia,
745 F.2d at 179 (Winter, J., dissenting) (citing and quoting Sugar Inst. v.
United States, 297 U.S. 553, 601 (1936) (“steps . . . to secure adherence,
without deviation, to prices and terms . . . announced” are illegal)).
COSTCO WHOLESALE CORP. v. HOEN 1415
will facilitate horizontal collusion, the dissent’s position is
more consistent with Midcal.” AREEDA & HOVENKAMP, ¶ 217b.16
2
[6] With these precedents, principles and concerns in mind,
we conclude that Washington’s “post-and-hold” pricing sys-
tem is a hybrid restraint. In Fisher, the Court emphasized that
the Berkeley ordinance was a unilateral restraint because “it
place[d] complete control over maximum rent levels exclu-
sively in the hands of the Rent Stabilization Board. Not just
the controls themselves but also the rent ceilings they man-
date[d] [had] been unilaterally imposed on the landlords by
the city.” 475 U.S. at 269. In contrast here, the LCB has only
part of the power of the Rent Stabilization Board; it may
police the procedures of posting and the adherence to the
posted prices, but it retains no control over the prices them-
selves, which are left exclusively (with the exception of the
minimum mark-up) within the control of the particular whole-
saler. See Midcal, 445 U.S. at 105 (the State “simply autho-
rizes price setting and enforces the prices established by
private parties”); 324 Liquor Corp., 479 U.S. at 345 (“Each
wholesaler sets its own ‘posted’ prices; the State does not
control month-to-month variations in posted prices . . . The
State has displaced competition among liquor retailers with-
out substituting an adequate system of regulation.”). Although
each wholesaler is only required to adhere to its own posted
price and is not compelled to follow others’ pricing decisions,
the logical result of the restraints is a less uncertain market,
16
Indeed, it appears that Judge Winter’s view in Battipaglia has pre-
vailed in the Second Circuit. See Freedom Holdings, Inc. v. Spitzer, 357
F.3d 205, 223-24 n.17 (2d Cir. 2004) (noting that the “agreement” ques-
tion was reserved in Battipaglia and concluding that “since our decision
in Battipaglia, the Supreme Court has made it clear that an actual ‘con-
tract, combination or conspiracy’ need not be shown for a state statute to
be preempted by the Sherman Act”) (citing 324 Liquor, 479 U.S. at 345-
46 n.8).
1416 COSTCO WHOLESALE CORP. v. HOEN
a market more conducive to collusive and stabilized pricing,
and hence a less competitive market.
As has been explained:
By prohibiting certain unilateral conduct in which
private parties might otherwise have engaged, post-
and-hold regulations limit the domain of rivalry and
thus increase the likelihood of an anticompetitive
outcome that private parties could not legally
achieve by actual agreement. They may facilitate
tacit collusion, even though they do not explicitly
authorize any kind of collusion.
Lopatka & Page, 20 YALE J. ON REG. at 312; see also FTC v.
Ticor Title Ins. Co., 504 U.S. 621, 634-35 (1992) (“Our deci-
sions make clear that the purpose of the active supervision
inquiry . . . is to determine whether the State has exercised
sufficient independent judgment and control so that the details
of the rates or prices have been established as a product of
deliberate state intervention, not simply by agreement among
private parties.”).
The State contends that its post-and-hold differs from that
which we struck down in Miller because the Oregon plan in
that case allowed wholesalers a “sneak peek” at their competi-
tors’ pricing. In our view, very little turns on the presence of
the “sneak peek.” Our decision in Miller rested upon our
refusal to ignore the fact “that the challenged regulations
facilitate the exchange of price information and require adher-
ence to the publicly posted prices.” 813 F.2d at 1349. We
noted further that because “Oregon allows private parties to
set the prices and does not review the reasonableness of those
prices . . . this case is unlike the purely public restraint of
Berkeley’s regulatory scheme which removed the power to set
rents from the landlords.” Id. at 1351. At no point in the deci-
sion did we emphasize the centrality to our inquiry of the
advanced look at competitors’ prices.
COSTCO WHOLESALE CORP. v. HOEN 1417
[7] We are thus unable to limit the language and reasoning
of Miller to reach only schemes where a “sneak peek” at com-
petitors’ pricing is allowed. Although the allowance of imme-
diate adjustments to prices within 5 days may facilitate
collusion and discourage price cuts, it does not fundamentally
alter the conclusion that the current post-and-hold scheme,
like the one in Miller, facilitates and encourages interdepen-
dent prices, which prices are set solely according to private
marketing decisions of non-state actors. Accordingly, we con-
clude, consistent with Miller and with the Supreme Court’s
teachings, that Washington’s scheme of requiring the posting
of wholesale prices and adherence to those prices for at least
30 days is a hybrid restraint of trade, subject to preemption by
the Sherman Act.17
3
We also conclude that the “post-and-hold” restraint is a per
se violation of the Sherman Act. The Supreme Court has held
that an agreement to adhere to posted prices is a per se viola-
tion without regard to its reasonableness. See Catalano, 446
U.S. at 649-50 (“[T]here is a plain distinction between the
lawful right to publish prices and terms of sale, on the one
hand, and an agreement among competitors limiting action
17
We do not reach this conclusion lightly, for we share to some degree
the concerns expressed in TFWS by our former colleague on the Fourth
Circuit, Judge Michael Luttig. See 242 F.3d at 213-15. In a concurring
opinion, Judge Luttig agreed that Maryland’s post-and-hold system and
volume discount ban were hybrid restraints of trade under relevant
Supreme Court precedent, in particular 324 Liquor. He worried, however,
that the logic of 324 Liquor “could result in significant areas of unilateral
state action being regarded as hybrid state/private action, and therefore
potentially in violation of the Sherman Act when it is not, and in deroga-
tion of what should be obvious state plenary authority.” 242 F.3d at 215
(Luttig, J., concurring). Although we share this concern about broadening
the reach of the antitrust laws to preempt state law, we also recognize that
the Supreme Court has expressed strong disdain for state laws which leave
unsupervised regulatory power in the hands of non-political, non-
responsive private actors.
1418 COSTCO WHOLESALE CORP. v. HOEN
with respect to the published prices, on the other.”); see also
Miller, 813 F.2d at 1349 (“If the wholesale beer and wine dis-
tributors had entered into a private agreement to accomplish
what is otherwise required by the Oregon regulations, there is
no question that a per se violation of Section 1 of the Sherman
Act would be found.”); Sugar Inst. v. United States, 297 U.S.
553, 601 (1936); Sanders, 504 F.3d at 918 (noting that a
price-posting scheme “necessarily involves a delegation of
market power to private parties that is per se illegal under the
Sherman Act”).
Such agreements to adhere to posted prices are anti-
competitive because they are highly likely to facilitate hori-
zontal collusion among market participants. When firms in a
market are able to coordinate their pricing and production
activities, they can increase their collective profits and reduce
consumer welfare by raising price and reducing output.
Lopatka & Page, 20 YALE J. ON REG. at 311 (“Under conven-
tional models of oligopoly behavior, the dissemination of
information about prices and a credible commitment to main-
tain those prices reduce a firm’s uncertainty about its rivals
pricing behavior and thereby predictably foster a non-
competitive outcome.”); see also George Stigler, A Theory of
Oligopoly, 72 J. POL. ECON. 44 (1964) (arguing that successful
collusion requires firms to overcome particular market
uncertainties; one of the key uncertainties is whether another
firm will “cheat” its rivals by offering a lower price). An
adherence requirement effectively removes a market uncer-
tainty by making pricing behavior transparent and discourag-
ing variance.18
18
Although LCB places much emphasis on the fact that the prices are
effective once announced, as opposed to the scheme in Miller which gave
a “sneak peek” of prices, such a distinction will not save the scheme from
per se condemnation. That firms are not empowered immediately to alter
their prices to meet a lower price or to adjust to a higher price does not
alter the conclusion that in the long run, prices for beer and wine are more
likely to be uniform and stable because of tacit collusion.
COSTCO WHOLESALE CORP. v. HOEN 1419
[8] In addition, a requirement that a firm adhere to its price
for 30 days makes a price cut temporarily irreversible, and
hence more expensive and much less likely. See AREEDA &
HOVENKAMP, ¶ 217b2 n.48. Finally, “cheating” in this scenario
is not monitored by means of an inherently unstable cartel;
instead, enforcement of the adherence requirement is carried
out by the State, with serious legal, practical and economic
penalties imposed on firms who vary from posted prices. State
enforcement of adherence to privately set, supra-competitive
prices is precisely the danger which the Supreme Court envi-
sioned in crafting the hybrid and active supervision tests. In
short, we have little trouble concluding that the post-and-hold
scheme would constitute a per se violation of the Sherman
Act. Thus, unless it is otherwise saved by the doctrine of state
immunity or by the Twenty-first Amendment, Washington’s
post-and-hold scheme is preempted.
D
In examining the other challenged restraints—the minimum
mark-up, volume discount ban, credit ban, uniform pricing
requirement, and delivered pricing requirement—we must
return to the preliminary problem of whether these provisions
should be examined separately or as part of a single antitrust
conspiracy whose goal is to stabilize prices at supra-
competitive levels.
In Miller, without significant analysis, we appeared to lump
the challenged volume discount ban in with Oregon’s post-
and-hold provision. In effect, we presumed an inter-
connectedness to the regulations. The Fourth Circuit’s deci-
sion in TFWS provides little guidance on this issue but also
considered the restraints in tandem. Its analysis on the chal-
lenged volume discount ban amounted to this: “The volume
discount ban is a part of the hybrid restraint because it rein-
forces the post-and-hold system by making it even more
inflexible. Wholesalers post their prices as required, and dis-
1420 COSTCO WHOLESALE CORP. v. HOEN
counts of any nature are prohibited by regulation.” TFWS, 242
F.3d at 209.
If one were to view all of these restraints as a package, with
the post-and-hold requirement as the center around which all
the other restraints revolve—as the district court did—it might
appear that they create a market structure inviting of collu-
sive, interdependent pricing, which would increase, or at the
least stabilize, prices for beer and wine for retailers at supra-
competitive levels. As Areeda and Hovenkamp explain:
[T]he principal use of competitor agreements on
nonprice terms is to eliminate or reduce the various
avenues down which competition can occur, thus
making a secret price agreement or an oligopoly eas-
ier to maintain. For example, a price-fixing agree-
ment or oligopoly may be frustrated by the fact that
although nominal prices are readily observable from
seller price lists, various firms continue to compete
by negotiating rebates, discounts, or unusually favor-
able credit terms on an individual basis. Further, the
latter are not readily observable. By agreeing with
each other to eliminate discounting or rebates, the
firms can shift the focus of competition to price and
thus ensure that the cartel or oligopoly will function
more effectively.
AREEDA & HOVENKAMP, ¶ 2022a; see also A.D. Bedell Whole-
sale Co., Inc. v. Philip Morris Inc., 263 F.3d 239, 258 (3d Cir.
2001) (“[T]he injury in Midcal was caused by private parties
taking advantage of the state imposed market structure . . .
Even though, as defendants argue, the Multistate Settlement
Agreement created the cartel, this fact makes the case analo-
gous to Midcal, not different.”).19 In other words, taken as a
19
We agree with the district court that these restraints should be consid-
ered to be of the per se variety. An agreement “to pay or charge rigid, uni-
form prices would be an illegal agreement under the Sherman Act.”
COSTCO WHOLESALE CORP. v. HOEN 1421
whole, Washington’s system of regulation focuses competi-
tive pressures entirely away from discounts and rebates and
towards explicit price. And when the explicit price must be
posted and adhered to for thirty days, there is a very serious
risk of interdependent, non-competitive pricing. Thus, we
agree with the district court that if these “pricing element”
restrictions must be considered part-and-parcel of the posting
scheme, then they would likely be preempted under the rea-
soning of 324 Liquor.
1
[9] We think it would be a mistake, however, to truncate
the analysis by only looking at how these provisions interact
with the post-and-hold requirement. Here, we confront princi-
ples of severability to consider whether, in the absence of the
publication of prices and the State’s enforcement of adherence
to those published prices, any of the pricing restraints might
otherwise be considered legitimate, unilateral acts of the sov-
Socony-Vacuum Oil Co., 310 U.S. at 222; see also Catalano, 446 U.S. at
647-48 (a restraint “pegging, or stabilizing the price is illegal per se”). A
delivered pricing arrangement that removes transportation costs from com-
petitive bidding is also per se unlawful. See, e.g., Boise Cascade Corp. v.
FTC, 637 F.2d 573, 575 (9th Cir. 1980) (delivered pricing agreements are
per se violations because “[w]hen combined with the standardization of
delivery methods, service extras, and discounts, any delivered pricing sys-
tem can become a potent tool for assuring that competitors are able to
match prices and avoid the rigors of price competition”). The bans on
credit sales and bans on discounts are also per se violations. Catalano, 446
U.S. at 648 (“An agreement to terminate the practice of giving credit is . . .
tantamount to an agreement to eliminate discounts, and thus falls squarely
within the traditional per se rule against price fixing.”); see also AREEDA
& HOVENKAMP, ¶ 2022a (explaining that credit terms are an integral ele-
ment of overall price). Finally, the minimum mark-up provision is a per
se violation because if horizontal competitors were to agree amongst
themselves to mark up their products at least at a level above acquisition
price, it would constitute classic price fixing. Horizontal price mainte-
nance, as opposed to vertical price maintenance, is subject to per se con-
demnation. See Socony-Vacuum Oil Co., 310 U.S. at 218.
1422 COSTCO WHOLESALE CORP. v. HOEN
ereign state. In applying this severability analysis, we recog-
nize that such an inquiry is fraught with uncertainty and
hypotheticals: What would a scheme without a post-and-hold
requirement look like? What would be its economic effect?
Would the State want such a scheme? Nonetheless, despite
the uncertainty inherent in this type of analysis, we think it
absolutely necessary, out of respect for the functions of the
states in our federal system, to consider whether, with the
post-and-hold aspects of the regulations excised, other por-
tions of the State regulatory system may be saved from invali-
dation.
The Washington Supreme Court has set forth its severabil-
ity doctrine as follows:
[A]n act or statute is not unconstitutional in its
entirety unless invalid provisions are unseverable
and it cannot reasonably be believed that the legisla-
tive body would have passed one without the other,
or unless elimination of the invalid part would render
the remaining part useless to accomplish the legisla-
tive purposes. A severability clause may provide the
assurance that the legislative body would have
enacted remaining sections even if others are found
invalid. It is not necessarily dispositive on that ques-
tion, though . . . . The independence of the valid
from the invalid parts of an act does not depend on
their being located in separate sections. The invalid
provision must be grammatically, functionally, and
volitionally severable.
McGowan v. State, 148 Wash. 2d 278, 60 P.3d 67, 75 (Wash.
2002) (internal punctuation marks, footnote and citations
omitted).
[10] In the absence of a requirement that a firm adhere to
its published price, we think the volume discount ban, the
delivered pricing ban, and the ban on credit sales would all be
COSTCO WHOLESALE CORP. v. HOEN 1423
considered unilateral restraints imposed by the State, with no
degree of discretion delegated to private individuals. Just as
with the central warehousing ban, any anticompetitive effect
arising out of these restraints is the result not of private dis-
cretion, but of the sovereign’s command. There is no “meet-
ing of the minds” to determine how much discounts will be,
whether territorial variations in price will be allowed, or
whether credit may be extended over a certain period of time.
The State of Washington commands that no discounts be
given, no credit be extended, and no transportation allowances
be factored in;20 that the wholesalers comply with these com-
mands is not enough to deem the restraints hybrid. See Fisher,
475 U.S. at 266 (“A restraint imposed unilaterally by govern-
ment does not become concerted-action within the meaning of
the statute simply because it has a coercive effect upon parties
who must obey the law. The ordinary relationship between the
government and those who must obey its regulatory com-
mands whether they wish to or not is not enough to establish
a conspiracy.”).
[11] Thus, considering these restraints in the absence of a
linkage to the requirement that wholesalers publish and
adhere to their announced prices, any semblance of an “agree-
ment” falls away. The State does not enforce private market-
ing or price setting decisions, but instead enforces its own
mandates. Thus, if the post-and-hold provision can be sev-
ered, we can uphold these restraints as unilateral within the
meaning of Fisher.
[12] And, although we find it a slightly more difficult ques-
tion, we also conclude that the minimum mark-up of 10% and
20
It is true that the ban on providing volume discounts or transportation
allowances will make a firm’s prices more transparent to its competitors;
but the delegation of discretion to private actors, the hallmark of a hybrid
restraint, is simply missing from these restraints. The nature and extent of
the competitive injury to retailers is largely complete upon enactment of
the bans.
1424 COSTCO WHOLESALE CORP. v. HOEN
the uniform price requirement, in the absence of the post-and-
hold requirement, survive Sherman Act preemption because
they are unilateral restraints. Costco contends that the mark-
up provision is not actively supervised by the State because
“[p]roducers and wholesalers can push their prices without
limit above the notional 10% minimum markup, and there is
no attempt to control or monitor such levels.” Indeed, the dis-
trict court concluded that “[t]he minimum markup require-
ments have virtually no impact because suppliers and
distributors routinely markup their products by far more than
10%.” Findings of Fact at *8, ¶ 28.
Costco contends that discretion on the part of wholesalers
to price above the notional 10% mark-up makes the mark-up
provision impermissible. But such discretion is not a creation
of the minimum mark-up provision. Instead, the discretion is
a right of the market participant independent of the statute.
The State, by imposing the 10% floor, withdraws a very small
degree of that discretion from wholesalers, but it in no way
grants—the Supreme Court’s term in Fisher, 475 U.S. at 268
—the discretion in the first place. Indeed, in 324 Liquor, the
Court went out of its way to acknowledge that “[a] simple
‘minimum markup’ statute requiring retailers to charge 112
percent of their actual wholesale cost may satisfy the ‘active
supervision’ requirement, and so be exempt from the antitrust
laws . . . .” 479 U.S. at 345 n.6; see Morgan v. Div. of Liquor
Control, Conn. Dep’t of Bus. Regulation, 664 F.2d 353 (2d
Cir. 1981) (upholding a similar markup statute in the State of
Connecticut); see also 324 Liquor, 479 U.S. at 346 n.6
(describing the statute at issue in Morgan as a “simple”
markup statute). Washington’s 10% mark-up is the kind of
requirement that the Court would uphold because it does not
grant to private parties a means to manipulate, and therefore
control, the pricing decisions of other firms. Instead, the
Washington statute merely requires a mechanical calculation
requiring that a wholesaler mark its prices at least 10% higher
than its costs for the product. See Snake River Valley Elec.
Ass’n, 238 F.3d at 1194 (“There is no reason, for example, to
COSTCO WHOLESALE CORP. v. HOEN 1425
require state supervision of law that prescribes the percentage
over wholesale that an alcohol retailer can charge. The
amount is a simple calculation that the retailer has no discre-
tion to alter.”). Thus, we conclude that the discretion to price
above the State-established floor is discretion to be sure, but
it is not the type of “hybrid” discretion with which the
Supreme Court was concerned in Fisher and 324 Liquor.
[13] Similarly, that the uniform price requirement allows
manufacturers and distributors the discretion to set their own
price, which they must then apply uniformly, does not render
the uniform price rule a hybrid restraint in the absence of the
post-and-hold requirement. The discretion to set a price, in the
absence of any obligation to post it or maintain it for any
period of time, is not a grant of discretion that facilitates hori-
zontal price collusion. Indeed, the ability of manufacturers
and distributors to set their own prices is a basis for price
competition rather than a limitation on such competition.
Thus, the uniform price requirement is not, in and of itself, a
“hybrid” restraint.
2
[14] The remaining question in the severability analysis is
whether the Washington legislature would have enacted these
sections independently even if it knew that the post-and-hold
requirement was invalid. In general, “[t]he lodestar of sever-
ability is legislative intent.” Gubiensio-Ortiz v. Kanahele, 857
F.2d 1245, 1267 (9th Cir. 1988), vacated, 488 U.S. 1036
(1989), aff’d in part and rev’d in part, on other grounds, 871
F.2d 104 (9th Cir. 1989) (per curiam). As previously noted,
the standard under Washington law requires us to sever the
valid provisions from the invalid provision, unless “it cannot
reasonably be believed that the legislative body would have
passed one without the other, or unless elimination of the
1426 COSTCO WHOLESALE CORP. v. HOEN
invalid part would render the remaining part useless to
accomplish the legislative purposes.” McGowan, 60 P.3d at 75.21
One factor that we find indicative, though not dispositive
by itself, of the legislature’s intent is that its alcohol regula-
tory scheme includes a severability provision. See RCW
66.28.090. That section provides: “If any provision of this act
or its application to any person or circumstance is held
invalid, the remainder of the act or the application of the pro-
vision to other persons or circumstances is not affected.” Id.
Although existence of a severability provision is not neces-
sary to reveal a legislative desire to sever invalid provisions
from valid ones, its presence does raise a presumption that
such is the State’s intent.
[15] Further, we believe that the district court’s treatment
of the regulatory scheme, in which it viewed everything
through the prism of the post-and-hold requirement, actually
turns Washington’s regulatory system on its head. When
viewed correctly, we think it clear that the post-and-hold pro-
vision can be excised from the remaining restraints in a way
that the legislature would have intended. The district court’s
tacit assumption in its analysis was that the post-and-hold
requirement was the center of Washington’s solar system of
alcohol regulation; instead, we think it clear that the uniform
pricing requirement is the relevant center. All of the other
restraints revolve around the uniform pricing rule because
their only purpose is to enforce rigidly RCW
66.28.180(2)(c)’s requirement that each distributor sell its
beer and wine products to every retailer at the same price it
has posted. See also RCW 66.28.170 (“It is unlawful for a
21
Washington’s severability analysis is thus very similar to that which
has been applied to acts of Congress. See Buckley v. Valeo, 424 U.S. 1,
108 (1976) (per curiam) (“Unless it is evident that the Legislature would
not have enacted those provisions which are within its power, indepen-
dently of that which is not, the invalid part may be dropped if what is left
is fully operative as a law.”) (internal quotations and citations omitted).
COSTCO WHOLESALE CORP. v. HOEN 1427
manufacturer of wine or malt beverages holding a certificate
of approval issued under RCW 66.24.270 or 66.24.206 or the
manufacturer’s authorized representative, a brewery, or a
domestic winery to discriminate in price in selling to any pur-
chaser for resale in the State of Washington.”). Because the
other restraints are a mechanism for enforcing the uniform
price requirement, we believe that the legislature would have
enacted them even had it been aware of the invalidity of its
post-and-hold system.
E
To summarize our Fisher analysis, we agree with the dis-
trict court’s conclusion that the retailer-to-retailer sales ban is
a unilateral restraint not subject to Sherman Act preemption.
We disagree with the district court’s conclusions that the cen-
tral warehousing ban, the volume discount ban, the delivered
pricing requirement, the credit ban, the uniform pricing
requirement and the minimum mark-up are hybrid restraints
of trade subject to Sherman Act preemption. Also, we agree
with the district court’s conclusion that, under our decision in
Miller, Washington’s post-and-hold scheme is a hybrid
restraint of trade that is subject to Sherman Act preemption.22
22
As mentioned previously, we view the Midcal active supervision
prong in this case as largely collapsing into Fisher’s hybrid/unilateral
inquiry. See supra at II.B. We emphasize, however, that viewing the post-
and-hold scheme through the active supervision prism does not help
Washington. As we explained in reviewing Oregon’s similar post-and-
hold scheme in Miller, “Oregon ‘neither establishes prices nor reviews the
reasonableness of the price schedules . . . [nor does it] monitor market
conditions or engage in any ‘pointed reexamination’ of the program.” Ore-
gon mandates the posting of prices to be charged by each wholesaler, but
does not in any way review the reasonableness of the prices set. While the
commission ‘may reject any price posting which is in violation of any of
its rules,’ Rule 210(1)(b), the effect of that rule is simply to effectuate the
price posting and the prohibitions on quantity discounts and transportation
allowances. It does not provide for government establishment or review of
the prices themselves . . . Oregon merely authorizes and enforces the dis-
1428 COSTCO WHOLESALE CORP. v. HOEN
IV
[16] We finally consider whether the post-and-hold provi-
sions of Washington’s regulatory scheme which we have
found to be subject to preemption may be otherwise saved by
operation of the State’s powers under the Twenty-first
Amendment. Section 2 of the Twenty-first Amendment pro-
vides: “The transportation or importation into any State, Ter-
ritory or possession of the United States for delivery or use
therein of intoxicating liquors in violation of the laws thereof,
is hereby prohibited.” U.S. CONST. amend. XXI, § 2. Although
this Amendment “gives the States wide latitude to regulate the
importation and distribution of liquor within their territories,
. . . [i]t is well settled that the Twenty-First Amendment did
not entirely remove state regulation of alcohol from the reach
of the Commerce Clause.” Brown-Forman Distillers Corp. v.
N.Y. State Liquor Auth., 476 U.S. 573, 584 (1986) (citing
Midcal, 445 U.S. at 107; Bacchus Imports, Ltd. v. Dias, 468
U.S. 263 (1984)).
In Midcal, the Supreme Court stressed that “important fed-
eral interests in liquor matters survived the ratification of the
Twenty-first Amendment.” 445 U.S. at 108. Because the
Twenty-first Amendment and the Commerce Clause are both
parts of the same Constitution, “each must be considered in
the light of the other, and in the context of the issues and
interests at stake in any concrete case.” Id. at 109 (quoting
puted pricing practices.” 813 F.2d at 1351 (quoting Miller v. Or. Liquor
Control Comm’n, 688 F.2d 1222, 1225-26 (9th Cir. 1982)). We see no dis-
cernable difference in Washington: the State neither sets the prices (out-
side the minimum mark-up), nor reviews those prices for reasonableness;
the State does not engage in any pointed reexamination of the program;
nor does the fact that the LCB can reject price postings in any way satisfy
Midcal’s requirement. Thus, even assuming that the hybrid and active
supervision inquiries do not completely overlap in this case, our decision
in Miller compels us to conclude that Washington cannot meet the active
supervision prong of Midcal.
COSTCO WHOLESALE CORP. v. HOEN 1429
Hostetter v. Idlewild Liquor Corp., 377 U.S. 324, 332 (1964)).
In this “pragmatic effort to harmonize state and federal pow-
ers,” id., the key question is “whether the interests implicated
by a state regulation are so closely related to the powers
reserved by the Twenty-first Amendment that the regulation
may prevail, notwithstanding that its requirements directly
conflict with express federal policies.” Capital Cities Cable,
Inc. v. Crisp, 467 U.S. 691, 714 (1984).
The Twenty-first Amendment inquiry is three-fold. First, a
reviewing court should “examine the expressed state interest
and the closeness of that interest to those protected by the
Twenty-first Amendment.” TFWS, 242 F.3d at 213. Next, a
reviewing court should inquire “whether, and to what extent,
the regulatory scheme serves its stated purpose in promoting
temperance.” Id. In other words, “is the scheme effective?”
Id. As our court stated in Miller, the answer to this question
“may ultimately rest upon findings and conclusions having a
large factual component.” 813 F.2d at 1352. Finally, the court
should balance Washington’s identified interests (to the extent
that the interests are furthered by the regulatory scheme)
against the established federal interest in promoting competi-
tion under the Sherman Act. TFWS, 242 F.3d at 213.
[17] We have no doubt that the district court correctly con-
cluded that temperance was a valid and important interest of
the State under the Twenty-first Amendment.23
23
The State forcefully argues that it also has a compelling interest in the
promotion of orderly markets. It cites the Supreme Court’s statement in
North Dakota v. United States, 495 U.S. 423, 432 (1990), that the two
North Dakota regulations at issue, which were passed “[i]n the interest of
promoting temperance, ensuring orderly market conditions, and raising
revenue,” fell within the State’s core interests under the Twenty-first
Amendment. It is not precisely clear, however, what “orderly markets”
means in this context. See Bainbridge v. Turner, 311 F.3d 1104, 1115
(11th Cir. 2002) (“As for ‘ensuring orderly markets,’ we are not sure what
that phrase means . . . .”). Indeed, at trial, there were different, competing
definitions set forth by the State. See Findings of Fact at *7, ¶ 25 (“LCB
1430 COSTCO WHOLESALE CORP. v. HOEN
We must therefore, as the Supreme Court instructed in Mid-
cal, consider the fit between the State’s interest and its regula-
tion.24 The district court acknowledged that “Washington has
one of the lowest rates in the country for per capita ethanol
consumption per drinker, even though Washington ranks well
above the national average in terms of the percentage of the
population who consume alcohol.” Findings of Fact at *6,
¶ 18. However, it rejected this “moderation” as a basis for
affording Twenty-first Amendment immunity because it
found “no persuasive evidence” that the challenged restraints
were the cause. Id. The court also noted that there was little
empirical evidence documenting the relationship between
such pricing schemes and consumption. Id. at *6, ¶¶ 19-20.
Therefore, the district court was “not persuaded that the chal-
member Vera Ing defined ‘orderly distribution’ as the ‘three-tier system’
and stated that orderly distribution ‘would be the ability to supervise” and
‘clearly articulated procedures.’ Dr. Kenneth Casavant, an economist,
defined ‘orderly marketing’ as ‘asking the market to have the prices reflect
the cost of production’ and to have the market avoid ‘gluts and scarci-
ties.’ ”). Given the difficulty of defining this concept, we discern no clear
error in the district court’s conclusion that the restraints were minimally
effective in promoting this interest.
24
Initially, LCB defendants, WBWWA and numerous amici contend
that to require any proof of effectiveness gives insufficient deference to
the States’ policy prerogatives. See, e.g., Brief of the National Beer Whole-
salers Association at 12-14. We reject this argument because the Supreme
Court, at least implicitly, has already rejected it. In both Midcal and 324
Liquor, the two cases involving state restraints which were not directed at
discrimination against out-of-state interests, the Supreme Court has
required some degree of fit between the regulation and the goal. See, e.g.,
Midcal, 445 U.S. at 112-14 (requiring the state to substantiate its concerns
to prevail against the undoubted federal interest in a competitive econ-
omy); 324 Liquor, 479 U.S. at 350 (following Midcal and requiring state
to substantiate its interest). In addition, in Miller, we emphasized that the
district court on remand would need to consider “the extent to which, in
reality, the state rule serves its avowed purposes.” 813 F.2d at 1352 n.7.
Thus, the district court was correct in requiring the State of Washington
to “substantiate” its interests by showing some degree of fit between its
interests and its regulatory scheme.
COSTCO WHOLESALE CORP. v. HOEN 1431
lenged restraints are effective in promoting temperance,
whether viewed individually or as a whole.” Id. at *6, ¶ 18.
[18] We cannot say that we are “left with the definite and
firm conviction that a mistake has been committed” with
respect to the district court’s findings of fact; therefore, we
conclude that they are not clearly erroneous. Lentini v. Cal.
Ctr. for the Arts, 370 F.3d 837, 843 (9th Cir. 2004). The State
failed to demonstrate that its restraints are effective in pro-
moting temperance; furthermore, as Costco’s expert Michael
Moore indicated, it is impossible to segregate the effects of
the post-and-hold scheme from all the other polices adopted
by Washington to influence alcohol consumption. Findings of
Fact at *6, ¶ 21. We therefore agree with the district court
with respect to the second part of the Twenty-first Amend-
ment inquiry.
[19] In balancing the State’s interest in promoting temper-
ance with the federal interest in promoting competition under
the Sherman Act, we must keep in mind the extent to which
the State’s “interest is actually furthered by the regulatory
scheme.” TFWS, 242 F.3d at 213. Given that the State has
failed to demonstrate that the post-and-hold requirement is
effective in promoting temperance, we agree with the district
court that “the state’s interests do not outweigh the federal
interest in promoting competition under the Sherman Act.”
Findings of Fact at *10.25
25
Although we ultimately agree with the district court’s conclusion, we
are troubled by the district court’s apparent application of a “narrow tailor-
ing” test. See Findings of Fact at *7, ¶ 22 (noting that “[i]f the State
desires to promote temperance by artificially increasing beer and wine
prices, the State could readily achieve that goal in a manner that does not
run afoul of the Sherman Act. Most obviously, the State could adopt
higher excise taxes on beer and wine.”); see also id. at *9, ¶ 34.
We do not agree that the existence of an alternative form of regulation
necessarily means that the State’s interest will yield to the federal interest
in promoting competition. It is true that a “narrow tailoring” test may have
1432 COSTCO WHOLESALE CORP. v. HOEN
[20] Because the State failed to carry its burden on the
Twenty-first Amendment defense, the post-and-hold scheme
is not saved from preemption under the Sherman Act.
V
In conclusion, 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 pre-
emption 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 or the Twenty-first
Amendment. Each party shall bear its own costs on appeal.
AFFIRMED IN PART AND REVERSED IN PART.
some applicability in the case of blatant discrimination between in and
out-of-state liquor interests, but it has never been applied in the context of
balancing the states’ core concerns with the principles of the Commerce
Clause. See Granholm, 544 U.S. at 489 (“State policies are protected
under the Twenty-first Amendment when they treat liquor produced out of
state the same as its domestic equivalent. The instant cases, in contrast,
involve straightforward attempts to discriminate in favor of local produc-
ers.”); id. (“We still must consider whether either state regime ‘advances
a legitimate local purpose that cannot be adequately served by reasonable
nondiscriminatory alternatives.’ ”) (internal citations omitted).
The district court’s suggestion that the State should serve its interest in
some other way disparages the policy choices that Section 2 of the
Twenty-first Amendment commits to the states. There doubtless are vary-
ing 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.