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 Wn.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.