Washington State appeals court overturns some trade practice regulations regarding price differentials to retailers.

BY ASHLEY BRANDT · SEPTEMBER 17, 2019

In a blow against some restrictive trade practice regulations Washington’s Court of Appeals recently struck several rules of the Washington State Liquor and Cannabis Board as overly broad and unsupported by the state’s liquor statute.

The background for the challenge was the 2012 amendment to Washington’s liquor laws which ended the state’s monopoly on the sale of liquor. The enacting legislation started with the following noble intent statement:

The people of the state of Washington, in enacting this initiative measure, find that the state government monopoly on liquor distribution and liquor stores in Washington and the state government regulations that arbitrarily restrict the wholesale distribution and pricing of wine are outdated, inefficient, and costly to local taxpayers, consumers, distributors, and retailers. Therefore, the people wish to privatize and modernize both wholesale distribution and retail sales of liquor and remove outdated restrictions on the wholesale distribution of wine by enacting this initiative.

The changes were broad and one of the many was a thoughtful prohibition on discrimination in pricing with an allowance for pricing discounts and differentials to retailers based on business factors:

It is unlawful for a manufacturer of spirits, wine, or malt beverages holding a certificate of approval or the manufacturer’s authorized representative, a distillery, brewery, or a domestic winery to discriminate in price in selling to any purchaser for resale in the state of Washington. Price differentials for sales of spirits or wine based upon competitive conditions, costs of servicing a purchaser’s account, efficiencies in handling goods, or other bona fide business factors, to the extent the differentials are not unlawful under trade regulation laws applicable to goods of all kinds, do not violate this section.

For some reason, even though the statute allowed for price differentials, the Washington State Liquor and Cannabis Board enacted a series of rules restricting pricing differentials and other practices that many retailers took exception to. So they brought suit seeking a determination that the rules were preempted by the statutory language and that the statutory language’s allowed for practices the rules prohibited.

You can find all of the Washington State wine and spirits trade practice rules here. The three at issue in this case that the court overturned were:

WAC 314-23-065

What are “unfair trade practices”?

(1) “Unfair trade practice” means one retailer or industry member directly or indirectly influencing the purchasing, marketing, or sales decisions of another retailer or industry member by any agreement written or unwritten or any other business practices or arrangements such as, but not limited to, the following:

(a) Any form of coercion between industry members and retailers or between retailers and industry members through acts or threats of physical or economic harm, including threat of loss of supply or threat of curtailment of purchase;

(b) A retailer on an involuntary basis purchasing less than it would have of another industry member’s product;

(c) Purchases made by a retailer or industry member as a prerequisite for purchase of other items;

(d) A retailer purchasing a specific or minimum quantity or type of a product or products from an industry member;

(e) An industry member requiring a retailer to take and dispose of a certain product type or quota of the industry member’s products;

(f) A retailer having a continuing obligation to purchase or otherwise promote or display an industry member’s product;

(g) An industry member having a continuing obligation to sell a product to a retailer;

(h) A retailer having a commitment not to terminate its relationship with an industry member with respect to purchase of the industry member’s products or an industry member having a commitment not to terminate its relationship with a retailer with respect to the sale of a particular product or products;

(i) An industry member being involved in the day-to-day operations of a retailer or a retailer being involved in the day-to-day operations of an industry member in a manner that violates the provisions of this subsection;

(j) Discriminatory pricing practices as prohibited by law or other practices that are discriminatory in that the product is not offered to all retailers in the local market at the same price.

(2) The exercise of undue influence is an unfair trade practice and is prohibited.

[Statutory Authority: RCW 66.08.030. WSR 15-19-130, § 314-23-065, filed 9/21/15, effective 10/22/15.]

WAC 314-23-080

Are licensed distributors or other licensed suppliers of spirits and wine allowed to provide volume discounts to on-premises or off-premises retail licensees?

(1) Yes, distributors or other licensed suppliers are allowed to provide volume discounts to licensed on-premises and off-premises retailers. The discounts must be based solely on the volume of the spirits and/or wine that is purchased by a retailer from a distributor or other licensed suppliers. However, the limitations on interactions between the levels of licenses remain, including the prohibition on undue influence and sales below cost of acquisition.

(2) Differential pricing between on-premises licensed retailers and off-premises licensed retailers is allowed under the following exceptions:

(a) For spirits: A new product to the market may be sold to on-premises retailers at an “introductory price” for a maximum of six months. After the six-month introductory period the price for on-premises and off-premises retailers must be the same price for the same volume purchased.

(i) “New product” means the product has not previously been offered for sale to retailers.

(ii) “Introductory price” means the price of the spirits product when it first becomes available for purchase.

(b) For wine: Wine may be sold to on-premises retailers and off-premises retailers at different prices.

[Statutory Authority: RCW 66.08.030. WSR 15-19-130, § 314-23-080, filed 9/21/15, effective 10/22/15.]

WAC 314-23-085

What type of discounts are not allowed?

The following types of discounts are not allowed. Please note that this list is representative and not inclusive of all practices that are not allowed:

(1) Volume discounts that violate local, state, or federal laws.

(2) Discounts on purchases over time. Prices must be based on the spirits or wine delivered in a single shipment.

(3) Discounts on a combined order that is delivered to multiple licensed sites. Volume discounts may only be provided based on combined orders by one or more licensees to the “central warehouse” or a single location to which the order is delivered.

[Statutory Authority: RCW 66.08.030. WSR 16-19-105, § 314-23-085, filed 9/21/16, effective 10/22/16; WSR 15-19-130, § 314-23-085, filed 9/21/15, effective 10/22/15.]

The court agreed with the retailers and held that the Board had exceeded its authority in enacting these three rules and that they were therefore invalid.

In doing so, the court had an interesting point regarding offering volume discounts. Making the point that an extended term contract can effectuate volume discounts without necessarily offering rebates or extending credit:

This is so, the Board asserts, because all volume discounts over a period of time necessarily constitute an extension of credit by the seller to the buyer or a rebate of funds previously paid, both of which would constitute moneys or moneys’ worth. Again, we disagree.

 The Board’s argument fails because it relies on a flawed premise: that volume discounts over time necessarily require a seller to extend credit to a buyer or give the buyer a rebate. For example, if a buyer enters into a contract to purchase an amount of wine to be delivered in shipments at various points throughout the term of the contract, it is not an extension of credit to base the price of the wine on the total amount to be sold so long as payments for each shipment are made prior to or upon delivery. Although it is theoretically possible for parties to enter into a contract such that the seller extends credit to the buyer or gives the buyer a rebate following the purchase of a certain amount of product, no such terms are required in every long term contract involving multiple deliveries of product over time. The Board is wrong to assert that parties entering into long term contracts must necessarily be extending credit or receiving rebates upon the completion of the contract. 

I’m not certain why the whole of that first regulation 314-23-065 was invalidated and not just subpart “1(j)”, but the rest clearly fell afoul of the statute’s exceptions allowing for variant pricing. You can read the opinion in Washington Restaurant Association v. Washington State Liquor and Cannabis Board here.