Opinion
No. C04-360P.
September 14, 2006
ORDER ON DEFENDANTS' MOTION FOR STAY
This matter comes before the Court on the Liquor Control Board (LCB) Defendants' motion for stay of order and judgment enjoining enforcement of certain rules and laws pending appeal. (Dkt. No. 158). The Court has reviewed the materials submitted by the parties, including a brief filed by the Intervenor-Defendant Washington Beer and Wine Wholesalers Association (WBWWA). Being fully advised and having heard oral argument on this matter, the Court GRANTS in part and DENIES in part the LCB Defendants' motion. The Court finds that a partial stay of judgment is warranted until the next regular session of the Washington State Legislature has been completed in order to provide the Legislature with an opportunity to respond to the Court's ruling. Therefore, the Court will extend the stay of judgment in this matter until May 1, 2007. The reasons for the Court's order are set forth below.
On the day that Plaintiff's brief in opposition to the LCB Defendants' motion was due, the WBWWA filed a 12-page brief "joining" the LCB Defendants' motion and offering additional arguments in support of the motion. (Dkt. No. 175). The Court has reviewed the WBWWA's brief, despite the fact that the procedure followed by the WBWWA is not authorized by the Local Civil Rules of this Court. See Local Civil Rule 7(b)(2) (authorizing parties to file briefs in opposition to a motion, but making no provision for filing briefs to lend additional support to another party's motion). Because the WBWWA filed its brief on the same day that Plaintiff's opposition brief was due, Plaintiff did not have the opportunity under the Local Civil Rules to file a written response to the WBWWA's additional arguments.
Background
In this litigation, Costco has challenged various Washington state policies governing the sale and distribution of beer and wine. On December 21, 2005, the Court granted in part Costco's motion for summary judgment on its claim that Washington's policy of allowing only in-state beer and wine producers to sell their products directly to retailers violates the Commerce Clause. The Court stayed entry of judgment on that claim until April 14, 2006 to provide the State Legislature with the opportunity to address this issue by either: (1) extending the direct sales privilege to out-of-state producers; or (2) withdrawing the privilege from in-state producers. The Legislature chose to enact legislation extending the direct sales privilege of out-of-state producers, although it included a "sunset provision" that provides that the new law will expire unless it is renewed.
Costco also raised federal antitrust claims challenging a number of Washington state policies governing beer and wine sales and distribution. Following a bench trial, the Court entered its findings of fact and conclusions of law on April 21, 2006. The Court found that the following restraints challenged by Costco ("the challenged restraints") should be enjoined because they are preempted by the federal Sherman Act and are not shielded by the Twenty-first Amendment:
(a) "Post and hold" policies that require beer and wine distributors and manufacturers to "post" the prices of their products with the state and to "hold" those posted prices for a full calendar month.
(b) Uniform pricing policies that require beer and wine distributors to sell their products to every retailer at the same price.
(c) Prohibitions on credit sales of beer and wine.
(d) Prohibitions on volume discounts for beer and wine sales.
(e) Policies that require beer and wine distributors to charge the same "delivered" price to all retailers, even if the retailer pays the freight and picks up the goods itself.
(f) Prohibitions on central warehousing of beer and wine by retailers.
(g) Policies that require a 10% minimum mark-up on sales of beer and wine from producers to wholesalers, as well as a 10% minimum mark-up on sales of beer and wine from distributors to retailers.
The Court entered a judgment on April 24, 2006, which was amended on May 25, 2006. The LCB Defendants have filed a notice of appeal from the amended judgment and have moved to stay the judgment pending appeal. The Court initially stayed enforcement of the judgment for 30 days. By agreement of the parties, the Court included a provision in the amended judgment that extended the stay until the Court rules on this motion.
Analysis
The LCB Defendants bring their motion to stay pursuant to Fed.R.Civ.P. 62(c), which provides in relevant part:
When an appeal is taken from an interlocutory or final judgment granting, dissolving, or denying an injunction, the court in its discretion may suspend, modify, restore, or grant an injunction during the pendency of the appeal upon such terms as to bond or otherwise as it considers proper for the security of the rights of the adverse party. . . .
"This rule codifies the inherent power of a court `to preserve the status quo where, in its sound discretion, the court deems the circumstances so justify.'" Christian Science Reading Room Jointly Maintained v. City County of San Francisco, 784 F.2d 1010, 1017 (9th Cir. 1986)
The question of whether a stay pending appeal is warranted requires consideration of four factors: "(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies." Hilton v. Braunskill, 481 U.S. 770, 776 (1987).
The Ninth Circuit has noted that "[t]he standard for evaluating stays pending appeal is similar to that employed by district courts in deciding whether to grant a preliminary injunction."Lopez v. Heckler, 713 F.2d 1432, 1435 (9th Cir. 1983). Under this standard, a party must demonstrate either: (1) a probability of success on the merits and the possibility of irreparable injury; or (2) that serious legal questions are raised and that the balance of hardships tips sharply in its favor. Id. Consistent with Hilton, the public interest is also a factor to be "strongly considered." Id.
1. Merits of Appeal
The Court does not find that the LCB Defendants have demonstrated a strong likelihood of success on appeal. However, "[w]hen the request for a stay is made to a district court, common sense dictates that the moving party need not persuade the court that it is likely to be reversed on appeal." Canterbury Liquors Pantry v. Sullivan, 999 F. Supp. 144, 150 (D. Mass. 1998). Instead, "the movant must only establish that the appeal raises serious and difficult questions of law in an area where the law is somewhat unclear." Id. Here, the Court finds that the antitrust issues in this case present reasonably serious and difficult questions of law in an area where the law is not entirely clear, particularly given the breadth of Costco's challenge to state policies. Costco's antitrust claims required a detailed four-part analysis and presented a number of issues of law that are not entirely well-settled.
As discussed earlier, Costco also raised a Commerce Clause challenge to Washington's policy of allowing only in-state beer and wine manufacturers to sell directly to retailers. The Court does not regard this constitutional claim as posing a difficult question of law, given the guidance provided by the Supreme Court's ruling in Granholm v. Heald, 544 U.S. 460 (2005). In any case, the State Legislature responded to the Court's ruling on Costco's constitutional challenge by extending the direct sales privilege to out-of-state manufacturers, subject to a sunset provision. As a result, today's ruling should not be construed as staying the Court's judgment on Costco's constitutional claims.
2. Injury to Defendants if a Stay Does Not Issue
Although the LCB Defendants and the WBWWA argue that they will suffer irreparable harm if a stay of judgment does not issue, neither party has offered affidavits or declarations to support their contentions. The LCB Defendants raise three primary arguments: (1) they will not be able to regulate the sale and distribution of beer and wine effectively if a stay does not issue; (2) they will be unable to effectively collect the "liter tax" on beer and wine without a stay; and (3) their appeal may become moot if a stay is not issued. The WBWWA also argues that "in the absence of a stay the Court's ruling will affect the business practices of WBWWA members and the very structure of their businesses" and will "impact their relationships with customers and creditors, and could jeopardize the livelihood of their employees." (Dkt. No. 175 at 9).
A. LCB's Ability to Regulate
The LCB Defendants assert that "[i]f the Court's order takes effect, the LCB will be without effective ability to regulate." (Opening Brief at 4). However, as Costco notes, other states operate their beer and wine regulatory systems without the challenged restraints. Costco also observes that the State Liquor Act includes a severability clause that provides that if any clause, part, or section of the act is invalidated, such judgment shall not affect nor invalidate the remainder of the act. See RCW 66.98.020. The Court's judgment does not enjoin many aspects of the beer and wine regulatory system, such as laws and regulations regarding licensing, advertising, promotional activities, labeling, warnings, below-cost sales, free alcohol, public consumption, and sales to minors and the intoxicated. As a result, the LCB Defendants' contention that the Court's judgment would leave the LCB "without effective ability to regulate" must be regarded as an overstatement.
The LCB Defendants raise two specific regulatory concerns: (1) the Court's judgment will hinder the LCB's ability to enforce laws prohibiting below-cost sales of beer and wine; and (2) the Court's ruling will hamper their ability to enforce laws governing the separation of tiers in the beer and wine distribution system. The Court considers each concern below. Ability to Enforce Laws Against Below-Cost Sales: First, the LCB Defendants argue that enjoining the challenged restraints will impact their ability to enforce laws against below-cost sales of beer and wine. Among other things, the challenged restraints require all producers and wholesalers to post their prices with the LCB and hold the posted prices for a month. Beer and wine distributors must also charge uniform prices to all retailers, must not sell beer and wine on credit to retailers, and must charge all retailers the same "delivered" price regardless of the actual delivery costs. The LCB Defendants suggest that without such policies, the agency "would have extreme difficulty enforcing the unchallenged ban on retail sales at a price below acquisition." (Opening Brief at 4).
In response, Costco notes that the LCB has broad authority to inspect the books and records of beer and wine manufacturers and license holders. See RCW 66.08.130 .140. The LCB may also seek a search warrant with probable cause (RCW 66.32.020) and seek appointment of an administrative law judge with authority to compel testimony and document production (RCW 66.24.010(3)(d)). Costco also suggests, and the Court agrees, that the Court's judgment should not be construed as barring a requirement that beer and wine producers and distributors confidentially post their prices with the LCB, provided that a confidential price posting requirement is not accompanied by a "hold" requirement. As a result, Costco maintains that enforcing the Court's judgment pending appeal would not leave the LCB without the ability to investigate and enforce laws against below-cost sales.
The challenged restraints may facilitate the LCB's ability to enforce laws against below-cost sales of beer and wine. However, the LCB Defendants have not offered affidavits or declarations to support their contentions that they would have "extreme difficulty" enforcing this law without the challenged restraints, nor do they specify what additional regulatory authority or policies may be needed in order to enforce laws against below-cost sales if the challenged restraints are enjoined. This lack of evidence and specificity makes it difficult for the Court to evaluate the degree of harm that the LCB Defendants would experience if a stay does not issue. In any case, to the extent that the LCB Defendants believe that the State Legislature must enact new legislation to facilitate the LCB's ability to enforce laws against below-cost sales in light of the Court's judgment, such a concern would only warrant a stay until the State Legislature has had an opportunity to respond to the Court's ruling.
Ability to Enforce Separation of Tiers: The LCB Defendants suggest that eliminating the challenged restraints will make it more difficult to "efficiently and reliably determine that manufacturers are at arms length from retailers" and that "[w]ithout the `buffer' of a mandatory middle tier (or an effective set of replacement controls) the LCB will be hard pressed to regulate prohibited practices." (Opening Brief at 5).
The LCB Defendants appear to argue that the Court's judgment would eliminate the "buffer of a mandatory middle tier" — i.e., beer and wine wholesalers — from the current system. However, as Costco notes, it was the State Legislature that decided to allow and expand direct sales of beer and wine from manufacturers to retailers. Because the State Legislature has elected to permit direct sales from manufacturers to retailers without requiring products to pass through a separate wholesaler tier, the Court fails to see how enjoining the challenged restraints will create a risk of irreparable harm by eliminating the "buffer of a mandatory middle tier."
B. Ability to Collect Liter Tax
The LCB Defendants also suggest that unless a stay is issued, they will be hampered in their ability to collect the "liter tax" on beer and wine. This tax is presently collected at the wholesaler level. The LCB Defendants assert that "[w]ithout a stay, the liter tax would still be due to the LCB but no consistent, reliable mechanism would exist for determining what amount of tax was due, when it came due and from what entity it could be collected" and that "[w]ithout a stay the current tax collection system will be set aside with no replacement in sight." (Opening Brief at 6).
Aside from these conclusory assertions, LCB Defendants offer no additional evidence or argument to explain how enjoining the challenged restraints would hinder the LCB's ability to collect the liter tax. As Costco observes in its opposition brief, "none of the challenged restraints are part of the tax collection system" (Opp. Brief at 11) — a point that the LCB Defendants do not dispute in their reply brief. As a result, the LCB Defendants have offered little basis to find that difficulties in collection of the liter tax would constitute irreparable harm sufficient to warrant a stay. And once again, to the extent that the LCB Defendants believe that the State Legislature must enact new legislation to facilitate the LCB's ability to collect the liter tax, such a concern would only warrant a stay until the State Legislature has had an opportunity to enact such legislation.
C. Mootness Concerns
In their reply brief, the LCB Defendants argue for the first time that unless the Court's judgment is stayed, their appeal may become moot. The LCB Defendants present no legal authority to support this argument, and there is no basis for the Court to find that the LCB Defendants would be injured due to this concern.
D. Injury to Beer and Wine Wholesalers
The WBWWA argues that if a stay of judgment does not issue, "[t]he potential harm to WBWWA members from the Court's ruling is the disruption of an entire industry, which extends far beyond mere economic damage." (Dkt. No. 175 at 9). The WBWWA maintains that the absence of a stay "will affect the business practices of WBWWA members and the very structure of their businesses" and "will also impact their relationships with customers and creditors, and could jeopardize the livelihood of their employees." Id.
The WBWWA also expresses concern that failure to stay the judgment will harm small retailers of beer and wine. However, the WBWWA represents beer and wine wholesalers, not small retailers.
As noted earlier, Costco did not have an opportunity to file a written response to the WBWWA's brief because the WBWWA filed a 12-page brief "joining" the LCB Defendants' motion on the same date that Costco's brief in opposition to the LCB Defendants' motion was due. Putting aside this concern, the Court does not find that the WBWWA has offered compelling evidence that its members will suffer irreparable harm if a stay does not issue. The WBWWA offers no affidavits or declarations in support of its assertions of irreparable harm. The Court recognizes that enjoining the challenged restraints will end certain requirements that beer and wine wholesalers have operated under for a number of years, which will likely result in greater competition in the marketplace. However, "[t]he mere existence of competition is not irreparable harm, in the absence of substantiation of severe economic impact." Washington Metro. Area Transit Comm'n v. Holiday Tours, Inc., 559 F.2d 841, 843 n. 3 (D.C. Cir. 1977).
3. Injury to Costco If a Stay Issues
For its part, Costco's briefing does not suggest that the company will be substantially injured if the Court's judgment is stayed pending appeal. As a result, Costco provides the Court with little if any basis to find that the company will be significantly prejudiced by a stay. Costco's ability to operate profitably despite the challenged restraints also tends to suggest that Costco would not suffer substantial harm if a stay does not issue. As one court noted in a case challenging aspects of Massachusetts' regulatory system, "a stay would merely perpetuate pending appeal a regulatory system under which it appears that plaintiffs have been able to operate profitably, although not as profitably as they expect to operate if non-discriminatory price competition is permitted." Canterbury Liquors Pantry v. Sullivan, 999 F. Supp. 144, 151 (D. Mass. 1998).
4. Public Interest
In some respects, the public interest may be advanced if a stay does not issue pending appeal. As Costco notes, denying a stay would advance the public's interest in promoting competition and the underlying policy goals of the Sherman Act. Denying a stay may also result in somewhat lower beer and wine prices for some consumers.
At the same time, smaller retailers and their customers may pay somewhat higher prices for beer and wine if the Court's judgment is not stayed. In addition, the Court is mindful of the LCB Defendants' argument at trial that the restraints promote temperance by increasing the average prices of beer and wine in Washington state. As the Court noted in its findings of fact and conclusions of law, the State Legislature could readily advance this goal in a manner that does not violate federal antitrust law by increasing excise taxes on beer and wine. However, the Legislature adjourned its 2006 regular session before the Court entered its judgment and has not had an opportunity to take action in response to the Court's ruling. The public interest would appear to weigh in favor of providing the State Legislature with the opportunity to determine whether it wishes to take such a step before the Court's judgment takes effect.
The question of whether the State Legislature may wish to raise excise taxes on beer and wine to promote temperance is one of many policy decisions that the State Legislature may confront in light of the Court's ruling. The Court's judgment would enjoin a number of policies adopted by the State Legislature in an important area of public concern. Many of the policies have been in place, in one form or another, since the end of Prohibition. Under these circumstances, the Court finds that the public interest would be served by staying the Court's judgment until the State Legislature has had an opportunity to respond to the Court's ruling. The public has a strong interest in having its elected representatives determine, in an orderly and deliberate fashion, whether new policies should be adopted in response to the Court's judgment.
Conclusion
The Court finds that the LCB Defendants' appeal raises serious and difficult questions of law, at least with respect to Costco's antitrust claims. The Court also finds that Costco has not demonstrated that it will be significantly prejudiced if a stay issues. For their part, the LCB Defendants and the WBWWA have not made an especially compelling showing that the balance of the hardships tips so sharply in their favor as to warrant a stay. Their arguments are largely conclusory or speculative and are not supported with affidavits or declarations. However, as the Court noted in its findings of fact and conclusions of law, eliminating the challenged restraints will require some significant changes in Washington's existing system for beer and wine sales and distribution. In addition, enjoining the challenged restraints will eliminate some tools that the LCB has used to enforce laws prohibiting below-cost sales of beer and wine. As a result, it may be necessary for the LCB to seek additional enforcement tools and regulatory authority from the State Legislature in light of the Court's judgment. In addition, the public interest would be served by providing the State Legislature with an opportunity to decide whether it wishes to adopt new policies regarding beer and wine sales and distribution before the Court's judgment takes effect.
Under these circumstances, the Court finds that a partial stay of the judgment in this matter is warranted until the State Legislature has had an opportunity to take action in response to the Court's ruling. The next regular session of the State Legislature will begin on January 8, 2007, the second Monday in January. See RCW 44.04.010. Under the Washington Constitution, the State Legislature's regular session in an odd-numbered year may last no more than 105 days. See Wn. Const., art. II, § 12(1). As a result, the next regular session of the Legislature should be completed by April 23, 2007.
Therefore, the Court will extend its stay of judgment in this matter until May 1, 2007, with the exception that the stay will not apply to the Court's judgment on Costco's constitutional claims regarding policies that permit only in-state beer and wine manufacturers to sell their products directly to retailers. Any further requests for a stay pending appeal in this matter should be directed to the Court of Appeals. As Costco has not argued in its briefing that it would suffer injury if the stay is extended or that security should be required as a condition of extending the stay, the Court will not require defendants to post a bond.
The clerk is directed to provide copies of this order to all counsel of record.