Washington HB 2040: Tied-House Laws & Trade Regulations

On May 15, 2009, HB 2040 was signed into law.  The law ends Washington's prohibition on vertical integration among the three tiers of wine and beer distribution and creates some modest exceptions to trade regulation prohibitions.  Some of these exceptions were required to conform Washington law to the 9th Circuit's 2008 Costco v. Hoen decision.  However, many onerous trade regulation restrictions remain in place.  Most notable is the ban on quantity discounts to retailers.

Key Provisions of HB 2040:

Vertical Integration Allowed

HB 2040 allows certain relationships and financial interests between the manufacture and distributor tiers of the liquor industry and the retailer tier.   In a 360, Washington legislature now allows vertical integration - so long as you create different business entities to hold the different licenses. 

It now is lawful for an industry member to have a direct or indirect financial interest in a retailer unless the interest has or will result in undue influence over the retailer's purchasing decisions and/or over the industry member's marketing or sales decisions or has or will result in an adverse impact on public health and safety.  Any financial interest allowed as of the effective date of the act is presumed lawful.  The bill contains an enforcement mechanism.   Any person may file a complaint with the Liquor Control Board asserting a relationship results in undue influence or an adverse impact on public health or safety. The Board may investigate and issue an administrative violation notice. 

Ban on Moneys' Worth

Washington historically had a strict prohibition on a supplier from providing things of value to a retailer.  It is couched in terms of banning a supplier from providing "moneys' worth" to a retailer.  HB 2040 further clarifies what is meant by "moneys' worth."  The definition includes:  no tie in sales; no obligation by a retailer to purchase a specific quantity of goods (e.g. no quantity discounts based on purchase of 100 cases of wine or beer); and no commitment by an industry member not to terminate a relationship with another party with respect to sales and purchases of a particular product.  One open question is whether the latter prohibition impacts performance criteria in distribution contracts.

The exceptions to the moneys' worth prohibition are retained with minor changes, including retailer advertising specialties.  It is notable the exception for retailer advertising specialties specifically prohibits an industry member from providing these trinkets to consumers.

The exceptions include:

• Shelf and category management.
• Personal services such as education or tasting activities and industry members may participate and pour samples, hold bottle signing events and provide other educational experiences at certain licensed premises.
• Retailer advertising specialties may be provided if of nominal value and branded with the industry member's imprinted advertising matter.  The items may include trays, lighters, blotters, postcards, corkscrews, glasses, mugs, napkins, matches, shirts hats, visors or similar items.  The items may not bear the name of the retailers and may not be provided for distribution to consumers.  There is no dollar value limit per brand or per retailer -- only the caution that the items are of "nominal value".
• All industry members jointly may produce brochures and advertise to benefit and promote tourism in Washington state.
• Industry members may post retailer listings on their websites and direct links to retailer websites.

The new law confirms the existing right of industry members to sponsor or advertise at sports entertainment facilities.

Pricing

Finally with respect to pricing, post and hold rules are eliminated.  And, industry members are prohibited from discrimination.  In other words, they must make any deal or treat available to all buyers on equal terms.  There is a ban on sales below cost but the mandatory ten percent markup has been eliminated.  The ban on quantity discounts survives. 

Record Keeping

The law requires industry members to keep records of the above practices for three years.  In addition, provisions require out-of-state wineries (certificate holders) as well as other industry members to keep records of their contracts with wholesalers and all advertising trade allowance and incentive programs as well as all commission bonuses or gifts.

Conclusion:

Governor Gregoire's signature on HB 2040 could end the saga of Costco v. Hoen.  This may prove to be a victory for retailers that desire to vertically integrate wholesale and retail businesses.  The retailers will need to jump through hoops and make some accommodation to accomplish these goals but the elimination on the ban of vertical integration makes self distribution possible with the caveat that any retailer owned or controlled wholesaler must service other retailers without discrimination.