HB 2040/SB 6027: AN ALTERNATIVE VIEW

I. Introduction
The bill as signed by the governor on May 15, 2006 changes the Washington liquor
code in three areas: (1) Trade practices by suppliers, such as point-of-sale
merchandising. (2) Prices charged by suppliers. (3) Interests an industry member in a
supplier tier of distribution may hold in a retail tier business, and vice versa.
Although the bill has been touted as liberalizing tied house law, its actual effect on tied
house is to tighten the trade practice restrictions while offering a mostly illusory
relaxation of the inter-tier interest provisions. With respect to pricing, the bill deletes the
10% minimum wholesaler markup and minimally conforms statutes to the Costco
decision’s elimination of the 30-day post-and-hold system, which the Washington State
Liquor Control Board (LCB) had already abandoned.
The bill’s limitation of competition in price, promotional activities, and services
represents an historical objective of the wholesaler lobby, whose members appear to be
the primary beneficiaries. Publicity about the bill correctly reports that it was supported
by Costco Wholesale Company, trade associations representing retailers, winery trade
associations, and others. Indeed, the impetus came from a broadly based “three-tier
task force“ convened by the LCB, which issued its report in late 2006 with relatively
liberal recommendations and was followed by a select joint legislative committee that
received input from various sources, including wineries. Once put in the form of a bill
before the legislature, however, the measure exhibited the typical characteristics of
wholesaler-written legislation. Observers differ on how broadly the resulting law is
supported, or is even understood, by other industry groups, but it is difficult to deny that
the wholesalers –perennially the strongest lobbying organization I n the industry–
blocked attempts to address its contradictions and appear to have effectively controlled
the drafting process.
II. Trade Practices
Trade practice restrictions of the bill start with revision of the core concept.
Present RCW 66.28.010(1)(a):
“Except as provided in subsection (3) of this section, no manufacturer,
importer, distributor, or authorized representative shall advance1
moneys or moneys’ worth to a licensed person under an arrangement,
nor shall such licensed person receive, under an arrangement, an
advance of moneys or moneys’ worth.”
Bill § 6:

                                                            
1
The bill makes no change in use of the term “advance,” rather than a more general term, such
as “furnish.” Thus, both current and proposed tied house laws stop short of applying to all
transfers of things or services of value. Because there is no exception for ordinary trade, either
in § 7 of the bill or in current law, if the basic prohibition applied to all transfers of value, it would
be illegal for a supplier to deliver wine to a retailer (thereby furnishing “money’s worth”), even if
paid for. The only obvious basis on which an ordinary delivery is lawful is that “advance” does
not include transactions generally regarded as equal exchanges. Later statutes and LCB
regulations do not, however, consistently apply that understanding of the term. 
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 2
“Except as provided in section 7 of this act, no industry member shall
advance and no retailer3 shall receive moneys or moneys’ worth under
. . . any . . . agreement[,] . . . business practice or arrangement.”
The above change abandons the present limitation of the law to advances “under
an arrangement” and expands the reach of the law to any business practice.
Although there is no judicial definition of “under an arrangement,” the law of
statutory construction requires that it be given some effect. The most likely
meaning is to include only direct transfers of monetary value, excluding those
with indirect effects that do not involve any express or implied arrangement
between the paying and receiving parties –e.g., the business practice of a
winery’s advertising the brand in local media, which is worth money to the
retailer, but involves an arrangement only with the advertising medium. Thus, a
wide range of marketing activities that are probably not forbidden under current
law because there is no arrangement with the retailer are likely prohibited under
the bill because they are, of course, business practices.
The bill also removes an important tied house exception, now found in
RCW 66.28.010(3)(a):
“. . . . Nothing in this section shall prohibit a retail licensee, or any
person financially interested, directly or indirectly, in such a retail
licensee from having a financial interest, direct or indirect, in a
business which provides, for a compensation commensurate in value
to the services provided, . . . services to a manufacturer, so long as the
retail licensee or person interested therein has no direct financial
interest in or control of said manufacturer.”
The § 7 exceptions referred to in § 6 of the bill do not parallel the subsection 3
exceptions of the current code, which the bill repeals. Any marketing plan
involving payments to a retailer in exchange for services –e.g., buying a listing or
ad in a retailer-affiliated publication– currently permitted as a subsection 3
exception will be forbidden when the bill becomes law, unless specifically
described in § 7 or regarded as something other than an “advance” (a term the
LCB has never defined).

                                                            
2
“Industry member” is defined in § 2(3) of the bill as a manufacturer, importer, wholesaler or
similar supplier and its affiliates, subsidiaries, officers, directors, partners, employees and
representatives. The list does not include shareholders or LLC members, and it is unclear
whether an investor or parent company is an affiliate.
3
The bill retains the current one-way perspective of regulating only benefits running from
supplier tier members to retailers and does not prohibit benefits retailers may confer on
suppliers. However, by regulation the LCB maintains a reverse restriction on suppliers’ receipt
of benefits from retailers, WAC 314-12-140(3), whose validity is an open question under current
law. Under the bill the issue is more complicated, as “retailer,” defined in § 2(5), includes
agents, officers, directors, partners, shareholders and employees. Thus, a winery parent of, or
investor in, a retailer is explicitly a retailer, but a retailer parent of a winery would be an industry
member only if parents are considered “affiliates” of their subsidiaries.
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Exception-listing not only perpetuates, but reinforces, the concept that everything
beneficial to a retailer not expressly permitted is forbidden. An express-
exceptions-only approach, when the basic tied house prohibition has been
extended to any “business practice,” creates many new implied prohibitions. In
net effect, the bill compels an administrative policy against allowing any program
that is not described in some detail by statute, tempered only by the LCB’s
willingness to allow common-sense contravention of the statute.
The list of permitted activities at § 7 is extremely limited. Proponents of the bill
have claimed that it expands permissible winery marketing practices to include
(1) providing brand-identified items of “nominal value,” such as T-shirts, cigarette
lighters, and pens, to preferred retailers and (2) pouring wine and otherwise
participating in events at private clubs and premises with temporary special event
permits.
Even those modest claims are difficult to sustain. All the items and activities
mentioned are made illegal by the bill (but not by current law) if the LCB finds
giving them is likely to influence the buying or selling decisions of the retailer.
Ordinarily, the entire purpose of branded novelty items or presenting a wine
tasting (like almost any marketing effort) is to have a favorable influence on
purchase decisions.
With respect to branded advertising novelties, the bill impliedly allows furnishing
such items without charge, as compared to current law, which requires a winery
to charge the retailer at least cost for them. The bill introduces the restriction that
the retailer may not sell or give any of the items to its customers. It is unclear
whether the sale option will still exist and, if so, will remain free of the prohibition
on, for example, a patron’s taking a brand-identified coaster home.
Businesses can only guess at what constitutes “nominal value,” which is an
independent requirement, not necessarily met by the examples of items in the
statute. Items are not deemed to be of nominal value by virtue of their
appearance on the list. Rather, furnishing listed items is permissible (assuming it
meets other § 7 requirements) only if it the items are in fact of nominal value in
the aggregate. Listing shirts, for example, suggests that there are some shirts
that individually would qualify as of nominal value, thereby providing a clue to
what is meant by “nominal” for a single item (presumably not less than the value
of the cheapest imprinted T-shirt, or around $7.50). There is, however, not even
a clue as to how many such shirts could be furnished without going over
aggregate nominal value.
With respect to presenting wines at private club and special event premises,
current law, RCW 66.28.155, permits those activities at “the licensed premises of
a retailer.” It is well within the LCB’s administrative authority to include the
locations of private club licenses (RCW 66.24.440-.452) and special occasion
licensees (RCW 66.24.380) in the category already allowed by statute.
III. Pricing
Section 10 of the bill removes formal posting of prices, the requirement that they
be unchanged for thirty days, and the minimum wholesale markup.

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The problematic uniform pricing requirement remains in RCW 66.28.170, which
will not be repealed, and in § 10(2)(d) of the bill. The bill also retains prohibition of
quantity discounts and sales below acquisition cost, § 10(1)(d). The bill is
ambiguous regarding the effect of “close-out” status of prices under § 10(1)(e),
which probably creates an exception to the acquisition cost pricing floor. The bill
in § 10(2)(a) requires wineries to maintain price lists at their licensed premises,
for the purpose of auditing sales to enforce uniform prices, but doesn’t say the
price lists cannot be in electronic form changeable by cell phone from the field or
specify how frequently they can be modified. How much pricing flexibility will
result from the Costco changes depends on policies and procedures yet to be
adopted by the LCB.
Deleting the 10% minimum wholesale markup will not affect traditional full-
service three-tier distribution, whose economics involve a substantially larger
margin, but could have beneficial effects on innovative variations, such as no-
frills “guerilla” distribution and, provided the LCB remains flexible on physical
delivery of goods that skips one or more stops in the path of purchase and
resale, paper-only three-tier distribution with efficient “drop shipment” delivery.
IV. Inter-Tier Interests
With narrow “custom” exceptions created to allow specific transactions, under current
law parties licensed as suppliers (primarily manufacturers, importers, and wholesalers)
and their investors and officers are forbidden to hold financial interests, such as stock,
LLC membership, promissory notes, or outright ownership, in a licensed retail business.
Present RCW 66.28.010(1)(a):
“No manufacturer, importer, distributor, or authorized representative,
or person financially interested, directly or indirectly, in such
business; whether resident or nonresident, shall have any financial
interest, direct or indirect, in any licensed retail business . . . .”
Oddly enough (and contrary to assertions by some regulators), there is currently no
direct prohibition of a winery’s obtaining financing from, or even being owned by, a
retailer.4
The bill permits some supplier interests in retailers that are currently forbidden, but only
if operation of the enterprise meets certain conditions, and extends the tied house
restriction to retailer interests in suppliers. The conditions for legality are drawn (whether
by design or oversight) so as to render impractical operation of, for example, a winery-
owned wine bar or a restaurateur-owned winery. Moreover, receiving or advancing any
payment of a dividend, investment or other monetary transfer between those entities
would seem to require an exception to bill § 6, but is not found in the § 7 list.
                                                            
4
In one view, a person financially interested in a retailer would necessarily have an indirect
interest in a business in which the retailer holds a direct interest. If that makes the investor a
“person financially interested” in the winery, then the person may not hold the interest in the
retailer. Under that interpretation, the bill permits an inter-tier interest that would otherwise be
forbidden. The same argument does not apply to the current absence of a prohibition of a
retailer’s advancing moneys’ worth to wineries, but the interlocking definitions in the bill may
introduce a new tied house prohibition of “upstream” financial assistance.
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The bill will repeal current RCW 66.28.010, which prohibits such interests with
specific limited exceptions, leaving the code with no explicit prohibition of inter-
tier interests. However, taking together the “unless” clause of § 3(1), the
preamble’s vague favorable reference to a three-tier distribution system in § 1,
and the possibility of adverse action by the LCB in § 5, such an interest is in
effect declared illegal if one entity directly or indirectly influences the buying or
selling decisions of the other or if the LCB finds the interest has at any time
resulted, or is likely to result, in:
a. Any of the disqualifying conditions listed in § 2(6), or
b. Making alcohol significantly more attractive5 or available to minors, or
c. Overconsumption, or
d. Any consumption by minors, or
e. Any other harmful or abusive form of consumption.
As industry members are in the business of buying and selling, and the whole
point of owning or holding an interest in another business is usually to
consolidate business decision-making, the circumstances under which the bill’s
dispensation could be of practical benefit are extremely limited. Part of the
problem for inter-tier integration and capitalization is the interlocked nature of § 2
definitions. A winery subsidiary of a retailer is also a retailer under the statute,
and the retailer parent, if it is considered an “affiliate” of its subsidiary, is deemed
a supplier. Thus, provisions that seem aimed at protecting retailer independence
may apply in reverse, with anomalous effects.
Anyone, whether or not involved in the industry and whether or not harmed or
threatened to be harmed, at any time before or after creation of an inter-tier
financial interest, can require the LCB to determine whether any of the
disqualifying conditions exists. The following are non-exclusive examples of
conditions that would normally exist in an affiliated supplier-retailer relationship,
but could trigger a divestiture order under §§ 2(6) and 5, in the hypothetical case
of a winery selling wine to a retail licensee that owns shares of the winery’s
stock, even in the absence of any effect on buying or selling decisions:
a. The retailer orders a specific number of cases of any product, § 2(6)(d).
b. A commitment exists between the winery and the retailer to continue doing
business with one another, § 2(6)(h).
The LCB must upon complaint investigate “as it deems appropriate” to ascertain
whether influence over buying or selling decisions, or other influence defined as
“undue,” or an influence on public health and safety defined as “adverse,” has
occurred any time or is more likely than not to occur. If so, the LCB, must begin
administrative violation proceedings and/or deny any pending license application

                                                            
5
Presumably, any vertical integration of distribution or inter-tier capitalization that brings a
substantially cheaper wine to market would make “alcohol” more attractive to persons under 18
(“minors”) along with everyone else, even if no underage purchases occur. The bill, like much of
the liquor code, depends on willingness of regulators to apply common sense rather than literal
meaning.
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by a party to the interest and, if the interest already exists, may require the
parties to “undo” the transaction.
Risk of forced divestiture will render inter-tier investment highly problematic.
Managers with responsibilities to shareholders would be well advised to steer
clear of acquisitions or investments that could be ruinously reversed under
unpredictable circumstances. Thus, the tied house “liberalization” claimed for the
bill does not seem likely to encourage economic development.
V. Conclusion
HB 2040 is another measure to tighten tied house trade practice rules. Its effect
is to increase the wholesalers’ means of resisting supplier pressure to engage in
inter-brand competition in merchandising services and other non-price
competition, by declaring a broader range of practices illegal. The façade of
financial interest dispensation does not seem likely to compensate the public for
reduction of competition in distribution of licensed beverages.
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