State Pricing Regulations Must Promote Temperance

States must produce a factual record for courts to determine whether a state's regulation of alcohol beverage prices under the Twenty-first Amendment will withstand antitrust scrutiny. This was the holding of a recent decision from the U.S. Court of Appeals for the Fourth Circuit in TFWS, Inc. v. Schaefer.¹ A three-judge panel reversed the lower court's determination that Maryland's regulation of wholesale prices was constitutionally protected. The federal appellate judges remanded the case in order for Maryland to prove that its regulation of wholesale prices does, in fact, promote temperance within the state.

Like several of its sister states, Maryland regulates wholesale prices in two respects. First, it imposes a post-and-hold system under which wholesalers must "post" their prices with Maryland regulators.² The wholesaler is then required to sell to retailers at the posted price for at least the month following the posting. This pricing information is made available to competing wholesalers who, naturally, may see fit to post a matching price the following month. Second, Maryland prohibits wholesalers from offering volume discounts to retailers. By statute a wholesaler may not discriminate in price "between one retailer and another retailer" and by regulation a wholesaler may not offer discounts "of any nature."³ Both the post-and-hold and volume-discount restrictions are intended to promote stable and uniform prices in the wholesale market and, ultimately, temperance among consumers.

TFWS, Incorporated, an alcohol beverage retailer, challenged Maryland's price restrictions under the Sherman Antitrust Act. The district court dismissed TFWS's complaint ruling that Maryland's regulations, while anticompetitive, nonetheless were protected by Section 2 of the Twenty-first Amendment, which provides:

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 prohibited."⁴

Importantly, Maryland did not raise the Twenty-first Amendment as a defense; thus, the district court's sua sponte consideration of the Twenty-first Amendment was made without input from the parties and without a factual record.

TFWS appealed to the Fourth Circuit. The federal appellate court's opinion summarizes the now-settled framework for determining when a state's alcohol beverage pricing regulations must give way to federal antitrust laws:

The threshold question is whether the state's pricing regulations violate the Sherman Act . . . . The next question is whether the regulations are shielded from the Sherman Act under the "state action" doctrine . . . . The final question is whether the Twenty-first Amendment overrides a Sherman Act challenged to the regulations . . . .⁵

Applying this framework, the court agreed with the district court's rulings on the first two questions: the state's pricing regulations are per se unlawful under the Sherman Antitrust Act and the state action doctrine does not apply because Maryland does not "actively supervise" the posted prices. In sum, Maryland's regulations constitute an unlawful "hybrid" restraint under which Maryland simply enforces the prices posted by wholesalers without reviewing those prices for reasonableness.⁶

The TFWS court's analysis of the third question, however, prompted its reversal of the lower court's ruling. The appellate court observed that the Supreme Court's precedent requires the application of a balancing test to determine if a state's Twenty-first Amendment powers are sufficient to trump the goals of the Sherman Act.⁷ T his is a fact-specific inquiry that requires a state to "demonstrate that its liquor regulatory policies directly serve the interests it proffers under the Twenty-first Amendment."⁸ Here, however, the district court relied instead on its "'own rational perception and common sense' and 'upon facts extant in the real world'."⁹ In other words, the lower court erred by taking judicial notice of facts that Maryland was obliged to prove. Upon remand, the appellate court held that Maryland must prove its regulations effectively promote temperance and that TFWS may respond as it deems appropriate.¹⁰

State regulators should glean two lessons from TFWS. First, to invoke the Twenty-first Amendment, regulators should be ready to provide concrete evidence that their regulatory price restraints are effective. This may be problematic. Two Supreme Court decisions suggest that the correlation between pricing regulations and temperance, or other stated purposes, may be difficult to establish and will be closely scrutinized.¹¹

The second lesson is that the Twenty-first Amendment may not be the most effective means of insulating price restraints from antitrust scrutiny. Regulators may be better served, for example, by focusing their efforts on compliance with the "active supervision" prong of the state action doctrine. Compliance can be achieved in one of two ways. Regulators can undertake to monitor market conditions and to review privately set prices for "reasonableness" or price restraints can be tailored so that compliance requires only a simple calculation and, thus, limited state supervision.¹² Under either alternative, regulators may have to make substantive changes to their price restrictions; however, they will not have to prove that those restrictions serve a legitimate end or that they are effective.¹³

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