Washington state, wholesalers ordered to pay $1.9 million of Costco's legal costs

Washington state and the state Beer and Wine Wholesalers Association have not decided whether to appeal a decision by U.S. District Judge Marsha Pechman requiring them to pay Costco $1.9 million for legal costs in its battle to change beer- and wine-distribution rules.

Although Costco Wholesale lost most aspects of a years-long legal battle to change Washington's beer- and wine-distribution rules, a judge said this week that the defendants must pay most of its legal costs.

That puts the state and the Washington Beer and Wine Wholesalers Association on the hook for about $1.9 million, although the exact amount is still being worked out.

It's on top of $416,615 that the state was ordered to pay Issaquah-based Costco last year for another part of the case.

Of Tuesday's ruling, Costco attorney John Sullivan said, "We're pleased that the judge determined that we substantially prevailed in the lawsuit, and that the public interest was served."

The state and wholesalers association have not decided whether to appeal the decision by U.S. District Judge Marsha Pechman in Seattle.

For the state, the ruling is "disappointing, certainly. It's not the result we hoped for," said Assistant Attorney General Martha Lantz.

John Guadnola, executive director and attorney for the wholesalers association, said that it would work with the state to determine how to share the expense. "We don't have that much money," he said.

The issue of legal costs is the last vestige of a long court battle that Costco started with a 2004 lawsuit in which it argued that the state's beer- and wine-distribution system was anti-competitive and violated a federal law designed to limit monopolies.

Costco won many of the legal changes it sought in Pechman's courtroom, but most of her decisions were overturned on appeal. After the appeal, the state's three-tier system — in which distributors act as middlemen between manufacturers and retailers — remained mostly intact.

However, the appeals court upheld Costco's victory in eliminating the state's "post" and "hold" rules, which required beer and wine manufacturers and suppliers to wait 30 days before making price changes that they posted with the state liquor board.

This week, Pechman said that victory was enough to force the state and wholesalers association to pay most of Costco's legal bills. It brought about a change in law that benefited the public, she wrote.

Costco's most recent quarter profit was $209.6 million, down 29 percent from a year earlier.

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Its shares are trading around $45, near the low end of its 52-week range of $38.17 to $74.89.

Barron's reported this week that over the last couple weeks, investors have traded unusually high volumes of Costco's put options, which typically means they were betting on a stock-price drop.