Mary M. Tennyson, Sr. Assistant Attorney General Legal Counsel to Washington State Liquor Control Board March 13, 2013

Initiative 1183 Timeline December 8, 2011, I-1183 took effect March 1, 2012, Distributors and Suppliers licensees allowed to sell to spirits retailers May 31, 2012, State stores closed June 1, 2012, new Spirits Retail Licensees can sell to public

Washington Supreme Court Rejects Constitutional Challenge to Initiative 1183

Defending I-1183: Two legal challenges filed December 6 and 7, 2011 King County Superior Court (Seattle), Cowlitz County Superior Court (Longview) Cowlitz County case heard first; Motion for Preliminary Injunction denied. Judge ruled initially to overturn the law on constitutional grounds (single subject, subject-in-title claims) Judge reversed initial ruling on Motion for Reconsideration, March 19, 2011

Expedited review by Washington Supreme Court Challengers filed expedited appeal, direct review by Washington Supreme Court Supreme Court accepted case on expedited review Appellant requested injunction pending decision Injunction denied after briefing and argument, April 7, 2012 Court heard argument on May 17, ruled 5-4 on May 31 to uphold the law. King County case later dismissed as moot.

Rulemaking, Auction Store Rights, Issue New Licenses, Lay off Employees, Close Stores

Board Rulemaking Emergency Rules adopted effective Dec. 8, 2011 In effect for 120 days; some re-adopted eff. April 8, 2012 Proposed language of Permanent rules filed March 14,, 2012; revised language for some rules filed April 18; public hearing May 24. Permanent rules adopted May 30, filed June 5, 2012, effective July 6, Proposed language of rules to revise and repeal existing rules filed May 3, 2012; hearings on June 27 and July 25 Second set of Permanent rules filed August 1, 2012, effective Sept. 1, 2012

State liquor stores closed, WSLCB issued 1455 retail liquor licenses (10,000sf+) Board auctioned right to operate liquor store at 167 former state store locations (not all have active licenses) Board sold product in its stores to successful bidders, returned some product to suppliers under buy-back agreements; auctioned remaining inventory Nov. 1, 2012 Former contract liquor stores licensed, purchased product Some bidders and former contract store managers failed to pay for product, collection efforts ensued

As of March 1, 2013, ten lawsuits filed, challenging Board’s actions to implement the new law

Challenges to WSLCB rules-Costco, Washington Rest. Association, NW Grocers Ass’n, Petitioners 1 st Lawsuit filed June 21, 2012 to challenge rules adopted on May 30 (rules effective July 6) 2 nd Lawsuit filed August 17, 2012 to challenge rules adopted August 1, 2012 (effective Sept. 2) WSLCB and its member named Respondents Washington Beer and Wine Distributor s Ass’n intervened as Respondents Framed as Petition for Review under Washington Administrative Procedure Act

Rule challenge cases, cont’d 2 Cases consolidated for briefing and argument Briefing complete as of 3/8/13, argument set for 4/4/13. Complaint asks for rules to be declared invalid and unenforceable Challenge emergency rules as not required, no emergency (Emergency rules expired in August, 2012) Allege Board did not substantially comply with statutory rulemaking procedures

Rule challenge cases, cont’d Assert rules amend the statute, exceed WSLCB authority Limit on retail to retail sale of 24 liters per day (wine and spirits) Rules requiring spirits distributors and wine distributors to sell and deliver product from their licensed location Rules defining who Certificate of Approval holders can, and cannot, sell spirits to. Rules defining authority of Spirits Importers Assert rules omit rights granted to spirits distributors and grocery stores with wine retailer reseller permit that law grants

Rule challenge cases, cont’d Assert rules violate Supremacy Clause, NAFTA, and “similar provisions of other international trade agreements”; inappropriately discriminates between Washington licensees and out-of-state certificates of approval holders, grant special privileges and immunities in violation of 2 sections of the Washington Constitution, and Allege rules violate state Constitutional provision against amending an initiative within 2 years of its adoption

Fedway Marketplace v WSLCB Landlords of state store locations sued, asserting Board did not have right to terminate leases Sought continued payment of rent and payment of amortized tenant improvement costs Filed as class action Dismissed by Motion for Judgment on the Pleadings, February 1, 2013, prior to hearing on certification of the class Discovery was voluminous and contentious Plaintiffs have appealed dismissal to Court of Appeals

2 other landlord lawsuits Sprague Partners (from Spokane) Landlord for state store purchased right at auction to operate SRL Did not seek license Sued state for terminating lease Voluntary dismissal without prejudice, participated in FedWay Marketplace case Cascade Plaza Associates, Summons and Complaint served, not filed, only served. (Voluntary nonsuit) If Fedway appeal successful, may be reactivated

City of Burlington v. WSCLB Factual background: Purchaser of right to operate liquor store at location of former state store in Burlington, WA, was unable to negotiate lease for that location Sought/obtained WSLCB approval to transfer store operating right to location he already operated (mini- mart) City of Burlington objected to location, citing potential for sales to minors

City challenge to grant of spirits retail license, cont’d Board granted relocation of right to operate store, granted spirits retail license to applicant location does not have a negative violation history with Board Location is not within 500 feet of a school, etc. Licensee is party to the case Record filed with court City’s brief due 3/5/13; Board’s brief due 3/28/13 Court hearing set for 4/19/13

Rez Bev, LLC Challenge to application of 10,000 square foot minimum store size for spirits retail license, within boundaries of Indian reservation Board has held application pending adoption of Trade Area rules; Rez Bev asserts 10,000 square foot limitation is a zoning regulation, not applicable to a tribal member on his reservation. Petitioner’s brief due April 30, 2013, Board’s brief due May 20, Trial set for June 14, 2013

Tillman Carr, et al, v. WSLCB 11 former contract store managers have sued WSLCB and Department of Revenue. Assert WSLCB breached their contracts by terminating them early (unconstitutional impairment of contract and taking of property without just compensation) Assert WSLCB did not “avert harm” to interests of former contract store managers. Assert WSLCB should not require them to pay 17% fee on sales to restaurants and bars Allege DOR violated law by failing to adopt rules re: unconstitutional impairment of contract

Bases of challenge: RCW (6)(b): “The [Board’s] transition must include, without limitation, a provision for applying operating and asset sale revenues of the board to just and reasonable measures to avert harm to interests of tribes, military buyers, and nonemployee liquor store operators under then existing contracts for supply by the board of distilled spirits, taking into account present value of issuance of a spirits retail license to the holder of such interest. The provision may extend beyond the time for completion of transition to a spirits licensee system.”

Bases of challenge, cont’d § 303 of I-1183 provides: The department of revenue must develop rules and procedures to address claims that this act unconstitutionally impairs any contract with the state and to provide a means for reasonable compensation of claims it finds valid, funded first from revenues based on spirits licensing and sale under this act. DOR issued statement that it lacks authority to make the required determinations

Assoc. of Washington Spirits and Wine Distributors v. WSLCB Association challenges WSLCB rules adopted to implement collection of $150 million in Spirits Distributor License fees RCW mandates that by March 31, 2013, holders of spirits distributor licenses must have paid $150 million in spirits distributor license fees (fee is 10% of sales of spirits for first 2 years after licensure). Board required to assess any shortfall against “holders of spirits distributor licenses”. Who pays 10% fee—rule challenged in first rule challenge also

Lawsuit by Distributors, cont’d WSLCB rule requires all persons “holding spirits distributor license” to pay shortfall in collection of $150 million Distributors assert that all those who pay 10% fee should also be subject to shortfall assessment, and that payments of 10% fee by those persons should be included to determine amount of shortfall If first rule challenge successful on who pays 10% fee, will impact outcome of distributor rule challenge: if rule struck down, may moot second case.

Second group of former contract store managers sue: Charles Ferrel Suit for damages by three former contract liquor store managers, filed 1/30/13. Claims similar to Carr v. WSLCB Also assert that 17% retail spirits license fee on sales to restaurants and bars violates the privileges and immunities clause of Washington Constitution Answer filed, scheduling conference set for 4/5/13

Tort claim by auction winner Board granted license to BevMo! for space awarded to auction winner; landlord expanded space to >10,000 sf Auction winner allowed to relocate within one mile, but doesn’t want competition Demanded Board deny license to BevMo! Several other similar situations

Petition to rescind purchase of auction right Persons/corporations who purchased the right to operate a spirits retail license at the locations formerly leased by the WSLCB have filed a petition with the Board, asking the Board to rescind the contracts and refund the amount they paid in the auction. Many of the persons joining the petition are delinquent or late in payment of the 17% spirits retail licensee; Board has authority to suspend license for nonpayment.

Potential other claims Auction winner has filed tort claim Group of auction winners who purchased rights to 40+ former state store locations have filed petition with Board, seeking rescission of purchase contracts; no lawsuit filed yet

Questions?