• Business Week, Monday, December 31, 2007 11:30 AM

A federal court case filed in Seattle is challenging the three-tier distribution system requiring alcohol makers to sell to wholesalers, and wholesalers to sell to retailers as outdated and anticompetitive. Costco Wholesale won an antitrust lawsuit challenging its home state's three-level arrangement in 2006. The state appealed, arguing that the 21st Amendment ending Prohibition gave states the authority over alcohol regulation.

The Ninth Circuit Court of Appeals is expected to rule on the case soon. The decision could have widespread ramifications for every group with a stake in the beer and wine industry. Brewers and wineries nationwide could eventually gain the power to sell their products directly to retailers. Distributors and state tax collectors could lose substantial revenues.

Costco is pushing for the right to buy beer and wine just as it does soap or flat-screen TVs--bypassing middlemen and negotiating big discounts from manufacturers. Distributors say the current system fosters choice for consumers, while avoiding the excesses of a century ago. "This is alcohol; it's not toothpaste," says Phil Terry, CEO of Monarch Beverage, Indiana's largest distributor.

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