TFWS, INCORPORATED, t/a Beltway Fine Wine and Spirits v. William Donald Schaefer

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 TFWS, INCORPORATED, t/a Beltway
Fine Wine and Spirits,
Plaintiff-Appellant,
v.
WILLIAM DONALD SCHAEFER, in his
official capacity as Comptroller of
the Treasury of the State of
Maryland; CHARLES W. EHART, in
his official capacity as
Administrator of the Alcohol and No. 99-2279  Tobacco Tax Unit of the
Comptroller of the State of
Maryland,
Defendants-Appellees.
MARYLAND LIQUOR STORES
ASSOCIATION, INCORPORATED;
MARYLAND STATE LICENSED
BEVERAGE ASSOCIATION; MARYLAND
UNITED LICENSEES BEVERAGE
ASSOCIATION,
Amici Curiae. 

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 TFWS, INCORPORATED, t/a Beltway
Fine Wine and Spirits,
Plaintiff-Appellee,
v.
WILLIAM DONALD SCHAEFER, in his
official capacity as Comptroller of
the Treasury of the State of
Maryland; CHARLES W. EHART, in
his official capacity as
Administrator of the Alcohol and No. 99-2342  Tobacco Tax Unit of the
Comptroller of the State of
Maryland,
Defendants-Appellants.
MARYLAND LIQUOR STORES
ASSOCIATION, INCORPORATED;
MARYLAND STATE LICENSED
BEVERAGE ASSOCIATION; MARYLAND
UNITED LICENSEES BEVERAGE
ASSOCIATION,
Amici Curiae. 
Appeals from the United States District Court
for the District of Maryland, at Baltimore.
Frederic N. Smalkin, District Judge.
(CA-99-2008-S)
Argued: April 5, 2000
Decided: March 1, 2001
Before LUTTIG and MICHAEL, Circuit Judges, and
Claude M. HILTON, Chief United States District Judge
for the Eastern District of Virginia, sitting by designation.
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Affirmed in part, vacated in part, and remanded by published opinion.
Judge Michael wrote the opinion, in which Chief Judge Hilton joined.
Judge Luttig wrote a concurring opinion.
COUNSEL
ARGUED: William James Murphy, MURPHY & SHAFFER, Balti-
more, Maryland, for Appellant. Steven Marshall Sullivan, Assistant
Attorney General, Baltimore, Maryland, for Appellees. ON BRIEF:
Robert T. Shaffer, III, John J. Connolly, MURPHY & SHAFFER,
Baltimore, Maryland, for Appellant. J. Joseph Curran, Jr., Attorney
General of Maryland, Meredyth Smith Andrus, Assistant Attorney
General, Baltimore, Maryland, for Appellees. William B. Schreiber,
Alan Warshauer, WORMSER, KIELY, GALEF & JACOBS, L.L.P.,
New York, New York, for Amici Curiae.
OPINION
MICHAEL, Circuit Judge:
This case involves an antitrust challenge to certain Maryland stat-
utes and regulations that control the wholesale prices of liquor and
wine (together, "liquor") in that state. Plaintiff TFWS, Inc. owns and
operates a large retail liquor store in Towson, Maryland, known as
Beltway Fine Wine & Spirits. TFWS sued Maryland’s State Comp-
troller and the Administrator of the Alcohol and Tobacco Tax Unit of
the Comptroller’s office (together, the "Comptroller"), seeking a dec-
laration that Maryland’s regulatory scheme, which (1) requires liquor
wholesalers to post prices and adhere to them and (2) prohibits vol-
ume discounts, is a violation of § 1 of the Sherman Act. Acting on the
Comptroller’s motion to dismiss, the district court held that TFWS’s
suit could be maintained under the Ex parte Young doctrine, that
Maryland’s liquor regulatory scheme is a "hybrid restraint" constitut-
ing a per se violation of § 1 of the Sherman Act, and that Maryland’s
scheme is not shielded by "state action" immunity from the antitrust
laws. Acting on its own motion, the district court went on to hold that
the regulatory scheme, notwithstanding its anticompetitive effect,
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should be upheld because Maryland’s interest under the Twenty-first
Amendment trumps the federal interest under the Sherman Act. The
district court therefore dismissed the complaint. We affirm in part and
vacate in part. We vacate the district court’s Twenty-first Amendment
ruling, which was made without a record. Both sides should have the
chance to offer evidence on Maryland’s Twenty-first Amendment
defense before the district court balances Maryland’s interest under
the Amendment against the federal interest in promoting competition.
Accordingly, the case will be remanded for further proceedings on the
Twenty-first Amendment question.
I.
The Twenty-first Amendment repealed Prohibition in 1933 and
gave the states wide latitude to regulate liquor distribution and sales
within their borders. See U.S. Const. amend. XXI; North Dakota v.
United States, 495 U.S. 430, 431 (1990). Two methods of regulation
have emerged. The first is the operation of a state monopoly on liquor
sales with state-run stores. The second is a licensing system that
grants licenses to those in the liquor distribution chain, namely, manu-
facturers, wholesalers, and retailers, who must operate under detailed
regulations. In Maryland the licensing system is the prevailing
method of regulating liquor sales, and it is the system in force in Bal-
timore County, where TFWS operates.
Maryland’s liquor licensing system imposes stiff restrictions on
how manufacturers and wholesalers (together, "wholesalers") price
their products to retailers. (Retailers, such as TFWS, must buy all of
the liquor they resell to consumers from licensed wholesalers. See
Md. Ann. Code art. 2B, § 12-107.) In this case TFWS challenges two
of the price restrictions Maryland imposes on the wholesale market:
the post-and-hold pricing system and the prohibition of volume dis-
counts.
The post-and-hold system, which is mandated by Maryland’s Alco-
holic Beverages Code and implemented by the Comptroller through
regulation, promotes stable and uniform prices in the wholesale liquor
market. The statute directs the Comptroller to establish a price posting
system that requires wholesalers to file price schedules and proposed
price changes that are made available to their competitors. See Md.
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Ann. Code art. 2B, § 12-103(c). By the fifth of each month wholesal-
ers must post with the Comptroller a schedule of any price changes
they intend to make for the following month. See Md. Regs. Code tit.
03, § 02.01.05B(2). The Comptroller then makes these postings avail-
able to other wholesalers, see id. § .05D(2), who are given until the
thirteenth of the month to file amended price schedules for new
brands or new sizes of existing brands, see id. § .05C(2). Of course,
when one wholesaler posts a price change for an existing product, a
competitor may match that price in a regular filing the following
month. Under the post-and-hold system wholesalers must sell to
retailers at the prices established in the posted schedule for at least the
month following the posting. See id. § .05B(2)(c).
The volume discount ban is also based on provisions in the statute
and the Comptroller’s regulations. The statute prohibits wholesalers
from discriminating in price "between one retailer and another
retailer." Md. Ann. Code art. 2B, § 12-102(a). The Comptroller by
regulation prohibits wholesalers from offering discounts "of any
nature" to liquor retailers. Md. Regs. Code tit. 03, § 02.01.05B(3)(c).
The post-and-hold system and the volume discount ban have one
overriding purpose: fostering and promoting temperance. See Md.
Ann. Code art. 2B, §§ 12-102, -103(a). The regulatory scheme alleg-
edly promotes temperance by eliminating price wars among liquor
wholesalers and by maintaining wholesale prices at stable (and
higher) levels. See id. § 12-103(a). The "Declaration of policy" for
Maryland’s Alcoholic Beverages Code acknowledges the anticompe-
titive intent of the state’s liquor control laws and regulations. Specifi-
cally, regulators are given broad power (1) to "displace or limit
economic competition by regulating . . . the sale or distribution of
alcoholic beverages" and (2) to "adopt and enforce [authorized] regu-
lations . . . notwithstanding any anticompetitive effect." Id. § 1-
101(b)(2).
The Comptroller has broad authority to enforce the post-and-hold
system and the volume discount ban. See id. §§ 10-401, 12-103(d).
According to TFWS, the Comptroller routinely enforces and threatens
to enforce both of these restrictions against wholesalers. The Comp-
troller has the authority to revoke or suspend a wholesaler’s license
for a violation of the liquor control statutes and regulations. See id.
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§ 10-401. The Comptroller may also accept "an offer of compromise"
(a fine, in effect) instead of revoking or suspending a license. Id. § 10-
402. Also, the Comptroller regularly publishes notices of violations
of the pricing provisions, including the sanctions imposed, and dis-
tributes those notices to all liquor wholesalers.
TFWS asserts that Maryland’s controls on wholesale liquor pricing
are anticompetitive and cause the company to lose sales volume and
profits in its retail business. According to TFWS, the State’s pricing
scheme restrains competition by allowing wholesalers to do two
things: (1) match each other’s prices at artificially high levels and (2)
maintain those high prices. TFWS therefore filed this action in district
court against the Comptroller, seeking a declaration that the Comp-
troller’s continuing enforcement of Maryland law and regulations
imposing the post-and-hold pricing system and banning volume dis-
counts violates § 1 of the Sherman Act. The Comptroller promptly
moved to dismiss under Fed. R. Civ. P. 12(b)(1) for lack of subject
matter jurisdiction on the following two grounds: (1) that the Eleventh
Amendment bars the action against the Comptroller, who was sued in
his official capacity and (2) that § 1 of the Sherman Act "does not
apply to the defendant State official[’s] enforcement of State law" (in
other words, the suit is barred by the "state action" doctrine).
The district court summarily rejected the Comptroller’s Eleventh
Amendment defense, holding that TFWS’s action could proceed
under the Ex parte Young exception because it simply seeks to enjoin
the Comptroller from committing violations of the Sherman Act by
his "enforcement of state law allegedly inconsistent therewith." As a
preliminary to considering the state action question, the district court
measured Maryland’s liquor pricing scheme against the strictures of
§ 1 of the Sherman Act. The district court held that Maryland’s regu-
latory scheme constitutes a per se violation of the antitrust law.
According to the district court, the scheme is an illegal "hybrid
restraint," that is, a scheme in which Maryland "authorize[s] price set-
ting and enforce[s] the prices established by private entities." Because
Maryland neither establishes the posted prices nor reviews them for
reasonableness, the court held that the Comptroller was not immu-
nized by the state action doctrine. Next, the district court on its own
motion reached the ultimate issue: whether "the Twenty-first Amend-
ment trumps the Sherman Act in this case." The court proceeded to
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balance the federal and state interests without any input from the par-
ties. Relying mainly on its own instincts and perceptions, the district
court concluded that "despite the anticompetitive effect of the scheme
challenged in this case, it should be upheld under the powers reserved
to the states under the Twenty-first Amendment." The court then dis-
missed the complaint for failure to state a claim. TFWS appeals on
the Twenty-first Amendment issue, and the Comptroller cross appeals
on the issues relating to Eleventh Amendment immunity, the Sherman
Act, and state action immunity. We review all of these issues de novo.
See Lynn v. West, 134 F.3d 582, 585 (4th Cir. 1998).
II.
The district court held that the Eleventh Amendment does not bar
TFWS’s suit, and we agree. The suit, brought against a state official
(the Comptroller) to end alleged violations of the Sherman Act that
are said to be continuing, is authorized under Ex parte Young, 209
U.S. 123 (1908).
The Eleventh Amendment grants "an unconsenting State [immu-
nity] from suits brought in federal court by her own citizens as well
as by citizens of another State." Edelman v. Jordan, 415 U.S. 651,
662-63 (1974). See also Seminole Tribe of Fla. v. Florida, 517 U.S.
44, 72-73 (1996) ("The Eleventh Amendment restricts the judicial
power under Article III . . . ."). However, the Ex parte Young excep-
tion to Eleventh Amendment immunity remains generally available to
a plaintiff who seeks prospective declaratory and injunctive relief
against a state official for an ongoing violation of federal law. See
Idaho v. Coeur d’Alene Tribe, 521 U.S. 261, 294, 296 (1997)
(O’Connor, J., concurring); id. at 297-98 (Souter, J., dissenting);
Green v. Mansour, 474 U.S. 64, 68 (1985); Pennhurst State Sch. &
Hosp. v. Halderman, 465 U.S. 89, 106 (1984); Booth v. Maryland,
112 F.3d 139, 141-42 (4th Cir. 1997). The Young exception is an "es-
sential . . . part of our sovereign immunity doctrine," Alden v. Maine,
527 U.S. 706, 748 (1999), that is necessary "to promote the vindica-
tion of federal rights," Pennhurst, 465 U.S. at 105. See also Green,
474 U.S. at 68 (affirming that "the availability of prospective relief
of the sort awarded in Ex parte Young, gives life to the Supremacy
Clause"). Although recent Supreme Court cases have added muscle
to the constitutional principle of state immunity from litigation, the
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Court has not questioned the continuing validity of the Young excep-
tion. See Alden, 527 U.S. at 747 ("[C]ertain suits for declaratory and
injunctive relief against state officers must . . . be permitted if the
Constitution is to remain the supreme law of the land."); Seminole
Tribe, 517 U.S. at 72 n.16 ("[A]n individual may obtain injunctive
relief under Ex parte Young in order to remedy a state officer’s ongo-
ing violation of state law.").
According to TFWS’s complaint, the Comptroller’s continued
enforcement of the post-and-hold scheme and the volume discount
ban violates § 1 of the Sherman Act. The company seeks declaratory
and injunctive relief: it asks that these pricing restrictions be declared
unlawful and that the Comptroller be enjoined from enforcing them.
TFWS does not request money damages or other retrospective relief
for past violations. Because TFWS alleges an ongoing violation of
federal law and seeks only prospective relief, it appears that the com-
pany’s suit against Maryland’s Comptroller fits neatly within the
Young exception to Eleventh Amendment immunity. See Coeur
d’Alene, 521 U.S. at 281 ("An allegation of an ongoing violation of
federal law where the requested relief is prospective is ordinarily suf-
ficient to invoke the Young fiction.").
Relying on the Supreme Court’s recent decision in Idaho v. Coeur
d’Alene Tribe, Maryland argues that it has a "special sovereignty
interest" in liquor regulation that removes this case from the Young
exception. Before considering the specifics of Maryland’s argument,
we look briefly at Coeur d’Alene. The Coeur d’Alene Tribe claimed
that federal law gave it beneficial ownership of the submerged lands
and banks of Lake Coeur d’Alene in Idaho. The Tribe sued Idaho
state officials seeking a declaration of its ownership and an injunction
barring state officers from exercising regulatory authority over the
submerged lands. See id. at 264-65. The Supreme Court held that the
Tribe’s suit was barred by the Eleventh Amendment; specifically, the
Young exception did not apply because of the "particular and special
circumstances" that made the Tribe’s suit "unusual." Id. at 287, 281.
The suit was unusual, the Court said, because it was the "functional
equivalent of a quiet title action which implicate[d] special sover-
eignty interests." Id. at 281.
The Supreme Court’s conclusion that Young did not apply was
based on its examination of the "effect of the Tribe’s suit and its
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impact on [Idaho’s] special sovereignty interests." Id. This examina-
tion raised two concerns. First, the Court was concerned that the Tribe
was asking a federal court to declare that the submerged lands were
for the Tribe’s exclusive use and occupancy. See id. at 282. It was,
in essence, attempting to divest the State of Idaho of a substantial
property interest. Second, the Court was concerned that the Tribe was
seeking (1) a declaration "that the lands in question [were] not even
within the regulatory jurisdiction of the State" and (2) an injunction
that would "bar the State’s principal officers from exercising their
governmental powers and authority over the disputed lands." Id. The
Court relied on history to explain the importance of submerged lands
to state sovereignty. The Court emphasized that "lands underlying
navigable waters have historically been considered ‘sovereign
lands.’" Id. at 283. Indeed, state ownership and control of submerged
lands is "‘considered an essential attribute of [state] sovereignty.’" Id.
(quoting Martin v. Lessee of Waddell, 16 Pet. 367, 410 (1842)). The
Court concluded "that if the Tribe were to prevail, Idaho’s sovereign
interest in its lands and waters would be affected in a degree fully as
intrusive as almost any conceivable retroactive levy upon funds in its
Treasury." Id. at 287. In sum, the Court decided that the Young rule
did not apply because the Tribe’s suit was not really a suit to enjoin
state officials from an ongoing violation of federal law. Rather, it was
the "functional equivalent" of a suit against the State of Idaho itself
because it sought to dispossess the State from land within its borders
and to remove that land from the State’s regulatory authority.
Maryland asserts that its authority as a state to regulate liquor
under the Twenty-first Amendment qualifies as a "special sovereignty
interest" under Coeur d’Alene. According to Maryland, because
TFWS’s suit in essence seeks to enjoin the State from exercising this
regulatory authority, the suit (like the Tribe’s suit in Coeur d’Alene)
is barred by the Eleventh Amendment. We disagree. Both Coeur
d’Alene and TFWS’s complaint are sufficiently narrow that they do
not conflict. As a result, TFWS’s suit is allowed under the Young
exception.
First, we do not believe that the Twenty-first Amendment creates
state authority that qualifies as a "special sovereignty interest" under
Coeur d’Alene. In Coeur d’Alene Idaho’s ownership over the sub-
merged lands was considered an "essential attribute" of the state’s
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"sovereign authority and its standing in the Union." Coeur d’Alene,
521 U.S. at 282, 283. These lands, the Supreme Court said, are "tied
in a unique way to [state] sovereignty" by reason of ancient doctrines
and the development of English and early American law. Id. at 282-
86. Indeed, a state’s right to submerged lands is said to be absolute,
"‘subject only to the rights . . . surrendered by the Constitution to the
general government.’" Id. at 283 (quoting Martin, 16 Pet. at 410).
Maryland’s power under the Twenty-first Amendment is not as basic
or exclusive as a state’s territorial right to its submerged lands. As the
Supreme Court has said, "important federal interests in liquor matters
survived the ratification of the Twenty-first Amendment." Ca. Retail
Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 108
(1980). For example, a state’s power to regulate liquor, although sub-
stantial, "may be subject to the federal commerce power in appropri-
ate situations." Id. at 110. When federal and state interests over liquor
regulation come into conflict, those interests "can be reconciled only
after careful scrutiny . . . in a ‘concrete case.’" Id. (quoting Hostetter
v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324, 332 (1964)).
Because there is "no bright line between federal and state powers over
liquor," id., we do not believe that Maryland’s Twenty-first Amend-
ment power qualifies as a "special" state sovereignty interest under
Coeur d’Alene.
Even if the Twenty-first Amendment did create a special sover-
eignty interest, Coeur d’Alene presents one more hurdle for Mary-
land. We must examine "the effect of [TFWS’s] suit and its impact
on" any special sovereignty interest "in order to decide whether the
Ex parte Young fiction is applicable." Coeur d’Alene, 521 U.S. at 281.
To guide our examination, we look at what the Tribe sought in Coeur
d’Alene: a declaration that the submerged lands were not within the
sovereign jurisdiction of Idaho and an injunction that would have
altogether eliminated Idaho’s regulatory authority over these lands.
The prospects of such a judgment created "particular and special cir-
cumstances" that rendered "the Young exception inapplicable." Id. at
287. What TFWS seeks in this case is quite different from what the
Tribe wanted in Coeur d’Alene. TFWS is not seeking to strip Mary-
land of its authority to regulate liquor under the Twenty-first Amend-
ment; it simply seeks to require the Comptroller to regulate in a way
that is consistent with the Sherman Act. TFWS’s claim is not out of
the ordinary, and it is in line with the Young exception.
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III.
The framework for considering whether a state’s liquor pricing reg-
ulations can be successfully challenged under the Sherman Act was
established by the Supreme Court in California Retail Liquor Dealers
Association v. Midcal Aluminum, Inc., 445 U.S. 97 (1980). The
threshold question is whether the state’s pricing regulations violate
the Sherman Act. See id. at 102. The next question is whether the reg-
ulations are shielded from the Sherman Act under the "state action"
doctrine. See id. at 103. The final question is whether the Twenty-first
Amendment overrides a Sherman Act challenge to the regulations.
See id. at 106.
A.
Section 1 of the Sherman Act says, "Every contract, combination
. . . or conspiracy, in restraint of trade . . . is hereby declared to be
illegal." 15 U.S.C. § 1. We agree with the district court that Mary-
land’s liquor regulatory scheme is a hybrid restraint that amounts to
a per se violation of § 1.
When a state regulatory scheme is challenged for being irreconcil-
able on its face with § 1 of the Sherman Act, the antitrust violation
must be of the per se variety. See Rice v. Norman Williams Co., 458
U.S. 654, 661 (1982); see also Fisher v. City of Berkley, 475 U.S.
260, 270 n.2 (1986). According to Rice, we approach the issue in the
following way: "we apply principles similar to those we employ in
considering whether any state statute is pre-empted by a federal stat-
ute pursuant to the Supremacy Clause. As in the typical pre-emption
case, the inquiry is whether there exists an irreconcilable conflict
between the federal and state regulatory schemes." Rice, 458 U.S. at
659. A state regulatory scheme, when challenged on its face, "may be
condemned under the antitrust laws only if it mandates or authorizes
conduct that necessarily constitutes a violation of the antitrust laws in
all cases, or if it places irresistible pressure on a private party to vio-
late the antitrust laws in order to comply with the statute." Id. at 661.
See also 324 Liquor Corp. v. Duffy, 479 U.S. 335, 341 (1987) (inquir-
ing whether New York liquor pricing law that allowed wholesalers to
control retail prices was a per se violation of § 1 of the Sherman Act).
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Our analysis under § 1 has two steps. We first decide whether the
regulatory system at issue is a "unilateral restraint" or a "hybrid
restraint." See Fisher, 475 U.S. at 267-68. Second, if it is a hybrid
restraint, we must decide whether it involves a per se violation of § 1.
See Canterbury Liquors & Pantry v. Sullivan, 16 F. Supp. 2d 41, 45
(D. Mass. 1998).
A state law that restrains competition may survive a Sherman Act
preemption challenge if the state unilaterally imposes the restraint.
See Fisher, 475 U.S. at 266-67. In Fisher the City of Berkeley, Cali-
fornia, enacted a rent stabilization ordinance that placed strict rent
controls on certain classes of real property rented for residential use.
See id. at 262. The ordinance required landlords to adhere to the pre-
scribed rent ceilings, and violators were subject to civil and criminal
penalties. See id. at 262-63. A group of landlords sued the city, claim-
ing that the rent control ordinance was a traditional per se price fixing
violation. The Supreme Court rejected the landlords’ challenge.
Because § 1 of the Sherman Act is directed only at "unreasonable
restraints of trade effected by a ‘contract, combination . . . or conspir-
acy’ between separate entities," id. at 266 (quoting Copperweld Corp.
v. Independence Tube Corp., 467 U.S. 752, 768 (1984)), the Court
concluded that the city’s unilateral imposition of rent control did not
amount to agreement or "concerted action," id. The Court acknowl-
edged the landlords’ argument that if they had banded together to fix
rental prices in the absence of an ordinance, their action would have
been a per se violation of the Sherman Act. See id. The method pre-
scribed by the ordinance saved it from § 1, according to the Court:
A restraint imposed unilaterally by government does not
become concerted-action within the meaning of the [Sher-
man Act] simply because it has a coercive effect upon par-
ties who must obey the law. The ordinary relationship
between the government and those who must obey its regu-
latory commands whether they wish to or not is not enough
to establish a conspiracy. Similarly, the mere fact that all
competing property owners must comply with the same pro-
visions of the Ordinance is not enough to establish a con-
spiracy among landlords. Under Berkeley’s Ordinance,
control over the maximum rent levels of every affected resi-
dential unit has been unilaterally removed from the owners
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of those properties and given to the Rent Stabilization
Board.
Id. at 267. In sum, the city’s rent control scheme did not run afoul of
§ 1 because "the rent ceilings imposed by the Ordinance and main-
tained by the Rent Stabilization Board have been unilaterally imposed
by government upon landlords to the exclusion of private control." Id.
at 266.
The Supreme Court in Fisher was careful to recognize, however,
that a governmentally imposed trade restraint that enforces private
pricing decisions is a "hybrid restraint" that fulfills the Sherman Act’s
"concerted action" requirement. As the Court said:
Not all restraints imposed upon private actors by govern-
ment units necessarily constitute unilateral action outside
the purview of § 1. Certain restraints may be characterized
as "hybrid," in that nonmarket mechanisms merely enforce
private marketing decisions. See Rice v. Norman Williams
Co., 458 U.S. at 665 (Stevens, J., concurring in judgment).
Where private actors are thus granted "a degree of private
regulatory power," id., at 666, n.1, the regulatory scheme
may be attacked under § 1.
Fisher, 475 U.S. at 267-68.
The Supreme Court in Fisher characterized two of its decisions,
Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384 (1951),
and Ca. Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445
U.S. 97 (1980), as involving hybrid restraints. A later decision, 324
Liquor Corp. v. Duffy, 479 U.S. 335 (1987), also involved a regula-
tory scheme that was termed a hybrid restraint. All three of these
cases, Schwegmann, Midcal, and 324 Liquor, dealt with the liquor or
wine industry and some form of state-sanctioned resale price mainte-
nance.
In Schwegmann a Louisiana statute authorized a liquor distributor
to enforce its resale price maintenance agreement with one retailer
against non-signing retailers. See Schwegmann, 341 U.S. at 387. This
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was a hybrid restraint because the involvement of the distributor in
setting retail prices "made it impossible to characterize the regulation
as unilateral action by the State of Louisiana." Fisher, 475 U.S. at 268
(discussing Schwegmann). In Midcal a California statute, among other
things, required vintners to set the resale prices of their wholesalers,
regardless of whether the wholesalers agreed. See Midcal, 445 U.S.
at 99. This was also a hybrid restraint of trade. The vintners set the
prices, and "the mere existence of legal compulsion [that is, the state
statute requiring price setting] did not turn California’s scheme into
unilateral action by the State." Fisher, 475 U.S. at 268 (discussing
Midcal). In the third case, 324 Liquor, New York’s liquor pricing stat-
utes and regulations permitted wholesalers to control the minimum
resale prices of retailers. See 324 Liquor, 479 U.S. at 340. The Court
found the scheme to be a hybrid restraint because the state "granted
[private actors] a degree of private regulatory power." Id. at 345 n.8
(quoting Fisher, 475 U.S. at 208) (internal quotation marks omitted).
The Court therefore rejected the defendants’ "contention that there
[was] no ‘contract, combination . . ., or conspiracy, in restraint of
trade.’" 324 Liquor, 479 U.S. at 345 (quoting 15 U.S.C. § 1).
Common threads run through Schwegmann, Midcal, and 324
Liquor. Each involved state liquor or wine laws that empowered pri-
vate parties to set prices, and those prices were enforced by govern-
ment mechanisms. Each involved a hybrid restraint subject to
challenge under § 1 as concerted action. (The Supreme Court found
that the hybrid restraint in each case was a per se violation of § 1, but
we get a bit ahead of our story in noting this.)
We must now say whether Maryland’s liquor regulatory scheme
requiring post-and-hold pricing and prohibiting volume discounts is
a hybrid restraint. The post-and-hold system is a classic hybrid
restraint: the State requires wholesalers to set prices and stick to them,
but it does not review those privately set prices for reasonableness;
the wholesalers are thus granted a significant degree of private regula-
tory power. The volume discount ban is a part of the hybrid restraint
because it reinforces the post-and-hold system by making it even
more inflexible. Wholesalers post their prices as required, and dis-
counts of any nature are prohibited by regulation.
Our determination that the challenged Maryland liquor pricing
scheme is a hybrid restraint does not necessarily mean that it violates
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§ 1 of the Sherman Act. See Canterbury Liquors & Pantry v. Sullivan,
16 F. Supp. 2d 41, 46 (D. Mass. 1998). We turn, then, to the § 1 per
se analysis. Per se violations arise from "certain agreements or prac-
tices which because of their pernicious effect on competition and lack
of any redeeming virtue are conclusively presumed to be unreason-
able and therefore illegal without elaborate inquiry as to the precise
harm they have caused or the business excuse for their use." Conti-
nental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 50 (1977) (quot-
ing Northern Pac. R. Co. v. United States, 356 U.S. 1, 5 (1958)). Our
analysis of Maryland’s wholesale liquor pricing scheme leads us to
conclude that it constitutes a per se violation of § 1 of the Sherman
Act.
Under Maryland’s post-and-hold system, liquor wholesalers post
prices and adhere to them for thirty days after they are in effect.
Moreover, with respect to new brands and sizes, competing wholesal-
ers may match the prices of the posting wholesaler before the posted
prices go into effect. If liquor wholesalers entered into private agree-
ments to accomplish what is required (and allowed) under the Mary-
land scheme, a per se Sherman Act violation would result. There is,
we recognize, a "plain distinction between the lawful right to publish
prices . . . on the one hand, and an agreement among competitors lim-
iting action with respect to the published prices, on the other." Cata-
lano, Inc. v. Target Sales, Inc., 446 U.S. 643, 649-50 (1980) (per
curiam). This distinction makes one thing obvious: agreements to
adhere to previously announced prices are unlawful per se. See Sugar
Inst. v. United States, 297 U.S. 553, 601 (1936) (noting that "steps
taken to secure adherence, without deviation, to prices and terms . . .
announced" violate § 1). Again, Maryland’s post-and-hold pricing
scheme mandates the exchange of price information by wholesalers
through public posting and dissemination, and it requires adherence
to the publicly announced prices. The Maryland system thus mandates
activity that is essentially a form of horizontal price fixing, which has
been called "the paradigm of an unreasonable restraint of trade."
NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, 100
(1984). Maryland’s post-and-hold regime is subject to § 1 as a hybrid
restraint, and we hold that it is illegal per se.
Other lower courts considering state post-and-hold beverage pric-
ing systems have likewise concluded that they constitute per se viola-
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tions of the Sherman Act. For example, in Miller v. Hedlund, 813
F.2d 1344, 1349 (9th Cir. 1986), the Ninth Circuit struck down Ore-
gon’s regulatory scheme, which was nearly identical to Maryland’s.
The Oregon regulations required wholesalers to post wine and beer
prices ten days prior to their effective date and to adhere to the posted
prices for specified periods, which were 30 days for wine and 180
days for beer. See id. at 1347. (The state did not review the posted
prices for reasonableness.) The court said, "If the wholesale beer and
wine distributors had entered into a private agreement to accomplish
what is otherwise required by the Oregon regulations, there is no
question that a per se violation of Section 1 of the Sherman Act
would be found." Id. at 1349. Because the state regulations compelled
activity (the public posting of prices and adhering to those prices) that
"would otherwise be a per se violation of the Sherman Act," id., the
Oregon regime qualified as a hybrid restraint amounting to a per se
violation of the Sherman Act.
Several district courts have reached the same result. See, e.g., Beer
& Pop Warehouse v. Jones, 41 F. Supp. 2d 552, 560-62 (M.D. Pa.
1999) (holding that Pennsylvania post-and-hold pricing statute for
beer was a per se violation of the Sherman Act); Canterbury Liquors
& Pantry v. Sullivan, 16 F. Supp. 2d 41, 47-48 (D. Mass. 1998) (hold-
ing that Massachusetts post-and-hold liquor pricing scheme was a per
se violation of § 1). The only notable exception to these circuit and
district court decisions is Battipaglia v. New York State Liquor
Authority, 745 F.2d 166 (2d Cir. 1984), a case in which a divided
panel upheld a post-and-hold system for wholesale liquor prices in
New York. Battipaglia has not been followed elsewhere, and a lead-
ing commentator on antitrust law has sided with the dissent. See 1
Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 217, at 308-
09 (2d ed. 2000) ("Given the great danger that agreements to post and
adhere will facilitate horizontal collusion, the dissent’s position [in
Battipaglia] is more consistent with" the Supreme Court’s hybrid
restraint jurisprudence).
Maryland’s volume discount ban is also a per se violation of the
Sherman Act, according to Catalano. In Catalano the Supreme Court
considered a claim by beer retailers that wholesalers, in agreeing to
stop providing short-term credit to retailers, had violated the Sherman
Act. See Catalano, 446 U.S. at 644-45. The Court held that the agree-
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ment was a per se violation of § 1, reasoning that "[a]n agreement to
terminate the practice of giving credit is . . . tantamount to an agree-
ment to eliminate discounts, and thus falls squarely within the tradi-
tional per se rule against price fixing." Id. at 648. At least one other
court has held that the elimination of volume discounts is a per se vio-
lation of § 1 under Catalano. See Godix Equip. Exp. Corp. v. Cater-
pillar, Inc., 948 F. Supp. 1570, 1576 (S.D. Fla. 1996), aff’d, 144 F.3d
55 (11th Cir. 1998).
For the foregoing reasons, we hold that the Maryland statutes and
regulations that require liquor wholesalers to post and hold their
prices and that prohibit them from offering volume discounts consti-
tute a per se violation of § 1 of the Sherman Act.
B.
The district court correctly held that Maryland cannot claim "state
action" immunity from the Sherman Act. The state action immunity
doctrine, first articulated in Parker v. Brown, 317 U.S. 341, 351
(1943), holds that the Sherman Act was not "intended to restrain state
action or official action directed by a state." Id. On the other hand, "a
state does not give immunity to those who violate the Sherman Act
by authorizing them to violate it, or by declaring that their action is
lawful." Id. The Supreme Court has articulated a two-part test for
determining whether immunity exists under Parker v. Brown: "First,
the challenged restraint must be one ‘clearly articulated and affirma-
tively expressed as state policy;’ second, the policy must be ‘actively
supervised’ by the State itself." Ca. Retail Liquor Dealers Ass’n v.
Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980) (quoting City of
Lafayette v. La. Power & Light Co., 435 U.S. 389, 410 (1978)). The
district court held that Maryland’s regulatory system satisfied the first
part of this test but failed the second part for lack of active supervi-
sion.
The district court’s denial of immunity is validated by 324 Liquor
Corp. v. Duffy, 479 U.S. 335, 344-45 (1987), a case in which the
Supreme Court held that one aspect of the New York State liquor
pricing system was not entitled to antitrust immunity under Parker v.
Brown. The scheme challenged in 324 Liquor involved a New York
State liquor statute that (1) required liquor wholesalers to post prices
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to retailers per bottle and per case and (2) required retailers to charge
at least 112 percent of the wholesalers’ posted bottle price. See id. at
339-40. Because most retailers bought by the case, the wholesalers
could effectively manipulate the retail price of liquor. See id. at 340.
The Court ruled that New York’s program was not entitled to antitrust
immunity because the State did not actively supervise the pricing
scheme. See id. at 344. The Court, in concluding that the program was
not actively supervised, said that it "‘simply authorizes price setting
and enforces the prices established by private parties. . . . New York
neither establishes prices nor reviews the reasonableness of price
schedules.’" Id. at 344-45 (quoting Midcal, 445 U.S. at 105) (internal
citations omitted). In addition, the Court noted that the State did not
monitor the conditions in the liquor market nor did it "engage in any
‘pointed reexamination’ of the program." Id. at 345 (quoting Midcal,
445 U.S. at 105).
Maryland’s post-and-hold system, like New York’s scheme in 324
Liquor, is not actively supervised. Maryland’s Comptroller does not
set liquor prices; the wholesalers have discretion to determine their
posted prices. Although Maryland law requires wholesalers to post
prices and adhere to them, the Comptroller, who enforces the prices,
has no authority to review them for reasonableness. Moreover, as the
district court concluded, the Comptroller does not monitor liquor mar-
ket conditions or engage in any "pointed reexamination" of Mary-
land’s liquor pricing program. For these reasons, the Comptroller’s
involvement in the regulatory scheme is insufficient to establish anti-
trust immunity under Parker v. Brown.
C.
The final question, whether the Twenty-first Amendment bars
application of the Sherman Act in this case, is one of considerable
importance. Section 2 of the Twenty-first Amendment 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 hereby prohibited." U.S. Const.
amend. XXI.
The district court decided the Twenty-first Amendment question
even though Maryland had not yet raised the Amendment as a
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defense. Because Maryland raised other issues in its motion to dis-
miss, neither side had a chance to make its case on the Twenty-first
Amendment issue. The district court nevertheless tackled the matter
— with commendable diligence, we might add — holding that "de-
spite the anticompetitive effect of the [liquor regulatory] scheme chal-
lenged in this case, it should be upheld under the powers reserved to
the States under the Twenty-first Amendment." This conclusion, the
court said, was based on its own "rational perception and common
sense" and "upon facts extant in the real world." The district court’s
views, expressed without benefit of a record, are as follows. First, "li-
quor, being subject to abuse, is more readily abused when readily
available, and it is a matter of simple economics that, the lower the
price of a commodity, the more readily available it is." Second, "prob-
lems of alcohol abuse have always been particularly acute and
endemic among the poor, who are too easily and sorely tempted to
escape their predicament through a bottle." Third, it is "reasonable for
[Maryland] to foster the goal of temperance . . . by a [regulatory]
mechanism that prohibits ‘price wars’ among liquor dealers." This is
self-evident, the district court indicated, because "[n]o one could
argue that increased costs would not further at least some reduction
in demand."
TFWS did not have the opportunity to challenge these observations
and conclusions, and the company seeks to offer evidence and argu-
ment that Maryland’s scheme does not promote temperance or serve
any other legitimate purpose under the Twenty-first Amendment. In
addition, our review of the cases, particularly those from the Supreme
Court, indicates that courts do not evaluate the strength of a state’s
Twenty-first Amendment defense without the benefit of some record.
Balancing the federal interest of promoting competition against a
state’s interest under the Twenty-first Amendment can be ticklish
business, but the Supreme Court has given us substantial guidance.
The Court instructs us that when a state’s Twenty-first Amendment
interests conflict with federal power exercised under the Commerce
Clause, courts must conduct a balancing test in a "‘pragmatic effort
to harmonize state and federal powers.’" 324 Liquor Corp. v. Duffy,
479 U.S. 335, 346-47 (1987) (quoting Ca. Retail Liquor Dealers
Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 109 (1980)). "The ques-
tion in each case is ‘whether the interests implicated by a state regula-
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tion are so closely related to the powers reserved by the Twenty-first
Amendment that the regulation may prevail, notwithstanding that its
requirements directly conflict with express federal policies.’" Id. at
347 (quoting Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 714
(1984)). This balancing is to be conducted with the further instruction
that "[b]oth the Twenty-First Amendment and the Commerce Clause
are parts of the same Constitution [and] each must be considered in
light of the other and in the context of the issues and interests at stake
in any concrete case." Bacchus Imports, Ltd. v. Dias, 468 U.S. 263,
275 (1984) (alterations in original) (quoting Hostetter v. Idlewild Bon
Voyage Liquor Corp., 377 U.S. 324, 331-32 (1964)). The Supreme
Court has said that Congress "‘exercis[ed] all the power it possessed’
under the Commerce Clause when it approved the Sherman Act."
Midcal, 445 U.S. at 111 (alteration in original) (quoting Atlantic
Cleaners and Dryers v. United States, 286 U.S. 427, 425 (1932)). As
a result, "unsubstantiated state concerns" under the Twenty-first
Amendment are not sufficient to trump the "goals of the Sherman
Act;" a state must demonstrate that its liquor regulatory policies
directly serve the interests it proffers under the Twenty-first Amend-
ment. Id. at 114. See also 324 Liquor, 479 U.S. at 350 (rejecting New
York’s "unsubstantiated interest in protecting small retailers"). In the
end, the state’s interests must be of sufficient weight to "prevail
against the federal interest in enforcement of the antitrust laws." 324
Liquor, 479 U.S. at 250 n.12.
There may be some question about what evidence or information
is appropriate in reviewing a state’s interests under the Twenty-first
Amendment. The Supreme Court’s review in these cases has gone
beyond a consideration of the pertinent statutes and regulations. For
example, in Midcal the Court, in concluding that California’s retail
price maintenance system for wine did not further its avowed Twenty-
first Amendment purposes of promoting temperance and an orderly
market, considered information from a state court decision. This
information included facts from (1) a state study analyzing liquor
consumption while retail price maintenance was in effect and (2) a
state agency decision that relied on a congressional study about the
impact of fair trade laws on small retailers. See Midcal, 445 U.S. at
112-14. Likewise, in 324 Liquor the Supreme Court relied on "evi-
dence in the record indicat[ing] that the number of retail liquor outlets
in New York [was] continu[ing] to decline" in concluding that New
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York’s expressed interest in protecting small retailers had not been
substantiated. See 324 Liquor, 479 U.S. at 350. At least one circuit
court, mindful of the Supreme Court’s approach in Midcal and 324
Liquor, has observed that "the Twenty-first Amendment issue may
ultimately rest upon findings and conclusions having a large factual
component." Miller v. Hedlund, 813 F.2d 1344, 1352 & n.7 (9th Cir.
1987).
On remand Maryland should be given the opportunity to assert and
substantiate its Twenty-first Amendment defense, and TFWS should
be permitted to respond. The analysis the district court should under-
take in analyzing Maryland’s interest and then balancing it against the
federal interest is straightforward. First, the court should examine the
expressed state interest and the closeness of that interest to those pro-
tected by the Twenty-first Amendment. We acknowledge that little
analysis is needed on this point. Temperance is the avowed goal of
the Maryland regulatory scheme, and the Twenty-first Amendment
definitely allows a state to promote temperance. Second, the court
should examine whether, and to what extent, the regulatory scheme
serves its stated purpose in promoting temperance. Simply put, is the
scheme effective? Again, the answer to this question "may ultimately
rest upon findings and conclusions having a large factual component."
Miller, 813 F.2d at 1352. Finally, the court should balance the state’s
interest in temperance (to the extent that interest is actually furthered
by the regulatory scheme) against the federal interest in promoting
competition under the Sherman Act.
IV.
In sum, we affirm in part, holding that TFWS’s suit fits within the
Ex parte Young exception to Eleventh Amendment immunity, that
Maryland’s liquor regulatory scheme is a hybrid restraint amounting
to a per se violation of § 1 of the Sherman Act, and that Maryland
cannot claim state action immunity. We vacate the order of dismissal,
which afforded Maryland’s regulatory scheme protection under the
Twenty-first Amendment, and we remand for further proceedings on
the Comptroller’s Twenty-first Amendment defense.
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED
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LUTTIG, Circuit Judge, concurring:
I agree with the majority that TFWS’ suit is not barred by the Elev-
enth Amendment and that it is inappropriate on the record before us
to decide the Twenty-First Amendment question. I also must ulti-
mately agree with the majority that the Maryland statute at issue is
preempted by the Sherman Act as a hybrid restraint of trade — at
least under the authority of the Supreme Court’s decision in 324
Liquor v. Duffy, 479 U.S. 335 (1987). I believe it possible, however,
although the State of Maryland certainly does not make the argument,
that the Supreme Court in 324 Liquor misunderstood its own prior
precedents in Fisher v. City of Berkeley, 475 U.S. 260 (1986),
Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384 (1951),
and California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc.,
445 U.S. 97 (1980), in holding that the regulations in that case in fact
constituted a so-called hybrid restraint. Under a proper understanding
of the precedents upon which 324 Liquor itself was assertedly based,
I believe that the regulations at issue in that case — like those in the
case before us — represent classic unilateral state action, which is, of
course, exempt from the Sherman Act.
As the Supreme Court explained in Fisher, "there can be no liabil-
ity under § 1 [of the Sherman Act] without an agreement." Fisher,
475 U.S. at 266. Thus, in that case, the Court held that a local ordi-
nance establishing rent controls did not violate the Sherman Act
because the ordinance constituted unilateral action by the govern-
ment, with no agreement between private parties. Id. at 269-70. And
the Court distinguished Schwegmann and Midcal as cases that
involved not unilateral action, but, rather, "hybrid" restraints, "where
private actors [were] . . . granted a degree of private regulatory
power," and state-imposed "nonmarket mechanisms . . . enforce[d]
private marketing decisions." Id. at 268-69. That is, in the Louisiana
and California schemes at issue in those cases, private parties inde-
pendently reached pricing agreements, which the state then authorized
and enforced.*
*In Schwegmann, a Louisiana statute authorized "a distributor and
retailer to make a ‘contract’ fixing the resale price" and enforced the
contract even against a seller who was not a party to it. Schwegmann,
341 U.S. at 386-87 (emphasis added). Likewise, in Midcal, the chal-
lenged statute prohibited wine merchants from selling to retailers at a
price other than that set "either in an effective price schedule or in an
effective fair trade contract." Midcal, 445 U.S. at 99 (emphasis added).
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Here, as in Fisher, I believe the Maryland statute is unilateral
action because there is no voluntary agreement, independently
reached, between private parties that is either authorized or enforced
by the state. In fact, there is no "agreement" at all. Rather, and simply,
the state imposed requirements upon the private wholesalers unilater-
ally, that they post and hold, and refrain from volume discounts —
requirements which we have no reason to think they themselves
would have agreed to independently. For this reason, the Maryland
regulations are materially distinguishable from those at issue in
Schwegmann and Midcal, in which state action cloaked affirmative,
private, anticompetitive business agreements.
I must acknowledge, however, that the Maryland regulations before
us are not materially different from the regulations in 324 Liquor, and
consequently that the majority cannot be faulted for its conclusion
that the former may be properly considered forms of hybrid restraint.
But I cannot help but wonder whether the Court in 324 Liquor misun-
derstood its own precedents in Fisher, Schwegmann, and Midcal, in
holding that the New York regulations then before the Court really
were hybrid, as opposed to unilateral, restraints. The Court’s very
brief textual and footnote treatment of the question of whether there
was a ‘contract, combination . . . or conspiracy in restraint of trade,’"
bordered on the perfunctory. See 324 Liquor, 479 U.S. at 345 & n.8
(quoting 15 U.S.C. § 1). And the Court did not even attempt to com-
pare and contrast the New York regulations with the various regula-
tory schemes at issue in Fisher, Schwegmann, and Midcal. It invoked
its observation in Fisher that private actors had been granted "‘a
degree of private regulatory power,’" id. at 345 n.8 (quoting Fisher,
475 U.S. at 268), and it seemed thereafter simply to assume uncriti-
cally that private parties before them actually had been afforded "a
degree of private regulatory power" of the kind that the Court said
would be prohibited in Fisher and held was prohibited in Schweg-
mann and Midcal.
The wholesalers in 324 Liquor indeed did possess "a degree of pri-
vate regulatory power" as a result of the New York regulation, as do
the wholesalers in the present case. But it was not, there, and it is not
here, the kind of private regulatory power referenced in Fisher and
proscribed in Schwegmann or Midcal. The private regulatory power
at issue in those cases was the power of private parties independently
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to set prices via an agreement — that is, via concerted action. No
comparable power was conferred upon the private parties by the state
in 324 Liquor. Nor is any such power exercised or authorized here.
In my view, this case, like 324 Liquor, involves classic unilateral state
action — not hybrid state and private conduct — and Maryland’s reg-
ulatory scheme should therefore not be subject to the Sherman Act.
I find confirmation of this in the fact that the observation made by
the Court in Fisher to contrast the Berkeley regulations from those in
Schwegmann and Midcal is equally apt here to distinguish the Mary-
land regulations from the typical hybrid restraint:
A restraint imposed unilaterally by government does not
become concerted action within the meaning of the [Sher-
man Act] simply because it has a coercive effect upon par-
ties who must obey the law. The ordinary relationship
between the government and those who must obey its regu-
latory commands whether they wish to or not is not enough
to establish a conspiracy.
Id. at 267.
I would not even raise the issue of the precedential correctness of
324 Liquor but for what I believe is its deceptive significance. Contin-
uation of this interpretive error — if that it be — is not without conse-
quence. Carried forward, what might be wholly unintended could
result in significant areas of unilateral state action being regarded as
hybrid state/private action, and therefore potentially in violation of the
Sherman Act when it is not, and in derogation of what should be obvi-
ous state plenary authority.
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