Gone but not forgotten.

OLYMPIA, June 22.—The people who brought you Initiative 1183, the ballot measure that shut down the state liquor stores, have gone to court to challenge new state rules they say undermine the competition they envisioned when they filed the measure last year.

The rules adopted by the state Liquor Control Board are one factor in the somewhat-higher booze prices Washington consumers noted when vodka and whiskey started showing up on supermarket shelves June 1 and the old state liquor stores closed for good. The 1183 coalition says the rules tend to arbitrarily restrict wholesale distribution of wine and spirits, shutting down alternate distribution channels envisioned by the initiative and reinforcing the position of established alcoholic-beverage distributors in the marketplace. The board adopted rules to implement the initiative last February, and voted last month to make them permanent, effective July 1.

The lawsuit, filed late Thursday by the Washington Restaurant Association, the Northwest Grocery Association and Costco Wholesale Corp., claims that the Liquor Control Board is circumventing the language of the initiative, restricting the ability of retailers to compete and increasing prices for consumers.

“It is frustrating for our members from the grocery side and for manufacturers who thought they could work with us and now they can’t,” said Holly Chisa, lobbyist for the Northwest Grocery Association. “It would be our hope that the rules would be reasonable and that the court would uphold the spirit of the initiative. We are committed to making the initiative come to fruition as intended by the voters.”

The measure passed last November with 59 percent of the vote.

Five Interpretations are Challenged

The lawsuit challenges five interpretations adopted by the Liquor Control Board:

— A 24 liter-per-day restriction on sales by most retailers. Practically speaking, the restriction shunts the high-volume restaurant and bar trade to distributors. Though the initiative imposes a limit of 24 liters per sale, it doesn’t mention a daily limit. The Liquor Control Board maintains the restriction makes no sense otherwise. Former contract stores are exempt from the rule.

— Imposition of a 10 percent distributor fee on manufacturers that sell directly to retailers. The initiative for the first time in any state allows retailers to buy directly from spirits manufacturers, but doesn’t require the imposition of a distributor fee. The Liquor Control Board maintains other rules on the books require direct sellers to be considered “self-distributors,” subject to fees, even if they are not subject to a distributor license. The rule has the effect of increasing prices in the direct-sales channel.

— A prohibition on direct sales by foreign manufacturers. The rules require foreign manufacturers to sell their products through distributors. The initiative imposed no such limitation. That’s a big restriction on a business in which many varieties of spirits are produced in Canada, Europe, Australia and Mexico.

— Restrictions on delivery locations for spirits distributors. The lawsuit says the board limited the locations from which spirits distributors may sell and deliver product, again without authorization from the initiative.

— A prohibition on hard liquor being sold at less than the wholesale acquisition cost.

Says LCB Has Motive

The state Liquor Control Board adopts final rules last month.

Until I-1183 took the state out of the liquor business, for 78 years the Liquor Control Board and its predecessor agencies not only enforced liquor regulations in this state, they also operated Washington’s chain of 328 state-run and contract liquor stores. Liquor Control Board members and officials have said they were just trying to implement the initiative in accordance with existing state law. They reserved the right to interpret the language themselves, however, and their reading was substantially different than that of the initiative sponsors.

Last month, board member Chris Marr said the initiative clearly intended to carve out a special role for distributors, because it requires them to make a balloon payment next year of $150 million intended to compensate the state for “purchasing” the business. Last month, LCB executive director Rick Garza said there was nothing untoward about the rulemaking process: “What would we have to gain?”

The lawsuit spells out the suspicions. It says the board was never a fan of the initiative, which dramatically circumscribed the agency’s authority and function. “The primary opponents of the initiative were large out-of-state distributors, but the board did not favor the initiative and had opposed prior attempts at privatization and increased competition,” it says. “The board now seeks to circumvent the initiative through rules that still ‘arbitarily restrict the wholesale distribution and pricing of wine’ and spirits, undermining the initiative and protecting those distributors from competition. The board’s actions are increasing prices paid by consumers – yet the board blames voters for prices not being lower. The board has ignored the costs of its actions, and the challenged rules are outside of its authority, arbitrary and capricious, and contrary to I-1183 and requirements of the United States and Washington constitutions.”

It goes on to say, “the board does not even contend, much less rely upon evidence, that the regulations promote public health and safety, or otherwise protect communities from abuse of liquor. Instead, the board explicitly acknowledges that its purpose is to manipulate the marketplace to favor the financial interests of distributors as the expense of petitioners and consumers.”

A packed audience offered mostly negative comments about the proposed rules at a May hearing.

The suit says the rules ought to be tossed in their entirety. It says the Liquor Control Board violated the state’s Administrative Procedures Act by failing to consider adverse testimony and failing to provide justifications for its actions. It says the board exceeded its rulemaking authority, and in discriminating against foreign manufacturers it violated federal and international law. It claims the board acted in an “arbitrary and capricious manner” by ignoring the plain language, intent and purposes of I-1183, and apparently “acted to fulfill some concept of economic fairness that is contrary to the initiative’s provisions and its changes to state policy.” It says the rules violate the state constitution by granting special privileges and immunities to one class of business, and to the extent that the board might rely on authority granted by the Legislature, it says the rules impermissibly are “amending an initiative” within two years of its passage by a vote of the people. Such an amendment requires a two-thirds vote of the Legislature.

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