Key Points

  • The Arkansas Supreme Court held that Kirkland Signature is a single brand under Ark. Code Ann. § 3-2-403, which provides one exclusive wholesaler for each brand or label.
  • Once one manufacturer designates a wholesaler for a brand, every other manufacturer of that brand must designate the same wholesaler.
  • The court found § 3-2-403 ambiguous, read "brand" by its dictionary meaning as a trademark, and relied on ABC Division regulations and the legislature's wholesaler-protection purpose.
  • The court held that the ABC Board's grant of the change requests moving Mach Flynt and Levecke to Moon Distributors was supported by substantial evidence and was not arbitrary, capricious or an abuse of discretion.
  • Justice Bronni dissented on the merits, reading "brand" at the product level under § 3-2-412(c), and Justice Womack dissented on the ground that Article 5, section 20 of the Arkansas Constitution barred the suit.

The Arkansas Supreme Court held on Oct. 8 that every wine and spirit sold under Costco's Kirkland Signature label is a single brand under state alcohol law, so all manufacturers of those products must ship them through the same Arkansas wholesaler.

The decision went against Arkansas Wine and Spirits Wholesale LLC, which had distributed Kirkland Signature products for two suppliers until state regulators ordered those suppliers to switch to Moon Distributors Inc. Justice Rhonda K. Wood wrote for the court, which affirmed an order of the Arkansas Alcoholic Beverage Control Board. Special Justice Cory Cox joined her opinion. Justices Shawn A. Womack and Nicholas J. Bronni dissented in separate opinions, and Justice Webb did not participate.

Under the ruling, the first wholesaler designated for a trademarked brand becomes the exclusive Arkansas distributor for every product sold under that trademark, whichever manufacturer makes the product. "Once a manufacturer of a brand selects a wholesaler, other manufacturers of that brand must also designate that wholesaler," Justice Wood wrote.

Arkansas regulates alcohol through a three-tier system. Manufacturers sell to licensed in-state wholesalers, and wholesalers sell to retailers. Costco Wholesale Corp., a retailer, holds a registered trademark for its private label, Kirkland Signature.

After Costco opened its first Arkansas location, four manufacturers registered Kirkland Signature products with the state's Alcoholic Beverage Control Division. In early 2021, Ethica Wines registered a Chianti and Misa Imports a Pinot Grigio, each with Moon as wholesaler. Mach Flynt Inc. then registered a Sauvignon Blanc and Levecke Corp. a strawberry margarita, each with Arkansas Wine and Spirits. The division approved all four designations.

The division later realized that one brand had two wholesalers. Its director told Mach Flynt and Levecke that all Kirkland Signature products must go through Moon because "the Kirkland Brand Label was first registered and assigned to Moon Distributors." The two manufacturers filed requests to change wholesalers, but both stated that they preferred Arkansas Wine and Spirits.

Arkansas Wine and Spirits objected. The director granted the change requests after a hearing, and the board upheld that decision after a second hearing. Pulaski County Circuit Judge Herbert T. Wright Jr. affirmed. The Arkansas Court of Appeals then certified the case to the Supreme Court.

The case turned on Arkansas Code section 3-2-403. That statute requires each manufacturer to file a federal Certificate of Label Approval, a label clearance issued by the U.S. Alcohol and Tobacco Tax and Trade Bureau, "for each brand" it ships into the state for the first time. The manufacturer must also name one licensed wholesaler as "the exclusive distributor of such brand or label within the state."

The majority found the statute ambiguous. "Indeed, rarely have we seen such confusing and internally inconsistent legislative language," Justice Wood wrote. Citing two dictionaries, the court read the ordinary meaning of "brand" as a trademark or distinctive name that identifies a seller's goods.

Arkansas Wine and Spirits relied on a neighboring provision, section 3-2-412, which defines a brand as "the same product or substantially the same product as evidenced by the product label that must be filed with the division." Under that reading, the court said, every registered beverage would be its own brand. The majority found that division regulations helped reconcile the two sections. Those regulations define a product as a brewed, fermented or distilled liquor and state that the term "shall not be construed to mean a particular malt, spirituous or vinous liquor, or any variety, category, or subcategory thereof."

The court also pointed to the legislature's stated aim of preventing "undue control of such wholesalers by . . . manufacturers." Arkansas Wine and Spirits had warned that a single wholesaler might treat some manufacturers of a brand better than others. "But we are not the policy-making branch. Whether this is sound policy is not for us to determine," Justice Wood wrote. Reading the statute differently, she added, would require the court to turn the phrase "brand or label" into "brand and label."

On the remaining issues, the court found substantial evidence of good cause for the change requests, writing that it "cannot hold that granting a change request to comply with state statutes is anything other than substantial evidence of good cause." It also held that the board's decision was not arbitrary, capricious or an abuse of discretion.

Justice Bronni called the wholesaler statutes "awkward, ungrammatical, and a textbook example of how not to write a statute," and he described section 3-2-403(b)(1) as "basically one big run-on sentence." He wrote that poor drafting did not make the law ambiguous. He would have applied section 3-2-412's product-level definition of brand and barred each manufacturer only from designating more than one wholesaler per product.

Manufacturers file label approvals product by product, Justice Bronni noted, and "everyone agrees that there is no such thing as a Kirkland Signature COLA." He also cited the legislature's separate goal of maintaining "healthy competition," writing that "nothing kills healthy competition like an even broader monopoly." Quoting a concurrence by Justice Thomas in the U.S. Supreme Court's Loper Bright decision, he wrote that agencies do not get "to dictate the outcome of cases through erroneous interpretations." He questioned why the majority cited the division's regulations at all, "unless its real goal is to resurrect deference to bureaucrats."

Justice Womack would have dismissed the case without reaching the merits. He wrote that Article 5, section 20 of the Arkansas Constitution, the state's sovereign-immunity provision, deprived the courts of jurisdiction. "Without an express constitutional provision to the contrary, the State can never properly be a defendant in any of its courts," he wrote, adding that the state's Administrative Procedure Act could not override that command.

Kenneth P. "Casey" Castleberry of Castleberry Law Firm, PLLC represented Arkansas Wine and Spirits. Cara D. Butler of Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C. represented Moon Distributors.

The ruling leaves Moon as the designated wholesaler for all four Kirkland Signature products. Justice Wood wrote that Mach Flynt and Levecke can still petition the division for a change. Under section 3-2-403, a designated wholesaler cannot be changed without a hearing and a finding of good cause by the director.