The case involved a dispute between Costco Wholesalers and the Washington State Liquor Control Board. Costco claimed the Washington system regulating the sale and distribution of alcohol violated the Sherman Antitrust Act and the Commerce Clause because the system allowed only Washington-based wineries and breweries to sell directly to retailers. The Washington Beer and Wine Wholesalers Association (WBWWA) was permitted, under FRCP 24(a), to intervene to protect its own interests throughout the litigation.

Early on, Costco was granted several summary judgment motions regarding the defendant's liability. The district court found Washington's laws to be in violation of the Commerce Clause, but stayed judgment to give the Washington Legislature time to extend its direct-sales privilege to out-of-state wineries and breweries. The sole issue to be tried before the district court involved whether the 21st Amendment was a valid defense to a Sherman Antitrust violation. The district court held it was not. The Ninth Circuit upheld the district court only to the extent that price-posting and price-holding are not saved by the 21st Amendment. However, the Ninth Circuit held in Costco Wholesale Corp. v. Maleng (CA9 2008), the remaining challenged restraints did not violate the Sherman Act. While the appeal in Maleng was pending, the district court found that WBWWA was not liable for attorneys fees and costs.

Friday's opinion upheld that decision with regards to WBWWA's liability under §1988(b), but reversed and remanded with regard to §26.

42 U.S.C. §1988(b) gives courts the discretion to award attorney's fees to the prevailing party of a §1983 action. In Costco v. Hoen, the Ninth Circuit found discretion to award attorneys fees to be guided by Independent Federation of Flight Attendants v. Zipes. In Zipes, the U.S. Supreme Court held a district court should not grant attorneys fees against an "innocent" intervenor unless the action was "frivolous, unreasonable, or without foundation." The Ninth Circuit agreed with the district court that WBWWA was an "innocent" intervenor because the group had not been found liable of engaging in unlawful activity. This meant that the district court use its discretion to award attorneys fees only if the intervenor's conduct was "frivolous, unreasonable, or without foundation."
While Costco argued WBWWA's arguments were frivolous given the U.S. Supreme Court's 2005 holding in Granholm v. Heald, the Ninth Circuit found the district court did not abuse its discretion by finding WBWWA's arguments were not frivolous. The Ninth Circuit found that facts of Granholm and the facts of the present case were "sufficiently distinct to make WBWWA's argument colorable, even if it was ultimately unpersuasive." Furthermore, the Ninth Circuit found it particularly important that when WBWWA made its arguments Granholm had only recently been decided, and "no Ninth Circuit authority then existed clarifying the decision and its scope." The court stated: "We are particularly reluctant to find a colorable argument frivolous when it has been advanced on a novel issue."

The district court's §26 holding was reversed and remanded because 15 U.S.C. §26 makes payment of attorneys fees mandatory. While the Ninth Circuit found Zipes relevant to a court's discretionary decision to award attorneys fees, Zipes is not controlling in the case of a statute that required imposition of attorneys fees. Before WBWWA would be required to pay attorneys fees however, the court had to determine whether Costco had "substantially prevailed" in its injunction action. The Ninth Circuit reasoned that while Costco had "substantially prevailed" at the district court level, because the Ninth Circuit's decision in Maleng had reversed much of the district court's holding, there remained an issue of whether Costco's was the substantially prevailing party. Upon remand, the district court will be left to determine whether Costco's success was sufficient for it to receive attorneys fees under 15 U.S.C. §26.