En Banc Opinion Could Set Precedent for Tied-House Laws

By on June 15, 2017

Yesterday, the en banc (full) Ninth Circuit Court of Appeals issued the attached opinion in the case of Retail Digital Network v. Prieto, No. 13-56069.

As you may recall, the Retail Digital Network case concerns the legality of sections of California’s tied-house laws, California Business and Professions Code Section 25503(f)-(h), which prohibit manufacturers and wholesalers (and their agents) from giving anything of value to retailers in exchange for advertising their products.  Retail Digital Network (RDN), which installs advertising displays in retail stores and contracts with parties to advertise their products on the displays, sought a declaratory judgment that Section 25503(f)-(h) violated the First Amendment after RDN’s attempts to contract with alcohol manufacturers failed due to the manufacturers’ concerns that such advertising would violate these tied-house provisions.

The District Court found Section 25503(f)-(h) constitutional under a Ninth Circuit case from 1986, Actmedia, Inc. v. Stroh, in which the court upheld Section 25503(h).  Then in January 2016, a panel of the Ninth Circuit reversed, holding that Actmedia is “clearly irreconcilable” with the Supreme Court’s 2011 opinion in Sorrell v. IMS Health Inc.  The panel accordingly would have remanded the case to the District Court for further proceedings under Sorrell’s allegedly more restrictive First Amendment standard.  But the state requested an en banc (full court) rehearing, which the court granted.

Yesterday’s en banc opinion reverses the panel and affirms the decision of the District Court.  The en banc court’s analysis begins with a detailed review of Actmedia’s application of the four-part test first articulated by the Supreme Court in Central Hudson v. Public Service Commission of N.Y., 447 U.S. 557 (1980), and the observation that in spite of considerable debate on the subject, the Supreme Court still applies Central Hudson in First Amendment commercial speech cases.  The Central Hudson test looks at whether:  (1) the speech is not misleading and concerns lawful activity; (2) the governmental interest justifying the regulation is substantial; (3) the regulation directly advances the governmental interest; and (4) the regulation is not broader than necessary to serve the governmental interest.

First addressing the RDN position that prevailed before the panel, the en banc court opinion rejects the notion that Sorrell marked a fundamental departure from Central Hudson.  Instead, the opinion views Sorrell as an application of Central Hudson, and thus compatible with the analysis conducted by the Ninth Circuit back in 1986 in deciding Actmedia.

Turning to the merits of Actmedia’s application of the Central Hudson test, the en banc opinion upholds Actmedia’s conclusion that the California tied-house provisions at issue satisfy prongs three and four of Central Hudson.  In particular, the value of the tied-house laws in maintaining California’s “triple-tiered distribution scheme” was found to satisfy the Supreme Court’s test for commercial speech restrictions.  And because the numerous exceptions to the tied-house laws are narrow (according to the en banc court), they do not render the overall scheme irrational.  The opinion does, however reject Actmedia’s reliance on temperance as a justification for upholding the tied-house laws.  Echoing the reasoning of several post-Actmedia Supreme Court opinions, the en banc opinion recognizes that reducing the amount of advertising seen by consumers does not satisfy the requirements of Central Hudson’s third and fourth prong.

Ninth Circuit Chief Judge Thomas wrote a dissenting opinion.  In it, he argues (consistent with the three-judge panel’s reasoning) that Actmedia is irreconcilable with Sorrell and accordingly should be overruled.

The en banc Ninth Circuit decision represents a substantial victory for defenders of both federal and state tied-house laws and related statutes and regulations.  It also could become a substantial precedent, as it reflects the views of the entire Ninth Circuit, not just a panel, in a case widely followed by the industry and by First Amendment observers.  That high profile also means an attempt to seek Supreme Court review seems likely.  The Supreme Court, however, only accepts a very small percentage of the cases brought before it.  So for now at least, California’s tied-house statutes remain intact.