Texas Court of Appeals Reverses T.G.I. Friday’s Label Decision

By on October 16, 2017

On Friday, October 13, 2017, a Texas Court of Appeals handed down the long-awaited decision in Texas Alcoholic Beverage Commission v. Mark Anthony Brewing, Inc., No. 03-16-00039-CV.

The case involves Texas’ ban on private-label malt beverage/beer labels, which appear in regulations that are one aspect of the state’s comprehensive tied-house laws. Mark Anthony Brewing sought a declaratory ruling on those Texas Alcoholic Beverage Commission (TABC) regulations after the TABC refused to approve the labels for Mark Anthony’s T.G.I. Friday’s branded flavored malt beverages. T.G.I. Friday’s is also, of course, a well-known retail chain. Mark Anthony produces the T.G.I. Friday’s line under a trademark license from the retailer, as governed by a trademark licensing agreement between the parties.

A Texas trial court ruled in favor of Mark Anthony, holding that the TABC regulations in question violate the First Amendment. The trial court further ruled that Mark Anthony’s sales of the product and the licensing agreement between Mark Anthony and T.G.I. Friday’s either did not violate Texas’ tied-house prohibitions or, in the alternative, those prohibitions were unconstitutional as applied to Mark Anthony’s sales and the parties’ agreement.

On appeal, the Texas Court of Appeals (Third District, at Austin) reversed. It did so on the threshold issue of whether Mark Anthony’s labels were entitled to First Amendment protection. Recall that the First Amendment only protects commercial speech that is truthful, not misleading and relates to lawful activity. The Court of Appeals concluded that the T.G.I. Friday’s labels did not enjoy First Amendment protection because (according to the court) they did not relate to lawful activity.

While the sale of malt beverages and their advertising is not illegal, the Court of Appeals focused on the licensing agreement between Mark Anthony and T.G.I. Friday’s. The agreement contained such standard intellectual property licensing provisions as a requirement that T.G.I. Friday’s (the retailer and trademark owner) exercise quality control oversight over the production of T.G.I. Friday’s branded malt beverages. The Court of Appeals accordingly concluded that the agreement gave T.G.I. Friday’s control over Mark Anthony’s business in a manner that violated Texas’ tied-house statutes and regulations. And because the trademark licensing agreement is unlawful, according to the court, then Mark Anthony’s use of the T.G.I. Friday’s brand name concerns unlawful activity and does not receive First Amendment protection.

The Court of Appeals’ decision prompts two immediate thoughts: first, no trademark owner can risk granting a “naked license”—one without quality control and related mechanisms—to another party. Doing so risks the integrity and enforceability of the trademark. So, in practical effect (and notwithstanding some musings by the Court of Appeals at the end of its opinion) the Court of Appeals’ ruling suggests that the government can prohibit private-label and restricted-label brands on lawful products.

Second, the logic of the Court of Appeals’ opinion is that a speech ban’s prohibition of the conduct (e.g., the trademark license agreement) necessary to let the speech occur can render that speech unlawful and therefore unprotected. Taken to its logical extreme, such a doctrine would provide government with a powerful tool to suppress First Amendment commercial speech and accordingly seems subject to serious questioning by a reviewing or other court. Recall, for example, the landmark 1996 case of 44 Liquormart, Inc. v. Rhode Island, in which the Supreme Court struck down Rhode Island’s ban on price advertising for alcohol beverages. Under the logic of the Texas Court of Appeals’ decision, Rhode Island’s ban can be restored by legislation or regulations declaring that any alcohol beverage licensee cannot exercise any degree of control over the business or advertisements of a media outlet. As no brand owner would pay a publication, broadcast outlet or website operator without being able to dictate the content of the advertising of its products, such a prohibition would effectively restore the ban overturned by 44 Liquormart.

The Texas Court of Appeals’ reasoning appears particularly suspect in light of the 2011 opinion in Sorrell v. IMS Health Inc. That Supreme Court decision struck down a Vermont statute that made it illegal for pharmacies, insurers and related entities to sell physician prescription information to pharmaceutical manufacturers and marketers without the consent of the prescribing physician. Applied to Sorrell, the logic of the Texas Court of Appeals would suggest that the information exchange deemed protected in Sorrell related to unlawful conduct—the sale of prescription information—and therefore should receive no First Amendment protection. Yet the Sorrell Court, examining a legal scheme somewhat but not perfectly analogous to the Texas regulations at issue in Mark Anthony Brewing, rejected Vermont’s argument that the law in question was a mere economic regulation that does not warrant heightened judicial scrutiny. The Supreme Court explained that although economic regulations that place a mere incidental burden on speech may be upheld, heightened First Amendment scrutiny is warranted for measures that impose a burden on speech based on the content of the speech and the identity of the speaker.

Whether a further appeal of the decision will materialize remains to be seen. In the absence of an appeal, parties with an interest in private- and restricted-label products might still mount a facial challenge to the Texas regulations in question by filing suit in federal court. But for the immediate future at least, Texas’ ban on private- and restricted-label malt beverages/beers remains intact.