During the Wine, Beer & Spirits Law Conference, Marc Sorini discussed recent legal developments in federal and state trade practice law. He provides a background for each and explores recent and pending investigations.
During the International Wine Association’s 2018 Conference, Marc Sorini presented on the latest law developments, including the Commerce Clause and First Amendment.
The topic was made particularly timely by the Supreme Court’s September 27 decision to grant certiorari review of the Byrd v. Tennessee Wine and Spirits Retailers Association decision.
The latest development in a lengthy legal challenge to advertising restrictions in Missouri’s tied house laws and regulations raises practical economic issues for the alcohol beverage industry and significant legal and policy issues for legislators and regulators at all levels of government. On June 28, Judge Douglas Harpool of the US District Court for the Western District of Missouri filed a decision in Missouri Broadcasters Association vs. Dorothy Taylor. The Missouri Broadcasters Association (MBA) is a trade association representing media outlets. Two licensed Missouri retailers were also plaintiffs in the lawsuit. Ms. Dorothy Taylor is the Supervisor of the Missouri Division of Alcohol and Tobacco Control (DATC).
The basic issue in the case is whether several Missouri alcohol beverage advertising restrictions violate the plaintiffs’ commercial speech rights protected by the First Amendment to the US Constitution.
The June District Court decision follows a bench trial held in February 2018. The trial occurred as the result of prior legal proceedings culminating in a 2017 decision by the US Court of Appeals for the Eighth Circuit, which found that the MBA’s amended complaint “plausibly demonstrates that the challenged provisions [of Missouri’s tied house law] do not directly advance the government’s asserted substantial interest, are more extensive than necessary and unconstitutionally compel speech and association.”
Perhaps the most important Missouri law challenged in this litigation is an exception in the tied house laws that authorizes a manufacturer to pay for advertising that lists “two or more affiliated retail businesses selling its products” subject to four conditions:
(a) The advertisement shall not contain the retail price of the product;
(b) The listing of the retail businesses shall be the only reference to such retail businesses in the advertisement;
(c) The listing of the retail businesses shall be relatively inconspicuous in relation to the advertisement as a whole; and
(d) The advertisement shall not refer only to one retail business or only to a retail business controlled directly or indirectly by the same retail business.
This language may be familiar to many practitioners and regulators as a nearly identical provision appears in the Federal Alcohol and Tobacco Tax and Trade Bureau (TTB) tied house regulations. Laws and regulations of several states include similar express exceptions and TTB regulations are incorporated by reference in the trade practices regulations of other states. Innumerable TTB and state tied house laws and regulations restrict advertising in similar ways and may be invalidated if the analysis in Missouri Broadcasters is applied by other courts and ultimately upheld by federal appellate courts.
Other Missouri laws and regulations that were successfully challenged by MBA in the trial court prohibit (a) media advertising of price discounts, (b) beer and wine coupons, (c) outdoor advertising of discounts by retailers and (d) below cost advertising.
Unlike many cases based solely on theoretical legal arguments and the text of laws and regulations, the trial in the Missouri case resulted in a wide-ranging inquiry that included expert witnesses on advertising and the level of effort invested by the Missouri DATC in enforcing the challenged laws and regulations. The court’s decision suggests that the state struggled to provide any credible evidence that the challenged laws “directly reduce overconsumption of alcohol and underage drinking.”
The court found that the plaintiffs’ expert testimony provided substantial evidence “that there is in fact no demonstrative relationship between media advertising of alcohol and overall consumption rates of underage drinking…The State failed to present any evidence contradicting the testimony, empirical studies, and statistical analysis relied on by the Plaintiffs’ expert.”
The court agreed with the plaintiffs and cited language from the 8th Circuit decision that “the multiple inconsistencies within the regulations poke obvious holes in any potential advancement” of the state’s interest, “to the point the regulations do not advance the interest at all.” This finding is a threat to dozens of federal and state alcohol beverage laws that are riddled with exceptions that allow alcohol beverage advertising in one context and expressly prohibit the same advertising in another context (e.g., prohibiting exterior signs and permitting indoor signs).
Because the challenged Missouri laws restrict commercial speech rights protected by the First Amendment, the court also awarded legal fees to MBA and the retailer plaintiffs.
Advertising can be removed from the “marble cake” of state and federal tied house restrictions without dire consequences for regulators. If the reasoning in Missouri Broadcasters survives, the most significant effects will occur in intra-industry negotiations where parties will determine how advertising costs and activities are apportioned across the three-tier system.
Before proclaiming the death of the three-tier system, hundreds of state licensing and tied house laws have nothing to do with advertising. Prohibitions on ownership interests in more than one tier of the alcohol beverage industry are not affected by the recent decision along with substantial restrictions on industry trade practices other than advertising.
Finally, the reasoning in Missouri Broadcasters may have to survive another appeal and must be adopted by other courts to broadly affect house restrictions on advertising throughout the United States. Perhaps a state (or more likely a state with support from interested industry members) will develop credible evidence to support similar laws in other jurisdictions. For example, California aggressively defended analogous laws and regulations, which were ultimately upheld last year by the Ninth Circuit Court of Appeals.
On June 19, 2017, the Supreme Court issued its decision in Matal v. Tam, declaring the Trademark Act’s (commonly referred to as the “Lanham Act”) “disparagement clause” unconstitutional as a violation of the free speech principles embodied in the First Amendment. If the case name doesn’t ring a bell, the players involved might. The decision was the culmination of Simon Shiao Tams’ fight to obtain a federal trademark registration for “THE SLANTS” for use in connection with his rock band. The term “Slants” can be used as a racially pejorative word for persons of Asian descent and was selected by the Asian-American band in an effort to “reclaim” the derogatory term. Tam’s win at the Supreme Court, however, wasn’t only a victory for his band. The Washington Redskins, who are also engaged in a protracted legal battle to maintain their trademark registrations despite challenge from a Native American group, hailed the decision a success. The Redskins’ owner, Dan Snyder, simply stated: “I am THRILLED.”
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. Continue Reading Texas Court of Appeals Reverses T.G.I. Friday’s Label Decision
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.
Last week, the US Court of Appeals for the Eighth Circuit weighed in on the legality of restrictions on alcohol advertising under the First Amendment, issuing an opinion in Missouri Broadcasters Association v. Lacy that could eventually broaden free speech protections for alcohol beverage advertisements. After the lower court granted defendants’ motion to dismiss and plaintiffs appealed, the Eighth Circuit reversed the district court’s dismissal, finding that plaintiffs’ claim alleging the unconstitutionality of a Missouri statute and two regulations should be heard.
The case concerned three Missouri provisions – two regulations and a statute – that restrict the advertising of alcohol beverages:
- a regulation prohibiting retailers from advertising price discounts outside of the licensed premises (but allowing the advertising of discounts by using generic descriptions (e.g., “Happy Hour”), as well as the advertising of specific discounts within the licensed premises);
- a regulation prohibiting retailers from advertising prices below cost; and
- a statute requiring manufacturers and wholesalers choosing to a list a retailer in an advertisement to exclude the retail price of the product from the advertisement, list multiple unaffiliated retailers and make the listing relatively inconspicuous.
Plaintiffs – a broadcasting industry group, radio station operator, winery and retailer – sued Missouri’s supervisor of liquor control and attorney general, alleging that the three provisions are facially invalid under the First Amendment in that they prohibit truthful, non-misleading commercial speech, are inconsistently enforced by the state and the challenged statute unconstitutionally compels speech.
To state a claim that a statute is facially unconstitutional under the First Amendment, Supreme Court precedent instructs that plaintiffs must show that there are no set of circumstances under which the challenged provision would be valid, or that a substantial number of the provision’s applications are unconstitutional. Alcohol beverage advertisements involve commercial speech, which receives less protection under the First Amendment than other constitutionally protected forms of expression. In Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York (1980), the Supreme Court articulated a four-part test for determining the constitutionality of laws restricting commercial speech: whether (1) the speech concerns lawful activity and is not misleading; (2) the governmental interest justifying the regulation is substantial; (3) the regulation directly advances the governmental interest; and (4) the regulation is no broader than necessary to further the governmental interest.
Applying the third and fourth factors of the Central Hudson test (plaintiffs and defendants agreed on the first two factors of the test), the court found that the facts plaintiffs alleged were “more than sufficient” to state a plausible claim. First, the court opined, plaintiffs made sufficient allegations that the challenged provisions do not directly advance Missouri’s substantial interest in promoting responsible drinking. Although defendants argued that a link exists between advertising promotions and increased demand for alcohol beverages, the court noted that “multiple” inconsistencies in the regulations demonstrate that the regulations do not advance Missouri’s interest in promoting responsible drinking. Likewise, the court determined, plaintiffs pled sufficient facts to support a finding that the statute does not directly advance Missouri’s asserted interests: the court noted that because the statute is an exception to Missouri’s general tied-house law, it “actually weakens,” rather than furthers, “the impact of the overall statutory scheme.”
Second, the Eighth Circuit found that plaintiffs alleged “more than sufficient information” to show that the challenged provisions are more extensive than necessary to further the state’s interests, noting that there are alternatives to the provisions that would be less intrusive to plaintiffs’ rights under the First Amendment. Finally, the court determined that the challenged statute compels speech and association in that it requires manufacturers and wholesalers to both associate with more than one retailer and to list more than one retailer, if they choose to list any in advertisements.
The Eighth Circuit’s decision is timely: last week the Ninth Circuit Court of Appeals held an en banc hearing in Retail Digital Network, LLC v. Appelsmith, a case involving a First Amendment challenge to California’s restrictions on alcohol advertising, which we discussed in more detail last year. One key issue in Retail Digital Network – but only glossed over in a footnote in the Missouri Broadcasters case – involves the impact of the Supreme Court’s 2011 decision in Sorrell v. IMS Health, Inc., which called for a “heightened” level of judicial scrutiny when determining the constitutionality of restrictions on commercial speech.
On January 7, 2016, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in Retail Digital Network, LLC v. Appelsmith, overruling longstanding Ninth Circuit precedent concerning the legality of certain restrictions on alcohol beverage advertising under the First Amendment and opening the door to part of California’s tied-house scheme potentially being declared unconstitutional. The 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, LLC (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). The Actmedia court applied the intermediate scrutiny test on commercial speech regulation articulated by the Supreme Court in Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York (1980). 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. RDN argued that subsequent Supreme Court decisions – Rubin v. Coors Brewing Co. (1995), 44 Liquormart, Inc. v. Rhode Island (1996), and Sorrell v. IMS Health, Inc. (2011) – overrule Actmedia.
The Ninth Circuit determined that Actmedia is “clearly irreconcilable” with Sorrell – a difficult standard to meet. (The court did not find Coors or 44 Liquormart to have undermined the reasoning of Actmedia as these cases involved complete bans on certain commercial speech, which Section 25503 is not.) Sorrell required “heightened judicial scrutiny” (rather than the intermediate scrutiny applied by the Actmedia court) of restrictions on non-misleading, content- or speaker-based commercial speech about lawful products.
Such heightened scrutiny may be applied using the Central Hudson test, the Ninth Circuit found, but the court must further focus on the consistency between the government’s asserted interest under the second Central Hudson prong and the legislative purposes that “actually animated” the challenged law. In articulating its decision, the court noted that other federal circuit courts of appeal have agreed that Sorrell requires heightened judicial scrutiny of content-based restrictions on non-misleading commercial speech.
The court reversed the lower court’s grant of summary judgment to the California Department of Alcoholic Beverage Control (ABC) and remanded the case to the district court to apply heightened judicial scrutiny to the statute. Specifically, the court advised the lower court to consider whether the ABC has shown a real danger of paid advertising of alcohol beverages leading to vertical or horizontal integration under circumstances existing in the current market (and suggested that the legislative concerns at the time of Section 25503(f)-(h)’s enactment are no longer “an actual problem in need of solving”). The court also instructed the lower court to consider whether the ABC’s concern is real in the circumstances of the case (where a third party, not a manufacturer or wholesaler, makes payments to retailers). The district court must consider whether the ABC has shown that Section 25503(f)-(h) “materially advances” its “goals of preventing vertical and horizontal integration and promoting temperance” (and suggested that the ABC has not). Finally, the district court must find, under the fourth Central Hudson prong, a fit between the legislature’s goals and the means used to accomplish those goals (and suggested that a narrower approach may be possible to achieve the ABC’s goals).
By remanding the case, the Ninth Circuit gives the district court the opportunity to independently determine the constitutionality of the relevant tied-house provisions after applying heightened judicial scrutiny consistent with this opinion. Nevertheless, based on the Ninth Circuit’s reasoning, we believe it is highly likely that Sections 25503(f)-(h) will be found unconstitutional under the First Amendment.