9th Circuit rules that restrictions prohibiting payments for alcohol advertising from manufacturers to retailers are lawful in spite of their abridgment of free speech.

We’ve been posting this week about notable First Amendment cases in alcohol advertising and labeling with and eye towards bringing you up to speed on some of the recent developments in the area.

The easy cases in this area are developments challenging State and Federal standards applying notions of “obscenity” or “indecency” or those practices such as advertising with the flag or insignias, that, while not particularly challenged yet, likely won’t withstand First Amendment analysis under the Supreme Court precedents of Rubin v. Coors Brewing or 44 Liquormart or even under related but non-alcohol cases such as the recent First Amendment decision in Matal v. Tam – invalidating portions of a law and its application by a Government agency dealing with banning trademarks the Government found to be disparaging (for instance what does that mean for prohibitions on criticizing or disparaging a competing brewer, vintner or distiller’s products).

The harder cases which are percolating in the Courts of Appeal generally involve advertising and labeling restrictions that prohibit speech, but do so under the guise of preserving the three-tiered system and preventing the ever-present alcohol administrator’s nightmare of a boogeyman – the “tied-house”.

It’s one of these cases that we turn to today. Recently in Retail Digital Network v. Prieto, an en banc panel of the 9th Circuit Court of Appeals considered whether a California tied-house restriction banning manufacturers of alcoholic beverages from providing anything of value to retailers for advertising the manufacturers’ alcohol products (California Business and Professions Code §25503(f)-(h)) violated the First Amendment prohibitions on restricting commercial advertising ala Central Hudson.

Specifically, the statute at issue reads:

No manufacturer, winegrower, manufacturer’s agent, California winegrower’s agent, rectifier, distiller, bottler, importer, or wholesaler, or any officer, director, or agent of any such person, shall do any of the following: …

(f) Pay, credit, or compensate a retailer or retailers for advertising, display, or distribution service in connection with the advertising and sale of distilled spirits.

(g) Furnish, give, lend, or rent, directly or indirectly, to any person any decorations, paintings, or signs, other than signs advertising their own products as permitted by Section 25611.1.

(h) Pay money or give or furnish anything of value for the privilege of placing or painting a sign or advertisement, or window display, on or in any premises selling alcoholic beverages at retail.

What happened was that an advertising company, Retail Digital Network, which installs large electronic displays in liquor stores and grocery stores and other premises that sell alcohol (think 7-foot screens in liquor stores that display 15 second ads), lost out on contracts when manufacturers like St-Germain and Moȅt Hennessy pulled out of contracts for fear that advertising through Retail Digital Network violated the statute. According to the opinion Anheuser-Busch, beam Global, Diageo, Jack Daniels, MillerCoors and Skyy all refused to contract with retail digital Network because of the same concerns-namely that because RDN shared a portion of its revenue with the retail stores, by paying RDN and having them pay money to the retailers, the manufacturers were potentially violating the statute’s prohibition on paying money or furnishing things of value for advertisements on an alcohol seller’s premises.

The Court examined the matter under the Central Hudson factors and in light of a prior decision from 1986 which had upheld the same statute under the same analysis.

Importantly, the two goals advanced by the Government that the Court considered were 1) exercising the State’s 21st Amendment powers in regulating the structure of the alcoholic beverage industry in California (preserving the 3-tiered system and preventing tied-houses), and 2) promoting temperance.

Interestingly, the Court held in favor of the State of California based on the first substantive interest (preventing tied-houses) but found that temperance wasn’t a substantial interest.

In finding that the prohibition on manufacturers paying money for advertising to retailers, the Court found:

To the extent that [the prior case] upheld Section 25503(h) on the basis that it directly and materially advances the State’s interest in maintaining a triple-tiered distribution scheme, we agree with the court’s sound analysis. Furthermore, we concur that Section 25503(h) is sufficiently tailored to advance that interest. Section 25503(h) serves the important and narrowly tailored function of preventing manufacturers and wholesalers from exerting undue and undetectable influence over retailers. Without such a provision, retailers and wholesalers could side-step the triple-tiered distribution scheme by concealing illicit payments under the guise of “advertising” payments. Although RDN argues that the numerous exceptions to Section 25503(f)–(h) undermine its purpose, RDN fails to recognize that the exceptions do not apply to the vast majority of retailers, and they therefore have a minimal effect on the overall scheme. This stands in stark contrast to cases in which conflicting regulations have rendered the regulatory scheme “irrational [ ],” Rubin, 514 U.S. at 488, or where the regulatory scheme is “so pierced by exemptions and inconsistencies” that it lacks “coheren[ce],” Greater New Orleans Broad., 527 U.S. at 190, 195.

In holding that temperance was not a sufficient interest to withstand the Central Hudson test, the Court found:

We do not, however, reach the same conclusion with respect to Actmedia’s [the prior case] holding that Section 25503(h) directly and materially advances California’s interest in promoting temperance. Even assuming that promoting temperance is a substantial interest, Actmedia erroneously concluded that Section 25503(h) directly and materially advances that interest by “reducing the quantity of advertising that is seen in retail establishments selling alcoholic beverages.” 830 F.2d at 967. Section 25503(h) applies solely to advertising in retail establishments, which comprises a small portion of the alcohol advertising visible to consumers. In addition, it prohibits only paid advertisements, and therefore, by its terms, does not reduce the quantity of advertisements whatsoever. See, e.g., Rubin, 514 U.S. at 488 (“The failure to prohibit the disclosure of alcohol content in advertising, which would seem to constitute a more [effective approach than prohibiting the same information on labels], makes no rational sense ․”). If California sincerely wanted to materially reduce the quantity of alcohol advertisements viewed by consumers, surely it could have devised a more direct method for doing so. See, e.g., Greater New Orleans Broad., 527 U.S. at 192 (“There surely are practical and nonspeech-related forms of regulation ․ that could more directly and effectively alleviate some of the social costs of casino gambling.”). Actmedia otherwise concluded that Section 25503(h) only indirectly advances California’s interest in promoting temperance by preventing tied-houses. … We agree with that conclusion, but indirect advancement fails to satisfy Central Hudson’s third factor. See Central Hudson, 447 U.S. at 566. We therefore disapprove of Actmedia’s reliance on promoting temperance as a justification for Section 25503(h). See id.Broad., 527 U.S. at 190, 195.

In a powerful (powerful because it would have sent the case back for further review) dissent, one Judge, Chief Judge Thomas, found that the State should be put to the actual task of proving whether the asserted interest of preserving the three-tiered system are just a pretext for suppressing a disfavored message (alcohol advertising). “[A] purposive inquiry means that the government cannot rely on post-hoc rationalizations to justify the statute.”

On balance, this decision got it wrong. A narrowly tailored law would be one that prohibited the influence a manufacturer might exert over a retailer if they have a monetary connection, which is the real fear addressed in tied-house legislation. Additionally, the Court even suggested that review of the agreements for advertising could be reviewed by the State liquor authority to determine if something more than the price of advertising was being paid.

Unfortunately, this case was decided on a summary judgment motion and not a full trial with evidence and expert testimony regarding both the effect of the statute in question and whether alternative measures might accomplish similar goals without limiting free expression in the commercial speech context. You’ll see in our next post that a full hearing on the merits can make all the difference when we look at a current case under consideration in the 8th Circuit.