Federal Court finds merit in argument against advertising laws meant to promote three-tiered system; allowing distillers, wineries, and breweries to operate tap rooms or sell at retail on their premises wholly abandons the argument that statute prohibits commingling between three-tiered system.

There’s an interesting bit in Richard Branson’s autobiography, “Losing my Virginity” where he discusses how he obtained the purchase money to buy the nightclub Heaven – needing to put very little money down – because the brewery providing drinks to the club provided the financing in exchange for selling their beer (one assumes some form of exclusivity was at play). A true tied-house arrangement. Amazingly, independent craft producers and large alcoholic beverage manufacturers both do well in markets that don’t have these restrictions… despite the hair-pulling, gut-wrenching, parade of horribles trotted out by opponents in the U.S. to any such intertwining.

Interestingly, small producers have been gaining a foothold in the tied-house arena for years in the U.S. with brewpubs, and brewery, winery, and distillery tap rooms, and very few people have pointed out that these exceptions to the tied-house rules in many States operate as a form of proof that the fear of devolving into country where only Budweiser and Miller products are exclusively sold at Budweiser and Miller bars is unfounded. Perhaps there’s merit to the theory that consumer demand will dictate the market and that regular antitrust laws and anti-competitive action restrictions are the only laws necessary to ensure fair play and fair markets and that a three-tiered regulatory scheme is unnecessary and overly burdensome.

The failure to make this argument was recently rectified in a Federal District Court opinion (Missouri Broadcasters Association et al. v. Taylor) granting judgment after a full trial to a group of plaintiffs (advertisers, a bar, a grape grower and a radio station) when they challenged some regulations and a statute restricting the advertisement of alcoholic beverages in the State of Missouri. This case was had a full trial after a remand from the 8th Circuit Court of Appeals which we wrote about here. The Court had initially granted the State of Missouri’s motion to dismiss and the 8th Circuit reversed finding that as pled in the complaint, if the allegations were true, then the plaintiffs had a case that the advertising restrictions at issue violated the First Amendment.

All this week, we’ve been detailing the history and arguments raised around alcohol advertising and the First Amendment under recent Supreme Court and Appellate Court jurisprudence. In this, entry and the next, we’ll be discussing the Missouri Broadcasters District Court order, its findings and holdings and where the matter stands now that the State has sought appeal of the decision.

To start with, and for today’s discussion, the use of an argument that pointed out the fallacy of tied-house restrictions where exceptions are made for some alcoholic beverage producers (usually small craft producers) and not others, held water with the Judge in determining whether an advertising restriction advanced the goals of “preventing restriction of competition” and preventing “wholesalers from gaining fiscal control of retailers’ sales tactics or strategies.”

The Court’s reasoning on this issue of was based largely on a finding in the initial Appellate Court decision from the 8th Circuit which found that “the statute does nothing to further the interest of maintaining an orderly marketplace and actually weakens the impact of the overall statutory scheme because this statute is an exemption to the restrictions preventing retailers, wholesaler and producers from becoming financially entangled.”

Following up on that point and expanding on it, the Court made important note of the actual tied-houses allowed under Missouri law and pointed to them as reasons that the State statute was inconsistent and could not be said to effectuate an orderly marketplace:

In essence, the three tier system the State is promoting is a measure to keep the manufacture and wholesale tiers from controlling or dominating the retail tier.  Therefore, the State believes the three tier system maintains an orderly marketplace by prohibiting vendor paid advertisements and cooperative advertisements. The State’s  purported goal is to restrict manufacturers and wholesalers from comingling with, or picking favorites among, retailers. The intent is to prevent restrictions of competition and/or prevent wholesalers from gaining fiscal control of retailers’ sales tactics or strategies.

Missouri’s Challenged  Statute, similar to the  regulations discussed herein,is also filled with exceptions and inconsistencies adopted piecemeal over time.  For example, the State permits Missouri based wineries to comingle all three tiers, including producing wine, wholesaling wine,and retailing wine.  See Mo. Ann. Stat.§§ 311.190.1 and 311.070.11. Further,Missouri allows out of state wineries to make direct retail sales to Missouri residents and consumers.  Distillers of spirits and microbrewers are allowed to sell their own produced liquor or beer through retail businesses on their premises, again comingling  the three tiers the Statute is argued to protect. Plaintiffs provided numerous examples, such as these, demonstrating how the three tier regulatory system has been blurred,if not wholly abandoned.

The Challenged Statute generally prohibits distillers, wholesalers, brewers,or winemakers from  providing advertising, financial assistance,or incentives to retailers through advertising. However, even  the Statute itself contains numerous exceptions to this general rule. These exceptions apply to both advertising  restrictions and to prohibitions on providing financial incentives and assistance to retailers. As described above,  a distiller, wholesaler, brewer,or wine maker may advertise on behalf of a retailer if the advertisement refers to multiple retailers, does not  include the retail price, and only identifies the retail businesses in an inconspicuous manner.

The Court went on to note that various other forms of giving/or financial entanglement were allows under Missouri’s system which also allowed for of-value considerations between the tiers (when we say between the tiers, generally its manufacturers and wholesalers giving things of value to retailers) – as the Court noted:

In  addition,  wholesalers are  permitted to provide  other financial incentives  to retailers, including bar ware, mirrors,or other tangible goods to be placed inside the retail establishments,that in  essence provide advertising of the wholesaler’s products.These types of “incentives”expressly permit some financial commingling of the wholesale and retail tiers of the liquor industry and contradict the State’s asserted interest in maintaining a separate three tier marketplace.   In response to Plaintiffs’ evidence, the State has provided no explanation as to why advertising commingling would disrupt the State’s regulatory scheme, while these other instances of financial commingling that are allowed under the State’s statutes and regulations do not.

The  Court  finds the  State cannot  meet its burden to  establish that the Statute  directly advances a substantial  interest.The infringement of Plaintiffs’ First Amendment rights clearly exceeds any direct benefit to maintaining what is left of the three tier regulatory scheme. As a result, the State has failed to establish how the Challenged Statute directly advances its substantial interests.

This is an excellent application of the argument and the point that allowances for some versions of tied-houses are really an exception that swallows the rule when it comes to arguing that an orderly marketplace is maintained by allowing the practice in some instances but not others.

Now, a fair point is that it doesn’t look like the State put up much of a fight. Perhaps an economic analysis would show that allowing tied-houses for small craft producers has little to no impact on the greater sales and economy in wine, spirits and beer that is driven by large multinational producers… but the State didn’t present evidence on the matter, and, quite frankly, whether or not an impact is made doesn’t prove the point that they’d also have to prove that restricting the financial interests of large producers provides an orderly marketplace – a hard thing to do given our cousins in Europe appear to be flourishing in both craft and multinational brands.

We’ll be following up with a larger analysis on this case and some of the other wonderful points and conclusions reached in the order  in the next entry. For those interested in the blueprint for how this case might be pled – here’s a link to the operative complaint in this case, including all the exhibits. Definitely worth a read to see how a well drafted pleading can go a long way to making the case against an irrational legislative and regulator scheme. Also, it might give those in other jurisdictions some guideposts for challenging similar restrictions.