So here’s the thing: there is an extremely important case in front of the Ninth Circuit right now that could have a dramatic impact on the craft beer industry. For reasons I won’t get into here, the Ninth Circuit as a whole (not the typical three-judge panel) heard oral arguments on January 19, 2017 regarding Retail Digital Network v. Appelsmith, 810 F.3d 638 (9th Cir. 2016). If the case goes the way the federal trend suggests, craft brewers could very likely find themselves being squeezed out of retail outlets—both bars and stores.
Why so important? It appears likely that the Ninth Circuit will strike down one of California’s tied-house restrictions (more on these in a future blog) that has been in effect since 1935. To summarize, California Business and Professions Code section 25503(h) makes it illegal for alcohol manufacturers to pay a retailer for advertising space on the retail premises. They can still advertise where they wish, but they cannot pay the retailer for that advertising. As Judge Callahan from the Ninth Circuit put it, “[t]hus, for example, a liquor store owner in California can hang a Captain Morgan Rum sign in his store’s window, but the Captain can’t pay him, directly or through an agent, for doing so.” Id. at 641-42.
Why is this law now potentially unconstitutional? Since the early 2000s, federal courts have been giving commercial speech more protection under the Fourth Amendment. The traditional test, known as the Central Hudson test, is what we call “intermediate scrutiny.” That means that while a demanding standard, it is not the highest standard courts can apply. In fact, the very statute at issue in Retail Digital Network (Section 25503(h)) was challenged and upheld in 1986 by the Ninth Circuit under this intermediate scrutiny standard. See Actmedia, Inc. v. Stroh, 830 F.2d 957 (9th Cir. 1986). But in 2011, the Supreme Court jumped on a commercial speech case and suggested, but did not apply, what the court deemed “heightened scrutiny.” See Sorrell v. IMS Health, Inc., 564 U.S. 552 (2011). The Court failed to even hint at what this heightened scrutiny would look like, and the opinion is entirely unclear as to whether the Court was simply considering Central Hudson as already a heightened analysis.
The three-judge panel of Retail Digital Network took Sorrell to heart. That panel, while not overturning Section 25503(h), sent it back to the district court to apply this amorphous heightened scrutiny to the statute (and strongly hinted that it wouldn’t survive). That is when the Ninth Circuit as whole (known as “en banc”) stepped in to review the case and hear oral arguments on January 19, 2017. So we don’t know if the Ninth Circuit is going to follow the trend and apply some form of heightened scrutiny. If it applies the traditional Central Hudson test, then Section 25503(h) will likely stand. If it applies heightened scrutiny, Section 25503(h) will likely be deemed unconstitutional.
Why do craft brewers care? If infinitely deep pockets (such as those pockets belonging to big beer) are allowed to purchase point-of-sale advertising, independent craft breweries are obviously at a significant disadvantage. One of the two main reasons Section 25503(h) was passed in 1935 was to prevent vertical and horizontal integration in the alcohol market (the other reason was to promote temperance), as well as to prohibit large manufacturers from currying favor with retailers by paying them to the exclusion of other manufacturers. Also, who is to tell whether a payment for “advertising” was really for that purpose, and not a payment just to get the retailer to push that manufacturer’s product (which is illegal)? You can see the logic. This would essentially amount to legal pay-to-play. Those of us in the industry know that pay-to-play exists at the margins (at least), but to legalize it would cut to the core of the three-tier system.
Think of the last time you were in a grocery store. The beer aisle consists largely of two big beer brands in various shapes and sizes—six pack cans, six pack bottles, six pack tin bottles, twelve pack cans, twelve pack bottles, twelve pack tin bottles, and on and on (not to mention gimmick spouts, wide mouths, etc.). Do consumers really care that much about packaging? Nope. It is shelf space. And that is everything. Allowing big beer manufacturers to purchase advertising space (and all the goodies that come along with a beholden retailer) will only further squeeze independent craft breweries from the shelves. What mom and pop store doesn’t want an influx of cash—even if there are strings attached?
Let me know what you think. Cheers.