In my last entry, I explored how the Ninth Circuit’s potential application of “heightened” commercial speech protections under Sorrell’s First Amendment analysis could spell trouble for the craft brewing industry in California.  Well, the Eighth Circuit recently continued the trouble, but it did so without applying any stricter scrutiny than that applied under the traditional Central Hudson test* (requiring a four-prong “intermediate scrutiny” analysis for commercial speech regulations).  Independent breweries: the three-tier system is in serious jeopardy.

In Missouri Broadcasters Assoc. v. Lacy, — F.3d — (8th Cir. 2017) (available at 2017 WL 218024), an association of broadcasters, a winery, and an alcohol licensee brought suit against the Missouri state supervisor of liquor control under the First Amendment and challenged three Missouri tied-house regulations that are fairly similar those in California (and most other states).  Specifically, the Missouri regs (1) prohibit alcohol retailers from advertising discounted prices outside the retail premises; (2) prohibit retailers from advertising prices below the retailer’s actual cost; and (3) require manufacturers, in all advertisements, to exclude the retail price, list multiple retail businesses not related to each other, and make the listing “inconspicuous.”  The stated purpose of these regs appears to be the state’s interest in promoting responsible alcoholic consumption.  For unstated reasons, the district court granted the government’s motion to dismiss.

The Eighth Circuit reversed. Instead of applying a “heightened” scrutiny analysis under Sorrell, as contemplated by the Ninth Circuit in Retail Digital Network, the Court reversed under the plain old Central Hudson intermediate scrutiny analysis—the one that courts have applied to many tied-house laws in the past that survived that level of scrutiny. See, e.g., Actmedia, Inc. v. Stroh, 830 F.3d 957 (9th Cir. 1986).  This is yet another example of the growing trend that federal courts are following to provide greater protections for commercial speech in the alcohol industry.  And a key part of the three-tier system in almost all jurisdictions has been leveling the advertising playing field—both for anti-competitive reasons and to promote some level of responsible drinking.

The Eighth Circuit looked askance at the Missouri regs for several key reasons. First, it held that “the common sense link between advertising promotions and increasing demand for alcohol does not demonstrate the challenged restrictions directly advance the interest in responsible drinking.”  The notion seems to be that for a regulation to survive even Central Hudson (as it is currently being applied), the states would have to show a more substantial nexus to the asserted interest than has been accepted in the past.  Second, the court suggested that there are likely alternatives to these regulations that directly advance the state’s goals in a less obtrusive manner (i.e., higher taxes on alcoholic beverages and educational campaigns).  Third, the court seemed to accept that the third regulation compelled speech by requiring advertisements to list multiple retailers (California requires this too).  So the case is now back in the district court’s hands.

Why do we care? The craft brewing industry is witnessing a multi-front, organized campaign to attack and dismantle the three-tier system.  Those who have lost market share to independent craft breweries** would like nothing more than the unfettered use of their deep pockets to influence the market to their advantage—whether through advertising or even direct pay-to-play conduct.  Of course, both are restricted or prohibited under the three-tier system to minimize vertical and horizontal integration and to promote responsible drinking.  The benefits to independent craft beer under the three-tier system are obvious.  But they are in jeopardy.  If you couple the mounting attacks on tied-house regulations with the growing trend in the federal courts (harder looks at commercial speech regulations), craft brewers are akin to my twelve-year-old son facing an Aroldis Chapman fastball.

I will note that the Eighth Circuit rejected the idea that Sorrell requires a departure from Central Hudson.  “Though Sorrell does describe the required scrutiny as ‘heightened,’ the Supreme Court still went on to apply the four-prong standard of Central Hudson.” Missouri Broadcasters, — F.3d – at n.5.  This potentially creates a circuit split between the Ninth and the Eighth Circuits, depending on how the Ninth Circuit resolves Retail Digital Network.  Perhaps craft beer will find itself before the Supreme Court in some capacity.

* The traditional Central Hudson test courts examine four questions:  “(1) whether the speech concerns lawful activity and is not misleading; (2) whether the asserted governmental interest justifying the regulation is substantial; (3) whether the regulation directly advances the governmental interest asserted; and (4) whether the regulation is not more extensive than is necessary to serve that interest.”  Central Hudson Gas Elec. Corp. v. Pub. Servs. Comm’n of New York, 447 U.S. 557, 566 (1980).  I say “traditional” because I am anxiously waiting to see if the Ninth Circuit modifies the analysis in Retail Digital Network.

** I use the term “independent” craft breweries due to big beer’s expansion into, and purchase of, what most would consider “craft” breweries. For reference, see Blair A. Robertson’s article at the Sac Bee:  http://www.sacbee.com/food-drink/beer/article118258943.html.

Let me know what you think.  Cheers.

 

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