So the Ninth Circuit got this one right. Basically, big beer still won’t be able to pay retailers for advertising under California law.  That, my fellow craft beer lovers, is a big deal.

If you’ve followed my prior blog posts, you’d know that I have been following the Retail Digital Network (“RDN”) case very closely.  It has major ramifications for craft beer, but as I’ve been saying all along, it also has major ramifications for the First Amendment and commercial speech regulations.

A little case history. RDN operated digital advertising displays in alcohol retail stores.  Those screens would then run a loop of advertisements for various companies that would show in the stores.  RDN entered into an agreement with two alcohol manufacturers to run advertisements in those stores for a fee.   However, those two manufacturers quickly killed those deals because California tied-house restrictions prevent alcohol manufacturers and wholesalers from giving anything “of value” to retailers for advertising their alcohol products. See Cal. Bus. & Prof. Code § 25503(f)-(h) (the “Code”).   Several other alcohol manufacturers declined such agreements on the same basis.  RDN sued the ABC, arguing that the Code impermissibly restricted commercial speech and was thus unconstitutional.

The District Court granted summary judgment in favor of the ABC because the Ninth Circuit had already considered this precise issue in Actmedia v. Stroh, 830 F.2d 957 (9th Cir. 1986) and found in favor of the ABC.  That decision found that the Code restrictions survived traditional commercial speech scrutiny under the Central Hudson test.  It basically held that California’s interests in prohibiting vertical and horizontal integration and temperance were sufficient to justify the restriction that prevented point-of-sale advertising restrictions for alcohol manufacturers and wholesalers.

On appeal, a three-judge panel of the Ninth Circuit reversed. It held that an intervening Supreme Court case, Sorrell v. IMS Health Inc., 564 U.S. 552 (2011) modified Central Hudson’s intermediate scrutiny test and required an undefined “heightened” scrutiny.  The opinion did not explicitly state what this new test would look like or what exactly would be modified from the original Central Hudson test.  It also heavily hinted that the challenged Business and Professions Code sections would not survive this heightened level of scrutiny.

But alas, before the District Court could decide the matter, the Ninth Circuit took it en banc. See Retail Digital Network, LLC v. Prieto , 861 F.3d 839 (9th Cir. 2017).The Court first recognized that the Code was adopted to “prevent the resurgence of tied-houses following the repeal of the Eighteenth Amendment” and that the legislature was specifically concerned that “advertising payments could be used to conceal illegal payoffs to alcoholic beverage retailers.” Id.  Is that ok?  Is that sufficient grounds to restrict commercial speech?  The Ninth Circuit thinks so, even under the plain old Central Hudson test that has been in use for years.

The crux of the argument RDN made is that for “content- or speaker-based regulations of commercial speech, Sorrell [supra.] requires courts to apply a greater level of scrutiny than Central Hudson previously required.” Id.  The Ninth Circuit didn’t buy it:  “RDN reads Sorrell too expansively.  Contrary to RDN’s argument, Sorrell did not mark a fundamental departure from Central Hudson’s four-factor test, and Central Hudson continues to apply.” Id.  The Court thus upheld the Code because it “directly and materially advances the State’s interest in maintaining a triple-tiered market system, and because there is a sufficient fit between that interest and the legislative scheme. Actmedia thus forecloses RDN’s First Amendment challenge to Section 25503(f)-(h).” Id.  Actmedia for the win.  “Old” law can still be good law.

So for craft beer fans, the bottom line is that in California, big beer simply can’t pay a retailer for advertising on site. Why is this a big deal?  Studies show that point-of-sale (“POS” in this case) advertising has dramatic impacts on purchasers.  Also, we know that big beer is not loathe to bend or break the rules to achieve galactic domination.  It would be quite easy for a payment to go from manufacturer to retailer for “advertising” that has no basis in reality or relationship to the advertising purchased.  Of course, who would police such transactions is another matter altogether.

For legal fans, there are lots of intricacies in the opinion that are very interesting, including disapproval of temperance as a justification for the Code’s restrictions and a potential avenue of attack for future challenges. Did I mention the circuit split?  If these interest you, be on the lookout for my forthcoming law review article on this subject.  I’ll let you know when it gets published.

* I hope you’ll excuse my brief summer hiatus. My daughter plays travel softball.  Some of you will understand that.  The en banc opinion came out during that hiatus.

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