This could be really bad for independent craft beer.  Most states have tied-house laws that prevent manufacturers from giving retailers a “thing of value.”  Among the many prohibitions this encompasses, manufacturers are (were?) universally prohibited from paying a retailer for advertising space.  Several exceptions exist, but the general purpose is to prevent a retailer from becoming beholden to a manufacturer and thus on the hook to push that manufacturer’s beer over another’s.  One of the obvious legal issues this raises is the First Amendment.

In 2017, the Ninth Circuit confronted this very prohibition in the context of a First Amendment challenge.  See Retail Digital Network LLC v. Prieto, 861 F.3d 839 (9th Cir. 2017).  Because this speech is commercial in nature (not core speech like political opinions) statutes restricting this kind of speech traditionally receive an intermediate level of scrutiny called the Central Hudson test.  This test is more lenient than strict scrutiny but something more than rational basis.  If you want to know more about these, email me.  Suffice it to say that statutes and regulations restricting commercial speech face a pretty tough test for a court to hold them constitutional. Under this intermediate Central Hudson test, the Ninth Circuit found that California’s prohibition of a manufacturer paying a retailer for advertising survived Central Hudson because it materially advances the states interest in maintaining a three-tier market system, and there was sufficient fit between that interest in the legislative scheme to prohibit market domination by large manufacturers.  See Retail Digital Network, 861 F.3d at 851-52.  Accordingly, for now, independent craft brewers in the Ninth Circuit can rest easy knowing that manufacturers cannot pay for advertising.

The Eight Circuit just threw a giant wrench in the issue.  In Missouri Broadcasters Ass’n v. Schmitt (dated January 8, 2020), the Eighth Circuit resolved the same challenge to a similar prohibition against paying for advertising in Missouri.  Unlike the Ninth Circuit, the Eighth Circuit held that “Missouri fails to show how the Statute, as applied, alleviates to a significant degree the harm of undue influence.”  The Eighth Circuit also pointed to the many exceptions to tied-house laws and stated that “[a] statutory framework with such advertising exceptions and inconsistencies renders the Statute as applied ineffective in preventing undue influence ‘in a direct and material way,’” in contrast to the Ninth Circuit.  If you are an independent craft brewery in the Eighth Circuit, prepare for an increased squeeze on shelf space and tap handles.

This creates a circuit split.  Big beer would like nothing more.

Why is the bad for independent craft beer you ask?  For two main reason.  First, the only manufacturers who can afford to play the pay for advertising game are the biggest ones.  If paying for advertising space became legal, the independent craft breweries you love would be at a severe disadvantage because they simply cannot afford to play that game.  And retailers everywhere would love increased revenues.  Secondly, and more importantly in my opinion, is that if large manufacturers were allowed to pay for advertising, who is going to police those deals?  More specifically, who is going to decide the reasonable value of an advertisement?  The point is, if large manufacturer A paid a retailer $20,000 per year for advertising, it completely blurs the lines between advertising payments and pay to play.  Frankly, this opens the door for those with deep pockets to legally engage in simple, plain pay-to-play conduct.  It would seriously squeeze your local independent.  We cannot afford to erode tied-house in this manner.  The results will be disastrous.

Cheers (I guess).  And let me know what you think.

*Nod to Ashley W. Brandt for breaking this case.

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