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.

 

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.