Takeaway

California tied-house law prohibiting alcohol beverage suppliers and wholesalers from paying to advertise at a retail establishment does not violate the First Amendment.
Ninth Circuit clarifies that nothing greater than intermediate scrutiny applies to regulations on commercial speech.
The three-tiered system of alcohol beverage distribution is alive and well in California.

On June 14, 2017, the U.S. Court of Appeals for the Ninth Circuit, sitting en banc, issued its decision in Retail Digital Network LLC v. Ramona Prieto, Case No. 13-56069, D.C. No 2:11-cv-09065-CBM-PJW. The decision rejects a First Amendment challenge to longstanding alcohol beverage trade practice laws and clarifies that nothing greater than intermediate scrutiny applies to regulations on commercial speech.

The Retail Digital Network Decision
As previously discussed in Ninth Circuit Opens the Door to Relaxing Decades-Old Law Restricting Supplier-Paid Advertising in Retail Establishments, Retail Digital Network involves an advertiser, Retail Digital Network LLC (RDN), that desired to operate as a non-licensed alcohol beverage industry advertising middleman. RDN installs liquid crystal displays in retail stores. It generates revenue by contracting with advertisers to display their products and services and pays each retail store a percentage of its advertising revenue. RDN offered its services to alcohol beverage suppliers who refused to do business out of concern that RDN’s business model would violate California Bus. & Prof. Code section 25503 (f)-(h), which, among other things, forbids alcohol beverage suppliers and wholesalers from directly or indirectly paying for the privilege of advertising at retail establishments.

In 2011, RDN filed suit in the U.S. District Court for the Central District of California seeking declaratory relief that section 22503 (f)-(h) violates the First Amendment’s guarantee of freedom of commercial speech. It also sought to enjoin the State’s enforcement of the law. The State moved for summary judgement which the District Court granted relying on the Ninth Circuit’s 1986 decision in Actmedia, Inc. v. Stroh., 830 F.2d 957 (9th Cir. 1986). Actmedia upheld section 25503 as consistent with the First Amendment after applying intermediate scrutiny to laws burdening commercial speech under the leading commercial speech case, Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557(1980). Central Hudson established a four-part framework for assessing restrictions on commercial speech: (1) whether the speech at issue concerns lawful activity and is not misleading; (2) whether the asserted government interest is substantial; and, if so, (3) whether the regulation directly advances the governmental interest asserted; and (4) whether it is not more extensive than is necessary to serve that interest (Central Hudson, 447 U.S. at 566).

In January 2016, a three-judge panel of the Ninth Circuit reversed the district court, ruling that Actmedia is irreconcilable with a trio of subsequent Supreme Court decisions including Rubin v. Coors Brewing Co., 514 U.S. 476 (1995), 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484 (1996) (plurality opinion), and, most importantly, Sorrell v. IMS Health, Inc., 564 U.S. 552 (2011). The panel held that Sorrell modified the Central Hudson test by requiring heightened scrutiny for laws like section 25503 that burden content- or speaker-based non-misleading commercial speech about legal goods or services.

After granting rehearing en banc, the Ninth Circuit affirmed the district court in a 10-to-1 decision ruling that Sorrell did not fundamentally alter the four-factor Central Hudson test by requiring heightened scrutiny of laws that regulate commercial speech (Retail Digital Network, at 16-19). The court held that Actmedia correctly decided that section 25503(h) survives intermediate scrutiny under Central Hudson (Id. at 23).

However, the court disapproved of Actmedia’s reliance on the State’s purported interest in promoting temperance as a justification for section 25503(h), finding that section 25503(h) directly and materially advanced the State’s interest in maintaining a three-tiered distribution scheme and is sufficiently tailored to prevent suppliers and wholesalers from exerting “undue and undetectable” influence over retailers. The court reasoned that “[w]ithout such a provision, retailers and wholesalers could side-step the triple-tiered distribution scheme by concealing illicit payments under the guise of ‘advertising’ payments” (Id. at 24).

A common criticism of California’s three-tier system has been that it is rife with exceptions. Addressing that issue here, the Ninth Circuit noted that since “the vast majority of retailers” do not qualify for any of the numerous exceptions, those exceptions have only a minimal effect on the overall scheme.

On balance, Retail Digital Network preserves the three-tier system status quo—at least for now. It is likely, however, that as alcohol beverage advertising methods progressively evolve through digital media, challenges to this and other similar trade practice laws nationwide will continue.