In a highly anticipated ruling that maintains the status quo for alcohol beverage laws across the country, the U.S. Court of Appeals for the Ninth Circuit in Retail Digital Network v. Prieto, 861 F.3d 839 (9th Cir. 2017), recently determined that California's interest in preventing the undue influence of manufacturers over retailers was sufficient to trump First Amendment commercial speech challenges. In so holding, the court maintained longstanding precedent supporting the government's right to restrict advertising by alcohol suppliers, directly or indirectly, at the retailer outlets carrying their products, in contrast to business as usual for other nonalcohol brand owners.

At issue in Retail Digital was plaintiff RDN's challenge to certain provisions of California's "tied house" laws, which restrict the ability of manufacturers to provide paid advertising, point-of-sale material or "anything of value" to licensed retailers of their products (see Cal. Bus. & Prof. Code Section 25503). RDN is a nonlicensed, third-party advertising company that runs paid advertisements over LCD screens it installs in retail outlets, as in Retail Digital Network v. Appelsmith, 945 F. Supp. 2d 1119, 1121 (C.D. Cal. 2013). After being unable to contract with alcohol manufacturers, including Anheuser-Busch InBev, MillerCoors and Diageo, due to their concerns that advertising with RDN would violate Section 25503, RDN brought suit against the director of the California Department of Alcoholic Beverage Control, seeking a declaratory judgment that Section 25503 was an unconstitutional restraint on RDN's First Amendment right to commercial speech.

In assessing the merits of RDN's challenge at summary judgment, the court and parties agreed that the case hinged on the legal question of whether the court was required to apply a heightened standard of review due to the U.S. Supreme Court's decisions in Rubin v. Coors Brewing, 514 U.S. 476 (1995); 44 Liquormart v. Rhode Island, 517 U.S. 484 (1996); and Sorrell v. IMS Health, 564 U.S. 552 (2011). As RDN conceded at oral argument, if the previous standard of intermediate scrutiny had not changed, there was "no room for this litigation" because the Ninth Circuit's prior decision in Actmedia v. Stroh, 830 F.2d 957 (9th Cir. 1986) was fatal to RDN's challenge.

Decided 20 years before Retail Digital, the Ninth Circuit in Actmedia reviewed a nearly identical challenge to Section 25503 to determine that the section met the four-factor test articulated by the Supreme Court in Central Hudson Gas & Electric v. Public Service Commission, 447 U.S. 557 (1980). Similar to Retail Digital, Actmedia involved a third-party advertiser of supermarket shopping carts losing business opportunities for placing advertisements by large alcohol manufacturers due to Section 25503.

In considering the First Amendment challenge, the court followed the analysis set forth in Central Hudson to "determine whether the expression is constitutionally protected," which for commercial speech "must concern lawful activity and not be misleading," "whether the governmental interest is substantial," and, if so "whether the regulation directly advances the government interest asserted," and "whether it is not more extensive than necessary to serve that interest," (quoting Bolger v. Youngs Drug Products, 463 U.S. 60, 68-69 (1983)). After quickly determining that the first two factors were met, the court focused on the last two inquiries to conclude that "Section 25503(h) furthers California's purposes of both limiting the ability of large alcoholic-beverage manufacturers and wholesalers to achieve vertical and horizontal integration by acquiring influences over the state's retail outlets, and of promoting temperance among the state's residents" and that the "provision is not broader than necessary to achieve these purposes."

Returning to Retail Digital, the district court focused on RDN's argument that the Supreme Court's decision in Sorrell "requires heightened scrutiny review of laws burdening nonmisleading commercial speech," thereby "amending the Central Hudson test applied in Actmedia and requiring a different result here." In particular, the court focused on whether the Supreme Court's statement that "the First Amendment requires heightened scrutiny whenever the government creates 'a regulation of speech because of disagreement with the message it conveys'" changed the Central Hudson analysis. After reviewing the majority and dissenting opinions, the district court determined that Sorrell did not create a heightened standard—as suggested by RDN—and that the parties and the court were still bound by the holding in Actmedia. On appeal, a three-judge panel of the Ninth Circuit disagreed with the lower court's finding. (See Retail Digital Network v. Appelsmith, 810 F.3d 638 (9th Cir. 2016).) Specifically, the court found that Actmedia "is clearly irreconcilable with Sorrell" and that "Sorrell requires heightened judicial scrutiny of content-based restrictions on nonmisleading commercial speech regarding lawful products, rather than the intermediate scrutiny applied to section 25503 in Actmedia." Finding that Actmedia "is no longer binding," the court determined that "the Supreme Court has since made clear that the First Amendment does not allow the government to silence truthful speech simply for fear that adults who hear it would be too persuaded." "Even in the context of commercial speech, 'the fear that people would make bad decisions if given truthful information cannot justify content-based burdens on speech.'"

Given the significance of the decision on the treatment of commercial speech beyond alcohol, the Ninth Circuit agreed to consider the case for en banc review. After much anticipation, the Ninth Circuit issued its opinion earlier this summer, affirming the district court's determination that "Sorrell did not modify the Central Hudson standard" and "reaffirmed Actmedia's core holding." In doing so, the court took time to review both the reasoning behind Section 25503 when enacted as well as its continued relevance today.

Specifically, the court noted that Section 25503 was "adopted to prevent the resurgence of tied-houses," which "refers to retailers and saloons that are controlled by larger manufacturing or wholesale interests," "following repeal of the Eighteenth Amendment." In particular, the court noted that Section 25503 addresses California's "specific concern that advertising payments could be used to conceal illegal payoffs to alcoholic beverage retailers, thereby undermining" the importance of maintaining the independence of the retail tier. For this reason, the court held that Section 25503 "serves the important and narrowly tailored function of preventing manufacturers and wholesalers from exerting undue and undetectable influence over retailers" as "without such a provision, retailers and wholesalers could side-step the triple-tiered distribution scheme by concealing illicit payments under the guise of 'advertising' payments." The court, however, reached a different conclusion regarding the state's interest in promoting temperance. It found that, because the section only applies to paid advertising in retail establishments, it at best only indirectly promotes temperance, which fails to satisfy the third factor of Central Hudson.

While the legal analysis in the Retail Digital cases focused on the interplay between Sorrell and Central Hudson, had the original panel decision of the Ninth Circuit not been reversed, alcohol beverage laws across the country would have been vulnerable to constitutional attack. This is because, while each state's liquor codes vary, the concept of "tied house" restrictions on manufacturers' providing "value" to retailers is nearly universal. (See 47 P.S. Section 4-411 (outlining Pennsylvania's tied-house provision, which prevents manufacturers and their agents and employees from "giving anything of value or the equivalent thereof to" retail licensees).) In other words, the Ninth Circuit reaffirmed the status quo not just for California, but for the rest of the country in asserting the continued viability of advertising restrictions for manufacturers in the face of First Amendment challenges.