Federal Court rules against state liquor statutes and regulations without a 21st Amendment analysis

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Importance

In a potentially groundbreaking case a federal district overturned a state’s regulations and statute that restricted alcohol advertising practices. The case’s potential importance is that it made the decision without considering the effects of the 21st Amendment. Secondly, the Court noted that the three-tier system is riddled with some many inconsistencies that it’s hard to justify laws that curtail free speech based on maintaining the integrity of the three-tier system. Missouri Broadcasters Association v. Taylor, no. 2:13-CV-2792-MDH (decided on June 28, 2018, Western District of Missouri)

 

Law at issue

Missouri has two regulations and a statute that restrict alcohol advertising practices.

The first regulation prohibits media advertising of price discounts but allows certain exceptions. The retailers are prohibited from offering coupons or price discounts on beer and wine but are allowed to advertise the price discounts on intoxicating spirits.  The regulation also does not permit outside advertising on certain discounts but permits advertising within the venue. Finally, generic advertising such as “Happy Hour” or “Ladies Night” are allowed but more specific advertising such as “two-for-one specials are prohibited.”

The second regulation prohibits the advertising of selling alcoholic liquor below cost even though the practice of selling below cost is permitted.

The Missouri statute prohibits wholesalers or manufacturers from providing any financial aid to retailers including through advertising. Like the aforementioned regulation, there are exceptions. Exceptions are allowed if the advertisement contains the name and address of two or more unaffiliated businesses, it does not contain the retail price, the listing of the retail business shall be the only reference to the retail business in the advertisement, the listing of the retail business should be relatively inconspicuous, and the advertisement should not refer only to one business or to retail businesses controlled by the same retailer.

 

Central Hudson Test applied to the regulations

Since both parties agree that the regulations govern free speech, the Court decided to implement the Supreme Court standards from Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980) to determine whether the restrictions violated commercial free speech. In Central Hudson the Supreme Court implemented a four-prong test for determining the constitutionality of a law burdening commercial speech: “(1) whether the commercial speech at issue concerns unlawful activity or is misleading; (2) whether the governmental interest is substantial; (3) whether the challenged regulation directly advances the government’s asserted interest; and (4) whether the regulation is no more extensive than necessary to further the government’s interest.” Id.

Missouri indicated that it restricted free speech because the restrictions were necessary to promote responsible consumption of alcohol, combat illegal underage drinking and maintain an orderly marketplace.

The Court found that there is a substantial government interest in dissuading overconsumption and combating underage drinking. Further, they found the state had a substantial interest in maintaining an orderly marketplace.  Based on these conclusions, the Court concluded it was not necessary to analyze the first two prongs of the Central Hudson test.

Its analysis focused on the third and fourth prongs of the Central Hudson test and looked at whether the regulations and statute at issue: 1) directly advance the state’s substantial interests; and/or 2) are no more extensive than necessary.

Under the applicable legal framework, the State has the burden to prove that the regulations directly advance the State’s substantial interests and that the regulations are no more extensive than necessary to further the state’s interest.

To simplify, the State must demonstrate that prohibiting advertising of discount prices and below-cost alcohol directly reduces overconsumption of alcohol and underage drinking.

On the first test, directly advancing the state’s substantial interests, the State failed to meet its burden of proof. The State needed to prove that its restrictions on discounting practices and other advertising restrictions led to a reduction in consumption and underage drinking. The Plaintiff offered evidence that even though alcohol advertising has increased, in general the amount of alcohol consumed has fallen. The State did not provide evidence to combat this assertion, nor did they provide any evidence which indicated that its restrictions on free speech directly advanced any interest.

Further, the regulation was loaded with inconsistencies which called into question the State’s position. While allowing coupons for spirits, it didn’t allow it for beer and wine, while allowing general “Happy hour” or “Ladies Night” advertising, it did not allow advertising for more specific discounts, which it allowed advertised within but not without the retail premise. The inconsistency as applied, lead the Court to question whether the regulation was designed to advance the State’s substantial interest in reducing overconsumption and underage drinking.

As for the second part of the test, whether the regulations are no more extensive than necessary, the Court looked at whether the State could employ less restrictive means for combating overconsumption and underage drinking. The Court found that the State failed this test.

The plaintiff established that the State had multiple non-speech-suppressive alternatives that could directly advance the State’s interests in reducing overconsumption and underage drinking.

Alternatives included but are not limited to:(1) an increase in taxes of alcohol; (2) direct controls on pricing; (3) development and full funding of educational campaigns concerning the problems of excessive and underage drinking; (4) a ban on promotions on alcohol in the entirety; (5) enhancement of enforcement penalties; or (6) implementation of one or more of the foregoing alternatives within a 2-mile radius of colleges instead of the entire state.

The Court agreed with the plaintiff’s assertions on alternative means and agreed that the State had less intrusive means to regulate overconsumption and underage drinking rather than suppressing free speech.

 

Central Hudson Test applied to the statute

The State indicated that its statute which forbid a single retailer from being on an advertisement promotes its substantial interest of maintaining an orderly marketplace. The State posited that a manufacture or wholesaler providing funds via advertising would lead to a semblance of control over the single retailer. The statute is necessary to maintain the three-tier system and restrict manufacturers or wholesalers from commingling with or picking favorites among the retail tier.

Similar to its analysis of the regulations, the Court focused on the inconsistencies in the State’s legal authority. The State’s position of restricting free speech to maintain the integrity of the three-tier system was not convincing, especially when the State statutes did not allow for the maintaining of this integrity. Specifically, the Court noted that the State allowed wineries in some instances to operate in all three-tiers and further allowed out-of-state wineries to directly ship to customers, and craft brewers and distillers are allowed to sell product at retail.

The Court further took issue with the State’s position about advertising restrictions and focused on exceptions to the advertising rule to question the validity of the State’s position. The State statute allows advertising if it is offered to multiple retailers, doesn’t include the price, and only identifies the retailer’s business in an inconspicuous manner. Thus, the State even with restricting the advertisement’s content, still allows an advertising vehicle where the manufacturer or wholesaler can commingle with the retailer.

Next the Court took issue with the State’s position that by preventing advertising dollars from going to a retailer, this would stop the commingling of funds between the wholesaler or manufacturer and the retailer.  The Court noted that as a long-standing practice, the State permits the wholesaler or manufacturer to provide financial incentives to retailers which include barware, mirrors, and other tangible goods to be placed in the retail establishment. These practices permit some financial commingling between the tiers and contradict the State’s position.

As was the case with the regulations, the State provided no evidence or explanation on why advertising commingling disrupts the State’s regulatory scheme.

The Court found that the State did not meet its burden to establish that the Statute directly advances a substantial interest. The infringement of Plaintiffs’ First Amendment rights clearly exceeded any direct benefit to maintaining what is left of the three-tier regulatory scheme.

The Court similar to its analysis for the regulations looked at how the statute could have used less restrictive means. Instead of banning advertisements, the state could more closely police the practice, limit the money spent on advertising, and limit non-advertising financial incentives provided to retailers.

 

The Statute Unconstitutionally Compels Free Speech

The State ruled that the statute compels speech unconstitutionally through requiring the wholesaler or manufacturer to list more than one retailer, regardless of whether they choose to list them. As such, the Statute requires wholesalers or manufacturers to associate with a retailer that they may not want to include.

Further, the Court concluded that if the state is worried about favoritism to retailers, there are better alternatives than imposing restrictions on commercial speech.

In concluding, the Court held that the State did not establish that the Statute advances a substantial state interest, and further, even if the Statute advanced a substantial state interest, the State cannot establish that it is no more extensive than necessary to further that interest.

 

Takeaways

If the 8th Circuit upholds this decision, there are some potential groundbreaking events occurring. The 8th Circuit would affirm the principle that a state liquor statute or regulation could be overturned without a 21st Amendment analysis. If Courts begin to follow this precedent and rule in cases without considering the 21st Amendment, then a state’s position becomes weaker.

In previous cases, courts ruled that tied-house concerns overruled 1st Amendment considerations because commercial speech was not protected when it violated tied house rules. Retail Digital Network, LLC v. Prieto, No 13-56069 (9th Cir. 2017). In RDN the 9th Circuit held that California had a substantial interest in upholding the three-tier system and the restrictions of free speech worked towards this these substantial interests.

In this case mentioned above, Missouri Broadcasters Association, the Court considered the three-tier system a less than solid concept and the substantial interest for upholding the system was negated, when the state allowed the strict separation of the tiers to be violated in certain circumstances. Hence, the California’s justification in RDN for limiting commercial speech was not a valid justification in this case.

Since there are basically exceptions to every state three-tier system, will Courts adopt the standard from Missouri Broadcasters Association?  If so, Courts will begin to espouse the principle that the three-tier system lacks solidity and protecting the system is no longer in the state’s substantial interest. If this is the case, then the 21st Amendment becomes irrelevant and the Central Hudson test becomes the determining factor in commercial speech restriction cases.

Second, if Missouri Broadcasters Association becomes precedent, states everywhere would need to reevaluate tied-house statutes or regulations to determine if their statutes or regulations are too restrictive. This could lead to the rewriting of legal authority everywhere. Which begs the question, if the 8th Circuit upholds Missouri Broadcasters Association, and the states do not rewrite statutes or regulations, do we begin to see many challenges to state tied-house rules?

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