A prohibition-era law that barred alcohol makers from paying retailers and bars to advertise their wares may be doomed under an appellate ruling that gives expanded free speech protections to such payments.
As a result Californians may one day see far more liquor advertising and an expanded role for alcohol manufacturers in the marketplace.
The 9th U.S. Circuit Court of Appeals Thursday struck down its own 1986 precedent based on a U.S. Supreme Court ruling that has expanded First Amendment protection of commercial speech.
Retail Digital Network, which installs liquid crystal displays in retail stores and pays the store a share of ad fees, sued in 2011 because alcoholic beverage makers refused to participate based on the so-called “tied-house” laws passed in California during prohibition in the 1920s.
Tied-house laws developed from the perceived evil of saloons and other outlets that were controlled by liquor makers and wholesalers since the 1900s. The liquor manufacturers tied retailers to them by providing low-interest loans, reduced rents, free equipment and paying their staff.
For example, a tied-house was required to buy some or all of its beer for a particular brewery, while a “free house” could choose to stock beers freely.
Congress and state legislatures blamed the tied-house arrangements for creating monopolies and exclusive dealing arrangements for particular brands and spawning the vast growth in the number of bars and saloons.
In addition, the tied-house practices were said to foster bribery, political corruption, irresponsible ownership of bars and drunkenness.
To stop it, California and other lawmakers banned manufacturers and wholesalers from owning retail outlets or making gifts or paying rebates or buying the favor of retailers or their employees.
To understand what that means today, in 2014 the state Department of Alcoholic Beverage Control, ABC, accused a California winery of violating tied-house laws by sending a tweet that promoted the “SaveMart Grape Escape” in downtown Sacramento because SaveMart has a retail liquor license.
(California’s powerful wine industry has won some specific exemptions from tied-house law for itself.)
RDN challenged the tied-house restrictions make it illegal to make payments to retailers for “advertising.”
Judge Connie Callahan wrote that the 9th Circuit’s 1986 decision upholding the restrictions against a First Amendment challenge was no longer good in the face of the U.S. Supreme Court’s 2011 decision that applied a tougher test for state laws restricting commercial speech, Sorrell v. IMS Health.
The Sorrell decision and the circuit’s 1986 ruling in Actmedia “are clearly irreconcilable,” Callahan said. The 1986 decision allowed what she called “paternalistic policy” that California could promote temperance by reducing the amount of advertising.
“However, 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,” she said.
“We conclude that Actmedia is no longer binding,” she said.
The case was sent back to U.S. District Judge Consuelo Marshall in Los Angeles to apply to higher standard to the state’s restriction on commercial speech to determine if it still passes constitutional muster.
Case: Retail Digital Network, v. Appelsmith, No. 13-56069