Commercial Speech And Alcoholic Beverages - Part II

Commercial Speech And The Alcoholic Beverage Industry

Part I of this blog discusses the definition of “commercial speech” and the protections that have been extended to it by the Supreme Court.  Those concepts are critically important to the alcoholic beverage industry for two reasons.  First, producers and sellers of alcoholic beverages are engaged in commerce, and their success depends, in large part, upon commercial speech.  Second, the industry is subjected to stringent governmental regulations, many of which drastically restrict participants’ rights to free expression.  

The intense regulation of the alcoholic beverage industry springs from the Twenty-First Amendment, which repealed Prohibition and gave the states substantial powers to regulate the industry within their own borders.  Does the Twenty-First Amendment diminish industry participants’ rights to free expression, at least insofar as their commercial speech relates to alcoholic beverages? 

In 44 Liquormart, Inc. v. Rhode Island, the Supreme Court answered “No” to that question.  The Court invalidated a Rhode Island law that prohibited advertising the retail prices of alcoholic beverages as an unconstitutional restraint on commercial speech, applying the 4-part Central Hudson test discussed in our last posting.   The state attempted to justify its ban as an exercise of its authority under the Twenty-First Amendment, but the Supreme Court rejected that argument: “[W]e now hold that the Twenty-first Amendment does not qualify the constitutional prohibition against laws abridging the freedom of speech embodied in the First Amendment.”  The court also rejected Rhode Island’s assertion that its restriction was a justified as a condition to the licenses granted to retailers: “Even though government is under no obligation to provide a person, or the public, a particular benefit, it does not follow that conferral of the benefit may be conditioned on the surrender of a constitutional right.”

The Supreme Court’s ruling that participants in the alcoholic beverage industry have the same First Amendment rights to free expression as everyone else might surprise someone looking at the plethora of onerous restrictions on commercial speech that still persist in the industry, and the violations that regulators routinely assert against industry members.  The 44 Liquormart case was decided in 1996, but it has yet to have a meaningful impact upon legislators and regulators in many states.  Restrictive laws and regulations are commonplace, and many regulators still seek to penalize producers and retailers for commercial speech that would be unassailable in any other industry.  

The industry is becoming more proactive in asserting the First Amendment rights of its participants.  That trend should accelerate until regulators understand and respect participants’ rights.

The First Amendment should figure prominently in arguments to repeal or reform onerous regulations, and in defending against charges based on those regulations. The key to those arguments is the 4-part Central Hudson test, on which the government bears the burden of proving that its restriction meets that test.

Consider one of innumerable examples.  California law permits wine producers to respond to consumer inquiries about which retailers carry their wines, but only if they mention at least two retailers.  Suppose that a prospective consumer sends and email asking a small winery for the name of the retailer closest to her home, the winery responds by providing the address of one store that is part of a national chain, and the winery is then cited by the regulators for violating the statute. 

The winery’s statement is indisputably truthful, non-deceptive commercial speech, so the government bears the burden of showing that its effort to penalize that speech meets the Central Hudson test.  The California Supreme Court and Legislature have both recognized two paramount and legitimate interests served by the state’s alcoholic beverage control laws:  (1) preventing large producers from dominating and controlling local markets; and (2) preventing excessive consumption of alcohol.  The government would assert the first interest in this case.  Then, it must prove that its regulation advances that interest significantly and in the narrowest possible fashion.  However, it seems unlikely that the government could even prove that the large chain would ever know of the winery’s responsive email, let alone that that email has any real prospect of allowing the small winery to control the large retail chain.  The regulation is thus overly-broad, because it seeks to punish the small winery for conduct that could not lead to the result that the state has a legitimate interest in preventing.  Because the state cannot meet its burden of proof, the winery should win.

The preceding hypothetical is by no means an exaggeration of the types of charges still routinely being brought against industry members in many states.   As in the hypothetical, many industry regulations were passed in furtherance of governmental interests that cannot be shown to be relevant to current industry conditions.  Industry members that are threatened with penalties for commercial speech should hold the government to its burden to prove that the penalty meets the Central Hudson test.

In more extreme situations, some industry members are suing state officials directly for damages and injunctive relief under the federal Civil Rights Act.   The defendant officials routinely assert that they are entitled to qualified immunity from such claims, because they acted in good faith and did not violate established rights of which a reasonable person would have known.  In two prominent cases, however, federal Courts of Appeals have denied qualified immunity to state ABC officials.  

In LSO, Ltd. v. Stroh, decided in 2000, the Ninth Circuit rejected a defense of qualified immunity for California ABC officials.  The officials had threatened to suspend the on-premises license of a hotel if it allowed a convention to display an erotic art show.  The show was not “obscene” under First Amendment standards but sufficiently graphic to run afoul of an ABC regulation.  The Ninth Circuit held that, four years after 44 Liquormart, the officials should have known that “state liquor regulations are subject to the First Amendment just like any other state enactments.”

More recently, the Sixth Circuit rejected a qualified immunity defense for Michigan regulators who had banned a beer label proposed by Flying Dog Brewery as “detrimental to the health, safety or welfare of the general public.”  The Court of Appeals held that the Supreme Court’s decisions on commercial speech “should have placed any reasonable state liquor commissioners on notice that banning a beer label based on its content would violate the First Amendment” and sent the case back for a trial on the brewery’s claims against the officials for damages caused by the ban.

The trend towards protecting the First Amendment rights is encouraging for the alcoholic beverage industry.  Industry participants can advance that trend by asserting their rights and opposing unconstitutional interference by overly zealous regulators. 

Stay tuned for further installments to this blog.  We will continue to report on developments in this important area. 

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