Illinois Attorney General's Office Announces Intention to Dismiss False Claims Act Against Liquor Retailers

On December 27th we published a blog post describing the Illinois Qui Tam lawsuits.  In the interim many of our clients and friends, both on the winery and the retailer tier, have been sued by Mr.Diamond. Many of our clients have reluctantly settled their cases in order to avoid the cost of trying the cases against Mr. Diamond.  We have referred our clients to the very fine team of litigators at Jones Day in Chicago for defense.  Now Jones Day reports the first major defense break in the cases - the intention to dismiss the cases against the retailer defendants because the retailers have no nexus with the state that would establish a right to sue them in state court.   This is significant.  It does not, at first blush, help the winery defendants but it is a sign that the authorities in Illinois are taking a dim view of Mr. Diamond's activities.  That is a good thing.

Please stay tuned to Booze Rules (and the Jones Day blogs) for more information, and call or email us with questions.

-John

 http://thewritestuff.jonesday.com/rv/ff001efa85f32db8ea2f2eeeb34184969847e21d

Commercial Speech And Alcoholic Beverages - Part III

Unconstitutionality - Per Se vs. As Applied

We have explored the concept of commercial speech under the First Amendment and the fact that those in the alcoholic beverage industry have the same rights as everyone else.  Today’s post focuses on the possible effects of asserting those First Amendment rights, particularly in the context of regulation of the industry.

Courts can find a statute to be unconstitutional per se, meaning that the statute itself violates the Constitution and could not ever be lawfully applied.  In that case, the law itself is void and of no further effect, and no one can be punished for having violated that statute.  Let’s take an easy hypothetical: a statute prohibiting anyone in the electronic or print media from mentioning or commenting on any candidate for elective office within seven days of an election.  As long as there is a First Amendment, that statute is unconstitutional per se. 

Courts can also find that an otherwise valid statute is unconstitutional as applied in a particular case, meaning that the defendant in that case cannot be punished for having violated the statute, but the statute itself remains valid and can be enforced in other circumstances.   One of many examples is Edwards v. South Carolina, in which participants in a peaceful protest against segregationist policies of the state were convicted of “breach of the peace.”  The Supreme Court did not invalidate South Carolina’s “breach of the peace” law, but it did hold that that law could not constitutionally be applied to the defendants, who were exercising their First Amendment rights peacefully.  South Carolina could continue to apply that law to, for example, people shooting firecrackers in a public space.  It could not, however, apply the law as a means to suppress the exercise of First Amendment rights.

So, what does this have to do with the alcoholic beverage industry?   Many of the regulatory restraints on commercial speech stem from the laws passed after the repeal of Prohibition and are based on the exercise of powers under the Twenty-First Amendment.  The most common example are the “tied-house” laws, intended to achieve a separation of the production, distribution and retail tiers of the industry. 

It is highly unlikely that a court will find that the tied-house laws are unconstitutional per se, just because they can be used to suppress commercial speech.  The tied-house laws have repeatedly been recognized as advancing legitimate governmental interests, the most common being to prevent the domination of local markets by large producers and to promote temperance or, at least, moderation.  Moreover, those laws are supported by their historical role in the passage of the Twenty-First Amendment.

As we learned last time, however, the fact that the tied-house laws are not unconstitutional per se does not mean that they can be applied indiscriminately to suppress the exercise of First Amendment freedoms, including the utterance of commercial speech.  If the government fails to meet its burden of proving that its suppression of commercial speech meets the Central Hudson test, the tied-house laws would be unconstitutional as applied in that case. 

Let’s take two examples.  A large winery enters into an agreement with a local chain in State X, which has a three-tier tied-house law.  The agreement provides that, if the chain buys 75% of its wine inventory from the large winery, the winery will run a large volume of ads urging consumers to buy its wines from the chain’s stores.  The ABC in State X seeks to invalidate the agreement and to penalize the winery and the retail chain under the tied-house laws.  The producer asserts a First Amendment defense—it is running truthful ads.  Who wins?

With apologies to those rooting for the defendants, the ABC will likely prevail under the Central Hudson test.  Preventing the domination of local markets by a large producer has repeatedly been recognized to be a legitimate state interest.  Invalidating the agreement and penalizing the participants’ flagrant violation of the tied-house laws advances that interest, and it is hard to argue that a statute could be applied more narrowly. 

Example 2:  ShopStop, a grocery chain headquartered in Mudville buys the naming rights for the local baseball field, where the Mudville Nine play.  A small local winery, which does not sell its wine to ShopStop, holds an outing for some customers and staff members at one of the games.  The winery then posts on its website: “We had a great time last Saturday at ShopStop Field watching the Mudville Nine!  For once, Mighty Casey did not strike out, and the Nine beat the Mudhens 5-3!  Great game!”  The ABC cites the winery for violating the tied-house laws by providing free advertising to ShopStop.  The winery asserts a First Amendment defense—its posting was truthful commercial speech (if not fully protected speech).  Who wins this one?

If you guessed the winery, you, like Mighty Casey, did not strike out!  While preventing domination of local markets may be a legitimate governmental interest, the ABC would be hard-pressed to prove how applying the tied-house laws to suppress the winery’s speech advances that (or any other) legitimate governmental interest.   The winery truthful statement of where it held its outing, using the proper name of the field, cannot plausibly be linked to any potential domination of the Mudville wine market by the winery. The court should find that the ABC’s application of the law in this case is unconstitutional.

Most of the laws historically applied to the alcoholic beverage industry are unlikely to be held to be unconstitutional per se.  However, where those laws are used to suppress commercial speech in a manner that cannot be justified under Central Hudson, the courts should find them to be unconstitutional as applied.

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. 

Craft Beverages: Social Media Marketing the Effective and Compliant Way

On April 1, 2015, I stood before a packed room of distillers at the American Distilling Institute’s (“ADI”) annual conference in Louisville, Kentucky to deliver the message that there is a right, effective and compliant way to do state of the art social media marketing.  The best and brightest distilled spirits newcomers and craft favorites are members of ADI and over 1500 were at the national conference.  While every one of them recognized the importance of social media, the legalities and best practices for using social media are a mystery to many.  For those of you who couldn’t be there, here are some highlights and takeaways:

1. Which laws apply to social media?

Alcohol advertising is regulated by the federal regulators (TTB, FDA) and state ABC agencies, meaning there is dual jurisdiction and the potential for cross-violations from federal and state agencies.  There are no general rules, every state is different, and if an advertising or marketing practice is not specifically permitted, it’s often prohibited.  If it is permitted, it must follow both state and federal laws, rules and guidelines.  When marketing on social media and online, brands should tailor national advertising compliance to the most restrictive states, and event advertising is state-specific so each market needs to be reviewed for compliance before activation of event programs.

The TTB has released guidance on social media advertising here, and social media posts sponsored or conducted by brand accounts and those representing brands must comply with the federal advertising requirements in 27 CFR Parts 4, 5 and 7.  The FTC also published a study on alcohol advertising, available here.

There has been limited state guidance regarding the use of social media.  Some states, like California and Illinois, have addressed social media advertising as a potential thing of value to retailers when posts mention a specific retailer and have filed accusations against supplier licensees in these cases. Bills are proposed in both states, which, if they pass, would provide a social media exception to the tied house laws and permit this practice going forward. This state interpretation contrasts with states like Texas that have explicitly permitted retailer locators in social media.  Other states, like Washington and Oregon, permit social media as long as it does not appeal to or solicit viewers under 21 and as long as it complies with other laws (like Oregon’s Happy Hour restrictions).  Still other states, like Kentucky and North Carolina, permit social media advertising without additional guidance, and many more states provide no guidance about social media at all but fall back on the federal government’s regulations.

For still more information on social media, check the material from your relevant industry association, DISCUS, Wine Institute and Beer Institute for their social media and marketing guidelines.

2. What is the biggest social media trap to avoid?

Advertising Retailers!

• Be cautious of advertising events involving retailers, like the now infamous California accusations against suppliers who advertised the Save Mart Grape Escape in Sacramento, a charity event that did not take place at Save Mart, but was sponsored by them.
• There are specific state exceptions that permit you to advertise events you are attending at retail accounts – such as wine tastings and bottlesignings in California.  Every state is different though, so you want to understand what events you can and can’t advertise in every market.
• Federal law and some state laws permit advertising two or more unaffiliated retailers (retailer locators), but the specific information you can share varies.  Some states, for example, don’t permit names, only addresses, where your product can be found.  Here’s a good example of how to do a post with multiple retailers listed without any images or extra advertising material that is not permitted in many markets:

3.       What are some best practices to follow?

• Place ads responsibly and consider age-gating with DOB

The industry associations strongly recommend this, as does the FTC, and it’s a way of the industry self-policing and demonstrating responsible business practices.  They also strongly advise confirming age prior to engaging in a dialogue with consumers on social media.

• Create responsible content and monitor posts by others

While there is a safe harbor for posts by others, if your brand account retweets or reposts this content, it becomes yours.  Use privacy settings actively so that you don’t have content on your page or wall that doesn’t represent your brand or promotes the irresponsible use of your product.

• Educate your partners

Many industry members should know better, but don’t.  Don’t assume that the industry members you’re doing business with know the restrictions on their alcohol social media and marketing.  Also recognize that each company has different risk tolerances, so even the more established industry members may have made the business decision to take advantage of the lack of enforcement in a particular market or the gray areas within the regulations.

• Create clear privacy policies and a company social media policy

It’s important to control who can represent your brand on social media and in your online marketing, so create policies to determine your social media strategy and compliance rules and use privacy policies and restrictions to protect your customers’ information and how you monitor your own posts.  Make sure employees or paid agents (especially third party providers like delivery platforms and event companies!) who are posting about your brand disclose their affiliation or sponsorship and understand your policies, branding priorities and the regulatory parameters around your product.

If you have additional questions, we are here to help!

Commercial Speech And Alcoholic Beverages - Part I

“Can the ABC really prohibit me from telling my customers where I will be conducting a retail wine tasting?  Can the ABC really prosecute me for posting on Facebook that I will be attending an event, if the proper name of the event includes part of a retailer’s name?   Can the ABC prosecute me for my tweets about how cool the establishments are that carry my wine?  What happened to freedom of speech?  Did I lose my right to free speech because I produce or sell alcoholic beverages?

The series of blog posts explores those questions, and more, in the context of basic constitutional rights, rights that have up until now seemingly been ignored by the ABC. We are challenging the status quo, and this is why.

What Is “Commercial Speech”?

Explaining your constitutional rights in the context of the regulation of alcoholic beverage regulations requires some background in constitutional law.   While Con Law may not be your cup of tea (or glass of wine), the goal is to understand how the constitution protects you and your business.  So don your powdered wig, tri-corner hat and waistcoat and come along as we explore how the Founding Fathers’ great achievement applies to you today.

The First Amendment to the United States Constitution provides:  “Congress shall make no law … abridging the freedom of speech…”   That restriction applies to both the executive and legislative branches of the federal government, and it was later made applicable to state and local governments (including the agencies that regulate the alcoholic beverage industry) by the passage of the Fourteenth Amendment. 

The right to free speech is one of the bulwarks of the American system of government.  The vast majority supports free speech, at least in the abstract.   Enthusiasm diminishes when the freedom extends to unpopular speech, such as flag-burning, Neo-Nazi marches, or supporting terrorists, making judicial oversight all the more important.   The First Amendment has provided, and continues to provide, a steady parade of provocative cases that test the limitations of governmental power to suppress expression, either in the form of general prohibitions or post-speech penalties.

The Supreme Court has, in general, construed the freedom of speech broadly and thus constricted governmental power to suppress expression.   Restrictions based on the content of “speech,” which includes “expressive conduct” (such as flag-burning), are invalid, unless the content fits within the few, narrow exceptions that permit government to restrict expression.  Those exceptions include obscenity, defamation, “fighting words,” and incitement to conduct that constitutes a “clear and present danger” (e.g., the well-known exception that allows government to prohibit yelling “Fire” in a crowded theatre).

But what about advertisements, promotions, marketing and other forms of commercial expression?   Do those forms of expression qualify as “speech” protected by the First Amendment?   The Supreme Court has categorized those forms of expression as “commercial speech” and held that the category is protected from governmental interference by the First Amendment.  The protection extended to commercial speech is not as absolute as that extended to “pure” speech, but it is nonetheless substantial.

In the landmark Central Hudson case, the Supreme Court defined “commercial speech”  as “expression related solely to the economic interests of the speaker and its audience.”   Examples from the decided cases include advertisements in print and electronic media, product labels, soliciting customers, free samples, branded merchandise and events, and free gifts incident to purchases.

In Central Hudson, the Supreme Court enunciated a four-step test for determining the legitimacy of governmental restrictions on commercial speech:

• First, the commercial speech must concern lawful activity and not be misleading.  Put another way, the First Amendment protects neither speech promoting illegal activities or products, nor speech that is fraudulent or deceptive.
• Is a substantial governmental interest served by restricting commercial speech?
• Does the restriction on commercial speech directly and significantly advance the interest that the government asserts?
• Is the restriction on commercial speech narrowly tailored to advance the government’s interest, or is it more expansive than necessary?

The Supreme Court has held that the government has the burden to prove that its restrictions meet the Central Hudson test—a good result for those whose rights of expression are threatened by governmental action.

Join us next week for Part II of this blog.   We will discuss how the “commercial speech” doctrine and Central Hudson protect the free speech rights of those in the alcoholic beverage industry.