Retail Digital v. Appelsmith

At the end of Tuesday's class, Tracy mentioned that the 9th Circuit is currently hearing a case that implicates the tension between the 1st and 21st Amendments present in tied-house laws (refresher: 1A gives the right of free speech, 21A gives states the power to regulate the AB industry, including advertising). The case is Retail Digital Network LLC v. Jacob Appelsmith, as Director of the Alcoholic Beverage Control Board, 842 F. 3d 1092 (9th Cir. 2016) (now Retail Digital Network LLC v.  Timothy Gorsuch, as Director of the Alcoholic Beverage Control Board).

First, for those of you wondering what en banc means: US courts of appeals (aka circuit courts) have between 6 and 29 judges on the bench at any given time. Usually cases are heard by a panel of three judges, randomly selected. For complex cases, or when there are allegations of bias by the three-judge panel, a majority of the judges on the bench can vote to hear a case en banc. En banc (French for "on bench") means that the case is heard by the entire circuit bench, rather than the three-judge panel. So all 29 judges of the 9th Circuit are hearing Retail Digital v. Gorsuch.

Second, the facts of the case: Retail Direct (the plaintiff) is a business that installs LCD advertisement displays in retail outlets. It sued the Director of the California ABCB (formerly Jacob Appelsmith, now Timothy Gorsuch) challenging the California tied-house laws that prohibit Retail Direct from leasing advertising space at alcohol retail outlets to alcoholic beverage producers.

Now for the legal gymnastics:

21A: The California Tied House Statute
California Business and Professions Code Section 25500 prohibits upstream alcohol suppliers from furnishing, giving, or lending "any money or other thing of value, directly or indirectly," to a retailer. Specifically, producers and wholesalers may not (1) "pay, credit, or compensate a retailer . . . for advertising, display, or distribution service in connection with the advertising and sale of distilled spirits," (2) "furnish, give, lend, or rent, directly or indirectly, to any person any decorations, paintings, or signs, other than signs advertising their own products as permitted by Section 25611.1," or (3) "pay money or give or furnish anything of value for the privilege of placing or painting a sign or advertisement, or window display, on or in any premises selling alcoholic beverages at retail."

These prohibitions were legislated according to California's 21st Amendment right to regulate the alcoholic beverage industry in the state.

1A: Right to Free Speech
One its face, the First Amendment prohibits only Congress (i.e., the federal government) from enacting any law that abridges the freedom of speech. States are prohibited from abrogating freedom of speech via the 14th Amendment's due process and equal protection clauses and the judicially created incorporation doctrine. (It's a difficult area of law to explain in a short post, but I'm happy to provide more color if anyone's interested.) As such, state laws that limit freedom of speech are subject to equal protection analysis, which involves three tiers of scrutiny: strict, intermediate, and rational basis. Depending on the type of speech at issue, a different level of scrutiny will apply; the stricter the scrutiny, the harder it will be for a state of justify a restriction on speech.

At issue in Retail Direct is commercial speech (technically, speech that "does no more than propose a transaction;" practically, advertising), which has historically been subject only to intermediate scrutiny. However, in Sorrell v. IMS Health (2011), the US Supreme Court held that content-based or speaker-based restrictions on non-misleading commercial speech regarding lawful goods or services are subject to heightened (strict) scrutiny.

What are content-based and speaker-based restrictions? A content-based restriction is a law that prohibits speech about a certain topic (e.g., gun violence or alcoholic beverages). A speaker-based restriction is a law that prohibits speech by a certain group (e.g., corporations or wine producers).

Finally, for the case:

Retail Direct
The issue in Retail Direct is which tier of scrutiny should apply to restrictions on commercial speech by producers, strict or intermediate. The Central District of California applied intermediate scrutiny and found for the California ABCB. Retail Direct appealed to the 9th Circuit, which held that heightened scrutiny should apply and remanded the case to the district court to conduct the heightened scrutiny analysis. The California ABCB filed a motion for rehearing en banc, which was granted. As Tracy mentioned, oral arguments took place on January 19th. The 9th Circuit website hasn't been updated since then, and there's no indication as to when the court might issue a decision. But I'll keep checking and will keep you all posted.

If strict scrutiny were to apply, the California legislature (via the California Alcoholic Beverage Control Board) would have to prove that there exists a "compelling governmental interest" for the tied-house law's prohibition on manufacturer advertising at a retailer and that the law is "narrowly tailored" to achieve that interest (i.e., there are no less restrictive means available for the government to achieve its interest). In plain English, that means the California tied-house laws would likely be held unconstitutional and producers would likely be able to advertise with retailers.