This post was co-authored by Stoel Rives summer associate Chad Punch.

Earlier this summer, the Ninth Circuit Court of Appeals revisited an issue that it had examined thirty years prior: whether a California Prohibition-era tied house law is unconstitutional under the First Amendment because it impermissibly restricts commercial speech. Specifically, in Retail Digital Network, LLC v. Prieto (No. 13-56069), the plaintiff, Retail Digital Network, LLC (“RDN”) sued Ramona Prieto (“Prieto”) in her official capacity as Acting Director of the California Department of Alcoholic Beverage Control (“CABC”) seeking a declaration that California Business and Professions Code § 25503(f)–(h), which prohibits alcohol manufacturers and wholesalers from providing anything of value to retailers in exchange for advertising their alcohol products, violates the First Amendment of the Constitution. Hearkening back to its earlier decision in Actmedia, Inc. v. Stroh (830 F.2d 957 (9th Cir. 1986)), the court here ultimately disagreed with RDN’s arguments and left California’s longstanding tied house laws intact.

Decades prior, in Actmedia, the Ninth Circuit rejected a similar First Amendment challenge to the same California and Professions Code provision. Actmedia was engaged as an advertising middle-man. It leased advertising space on supermarket shopping carts, and placed other companies’ advertisements on those carts, including ads from alcohol manufacturer Adolph Coors Company (“Coors”). The CABC learned of the ads and determined that Coors had violated Section 25503(h) and threatened to revoke Coors’ California beer and wine licenses. Coors had its advertising removed from shopping carts and terminated its contract with Actmedia. Similar to RDN, Actmedia sought a declaration from the CABC that Coors’ conduct did not violate Section 25503(h), and even if it did, the law impermissibly restricted commercial speech under the First Amendment.

In Actmedia, the court applied the four-part “intermediate scrutiny” test first developed by the Supreme Court in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York (447 U.S. 557 (1980)) to determine and assess restrictions on commercial speech. Under the Central Hudson framework, (1) the speech must concern lawful activity and not be misleading; (2) the asserted governmental interest must be substantial; (3) the government’s regulation must directly advance the governmental interests asserted, and; (4) there must be a reasonable fit between the legislature’s ends and the means chosen to accomplish those ends. There, Actmedia’s contentions were rejected by the court. The Ninth Circuit ruled that Section 25503(h) passed constitutional muster under the four Central Hudson factors.

Fast-forward thirty years, and the Ninth Circuit was presented with a similar set of facts. RDN was in the business of installing large electronic advertising displays in alcohol retail stores throughout Southern California. The company sold advertising slots to various alcohol manufacturers and would then share a portion of the profit from those sales with the retail stores. RDN agreed to run advertisements for two large alcohol manufacturers, however, both companies, as well as several other multinational alcohol manufacturers, ultimately shied away from this type of advertising fearing that it could lead the CABC to take enforcement action  like it had against Coors.

Due to the loss of advertising contracts with alcohol manufacturers, RDN brought an action against Prieto claiming that California’s tied house restrictions are unconstitutional and that Actmedia was no longer good law because the Supreme Court’s 2011 decision in Sorrell v. IMS Health Inc. (564 U.S. 552 (2011)) fundamentally altered Central Hudson’s four-part test. RDN argued that the decision in Sorrell resulted in heightened judicial scrutiny for content-based commercial speech restrictions. The court rejected RDN’s argument and held instead that Sorrell did not modify the Central Hudson test, nor did it heighten judicial scrutiny. The Central Hudson analysis continues to apply almost exactly as it did in Actmedia.

Applying the factors one by one, the court found that the advertisements displayed by RDN concerned lawful activity and were not misleading, satisfying the first factor. The court also found that the CABC’s interest in regulating the tiers of the alcoholic beverage industry in California was substantial, satisfying the second factor.

The Ninth Circuit focused its attention on the third and fourth factors of the Central Hudson test. Previously, in Actmedia, the court found that Section 25503(h) directly and materially advanced California’s interest in promoting temperance. The court did not come to the same conclusion in Retail Digital Media. The court held that Section 25503(h) only indirectly advances California’s interest in promoting temperance since Section 25503(h) only applies to advertising in retail establishments, which is, as the court noted, “a small portion of the alcohol advertising viable to consumers.” Nonetheless, the court found that the third factor of Central Hudson was established  because Section 25503(h) directly and materially advances California’s interest in maintaining a triple-tiered market system.

The fourth and final factor was also met. The court explained that Section 25503(h) is “‘as narrowly drawn as possible to effectuate’ California’s purpose of preventing the illegal payoffs that would undermine its three-tiered alcohol distribution system.”

The en banc  Ninth Circuit decision in Retail Digital Media sets an important precedent in the defense of state tied house laws. We will keep our readers updated on any further appeals to the Ninth Circuit’s decision.