The Ninth Circuit Court has handed down a huge victory for tied house laws by ruling in favor of the California Alcohol Beverage Control (ABC) in the Retail Digital Network (RDN) v. Prieto court case. The case challenged a key tied-house law in California’s Business and Professions Code which prohibits alcohol beverage suppliers from giving anything of value to retailers in exchange for advertising. RDN challenged the provision claiming it violated the First Amendment, which allows truthful and non-misleading commercial speech.
The case was initiated when RDN, a media advertising company began installing digital screen displays in retail outlets throughout Southern California. The screens played ongoing advertisements which RDN sold to companies that wanted advertising exposure in bars, taverns and other on-premise establishments. RDN in turn paid the retailer a fee for using the digital screens.
Alcohol beverage suppliers rejected sales inquiries from RDN knowing that it was in violation of California tied house laws by indirectly paying a retailer for advertisement. RDN filed a lawsuit against the California Alcoholic Beverage Control (ABC) in District Court claiming that the California Business and Professions Code Section 25503(f)-(h), which prohibit manufacturers and wholesalers (and their agents) from giving anything of value to retailers in exchange for advertising their products was a
The District Court found Section 25503(f)-(h) constitutional using as precedent a 1986 Ninth Circuit Court case Actmedia Inc. v. Stroh in which the court upheld Section 25503(h). Similar to RDN, Actmedia was an “advertising middle-man” that would lease ad space on shopping carts and then sell that space to companies, including alcohol beverage suppliers. When the ABC determined this to be in violation of Section 25503, Actmedia filed a lawsuit claiming that the provision restricted commercial speech under the First Amendment. Actmedia lost the case in District Court and it was appealed to the Ninth Circuit which agreed with the lower court’s decision. The Ninth Circuit based their decision on a 1980 Supreme Court case called the Central Hudson case. The Central Hudson case was a test of commercial free speech, and the Supreme Court ruled that the Constitution accords a lesser protection to commercial speech than to other constitutionally guaranteed expression.
After the District Court issued their decision, RDN appealed and the case was sent to the Ninth Circuit Court, a federal court with jurisdiction over nine western states. In January of last year, a panel of three Ninth Circuit court judges remanded the case back to the lower court, essentially disagreeing with the lower court. In their ruling, the three-judge panel asked the lower court to use a higher level of scrutiny in analyzing restraints on commercial speech, and advised that tied house laws may in fact be outdated and no longer relevant, in part because of the many exceptions granted by the state legislature over the years. The remanding of the case gave the District Court the opportunity to determine the constitutionality of this key tied-house provision.
The California ABC requested a second hearing of the full Ninth Circuit which was granted and held in January. Just last week, the Ninth Circuit court made a stunning reversal by ruling in favor of the ABC. In the court’s opinion, it stated that the value of tied-house laws in maintaining California’s “triple-tiered distribution scheme” was found to satisfy the Supreme Court’s test for commercial speech restrictions. The opinion recognized that reducing the amount of advertising visible to consumers does not conflict with the Central Hudson case.
TIED HOUSE LIVES ON. Over the last 30 years there have been a few notable court cases (such as the Actmedia case mentioned above and the well-known Granholm case heard by the SCOTUS) which have pitted the 1st Amendment (free speech) against the 21st Amendment (alcohol beverage tied house structure). The RDN case was a legendary case that will undoubtedly be looked at as precedent in future cases.