Retail Digital Network, LLC v. Appelsmith

Decision Date07 January 2016
Docket NumberNo. 13–56069.,13–56069.
Citation810 F.3d 638
Parties RETAIL DIGITAL NETWORK, LLC, Plaintiff–Appellant, v. Jacob APPELSMITH, as Director of the Alcoholic Beverage Control Board, Defendant–Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Olivier A. Taillieu (argued) and Raffi V. Zerounian, The Taillieu Law Firm, Beverly Hills, CA, for PlaintiffAppellant.

Kamala D. Harris, Attorney General, Alicia M.B. Fowler, Senior Assistant Attorney General, Jerald L. Mosley, Supervising Deputy Attorney General, and Gabrielle H. Brumbach (argued), Deputy Attorney General, Los Angeles, CA, for DefendantAppellee.

Before: SIDNEY R. THOMAS, Chief Judge, CONSUELO M. CALLAHAN, Circuit Judge and EDWARD R. KORMAN,* Senior District Judge.


CALLAHAN, Circuit Judge:

California Business and Professions Code Section 25503(f) -(h) forbids manufacturers and wholesalers of alcoholic beverages from giving anything of value to retailers for advertising their alcoholic products. Thus, for example, a liquor store owner in California can hang a Captain Morgan Rum sign in his store's window, but the Captain can't pay him, directly or through an agent, for doing so. Twenty-nine years ago, in Actmedia, Inc. v. Stroh, 830 F.2d 957 (9th Cir.1986), we found this law to be consistent with the First Amendment. Today we consider whether Actmedia remains binding in light of intervening Supreme Court decisions, which PlaintiffAppellant Retail Digital Network, LLC (RDN) contends have strengthened the protection we must give commercial speech under the First Amendment.

We conclude that Actmedia is clearly irreconcilable with Sorrell v. IMS Health, Inc., ––– U.S. ––––, 131 S.Ct. 2653, 180 L.Ed.2d 544 (2011). Sorrell requires heightened judicial scrutiny of content-based restrictions on non-misleading commercial speech regarding lawful products, rather than the intermediate scrutiny applied to section 25503 in Actmedia. We therefore reverse the district court's summary judgment in favor of DefendantAppellee Jacob Appelsmith, Director of the California Department of Alcoholic Beverage Control (the State), and remand on an open record for the district court to apply heightened judicial scrutiny in the first instance.

A. California Business & Professions Code Section 25503

Section 25503 is part of a scheme of "tied-house" statutes passed by the California legislature in the wake of Prohibition.

The name "tied-house" derives from a perceived evil that the scheme was designed to defeat: the return of saloons and other retail alcoholic beverage outlets controlled by alcoholic beverage manufacturers and wholesalers that had been prevalent during the early 1900s. See Actmedia, 830 F.2d at 959–61 ; Cal. Beer Wholesalers Ass'n v. Alcoholic Beverage Control Appeals Bd., 5 Cal.3d 402, 407, 96 Cal.Rptr. 297, 487 P.2d 745 (1971). Manufacturers and wholesalers "tied" retailers to them by providing them with low-interest loans, reduced rents, and free equipment, employing their staff, and other means. See Actmedia, 830 F.2d at 960 ; see also Pickerill v. Schott, 55 So.2d 716, 719 (Fla.Sup.Ct.1951). Lawmakers in Congress, California, and other states blamed "the industry structure that tied-house arrangements created.... for producing monopolies and exclusive dealing arrangements, for causing a vast growth in the number of saloons and bars, for fostering commercial bribery, and for generating other 'serious social and political evils,' including political corruption, irresponsible ownership of retail outlets, and intemperance." Actmedia, 830 F.2d at 960 n. 2 (quoting S.Rep. No. 1215, 74th Cong., 1st Sess. 2, 6–7 (1935)); see also Nat'l Distrib. Co. v. U.S. Treasury Dep't, 626 F.2d 997, 1009–10 (D.C.Cir.1980).

To prevent vertical and horizontal integration of the alcoholic beverage industry and to promote temperance, the California legislature prohibited manufacturers and wholesalers from owning retailers or making gifts, paying rebates, or otherwise buying the favor of retailers and their employees. See, e.g., Cal. Bus. & Prof.Code §§ 25500, 25503(a) -(e). Section 25503(f) -(h), the provision challenged on First Amendment grounds here, was designed to "prevent manufacturers and wholesalers from circumventing these other tied-house restrictions by claiming that the illegal payments they made to retailers were for 'advertising.' " Actmedia, 830 F.2d at 967. In relevant part, section 25503(f) -(h) forbids manufacturers and wholesalers of alcoholic beverages, including their agents, from providing retail establishments with anything of value for the privilege of advertising their alcoholic products.1

California was not alone in passing tied-house laws. Congress and "the 'vast majority of states' enacted [similar] alcohol beverage control laws" following the repeal of the Eighteenth Amendment. Actmedia, 830 F.2d at 959 n. 1 (quoting Cal. Beer Wholesalers Ass'n, 5 Cal.3d at 407, 96 Cal.Rptr. 297, 487 P.2d 745 ). California's concern that advertising payments could be used to conceal illegal payoffs to retailers also "appears to have been widely held at the time of section 25503(h)'s enactment." Id. at 960. Congress, for example, passed a similar law barring manufacturers and distributors of alcoholic beverages from "paying or crediting the retailer for any advertising, display, or distribution service." 27 U.S.C. § 205(b)(4).

B. Actmedia, Inc. v. Stroh

Our court addressed section 25503(h)'s constitutionality under the First Amendment in Actmedia, Inc. v. Stroh., 830 F.2d 957 (9th Cir.1986). Actmedia, a corporation whose business consisted of leasing advertising space on supermarket shopping carts, challenged section 25503(h) as an impermissible restriction on commercial speech. Following trial, the district entered judgment for the State and dismissed Actmedia's claims.

On appeal, we applied the test for laws that burden commercial speech set forth in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980). Under that test, courts examine four questions: (1) whether the speech concerns lawful activity and is not misleading; (2) whether the asserted governmental interest justifying the regulation is substantial; (3) whether the regulation directly advances the governmental interest asserted; and (4) whether the regulation is not more extensive than is necessary to serve that interest. Id. at 566, 100 S.Ct. 2343.

We found "little dispute concerning the first two factors of the Central Hudson analysis." Actmedia, 830 F.2d at 965. First, the ads "concern[ed] lawful activity and [were] not ... misleading. Thus, they constitute[d] protected commercial speech under the [First Amendment]." Id. (quotation marks omitted). Second, the State "ha[d] a 'substantial' interest in exercising its twenty-first amendment powers and regulating the structure of the alcoholic beverage industry in California: the activities of manufacturers, wholesalers, and retailers in the state; the methods by which alcoholic beverages are marketed; and influences that affect the consumption levels of alcoholic beverages by California residents." Id. at 965–66.

Addressing the third Central Hudson factor, we concluded that " section 25503(h) furthers California's purposes both of limiting the ability of large alcoholic-beverage manufacturers and wholesalers to achieve vertical and horizontal integration by acquiring influences over the state's retail outlets, and of promoting temperance." Id. at 966. We explained that the provision eliminated a loophole potentially left open by California's other tied-house laws, through which manufacturers and wholesalers might use advertisement payments to buy the favor of retailers and their employees. Id. at 967. "Because prohibiting alcoholic-beverage manufacturers and wholesalers from paying retailers to advertise in their stores will eliminate any danger that such payments will be used to conceal illegal payoffs and violations of the tied-house laws, we conclude[d] that section 25503(h) furthers the same interests that led California to enact the tied-house laws." Id. We also reasoned that "in reducing the quantity of advertising that is seen in retail establishments selling alcoholic beverages, the provision also directly furthers California's interest in promoting temperance." Id.

Addressing the fourth Central Hudson factor, we concluded that " section 25503(h)'s blanket prohibition of paid advertising in retail establishments appears to be as narrowly drawn as possible to effectuate [the provision's] first purpose," that being "to prevent illegal payments from being channelled by alcoholic-beverage manufacturers and wholesalers to retailers." Id. We also found that section 25503(h) is not more extensive than necessary to achieve the provision's "second purpose[,] ... to promote temperance, both indirectly, by limiting vertical integration of the alcoholic-beverage industry and its side effects, and directly, by reducing the amount of point-of-purchase advertising." Id. We reasoned that "to the extent that the California legislature has determined that point-of-purchase advertising is a direct cause of excessive alcohol consumption, limiting that advertising is 'obviously the most direct and perhaps the only effective approach' available."Id. (quoting Metromedia, Inc. v. City of San Diego, 453 U.S. 490, 508, 101 S.Ct. 2882, 69 L.Ed.2d 800 (1981) ). We thus held that section 25503(h) survived intermediate scrutiny.

C. RDN's Suit

Like the plaintiff in Actmedia, RDN is a middleman involved in the advertising industry. RDN installs liquid crystal displays, or LCDs, in retail stores for advertisements and then enters into contracts with other parties who want to advertise their products on the displays. In exchange for placing a display in a retail store, RDN pays the store a percentage of the advertising fees generated by the display. RDN states that it has attempted to enter...

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