Video Gaming Consultants v. SC DOR

• Decision Date: 31 July 2000
• Docket Number: No. 25177.,25177.
• Citation: 342 S.C. 34,535 S.E.2d 642
• Court: South Carolina Supreme Court
• Parties: VIDEO GAMING CONSULTANTS, INC., Appellant, v. SOUTH CAROLINA DEPARTMENT OF REVENUE, Respondent.

342 S.C. 34

535 S.E.2d 642

VIDEO GAMING CONSULTANTS, INC., Appellant, v.SOUTH CAROLINA DEPARTMENT OF REVENUE, Respondent.

No. 25177.

Supreme Court of South Carolina.

Heard June 20, 2000.

Decided July 31, 2000.

H. Buck Cutts, of Surfside, for appellant.

General CounselHarry T. Cooper, Jr., and Chief Counsel for Regulatory Litigation Nicholas P. Sipe, both of Columbia, for respondent.MOORE, Justice:

AppellantVideo Gaming Consultants, Inc.(Video Gaming), appeals the circuit court's decision holding S.C.Code Ann. § 12-21-2804(b)(Supp.1999)¹ constitutional.We reverse.

FACTS

Video Gaming operates a video gaming business, Jackpot Video Games, in Garden City.On July 27, 1995, and September 25, 1995, respondentSouth Carolina Department of Revenue(DOR) issued citations to Video Gaming for violating § 12-21-2804(b).

This code section states: "No person who maintains a place or premises for the operation of machines licensed under Section 12-21-2720(A)(3) may advertise in any manner for the playing of the machines."²Video Gaming had displayed a large sign reading: "STOP HERE TRY OUR POKER VIEO GAMES" and two signs stating "JACKPOT VIDEO GAMES."³

Video Gaming appealed to the Administrative Law Judge (ALJ) challenging the statute on the ground that it violates the First Amendment.The ALJ upheld the citations.Video Gaming appealed to the circuit court.The circuit court affirmed the ALJ.

ISSUES

1) Does the ALJ have the authority to rule on the constitutionality of a statute?

2) Is the ban on advertising constitutional?

DISCUSSION

1) ALJ's authority

Initially, we address an issue which has appeared in several recent cases.The ALJ specifically stated he had the authority to declare a statute unconstitutional because an ALJ has the same authority as a circuit court judge.⁴However, we have ruled an ALJ should not rule on the constitutionality of statutes.SeeAl—Shabazz v. State,338 S.C. 354, 527 S.E.2d 742(2000)(ALJs must leave question of statute's constitutionality to the courts).ALJs are an agency of the executive branch of government and must follow the law as written until its constitutionally is judicially determined; ALJs have no authority to pass upon the constitutionality of a statute or regulation.See, e.g., Beaufort County Bd. of Educ. v. Lighthouse Charter Sch. Comm.,335 S.C. 230, 516 S.E.2d 655(1999);South Carolina Tax Comm'n v. South Carolina Tax Bd. of Review,278 S.C. 556, 299 S.E.2d 489(1983).In the present case, the only issue raised is the constitutionality of a statute.

Exhaustion is generally required as a matter of preventing premature interference with agency processes, so that the agency may function efficiently and so that it may have an opportunity to correct its own errors, to afford the parties and the courts the benefit of its experience and expertise, and to compile a record which is adequate for judicial review.Plainly these purposes would not be served when the only issue is the validity of a statute.See, e.g., Insurance Commissioner of Md. v. Equitable Life Assurance Soc.,339 Md. 596, 664 A.2d 862(1995).

Several cases from other jurisdictions have addressed this issue and have dispensed with the exhaustion requirement in certain situations.See, e.g., Finnerty v. Cowen,508 F.2d 979(2d Cir.1974);Martinez v. Richardson,472 F.2d 1121(10th Cir.1973);Marsh v. County Sch. Bd.,305 F.2d 94(4th Cir.1962).In Finnerty,the court held for it to require exhaustion of administrative remedies would be both futile and unnecessary when the party sought judicial resolution of only a constitutional question that could not be adjudicated by the federal agency.As here, Video Gaming sought a determination that could not be made by an agency or ALJ.See alsoSch. Dist. of City of Saginaw v. United States Dept. of HEW,431 F.Supp. 147(E.D.Mich.1977);Plano v. Baker,504 F.2d 595(2d Cir.1974).As a general rule, if the sole issue posed in a particular case is the constitutionality of a statute, a court may decide the case without waiting for an administrative ruling.Weinberger v. Salfi,422 U.S. 749, 95 S.Ct. 2457, 45 L.Ed.2d 522(1975).Thus, we hold if the only issue is a constitutional challenge to a statute or regulation, a party should seek a declaratory judgment from circuit court rather than going before an ALJ.

We note the mere presence of a constitutional issue does not excuse the exhaustion requirement where there are other issues in controversy.The constitutional issues may be raised, but not ruled upon, in the administrative proceedings.Sch. Dist. of City of Saginaw,431 F.Supp. 147, 154(citingYakus v. United States,321 U.S. 414, 437, 64 S.Ct. 660, 88 L.Ed. 834(1944)).However, practically speaking, requiringa party to raise an issue which cannot be ruled upon by an ALJ makes little sense.SeeRichardson v. Tennessee Bd. of Dentistry,913 S.W.2d 446(Tenn.1995)(APA requires more flexible approach and party may raise constitutional challenge upon judicial review).Thus, we hold the issue need only be raised to and ruled upon by the circuit court for preservation for further review.

2) Constitutionality of ban

The circuit court held the ALJ had properly applied the test set forth in Central Hudson.⁵In Central Hudson, the United States Supreme Court held:

In commercial speech cases, then, a four-part analysis has developed.At the outset, we must determine whether the expression is protected by the First Amendment.For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading.Next, we ask whether the asserted governmental interest is substantial.If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.

447 U.S. at 566, 100 S.Ct. at 2351.The circuit court also stated that this statute had been upheld under the Central Hudson analysis in Reyelt et al. v. South Carolina Tax Comm'n, Civil ActionNo. 6:XX-XXXX-X (D.S.C. July 5, 1994).However, this decision is not binding on this Court.SeeGentry v. Yonce,337 S.C. 1, 522 S.E.2d 137(1999)(citingPhillips v. Periodical Publishers' Serv. Bureau, Inc.,300 S.C. 444, 388 S.E.2d 787(1989)).Furthermore, the Reyelt decision, the ALJ, and the circuit court all relied heavily upon the case of Posadas,⁶ in which the Supreme Court deferred to the decision of the Puerto Rican legislature to ban advertising of casinos.In Posadas, Puerto Rico was permitted to ban casino gambling advertising aimed at its residents, while permitting advertising for other wagering games like cock fights.The Supreme Court has since disavowed its reasoning in Posadas.See44 Liquormart, Inc., v. Rhode Island,517 U.S. 484, 509, 116 S.Ct. 1495, 1511, 134 L.Ed.2d 711(1996)("we are now persuaded that Posadas erroneously performed the First Amendment analysis").

In 44 Liquormart, licensed retailers of alcoholic beverages who had violated Rhode Island's statutory ban on liquor price advertising challenged the ban's constitutionality.The first statute prohibited a licensee from advertising in any manner whatsoever the price of any malt beverage, cordials, wine, or distilled liquor offered for sale in that state.The second statute applied to the Rhode Island news media and contained a categorical prohibition against the publication or broadcast of any advertisements, even those referring to sales in other states, that made reference to the price of any alcoholic beverage.Additionally, the retailers in 44 Liquormart challenged regulations which provided that no placard or sign that is visible from the exterior of a package store may make any reference to the price of any alcoholic beverage.Rhode Island argued the ban promoted temperance.The Supreme Court held the challenged Rhode Island statutes and regulation abridged speech in violation of the First Amendment as made applicable to the States by the Due Process Clause of the Fourteenth Amendment.

In 44 Liquormart,the Supreme Court concluded that "special care" should attend the review of such blanket bans, and it pointedly remarked that "in recent years this Court has not approved a blanket ban on commercial speech unless the expression itself was flawed in some way, either because it was deceptive or related to unlawful activity."517 U.S. at 507, 116 S.Ct. at 1507(quotingCentral Hudson,100 S.Ct. at 2351).When a State regulates commercial messages to protect consumers from misleading, deceptive, or aggressive sales practices, or requires the disclosure of beneficial consumer information, the purpose of its regulation is consistent with the reasons for according constitutional protection to commercial speech and therefore justifies less than strict review.However, when a State entirely prohibits the dissemination of truthful, nonmisleading commercial messages for reasons unrelated to the preservation of a fair bargaining process, there is far less reason to depart from the rigorous review that the First Amendment generally demands.Id.

Sound reasons justify reviewing the latter type of commercial speech regulation more carefully.Most obviously, complete speech bans, unlike content-neutral restrictions on time, place, or manner of expression, are particularly dangerous because they all but foreclose alternative means of disseminating certain information.Id.The Court also held "[s]peech prohibitions of this type rarely survive constitutional review."517 U.S. at 504, 116 S.Ct. at 1508.

Here, as the circuit court held, the first prong of Central Hudson is clearly met.The advertising is entitled to first amendment protection as it is commercial speech concerning a legal activity and it is not misleading.⁷The second prong is whether the asserted governmental interest is substantial.If both inquiries yield positive answers, then, under Central...