A House Untied (may not be necessary)

Since shortly after the repeal of prohibition, most states (and our friends in D.C.) have maintained so-called “tied-house” statutes, under which it is illegal for manufacturers or wholesalers of alcohol to own retailers or to make gifts, pay rebates or otherwise buy the favor of retailers or their employees.  The rationale for these laws had its basis in the days before prohibition, when many manufacturers worked to vertically integrate their businesses.  Lawmakers in Congress, along with the legislatures of many states, blamed tied-house arrangements 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, Inc. v. Stroh, 830 F.2d 957 (9th Cir. 1986) (quoting S. Rep. No. 1215, 74th Cong., 1st Sess. 2, 6-7 (1935).

These tied-house laws came under periodic fire, but generally withstood scrutiny.  Now, that may be changing.

In January of this year, the United States Court of Appeals for the Ninth Circuit ruled in the case of Retail Digital Network, LLC v. Jacob Applesmith, as Director of the Alcoholic Beverage Control Board.  Retail Digital sells digital advertising, through displays in supermarkets.  It enters into contracts with manufacturers or wholesalers to advertise specific products, and pays the store a percentage of the advertising fees generated by the display.  So far, so good.  But Retail Digital wanted to sell ads for wine and beer, and it couldn’t convince any manufacturers to bite because of California’s tied-house law – which theoretically prohibited the arrangement.

In its lawsuit, Retail Digital hung its hat on the proposition that California’s law violated its rights to free speech.  And while commercial speech doesn’t receive the same level of protection as some other forms of speech, it nevertheless is protected.  What’s more, Retail Digital believed that a recent decision by the U.S. Supreme Court (Sorrell v. IMS Health, Inc., 131 S.Ct. 2653 (2011)) suggested that the California tied-house law might be vulnerable to attack.

Applying Sorrell, the Ninth Circuit held that Actmedia was no longer good law – and that California’s tied-house statute needed to be reexamined and subjected to heightened scrutiny than was previously applied.  Although it is unclear whether California’s statute will ultimately survive, indications are that it may indeed be on the ropes.  While not controlling, one sentence at the end of the Retail Digital opinion suggests that the Court is suspicious:

While we “hesitate to disagree with the accumulated, common-sense judgments of [the] lawmakers” who enacted [the California tied-house law], we cannot say on the record before us that the State’s prohibition-era concern about advertising payments leading to vertical and horizontal integration, and thus leading to other social ills, remains an actual problem in need of solving.

Does this signal an impending shift in tied-house laws across the Country?  It is hard to say, but that prospect is certainly on the horizon.

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