RELIEF AT LAST! ILLINOIS MOVES TO FIX THE SALES TAX LAWSUITS AGAINST OUT-OF-STATE SELLERS BUT PROPOSES TO PENALIZE WINERIES AND RETAILERS THAT SHIP WITHOUT PERMITS

By:  John W. Edwards II and John Hinman     

As readers of this blog (and certainly the many wineries and wine retailers who have been sued) know, the State of Illinois permitted the politically connected Diamond law firm to maintain hundreds of qui tam lawsuits claiming that not collecting sales tax on shipping charges for wine sent to Illinois consumers violated Illinois law. (See previous blog posts Illinois Qui Tam Lawsuits - Private Enforcement of a State Claim, Illinois Finally Offers Certainty and Relief for Victims of Sales Tax Lawsuits, But Prompt Action is Required in Pending Cases). It was not a surprise that in every case the costs of litigating the claims exceeded Diamond’s settlement demand.  The result? Many settlements. Both Diamond and the State (which was a passive party) reaped substantial windfalls.  This was a State-sanctioned rip-off and is a glaring example of the misuse of governmental power for the benefit of one politically connected lawyer.

Now there is a new sheriff in town. Governor Bruce Rauner took office in January 2015.  Because of the outrage that the Diamond lawsuits generated around the US (including by the Wine Institute and almost every state winery and wine retailer trade association) the Illinois Attorney General moved to dismiss numerous claims against the defendants that were still pending.  The trial court in Chicago granted the motions, holding that the State has broad discretion to decide what qui tam claims it wishes to pursue and Diamond wasn’t the one who should be making that decision.

Following up, the Illinois Department of Revenue (“IDOR”) proposed amendments to its regulations that will, if adopted (likely in the first half of 2016), clarify the Illinois rules on taxes on shipping charges.  The amendments will accomplish the following:

• Any seller that provides its Illinois customers with the option of picking up the ordered goods at the Sellers’s location is not required to remit sales taxes on shipping charges - if the pick-up option is offered at the time of sale. The Illinois customer does not have to use the pick-up option, or even be likely to use it.  All that the seller will have to do is provide the option. This provision will be retroactive to 2009, when the Illinois Supreme Court decided the case that gave rise to the claims for taxes on shipping charges in the first place. This is a simply common sense solution.

• To prevent a new series of claims on behalf of consumers against sellers that did collect Illinois sales tax on shipping charges, the IDOR proposed a unique safe harbor for those that had offered the pick-up option all along.  Sellers that offered a pick-up option will be deemed to have remitted sales taxes to Illinois correctly, regardless of whether they (i) collected and paid taxes on shipping after 2009 or (ii) did not collect the tax.  This safe harbor is intended to protect Sellers from further litigation in Illinois, no matter how they responded to the confusion caused by the 2009 decision that gave rise to basis of the lawsuit in the first place.

• Going forward, a Seller that offers free shipping (where permitted) or free shipping over a minimum amount of purchases need not collect tax on any additional shipping charges the customer chooses to incur, such as expedited shipping charges, so long as the selling price of the goods does not change.

• Also, going forward, if a Seller that offers a pick-up option for some goods but not others and the customer chooses to have all goods shipped, the Seller can itemize the shipping charge for each item and must collect sales tax on the charges for the items without the pick-up option.  If the Seller charges a lump sum for shipping, the entire charge is taxable if the total cost of goods without a pick-up option exceeds the cost of those with the option, but nontaxable if the reverse is true. It behooves all sellers to carefully examine their pick-up option terms and conditions.

• The new Regulations will apply to all Sellers that make sales to Illinois consumers and that (i) are subject to the Illinois Retailers Occupation Tax; (ii) maintain a place of business in Illinois; (iii) self-assess the Illinois sales and use tax; and (iv) hold a winery Shipper’s License from Illinois.

While these regulations provide welcome, albeit long-overdue, relief to wine sellers servicing Illinois consumers, those wineries (and there are many small wineries who just don’t obtain DTC permits) and retailers (who are prohibited from applying for DTC permits) face serious penalties (including potential felony charges) for shipping without a DTC permit. Moreover, the proposed inclusion of the Illinois trade practice policies into the regulations require that all wine shipped into Illinois be actually produced by the winery holding the DTC permit.

Rulemaking

To top it all off a new bill [IL SB 2989] is pending in the Illinois legislature that does following (from the bill description):

Provides that any person who both has received an initial cease and desist letter from the State Commission and for compensation ships alcoholic liquor into this State without a license shall be guilty of a Class 4 felony. Prohibits and establishes criminal penalties for the transportation of more than a certain amount of beer, wine, or spirits into the State without a license or for transporting beer, wine, or spirits into the State for sale or resale without a license. Increases other penalties.

Once again a state introduces a “send wine, go to jail” bill. Illinois is (and will continue to be) a challenging state in which to do business, especially for those without DTC permits, or for those unable to obtain DTC permits. 

ABC DISMISSES SAVE MART GRAPE ESCAPE ACCUSATION BUT REFUSES TO ADOPT JUDGE’S DECISION FINDING NO STRICT LIABILITY FOR ABC VIOLATIONS

By: John Hinman and John Edwards

For over two decades the ABC has been filing administrative discipline cases against retail and supplier licensees based upon marketing conduct that is lawful under federal alcohol law, and lawful for every other business in California.  The infamous ABC “thing of value” prohibition on relationships between suppliers and retailers has been ratcheted up over the last decade and is now being applied to prohibit normal marketing activities where the purpose of the marketing - to connect brand owners with consumers - is necessary to producer survival in an increasingly competitive marketplace. In our view, lawful marketing activity informs consumers through all available social media and other channels where product can be found, tasted and purchased; such as at special events (concerts for example), at retail stores and restaurants and at fairs and community gatherings sponsored by different sorts of organizations. 

The ABC adheres to what is legally referred to as a “strict liability” test to evaluate these cases. That means the ABC may charge (and sustain) a violation in the absence of any proof that the licensees involved in the marketing activity engaged in the sort of corrupt activities (such as bribery intended to get the suppliers brands into a retail account) that the law was originally intended to address.  The ABC test, essentially, is if there is any media or other connection between a supplier and a retailer that is not expressly authorized by the ABC Act (but may be authorized by other parts of California law, such as the Commercial Code), a violation of the ABC Act exists and may be prosecuted.

In 1993 the federal government (as a result of the landmark Fedway case authored by now Justice Ginsburg) accepted the court’s view that proof of actual corruption was a necessary precursor to regulatory liability and changed the federal regulations in 1994 to accommodate that principle.  That led to today’s world of federal alcohol regulation where the cases being prosecuted are those where there are provable and anti-competitive bad acts.

One glaring example of the ABC’s myopic strict liability point of view was exhibited in the series of Accusations filed against the suppliers that publicized on social media their participation in the 2014 Save Mart Grape Escape wine and food event organized by the Sacramento Convention & Visitors Bureau (“SCVB”). The event had been held for many years and attracted thousands of patrons.  In 2014, Save Market Supermarkets was the title sponsor of the event.  Save Mart is, of course, an off-sale retail licensee.

Some of the participating suppliers published notices on social media informing readers that the supplier would be offering tastings at the “Save Mart Grape Escape,” using the proper name (and, in some cases, the logo) of the event.  The ABC charged those suppliers with having violated Section 25502(a)(2) of the Business & Professions Code by giving a “thing of value,” free advertising on social media, to an off-sale retail licensee, Save Mart.  Ten suppliers (and Save-Mart, accused of accepting a thing of value) pled guilty and agreed to accept license suspensions.  As a direct result of the accusations, the 2015 Grape Escape event was cancelled by the sponsors.

One winery, Renwood Winery, chose to defend itself against the charges arguing that (1) it did not intend to provide, and had not provided, to Save Mart a thing of value prohibited by the statute; and (2) its Facebook posting was protected commercial speech and penalizing that speech is prohibited by the First Amendment.

The Renwood Winery case was tried on April 28, 2015 before ABC Administrative Law Judge Nicholas Loehr, a former ABC prosecutor and long-time ABC Judge.  In his written decision after the hearing (the decision was filed on September 22, 2015 and held quietly by the ABC for two and half months before being released on November 30, 2015), Judge Loehr held, on the basis of California precedent, that the ABC must prove that penalizing a winery under the ABC laws advances the governmental interests underlying those laws. 

In other words, there must be some proof of an actual corrupt effect on the relationship between the participants (the suppliers and the retailers) in order for liability to be found. No such proof was found to exist in the Renwood case so Judge Loehr ordered the case dismissed. In so doing he rejected the ABC’s strict liability approach to California’s ABC laws. 

In essence, the Judge held that purposeless prosecutions of “per se” violations are not permissible.  Because he found the ABC’s case to be deficient on a statutory analysis, Judge Loehr found it unnecessary to address the winery’s First Amendment defense. However, because he held (as explained in previous Booze Rules blog posts - The Grapes Escaped, A Modest Proposal, Commercial Speech And Alcoholic Beverages Part I, II & III) that California precedent compelled him to apply the analytical framework (and to reach the result) mandated by United States Supreme Court decisions applying the First Amendment to commercial speech, his decision recognized that ABC accusations must be analyzed under a governmental interest test - which means that the ABC must show that its prosecution has a basis in advancing the purposes of the original law.

Judge Loehr held that the purpose underlying Section 25502(a)(2) was to prevent an alcohol supplier from exercising influence over a retailer through corrupt means.  In Judge Loehr’s view, applying that statute to Renwood Winery served no legitimate governmental interest.  In other words, Judge Loehr took the position that licensees should not be penalized on a strict liability basis for conduct that was not shown by the ABC to foster any of the adverse effects on competition that the ABC laws were intended to prevent. 

Rather than accept the reasoning of Judge Loehr’s decision, the ABC (On November 30th, and without explanation) issued an Order rejecting Judge Loehr’s decision.  In addition, the Order dismissed the Accusation against Renwood Winery “in the interests of justice.” 

It was noted in the Order that the Legislature had passed a statute (new Section 23355.3) that will permit wineries, beginning on January 1, 2016, to engage in at least some of the activities that gave rise to the Accusation.  That statute was passed in reaction to the public outcry over the ABC’s original prosecutions of the suppliers that had publicized their participation the 2014 Save Mart Grape Escape. 

The ABC did not address how the “interests of justice” were served by the orders of conditional suspension for the ten suppliers that were required by their settlements to admit that they had violated the statute (and that now have those violations on their permanent records subject to disclosure in filings with the alcohol authorities of every state in which they apply for DTC or OSS permits).   

The ABC can certainly be applauded for exercising their prosecutorial discretion and dismissing an unjustifiable Accusation. On the other hand, the ABC’s action leaves open the question of whether licensees will continue to be subject to strict liability prosecutions. The ABC maintains that it is not required to show that its prosecutions of licensees serve any legitimate governmental purpose.  We disagree with that conclusion, and the case law on the issue (as Judge Loehr explained in his rejected decision) has only found liability where there was an actual effect on the supplier-retailer relationship that can be characterized as corrupt within the meaning of the tied-house laws.

This leaves licensees completely vulnerable to being charged (at almost any time) with technical, “per se,” gotcha, type of violations for engaging in normal business relationships with retailers, or with those that own or have an interest in retail establishments (such as was the case in the 2014 Bottlerock prosecutions now before the ABC Appeals Board). 

Likewise, it remains unclear whether the ABC acknowledges that the First Amendment protects the commercial speech of licensees to the same extent as any other commercial enterprise, as in our view it most assuredly does.  By dismissing the Accusation, the ABC avoided the Renwood Winery case being resolved at  a higher level.  However, avoidance of an appeal merely postpones the inevitable appellate resolution of the critical issues underlying that case and many others.

It is far past time for the end of strict liability as the test of licensee conduct with consumers and between the tiers. All that has been accomplished because of strict liability is the need for the legislature to create an increasingly byzantine (and crazy) set of arbitrary tied house exceptions that apply to some industry members, and some promotions, but not to others in ways that even the ABC (much less the licensee community) doesn’t understand. Maybe that helps the campaign war chests of the legislators who get contributions for drafting limited tied-house exceptions but it does nothing for the producers and retailers of this state.

Illinois Finally Offers Certainty and Relief for Victims of Sales Tax Lawsuits, but Prompt Action is Required in Pending Cases

As reported in our earlier Blog Post, wineries and retailers that sell online and ship to Illinois consumers have been victimized by a barrage of lawsuits filed by one Chicago law firm to collect sales tax supposedly due on Shipping & Handling charges.  While the claims asserted have largely been meritless, Illinois has allowed the lawsuits to proceed for years.  Because the cost of defending the cases has exceeded the cost of settlement, almost all cases have settled, resulting in a large windfall to the law firm and to the State of Illinois, which has collected a portion of the “back taxes” that were not owed in the first place. 

The government of Illinois has finally decided to put a stop to this process.  On August 28, 2015, the Illinois Department of Revenue issued proposed regulations that embody what has long been the law of Illinois:  wine producers and wine retailers selling wine to Illinois consumers are not required to collect sales tax on Shipping & Handling charges if:

·         The Shipping & Handling charges are stated separately from the price of the wine;

·         The seller offers the option to have the wine picked up at its facility (winery, tasting room, etc.), instead of having it shipped, even if that facility is not in Illinois; and

·         The price of the wine is the same regardless of whether they are picked up or shipped into Illinois, and no additional “profit” is earned on Shipping and Handling charges.

The proposed regulations will not become effective until they are approved by a committee of the Illinois Legislature, which will not occur until after a 45-day period for public comment.  If approved, the regulations would be retroactive to November 2009, effectively eliminating any claims (by the State or Qui Tam plaintiffs) for back taxes on Shipping and Handling under the Illinois 6-year statute of limitations for such claims, if the wine producer or retailer can demonstrate compliance with the requirements.

Notwithstanding that the regulations are not yet effective, the Illinois Attorney General has stated that her Office will review pending claims brought by the plaintiff law firm to collect sales taxes (but not settled claims).   The Attorney General will exercise her prerogative to dismiss any cases brought against a winery that was in compliance with the three requirements of the proposed regulations.  The defendants in the pending cases need to submit affidavits with proof of their compliance with those requirements and the period during which they were in compliance.  (Note that the State could still seek back taxes for any period in which a defendant was not in compliance). 

To obtain this review, the defendants must submit their proof by September 15.  Every defendant that would qualify for relief should contact their Illinois counsel and submit the required proof promptly.  This long-overdue action by Illinois will hopefully end the meritless claims against online sellers in that State.

We are counselling clients to review carefully their terms and conditions of sale.  We encourage all wineries, whether or not they sell wine to Illinois residents in accordance with an Illinois DTC permit, to review their website terms and conditions for compliance with legal requirements.   This basic level of legal due diligence will pay great dividends in preventing exposure to actions such as the ones initiated by the plaintiff lawyers in Illinois.

The Grapes Escaped - Why the First Amendment Matters

The Grapes Escaped - Why the First Amendment Matters

May 18th, 2015 | John Hinman & John W. Edwards II

For well over a decade, the Sacramento Convention & Visitors Bureau has held an annual wine and food tasting event that featured local Sacramento area wineries, breweries and restaurants.  The SCVB has had at least two “title sponsors,” both of which were supermarket chains.  Understandably, the title sponsors each had a portion of their corporate names included in the event title. The event was formerly known as the Raley’s Grape Escape and later as the Save Mart Grape Escape. 

As you will learn, had we been suppliers of alcohol, instead of anyone else, the California ABC considers the last sentence of the previous paragraph to be a violation of California law, once it was published by a supplier on the internet or through social media.  We could be prosecuted merely for publishing that name. 

Really??  In America??  What about freedom of speech protected by the First Amendment??  The answers are contained in the remainder of this article.  Fear not—the ABC will probably not prosecute you for reading this post, even if you are involved in the alcoholic beverage industry. No guarantees, however.

History of the Grape Escape

The annual event proved to be popular:  in 2014, some 45 wineries, over 20 restaurants and 12 breweries presented their products for tasting to the over 5,000 people who attended.  Tastings of alcohol were permissible because the California ABC issued to the SCVB a special non-profit license allowing them, as it had for every year of the event’s history.

The event seemed like a win-win for everyone.  Over 5,000 people had an enjoyable time.  Downtown Sacramento got a large influx of visitors.  Local wineries, breweries and restaurants got the opportunity to introduce their products to the public.  The event raised money for the Convention & Visitors Bureau, benefitting the city and its residents.

The ABC, however, “discovered” some nine [reportedly] wineries that had posted on their websites or on social media that they would be participating in the 2014 “Save Mart Grape Escape.”  Because the title of the event included a portion of the name of a retailer licensed for off-premises sales of alcohol, the ABC charged that those postings constituted free advertising by a supplier of a retailer in violation of the tied-house law prohibition on a supplier providing a “thing of value” to a retailer – in this case the social media post from the supplier saying it would be at the event was the “thing of value.”

The retailer was also charged with receiving a prohibited “thing of value” (the same social media post) and all parties were informed that their conduct was unlawful, which of course means that no title sponsor events involving licensed retailers and licensed suppliers are lawful in California.

The ABC filed “accusations” (statutory misdemeanors if brought in court against the winery principals) against all of the wineries, eight of which settled and received a suspended sentence and a years’ probation (meaning they would not have their licenses actually suspended for this violation) if they have no further violations for a year. 

This was not a warning, this was a prosecution. The wineries had to plead guilty to a violation, meaning that any subsequent offense would carry an enhanced penalty. Moreover, the violation would continue to be shown on the license file of the supplier and required to be disclosed (and explained) to other alcohol regulators in the US in connection with, among other required filings, applications for out of state product shipments requiring new permits.  Failure to disclose the violation, it should be noted, carries a perjury charge in most jurisdictions so the potential consequences to the wineries that pled guilty were and are serious.

One winery, which we represent, contested the charge.  The case was tried based on a First Amendment defense (as reported in Wine Business Monthly), but a result is not expected until August, at the earliest.

Meanwhile the Sacramento Convention & Visitors Bureau sent invitations to wineries, restaurant and breweries for the 2015 event.   Only four wineries agreed to participate.  The SCVB was forced to cancel the event.   This result is a perfect lose/lose—governmental action that thwarts the public interest. 

The ABC Reaction

On May 15, the Sacramento Bee published an article on these developments, quoting the Director of the ABC:

“I wish I knew why things shook out the way that they did.  No one was fined and no one lost their license, although eight participants were put on probation, which is the Board’s weakest form of sanction.

What got these companies on probation was that in their marketing on web pages and social media, wineries asked customers to go to Save Mart to buy tickets to the Save Mart Grape Escape.  That call to action by a producer to go to a specific retail location is a violation.

These laws are needed by the market so the small guys can get into the marketplace.

That is the disappointing part of this, this is the exact opportunity for the small wineries to get access to more customers.”

One factual issue needs to be addressed before we get into the substance of the Director’s comments.  We do not know the specifics of what other wineries may have posted on the internet.  Our client, which is defending itself against the charges, did nothing more than post on Facebook  that it would be attending the event, using the proper name that contained a portion of the retailer’s name.

Commercial Speech And The First Amendment

It is arguable that merely stating where you will be on a certain date and using the proper name of the event is pure free speech, which is absolutely protected from governmental interference unless it falls within a few very narrow and clearly inapplicable exceptions.  Because the Sacramento event had a commercial aspect to it for the participants, however, it is reasonable to analyze the postings as commercial speech, which has slightly lesser protection than pure speech.

As discussed in our earlier Booze Rules posts, the government is precluded from prohibiting or penalizing truthful and nonfraudulent commercial speech unless it satisfies the burden of proving that its actions pass the Central Hudson test:

·        The restriction on speech must substantially further a legitimate government interest, and

·        It must do so in the narrowest possible manner.

The ABC’s prosecutions of the wineries for their activities in connection with the Save Mart Grape Escape cannot pass muster under Central Hudson.

The ABC Director stated the governmental interest underlying the tied house laws:  preventing large wineries from dominating local markets, so “small guys can get into the marketplace.”  Of course, events like the Save Mart Grape Escape provide great opportunities for smaller wineries to introduce their wines to the public, and, with 45 wineries participating, there was virtually no risk that one would somehow dominate the Sacramento market, either directly or by currying favor and influence with the title sponsor. 

Assuming for the sake of argument that the government does have a legitimate interest in protecting small wineries from commercial domination by large competitors in the national retail chain store marketplace, do the ABC’s prosecutions in this case advance this interest?  The answer is obviously no.  The commercial speech at issue simply informed consumers about the event and advertised that the supplier would be there.  It did not tout Save Mart Supermarkets.  If the event itself served the governmental interest by providing a mechanism for the small suppliers to have their products exposed to the public, how does prohibiting participants from telling anyone about the event advance that interest? 

But wait---there’s more!   In its November 8, 2014 article about the wave of ABC prosecutions, the Sacramento Bee reported that the prosecutions had been initiated not by diligent detective work from the ABC, but, rather, on a tip from an unnamed billion-dollar winery that uses its legal department to scour the internet for violations by its smaller competitors.  Assuming that to be true (and only the ABC knows for sure), these prosecutions have had the ironic effect of advancing market domination by the large winery, which has successfully chilled the commercial speech of its smaller competitors and shut down an event that, as the Director puts it, provides “the exact opportunity for the small wineries to get access to more customers.” 

What Should Be Done

The lamentable results of the ABC’s prosecutions were entirely avoidable and can still be rectified, at least to some extent.  The Sacramento Convention & Visitors Bureau says it is too late to save the 2015 event, but future years and other similar events  - this is not just about the Save Mart Grape Escape but about every retailer title sponsored event in the state where alcoholic beverage suppliers are involved - could be salvaged.  

The ABC has broad discretion to apply California’s tied-house laws to advance legitimate interests, which include the economic health of the small producers of this state.  We believe that the ABC is required to apply those laws in a manner consistent with the First Amendment, the best interests of California’s alcoholic beverage producers and retailers and, most importantly, common sense. 

We are defending our clients based on these principles and we will continue to do so until we get court rulings deciding these issues (which are at stake in other cases as well) one way or another. Those rulings will be coming.

However, given the adverse and apparently unexpected consequences of these prosecutions, the ABC should reconsider, withdraw all of the charges and void the plea agreements.  We believe that the First Amendment requires no less.

That result would require the ABC to eat a bit of crow by admitting that the charges should not have been brought in the first place.  We suggest that a nice, plummy Zin from one of the fine Sacramento area wineries might make the meal more palatable.

Commercial Speech And Alcoholic Beverages - Part III

Unconstitutionality - Per Se vs. As Applied

We have explored the concept of commercial speech under the First Amendment and the fact that those in the alcoholic beverage industry have the same rights as everyone else.  Today’s post focuses on the possible effects of asserting those First Amendment rights, particularly in the context of regulation of the industry.

Courts can find a statute to be unconstitutional per se, meaning that the statute itself violates the Constitution and could not ever be lawfully applied.  In that case, the law itself is void and of no further effect, and no one can be punished for having violated that statute.  Let’s take an easy hypothetical: a statute prohibiting anyone in the electronic or print media from mentioning or commenting on any candidate for elective office within seven days of an election.  As long as there is a First Amendment, that statute is unconstitutional per se. 

Courts can also find that an otherwise valid statute is unconstitutional as applied in a particular case, meaning that the defendant in that case cannot be punished for having violated the statute, but the statute itself remains valid and can be enforced in other circumstances.   One of many examples is Edwards v. South Carolina, in which participants in a peaceful protest against segregationist policies of the state were convicted of “breach of the peace.”  The Supreme Court did not invalidate South Carolina’s “breach of the peace” law, but it did hold that that law could not constitutionally be applied to the defendants, who were exercising their First Amendment rights peacefully.  South Carolina could continue to apply that law to, for example, people shooting firecrackers in a public space.  It could not, however, apply the law as a means to suppress the exercise of First Amendment rights.

So, what does this have to do with the alcoholic beverage industry?   Many of the regulatory restraints on commercial speech stem from the laws passed after the repeal of Prohibition and are based on the exercise of powers under the Twenty-First Amendment.  The most common example are the “tied-house” laws, intended to achieve a separation of the production, distribution and retail tiers of the industry. 

It is highly unlikely that a court will find that the tied-house laws are unconstitutional per se, just because they can be used to suppress commercial speech.  The tied-house laws have repeatedly been recognized as advancing legitimate governmental interests, the most common being to prevent the domination of local markets by large producers and to promote temperance or, at least, moderation.  Moreover, those laws are supported by their historical role in the passage of the Twenty-First Amendment.

As we learned last time, however, the fact that the tied-house laws are not unconstitutional per se does not mean that they can be applied indiscriminately to suppress the exercise of First Amendment freedoms, including the utterance of commercial speech.  If the government fails to meet its burden of proving that its suppression of commercial speech meets the Central Hudson test, the tied-house laws would be unconstitutional as applied in that case. 

Let’s take two examples.  A large winery enters into an agreement with a local chain in State X, which has a three-tier tied-house law.  The agreement provides that, if the chain buys 75% of its wine inventory from the large winery, the winery will run a large volume of ads urging consumers to buy its wines from the chain’s stores.  The ABC in State X seeks to invalidate the agreement and to penalize the winery and the retail chain under the tied-house laws.  The producer asserts a First Amendment defense—it is running truthful ads.  Who wins?

With apologies to those rooting for the defendants, the ABC will likely prevail under the Central Hudson test.  Preventing the domination of local markets by a large producer has repeatedly been recognized to be a legitimate state interest.  Invalidating the agreement and penalizing the participants’ flagrant violation of the tied-house laws advances that interest, and it is hard to argue that a statute could be applied more narrowly. 

Example 2:  ShopStop, a grocery chain headquartered in Mudville buys the naming rights for the local baseball field, where the Mudville Nine play.  A small local winery, which does not sell its wine to ShopStop, holds an outing for some customers and staff members at one of the games.  The winery then posts on its website: “We had a great time last Saturday at ShopStop Field watching the Mudville Nine!  For once, Mighty Casey did not strike out, and the Nine beat the Mudhens 5-3!  Great game!”  The ABC cites the winery for violating the tied-house laws by providing free advertising to ShopStop.  The winery asserts a First Amendment defense—its posting was truthful commercial speech (if not fully protected speech).  Who wins this one?

If you guessed the winery, you, like Mighty Casey, did not strike out!  While preventing domination of local markets may be a legitimate governmental interest, the ABC would be hard-pressed to prove how applying the tied-house laws to suppress the winery’s speech advances that (or any other) legitimate governmental interest.   The winery truthful statement of where it held its outing, using the proper name of the field, cannot plausibly be linked to any potential domination of the Mudville wine market by the winery. The court should find that the ABC’s application of the law in this case is unconstitutional.

Most of the laws historically applied to the alcoholic beverage industry are unlikely to be held to be unconstitutional per se.  However, where those laws are used to suppress commercial speech in a manner that cannot be justified under Central Hudson, the courts should find them to be unconstitutional as applied.