Thursday, January 07, 2016

Retail Digital Network LLC v. Appelsmith (9th Cir. - Jan. 7, 2015)

It's January 7.  And today we see the first published opinion by the Ninth Circuit in the new year.

Welcome to 2016, Ninth.  Glad to see ya.

It's also an opinion worth considering at some length.  Judge Callahan's opinion describes the underlying statute accurately and succinctly.  As well as with some flair.  Starting the opinion with:

"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."

I especially like "the Captain" part.  Nothing like free advertising in a judicial opinion.  Plus, it proves that the legal intelligencia views, and remembers, the relevant advertising as well as everyone else.

Why, by the way, does California -- alongside a plethora of other states -- have these rules?  It's actually a fairly interesting story.  And, unlike what you might first think, it's a story about monopolies:

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. 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. 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.” 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. 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.’”

Neat, eh?

So what's the problem?

Well, the plaintiff here says that the statute violates its First Amendment rights.  It's willing to pay.  The store is willing to take the money and advertise.  First Amendment, it says.

You can analyze that argument by itself.  But you can also analyze it pursuant to precedent.  And here in the Ninth Circuit, the latter method may be particularly insightful.  Since this precise issue, about this very same statute, making the identical argument, had been raised by a different party in an earlier case. And here's how Judge Callahan's opinion (accurately) describes that precedent:  "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."

Well, okay, then.  Case over, right?

Not so fast.

The Supreme Court has made some intervening decisions about commercial speech since then.  This is an area that's changed a bit as the composition of the Court has changed.

Still, Judge Callahan and the rest of the panel are generally required to follow circuit precedent.  As Judge Callahan says, "[a]s a three-judge panel, we are bound by Actmedia unless it is “clearly irreconcilable” with intervening higher authority."

Judge Callahan holds, however, that there's precisely such “clearly irreconcilable” intervening authority: Sorrell v. IMS Health, Inc., 131 S. Ct. 2653 (2011).  So the panel's got to look at that opinion at some length, to make sure it's "clearly irreconcilable."  And look it does.

When I first read the opinion, which discusses the relevant precedent at length, I thought:  "Okay, I guess the law is changing a little bit here."  But the more I looked, the more I wondered about that.  Especially whether it's at all plausible to claim that the intervening opinion is "clearly irreconcilable" with the earlier Ninth Circuit case.

You can read the entire opinion if you'd like.  Which discusses the intervening authority at some length.

But I can also shorthand it for you.  Entirely accurately.  And you'll see why my views on this issue started to clarify.

(1) The Supreme Court previously analyzed commercial speech restrictions pursuant to what's called the four-part test in Central Hudson, named after the 1980 Supreme Court case of the same name.

(2)  In the prior circuit precedent, Actmedia, in 1986, the Ninth Circuit applied the four-part Central Hudson test to California's statute and found that the statute didn't violate the First Amendment.

(3)  In 2011, in Sorrell, the Supreme Court decided a commercial speech case in which it expressly applied to the statute the . . . four-part Central Hudson test.

Ergo, today, Judge Callahan's opinion holds that the prior circuit precedent, which applied the four-part Central Hudson test, is "clearly inconsistent" with the Supreme Court's intervening precedent in Sorrell, which applied the four-part Central Hudson test, and hence the district court's opinion -- which applied the four-part Central Hudson test -- must be reversed, and the prior Ninth Circuit precedent, which applied the four-part Central Hudson test, must be overruled.


Let's take a closer look at each of these steps.

I'm sure you believe me on (1) -- that Central Hudson applied the four-part Central Hudson test.

Similarly, (2)'s beyond dispute, and Judge Callahan's opinion says so itself:  "On appeal [in Actmedia], 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 (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."

So what about (3)?

Everyone agrees that the Court in Sorrell applied the four-part Central Hudson test.  Judge Callahan's opinion even says so, and every one who's ever written anything about Sorrell agrees on this point.

So why's it different?  Well, the words that the Sorrell used in describing the proper test -- right before it expressly applied the existing four-part Central Hudson test to invalidate the statute in that case -- were arguably a bit different that the words used in Central Hudson.  For example, Judge Callahan describes the third prong of the Central Hudson test as "whether the regulation directly advances the governmental interest asserted," whereas she describes that prong as described in Sorrell as whether "the harms [the government] recites are real and that its restriction will in fact alleviate them to a material degree."  One says there needs to be a "government interest" that's "directly advanced," and the other says there need to be "real" harms that are "in fact" alleviated.  I'll let you decide whether those different words mean anything different at all, much less are "clearly irreconcilable."  Ditto for the fourth prong, which Judge Callahan describes as "whether the regulation is not more extensive than is necessary to serve that interest" in Central Hudson versus whether "the challenged law is drawn to achieve [the government’s substantial] interest" and a "fit between the legislature’s ends and the means chosen to accomplish those ends" as described in Sorrell.

Clearly irreconcilable?

It's true that Sorrell said that commercial speech restrictions are given "heightened scrutiny".  But as Judge Callahan points out, "[w]hile the Court found that heightened judicial scrutiny of the law was required, the Court did not actually apply heightened scrutiny." And it's unclear whether the four-part Central Hudson test -- which demands in its third and fourth prongs the direct advancement of a government interest and regulations no more extensive than are necessary to serve that interest -- isn't precisely the type of heightened scrutiny (e.g., way above rational basis) that's required.  Especially since everyone agrees, and that includes Judge Callahan, that we're not talking about strict scrutiny here:  that's not the test.

So is applying the Central Hudson test inconsistent with Sorrell (which, I'll reiterate, did precisely that to the actual case before it)?  Here's how Judge Callahan describes what the Second Circuits say about the issue of Sorrell versus Central Hudson:  "The Second Circuit also has interpreted Sorrell to require heightened scrutiny of content- or speaker-based restrictions on commercial speech, which may be applied using the framework of the Central Hudson test. United States v. Caronia, 703 F.3d 149, 164 (2d Cir. 2012)."  So that seems to mean that the "heightened scrutiny" requirement "may be applied using the framework of the Central Hudson test," no?

Clearly irreconcilable?

Put entirely to one side the fact that, since the Court in Sorrell actually applied the Central Hudson test, and not any other test, anything else is might have said is undisputably dicta.  Does that opinion really permit the three-judge panel here to overrule prior circuit precedent?

Look, there's no doubt that the Court nowadays is more conservative, as well as more protective -- at least in fact, if not in doctrine -- of commercial speech.  And I also think it's plausible to argue that if the Court had to actually decide whether to overrule the Central Hudson four-part test as the applicable standard, there's a decent chance it might do so.

But although the language of Sorrell is different than the language in Central Hudson, I think it's a fair piece of a stretch to say that the two cases are "clearly irreconcilable."  Especially since no one contends that the former actually overruled the latter, and since the former actually applied the latter's test as well.

This much, however, we can say for sure:  If the one opinion that's been published so far by the Ninth Circuit is at all indicative of what's upcoming, 2016 will be a fascinating year.