NO. 03-16-00039-CV
__________________________________________________________________
IN THE THIRD COURT OF APPEALS
AT AUSTIN, TEXAS
__________________________________________________________________
TEXAS ALCOHOLIC BEVERAGE COMMISSION,
Appellant
v.
MARK ANTHONY BREWING, INC.,
Appellee
_________________________________________________________
Appeal in Trial Case No. D-1-GN-13-003570
from the 345th Judicial District in and for Travis County, Texas
_____________________________________________________________
BRIEF OF APPELLEE MARK ANTHONY BREWING
__________________________________________________________________
P.M. Schenkkan
State Bar No. 17741500
Mary A. Keeney
State Bar No. 11170300
GRAVES, DOUGHERTY, HEARON
& MOODY
A Professional Corporation
401 Congress Avenue, Suite 2200
Austin, Texas 78701
Telephone: (512) 480.5682
Facsimile: (512) 480.5882
[email protected]
[email protected]
M. Jack Martin, III
State Bar No. 13094360
Lou Bright
State Bar No. 02991900
Martin Frost & Hill
3345 Bee Cave Road, Suite 105
Austin, Texas 78746
Telephone: (512) 473-0300
Facsimile: (903) 386-2714
[email protected]
[email protected]
.
ATTORNEYS FOR APPELLEE MARK ANTHONY BREWING, INC
ORAL ARGUMENT REQUESTED
October 28, 2016
TABLE OF CONTENTS
INDEX OF AUTHORITIES ..................................................................vii
STATEMENT OF THE CASE ...............................................................xi
STATEMENT REGARDING ORAL ARGUMENT ...............................xii
ISSUES PRESENTED.........................................................................xiii
EXPLANATION OF CITATIONS TO THE RECORD ......................... xiv
INTRODUCTION ...................................................................................1
STATEMENT OF FACTS .......................................................................2
I.
The products, trademark license agreement, and labels .......2
II.
TABC staff deny label approval ..............................................3
III.
Mark Anthony seeks rule amendments and files suit............4
IV.
TABC adopts two more rule bans ...........................................6
V.
The amended petition and pretrial briefing ...........................8
VI.
The bench trial ........................................................................8
VII. The judgment, findings of fact and conclusions of law.........11
VIII. TABC’s appeal .......................................................................11
STANDARDS OF REVIEW .................................................................. 12
I.
Questions Of Law ..................................................................12
II.
Proof Of Facts in First Amendment Commercial
Speech Cases .........................................................................12
ii
III.
Heightened Scrutiny Of Content-Based Speech
Restrictions............................................................................13
IV.
Review Of Bench Trial Findings of Fact...............................14
SUMMARY OF ARGUMENT ............................................................... 15
I.
Banning Malt Beverage Labels Containing Retailer
Names ....................................................................................15
II.
Giving Things Of Value To Retailers....................................17
III.
TABC’s Attack On The Trademark License Agreement ......18
ARGUMENT AND AUTHORITIES...................................................... 23
I.
TABC’s retailer name label ban violates the First
Amendment ....................................................................................23
A.
B.
The First Amendment applies .............................................23
1.
Central Hudson applies to malt beverage labels .........23
2.
TABC no longer claims the labels are deceptive .........24
3.
The labels concern lawful products..............................24
4.
The Twenty-First Amendment does not qualify
the First ........................................................................25
TABC contention that the label ban advances the
government’s interest in retailer independence was
properly rejected by the district court ..................................26
1.
TABC asserts the government’s interest in the
three-tier system .........................................................26
iii
C.
2.
The three-tier system seeks to protect retailer
independence ................................................................27
3.
The three-tier system is not an end in itself ...............30
4.
The three-tier system and retailer independence
today ............................................................................32
The retailer name label ban violates the First
Amendment ...........................................................................34
1.
TABC did not prove harms to retailer
independence ................................................................34
(a) There is no evidence of actual harm to retailer
independence ..........................................................35
(b) TABC’s two-part speculative theory.......................36
(c) TABC’s preventative rule argument.......................39
II.
2.
The malt-beverage retailer name label ban does
not directly or materially protect retailer
independence ................................................................41
3.
Banning such labels on malt only is irrational ...........43
4.
The retailer name label ban rules are not
narrowly tailored ..........................................................44
TABC’s Thing of Value Theory Does Not Change the First
Amendment Analysis or Result, But Thing of Value Statutes
Can Be Construed to Avoid Unconstitutionality ...........................47
A.
First Amendment analysis and results are the same ..........48
1.
Authentic Beverages ....................................................49
iv
2.
B.
California ......................................................................51
The labels do not violate the ‘thing of value’
prohibitions............................................................................52
1.
Not every “thing of value” to a retailer is
prohibited .....................................................................52
2.
Exceptions by statute, rule and policy .........................53
(a) Thing of value exceptions by statute ......................53
(b) Thing of value exceptions by rule ...........................54
(c) Thing of value exceptions by policy.........................55
3.
III.
Courts require real threats to retailer
independence ................................................................56
The Trademark Agreement Does Not Violate Section
102.01(h) and Rule 45.110(c)(3). If It Did, It and Rule
45.110(c)(3) Would Be Unconstitutional As Applied ....................58
A.
The Trademark license agreement does not violate
section 102.01(h)....................................................................59
1.
TABC put in issue whether section 102.01(H) has
been violated .................................................................59
2.
How to approach the statutory construction
question ........................................................................60
3.
Shared quality control over products is not
prohibited control by on party over the business
of the other ...................................................................62
4.
Section 102.01(h) should not be read to condemn
such agreements ...........................................................64
v
B.
If section 102.01(h) were construed as TABC urges, it
and rule 45.110(c)(3) would be unconstitutional as
applied ...................................................................................66
1.
TABC put section 102.01(h)’s validity, as applied,
in issue .........................................................................67
2.
Pittsburgh Press and Ford Motor Co. do not apply .....68
3.
As TABC would construe and apply them, section
102.01(h) and rule 45.110(c)(3) fail the Central
Hudson tests .................................................................70
(a) TABC does not describe even speculative
harm.......................................................................70
(b) No effect at all on retailer control of
Manufacturers .........................................................71
(c) TABC can instead address actual prohibited
control .....................................................................72
CONCLUSION AND PRAYER ...............................................................73
CERTIFICATE OF SERVICE.................................................................75
CERTIFICATE OF COMPLIANCE ........................................................76
APPENDIX ..............................................................................................77
vi
CASE LAW
INDEX OF AUTHORITIES
PAGE(S)
44 Liquormart, Inc. v. Rhode Island,
517 U.S. 484 (1996) ............................................................ 25, 44, 69
Actmedia, Inc. v. Stroh,
830 F2d 957 (9th Cir. 1986)................................................. 13, 51, 52
Authentic Beverages Co. Inc. v. TABC,
835 F.Supp.2d 227 (W.D. Tex. 2011)...................................... passim
Bad Frog Brewery Inc. v. New York State Liquor Authority,
134 F.3d 87 (2nd Cir. 1998)............................................................23
Bolger v. Youngs Drug Prods. Corp.,
463 U.S. 60 (1983) ..........................................................................12
Cadena Commercial USA Corp. v. TABC,
449 S.W.3d 154 (Tex. App. – Austin 2014, pet. granted)...............60
Central Hudson Gas & Elec. Corp. v. Public Serv. Comm’n,
447 U.S. 557 (1980) ................................................................ passim
City of Keller v. Wilson,
168 S.W.3d 802 (Tex. 2005) ............................................................15
Edenfield v. Fane,
507 U.S. 761 (1993) ...................................................... 13, 22, 40, 42
Fedway Associates, Inc., v. U.S. Treasury, Bureau of Alcohol,
Tobacco and Firearms,
976 F.2d 1416 (D.C. Cir. 1992)............................... 56, 57, 58, 62, 64
Ford Motor C o. v. Texas Dept. of Trans,
264 F.3d 493 (5th Cir. 2001).....................................................68, 69
Granholm v. Heald,
544 U.S. 460 (2005) ........................................................................30
vii
Gulf Chemical & Metallurgical Corp. v. Hegar,
460 S.W.3d 743 (Tex. App. – Austin 2015, no pet.) .......................15
H.H. Holloway Trust v. Outpost Estates Civic Club Inc.,
135 S.W.3d 751 (Tex. App. – Houston [1st Dist.] 2004, pet.
denied) ............................................................................................14
Howell v. Tex. Workers’ Comp. Comm’n,
143 S.W.3d 416 (Tex, App. – Austin 2004, pet. denied) ................14
Kentucky Fried Chicken Corp. v. Diversified Packaging Corp.,
549 F.2d 368 (5th Cir. 1977)...........................................................65
Lorillard Tobacco Co. v. Reilly,
533 U.S. 525 (2001) ........................................................................71
National Distributing Co. v. U.S. Bureau of Alcohol, Tobacco and
Firearms,
626 F.2d 997 (D.C. Cir. 1980).........................................................30
Neel v. Tex, Liquor Control Bd.,
259 S.W.2d 312
(Tex. Civ. App. – Austin 1953, writ ref’d n.r.e.).......................30, 60
Ohralik v. Ohio State Bar Ass’n,
436 U.S. 447 (1978) ..................................................................40, 41
Oncor Elec. Delivery Co. v. Public Util. Comm’n,
406 S.W.3d 253 (Tex. App. – Austin 2013, no pet.) .......................12
Perry Homes v. Cull,
258 S.W.3d 580 (Tex. 2008) (citation omitted)...............................15
Pittsburgh Press Co. v. Pittsburgh Comm’n on Human Relations,
413 U.S. 376 (1973) ........................................................................68
Retail Digital Network LLC v. Applesmith,
810 F.3d 638 (9th Cir. 2016)................................................... passim
viii
Rubin v. Coors Brewing Co.,
514 U.S. 476 (1995) ................................................................ passim
Sorrell v. IMS Health, Inc.,
564 U.S. 552 (2011) ..................................................................13, 14
Virginia Bd. of Pharmacy v. Virginia Citizens Consumer Council
Inc.,
425 U.S. 748 (1976) ........................................................................34
TEXAS STATUTES
TEXAS ALCOHOLIC BEVERAGE CODE
chs. 12 and 12A...............................................................................27
16.01(a)(5) .......................................................................................27
16.09................................................................................................27
54.01................................................................................................27
101.671..............................................................................................5
102.01(h) ................................................................................. passim
102.07(a) .........................................................................................49
102.07(a)(2) .............................................................................4, 6, 47
102.07(g) .........................................................................................47
102.15(a)(1) .............................................................................4, 6, 47
102.51(b) ...........................................................................................6
108.03..............................................................................................54
108.09(a) .........................................................................................47
Act of April 30, 2007, 80th Leg., R.S., ch. 68 § 21, 2007 Tex. Gen.
Laws 62, 69 (codified at Tex. Alco. Bev. Code § 101.671) .........................5
Acts 1969, 61st Leg., p. 80, Ch. 38 § 16...................................................60
ix
FEDERAL STATUTES
27 U.S.C. § 205(a) ...........................................................................29
27 U.S.C. § 205(b) .....................................................................52, 54
27 U.S.C. § 205(e) ...........................................................................42
TEXAS RULES
16 TEX. ADMIN. CODE, CHAPTER 45
45.73(d) .........................................................................................3, 5
45.73(e)..........................................................................................3, 6
45.82(a)(7) .........................................................................................5
45.82(a)(7)(B) ................................................................................4, 6
45.110(c)..................................................................................6, 7, 55
45.110(c)(3) ............................................................................. passim
45.110(c)(4) .....................................................................................55
45.113..............................................................................................55
45.117..............................................................................................55
45.117(c)(2) ....................................................................................53
19 Tex. Reg. 5629 (Jul. 19, 1994) ...........................................................26
38 Tex. Reg. 8987 (Dec. 13, 2013) .............................................................6
39 Tex. Reg. 2727 (Apr. 11, 2014) .............................................................6
39 Tex. Reg. 6037-45 (Aug. 8, 2014)......................................................6, 7
OTHER AUTHORITIES
Restatement (Third) of Unfair Competition § 33 cmt. c (1955)..............66
Siegrun D. Kane, Kane on Trademark Law: A Practitioner’s Guide
§ 20:2 (4th ed. 2006).................................................................................66
Sunset Advisory Comm’n, Summary of Recommendations: Texas
Alcoholic Beverage Commission 5-6 (Issue 3) ( Feb. 2007) ....................45
The Market Power Effects of a Merger: Evidence from the U.S.
Brewing Industry (July 25, 2016) ...........................................................31
Toward Liquor Control (The Center for Alcohol Policy 2011 ed.) ....28, 29
x
STATEMENT OF THE CASE
Nature of the Case:
Mark Anthony Brewing, Inc. sought approval of
malt beverage labels using the TGI Friday’s
brand under a trademark license agreement.
Texas Alcoholic Beverage Commission (TABC)
staff refused, citing rules against retailer names
in such labels and statutory prohibitions on
giving a thing of value to a retailer.
Mark Anthony sought declarations that the rules
violate the First Amendment, and that the
statutes do not make the labels illegal or, in the
alternative, also violate the First Amendment.
SCR 16.
Another TABC rule prohibited advertising
benefiting a specific retailer. It had been held
unconstitutional in 2011. While suit was pending,
TABC amended it to add “if it is the result of
unauthorized activity.” TABC then argued that
the trademark license agreement violates a
statute prohibiting a member of one tier
“controlling or managing the business or
interests” of a member of another, making the
labels the result of unauthorized activity.
Trial Court:
The Hon. Lora Livingston, 345th District Court of
Travis County, Texas, held a two day bench trial.
Disposition:
The district court held the label ban rules
unconstitutional
and
that
the
statutory
provisions do not prohibit the labels or the
agreement or, alternatively, unconstitutionally
restrain commercial speech. CR 71-73. App. 1.
The district court entered findings of fact and
conclusions of law. CR 99-104. App. 2.
Court of Appeals:
TABC timely appealed the judgment.
xi
STATEMENT REGARDING ORAL ARGUMENT
Appellee Mark Anthony respectfully requests oral argument. The
case presents First Amendment and Texas statutory construction issues
of first impression and considerable importance.
First Amendment commercial speech caselaw is evolving rapidly.
One set of issues concerns Texas statutory prohibitions against
“giving” any “thing of value” to a retailer.
Such prohibitions are
common to many states.
Other issues concern a unique Texas statutory prohibition. TABC
says standard trademark license agreements violate it.
xii
ISSUES PRESENTED
1.
Did the district court correctly hold that rules banning malt
beverage labels containing the name of a retailer unconstitutionally
restrain commercial speech?
2.
Did the district court correctly hold that off-premises retail store
sales of products under such labels do not violate statutory prohibitions
on giving a thing of value to a retailer?
If not, did the court correctly hold that the thing of value
prohibitions, as applied here, unconstitutionally restrain commercial
speech?
3.
Did the district court correctly hold that the trademark license
agreement authorizing use of the name on the labels does not violate a
statutory prohibition on a retailer controlling a manufacturer?
If not, did the district court correctly hold that, as applied here,
that prohibition and a rule banning advertising benefiting a specific
retailer “if it is the result of unauthorized activity” unconstitutionally
restrain commercial speech?
xiii
EXPLANATION OF CITATIONS TO THE RECORD
References to the clerk’s record are denoted by “CR” for the main clerk’s
record and by “SCR” for the supplemental clerk’s record.
References to the court reporter’s record are denoted by the volume
number and RR. 2 RR contains testimony from Mark Anthony’s
witnesses. 3 RR contains testimony from TABC’s witnesses. 4 RR
contains Mark Anthony's exhibits admitted at trial. 5 RR contains
TABC’s exhibits admitted at trial.
xiv
INTRODUCTION
This is a First Amendment commercial speech case.
Authentic Beverages1 held TABC rule 45.110(c)(3)2 banning
advertising benefitting a specific retailer unconstitutional under
Central Hudson.3 Rules banning labels bearing a retailer name are
unconstitutional for the same reasons. Arguing that such labels violate
statutory “thing of value” prohibitions does not change the result.
Before trial, TABC amended rule 45.110(c)(3) to add “if the
advertising is the result of unauthorized activity.” It then contended
that the trademark license agreement gives TGIF restaurants
prohibited control over Mark Anthony and that such alleged control
makes Mark Anthony’s labels “illegal speech” not protected by the First
Amendment.
This was not the TABC’s initial basis for denying
approval of Mark Anthony’s labels. It is, instead, an effort to evade a
First Amendment analysis that the TABC’s conduct cannot withstand.
The Court should reject it.
Hundreds of alcoholic beverages bear retailer names under
trademark license agreements. The parties to such agreements do not
Authentic Beverages Co. Inc. v. TABC, 835 F.Supp.2d 227 (W. D. Tex. 2011).
The rules referenced in this brief are found in 16 Tex. Admin. Code Chapter 45.
3 Central Hudson Gas & Elec. Corp. v Public Serv. Comm’n, 447 U.S. 557 (1980).
1
2
1
control each other; they share quality control over new products the
brand owner authorizes the manufacturer to use the brand on. They do
not make the labels “illegal speech.”
STATEMENT OF FACTS
I.
The products, trademark license agreement, and labels.
Mark Anthony Brewing, Inc. (“Mark Anthony”) makes and sells
flavored alcoholic beverages. Its best known product is Mike’s Hard
Lemonade. 4 It holds a Texas non-resident manufacturer’s permit.5
In 2012, Mark Anthony licensed the use of the T.G.I. Friday’s
(TGIF) brand6 on new flavored malt-based beverages with names like
“Frozen Blackberry Long Island Iced Tea” and “Frozen Platinum
Margarita.”7 They are designed to be sold in grocery stores.
Mark Anthony’s products compete with products made by industry
giants, such as Bud Lite Lime-a-Rita and Smirnoff Ice.8 Grocery store
shelf space is mostly “dedicated to nationally advertised brands.”9 Mark
Anthony’s “top challenge” is “how do we get” its products “on the
5 RR, TABC Exh. 2.
Id.
6 4 RR, PX1; as amended, PX21, found at App. 3.
7 See 4 RR, PX13.
8 2 RR 80 (Dempsey); see also 2 RR 186-87 (Hinman).
9 2 RR 187 (Hinman).
4
5
2
shelf.”10 Licensed use of the TGIF brand on the labels makes Mark
Anthony’s products more likely “to move.”11
The owner of the intellectual property (IP) is T.G.I. Friday’s of
Minnesota, Inc. (TGIF-MN). In addition to the restaurants and Mark
Anthony, TGIF-MN licenses the brand to Heinz and a snack food
manufacturer for use on food products also sold in grocery stores.12
The labels state that “T.G.I. Friday’s is a registered trademark of”
TGIF-MN “used and distributed under license.”13
In 2013, Mark
Anthony obtained federal Certificates of Label Approval (COLAs)14 and
began selling the products in 47 states.15
II.
TABC staff deny label approval.
TABC staff refused label approval because of TABC rules under
which “[n]o malt beverage label shall include the name of a retailer.”16
TABC initially invoked rule 45.73(d), now (e), which provides in
pertinent part:
2 RR 80 (Dempsey).
2 RR 186-87 (Hinman).
12 See 4 RR PX10 (Heinz), PX11 (Inventure); see also 2 RR 88-89 (Dempsey).
13 See 4 RR PX13. The products are pouch products, so the “label” is a pouch.
14 See 2 RR 47-48 (Rossi; under d/b/a Jefferson Beverage Company); 2 RR 80-81
(Dempsey).
15 2 RR 80-81 (Dempsey); see also 4 RR, PX 14. In one state, Mark Anthony did not
proceed for reasons unrelated to labels. California, as discussed in the Argument,
denied label approval citing its thing of value statute.
16 See 4 RR, PX 16 (S. Greinert Ltr. of Mar. 19, 2013). and email (Apr. 12, 2014).
10
11
3
No application for a label .... shall be approved which …
includes the name, tradename, or trademark of any retailer
permittee or licensee or any private club registration
permittee.
TABC later also invoked rule 45.82(a)(7)(B):
Containers of malt beverages or any labels on such
containers … shall not contain … any statement, design,
device, or representation that … includes the name,
tradename or trademark of any retail licensee or permittee
or private club registration permittee.
TABC staff also invoked Texas Alcoholic Beverage Code (Code)
section 102.15(a)(1), under which no manufacturer or wholesaler shall
“furnish, give, or lend” any “thing of value” to a retailer.17 TABC later
also invoked Code section 102.07(a)(2), a similar “thing of value”
prohibition.
III.
Mark Anthony seeks rule amendments and files suit.
As TABC notes (pp. 4-5), its general counsel offered a hearing.
The Code does not provide hearings on label denials. TABC is bound by
its own rules and lacks power to declare statutes unconstitutional.
Mark Anthony therefore instead on October 15, 2013 petitioned TABC
to amend the rules and filed this suit in case TABC did not do so.
17
See 4 RR, PX 16 (S. Greinert email of Apr. 12, 2014).
4
Rule amendment seemed worth trying for two reasons. First, in
2011, Authentic Beverages18 had held unconstitutional rule 45.110(c)(3),
which prohibited any “advertising benefitting any specific retailer.”19
Judge Sparks had called TABC’s defense “half-hearted,”20 and TABC
did not appeal. Second, in February 2012, TABC staff had told the
industry that staff’s “preliminary thinking” in a proposed rulemaking
was to “delete” rules 45.73(d) and 45.82(a)(7).21
As to the statutory “thing of value” prohibitions, Mark Anthony
hoped to persuade TABC that the labels do not violate them. The labels
promote sales by off-premises retailers, not the restaurants. Despite
such prohibitions, TABC in 1992 approved labels with the TGIF brand
on spirits products made by Diageo,22 and in 20 years never challenged
or investigated them.23 In 2007, the Texas Legislature required that
TABC approve wine or spirits labels with federal COLAs.24
Authentic Beverages Co. Inc. v. Texas Alcoholic Beverage Comm’n, 835 F.Supp.3d
227, 251 (W.D. Tex. 2011).
19 See id. at 235.
20 Id. at 250.
21 See 4 RR, PX 12 (M. Wilson email Feb. 24, 2012).
22 See 4 RR, PX 2.
23 See 3 RR 39-43 (Jones).
24 Act of April 30, 2007, 80th Leg., R.S., ch. 68, § 21, 2007 Tex. Gen. Laws 62, 69
(codified at TEX. ALCO. BEV. CODE § 101.671).
18
5
IV.
TABC adopts two more rule bans.
In December 2013 TABC published Mark Anthony’s proposed rule
repeal for comment.25
Beer distributor trade associations opposed
repeal, mainly because the rules also prohibit private label beers that
grocery store chains would sell in competition with the national beer
brands that beer distributors have exclusive rights to distribute.26 They
proposed rules of their own,27 which the Texas Retailers Association,
large retail chains, the Texas Manufacturers’ Association and the Texas
Association of Business opposed.
In July 2014, TABC amended rules 45.73(e) and 45.82(a)(7)(B) in
ways that reaffirmed the private label ban, without changing the
substance relevant here.28
At the same time, however, TABC amended rule 45.110(c) to add
two prohibitions that are at issue here.
38 Tex. Reg. 8987 (Dec. 13, 2013).
See TEX. ALCO. BEV. CODE § 102.51(b).
27 39 Tex. Reg. 2727 (Apr. 11, 2014).
28 39 Tex. Reg. 6037-45 (Aug. 8, 2014). TABC amended rule 45.82(a)(7)(B) to add
references to “thing of value” Code sections 102.07(a)(2) and 102.15(a)(1). Id. at
6039-40.
25
26
6
Under rule 45.110(c), “practices and patterns of conduct that place
retailer independence at risk constitute an illegal inducement.”
TABC added another retailer name ban:
(7) … marking, branding or labeling a malt beverage with:
(A) the tradename or trademark of any retailer permittee
or licensee or any private club registration permittee; or
(B) a tradename or trademark that is owned or licensed
by, or is exclusively used by any retailer permittee or
licensee or any private club registration permittee.29
TABC also amended rule 45.110(c)(3), prohibiting “advertising
benefitting any specific retailer,” which Authentic Beverages had held
unconstitutional, by adding the proviso: “if the advertising is a result of
unauthorized activity.”30
In the suit, TABC then contended that the trademark license
agreement violates Code section 102.01(h), which makes the labels “the
result of unauthorized activity” for purposes of rule 45.110(c)(3), which
would make them “illegal speech” not entitled to First Amendment
protection.
Code section 102.01 prohibits “tied houses.”
Section 102.01
contains specific prohibitions common to many states, but (h) is unique
29
30
4 RR, PX 16.
39 Tex. Reg. 6044.
7
to Texas.
Section 102.01(h) prohibits a member of one tier from
controlling or managing the business or interests of a member of
another tier.
V.
The amended petition and pretrial briefing.
Mark Anthony sought declarations that:
(1) the rules banning malt beverage labels containing a retailer
name restrain commercial speech in violation of the First Amendment;
(2)
(a) sales of products under such labels do not violate thing of
value prohibitions, but
(b) if sales of products under such labels do violate thing of
value provisions, those provisions violate the First Amendment; and
(3) any other statutory provisions that prohibit such labels are
unconstitutional under the First Amendment.”31
VI.
The bench trial.
Judge Livingston held a bench trial, focused on four issues,
described here in general terms (record cites in the Argument).
31
SCR 13-16.
8
Are the labels deceptive? Deceptive speech is not protected by the
First Amendment.32 One professor of marketing testified for TABC that
the labels are “potentially misleading” as to whether the products are
made by or for sale at TGIF restaurants. Another testified for Mark
Anthony to the contrary. Other Mark Anthony witnesses testified that
Mark Anthony had obtained federal COLAs under standards that
prohibit deceptive labels.
Is Mark Anthony giving a thing of value to the restaurants? As
discussed in the Argument, in order to protect retailer independence,
the federal government and many states prohibit a manufacturer or
wholesaler from giving a thing of value to a retail permittee. TABC
witnesses testified that seeing the labels might lead grocery store
shoppers to go more often to TGIF restaurants and, if so, the
restaurants might over time come under Mark Anthony’s control. Mark
Anthony witnesses testified that any effect on restaurant traffic would
not be significant, and might be negative, and that the risk to retailer
independence was almost zero.
32
See Central Hudson, 447 U.S. at 563-64.
9
The First Amendment. The parties’ witnesses addressed the facts
relevant under Central Hudson First Amendment commercial speech
standards: the governmental interest asserted, whether the restriction
directly and materially advances it and is narrowly tailored to do so,
and whether there is any justification for banning labels with retailer
names as to malt-based but not wine or spirits-based products.33
Code section 102.01(h) and amended rule 45.110(c)(3) Between
filing of suit and trial, TABC shifted the main focus of its defense to a
new theory (at, e.g., 6): that the labels are not protected speech because
they are “incidental to an unlawful course of conduct,” referring to the
trademark license agreement.34
A TABC witness opined that the agreement violates Code
section 102.01(h) by giving TGIF restaurants control over Mark
Anthony.35 Mark Anthony witnesses testified that the agreements give
no control over Mark Anthony, that such agreements are common and
important, and that the standard terms criticized are necessary to
See Central Hudson, 447 U.S. at 564-66.
In part III of the Argument we show that this misstates the First Amendment
exception, which is for speech involving illegal offers or concerning illegal products.
35 See 3 RR 156-58 (Maisch).
33
34
10
preserve the legal validity and economic value of the intellectual
property.36
VII. The judgment and findings of fact and conclusions of law.
The trial court entered judgment. App. 1, CR 71-73. It declared
the rules unconstitutional.
It declared that sales of off-premises
products bearing the labels do not violate thing of value prohibitions,
and in the alternative that those prohibitions are unconstitutional as
applied.
It declared that the trademark license agreement does not
violate section 102.01(h), and in the alternative that it and rule
45.110(c)(3) are unconstitutional as applied. App. 1, CR 71-73.
TABC requested and the trial court entered findings of fact and
conclusions of law. App. 2, CR 99-104.
VIII. TABC’s appeal.
TABC timely appealed.
It does not challenge the trial court’s
conclusions and supporting findings that the labels are not deceptive.
36
See 2 RR 198-210 (Hinman).
11
STANDARDS OF REVIEW
I.
Questions Of Law
The validity of agency rules and the construction and validity of
statutes are questions of law, reviewed de novo.37
II.
Proof Of Facts In First Amendment Commercial Speech Cases
Under Central Hudson,38 in contrast to most kinds of challenges to
the validity of statutes and rules, “[t]he party seeking to uphold a
restriction on commercial speech carries the burden of justifying it.”39
Substantive Central Hudson standards present fact issues. If the
speech “is neither misleading nor related to unlawful activity,” the court
must determine “whether the asserted governmental interest is
substantial,” and whether the restriction “directly advances” that
interest and is “not more extensive than is necessary to serve that
interest.”40
The government “must demonstrate that the harms it
Oncor Elec. Delivery Co. v. Public Util. Comm’n, 406 S.W.3d 253, 260, 270 (Tex.
App.—Austin 2013, no pet.) (stating de novo review applies to questions of statutory
construction and same construction rules applied to statutes apply to
administrative rules).
38 Central Hudson, 447 U.S. 557.
39 Bolger v. Youngs Drug Prods. Corp., 463 U. S. 60, 71 n.20 (1983), quoted in
Authentic Beverages, 835 F. Supp. 2d at 241.
40 Central Hudson, 447 U.S. at 564, 566.
37
12
recites are real.”41 Its burden is “‘not satisfied by mere speculation or
conjecture’ … .”42
III.
Heightened Scrutiny Of Content-Based Speech Restrictions
Central Hudson review is “intermediate scrutiny.” In Sorrell v.
IMS Health, Inc., however, the Supreme Court held that a state
restriction on pharmaceutical marketing “must be subjected to
heightened judicial scrutiny,” and struck it as unconstitutional.43
Early this year, in Retail Digital Network44 the Ninth Circuit held
that its 1986 Actmedia45 decision was “clearly irreconciliable” with
Sorrell and “no longer binding.”46 Actmedia had upheld a California
thing of value statute prohibiting a manufacturer paying a retailer to
advertise its products in the retailer’s store.47
The Ninth Circuit
ordered remand for heightened scrutiny of a challenge to the same
statute by a different kind of “point-of-purchase” advertiser.
Rubin v. Coors Brewing Co., 514 U.S. 476, 487 (1995)(quoting Edenfield v. Fane,
507 U.S. 761, 762 (1993)).
42 Id., quoting Central Hudson, 447 U.S. at 566 and Edenfield.
43 564 U.S. 552 (2011).
44 Retail Digital Network LLC v. Applesmith, 810 F.3d 638, 642 (9th Cir. 2016),
pending on motion for rehearing and rehearing en banc.
45 Actmedia, Inc. v. Stroh, 830 F.2d 957 (9th Cir. 1986).
46 Retail Digital Network, 810 F.3d at 650-51.
47 “[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.” Id. at 640-41.
41
13
In
Sorrell,
“the
outcome
[was]
the
same”
under
either
intermediate or heightened scrutiny.48 Thus, heightened scrutiny of a
restriction is necessary only if it would survive intermediate scrutiny.49
If necessary, the heightened scrutiny standard approved in Sorrell
should apply here.
IV.
Review Of Bench Trial Findings Of Fact
TABC sets out (at 8-9) standards of review for findings of fact.
The factual sufficiency standards are inapplicable here because TABC
does not challenge the factual sufficiency of any finding. If an appellant
fails to challenge them on appeal, district court fact findings are binding
on the appellant and the reviewing court.50
TABC argues (at p. 27 n.12) that two findings are conclusively
refuted by the evidence.
“Evidence is conclusive only if reasonable
Sorrell, 564 U.S. at 571.
Retail Digital Network, 810 F.3d. at 648.
50 Howell v. Tex. Workers’ Comp. Comm’n, 143 S.W.3d 416, 439 (Tex. App.—Austin
2004, pet. denied) (“A party waives its challenges to the findings of fact and
conclusions of law if it fails to raise them in its original appellate brief.”); H.H.
Holloway Trust v. Outpost Estates Civic Club Inc., 135 S.W.3d 751, 754 (Tex.
App.—Houston [1st Dist.] 2004, pet. denied)(“The appellant must challenge the
sufficiency of the trial court’s findings in its issues on appeal or the findings are
binding on the appellate court.”)
48
49
14
people could not differ in their conclusions, a matter that depends on
the facts of each case.” 51
TABC contends that several findings are really conclusions of law.
If findings involve mixed questions of law and fact, the appellate court
reviews them for abuse of discretion;52 it “defers to the trial court’s
factual determinations if supported by the evidence and reviews its
legal determinations de novo.”53
SUMMARY OF ARGUMENT
I.
Banning Malt Beverage Labels Containing Retailer Names
The district court held unconstitutional three TABC rules banning
malt beverage labels containing the name or trademark of a retailer. It
concluded and declared that the rules “do not directly and materially
advance any substantial governmental interest and are not narrowly
tailored for that purpose.”54 That holding rests on specific fact findings
supported by the evidence.
City of Keller v. Wilson, 168 S.W.3d 802, 816 (Tex. 2005).
Perry Homes, v. Cull, 258 S.W.3d 580, 598 n.102 (Tex. 2008)(citation omitted).
53 Id.; see also Gulf Chemical & Metallurgical Corp. v. Hegar, 460 S.W.3d 743, 748
(Tex. App.—Austin 2015, no pet.)(same).
54 App. 1, CR 72; App. 2, CR 102, Conclusion of Law 7.
51
52
15
First, the district court correctly found that TABC had offered
only “indirect, attenuated, and speculative” theories of possible harm.55
TABC’s witnesses speculated that grocery store shoppers seeing the
labels might be more likely to go to TGIF restaurants and that, “if so,”
that might lead to Mark Anthony becoming, over time, able to “coerce”
them into carrying on-premise products they would not otherwise buy.
Mark Anthony’s regulatory expert, active nationally, testified that
any risk to retailer independence was “almost zero.” His opinion rests
on undisputed facts. “Hundreds” of products whose labels have retailer
names on them are sold nationally. Mark Anthony products bearing
the TGIF name were being sold in 46 states as of trial. Diageo’s had
been sold nationally and in Texas for two decades. TABC pointed to no
harm to the restaurants’ independence, asserting only that there “could
have” been an impact.
Second, the “overall irrationality” of a restriction on malt beverage
but not wine or spirits speech shows that the restriction “cannot directly
and materially advance” the government’s asserted interest.56
55
56
App. 2, CR 101, Finding of Fact 20.
Rubin v. Coors Brewing Co., 514 U.S. 476, 488 (1995).
16
The district court found no justification for TABC’s ban “on maltbased but not on spirits-based or wine-based” product labels containing
retailer names.57 The evidence supports the finding. Asked what the
justification was, TABC’s regulatory expert replied: “I don’t know.”
II.
Giving Things Of Value To Retailers
The district court declared that, if sales of products under the
labels violated “thing of value” prohibitions, those prohibitions would be
unconstitutional as applied.58 It reached this conclusion “for the same
reasons” as its conclusion that the rule bans are unconstitutional.59
Those reasons (the findings noted above, and others) are, as noted
above, unchallenged factually and fully supported by the evidence.
The court also declared that Mark Anthony’s sales of products
under the labels “is not giving a prohibited thing of value to the
restaurants,”60 concluding that “statutory ‘thing of value’ prohibitions
are not violated by sale of malt beverage products whose labels contain
the name of a retailer.”61
App. 2, CR 101, Finding of Fact 24.
App. 1, CR 72.
59 App. 2, CR 102, Conclusion of Law 9.
60 App. 1, CR 2.
61 App. 2, CR 102, Conclusion of Law 11.
57
58
17
That conclusion reads thing of value statutes as they have long
been read – to protect retailer independence from coercion. The district
court found no threat to retailer independence, in additional findings
again unchallenged and fully supported.
Instead of “giving” the restaurants something, Mark Anthony is
selling off-premises products “neither intended nor expected to be
purchased by the restaurants.”62 As the district court found, such sales
under labels bearing the TGIF brand are “unlikely to have any
appreciable effects one way or the other” on the restaurants, and “[a]ny
such effect is speculative.”63 They “do[] not threaten the independence
of the restaurants;” the restaurants “remain completely free” to decide
what alcohol to purchase from whom and in what quantities for their
customers’ on-premises consumption.64
III.
TABC’s Attack On The Trademark License Agreement
As discovery and pretrial briefing showed that its rules and its
thing of value theory could not survive Central Hudson analysis, TABC
shifted to a new theory.
App. 2., CR 102, Finding of Fact 26.
Id., Finding of Fact 27.
64 Id., Finding of Fact 25.
62
63
18
TABC asserts (at p. 16, emphasis in original) that “The Licensing
Agreement that allows Mark Anthony to use the TGI Friday’s name and
mark violates Code section 102.01(h).” That alleged violation, TABC
argues (at pp. 16-21), makes the labels “the result of unauthorized
activity,” and (at p. 6) “speech incidental to an illegal course of conduct,”
thereby stripping the labels of First Amendment protection.
TABC’s argument fails at three levels.
First, the trademark license agreement does not violate Code
section 102.01(h).
That section prohibits a permittee of one tier
controlling or managing the business or interests of a member of
another tier. The agreement does not give the restaurants, or even
their affiliate, the owner of the TGIF brand, any control over Mark
Anthony. In TABC’s own words (at p. 18), what it “gives” TGIF-MN is
“control over the products Mark Anthony makes that will carry the
TGIF name and mark.”
That control is quality control over the use of TGIF-MN’s brand on
new products. The license agreement does not “give” control of Mark
Anthony to TGIF-MN; TGIF-MN retains that quality control over its
19
brand as part of the terms on which it allows Mark Anthony to use the
brand.
Such quality control terms, the district court found, are “standard
terms needed to protect the validity and value of the intellectual
property while enabling both the licensor and the licensee to profit by
its use.”65 Both Mark Anthony’s marketing expert and its trademark
license agreement expert so testified.
TABC offered no evidence that Mark Anthony’s independence is
threatened. Mark Anthony agreed, as part of getting permission to use
the TGIF brand, not to launch a line of competing products using a
brand associated with casual dining restaurant chains that compete
with the TGIF restaurants. Otherwise, Mark Anthony remains free to
make and sell any products it wants, when, as, and on what terms it
pleases.
For its new theory, TABC does not even offer a speculative harm
argument.
It makes only the naked assertion (at p. 16) that it is
“equally important to protect the independence of members of the
wholesale and producer tiers.” TABC does not even try to explain why a
65
App. 2, CR 102, Finding of Fact 31.
20
chain of restaurants would want to control or manage the business or
interests of one small manufacturer of off-premises products.
Second, although TABC argues (at p. 20) that “Texas has made it
illegal” for a manufacturer “to enter into the type of relationship that is
depicted in the Licensing Agreement,” TABC can point to no statutory
language that actually does this. Moreover, Texas could not prohibit
trademark license agreements. No matter what statute Texas passes,
any alcoholic beverage producer can enter into such an agreement and
sell products under labels bearing the name of a retailer in other states.
All TABC is in fact trying to prohibit is Texas labels using such a
brand. TABC does not contend that the product sales are illegal, like
the sex-discriminatory job offers or online car sales in the cases it relies
on (at pp. 11-13). TABC says all Mark Anthony has to do to sell the
products in Texas is to change the labels – i.e, to use labels that do not
contain a retailer name.
The labels are thus commercial speech
protected under the First Amendment. The labels offer for sale and
provide information concerning lawful products, alcoholic beverages.
Finally, outlawing all trademark license agreements with the
owners of brands used by restaurants is not narrowly tailored to the
21
hypothetical possible harm. If some terms of some agreement were to
give a restaurant chain what TABC considers improper control over a
manufacturer that in some way affected Texas sales, TABC could notify
the parties of the alleged violation. The parties could modify its terms.
Mark Anthony and TGIF-MN did so, both in response to TABC’s
expert’s deposition criticisms and in response to another state
regulatory agency’s concerns.66 If the parties refuse to do so, TABC
could try to prove a violation.
TABC says (at p. 29) that it must be allowed to “prevent those
interactions from occurring in the first place.”
To justify a
“preventative measure” restricting commercial speech, however, a state
must prove that it addresses “what is in fact a serious problem” and
that the measure “will contribute in a material way to solving” it.
Edenfield v. Fane, 507 U.S. 761, 776 (1993). TABC offered no such
evidence. And Central Hudson and other First Amendment authorities
do not allow a state to use a statute governing conduct to render legal
commercial speech illegal and thereby circumvent a First Amendment
analysis.
66
See 2 RR 88-89 (Dempsey); 4 RR, PX 21 (amended license agreement).
22
ARGUMENT AND AUTHORITIES
I.
TABC’s Retailer Name Label Ban Violates The First Amendment.
A.
The First Amendment applies.
1.
Central Hudson applies to malt beverage labels.
Malt beverage product labels have repeatedly been held to be
protected commercial speech.
Applying
Central
Hudson,
the
Supreme
Court
held
unconstitutional federal regulations prohibiting “disclosure of alcohol
content on beer labels” that allegedly discouraged overconsumption by
preventing “strength wars.”67
Applying
Central
Hudson,
the
Second
Circuit
held
unconstitutional a state’s disapproval of beer labels showing a frog with
its middle finger raised, which the state attempted to defend as needed
to protect children from seeing indecency.68
Applying Central Hudson, in Authentic Beverages Judge Sparks
held invalid TABC rules and a Code section69 restricting malt beverage
Rubin v. Coors Brewing Co., 514 U.S. 476, 481, 486-88 (1995).
Bad Frog Brewery Inc. v. New York State Liquor Authority, 134 F.3d 87 (2nd Cir.
1998).
69 835 F. Supp.2d at 234-236, 240-247 and 250-51.
67
68
23
producers’ labels and “advertising which retailers sell their products.”70
TABC
had
argued
that
such
advertising
“implicates
vertical
integration.”71
2.
TABC no longer claims the labels are deceptive.
Central Hudson limits protection of commercial speech to speech
that is “neither misleading nor related to unlawful activity.” 72
In the trial court, TABC contended that the labels are misleading.
The district court found that they are not, the evidence supports that
finding, 73 and TABC has abandoned the point by not briefing it.
3.
The labels concern lawful products.
As the case moved to trial, TABC increasingly focused on a
distortion of the Supreme Court’s exception for commercial speech
regarding an “unlawful activity” or “unlawful product.”
The labels are commercial speech regarding lawful products and
sales. The speech held not entitled to First Amendment protection in
the two cases TABC relies on (at pp. 11-13) made substantively illegal
Id. at 243.
Id.
72 Central Hudson, 447 U.S. 557, 564.
73 For example, the labels at issue were approved under federal COLA standards,
which include a requirement that the labels not be deceptive. 2 RR 47-50 (Rossi); 2
RR 86-87 (Dempsey).
70
71
24
offers. In one, a newspaper ran want ads offering jobs on a basis that
discriminated between men and women.
In the other, a car
manufacturer made online offers to sell cars without going through a
licensed dealer.
Mark Anthony addresses this argument in more detail in Part III,
because it is best understood after reviewing the application of the
settled Central Hudson law TABC seeks to bootstrap its way out of.
4.
The Twenty-First Amendment does not qualify the
First.
TABC (at p. 8) asserts that this case involves a “clash between the
First and Twenty-First Amendments.” The Supreme Court has rejected
such arguments: “[T]he Twenty-first Amendment does not qualify the
constitutional prohibition against laws abridging the freedom of speech
embodied in the First Amendment,” and “cannot save” a ban on
alcoholic beverage commercial speech.74
74
44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 516 (1996).
25
B.
TABC’s contention that the label ban advances the
government’s interest in retailer independence was properly
rejected by the district court.
The consensus governmental interests underlying regulation of
alcoholic beverages are temperance, prevention of underage drinking,
tax collection, and retailer independence.75
TABC never claimed that a retailer name label ban directly serves
temperance or tax collection. It dropped a claim that the labels might
encourage underage drinking.76
1.
TABC asserts its interest in the three-tier system.
TABC (at pp. 22-30) argues that protection of the “three-tier
system” is the relevant government interest.
The one sentence
justification TABC gave when it adopted the first of the challenged
rules was “strengthen the three-tier system.”77
The three tiers are producers, wholesale distributors, and
retailers. Producers are brewers, other malt beverage manufacturers,
distillers,
and wineries.
On-premises retailers
are
bars
and
2 RR 194 (Hinman); see also 3 RR 153-54 (Maisch “wouldn’t necessarily say they
are the exclusive reasons”).
76 TABC’s corporate representative had speculated that underage grocery store
shoppers might be more tempted to try to buy illegally or steal alcoholic beverages
whose labels contained the TGIF name.
77 19 Tex. Reg. 5629 (Jul. 19, 1994).
75
26
restaurants.
Off-premises retailers are grocery stores, convenience
stores, multi-purpose retailers like WalMart, and liquor package stores.
The general idea of the three-tier system is that producers sell to
wholesale distributors, each wholesaler then offers the products it
carries for sale to any retailer that wishes to purchase them, and
retailers sell to ultimate consumers.
There are, however, many variations from state to state,78 and
many exceptions in every state.
In “control” states, such as
Pennsylvania, the state itself owns the retail outlets for off-premises
sales.79 In many of the 33 “license” states, including Texas, wineries
can sell directly to ultimate consumers, bypassing both distributors and
retailers,80 and craft brewers can sell at retail and do some
distribution.81
2.
The three-tier system seeks to protect retailer
independence.
The three-tier system is a means to protect a retailer’s
independence from coercive control by one manufacturer or wholesaler
over the retailer’s choice of products and pricing. This is clear from the
3 RR 239 (Maisch).
3 RR 185, 220 (Maisch).
80 See Code §§ 16.01(a)(5); 16.09; 54.01.
81 See Code chs. 12 and 12A.
78
79
27
origin of the system, from the federal Act that first enacted it, from the
state acts, including Texas, and from the caselaw.
Fosdick & Scott: TABC cites a page discussing the evils of “tied
houses” in a 1933 book by Fosdick and Scott, Toward Liquor Control.
Writing before the effective date of the repeal of Prohibition, the
authors opposed the kind of license systems that Texas and most states
now have, because of its “fundamental flaw” – i.e., “retain[ing] the
private profit motive which makes inevitable the stimulation of sales.”82
The authors urged state control, meaning that the state
“maintains an exclusive monopoly of retail sales for off-premises
consumption.”83 A significant minority of states have such systems.
For states like Texas that opt for a license system, Fosdick and
Scott made ten recommendations.84
One was that advertising “be
rigidly restricted or forbidden;” six states had already passed such
laws.85
TABC cites (at p. 15) recommendation number three, that the
“‘tied house,’ and every device calculated to place the retail
Toward Liquor Control at p. 11 (The Center for Alcohol Policy 2011 ed.).
Id.
84 Id. at pp. 28-34.
85 Id. at p. 33.
82
83
28
establishment under obligation to a particular distiller or brewer,
should be prevented by all available means.”86 “‘[T]ied houses,’ that is,
establishments under contract to sell exclusively the product of one
manufacturer,” they said,
had all the vices of absentee ownership. The manufacturer
knew nothing and cared nothing about the community. All
he wanted was increased sales. He saw none of the abuses,
and as a non-resident he was beyond local social influence.87
The authors also condemned the “effect” of tied houses “in stimulating
competition in the retail sale of alcoholic beverages.”88
The Federal Act:
In 1935, after repeal, Congress enacted the
Federal Alcohol Administration Act. The federal Act made it unlawful
for any producer or distributor “to require, by agreement or otherwise,”
any retailer to purchase its alcoholic beverages “to the exclusion in
whole or in part” of the products of others, “or if the direct effect of such
requirement is to prevent, deter, hinder, or restrict other persons from
selling or offering for sale any such products to such retailers.”89
Id. at p. 29.
Id.
88 Id.
89 27 U.S.C. § 205(a).
86
87
29
Thus, according to the federal Act and its legislative history, “the
essence of the ‘tied house evil’ was vertical integration.”90
Texas and other states’ tied-house statutes: Many states,
including Texas, closely follow the federal statute and regulations.
Texas considers a “tied house” relationship to be one that gives a
manufacturer or wholesaler “practical control over the business of the
retailer,” allowing “the creation of a monopoly for certain brands of
liquors as well as dictating prices.”91
TABC’s witness on regulation, a former Oklahoma regulator,
agreed: “the real problem that the three tier system was designed to
prevent
is
a
manufacturer
gaining
control
over
a
retail
establishment.”92
3.
The three-tier system is not an end in itself.
The three-tier system is an “unquestionably legitimate” approach
to alcoholic beverage regulation.93 But it is not an end in itself. As just
shown, it is a means to prevent vertical integration, in order to protect
National Distributing Co. v. U. S. Bureau of Alcohol, Tobacco and Firearms, 626
F.2d 997, 1009 (D.C. Cir. 1980).
91 Neel v. Tex. Liquor Control Bd., 259 S.W.2d 312, 316 (Tex. Civ. App.—Austin
1953, writ ref’d n.r.e.).
92 See 3 RR 191-93 (Maisch).
93 Granholm v. Heald, 544 U.S. 460, 466, 489 (2005).
90
30
retailer independence, and thereby to discourage underage drinking
and intemperance, as the district court found.94 It is not the only such
approach. As TABC’s witness agreed, there is less concern, “perhaps no
concern,” about retailer independence in control states.95
TABC argues (at p. 26 n.11) that the district court’s finding that
TABC’s prohibition of Mark Anthony’s labels had only an “indirect,
attenuated, and speculative” effect on the three-tier system is really a
conclusion of law. What the relevant statutes, rules and court cases say
is a question of law, but what governments actually use the three-tier
system for and the circumstances under which it was adopted are
matters of fact.
In any event, TABC does not challenge either the law or the facts:
what the three-tier system is about is retailer independence.
Mark Anthony strongly supports retailer independence. The malt
beverage market is dominated by AnheuserBusch and SAB-MillerCoors,
which together account for two-thirds of US sales, and are merging.96
App. 2, CR 101, Finding of Fact 19.
See 3 RR 186-87 (Maisch).
96 AnheuserBusch “accounts for about 35% of retail revenue” in the U.S., SABMillerCoors “for around 30%,” and “ABI is acquiring SAB-Miller in a deal worth
$106 billion.” Miller et al., “The Market Power Effects of a Merger: Evidence from
the U.S. Brewing Industry (July 25, 2016) at p. 5.
94
95
31
AnheuserBusch sells products that compete directly with Mark
Anthony’s, such as Bud Lite Lime-a-Rita.97 AnheuserBusch and SABMillerCoors, unlike smaller manufacturers, can afford to license brands
like the San Antonio Spurs, the Houston Astros, and the National
Football League.98
Mark Anthony would not want AnheuserBuschMillerCoors to
control the large retail chains.
AnheuserBuschMillerCoors already
have most of the grocery store shelf space.99 A much smaller
manufacturer faces a stiff challenge to get new products on the shelves
when those products are not supported by the brands the giants can
license or by their massive television advertising.100
4.
The three-tier system and retailer independence today.
When confronted with a “three-tier system” defense of a ban or
restriction on alcoholic beverage commercial speech, courts should first
ask whether there is “an actual problem in need of solving” – i.e.,
“whether the State has shown that there is a real danger that paid
advertising of alcoholic beverages would lead to vertical or horizontal
2 RR 80 (Dempsey).
See 3 RR 112, 132-33 (Dholakia).
99 2 RR 186-87 (Hinman).
100 See 2 RR 80 (Dempsey); 2 RR 186-87 (Hinman).
97
98
32
integration under circumstances existing in the alcoholic beverage
market today.”101
The world of alcoholic beverages today is quite different from the
1930’s.
Consolidation is horizontal, not vertical. There is worldwide
concentration of market power at the manufacturer level and state-level
concentration of market power at the distributor level.102
Most retail sales of alcohol are not by bars or saloons. They are by
chains of restaurants, grocery stores, convenience stores, and multipurpose stores like WalMart. These are national or even global chains.
Such chains are in no danger of succumbing to one manufacturer.
Corporate headquarters decide what alcoholic beverages to buy at
wholesale based on careful analysis of their customers’ expectations,
and therefore “typically” start with “the nationally advertised products”
that are the “most in demand.”103 They delegate to local management
what locally popular products, such as craft beers, to stock.104
Both the large retail chains and the large manufacturers compete
in part by massive advertising, on media that did not exist in the 1930s.
101Retail
Digital Network, 810 F.3d at 652.
See 2 RR 231-32 (Hinman).
103 2 RR 199 (Hinman).
104 Id.
102
33
The First Amendment first protected commercial speech in 1976.105 It
first protected speech about alcoholic beverages in 1995.106
C.
The retailer name label ban violates the First Amendment.
TABC must therefore prove the labels cause harm to retailer
independence in a way that “is real in the circumstances of this case,”107
that the retailer name label ban directly and materially addresses that
real harm, and that the ban is narrowly tailored to do so.
1.
TABC did not prove harms to retailer independence.
The government bears the burden of proving “that the harms it
recites are real and that its restriction will alleviate them to a material
degree.”108 TABC’s burden of showing real harm is “not satisfied by
mere speculation or conjecture.”109
The district court found that TABC had offered only “indirect,
attenuated, and speculative” theories of possible harm to the three tier
system.110 TABC suggests (at p. 26 n.11) that this finding is really a
conclusion of law. On the contrary, it is in major part a finding of fact:
See Virginia Bd. of Pharmacy v. Virginia Citizens Consumer Council Inc., 425
U.S. 748 (1976).
106 See Rubin v. Coors Brewing Co., 514 U.S. 476 (1995).
107 Retail Digital Network, 810 F.3d at 652-53.
108 Rubin v. Coors Brewing Co., 514 U.S. at 487.
109 Id.
110 App. 2, CR 101, Finding of Fact 20.
105
34
it fairly summarizes the only evidence of harm to the three-tier system
that TABC offered.
TABC does not challenge it factually, and no
evidence would support a contrary finding.
(a)
There is no evidence of actual harm to retailer
independence.
If such labels did cause real harm to retailer independence, TABC
should have been able to prove it.
“Hundreds” of products whose labels have retailer names on them
are being sold nationally,111 according to John Hinman, a lawyer who
has for 38 years had a national alcoholic beverage regulation practice.
Neither federal regulators nor 47 other states’ regulators barred
Mark Anthony’s malt-based products with TGIF on the labels. Since
May of 2013, when sales began in other states, there have been no
complaints about TGIF restaurant independence being affected.112 All
450 TGIF restaurants nationwide combined bought a total of 170 cases
of Mark Anthony products in 2013 and only 80 cases in 2014.113
In Texas, wine- or spirits-based products were as of trial being
sold under labels containing the restaurant chain names Chili’s,
2 RR 189 (Hinman).
2 RR 85 (Dempsey).
113 2 RR 83 (Dempsey).
111
112
35
Landry’s, Fleming’s, Ruth’s Chris Steakhouse, and Trader Vic’s, and
grocery store chain Trader Joe’s.114
TABC in 1992 approved labels with the TGIF brand on spirits
products made by Diageo,115 and in 20 years never challenged or
investigated
them.116
TABC’s
assistant
chief
of
audits
and
investigations testified that Diageo’s 20 years of Texas sales “could
have” affected retailer independence but “I don’t have any facts to
associate [that] having been a problem.”117
Instead of evidence of real harm to retailer independence, TABC
offered a two-step speculation and conjecture.
(b)
TABC’s two-part speculative theory
John Maisch, an assistant professor of business law at the
University of Central Oklahoma who had headed the Oklahoma
regulatory agency, stated TABC’s full theory:
“if the retail
establishments benefit from the sales of off-premises pouch products …,
then they might want Mark Anthony to keep selling the product and
See 2 RR 190 (Hinman) and 4 RR, PX 4.
See 4 RR, PX 2.
116 See 3 RR 39-43 (Jones).
117 3 RR 42 (Jones).
114
115
36
feel they need to carry other on-premise products that Mark Anthony
sells and that they would not otherwise carry.”118
As to the first step, benefit to restaurants, there were competing
expert opinions. Rice University professor Utpal Dholakia testified that
seeing the labels would increase a grocery store shopper’s “top of the
mind” awareness of the TGIF brand. 119 This, in turn, he opined would
have an “incremental benefit” to the restaurants – it would “impact[]
positively” on whether the shopper would “end up” going more often to
one.120 But he said “there’s no way” to quantify any increment in brand
awareness,121 and he did not ask his online survey participants whether
seeing the TGIF brand on the Mark Anthony product made them more
likely to visit a TGIF restaurant.122
University of Michigan professor Rajeev Batra addressed the
same issues for Mark Anthony. He specializes in brand management,
See 3 RR 191-193 (Maisch, admitting he stated this in his report provided in
response to Mark Anthony’s requests for disclosure).
119 3 RR 84 (Dholakia).
120 3 RR 87, 91 (Dholakia).
121 3 RR 121 (Dholakia).
122 3 RR 130-31 (Dholakia).
118
37
and before becoming a professor had managed a consumer product
brand.123
Professor Batra testified that TGIF brand awareness is already
very high, noting that 193 of the 198 Dholakia survey takers were
already familiar with it, and that the restaurant chain spends $50
million/year or more in national advertising.124
As a result, any
incremental brand awareness from grocery store shoppers seeing the
labels on pouch products would be “small, not significant, not
substantial.”125
Finally, any positive effect on traffic to the restaurants would be
“a very, very small effect,”126 not enough to affect business decisions by
the restaurant chain.127 In fact, the net effect on the restaurants could
well be negative – with shoppers choosing Heinz frozen food and Mark
Anthony beverages instead of going to a TGIF restaurant.128
The second step in TABC’s theory of harm is reflected in its
contention (at p. 24) that the malt beverage retailer name label ban
2 RR 121-122 (Batra).
2 RR 135, 139 (Batra).
125 2 RR 138 (Batra).
126 2 RR 140 (Batra).
127 2 RR 181 (Batra).
128 2 RR 144 (Batra).
123
124
38
rules “prevent the creation of an improper relationship between a
producer and a retailer,” and thereby “prevent the coercion of either
party by the other.”
That second step in TABC’s theory is entirely
speculative.
Under the trademark license agreement:
“ … there is no agreement or understanding with
respect to the sale or use by Friday’s of any product
manufactured and sold by Licensee, and … this Agreement
is not intended to, nor will it, induce the purchase by
Friday’s of Licensee’s products or exclude the purchase by
Friday’s of products produced by any other supplier of such
products.”129
In Mr. Hinman’s opinion, any risk to retailer independence is
“almost zero.”130
(c)
TABC’s preventative rule argument
Judge Livingston asked professor Maisch “where is the evidence
that any of the concerns that you’ve raised here have been documented
as a problem?”131
He responded that the “Texas legislature doesn’t
require the showing of actual control.
potential for these [sic] control.”132
App. 3, 4 RR, PX 21 at p. 25, ¶21 A.
2 RR 199 (Hinman).
131 3 RR 226.
132 See 3 RR 227.
129
130
39
It requires the inference of
TABC’s only Central Hudson argument on appeal is that First
Amendment law allows restrictions on commercial speech to “prevent
members of the producer tier from creating situations in which they will
[sic] have coercive power over retailers,” and “prevent the creation of an
improper cross-tier relationship.” 133 TABC is in error.
As the Supreme Court held in Edenfield v. Fane, speculations
about possible harms are not enough to justify “a preventative rule.”134
There, Florida sought “to justify its solicitation ban” on accountants
soliciting business clients “as a prophylactic rule” by “[r]elying on
Ohralik” 135 – referring to Ohralik v. Ohio State Bar Ass’n, 436 U.S. 447
(1978).
Under Ohralik, however, “a preventative rule was justified only in
situations ‘inherently conducive to overreaching,’” such as when “a
lawyer, a professional trained in the art of persuasion, personally
solicits an unsophisticated, injured, or distressed lay person.”136
Grocery store shoppers reading labels is not such a situation.
TABC Appellant’s Brief at 24; see also id. at p. 7.
507 U.S. 761, 773-74 (1993).
135 Id. at 773.
136 Edenfield, 507 U.S. at 774.
133
134
40
“Ohralik in no way relieves the State of the obligation to
demonstrate that it is regulating speech in order to address what is in
fact a serious problem … .”137 Grocery store shoppers reading labels
that contain a name used by restaurants is not a serious problem for
the restaurants’ independence.
And TABC offered no evidence of any serious problem.
2.
The malt-beverage retailer name label ban does not
directly or materially protect retailer independence.
Under Central Hudson TABC had to prove that the retailer name
label ban “directly” advances a substantial government interest. The
district court found that the three-tier system itself is an indirect means
of protecting retailer independence, and that “any effect” of TABC’s
retailer name ban “on the ‘three-tier system’ is indirect, attenuated, and
speculative.”138 TABC’s theory, as just seen, is indeed entirely indirect.
TABC also had to prove that its restriction would alleviate real
harms “to a material degree,” a burden that also is “not satisfied by
mere speculation or conjecture.”139
Id. at 776.
App. 2, CR 101, Finding of Fact 20.
139 Rubin v. Coors Brewing Co., 514 U.S.at 487.
137
138
41
It had to show “that the
preventative measure it proposes will contribute in a material way to
solving that problem.” 140
The district court found that any effect on the three tier system is
“attenuated, and speculative” and, as already shown, TABC’s own
evidence supports that adverse finding.
So does Mr. Hinman’s
testimony that banning labels with retailer names in them does not
materially
advance
consolidation
in
retailer
the
independence,
industry
through
and
that
controlling
labels
is
“completely
ineffective.”141 No one testified to the contrary.
Banning labels with retailer names only in Texas, and only on
malt beverages, could not materially contribute to solving the alleged
problem of independence of national chains of restaurants. Federal law
does not prohibit labels that include names used by retailers.142 No
other state has a statute or rule banning use on labels of names used by
retailers.
Mark Anthony and producers of hundreds of malt-based,
140Edenfield
v. Fane, 507 U.S. at 776.
2 RR 246 (Hinman). See also 2 RR 240 (Hinman).
142 The federal Act prohibits labels using the name of any “existing private or public
organization” but only “if” the way the name is used “is likely to falsely lead the
consumer to believe that the product has been indorsed, made, or used by, or
produced for, or under the supervision of, or in accordance with the specifications of,
such … organization.” 27 U.S.C. § 205(e) (emphasis added).
141
42
wine-based, and spirits-based products under such labels can continue
to sell them in 47 states.
3.
Banning such labels on malt only is irrational.
The Supreme Court has held that the “overall irrationality” of
restricting malt beverage labels but not wine or spirits labels shows
that the restriction “cannot directly and materially advance” any
“asserted interest.”143
More than 30 years ago, the San Antonio court of appeals noted
the irrationality of a similar Texas distinction.
TABC had rejected
Pearl Brewing Company beer labels as unauthorized private labels and
prohibited inducements.
The court held TABC’s denial arbitrary,
noting nothing “suggests any reason for allowing the practice in the
liquor industry, while denying it in the beer industry.”144
Rubin, 514 U.S. at 488. The Court rejected as irrational a restriction on beer
labels reflecting alcohol content that was not also applied to wine and spirits.
144 App. 4, Texas Alcoholic Beverage Comm’n v. Pearl Brewing Co., No. 04-8300529-CV (Tex. App.—San Antonio Dec. 31, 1985, no writ). Opinion at p. 19. In
February 1986 TABC settled with Pearl. TABC agreed to approve the labels and
that it “shall not promulgate or attempt to promulgate any new written rules that
would make unlawful the type of label approval” that Pearl had sought unless the
Legislature changed the statute. See App. 4, Settlement at p. 2. Nine years later,
TABC promulgated rules that include the first of the three retailer name label ban
rules at issue here. Nothing in the statute relevant to private brands or to retailer
names, however, had changed.
143
43
Here, the district court found “no substantial governmental
interest justification” for a retailer name label ban on malt-based but
not on spirits-based or wine-based alcoholic beverage products. CR 101,
FOF 24. TABC does not challenge this finding. The evidence already
discussed supports it, as does professor Maisch’s answer to the district
court’s question why Texas prohibits such labels on malt beverages
while allowing them on wine and spirits: “I’m not sure.”145
4.
The retailer name label ban rules are not narrowly
tailored.
Central Hudson also requires that the government prove that a
commercial speech restriction is “no more extensive than necessary,” or
at least show a “reasonable fit” between the restriction and the goal.146
The district court found that the “malt beverage label retailer
name ban is not narrowly tailored to advance any substantial
governmental interest; any such interest can be better served by other
regulatory action that does not restrict commercial speech.” CR 101,
FOF 22. TABC does not challenge the factual basis for this finding.
The evidence fully supports it. Mr. Hinman testified that any arguably
145
146
3 RR 228-29 (Maisch).
44 Liquormart, Inc., 517 U.S. at 507.
44
corrupt agreement or relationship could be investigated for violation of
substantive federal or state law, and label approval would not
immunize the parties.147
Instead, TABC makes the legal argument that it lacks the
resources to investigate such relationships. But that is no response.
Quite the contrary – it means that Texas itself does not think that there
is a problem with labels with retailer names leading to creation of
relationships in which the manufacturer can coerce a retailers.
That the Texas Legislature does not think there is such a problem
with labels is not just a logical deduction, it is an historical fact. The
Legislature in 2007 required TABC to approve wine and spirits product
labels that had received federal COLAs. This was part of a Sunset
process of “eliminating” regulations “not clearly tied to public safety or
consumer interests,”148 and the TABC did not provide the Sunset
Commission with any studies suggesting label approval was important
in preventing undue influence by manufacturers over retailers.149
2 RR 200-01 (Hinman).
See SUNSET ADVISORY COMM’N, SUMMARY OF RECOMMENDATIONS TEXAS
ALCOHOLIC
BEVERAGE
COMMISSION
5-6
(Issue
3)
(Feb.
2007)
https://www.sunset.texas.gov/public/uploads/files/reports/Alcoholic%20Beverage%20
Commission%20RTL%202007%2080%20Leg.pdf
149 3 RR 36-37 (Jones).
147
148
45
According to Dexter Jones, TABC’s assistant chief of audits and
investigations, stripping TABC of power to disapprove wine and spirits
labels has not hampered TABC’s ability to protect the independence of
restaurant retail chains like the TGIF chain, to stamp out unfair
competition, to discourage overconsumption and underage drinking, or
to assure efficient tax collection.150
He asserted that, in the year
between his deposition and trial, TABC had opened only 15 to 20 intertier investigations and selected the top five or so to actively work.151
To illustrate the basis for its speculations, TABC offered evidence
of TGIF Facebook posts of a promotion where the Mark Anthony
products could be purchased, for which Mark Anthony had furnished
the images.152 TABC also offered an email about Mark Anthony and a
consultant considering a “larger collaborative push” in four cities
outside Texas,153 and a consultant’s proposal to use the launch of the
off-premises products as an occasion to try to get Mike’s Hard
Lemonade into TGIF restaurants.154
Id. at 26-28 (Jones).
Id. at 15 (Jones). He testified that he “can’t discuss” investigations, so there is
no way to know how many, if any, even involved retailer names.
152 See 5 RR, DX 15 and 2 RR 102-08 (Dempsey).
153 See 5 RR, DX 26 and 2 RR 109 (Dempsey).
154 See 5 RR, DX 40 and 2 RR 109, 111-12 (Dempsey).
150
151
46
Mark Anthony’s general counsel stopped Mark Anthony’s
involvement in TGIF’s Facebook posts as soon as he discovered it.155
Such involvement may, however, have been perfectly proper.
Tier separation statutes do not, professor Maisch testified,
prohibit all communications between a member of the manufacturing
tier and a member of the retail tier, and “sales people” from the
manufacturer “go around all the time to talk” with retailers “about the
virtues of the product.”156
The Texas Code authorizes a manufacturer to tell the public
where its products may be purchased.157 Forbidding it to do so was held
unconstitutional in Authentic Beverages. The Texas Code authorizes
manufacturers to preannounce promotional activities with retailers.158
II.
TABC’s Thing of Value Theory Does Not Change the First
Amendment Analysis or Result, But Thing of Value Statutes Can
Be Construed to Avoid Unconstitutionality.
Code sections 102.15(a)(1) and 102.07(a)(2) say no manufacturer
or wholesaler may “give” a “thing of value” to a retailer. TABC argues
(at 24) that these provisions “prevent members of the producer tier from
2 RR 87 (Dempsey).
3 RR 205-06 (Maisch).
157 See TEX. ALCO. BEV. CODE § 108.09(a).
158 Id. § 102.07(g).
155
156
47
creating situations in which they will have coercive power over
retailers.”
Factually, this is the identical argument TABC makes for the
rules banning retailer names on labels. The First Amendment results
of applying these statutory prohibitions to ban the labels would be the
same.
Unlike the rules, however, the thing of value statutes can and
should be construed to avoid unconstitutionality.
Thing of value
statutes prohibit coercive control by manufacturers and distributors
over what products retailers buy from whom. The labels do not give
Mark Anthony any such control over TGIF restaurants.
A.
The First Amendment analysis and results are the same.
The district court concluded that, if the TGIF labels did violate
thing of value prohibitions, “as applied to these products and labels
those ‘thing of value’ prohibitions would violate the First Amendment
for the same reasons that the malt beverage retail name ban violates
the First Amendment.” CR 102, COL 9.
48
1.
Authentic Beverages
TABC has already lost this argument once, in Authentic
Beverages. Authentic Beverages in part concerned one of the Code’s
thing of value prohibitions, section 102.07(a). TABC took the position
that malt beverage producers could not advertise “which retailers sell
their products.”159 TABC argued that such advertising “confer[s] on the
retailer … a thing of value, which implicates vertical integration.”160
Judge Sparks held the “value to retailers” of such advertising “would be
minimal, and would thus scarcely raise the specter of vertical
integration,”161 and could not save the constitutionality of the
restriction on such advertising.
The same is even more true here. Authentic Beverages concerned
advertising that was intended to direct customers to the retailer, and
was expected to have at least “minimal” value to the retailer – a
manufacturer telling customers which retailers carried its products.
Here, the labels are intended and expected only to help sell products to
grocery store shoppers. The trial court found that they are “neither
intended nor expected to be purchased by the restaurants.” CR 102,
Authentic Beverages Co. 835 F. Supp. 2d at 243.
Id.
161 Id. at 244 & n.12.
159
160
49
FOF 26. They are “unlikely to have any appreciable effects one way or
the other on the restaurants,” and in any event, “[a]ny such effect is
speculative.”
CR 102, FOF 27.
Finally, the trial court found that,
“[a]ssuming without deciding” that the labels are advertising, “they are
not advertising ‘benefiting a specific retailer.’” CR 104, FOF 33.
TABC does not challenge FOF 26. As to FOFs 27 and 33, TABC
asserts (at p. 27 n.12) that the evidence conclusively establishes the
contrary, because both marketing professors agree that seeing the
labels increases brand awareness.
But as we have seen, professor
Dholakia said one could not quantify that “incremental” impact on
brand awareness, and professor Batra said any impact would not be
significant. Professor Dholakia did not even study whether seeing the
labels in the grocery stores would increase traffic to the restaurants,
and professor Batra testified that any such effect might even be
negative. Thus, the evidence fully supports FOFs 27 and 33.
Moreover, the trial court here found that sale of Mark Anthony’s
off-premises products with the labels does not “threaten” the
independence of the restaurants.
CR 102, FOF 25.
50
They “remain
completely free to decide … what alcohol to purchase from whom and in
what quantities for their customers’ on-premises consumption.” Id.
TABC does not challenge the legal or factual sufficiency of the
evidence to support that finding. As already shown, TABC argues only
that if sales of malt beverages under labels containing the TGIF brand
occur, the restaurants “might want Mark Anthony to keep selling the
product and feel that they need to carry other on-premise products that
Mark Anthony sells and that they would not otherwise carry.”162
2.
California
California is the only other state whose alcoholic beverage
regulator refused to approve the Mark Anthony product labels. It did so
on the basis of a California thing of value statute. For two reasons,
Authentic Beverages is the relevant precedent here.
First, California conducted no evidentiary hearing.
It simply
deemed the labels to have significantly benefited the restaurants.163
Second, an evidentiary hearing would have been pointless since
the controlling First Amendment case for California at the time was the
Ninth Circuit’s 1986 Actmedia decision, upholding a thing of value
162
163
See 3 RR 192-193 (Maisch agreeing that he said this).
2 RR 203 (Hinman).
51
statute prohibiting manufacturers from paying retailers to advertise in
the retailer’s store.
Only in 2016 did the Ninth Circuit hold that
Actmedia is no longer good law, and that California must prove that
such a speech restriction addresses real harm and directly and
materially advances a substantial governmental interest in stopping
it.164
B.
The labels do not violate the thing of value prohibitions.
The district court also concluded that, when construed to avoid
unconstitutionality, “statutory ‘thing of value’ prohibitions are not
violated by sale of malt beverage products whose labels contain the
name of a retailer.” CR 102, COL 11. That holding is fully consistent
with the purpose and judicial interpretation of such prohibitions.
1.
Not every “thing of value” to a retailer is prohibited.
As previously discussed, state statutes prohibiting giving any
“thing of value” to a retailer are modeled on the 1935 federal Act165 and
are intended to protect the independence of the retailer in deciding
what alcoholic beverages to purchase.
164
165
Retail Digital Network, 810 F.3d at 650-51.
27 U.S.C. § 205(b).
52
Not everything a manufacturer does or says that is valuable to a
retailer is a prohibited thing of value.
All states make statutory
exceptions, exceptions by rule, and exceptions by policy. Exceptions are
generally for things of modest value, for substantial things of value that
have sound business justifications, and for things of value that do not
threaten retailer independence. Courts require a real threat to retailer
independence.
2. Exceptions by statute, rule, and policy.
(a)
Thing of value exceptions by statute.
Professor Maisch acknowledged that the federal Act and most
states allow a variety of “point-of-sale” advertising by a manufacturer or
distributor – in the retailer’s store.166 Texas allows many such things of
value.
Consider Texas Code section 102.07, one of the thing of value
prohibitions at issue here. Subsection (b) authorizes giving retailers,
free of charge, “advertising specialties showing the name of the product
advertised,” as long as the dollar value in any one year is less than $78
in the year of enactment, adjusted for inflation. In rule 45.117(c)(2), the
166
3 RR 199 (Maisch).
53
TABC has increased this to $101 to account for inflation.
Under
subsection (d) of section 102.07, a winery may “furnish to a retailer
without cost recipes, recipe books, book matches, cocktail napkins, or
other advertising items showing the name of the winery furnishing the
items or the brand name of the product advertised,” as long as the cost
of each item does not exceed $1.
As has been discussed, Professor Dholakia could not quantify the
incremental benefit to brand awareness of a grocery store shopper
seeing the TGIF brand on a Mark Anthony product. Its value may be
similar to these statutorily allowed items. As professor Batra testified,
it may even be negative.
(b)
Thing of value exceptions by rule
State statutes also authorize regulators to make “thing of value”
exceptions by rule, just as the original 1935 federal Act does.167 The
Texas Code requires TABC to “adopt rules permitting and regulating
the use of” a wide array of objects, vehicles, equipment, caps and
uniforms “that bear alcoholic beverage advertising.”168
167
168
27 U.S.C. § 205(b).
Tex. Alco. Bev. Code § 108.03.
54
In a different subsection of rule 45.110(c) from the one that bars
advertising benefiting a specific retailer, TABC allows manufacturers to
furnish “food, beverages, entertainment and recreation” to “retailers or
their agents or employees” as long as the value does not exceed $500 per
person per occasion.169
In rule 45.113 for beer and rule 45.117 for
liquor, the TABC has promulgated numerous provisions authorizing
manufacturers, wholesalers and distributors to provide signs, gifts and
services to retailers.
(c)
Thing of value exceptions by policy.
State regulators also make regulatory policy exceptions. Not all
are for “de minimis” things of value to retailers.
TABC, for example, allows “loss leaders,” according to its
executive director.170 Texas excepts from illegal inter-tier relationships
volume discounts to a retailer as long as there is a “business reason” for
any differences in the retailers to whom the discounts are offered and as
long as the discount is not “excessive.”171
Rule 45.110(c)(4).
See 3 RR 261 (Cook).
171 See 4 RR, PX 8, TABC Marketing Practices FAQ: Inter-Tier Relationships –
Illegal Inducements at ¶ 4.
169
170
55
3.
Courts require real threats to retailer independence.
Courts construing generally worded thing of value prohibitions
therefore do not hold that any and every thing that a manufacturer or
distributor does or says that is or might be of some benefit to a retailer
is a prohibited “thing of value.” They require proof that the particular
thing, and the context in which it is given or furnished to the retailer,
involve a real and substantial threat to the retailer’s independence.
The leading case is the D.C. Circuit’s Fedway decision.172
A
wholesaler offered televisions and VCRs to the employees of any retailer
“if they agreed to buy certain quantities of specified liquor; the more
cases a retailer purchased, the greater in value the electronic good.”173
The Bureau of Alcohol, Tobacco and Firearms took the position
TABC takes here. It argued that the thing of value statute prohibits
“any inducement that the Bureau genuinely believes is dangerous—
capable, eventually, of breeding too cozy an association between
wholesaler and retailer.”174 The D.C. Circuit rejected that view: “[I]f
the Bureau suspects that a particular inducement places retailer
Fedway Associates, Inc., v. U. S. Treasury, Bureau of Alcohol, Tobacco and
Firearms, 976 F.2d 1416 (D.C. Cir. 1992).
173 Id. at 1418.
174 Id. at 1421.
172
56
independence at risk and thus that the inducement is proscribed” by the
statute, “it must provide substantial support backing up its suspicion –
at least where, as here, the anticompetitive nature of the inducement is
nowhere apparent on its face.”175
The D. C. Circuit explained why the agency must show a real
threat to retailer independence.
The Act was intended to foster
competition, in the belief that lower prices remove incentives for the
“corrupt black market” that was “one of the prime evils of
Prohibition.”176
“Allowing
the
Bureau
to
sanction
successful
inducements that BATF merely believes have the potential to lead” to
control over the retailer “risks outlawing inducements that work to
foster a competitive alcohol market.”177
Here, the labels are pro-competitive.
As we have seen, Mark
Anthony’s products are new products, intended to compete with
products like “Lime-a-Rita,” manufactured and advertised by industry
giant Anheuser Busch, and use of the TGIF brand is essential to
encourage grocery store chains to open some scarce shelf space for
them.
Id.
Id. at 1422.
177 Id.
175
176
57
The D.C. Circuit held that there was no inducement for the
retailer to purchase the wholesaler’s products “to the exclusion in whole
or part” of rivals’ products. Retailers who do so “are making a free and
rational economic choice to do so.”178
The restaurants here remain “completely free to decide in their
own business interests what alcohol to purchase from whom and in
what quantities … .” CR 102, FOF 25. TABC does not challenge this
finding and is bound by it.
III.
The Trademark Agreement Does Not Violate Section 102.01(h). If
It Did, It and Rule 45.110(c)(3) Would Be Unconstitutional As
Applied.
TABC contends (at p. 18-19) that the trademark license
agreement violates § 102.01(h) by giving the restaurants coercive
control over Mark Anthony.
It contends that this alleged violation
makes the labels the result of unauthorized activity under amended
rule 45.110(c)(3), and renders the labels “illegal speech” not protected
by the First Amendment. At the same time, it contends (at p. 31) that it
did not put in issue whether Texas can, consistently with the First
178
Id. at 1420.
58
Amendment, prohibit such agreements in order to ban labels containing
retailer names.
TABC is wrong on all counts.
A.
The trademark license agreement does not violate section
102.01(h).
1.
TABC put in issue whether section 102.01(h) has been
violated.
At trial, TABC asked professor Maisch whether, in his opinion,
the license agreement violated section 102.01(h).
He opined that it
did.179
Professor Maisch’s legal opinion is, of course, no evidence. It is
the opinion of one Oklahoma lawyer, who before this case had never
looked at the Texas Alcoholic Beverage Code and never dealt with a
trademark license agreement for a brand of any type.180
The district court declared that the trademark license agreement
does not violate section 102.01(h). 181 It concluded that section 102.01(h)
is not violated by the sale of products containing the name of a retailer
under a trademark license agreement with the brand owner.182 It found
See 3 RR 156-58 (Maisch).
3 RR 194-96 (Maisch).
181 App. 1, CR 73.
182 App. 2, CR 103, COL 14.
179
180
59
that the agreement “does not give the restaurants any ability to control
the business or interests of Mark Anthony;” it is “an arm’s length
agreement” with the brand owner, whose terms are “standard terms
needed to protect the validity and value of the intellectual property
while enabling both the licensor and the licensee to profit by its use.”183
2.
How to approach the statutory construction question.
Section 102.01(h) appears to be unique to Texas.184 It was enacted
in 1969 as Penal Code art. 666-17b,185 without any light being shed in
legislative history. No caselaw construes section 102.01(h). This Court
referred to it in Cadena Commercial USA Corp. v. TABC only to note
that, unlike the prohibition against an ownership interest in a retailer,
section 102.01(h) requires “control” over the member of another tier. 186
We know what prohibited control by a manufacturer over the
business of a retailer is – “practical control over the business of the
retailer,” allowing “the creation of a monopoly for certain brands of
liquors as well as dictating prices.”187 But what counts as a retailer
App. 2, CR 103, FOFs 29, 30 and 31.
3 RR 239 (Maisch, saying he has “never seen” a provision like it).
185 Added by Acts 1969, 61st Leg., p. 80, Ch. 38, § 16. What is now (h) was (f).
186 Cadena Commercial USA Corp. v. TABC, 449 S.W.3d 154, 167 (Tex. App.—
Austin 2014, pet. granted).
187 Neel, 259 S.W.2d at 316.
183
184
60
having prohibited “control or management” of the “business or
interests” of a manufacturer?
The
counterpart
would
be
a retailer
controlling
all
the
manufacturer’s decisions concerning what products to make and to
whom and how to sell them, and dictating their prices. The district
court properly found, based on the undisputed facts, that the agreement
does not give the restaurants such control or management over Mark
Anthony’s alcoholic beverage manufacturing business.188 TABC has no
challenge to the sufficiency of the evidence on which that finding is
based. Its only challenge is its erroneous contention (at pp. 18-19) that
the finding is wrong as a matter of law because Mark Anthony must
comply with the license agreement.
The trademark license agreement does not dictate prices on any
products. There is only one limit on what products Mark Anthony may
make and sell – not to use a brand associated with a different chain of
casual American restaurants as long as it is using the TGIF brand.
Mark Anthony is otherwise free to make and sell any products it
chooses, when and as it pleases.
188
App. 2, CR 103, FOF 30.
61
Mark Anthony agreed to that one limit in an arms-length bargain
over getting the license it needed to use the TGIF brand. TABC says (at
p. 19, n.9) that Mark Anthony’s agreement is irrelevant, but it is highly
relevant: Mark Anthony, like the retailers in Fedway, is “making a free
and rational economic choice.”189
3.
Shared quality control over products is not prohibited
control by one party over the business of the other.
The agreement thus does not give TGIF-MN control over Mark
Anthony’s business or interests. Instead, it provides (in TABC’s words
at p. 18) that TGIF-MN retains quality “control over the products Mark
Anthony makes that will carry the TGIF name and mark.”
The license agreement provides for quality control over (1) the
products to make sure that they are safe and that they taste as much
like bar-mixed cocktails as is possible for pouch products to do;190 (2) the
use of the IP, for consistency with other uses of the brand;191 and (2)
manufacturing conditions, to protect against human rights violations,
child labor, or other practices that would damage the brand.192
Fedway, 976 F.2d at 1422.
See App. 3, 4 RR, PX 21 at ¶5 Approvals And Quality, pp. 10-13, and Ex. F,
License Approval and Expectations Manual.
191 Id.
192 See App. 3, 4 RR, PX 21 at Ex. G, Code of Conduct.
189
190
62
Professor Batra, who specializes in brand management and had
himself managed a consumer product brand, had “no concerns” about
the agreement giving TGIF control or management of Mark Anthony.
The terms, he explained, are “not at all undue, coercive.”193 They are
“simply a brand owner exercising responsible diligence over the value of
the brand they are licensing out,” a “very normal practice,” simply “to
assure that quality standards don’t go below” the brand, to “safeguard
the use of the brand.”194
Mr. Hinman, who has helped negotiate and/or draft two dozen
such agreements currently in use in the industry, testified that “a
critical part of every license agreement is quality control,” that the
terms are “pretty normal,” and that they give the restaurants no undue
or unusual control or influence.195 TABC’s witness professor Maisch,
who had “never before encountered a trademark licensing agreement of
a brand of any type,”196 admitted he had no basis to dispute Mr.
Hinman.197
2 RR 159 (Batra).
2 RR 158-160 (Batra).
195 2 RR 207-209 (Hinman).
196 3 RR 195 (Maisch).
197 3 RR 197 (Maisch).
193
194
63
TABC itself referred to the terms as reflecting “very laudable
principles.”198 Professor Maisch’s only concern was, he said, that the
restaurants were “imposing” them on Mark Anthony.199 But that is
simply not so. Mark Anthony, like the retailers in Fedway, is “making
a free and rational economic choice.”200
4.
Section 102.01(h) should not be read to condemn such
agreements.
The evidence thus fully supports the finding that the agreement’s
terms are “standard terms needed to protect the validity and value of
the intellectual property while enabling both the licensor and the
licensee to profit by its use.”201 TABC does not challenge this finding
except to incorrectly suggest in a footnote (at p. 19, n. 9) that the
voluntary nature of the agreement is “irrelevant.”
Section 102.01(h) should not be read to condemn such agreements.
Texas could not and is not trying to prohibit trademark license
agreements.
Texas has no jurisdiction over alcoholic beverage sales
outside Texas, so it cannot prohibit industry participants from entering
into such agreements and acting under them in other states. Each such
3 RR 178 (direct examination of Maisch by TABC attorney).
See, e.g., 3 RR 178, 203 (Maisch).
200 Fedway, 976 F.2d at 1422.
201 App.2, CR 103, FOF 30.
198
199
64
licensee would be free to sell products under labels bearing the name of
a retailer in other states.
All Texas is in fact trying to prohibit is sales of such products
under such labels in Texas.
Whether Texas can prohibit a Texas
permittee’s licensed use of a brand on products sold in Texas is TABC’s
“illegal speech” argument.
Reading section 102.01(h) to prohibit commercial speech use of a
brand under standard shared quality control trademark license
agreements makes no sense. Trademark licensing has solid business
justification.
Licensed use of a brand on a product truthfully informs consumers
that both the manufacturer and the brand owner believe the product
meets consumers’ expectations for the brand. This is established law202
and supported by uncontroverted record evidence.203
Both the licensor and the licensee have strong economic incentives
to make sure that the new product meets brand expectations.
If
See Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368,
387 (5th Cir. 1977);
203
See 2 RR 135-36 (Batra) (Licensed use of the brand tells the consumer they
“wouldn’t put their brand on this unless they thought the quality was good enough,
matched the reputation they wanted to build up for the brand”).
202
65
consumers find it does not, they will buy less of it. Shared quality
control helps make sure that it does.
The trademark owner has another, even stronger, need to exercise
quality control. If it fails “to exercise reasonable control over the use of
the mark by a licensee,” it may be deemed to have “abandoned” the
trademark altogether.204
“The indispensable condition of a valid
trademark license is that the licensor control the nature and quality of
the goods or services sold under the mark.”205 Professor Maisch did not
know this.206
The Legislature could not have intended to prohibit such quality
control. “Protection of the public by assuring a consistent standard of
quality is a central purpose of trademark law.”207
B.
If section 102.01(h) were construed as TABC urges, it and
rule 45.110(c)(3) would be unconstitutional as applied.
The district court declared that, if section 102.01(h) were
interpreted as TABC urges, it and rule 45.110(c)(3), as applied to the
trademark license agreement and labels here, would violate the First
See RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 33 cmt. c (1995).
SIEGRUN D. KANE, KANE ON TRADEMARK LAW: A PRACTITIONER’S GUIDE § 20:2
(4th ed. 2006).
206 See 3 RR 203 (Maisch).
207 KANE ON TRADEMARK LAW: A PRACTITIONER’S GUIDE § 20:2.
204
205
66
Amendment.208 It based this conclusion on the same reasons as the
retailer name label ban rules,209 and an additional finding that the
labels are not the result of unauthorized activity because they use the
brand under license from its owner.210
1.
TABC put section 102.01(h)’s validity, as applied, in
issue.
TABC argues that the constitutionality of § 102.01(h) was neither
pled nor tried by consent. On the contrary, it was both pled and tried
by
consent.
(TABC
apparently
does
not
dispute
that
the
constitutionality of rule 45.110(c)(3) was properly at issue.)
In addition to seeking declarations about the label ban rules and
thing of value statutes, Mark Anthony sought declarations that “any
other statutory provisions, if they must be read to prohibit such labels,
are unconstitutional under the First Amendment.”211 Based on its
theory that the trademark license agreement violates section 102.01(h),
TABC contended that Texas sales under labels making licensed use of
the brand is “advertising benefiting a specific retailer” that “is the
result of unauthorized activity,” in violation of rule 45.110(c)(3). That,
App. 1, CR 72-73.
App. 2, CR 103, COL 14.
210 App. 2, CR 104, Finding of Fact 34.
211 SCR 16, ¶ 58.
208
209
67
TABC contended, in turn makes the labels “illegal speech,” stripping
them of First Amendment protection.
212
Thus, TABC placed section
102.01(h) directly in issue.
2.
Pittsburgh Press and Ford Motor Co. do not apply.
For the First Amendment to apply, commercial speech “must
concern
lawful
activity,”213
meaning
speech
“regarding
lawful
products.”214
TABC argues (at pp. 12, 20) that the First Amendment does not
apply, citing Pittsburgh Press Co. v. Pittsburgh Comm’n on Human
Relations215
and
Ford
Motor
Co.
v.
Texas
Department
of
Transportation.216 Those cases addressed entirely different situations.
The Pittsburgh Press wanted to run want ads for job offers that
discriminated between men and women, in violation of a city ordinance.
That is, it wanted to advertise “illegal commercial activity.”217
Similarly, Ford wanted to advertise online retail sales that did not go
through a dealer, and Texas law required retail sales to be by a licensed
See 2 RR 29-30 (TABC opening statement).
Central Hudson, 447 U.S. at 566.
214 Retail Digital, 810 F.3d at 642.
215 413 U.S. 376, 378 (1973).
216 264 F.3d 493, 507 (5th Cir. 2001).
217 Pittsburgh Press, 413 U.S. at 388.
212
213
68
dealer.
The “advertisement, while of truthful facts, is part of an
integrated course of conduct which violates Texas law.”218
Protected commercial speech about alcoholic beverages is “speech
about a lawful product.”219 Here, the product and selling it are perfectly
lawful.
Mark Anthony, a licensed non-resident manufacturer, sells
lawful products to licensed wholesalers, which in turn offer them to any
licensed retailers who wish to buy them.
TABC has no objection
whatsoever to the sale of the products. It simply wants to force Mark
Anthony, while using the TGIF trademark in 47 states, to pay to have a
different set of labels in Texas.220
Thus, what TABC actually opposes, and the only thing it opposes,
is use on the labels in Texas of a name used by a retailer. That is
shared commercial speech by both Mark Anthony and TGIF-MN,
truthfully
representing
that
lawful
expectations of the brand.
Ford Motor, 264 F.3d at 507.
44 Liquormart, 517 U.S. at 504.
220 See 3 RR 43 (Jones).
218
219
69
products
meet
consumer
3.
As TABC would construe and apply them, section
102.01(h) and rule 45.110(c)(3) fail the Central
Hudson tests.
Mark Anthony’s labels are not “illegal speech” under the First
Amendment, for all the reasons already discussed. Treating them as
illegal speech does not directly and materially advance any substantial
government interest, and is not narrowly tailored to do so.
(a)
TABC does not describe even speculative harm.
As to harm, TABC does not offer even a speculative theory. Its
entire argument is one sentence (at p. 16, emphasis in original):
Section 102.01(h) reflects an understanding by Texas’
Legislature that, if the independence of a member of any tier
of the industry is compromised, societal ills will follow, such
as intemperance, unfair competition in the market, and
organized criminal activity.
TABC cites as support the last four pages of the trial transcript.221
The trial court had asked TABC’s executive director if there are ways to
“target regulations to solve the problems that exist in this current
environment? And aren’t we obligated to do that?”222
director avoided any direct answer.
221
222
3 RR 276-80 (Cook).
3 RR 278 (Cook).
70
The executive
TABC does not cite the more relevant testimony. TABC’s counsel
had asked the executive director how would an agreement between a
manufacturer and an affiliate of retail permittees “cause” any societal
ills “to be more likely to occur?” She answered:
It’s not one of those things that you can pinpoint is it going
to happen today, is it going to happen tomorrow. It happens
over time when you whittle away at the framework. …. So is
it going to happen tomorrow? No. But with the continued
deregulation, without keeping those strict separations in
place to prevent that vertical integration over the course of
that time, it will matter, and it will hurt.223
That is naked speculation about unspecified possible harm.
(b)
No effect at
manufacturers.
all
on
retailer
control
of
Whatever the supposed harm might be, there is “little chance,”224
indeed none at all, that stopping Texas malt beverage sales under labels
making licensed use of a retailer brand would materially alleviate it.
Mark Anthony and all other manufacturers that license brands
used by retailers on hundreds of products can continue selling them
elsewhere.
223
224
Preventing
consolidation
through
3 RR 257-258 (Cook).
Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 566 (2001).
71
labels
would
be
“completely ineffective”225 to address the societal ills TABC speculates
might occur.
(c)
TABC can instead address actual prohibited
control.
Condemning Texas label usage of brands under standard
trademark license agreements is not narrowly tailored to address
whatever unspecified harms an unspecified improper retailer control of
a manufacturer might cause.
TABC has remedies that do not
improperly restrain commercial speech.
All TABC needs to do is to notify the manufacturer (and the brand
owner, if it is a Texas retail permittee) of specific contract terms or
specific related activities that it contends violates the Code, and explain
the alleged violation. In response, the parties to the agreement may
choose to modify its terms or challenge the agency. This is the standard
way that alcoholic beverage regulation works.226
Mark Anthony and TGIF-MN did that here. They changed the
way the trademark license royalty is calculated from a per sales basis to
a flat fee in response to concerns by New York regulators.227
2 RR 246 (Hinman).
2 RR 209-210 (Hinman).
227 2 RR 89 (Dempsey).
225
226
72
They
deleted or amended before trial several terms professor Maisch had
criticized in deposition. One provision purported to prevent wholesales
to low-end off-premises retailers; removing it was no problem since it
was unenforceable – Mark Anthony must sell to distributors, who must
offer their products to all retailers.228
If the parties believe the term is both lawful and too important to
give up, but TABC does not agree, TABC can do what the Code
envisages:
issue a notice of violation and, if necessary, pursut an
enforcement action.
CONCLUSION AND PRAYER
Appellee Mark Anthony Brewing respectfully requests that the
Court affirm the judgment below and grant Mark Anthony Brewing
such other and further relief to which it is entitled.
228
2 RR 88 (Dempsey).
73
Respectfully submitted,
By: /s/ P.M. Schenkkan
P. M. Schenkkan
State Bar ID No. 17741500
[email protected]
Mary A. Keeney
State Bar No. 11170300
[email protected]
GRAVES, DOUGHERTY, HEARON & MOODY
A Professional Corporation
401 Congress Avenue, Suite 2200
P.O. Box 98
Austin, Texas 78767
(512) 480-5682
(512) 480-5882 Telecopy
M. Jack Martin, III
State Bar No. 13094360
Lou Bright
State Bar No. 02991900
MARTIN FROST & HILL
3345 Bee Cave Road, Suite 105
Austin, Texas 78746
Telephone: (512)473-0300
Facsimile: (903)386-2714
[email protected]
[email protected]
ATTORNEYS FOR
MARK ANTHONY BREWING, INC.
74
CERTIFICATE OF SERVICE
By my signature below, I hereby certify that a true and correct
copy of the above and foregoing document has been sent via electronic
service to all counsel of record listed below on this the 28th day of
October, 2016.
Ms. Karen L. Watkins
State Bar No. 20927425
Office of the Attorney General
Administrative Law Division
P.O. Box 12548
Austin, Texas 78711-2548
512-475-4208 (telephone)
512-320-0167 (facsimile)
[email protected]
[email protected]
[email protected]
/s/ Mary A. Keeney
Mary A. Keeney
75
CERTIFICATE OF COMPLIANCE
This brief complies with the type-volume limitation of Tex. R. App.
P.9.4(i)(2)(B) because it contains 13792 words, excluding the parts of
the brief exempted by Tex. R. App. P. 9.4(i)(l). The undersigned relied
on the word count of MS Word, the computer program used to prepare
the brief.
/s/ Mary A. Keeney
Mary A. Keeney
76
APPENDIX
TAB
1.
Final Declaratory Judgment CR 71-73
2.
Findings of Fact and Conclusions of Law CR 99104
3.
Amended and Restated License Agreement
4.
TABC v. Pearl Brewing Company
77