Proposed Federal Alcohol Labeling Revisions Retain Constitutionally Suspect Review Standards

TTBOn November 26, 2018, the Alcohol and Tobacco Tax and Trade Bureau (TTB) published an extensive proposed rule that seeks to “reorganize and codify [labeling and advertising] regulations in order to simplify and clarify regulatory standards … and reduce the regulatory burden on industry members where possible.” The agency is accepting public comments on the proposal until June 26, 2019.

TTB’s efforts to streamline the rules and finally recognize long-standing First Amendment precedents are welcome. But parts of the proposed rule do not adequately protect the commercial speech rights of alcohol-beverage producers and consumers. We’ll focus here (as WLF will in its forthcoming public comment) on the prohibition of statements on labels or in advertisements that are disparaging, false, misleading, obscene, or indecent.

While encouraging civility in the wine, beer, and spirits marketplace may be a noble cause, simply stating that such regulation “reflects … longstanding ATF and TTB policy” will not save rules that restrict commercial speech from successful court challenges.

The proposed rule runs counter to the ever-increasing protections that are afforded to commercial speech. In Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of N.Y., 447 U.S. 557 (1980), the U.S. Supreme Court set out a baseline test for analyzing commercial speech regulations. The Court’s established four-step analysis asks whether: 1) the expression is protected by the First Amendment; 2) the government has a substantial interest in regulating the speech; 3) the regulation directly and materially advances the government’s substantial interest; and 4) the regulation is narrowly tailored. 447 U.S. at 566.

In recent years, the Court has applied Central Hudson in a much more exacting way, providing for “heightened scrutiny” where the restriction at issue discriminates against specific speakers or content. Sorrell v. IMS Health Inc., 564 U.S. 552, 552 (2011). In Sorrell, the Court explained the need for “heightened scrutiny whenever the government creates a regulation of speech because of disagreement with the message it conveys.” Id. at 566.

The TTB is doing just that in its proposal. While the TTB’s proposal would prohibit false speech (unprotected under the First Amendment), it also targets truthful commercial speech that may tend to mislead or offend consumers. This provision accords the TTB a great deal of latitude to subjectively judge alcohol producers’ speech. While there is bound to be discretion and subjective review of any agency regulation, the TTB’s prohibition of certain disparaging statements or indecent labels or advertisements goes too far. The rule is not narrowly tailored and therefore likely fails Central Hudson’s intermediate scrutiny test as well as Sorrell’s heightened scrutiny approach.

A more recent Supreme Court decision, Matal v. Tam, 137 S. Ct. 1744 (2017), should also give the TTB serious pause. There, the Court struck down the “disparagement clause” of § 1052 of the Lanham Act, which prohibited federal trademark registration for marks that might disparage any persons, living or dead. The Court held that the ban “offends a bedrock First Amendment principle: Speech may not be banned on the ground that it expresses ideas that offend.” 137 S. Ct. at 1751.

The Court applied the Central Hudson test, but also emphasized that Sorrell provides for heightened scrutiny when a law or regulation engages in viewpoint-based discrimination. The government asserted its interest in “protecting the orderly flow of commerce,” but the Court rejected this, finding the clause was not “an anti-discrimination clause; it [was] a happy-talk clause.” Id. at 1765. The Court found that free speech was more important than ridding the commercial market of offensive expressions. “The commercial market is well stocked with merchandise that disparages prominent figures and groups, and the line between commercial and non-commercial speech is not always clear, as this case illustrates. If affixing the commercial label permits the suppression of any speech that may lead to political or social ‘volatility,’ free speech would be endangered.” Id.

Another Lanham Act case in which the Court will hear oral arguments on April 15 could deal a second significant blow to § 1052. See In re Brunetti, 877 F.3d 1330 (Fed. Cir. 2017), cert. granted, 139 S. Ct. 782 (2019). In Brunetti, the Court will consider a challenge to the law’s prohibition of immoral and scandalous marks. The Trademark Office denied applications for an athletic apparel mark “FUCT” because it sounds like one of George Carlin’s Seven Dirty Words. The Federal Circuit ruled in favor of Brunetti, finding that the mark may be “immoral” or “scandalous” but the bar on such trademarks is nonetheless an unconstitutional restriction of free speech.

In addition to the constitutional concerns with its vague, subjective standards for alcohol labels and advertisements, the TTB must consider the message such paternalistic rules sends to state beverage control boards, which also review alcohol product labels. Such regulators have taken aim at craft beer names like “Dirty Bastard,” “Backwoods Bastard,” and “Raging Bitch,” as well as label images like a cartoon frog with its middle finger extended. Some of those decisions were successfully challenged under the First Amendment, but states would be better off helping their local businesses than forcing them into lawsuits.

An alternative, more appropriate approach, would be to promote self-regulation and self-policing of labels and advertisements that stray outside the normal commercial discourse. For example, The Brewer’s Association, which represents smaller, independent brewers, in 2017 issued a self-regulatory decision that prohibits beers whose labels it found to be “obscene” from touting that it won a Brewers’ Association-sponsored Great American Beer Festival award. Such self-regulation is preferable over government regulation, particularly when it comes to speech.

It is not as if the proposal ignores all First Amendment interests. For the first time, the TTB will officially recognize the Supreme Court’s decision in Rubin v. Coors Brewing Co., 514 U.S. 476 (1995) and provide greater commercial speech protections for alcohol labels. In Coors, the Court struck down on First Amendment grounds the Federal Alcohol Administration Act’s ban on alcohol content statements on beverage labels. The Court found that the Government’s regulation of speech was not sufficiently tailored to its goal of preventing “strength wars.” Id. at 490.

But the proposal still maintains the TTB’s antiquated view of commercial speech jurisprudence. It also lacks the clarity that the TTB says it seeks to provide. It is vague and overbroad and will likely cost many providers, both large and small, significant sums as they attempt to interpret the rules and design compliant labels and advertisements. The danger of a rule that does not explicitly state what is prohibited is that agencies can aggressively expand, or abruptly alter, the import of their regulations. Because agencies currently are afforded great deference to interpret their own regulations, the TTB can suddenly change how it interprets rules whenever it chooses.

Product labeling and advertising is often what sets one wine, beer, or spirit apart from another in a highly competitive market. A lack of consistency and clarity in the federal rules that govern such decisions can be ruinous, especially to smaller alcohol producers who can barely afford regulatory compliance counsel, let alone a constitutional expert. Delays due to labeling uncertainty or regulatory rejection also deprive consumers of new products.

Larger companies may also use this proposal as a club against the smaller rivals, urging the TTB to broadly interpret the vague terms in the rule (which won’t affect them because none of their products are or need to be labeled in an “edgy” way) to delay or reject competitors’ labels. Such regulatory arbitrage is bad for competition.

“Alcoholic beverage businesses often operate in an environment of uncertainty created by vague regulations, inconsistent enforcement, unpredictable policy changes, and capricious decisions.” Tracy Jong & Luis Ormaechea, Trends to Note in Alcoholic Beverage Trademark Law that Can Impact the Decision Making Process for Businesses at Critical Points in the Alcoholic Beverage Produce Life Cycle, 12 Buff. Intell. Prop. L.J. 19, 64 (2018). The TTB’s proposed rule seeks to clarify and simplify the regulations for alcohol-beverage producers. The Agency should strive to actually uphold that ideal.

Also published by Forbes.com on WLF’s contributor page.

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