NO. 03-16-00039-CV__________________________________________________________________

IN THE THIRD COURT OF APPEALSAT 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. SchenkkanState Bar No. 17741500Mary A. KeeneyState Bar No. 11170300GRAVES, DOUGHERTY, HEARON

& MOODY

A Professional Corporation401 Congress Avenue, Suite 2200Austin, Texas 78701Telephone: (512) 480.5682Facsimile: (512) 480.5882pschenkkan@gdhm.commkeeney@gdhm.com

M. Jack Martin, III State Bar No. 13094360Lou BrightState Bar No. 02991900Martin Frost & Hill 3345 Bee Cave Road, Suite 105 Austin, Texas 78746Telephone: (512) 473-0300Facsimile: (903) 386-2714jmartin@mfhliquorlaw.comlbright@mfhliquorlaw.com.

ATTORNEYS FOR APPELLEE MARK ANTHONY BREWING, INC

ORAL ARGUMENT REQUESTEDOctober 28, 2016

ii

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

iii

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. 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

B. 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

iv

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 independencetoday ............................................................................32

C. 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

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

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 ...........................47

A. First Amendment analysis and results are the same ..........48

1. Authentic Beverages ....................................................49

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2. California......................................................................51

B. The labels do not violate the ‘thing of value’ prohibitions............................................................................52

1. Not every “thing of value” to a retailer isprohibited .....................................................................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. Courts require real threats to retailer independence ................................................................56

III. The Trademark Agreement Does Not Violate Section102.01(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 constructionquestion ........................................................................60

3. Shared quality control over products is notprohibited 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

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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, section102.01(h) and rule 45.110(c)(3) fail the CentralHudson 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

vii

INDEX OF AUTHORITIESCASE LAW 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

viii

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

ix

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...............................................................................2716.01(a)(5) .......................................................................................2716.09................................................................................................2754.01................................................................................................27101.671..............................................................................................5102.01(h) ................................................................................. passim102.07(a) .........................................................................................49102.07(a)(2) .............................................................................4, 6, 47102.07(g) .........................................................................................47102.15(a)(1) .............................................................................4, 6, 47102.51(b) ...........................................................................................6108.03..............................................................................................54108.09(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

x

FEDERAL STATUTES

27 U.S.C. § 205(a) ...........................................................................2927 U.S.C. § 205(b) .....................................................................52, 5427 U.S.C. § 205(e) ...........................................................................42

TEXAS RULES

16 TEX. ADMIN. CODE, CHAPTER 4545.73(d) .........................................................................................3, 545.73(e)..........................................................................................3, 645.82(a)(7) .........................................................................................545.82(a)(7)(B) ................................................................................4, 645.110(c)..................................................................................6, 7, 5545.110(c)(3) ............................................................................. passim45.110(c)(4) .....................................................................................5545.113..............................................................................................5545.117..............................................................................................5545.117(c)(2) ....................................................................................53

19 Tex. Reg. 5629 (Jul. 19, 1994) ...........................................................2638 Tex. Reg. 8987 (Dec. 13, 2013) .............................................................639 Tex. Reg. 2727 (Apr. 11, 2014) .............................................................639 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

xi

STATEMENT OF THE CASE

Nature of the Case: Mark Anthony Brewing, Inc. sought approval of malt beverage labels using the TGI Friday’sbrand under a trademark license agreement. Texas Alcoholic Beverage Commission (TABC) staff refused, citing rules against retailer names in such labels and statutory prohibitions ongiving a thing of value to a retailer.

Mark Anthony sought declarations that the rules violate the First Amendment, and that thestatutes 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 astatute 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 statutoryprovisions 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.

xii

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.

xiii

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?

xiv

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.

1

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 1 Authentic Beverages Co. Inc. v. TABC, 835 F.Supp.2d 227 (W. D. Tex. 2011).2 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).

2

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

4 5 RR, TABC Exh. 2. 5 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).

3

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: 10 2 RR 80 (Dempsey).11 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).

4

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).

5

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

18 Authentic Beverages Co. Inc. v. Texas Alcoholic Beverage Comm’n, 835 F.Supp.3d227, 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).

6

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.

25 38 Tex. Reg. 8987 (Dec. 13, 2013).26 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.

7

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 4 RR, PX 16.30 39 Tex. Reg. 6044.

8

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.

9

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.

10

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

33 See Central Hudson, 447 U.S. at 564-66.34 In part III of the Argument we show that this misstates the First Amendmentexception, which is for speech involving illegal offers or concerning illegal products.35 See 3 RR 156-58 (Maisch).

11

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).

12

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

37 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 inAuthentic Beverages, 835 F. Supp. 2d at 241.40 Central Hudson, 447 U.S. at 564, 566.

13

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.

41 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.

14

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

48 Sorrell, 564 U.S. at 571.49 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.”)

15

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.

51 City of Keller v. Wilson, 168 S.W.3d 802, 816 (Tex. 2005).52 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.

16

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 App. 2, CR 101, Finding of Fact 20.56 Rubin v. Coors Brewing Co., 514 U.S. 476, 488 (1995).

17

The district court found no justification for TABC’s ban “on malt-

based 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

57 App. 2, CR 101, Finding of Fact 24.58 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.

18

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.

62 App. 2., CR 102, Finding of Fact 26.63 Id., Finding of Fact 27.64 Id., Finding of Fact 25.

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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

20

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.

21

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

22

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).

23

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

67 Rubin v. Coors Brewing Co., 514 U.S. 476, 481, 486-88 (1995).68 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.

24

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

70 Id. at 243.71 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); 2RR 86-87 (Dempsey).

25

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).

26

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

75 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).

27

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

78 3 RR 239 (Maisch).79 3 RR 185, 220 (Maisch).80 See Code §§ 16.01(a)(5); 16.09; 54.01.81 See Code chs. 12 and 12A.

28

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

82 Toward Liquor Control at p. 11 (The Center for Alcohol Policy 2011 ed.).83 Id.84 Id. at pp. 28-34.85 Id. at p. 33.

29

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

86 Id. at p. 29.87 Id.88 Id.89 27 U.S.C. § 205(a).

30

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

90 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).

31

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

94 App. 2, CR 101, Finding of Fact 19.95 See 3 RR 186-87 (Maisch).96 AnheuserBusch “accounts for about 35% of retail revenue” in the U.S., SAB-MillerCoors “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.

32

AnheuserBusch sells products that compete directly with Mark

Anthony’s, such as Bud Lite Lime-a-Rita.97 AnheuserBusch and SAB-

MillerCoors, 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

97 2 RR 80 (Dempsey).98 See 3 RR 112, 132-33 (Dholakia).99 2 RR 186-87 (Hinman).100 See 2 RR 80 (Dempsey); 2 RR 186-87 (Hinman).

33

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 multi-

purpose 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. 102 See 2 RR 231-32 (Hinman).103 2 RR 199 (Hinman).104 Id.

34

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:

105 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.

35

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,

111 2 RR 189 (Hinman).112 2 RR 85 (Dempsey).113 2 RR 83 (Dempsey).

36

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

114 See 2 RR 190 (Hinman) and 4 RR, PX 4.115 See 4 RR, PX 2.116 See 3 RR 39-43 (Jones).117 3 RR 42 (Jones).

37

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,

118 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).

38

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

123 2 RR 121-122 (Batra).124 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).

39

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. It requires the inference of

potential for these [sic] control.”132

129 App. 3, 4 RR, PX 21 at p. 25, ¶21 A.130 2 RR 199 (Hinman).131 3 RR 226.132 See 3 RR 227.

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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.

133 TABC Appellant’s Brief at 24; see also id. at p. 7.134 507 U.S. 761, 773-74 (1993).135 Id. at 773.136 Edenfield, 507 U.S. at 774.

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“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 It had to show “that the

137 Id. at 776.138 App. 2, CR 101, Finding of Fact 20.139 Rubin v. Coors Brewing Co., 514 U.S.at 487.

42

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 retailer independence, and that controlling

consolidation in the industry through 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 776.141 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).

43

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

143 Rubin, 514 U.S. at 488. The Court rejected as irrational a restriction on beerlabels 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. 04-83-00529-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.

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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 3 RR 228-29 (Maisch).146 44 Liquormart, Inc., 517 U.S. at 507.

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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

147 2 RR 200-01 (Hinman).148 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%20Commission%20RTL%202007%2080%20Leg.pdf149 3 RR 36-37 (Jones).

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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 inter-

tier 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

150 Id. at 26-28 (Jones).151 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).

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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

155 2 RR 87 (Dempsey).156 3 RR 205-06 (Maisch).157 See TEX. ALCO. BEV. CODE § 108.09(a).158 Id. § 102.07(g).

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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.

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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, 159 Authentic Beverages Co. 835 F. Supp. 2d at 243.160 Id. 161 Id. at 244 & n.12.

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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. They “remain

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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 See 3 RR 192-193 (Maisch agreeing that he said this).163 2 RR 203 (Hinman).

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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 Retail Digital Network, 810 F.3d at 650-51.165 27 U.S.C. § 205(b).

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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).

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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 27 U.S.C. § 205(b).168 Tex. Alco. Bev. Code § 108.03.

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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

169 Rule 45.110(c)(4).170 See 3 RR 261 (Cook).171 See 4 RR, PX 8, TABC Marketing Practices FAQ: Inter-Tier Relationships –Illegal Inducements at ¶ 4.

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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

172 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.

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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. 175 Id.176 Id. at 1422.177 Id.

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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.

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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

179 See 3 RR 156-58 (Maisch).180 3 RR 194-96 (Maisch).181 App. 1, CR 73.182 App. 2, CR 103, COL 14.

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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

183 App. 2, CR 103, FOFs 29, 30 and 31.184 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.

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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.

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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 prohibitedcontrol 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

189 Fedway, 976 F.2d at 1422.190 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.

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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

193 2 RR 159 (Batra).194 2 RR 158-160 (Batra).195 2 RR 207-209 (Hinman).196 3 RR 195 (Maisch).197 3 RR 197 (Maisch).

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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 suchagreements.

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

198 3 RR 178 (direct examination of Maisch by TABC attorney).199 See, e.g., 3 RR 178, 203 (Maisch).200 Fedway, 976 F.2d at 1422.201 App.2, CR 103, FOF 30.

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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

202 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”).

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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

204 See RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 33 cmt. c (1995).205 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.

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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,

208 App. 1, CR 72-73.209 App. 2, CR 103, COL 14.210 App. 2, CR 104, Finding of Fact 34.211 SCR 16, ¶ 58.

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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

212 See 2 RR 29-30 (TABC opening statement).213 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.

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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 products meet consumer

expectations of the brand.

218 Ford Motor, 264 F.3d at 507.219 44 Liquormart, 517 U.S. at 504.220 See 3 RR 43 (Jones).

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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 The executive

director avoided any direct answer.

221 3 RR 276-80 (Cook).222 3 RR 278 (Cook).

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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 all on retailer control of manufacturers.

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. Preventing consolidation through labels would be

223 3 RR 257-258 (Cook).224 Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 566 (2001).

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“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 They

225 2 RR 246 (Hinman).226 2 RR 209-210 (Hinman).227 2 RR 89 (Dempsey).

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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).

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Respectfully submitted,

By: /s/ P.M. SchenkkanP. M. SchenkkanState Bar ID No. 17741500pschenkkan@gdhm.comMary A. KeeneyState Bar No. 11170300mkeeney@gdhm.comGRAVES, DOUGHERTY, HEARON & MOODY

A Professional Corporation401 Congress Avenue, Suite 2200P.O. Box 98Austin, Texas 78767(512) 480-5682(512) 480-5882 Telecopy

M. Jack Martin, III State Bar No. 13094360Lou BrightState Bar No. 02991900MARTIN FROST & HILL

3345 Bee Cave Road, Suite 105 Austin, Texas 78746Telephone: (512)473-0300Facsimile: (903)386-2714jmartin@mfhliquorlaw.comlbright@mfhliquorlaw.com

ATTORNEYS FOR

MARK ANTHONY BREWING, INC.

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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. WatkinsState Bar No. 20927425Office of the Attorney General Administrative Law DivisionP.O. Box 12548Austin, Texas 78711-2548512-475-4208 (telephone)512-320-0167 (facsimile)karen.watkins@texasattorneygeneral.govrobin.sanders@texasattorneygeneral.govjeff.lutz@texasattorneygeneral.gov

/s/ Mary A. KeeneyMary A. Keeney

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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

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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