S.E. 2d
THE STATE OF SOUTH CAROLINA
In The Supreme Court
Video Gaming
Consultants, Inc., Appellant,
v.
South Carolina
Department of Revenue, Respondent.
Appeal From Horry County
J. Stanton Cross, Special Circuit Court Judge
Opinion No. 25177
Heard June 20, 2000 - Filed July 31, 2000
REVERSED
H. Buck Cutts, of Surfside, for appellant.
General Counsel Harry T. Cooper, Jr., and Chief
Counsel for Regulatory Litigation Nicholas P. Sipe,
both of Columbia, for respondent.
JUSTICE MOORE: Appellant Video Gaming Consultants, Inc.
(Video Gaming), appeals the circuit court's decision holding S.C. Code Ann. §
12-21-2804(b)(Supp. 1999) 1 constitutional. We reverse.
1 This section was repealed by 1999 Act No. 125, Part I, § 8, effective
July 1, 2000.
p. 459
Video Gaining Consultants v. SCDOR
FACTS
Video Gaming operates a video gaming business, Jackpot Video
Games, in Garden City. On July 27, 1995, and September 25, 1995,
respondent South Carolina Department of Revenue (DOR) issued citations to
Video Gaming for violating §12-21-2804(b).
This code section states: "No person who maintains a place or premises
for the operation of machines licensed under Section 12-21-2720(A)(3) may
advertise in any manner for the playing of the machines." 2 Video Gaming
had displayed a large sign reading: "STOP HERE TRY OUR POKER VIDEO
GAMES" and two signs stating "JACKPOT VIDEO GAMES." 3
Video Gaming appealed to the Administrative Law Judge (ALJ)
challenging the statute on the ground that it violates the First Amendment.
The ALJ upheld the citations. Video Gaming appealed to the circuit court.
The circuit court affirmed the ALJ.
ISSUES
1) Does the ALJ have the authority to rule
on the constitutionality of a statute?
2 27 S.C. Code Ann. Reg.117-190.2 states:
The Video Game Machines Act, found in Article 20,
Chapter 21 of Title 12, states that no person who
maintains a place or premises for the operation of
video game machines as defined in Code Section
12-21-2772(5) may advertise in any manner for
the playing of the machines. Therefore, any
attempt to call attention to, or make known, to the
general public that video game machines as defined
in Code Section 12-21-2772(5) are available for play
is advertising and is strictly prohibited by the statute.
3 The September violation was only for the two "Jackpot Video Games"
signs.
p.460
Video Gaming Consultants v. SCDOR
2) Is the ban on advertising constitutional?
DISCUSSION
1) ALJ's authority
Initially, we address an issue which has appeared in several recent
cases. The ALJ specifically stated he had the authority to declare a statute
unconstitutional because an ALJ has the same authority as a circuit court
judge. 4 However, we have ruled an ALJ should not rule on the
constitutionality of statutes. See Al-Shabazz v. State, 338 S.C. 354, 527
S.E.2d 742 (2000) (ALJs must leave question of statute's constitutionality to
the courts). ALJs are an agency of the executive branch of government and
must follow the law as written until its constitutionally is judicially
determined; ALJs have no authority to pass upon the constitutionality of a
statute or regulation. See, e.g., Beaufort County Bd. of Educ. v. Lighthouse
Charter Sch. Comm., 335 S.C. 230, 516 S.E.2d 655 (1999); South Carolina
Tax Comm'n v. South Carolina Tax Bd. of Review, 278 S.C. 556, 299 S.E.2d
489 (1983). In the present case, the only issue raised is the constitutionality
of a statute.
Exhaustion is generally required as a matter of preventing premature
interference with agency processes, so that the agency may function
efficiently and so that it may have an opportunity to correct its own errors, to
afford the parties and the courts the benefit of its experience and expertise,
and to compile a record which is adequate for judicial review. Plainly these
purposes would not be served when the only issue is the validity of a statute.
See, e.g., Insurance Commissioner of Md. v Equitable Life Assurance Soc.,
339 Md. 596, 664 A.2d 862 (1995).
Several cases from other jurisdictions have addressed this issue and
have dispensed with the exhaustion requirement in certain situations. See,
e.g., Finnerty v. Cowen, 508 F.2d 979 (2d. Cir. 1974); Martinez v.
4 The ALJ cited § 1-23-630 (Supp. 1999), which states: "Each of the law
judges of the division has the same power at chambers or in open hearing as
do circuit court judges, and to issue those remedial writs as are necessary to
give effect to its jurisdiction."
p.461
Video Gaming Consultants v. SCDOR
Richardson, 472 F.2d 1121 (10th Cir. 1973); Marsh v. County Sch. Bd., 305
F.2d 94 (4th Cir. 1962). In Finnerty, the court held for it to require
exhaustion of administrative remedies would be both futile and unnecessary
when the party sought judicial resolution of only a constitutional question
that could not be adjudicated by the federal agency. As here, Video Gaming
sought a determination that could not be made by an agency or ALJ. See
also Sch. Dist. of City of Saginaw v. United States Dept of HEW, 431
F.Supp. 147 (E.D.Mich. 1977); Plano v. Baker, 504 F.2d 595 (2d Cir. 1974).
As a general rule, if the sole issue posed in a particular case is the
constitutionality of a statute, a court may decide the case without waiting for
an administrative ruling. Weinberger v. Salfi, 422 U.S. 749, 95 S.Ct. 2457,
45 L.Ed.2d 522 (1975). Thus; we hold if the only issue is a constitutional
challenge to a statute or-regulation, a party should seek a declaratory
judgment from circuit court rather than going before an ALJ.
We note the mere presence of a constitutional issue does not excuse the
exhaustion requirement where there are other issues in controversy. The
constitutional issues may be raised, but not ruled upon, in the
administrative proceedings. Sch. Dist. of City of Saginaw, 431 F.Supp. 147,
154 (citing Yakus v. United States, 321 U.S. 414, 437, 64 S.Ct. 660, 88 L.Ed.
834 (1944)). However, practically speaking, requiring a party to raise an
issue which cannot be ruled upon by an ALJ makes little sense. See
Richardson v. Tennessee Bd. of Dentistry, 913 S.W.2d 446 (Tenn. 1995) (APA
requires more flexible approach and party may raise constitutional challenge
upon judicial review). Thus, we hold the issue need only be raised to and
ruled upon by the circuit court for preservation for further review.
2) Constitutionality of ban
The circuit court held the ALJ had properly applied the
test set forth in Central Hudson. 5 In Central Hudson, the United States
Supreme Court held:
In commercial speech cases, then, a four-part analysis
5 Central Hudson Gas & Elect. Corp v Public Serv. Comm'n of N.Y.,
447 U.S. 557, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980)(setting forth the test for
determining the constitutionality of regulations and restrictions on speech).
p.462
Video Gaming Consultants v. SCDOR
has developed. At the outset, we must determine whether.
the expression is protected by the First Amendment. For
commercial speech to come within that provision,
it at least must concern lawful activity and not be
misleading. Next, we ask whether the asserted
governmental interest is substantial. If both inquiries
yield positive answers, we must determine whether
the regulation directly advances the governmental
interest asserted, and whether it is not more extensive
than is necessary to serve that interest.
447 U.S. at 566, 100 S.Ct. at 2351. The circuit court also stated that this
statute had been upheld under the Central Hudson analysis in Reyelt et al.
v. South Carolina Tax Comm'n, Civil Action No. 6:93-1491-3 (D.S.C. July 5,
1994). However, this decision is not binding on this Court. See Gentry v.
Yonce, 337 S.C. 1, 522 S.E.2d 137 (1999) (citing Phillips v. Periodical
Publishers' Serv. Bureau, Inc., 300 S.C. 444, 388 S.E.2d 787 (1989)).
Furthermore, the Reyelt decision, the ALJ, and the circuit court all relied
heavily upon the case of Posadas, 6 in which the Supreme Court deferred to
the decision of the Puerto Rican legislature to ban advertising of casinos. In
Posadas, Puerto Rico was permitted to ban casino gambling advertising
aimed at its residents, while permitting advertising for other wagering
games like cock fights. The Supreme Court has since disavowed its
reasoning in Posadas. See 44 Liquormart, Inc., v. Rhode Island, 517 U.S.
484, 509, 116 S.Ct. 1495, 1511, 134 L.Ed.2d 711 (1996)("we are now
persuaded that Posadas erroneously performed the First Amendment
analysis").
In 44 Liquormart, licensed retailers of alcoholic beverages who had
violated Rhode Island's statutory ban on liquor price advertising challenged
the ban's constitutionality. The first statute prohibited a licensee from
advertising in any manner whatsoever the price of any malt beverage,
cordials, wine, or distilled liquor offered for sale in that state. The second
statute applied to the Rhode Island news media and contained a categorical
prohibition against the publication or broadcast of any advertisements, even
6 Posados De Puerto Rico Assoc. v. Tourism Co. of Puerto Rico, 478 U.S.
328, 106. S.Ct. 2968, 92 L.Ed.2d 266 (1986).
p.463
Video Gaming Consultants v. SCDOR
those referring to sales in other states, that made reference to the price of
any alcoholic beverage. Additionally, the retailers in 44 Liquormart
challenged regulations which provided that no placard or sign that is visible
from the exterior of a package store may make any reference to the price of
any alcoholic beverage. Rhode Island argued the ban promoted temperance.
The Supreme Court held the challenged Rhode Island statutes and
regulation abridged speech in violation of the First Amendment as made
applicable to the States by the Due Process Clause of the Fourteenth
Amendment.
In 44 Liquormart, the Supreme Court concluded that "special care"
should attend the review of such blanket bans, and it pointedly remarked
that "in recent years this Court has not approved a blanket ban on
commercial speech unless the expression itself was flawed in some way,
either because it was deceptive or related to unlawful activity." 517 U.S. at
507 (quoting Central Hudson, 100 S.Ct. at 2351). When a State regulates
commercial messages to protect consumers from misleading, deceptive, or
aggressive sales practices, or requires the disclosure of beneficial consumer
information, the purpose of its regulation is consistent with the reasons for
according constitutional protection to commercial speech and therefore
justifies less than strict review. However, when a State entirely prohibits
the dissemination of truthful, nonmisleading commercial messages for
reasons unrelated to the preservation of a fair bargaining process, there is
far less reason to depart from the rigorous review that the First Amendment
generally demands. Id.
Sound reasons justify reviewing the latter type of commercial speech
regulation more carefully. Most obviously, complete speech bans, unlike
content-neutral restrictions on time, place, or manner of expression, are
particularly dangerous because they all but foreclose alternative means of
disseminating certain information. Id. The Court also held "[s]peech
prohibitions of this type rarely survive constitutional review." 517 U.S. at
504.
Here, as the circuit court held, the first prong of Central Hudson is
clearly met. The advertising is entitled to first amendment protection as it is
p.464
Video Gaming Consultants v. SCDOR
commercial speech concerning a legal activity and it is not misleading.7 The
second prong is whether the asserted governmental interest is substantial.
If both inquiries yield positive answers, then, under Central Hudson, we
must determine whether the regulation directly advances the governmental
interest asserted, and lastly whether it is more extensive than is necessary to
serve that interest. Stated another way: "[A] governmental body seeking to
sustain a restriction on commercial speech must demonstrate that the harms
it recites are real and that its restrictions will in fact alleviate them to a
material degree." Greater New Orleans Broadcasting Ass'n v. United States,
527 U.S. 173, 188, 119 S.Ct. 1923, 1932, 144 L.Ed.2d 161 (1999)(citing
Edenfield v. Fane, 507 U.S. 761, 770, 113 S.Ct. 1792, 123 L.Ed.2d 543
(1993)). The circuit court found the ban met the third and fourth prongs of
Central Hudson. We disagree.
Minimizing gambling would certainly qualify as a substantial
governmental interest. However, the DOR has not shown the ban would
promote its goal of decreasing gambling activity. Under the third prong, the
ban must advance the State's objective "to a material degree." 44
Liquormart, 517 U.S. at 505. Here, the DOR argues and the circuit court
found that the ban would prevent gambling and gambling addictions and all
of the social ills implicated from addictive gambling (i.e. increased criminal
activity and harm to families). However, the DOR has presented no evidence
that the advertising ban would significantly reduce gambling. 44
Liquormart, 517 U.S. at 506.
The DOR presented three experts. Two were experts on gambling and
7 The DOR concedes the signs in question concern lawful activity. The
ALJ found the signs were misleading based upon the word "Jackpot." The
DOR states in its brief that it does not waive the issue whether the signs are
misleading. However, the DOR does not make any argument on the issue.
Thus, the DOR has abandoned this issue. See First Sav. Bank v. McLean,
314 S.C. 361, 363, 444 S.E.2d 513, 514 (1994) (noting an issue that is not
argued in the brief is deemed abandoned and precludes consideration on
appeal); see also Muir v. C.R. Bard, Inc., 336 S.C. 266, 519 S.E.2d 583
(Ct.App. 1999) (noting that conclusory arguments may be treated as
abandoned); Rule 208(b)(1)(B), SCACR ("Ordinarily, no point will be
considered which is not set forth in the statement of the issues on appeal.").
p.465
Video Gaming Consultants v. SCDOR
the third was an expert on advertising. Dr. Valerie Loranz testified that
children are starting to gamble earlier because of watching their parents
play the games, advertising of lottery tickets as family entertainment, and
their experiences with computers and other video games such as Pac Man -
not because of the advertising of "playing" of video poker machines. The
DOR contends the other experts testified as to the connection between
gambling and societal costs. Again, there was no expert testimony on the
connection between advertising "playing" of video games and increased
gambling. 8 The circuit court also held that, "Video Gaming would not be
contesting the ban unless it believed that advertising would increase
gambling and machine use." Certainly, we cannot conclude that advertising .
increases gambling simply because a party is contesting the constitutionality
of the ban.
After 44 Liquormart, the fourth-prong or "reasonable fit" inquiry under
Central Hudson has become a tougher standard for the State to satisfy.
Little deference can be accorded to the State's legislative determination that
a commercial speech restriction, is no more onerous than necessary to serve
the government's interests. 44 Liquormart, 517 U.S. 484, 509, 116 S.Ct.
1495, 1511.
In Greater New Orleans Broadcasting Ass'n, supra, other media
remained available, such as newspapers, magazines and billboards, and
broadcast advertising of casinos, without reference to gambling, was
permitted. The cases have repeatedly stated that government restrictions
upon commercial speech may be no more broad or no more expansive than
"necessary" to serve its substantial interests. See, e.g., Central Hudson, 447
U.S. at 566, 100 S.Ct. at 2351. The Supreme Court has not insisted that
there be no conceivable alternative, but only that the regulation not "burden
substantially more speech than is necessary to further the government's
legitimate interests." Board of Trustees of the State University of N.Y. v.
Fox, 492 U.S 469, 109 S.Ct. 3028, 3034, 106 L.Ed.2d 388 (1989).
8 Mr. Joseph Cook, one of the DOR's experts, testified that in his
opinion publishing a business's name would not be "advertising." Mr. Cook
made a distinction between "advertising" which is paid for by a business and
"promotion" which he testified would be placing a sign with the business's
name on the building.
p.466
Video Gaming Consultants v. SCDOR
The ALJ held the statute was not too restrictive because persons other
than Video Gaming operators could advertise the playing of the machines. 9
The circuit court agreed and, quoting Reyelt, stated that the Tourism
Department or the Chamber of Commerce could advertise. In its brief, the
DOR takes this analysis even further and contends video game operators can
advertise "Games" and "Food" 10 and even "24 Hours" as long as the
advertisements do not refer or call attention to the playing of games. 11 We
fail to see the practical distinction between these supposedly legal examples
of advertising and the ones for which Video Gaming was fined. All would in
effect be advertising the games and, since the gaming machines were not
being sold outright, the promotion would be, of course, for the "play" of the
games. The implied assertion is that somehow a ban on advertising the
"playing" of the games accomplishes the State's objective of not promoting
gambling; but merely advertising "games" also promotes gambling. 12 We
reiterate that the business Video Gaming was running was named "Jackpot
Video Games." Thus, two of the signs were advertising the business's name
and there was some discussion in the record about whether placing a sign
9 He also stated that the person who maintains the premises could also
advertise its business but not the playing of the machines. Arguably, Video
Gaming had done just that - advertised its business which was named
"Jackpot Video Games."
10 27 S.C. Code Ann. Reg. 117-190.1 provides that a business cannot
offer "food" as an inducement to influence a person to play video games.
Further, S.C. Code Ann. 12-21-2804 (E) states: It is unlawful to operate
machines licensed under Section 12-21-2720(A)(3) between the hours of
midnight Saturday night and six o'clock a.m. Monday morning." Thus, this
type of conduct would be illegal.
11 It appears that in 1995, the DOR agreed with Video Gaming that
"Video Games" was not advertising violating the statute. Thus, the effect of
the word "Jackpot" would have to be somehow be interpreted as referring to
the playing of the games. Obviously, the DOR tied its hands when it agreed
to the above and now it is stuck with the unappealing argument it makes.
12 We note the DOR did not fine Video Gaming for a violation of offering
a special inducement, such as a jackpot.
p.467
Video Gaming Consultants v. SCDOR
with a business's name on it even qualifies as "advertising." 13 Further, the
DOR also cannot satisfy the requirement that its restriction on speech is
reasonable or no more extensive then necessary to meet the fourth prong
because alternate forms of regulation and educational campaigns regarding
the effects of gambling might prove effective. 44 Liquormart, 517 U.S. at 507
(alternate regulations, educational campaigns, limiting per capita purchases,
or increased taxation are all alternatives which could be more effective in
tempering the use of alcohol).
Obviously, the DOR realizes that a complete or total ban on
advertising would be unconstitutional and violate the fourth prong of the
Central Hudson test. Thus, the DOR is trying to illustrate the
reasonableness of the prohibition. In doing so, the DOR has shown that the
ban does not accomplish their goal and thus, also does not meet the third
prong of the Central Hudson test. In conclusion, we hold the statute does not
meet the last two prongs in the Central Hudson test and thus the statute is
unconstitutional.
REVERSED.
TOAL, C.J., BURNETT, PLEICONES, JJ., and Acting Justice James
W. Johnson, Jr., concur.
13 The DOR stated at oral arguments the placing of a video gaming
business's name and phone number in the white pages of the phone book
would be a violation.
p.468