Find Legal Information

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.

July 1, 2000.

p. 459

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?

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

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.

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

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

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

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

328, 106. S.Ct. 2968, 92 L.Ed.2d 266 (1986).

p.463

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

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

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

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).

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

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

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

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.

business's name and phone number in the white pages of the phone book

would be a violation.

p.468