Opinion ID: 166597
Heading Depth: 3
Heading Rank: 2

Heading: Application of Commercial Speech Scrutiny

Text: 34 We recently summarized the Supreme Court's three-part test governing First Amendment challenges to regulations restricting non-misleading commercial speech that relates to lawful activity: 35 First, the government must assert a substantial interest to be achieved by the regulation. Central Hudson, 447 U.S. at 564, 100 S.Ct. 2343. Second, the regulation must directly advance that governmental interest, meaning that it must do more than provide only ineffective or remote support for the government's purpose. Id. Third, although the regulation need not be the least restrictive measure available, it must be narrowly tailored not to restrict more speech than necessary. See id.; Board of Trs. of the State Univ. of N.Y. v. Fox, 492 U.S. 469, 480, 109 S.Ct. 3028, 106 L.Ed.2d 388 (1989). Together, these final two factors require that there be a reasonable fit between the government's objectives and the means it chooses to accomplish those ends. United States v. Edge Broad. Co., 509 U.S. 418, 427-28, 113 S.Ct. 2696, 125 L.Ed.2d 345 (1993). 36 Mainstream Mktg. Servs. v. FTC, 358 F.3d 1228, 1237 (10th Cir.2004). 37 In applying Central Hudson, we require the government first to prove that the law provides more than ineffective or remote support for the government's purpose. Central Hudson, 447 U.S. at 564, 100 S.Ct. 2343. We then distinguish between a regulation aimed at the activity the government seeks to prevent, and a regulation aimed at something else in the hope that it would sweep [the targeted activity] in during the process. Secretary of State of Maryland v. Joseph H. Munson Co., 467 U.S. 947, 969-70, 104 S.Ct. 2839, 81 L.Ed.2d 786 (1984). This standard does not require that the government's response to protect substantial interests be the least restrictive measure available. All that is required is a proportional response. Mainstream Mktg., 358 F.3d at 1238. 38 In the context of disclosure requirements, the Supreme Court has provided additional guidance. In Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 105 S.Ct. 2265, 85 L.Ed.2d 652 (1985), the Supreme Court upheld an Ohio rule that attorneys advertising their availability on a contingent-fee basis should reveal in their advertising that clients will have to pay costs even if their lawsuits are unsuccessful. In reaching this conclusion, the Court distinguished between statutes like Section 17(b) that compel disclosures from those that prohibit speech. It noted, in part, that because disclosure requirements trench much more narrowly on an advertiser's interest than do flat prohibitions on speech, warnings or disclaimers might be appropriately required ... in order to dissipate the possibility of consumer confusion or deception. Id. at 651, 105 S.Ct. 2265 (internal citation omitted). The Court concluded that an attorney's constitutionally protected interest in not providing any particular factual information in his advertising is minimal, and thus found the disclosure requirement at issue was  reasonably related to the State's interest in preventing deception of consumers. Id. (citing Central Hudson ) (emphasis supplied). 39 Zauderer, therefore, eases the burden of meeting the Central Hudson test. In assessing disclosure requirements, Zauderer presumes that the government's interest in preventing consumer deception is substantial, and that where a regulation requires disclosure only of factual and uncontroversial information and is not unduly burdensome, it is narrowly tailored. These principles are easily met here. 40 Section 17(b) contains two forms of disclosure: (1) that a promoter disclose his status as such, and (2) that a promoter disclose how much he is paid for his promotions. We discuss each separately since the former addresses slightly different interests than the latter.
41 It is undisputed that the government has an interest in protecting consumers from being misled. Illinois, ex rel. Madigan v. Telemarketing Assocs., 538 U.S. 600, 612, 123 S.Ct. 1829, 155 L.Ed.2d 793 (2003) ([T]he First Amendment does not shield fraud.). Section 17(b) directly advances this interest because investors—such as the listeners to Wenger's radio program and readers of his newsletter who testified in this case—base their decisions whether to buy a stock in part on whether various opinions about the product are self-serving or not. By requiring publicists to disclose their interests, the government prevents investors from mistaking self-interested for disinterested advice. And as the Supreme Court suggested in Lowe, the dangers of fraud, deception, or overreaching are present not only in publicity that contain[s] any false or misleading information, but also in publicity that is designed to tout any security in which [publicists] ha[ve] an interest. Lowe, 427 U.S. at 209-10, 96 S.Ct. 2586. 42 The disclosure requirement imposed by Section 17(b) is thus reasonably related to the goal of fraud prevention. A publicist who fails to disclose that he has an interest in the companies he promotes will almost always mislead his audience into thinking that his advice is disinterested. Similarly, we are influenced by the fact that the disclosure requirement applies only to those securities that a promoter has been paid to tout. The fact that the promoter must provide a disclaimer as to each security he touts at the time he promotes the security is only a minimal burden imposed by the statute. 43 Therefore, to the extent Section 17(b) requires stock publicists to disclose that they are receiving consideration from the companies they are promoting, it is tailored to prevent fraud and does not offend the First Amendment.
44 The last question is whether Section 17(b) survives scrutiny to the extent it requires publicists to disclose the amount of consideration they are receiving. Wenger argues that disclosure of an interest ordinarily suffices to put listeners on notice that a publicist's advice may not be trustworthy. 45 In our view, however, by requiring publicists to disclose the amount of consideration they are receiving, Section 17(b) imposes only a de minimis additional disclosure burden on the paid promoter. Telling a listener or reader that the promoter has been bought and paid for, and for how much, directly informs prospective purchasers of the speaker's biases. The listener is free to make an informed investment decision in light of that knowledge. The amount requirement of Section 17(b) is a natural corollary to the disclosure of the speaker's status as a promoter. As such, its satisfies the requirement that there be a reasonable fit between the congressional objective and the statutory command. 46 In addition, Congress has a substantial interest through the securities laws in making capital markets more open and efficient. It requires but little appreciation of ... what happened in this country during the 1920's and 1930's to realize how essential it is that the highest ethical standards prevail in the securities industry. Silver v. New York Stock Exchange, 373 U.S. 341, 366, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963); and see L. Auchincloss, The Embezzler (1966) (describing fictionalized 1930's stock promoter). Furthermore, [i]n the eyes of some, the best way to achieve both fairness and efficiency is to give all investors equal access to all relevant information. Dirks v. SEC, 681 F.2d 824, 835 n. 14 (D.C.Cir.1982), rev'd on other grounds, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). In enacting Section 17(b), Congress could reasonably conclude the amount of consideration a publicist receives will influence a rational investor's decision whether to buy or sell a stock, because a publicist's recommendation will be given more or less weight depending on how much he stands to benefit from trumpeting a stock. Therefore, even if Section 17(b)'s requirement that publicists disclose the amount of consideration did impose some burden, such a burden is reasonably related to the government's interest in promoting open capital markets. 47 And as a final matter, the disclaimers at issue here impose little burden on speech. In the context of a half hour broadcast or multi-page newsletter, it takes only a slight effort to tell one's listeners or readers, I have been paid 5.5 million shares of Pan World stock in exchange for putting the company on this show [or in this newsletter]. Appt.App. 58. 48 In sum, Section 17(b) does not violate Wenger's commercial speech rights. It allows publicists to still assert a message while advancing the consumer's interest in knowing the publicists' financial stake in promoting a stock, thereby reasonably advancing the government's interest in preventing deception and achieving more open securities markets. Accordingly, we reject Wenger's First Amendment challenge to Section 17(b).