SC Administrative Law Court Decisions

This matter comes before this tribunal pursuant to S.C. Code Ann. § 1-23-310, et seq. (Supp. 1996) and S.C. Code Ann. § 12-4-30(D) (Supp. 1996). The Department of Revenue alleges that on July 16, 1996, Respondent Edward Rothschild violated S.C. Code Ann. § 12-21-2804(B) (Supp. 1996) and S.C. Code Ann. Regs. 117-190.2 (Supp. 1996) by advertising for the playing of video poker machines. Petitioner seeks a $500.00 fine for the alleged advertising violation.

After timely notice to all parties, a hearing was held on December 16, 1997 at the Administrative Law Judge Division in Columbia, South Carolina. The issues before this tribunal are (1) whether § 12-21-2804(B) and Regulation 117-190.2 are constitutional; and (2) whether Respondent violated such provisions. Based upon the following Findings of Fact and Conclusions of Law, this tribunal concludes that § 12-21-2804(B) and Regulation 117-190.2 are constitutional, and Respondent violated such provisions.

FINDINGS OF FACT

The facts of this case are undisputed. At the hearing, the parties stipulated to the following facts:

1. Respondent Edward Rothschild owns and operates the Big E X Citing Emporium located at 4333 Fort Jackson Boulevard, Columbia, South Carolina. Respondent operates Class III video games machines (video poker machines) at this location. On the front exterior of the building, in letters approximately twelve inches high, the words "Video Poker" are displayed. See Petitioner's Ex. # 3.
2. On July 16, 1996, Revenue Agent William Byars conducted an inspection of Respondent's business at this location to determine whether the business was in compliance with the provisions of the South Carolina Video Games Machines Act, S.C. Code Ann. § 12-21-2770, et seq. (Supp. 1996).
3. Agent Byars cited Respondent for the video poker sign, alleging that such sign violated § 12-21-2804(B) of the Act, and Regulation 117-190.2.
4. Agent Byars photographed the sign and prepared a Regulatory Violation and Proposed Assessment Report that suggested imposing a $500.00 penalty on Respondent. See Petitioner's Ex. #3.
5. The Department used Agent Byars' report in reaching a decision in the Final Determination, issued on June 27, 1997, imposing a $500.00 penalty on Respondent for violating the advertising prohibition.

CONCLUSIONS OF LAW AND DISCUSSION

A. Jurisdiction

1. Pursuant to S.C. Code Ann. § 12-4-30(D) (Supp. 1996) and S.C. Code Ann. § 1-23-320 (Supp. 1996), the Administrative Law Judge Division has jurisdiction to hear this matter.
2. Respondent questions the facial constitutionality of S.C. Code Ann. § 12-21-2804(B) (Supp. 1996) and S.C. Code Ann. Regs. 117-190.2 (Supp. 1996). It is doubtful that this tribunal, as part of the executive branch, has the authority to question the constitutionality of a statute enacted by the General Assembly. See Bernard Schwartz, Administrative Law § 8.40 (3d ed. 1991) (". . . only the courts, not the agency, have authority to decide [the constitutionality of the law the agency seeks to enforce]"); see also David E. Shipley, South Carolina Administrative Law 7-39 (2d ed. 1989). Ordinarily, a party must exhaust all available administrative remedies before seeking judicial review. S.C. Code Ann. §1-23-380 (Supp. 1996). However, "the exhaustion requirement may be excused where the facts are undisputed and the only issues are of law." State Dairy Comm'n of S.C. v. Pet, Inc., 283 S.C. 359, 324 S.E.2d 56, 57 (1984); see also Bernard Schwartz, Administrative Law § 8.40 (3d ed. 1991).
3. Furthermore, the facial validity of § 12-21-2804(B) has been addressed previously by a federal court in a declaratory action. See Reyelt, et al. v. South Carolina Tax Comm'n, Civil Action No. 6:93-1491-3 (D.S.C. Nov. 15, 1993). Because the exhaustion requirement is excusable when a statute is facially challenged and the issue has already been addressed, this tribunal will not consider the constitutionality of § 12-21-2804(B) on its face.
4. However, this tribunal clearly has the authority to address Respondent's challenge to the constitutionality of the statute as applied to the facts of this case. Exhaustion of administrative remedies may be necessary when it is alleged that the statute is unconstitutional as applied in a particular factual setting. See Bernard Schwartz, Administrative Law § 8.40 (3d ed. 1991). Therefore, to the extent that the issue is raised in this forum for legal preservation and exhaustion of administrative remedies, this tribunal will address the constitutionality of § 12-21-2804(B) and Regulation 117-190.2 as applied to the facts of this case based on the Reyelt test.

B. Burden of Proof

1. A statute enacted by the legislature is presumed constitutional and the party attacking the statute bears the burden of proving its unconstitutionality beyond a reasonable doubt. Nichols v. South Carolina Research Auth., 290 S.C. 415, 351 S.E.2d 155 (1986). This burden necessitates that the party attacking the statute "[negate] every conceivable basis which might support it." North Charleston Land Corp. v. North Charleston, 281 S.C. 470, 316 S.E.2d 137 (1984), citing Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 364 (1973). Consequently, Respondent bears the burden of proving that § 12-21-2804(B) is unconstitutional.
2. Although Respondent bears the burden of proving that the statute is unconstitutional, the Department bears the burden of proving that Respondent violated § 12-21-2804(B) and Regulation 117-190.2. In civil cases, generally, the burden of proof rests upon the party who asserts the affirmative of an issue. 29 Am. Jur. 2d Evidence § 127 (1994); Alex Sanders, et al., South Carolina Trial Handbook § 9:3 Party With Burden, Civil Cases (1994). The Department is the party asserting the affirmative in this case; therefore, the Department must prove by a preponderance of the evidence that Respondent violated the law by placing the video poker sign on the building's exterior. The preponderance of the evidence "is evidence which is of the greater weight or more convincing than the evidence which is offered in opposition to it . . . ." Black's Law Dictionary 1182 (6th ed. 1990). "The preponderance of the evidence means such evidence as, when considered and compared with that opposed to it, has more convincing force and produces in the mind the belief that what is sought to be proved is more likely true than not true." Sanders, supra, § 9:5 Quantum of Evidence in Civil Cases (1994), (citing Frazier v. Frazier, 228 S.C. 149, 89 S.E.2d 225 (1955)).

C. Advertising Violation

1. The Video Games Machines Act ("Act"), which regulates video gaming machine activity in South Carolina, was enacted in 1993 and became effective on July 1, 1993. This Act is found at S.C. Code Ann. § 12-21-2770, et seq. (Supp. 1996). The statutory provision at issue before this tribunal is § 12-21-2804(B), which provides:

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 nor may a person offer or allow to be offered any special inducement to a person for the playing of machines permitted under Section 12-21-2720(A)(3).

1. Pursuant to S.C. Code Ann. § 12-21-2798 (Supp. 1996), the Department has promulgated regulations which further clarify the provisions of the Video Game Machines Act, and, as such, these regulations have the force and effect of law. See Young v. South Carolina Dep't of Highways and Pub. Trans., 287 S.C. 108, 336 S.E.2d 879 (1985); Faile v. South Carolina Employment Sec. Comm'n, 267 S.C. 536, 230 S.E.2d 219 (1976). Specifically, Regulation 117-190.2 defines the word "advertise" as set forth in § 12-21-2804(B). This regulation, effective June 23, 1995, provides in relevant part:

. . . 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.

It is evident from this definition that Respondent's sign constituted advertisement. It was displayed to make the public aware of the fact that video poker machines were available for play at the business establishment.

1. Furthermore, Respondent admitted that his "words" constituted advertisement for the playing of video poker. See Petitioner's Request for Admissions ¶¶ 2, 6, and 7.
2. The record is unclear as to whether Respondent stipulated that the information in the Request for Admissions is true or simply agreed to the document's admittance into evidence. In either case, Respondent's failure to deny or otherwise answer the Request for Admissions equals an admission to the truth of the matters. See S.C. R. Civ. P. 36 ("[t]he matter is admitted unless, within 30 days after service of the request, or within such shorter or longer time as the court may allow, the party to whom the request is directed serves upon the party requesting the admission a written answer or objection addressed to the matter, signed by the party or by his attorney"); see also In re Solomon, 307 S.C. 1, 3, 413 S.E.2d 808, 809 (1992). Therefore, the Admissions further evince that Respondent violated § 12-21-2804(B).
3. S.C. Code Ann. § 12-21-2804(F) (Supp. 1996) allows the imposition of a fine of up to $5,000.00 for the violation of S.C. Code Ann. § 12-21-2804(B).

D. The Constitutionality of Section 12-21-2804(B) & Regulation 117-190.2

1. As previously stated, a federal court has already determined that § 12-21-2804(B) is constitutional on its face. Reyelt, et al. v. South Carolina Tax Comm'n, Civil Action No. 6:93-1491-3 (D.S.C. Nov, 15, 1993). In Reyelt, the court upheld the statute using the test set forth in Central Hudson Gas & Electric Corp. v. Public Service Comm'n of New York, 447 U.S. 557 (1980).
2. Respondent contends that the district court's analysis in Reyelt has been altered by the United States Supreme Court's decision in 44 Liquormart, Inc. v. Rhode Island, 116 S.Ct. 1495 (1996). Having reviewed 44 Liquormart, this tribunal is unconvinced that the case alters the court's analysis in Reyelt.⁽¹⁾ However, this tribunal will address the constitutionality of § 12-21-2804(B) and Regulation 117-190.2 as applied to Respondent.
3. As a threshold consideration, speech can only be protected by the First Amendment if it contains lawful activity and is not misleading. Central Hudson, 447 U.S. at 566.
4. Respondent has admitted that his video poker sign constituted advertising for the playing of video poker. See Petitioner's Request for Admissions ¶¶ 2, 6, and 7. The sign was not false or misleading. By placing the words "video poker" on the establishment, Respondent informed the public that video gaming machines were available on the premises. The sign did not offer or suggest the availability of any special inducement to a person for the playing of video poker.
5. Because the advertisement was not false or misleading, it is subject to protection under the First Amendment. Therefore, the State must prove that (1) the governmental interest served by the speech restriction is substantial; (2) the regulation directly advances the asserted governmental interest, and (3) the regulation is no more extensive than necessary to serve the government's interest. Central Hudson, 447 U.S. at 566.
6. Reyelt establishes that the State has a substantial interest in regulating the advertisement of video poker machines. Furthermore, Respondent has admitted that the State's asserted interest in reducing gambling is substantial. See Petitioner's Request for Admissions, ¶¶ 1 - 5.
7. In Reyelt, the court also determined that the advertisement regulation set forth in § 12-21-2804(B) advances the State's interest of reducing public participation in gambling.⁽²⁾ The purpose of advertising is to increase consumer demand. A decrease in advertisement will lead to a decrease in consumer demand and will significantly minimize an increase in the growth of pathological gamblers in South Carolina. See Petitioner's Request for Admissions, ¶¶ 2 - 5; see also Greater New Orleans Broadcasting Ass'n v. United States, 69 F.3d 1296 (5th Cir. 1995).
8. Finally, a regulation must be no more extensive than necessary to serve the government's interest. Central Hudson, 447 U.S. at 566. The court in Reyelt held that S.C. Code Ann. § 12-21-2804(B) (Supp. 1996) satisfied this prong. The statute bans advertising by those who maintain a place or premises for the operation of licensed machines. It does not apply to such organizations as the Chamber of Commerce or the Tourism Department. Hence, the statute satisfies the fourth prong of the test by extending only as far as is necessary to reduce the demand for video poker among South Carolinians.

ORDER

Based on the foregoing Findings of Fact and Conclusions of Law, the Department shall impose a fine of $500.00 upon Respondent for violating the advertising prohibition of § 12-21-2804(B).

AND IT IS SO ORDERED.

JOHN D. GEATHERS

Administrative Law Judge

Post Office Box 11667

Columbia, South Carolina 29211-1667

February 17, 1998

1. A large portion of the holding in Reyelt was based on the Supreme Court's decision in Posadas de Puerto Rico Ass'n v. Tourism Co. of Puerto Rico, 478 U.S. 328 (1986). Respondent argues that Posadas is no longer persuasive because portions of that decision were questioned in 44 Liquormart. In Posadas, the Court, using the Central Hudson analysis, upheld a Puerto Rico statute that prohibited the advertisement of casino gambling aimed at the commonwealth's residents. In determining that the statute was no more extensive than necessary, the Court stated that it was up to the legislature to determine whether other less restrictive alternatives would be as effective as a total prohibition of advertisement. In 44 Liquormart, the Court questioned this extremely deferential standard. 116 S.Ct. at 1511 ("[g]iven our longstanding hostility to commercial speech regulation of this type, Posadas clearly erred in concluding that it was "up to the legislature" to choose suppression over a less speech-restrictive policy"). Additionally, the Court questioned the proposition that the ability to completely ban an activity necessarily implied the right to ban advertisement of the activity. Id. at 1512. Finally, the Court overruled the proposition that there is a "vice exception" to the commercial speech doctrine. Id. The Court did not alter the test enunciated in Central Hudson.

2. Respondent asserts that the state's interest is not directly advanced because the ban only applies to persons maintaining a place or premise where video gaming machines are located. In support of this proposition, Respondent cites Rubin v. Coors Brewing Co., 115 S.Ct. 1585 (1995). There are factual differences which make Rubin inapposite to this case. In Rubin, a federal statute prohibited disclosure of alcoholic content on beer labels. The government's stated purpose for the statute was to prevent brewers from competing for customers on the basis of alcoholic content ("strength wars"). The Court held that strength wars would not be prevented by a labeling restriction on beer when other statutes provided that the same information could be conveyed in advertisements and on labels of other alcoholic beverages. Rubin, 115 S.Ct. at 1592. In this case, the Department has stated that it has an interest in lessening pathological gambling among the citizens of South Carolina because of the deleterious effect of gambling on society. The ban targets only those persons whose advertisement would be most likely to reach citizens of South Carolina.