AEP Texas Comm. & Indus. Retail Ltd. P’ship v. Public Util. Comm’n, 2014 WL 3558763, No. 03–13–00358–CV, -- S.W.3d – (Tex. Ct. App. July 17, 2014)
A complicated regulatory background is the setting for this case about the evidence required to deem commercial speech—here in the form of trademarks—misleading, and thus its prohibition exempt from Central Hudson review. Texas deregulated retail energy supply in the 1990s. Doing so required breaking up vertically integrated entities that previously had been exclusive suppliers to their areas. Transmission/distribution networks remained monopolies, but networks were required to sell nondiscriminatory access to different energy suppliers. The issue here concerns “retail electric providers” (REPs), which sell power to end users, and transmission/distribution utilities (TDUs), which were restricted from owning generation assets or selling electricity themselves. However, separate affilated companies owned by a common holding company were allowed, so holding companies could own both TDUs and REPs.
In order to prevent the unbundled units from retaining market dominance, Texas required a REP affiliated with a TDU to charge an above-market price within the TDU’s service area for a period after customer choice began. And Texas authorized the Commission to regulate to control market power and protect consumers. The Commission enacted various rules to regulate REPs. Among other things, a REP’s business name can’t be “deceptive, misleading, vague,” or “otherwise contrary” to the Code of Conduct.
AEP provides retail electric service to industrial and large commercial customers under the name AEP Retail Electric (AEP REP); it would like to expand to all customers under that name. AEP REP is a subsidiary of AEP; the name it sought to use was “an important part” of a “multi-market, multi-state marketing” strategy of the AEP corporate family that was aimed at “promot[ing] brand name recognition” in the retail electric markets. Members of the AEP corporate family commonly utilize uniform branding that emphasizes the “AEP” abbreviation and a distinctive logo consisting of a red parallelogram with a white “AEP” inside. AEP REP intended to use the same sort of branding, alongside the “AEP Retail Electric” name.
The Commission, and about 20 other REPs, opposed the use of this name, in the context of the ongoing activities of two other AEP subsidiaries. AEP previously acquired two TDUs and affiliated REPs; it then sold the affiliated REPs and changed the names of the TDUs to AEP variants which do business under the shared name “AEP Texas” and red parallelogram logo.
The factual issues centered on evidence that retail consumers in the service areas of the “AEP Texas” TDUs already had extensive familiarity with the AEP name and branding from a decade of use on vehicles, employee uniforms, electric meters on consumers’ properties, a website, and a Facebook page, along with ads and community and charitable contributions. An AEP REP survey in the AEP Texas service areas indicated that 73% of respondents were already familiar with both the name “AEP Texas” and the name “AEP Retail Energy,” even though the latter had yet to operate as a mass-market REP. Those entities thus tied for third in market recognition out of a list of fourteen, behind only the two largest REPs. They were about 20 points higher than the next highest, which happened to be the areas’ original incumbent REPs. The Commission found the AEP logo to be “omnipresent” in the relevant areas.
The other key piece of evidence was that retail customers tended to overlook the different roles of TDUs and REPs. Over one-third mistakenly believed that the REP from which they bought electricity also owned the wires that delivered the electricity, and 32% believed that “AEP Retail Energy” provided electric transmission and distribution services. The opponents argued that this showed that a shared name would exacerbate confusion, while AEP REP cited evidence suggesting that these misunderstandings would exist no matter what name the REP used.
The formerly affiliated REPs contended that using the AEP name for a REP would confuse consumers into thinking that “AEP Retail Electric” and “AEP Texas” were one and the same or that customers of “AEP Retail Electric” otherwise stood to benefit from that company's affiliation with the TDU. The Commission agreed that sharing the name and branding would amount to prohibited “joint advertising or promotional activities,” discriminating in favor of the affiliated REP.
The court first rejected statutory/administrative law challenges to this decision (and the dissent would have resolved the administrative law issues in AEP’s favor). Basically, AEP argued that “joint advertising or promotional activities” had to be something more than sharing a brand name, and that even if shared branding did qualify, it didn’t “favor” AEP REP relative to competitors, which was required for it to be unfair discrimination. The court found that the Commission didn’t err in considering how retail consumers would likely understand AEP’s marketing strategy. Even if there were no “direct or overt” attempts by AEP Texas to favor its affiliate, retail consumers would likely perceive that AEP Texas’s use of the shared name, logo, and branding was promoting all of the affiliated entities collectively. Since a central concern of the regulations was to prevent cross-subsidization between regulated and competitive activities (TDUs and REPs, respectively), this was within the Commission’s power to regulate. The Commission reasonably found that the “AEP” name and branding would “have the practical effect of promoting both the ‘AEP Texas’ TDUs and AEP REP and leveraging each other”s notoriety and goodwill to benefit the other,” and thus reasonably found a prohibited cross-subsidy.
Given all that, was the regulation nonetheless a violation of the First Amendment? AEP conceded that its business name and logo were commercial speech. Central Hudson only protects commercial speech that isn’t unlawful or misleading. The Commission found as a fact that the use of the name “AEP Retail Electric” and related branding would be misleading in the context of Texas’s retail electric market. Retail customers would likely to perceive incorrectly that the REP and the TDU were the same or that they otherwise stood to benefit from the entities’ affiliation, such as by receiving more reliable service. Thus, the name was not entitled to any First Amendment protection at all.
AEP argued that this rationale was mere paternalism. But past paternalism cases involved the suppression of truthful information. The regulation here wasn’t just designed to influence consumers’ decisions, but rather to ensure that their decisions weren’t influenced “in a manner that undermines competition itself.”
The analysis concluded with a big quote from Friedman v. Rogers (another case out of Texas), which allowed the state to ban the use of certain trade names. Such a ban had only an incidental effect on the content of commercial speech, since “a trade name conveys information only because of the associations that grow up over time between the name and a certain level of price and quality of service,” and the information conveyed is “largely factual, concerning the kind and price of the services offered for sale.” The same factual information could be communicated to the public in other ways. The state merely required the information to be presented in a nondeceptive form. (This informational understanding of trademarks is pretty deeply inconsistent with the modern idea of goodwill. Also, to the extent that AEP wants to communicate that the TDU and the REP are related—that “largely factual” aspect of trademark—I don’t see how it has any alternatives to communicate that message to the public, since it’s that communication that the Commission found confusing/deceptive.)