Central Hudson Gas and Electric Corp. v. Public Service Commission of NewYork

Central Hudson was the most significant case up to its time in establishing a framework for the practice of commercial speech. The case set in place a four-part test--which was not without controversy--for the constitutionality of state laws restraining commercial speech, which is somewhat more limited that ordinary free speech under the First Amendment.

In 1973, the oil-producing nations of the world raised the price of oil, which caused a severe "energy crisis" in the United States. As a response to the need to conserve fuel, the Public Service Commission of the State of New York ordered in December of 1973 that all electric utilities in the state desist from any form of advertising which "promot[es] the use of electricity."

Three years later, with the energy crisis over, the commission solicited public opinion as to the rule limiting promotional advertising. Central Hudson Gas and Electric Corporation, an electrical utility, opposed the rule on First Amendment grounds, claiming that it abridged free speech. In Central Hudson's advertising, the company encouraged customers to use energy at "off-peak" times such as late at night, when demand for electricity was low. This, the company reasoned, would ultimately encourage economy of energy.

However, the commission decided to continue with its ban, and on 25 February 1977, it clarified its position in a policy statement. The latter classified advertising as either "promotional," which was intended to increase consumption, or "institutional and informational," which in essence included all other advertising not obviously intended for the purpose of stimulating sales. Promotional advertising, the commission declared, ran counter to the continuing national policy of conserving energy.

The commission, which judged Central Hudson's advertising to be promotional in nature, acknowledged that its rule would not necessarily lead to greater energy conservation, since by restricting the advertising that would promote off-peak consumption, it would to some extent limit the "beneficial side- effects" that such advertising might have. Its rationale was that the use of additional power encouraged by such advertising would create higher rates for all users, since at that time electricity rates in New York state were not based on the more economically efficient system of marginal cost. As for informational advertising, the commission permitted that which would encourage "shifts of consumption" (emphasis in original) from high-demand to low-demand time periods. Despite the rather nebulous distinction between this and the so-called promotional advertising by Central Hudson, the commission reasoned that such informational advertising would not have the purpose of increasing overall consumption of energy. Promotional advertising, on the other hand, would give "misleading signals" to consumers because it would appear to encourage consumption of power.

Central Hudson took the commission to state court, charging that the order was a restraint of commercial speech, and violated the First and Fourteenth Amendments to the Constitution. The state and intermediate appellate courts upheld the commission's order, and the New York Court of Appeals affirmed. In so doing, the court cited the fact that, as an electrical utility, Central Hudson operated in a "noncompetitive market." As for the constitutional question of commercial speech, the Court reasoned, the state's interest in limiting consumption was more compelling that the utility's claim.