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

The Supreme Court held 8-1 that the commission's order was unconstitutional. Justice Powell, who gave the Court's opinion, used a four-part test for the constitutionality of a law limiting commercial speech. First of all, a court must determine whether such speech is protected under the First Amendment. Assuming it passes that test, then it comes under a three-part formula for balancing interests. The components of this formula require the Court to question three aspects of the claim: whether or not the government's interest in the situation was "substantial"; whether or not the Court's regulation of the commercial speech in question "directly advanced" the government's interest; and whether that regulation would be "more extensive than necessary to serve that interest".

Powell addressed the question of the First Amendment's protection of free speech. Though such constitutional protection is "lesser" than that given to other guaranteed forms of expression, he said, it is indeed protected. Commercial speech must not be misleading, or encourage unlawful activity, whereas ordinary free speech need not meet those criteria in order to be protected. As for the question of whether or not Central Hudson's speech could be limited by virtue of the fact that it held a monopoly over the sale of electricity within its service area, Powell did not find this a compelling justification.

Given that Central Hudson's right to commercial speech was protected, Powell went on to ask if the commission's interest was "substantial." He did find that the commission had a substantial interest in limiting consumption; however, he did not find this "a constitutionally adequate reason for restricting protected speech[,] because the link between the advertising prohibition and appellant's rate structure is, at most, tenuous." In other words, whether or not the commission limited the advertising would have little bearing on the conservation of energy, and therefore it would not "directly advance" the state's interest. And, he found, the regulation was more extensive than necessary, precisely because it would not directly lead to any decrease in consumption.