Opinion issued January 9, 2020




                                        In The

                                Court of Appeals
                                       For The

                            First District of Texas
                              ————————————
                                NO. 01-18-00554-CV
                             ———————————
    GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS, Appellant
                                           V.
                            TEXAS BLC, INC., Appellee


                     On Appeal from the 250th District Court
                             Travis County, Texas1
                     Trial Court Case No. D-1-GN-17-002768




1
       This appeal was transferred from the Third Court of Appeals to the First Court of
       Appeals pursuant to an order of transfer by the Texas Supreme Court. See TEX.
       GOV’T CODE § 73.001. We are unaware of any conflict between the precedent of
       the Court of Appeals for the Third District and that of this Court on any relevant
       issue. See TEX. R. APP. P. 41.3.
                           MEMORANDUM OPINION

      We dismiss this appeal because, in light of a ruling from the federal district

court for the Western District of Texas, Austin Division, no ruling from this court

can currently affect the rights of the parties and this appeal is thus moot. We write

to explain the unusual procedural posture of this case that leads to this conclusion.

      In 2007, the Texas Legislature enacted a statute requiring the collection of a

$5 per patron fee from businesses that offer live nude entertainment and allow the

consumption of alcohol on their premises. TEX. BUS. & COMM. CODE § 102.052(a).

Such a business is considered a sexually oriented business (“SOB”). Id.

§ 102.051(2). SOBs are required to self-report and remit the SOB fees. See TEX.

BUS. & COMM. CODE § 102.053 (requiring SOBs to remit the fee quarterly along

with a report “containing the information required by the comptroller”).

      The Legislature delegated to the Comptroller of Public Accounts

responsibility for administration, collection, and enforcement of the SOB fee. Id.

§ 102.056; see also TEX. TAX CODE § 111.001 (“Comptroller to Collect Taxes”).

The Comptroller is authorized to “adopt rules that do not conflict with the laws of

this state or the constitution of this state or the United States for the enforcement of

the provisions of this title and the collection of taxes and other revenues under this

title.” TEX. TAX CODE § 111.002(a).




                                           2
      The SOB fee statute became effective January 1, 2008, and it was

immediately challenged in state court. See State of Texas, 2017 WL 11072005, at

*6 (June 2, 2017) (ALJ Proposal for Decision). The Travis County district court

held that imposition of the SOB fee violated the First Amendment to the United

States Constitution, and it enjoined the Comptroller from assessing or collecting

the fee. Tex. Entm’t Ass’n, Inc. v. Combs, No. D-1-GN-07-004179, 2008 WL

2307196 (345th District Court, Travis County, Mar. 28, 2008) (Combs I), rev’d,

347 S.W.3d. 277 (Tex. 2011). The Austin Court of Appeals concluded that the

SOB fee was a “content-based tax subject to strict scrutiny,” and it held that the

SOB fee was “unconstitutional under the First Amendment. See Combs v. Tex.

Entm’t Ass’n, Inc., 287 S.W.3d 852, 864 (Tex. App.—Austin 2009) (Combs II),

rev’d, 347 S.W.3d 277 (Tex. 2011).

      The Supreme Court of Texas disagreed that the SOB fee statute was subject

to strict scrutiny, concluding that it was “not aimed at any expressive content of

nude dancing but at the secondary effects of the expression in the presence of

alcohol.” See Combs v. Tex. Entm’t Ass’n, Inc., 347 S.W.3d. 277, 286, 287–88

(Tex. 2011) (Combs III) (“The fee in this case is clearly directed, not at expression

in nude dancing, but at the secondary effects of nude dancing when alcohol is

being consumed. An adult entertainment business can avoid the fee altogether




                                         3
simply by not allowing alcohol to be consumed. For these reasons, we conclude

that the fee is not intended to suppress expression in nude dancing.”).

      The Texas Supreme Court evaluated the statute under the four-part test of

U.S. v. O’Brien, 391 U.S. 367 (1968), which concerns content-neutral restrictions

on symbolic speech. 391 U.S. at 377. Under O’Brien,

      a government regulation is sufficiently justified [1] if it is within the
      constitutional power of the Government; [2] if it furthers an important
      or substantial governmental interest; [3] if the governmental interest is
      unrelated to the suppression of free expression; and [4] if the
      incidental restriction on alleged First Amendment freedoms is no
      greater than is essential to the furtherance of that interest.

Id. The Texas Supreme Court held that the O’Brien test was satisfied, in part by

concluding that the $5 per patron fee was “a minimal restriction on the

businesses.” Combs III, 347 S.W.3d at 288.

      After the 2011 Supreme Court opinion, the case was remanded for the court

of appeals to consider the arguments relating to the Texas Constitution, and in

2014, the Austin Court of Appeals upheld the statute against the state constitutional

challenges. Tex. Entm’t Ass’n, Inc. v. Combs, 431 S.W.3d 790, 801 (Tex. App.—

Austin 2014, pet. denied) (Combs IV). The Comptroller then began enforcing the

SOB fee. See State of Texas, 2017 WL 11072005, at *6 (June 2, 2017) (ALJ

Proposal for Decision).2


2
      At oral argument, the parties explained that during the protracted pendency of the
      litigation concerning the constitutionality of the SOB fee statute, the Comptroller
                                           4
      The Comptroller’s enforcement actions sometimes included businesses that

operate as bikini-latex clubs—clubs that serve alcohol and offer live entertainment

by women, who are partially covered by latex that is applied to their bodies in a

liquid or semiliquid state. The Comptroller contended that these clubs were

sexually oriented businesses under the SOB fee statute. The clubs contended that

they were not SOBs because their entertainers were covered with clothing or liquid

latex that had dried on their bodies, and therefore they were not nude. In some

cases, the administrative law judges agreed with the clubs and found that no SOB

fees were owed.

      In 2017, the Comptroller adopted a rule regarding the sexually oriented

business fee (“the SOBF Rule”).3 34 Tex. Admin. Code § 3.722. The SOBF Rule

defined “clothing” as “a garment used to cover the body, or a part of the body,

typically consisting of cloth or a cloth-like material. Paint, latex, wax, gel, foam,

film, coatings, and other substances applied to the body in a liquid or semi-liquid

state are not clothing.” Id. § 3.722(a)(1). After the adoption of this rule, the

administrative law judges began holding in favor of the Comptroller, finding that

bikini-latex clubs were SOBs for the purposes of the fee.



      did not seek collection from bikini-latex clubs because the parties had reached an
      understanding.
3
      In 2015, Glenn Hegar became the Comptroller, succeeding Susan Combs, who
      served from 2007 until 2015.
                                           5
      Ordinarily, to assert a challenge that a taxing statute is unlawful, the

taxpayer is required to pay the tax under protest and seek a refund. See TEX. TAX

CODE § 112.051(a) (“If a person who is required to pay a tax or fee imposed by

this title or collected by the comptroller under any law, including a local tax

collected by the comptroller, contends that the tax or fee is unlawful or that the

public official charged with the duty of collecting the tax or fee may not legally

demand or collect the tax or fee, the person shall pay the amount claimed by the

state, and if the person intends to bring suit under this subchapter, the person must

submit with the payment a protest.”). However, the Administrative Procedure Act

authorizes the filing of a declaratory judgment action to challenge “the validity or

applicability of a rule,” when “it is alleged that the rule or its threatened application

interferes with or impairs, or threatens to interfere with or impair, a legal right or

privilege of the plaintiff.” TEX. GOV’T CODE § 2001.038(a). A party can also

challenge the constitutionality of a statute or rule under the Uniform Declaratory

Judgment Act. See Patel v. Tex. Dep’t of Licensing & Regulation, 469 S.W.3d 69,

76 (Tex. 2015).

      Texas BLC is an association of bikini-latex clubs and the appellee in this

appeal. As an association, it was not subject to the SOB fee. See TEX. BUS. &

COMM. CODE §§ 102.051–.056. However, under the doctrine of associational

standing, on June 19, 2017, it filed an APA suit for declaratory judgment (Texas


                                           6
BLC v. Glenn Hegar, No. D-1-GN-17-002768) challenging the validity of SOBF

Rule, specifically the definition of clothing and its exclusion of materials applied to

an entertainer in a liquid or semi-liquid state.4

      “Courts generally presume that agency rules are valid, so parties who

challenge a rule have the burden of proving its invalidity.” Tex. State Bd. of

Exam’rs of Marriage & Family Therapists v. Tex. Med. Ass’n, 511 S.W.3d 28, 33

(Tex. 2017). A rule is invalid when it: “(1) contravenes specific statutory language;

(2) runs counter to the general objectives of the statute; or (3) imposes additional

burdens, conditions, or restrictions in excess of or inconsistent with the relevant

statutory provisions.” Id. Determining the validity of a rule requires us to construe

the statutory language. See id.; Tex. Orthopaedic Ass’n v. Tex. State Bd. of

Podiatric Med. Examiners, 254 S.W.3d 714, 719–20 (Tex. App.—Austin 2008,

pet. denied).

      The issue in the state-court case challenging the validity of the SOBF Rule

required the court to determine whether the rule was in harmony with the SOBF

statute based on a construction of the statute and the Rule. In the state-court case,


4
      Although not challenged in the trial court or raised on appeal, we note that Texas
      BLC has standing to sue on behalf of its members by virtue of associational
      standing. See Tex. Ass’n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 447
      (Tex. 1993) (quoting Hunt v. Washington State Apple Advertising Comm’n, 432
      U.S. 333, 342 (1977)); Tex. Dep’t of Family & Protective Servs. v. Grassroots
      Leadership, Inc., No. 03-18-00261-CV, 2018 WL 6187433, at *4 (Tex. App.—
      Austin Nov. 28, 2018, no pet.) (mem. op.).
                                            7
Texas BLC did not challenge the constitutionality of the SOBF Rule, although it

could have done so by way of a suit for declaratory judgment. See Patel, 469

S.W.3d at 76. On May 14, 2018, the Travis County district court entered final

judgment holding the SOBF Rule invalid. On June 6, 2018, the Comptroller filed a

notice of appeal, invoking this court’s jurisdiction in this appeal.

      Meanwhile, on June 19, 2017, the same day the underlying case was filed in

state court, Texas Entertainment Association, Inc. v. Glenn Hegar, No.

1:17CV00594, was filed in the federal district court for the Western District of

Texas, Austin Division. TEA, like Texas BLC, is an association of bikini-latex

clubs. In the federal case, TEA challenged the constitutionality of the SOBF Rule

under the U.S. Constitution. While this appeal was pending, in February 2019, the

federal district court granted partial summary judgment in favor of TEA, finding

that the Rule was unconstitutional under the First Amendment.

      The federal district court began its analysis by declining to consider a

challenge to the constitutionality of the SOBF statute because the Texas Supreme

Court has already considered that and found the statute withstands constitutional

scrutiny. See Combs III, 347 S.W.3d at 277. The federal district court found,

however, that the SOBF Rule was a content-based restriction, not a content-neutral

restriction. Slip op. at 20–22. In reaching that conclusion, the federal court stated:

“By defining the word ‘clothing’ to not cover the latex worn in latex clubs, the


                                           8
Comptroller expanded the application of the fee to businesses not previously taxed,

and then tried to recover fees based on that expanded coverage.” Slip op. at 20.

      The court also relied on MD II Entm’t, Inc. v. City of Dallas, Tex., 935 F.

Supp. 1394, 1396 (N.D. Tex. 1995), aff’d sub nom., MD II Entm’t, Inc. v. City of

Dallas, 85 F.3d 624 (5th Cir. 1996). In MD II, Dallas amended a zoning ordinance

relating to sexually oriented businesses. 935 F. Supp. at 1396. The amendment

changed the definition of nudity. Id. Before the amendment a female dancer who

covered her areola opaquely was not considered nude, but after the amendment, a

dancer would be required “to cover opaquely all of her breast beneath the areolae

to avoid the relevant zoning restrictions.” Id. The zoning ordinance thus expanded

the definition of nudity but did so without evidence of a link to secondary effects

that could be curbed by the expanded definition. Id. at 1397–98. The court struck

the Dallas zoning amendment as a content-based restriction. Id. at 1399.

      The federal district court in the TEA case concluded that the SOBF Rule was

likewise a content-based restriction because the Comptroller adopted it without

“reference to or concern for mitigating any identified secondary deleterious

effects,” and it further concluded that the SOBF Rule was “directed at the essential

expressive nature of latex clubs’ business, and thus is a content-based restriction.”

Slip op. at 22.




                                         9
         The court also concluded that if the Rule were considered content-neutral, it

would nevertheless fail the O’Brien test. Slip op. at 23. The O’Brien test requires

that the regulation be justified by a substantial governmental interest. See 391 U.S.

at 377. The Comptroller asserted two substantial governmental interests advanced

by the SOBF Rule: (1) reducing the secondary effects of adult businesses and

(2) managing fiscal operations through assessing, administering, and collecting

taxes. Slip op. at 24. The court rejected the first reason because the Comptroller

provided no evidence that the SOBF Rule reduced the secondary effects of adult

businesses in any way different from the statute itself, and it rejected the second

reason, saying the SOBF Rule “expands” the statute. Id. The federal district court

wrote:

         The amended rule also does not serve the second asserted interest. The
         amended rule expands—or clarifies—the application of the $5 fee
         statute. It speaks to the imposition of the fee itself; it is not a rule that
         merely assists in the administration or collecting of an otherwise valid
         fee or tax. If this asserted interest is sufficiently substantial to justify
         the amended rule, then any fee or tax furthers a substantial
         government interest merely by existing, no matter what it seeks to
         regulate or why. Such expansive and tautological reasoning must be
         rejected, particularly so where the issues are of a constitutional
         dimension.

Id. (internal citations omitted). By holding the Rule unconstitutional, the federal

district court has effectively enjoined the Comptroller from enforcing the SOBF

statute against bikini-latex clubs, including the members of Texas BLC.



                                              10
      This brings us to the unusual procedural posture of this appeal. The federal

district court has already determined the sole issue in this case: the validity of the

SOBF Rule.5 The federal district court construed the SOBF Rule, saying: “By

defining the word ‘clothing’ to not cover the latex worn in latex clubs, the

Comptroller expanded the application of the fee to businesses not previously taxed,

and then tried to recover fees based on that expanded coverage.” Slip op. at 20.

      No Texas appellate court has yet construed the SOBF statute’s meaning of

the terms “clothed,” “unclothed,” “uncovered,” or “clothing.” Cf. Moore v. Sims,

442 U.S. 415, 429 (1979) (“State courts are the principal expositors of state law.”).

In our court, the Comptroller has argued that the SOBF Rule is fully in harmony

with the statute, which the        Supreme Court of Texas has already found to

withstand constitutional scrutiny. See Combs III, 347 S.W.3d at 278.

      The Texas Legislature has provided that all direct review of the validity or

applicability of a rule shall be concentrated in the state district courts of Travis

County. See TEX. GOV’T CODE § 2001.038; see also Burford v. Sun Oil, 319 U.S.

315, 326 (1943) (discussing principles underpinning equitable federal abstention).


5
      The federal district court also relied on MD II Entm’t, Inc. v. City of Dallas, Tex.,
      935 F. Supp. 1394, 1396 (N.D. Tex. 1995), aff’d sub nom., MD II Entm’t, Inc. v.
      City of Dallas, 85 F.3d 624 (5th Cir. 1996), as a white-horse analogous case. But
      the value of MD II Entm’t as persuasive authority depends entirely on whether the
      Comptroller’s Rule imposed a new restriction, as the City did in MD II Entm’t. As
      we explain in the main text, that is the question presented in this appeal from the
      state district court judgment.
                                           11
In Burford, the United States Supreme Court concluded that federal courts should

leave “problems of Texas law to the State court” and that when regulatory

questions “so clearly involve[] basic problems of Texas policy,” federal courts

should exercise “equitable discretion” to permit “Texas courts the first opportunity

to consider them.” 319 U.S. at 332.

      In Younger v. Harris, 401 U.S. 37 (1971), the Supreme Court addressed “the

notion of ‘comity,’ that is, a proper respect for state functions. . . .” 401 U.S. at 44.

The Court explained:

             This, perhaps for lack of a better and clearer way to describe it,
      is referred to by many as “Our Federalism” . . . .

             The concept does not mean blind deference to “States’ Rights”
      any more than it means centralization of control over every important
      issue in our National Government and its courts. . . . What the concept
      does represent is a system in which there is sensitivity to the
      legitimate interests of both State and National Governments, and in
      which the National Government, anxious though it may be to
      vindicate and protect federal rights and federal interests, always
      endeavors to do so in ways that will not unduly interfere with the
      legitimate activities of the States.

Id.

      The United States Supreme Court has identified “three distinct

considerations that counsel abstention when broad-based challenges are made to

state statutes.” Moore, 442 U.S. at 428. The first consideration, arising from

Railroad Comm’n v. Pullman Co., 312 U.S. 496, 498 (1941), is “that a federal

court will be forced to interpret state law without the benefit of state-court
                                           12
consideration and therefore under circumstances where a constitutional

determination is predicated on a reading of the statute that is not binding on state

courts and may be discredited at any time—thus essentially rendering the federal-

court decision advisory and the litigation underlying it meaningless.” Moore, 442

U.S. at 428. The second consideration is “the need for a concrete case or

controversy.” Id. The third consideration is “the threat to our federal system of

government posed by ‘the needless obstruction to the domestic policy of the states

by forestalling state action in construing and applying its own statutes.’” Id. at 429

(quoting Alabama State Fed’n of Labor v. McAdory, 325 U.S. 450, 471 (1945)).

      The federal district court’s interpretation of the SOBF Rule as expanding the

SOBF statute is “a reading” “that is not binding on state courts.” Moore, 442 U.S.

at 428. The federal district court’s order did not expressly address the text of the

SOBF Rule, any canons of construction, see TEX. GOV’T CODE §§ 311.001–.035

(the “Code Construction Act”), or whether the SOBF Rule contravened statutory

language, ran counter to the objectives of the statute, or imposed additional

burdens, conditions or restrictions in excess of or inconsistent with the relevant

statutory provisions. See Tex. State Bd. of Exam’rs of Marriage & Family

Therapists, 511 S.W.3d at 33. The SOBF statute defines “nude” as “(A) entirely

unclothed” or “(B) clothed in a manner that leaves uncovered or visible through

less than fully opaque clothing any portion of the breasts below the top of the


                                         13
areola of the breasts, if the person is female, or any portion of the genitals or

buttocks.” TEX. BUS. & COMM. CODE § 102.051(1) (emphasis supplied). By

defining “nude” in terms of being “unclothed” or “clothed” but with exceptions

that leave the specified body parts visible, the question before our court in this

appeal was whether the Legislature intended that only fully opaque clothing would

suffice to render a business not subject to the SOB fee.

      Were we to conclude that the statute imposed the SOB fee when the

specified body parts were covered but not with “clothing,” then we would

necessarily conclude that the Comptroller did not expand the application of the fee

to businesses not previously taxed. In other words, we could interpret the statute

and the Rule in a manner contrary to the conclusion reached by the federal district

court because its order is not binding on us. The federal district court’s order is,

however, binding on the parties to that case, which includes the Comptroller. And

it is this effect of the federal district court’s order that renders this appeal moot.

      Because the federal district court’s decision enjoins the Comptroller from

collecting SOB fees from bikini-latex bars, including the members of Texas BLC,

there is no live controversy between the parties that will actually be resolved by a

determination of the validity of the Comptroller’s SOBF Rule. See Matthews, on

behalf of M.M. v. Kountze Indep. Sch. Dist., 484 S.W.3d 416, 418 (Tex. 2016)

(“The mootness doctrine applies to cases in which a justiciable controversy exists


                                            14
between the parties at the time the case arose, but the live controversy ceases

because of subsequent events.”). Even if we were to conclude that the SOBF Rule

is fully consonant with the SOBF statute, the Comptroller could not collect the

SOB fees from the bikini-latex bars that are members of Texas BLC because the

federal district court order prevents it from doing so.

       “A declaratory-judgment action does not give a court jurisdiction ‘to pass

upon hypothetical or contingent situations, or to determine questions not then

essential to the decision of an actual controversy, although such questions may in

the future require adjudication.’” Tesco Corp. (US) v. Steadfast Ins. Co., No. 01-

13-00091-CV, 2015 WL 456466, at *2 (Tex. App.—Houston [1st Dist.] Feb. 3,

2015, pet. denied) (mem. op.) (quoting Bexar Metro. Water Dist. v. City of

Bulverde, 234 S.W.3d 126, 130–31 (Tex. App.—Austin 2007, no pet.)). We are not

authorized to issue an advisory opinion. See Texas Ass’n of Bus., 852 S.W.2d at

444.

       Accordingly, we dismiss this appeal. All pending motions are dismissed.




                                               Peter Kelly
                                               Justice

Panel consists of Justices Kelly, Hightower, and Countiss.



                                          15
