Freedom Holdings, Inc. v. Spitzer
| Decision Date | 06 January 2004 |
| Docket Number | Docket No. 02-7492. |
| Citation | 357 F.3d 205 |
| Parties | FREEDOM HOLDINGS INC., d/b/a North American Trading Company, and International Tobacco Partners, Ltd., on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. Eliot SPITZER, in his official capacity as Attorney General of the State of New York, and Arthur J. Roth, in his official capacity as Commissioner of Taxation and Finance of the State of New York, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
David F. Dobbins, Patterson, Belknap, Webb & Tyler, LLP, New York, New York, for Plaintiffs-Appellants.
Avi Schick, Deputy Counsel to the Attorney General of the State of New York (Eliot Spitzer, Attorney General of the State of New York, Michael S. Belohlavek, Deputy Solicitor General of the State of New York, Daniel Schulze, Assistant Attorney General of the State of New York, of counsel), New York, New York, for Defendants-Appellees.
Before: WINTER, SACK, and SOTOMAYOR, Circuit Judges.
Judge SACK concurs in a separate opinion.
This appeal involves a challenge to New York legislation enacted pursuant to the settlement agreement of a host of various lawsuits brought by most of the states against the major tobacco manufacturers. Freedom Holdings Inc. and International Tobacco Partners, Ltd. — companies that import cigarettes for resale in New York from foreign manufacturers who are non-parties to the settlement agreement — appeal from Judge Hellerstein's dismissal of their complaint pursuant to Fed.R.Civ.P. 12(b)(6). The appellees are Eliot Spitzer, Attorney General of the State of New York, and Arthur J. Roth, Commissioner of Taxation and Finance of the State of New York, both officials with responsibility for enforcing the laws being challenged, New York Tax Law §§ 480-b, 481, subdiv. 1(c), and 1846 (the "Contraband Statutes").
The Contraband Statutes were passed in connection with the Master Settlement Agreement (the "MSA") executed by the country's four major tobacco manufacturers and most of the states. Appellants allege — and at this stage we must assume their allegations to be true — that New York's Contraband Statutes enforce a market-sharing and price-fixing cartel embodied in the MSA that allows the major tobacco manufacturers to charge supra-competitive prices, in exchange for sharing their monopoly profits with the State of New York.
Appellants challenge the Contraband Statutes on the grounds that: (i) they violate the Commerce Clause, U.S. Const. Art. I § 8, cl. 3; (ii) they are in conflict with Section 1 of the Sherman Act, 15 U.S.C. § 1, and therefore preempted; and (iii) New York's selective nonenforcement as to wholesalers and importers on Native American reservations violates the Commerce Clause and the Equal Protection Clause.
Appellees moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6). The district court granted the motion, holding that: (i) the Commerce Clause is not violated because the Contraband Statutes do not favor local interests over out-of-state interests; (ii) the Contraband Statutes do not violate the antitrust laws because they are unilateral state action and are thus not prohibited by the Sherman Act under Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943); and (iii) under Washington v. Confederated Bands and Tribes of the Yakima Indian Nation, 439 U.S. 463, 99 S.Ct. 740, 58 L.Ed.2d 740 (1979), and New York Ass'n of Convenience Stores v. Urbach, 92 N.Y.2d 204, 677 N.Y.S.2d 280, 699 N.E.2d 904 (1998), appellants failed to state a valid equal protection claim.
Appellants renew their claims on appeal. We affirm the dismissal of the Commerce Clause claim. We reverse with respect to the Sherman Act claim because, based on the complaint's allegations, the Parker state action immunity doctrine does not immunize the Contraband Statutes from preemption by the Sherman Act. In that regard, we reach the same conclusion as did the Third Circuit in A. D. Bedell Wholesale Co. v. Philip Morris Inc., 263 F.3d 239 (3d Cir.2001). We remand the selective enforcement claim to allow the district court to elaborate on its ruling and appellants to amend their complaint. We begin with a Table of Contents.
CONTENTS
BACKGROUND .......................................................................210
a) The Master Settlement Agreement and Related New York Legislation ..............210
1. Master Settlement Agreement ...............................................210
2. New York Escrow Statute ...................................................211
3. New York's Contraband Statutes ............................................213
b) The Complaint and Proceedings in the District Court ...........................215
DISCUSSION .......................................................................216
a) Dormant Commerce Clause Claim .................................................216
1. Analysis Under the "Clear Discrimination" Standard and "Pike Balancing
Test" ...................................................................217
2. Extraterritoriality Analysis ..............................................219
b) Sherman Act Claim .............................................................222
1. Preemption Analysis .......................................................222
2. Per Se Violation ..........................................................223
(i) Unilateral Act of State .............................................223
(ii) The Allegations of the Complaint ....................................225
3. State Action Immunity .....................................................226
(i) Clear Articulation and Affirmative Expression .......................226
(A) Express Adoption of an Anticompetitive Scheme ...................227
(B) State Policy Goals ..............................................227
(ii) Active Supervision ...................................................231
4. The Noerr-Pennington Immunity .............................................232
c) Equal Protection Claim ........................................................233
CONCLUSION .......................................................................235
We begin with a summary of relevant provisions of the MSA and related New York legislation as alleged in appellants' complaint. Because this appeal is from a dismissal on the pleadings, we assume the factual allegations of the complaint to be true.
In 1997, the State, City, and the counties of New York filed suit against the country's major cigarette manufacturers. See State v. Philip Morris, Inc., 179 Misc.2d 435, 686 N.Y.S.2d 564 (N.Y.Sup.Ct.1998). The action sought to recover damages related to the costs borne by these various political units of treating smoking-related illnesses and to impose restrictions on the cigarette manufacturers' sales, marketing, advertising, and disclosure practices. Similar actions were brought by 45 other states. These lawsuits were settled by execution of the MSA in November 1998. The settlement of the New York lawsuit was approved by the Supreme Court of New York, New York County, in a consent decree signed on December 23, 1998. See 179 Misc.2d at 451, 686 N.Y.S.2d 564.
The MSA was initially executed by the four dominant (alleged to account for 98% of cigarette sales at the time) cigarette manufacturers, Philip Morris, Lorrilard Tobacco, Brown & Williamson, and R.J. Reynolds (the "Original Participating Manufacturers," hereinafter "OPMs"), and by forty-six states (including New York), the District of Columbia, Puerto Rico, American Samoa, Guam, the Northern Mariana Islands, and the U.S. Virgin Islands (the "Settling States"). Thirty-three additional, and smaller, tobacco companies (the "Subsequent Participating Manufacturers," hereinafter "SPMs" and, together with the OPMs, the "Participating Manufacturers," hereinafter "PMs") became parties to the MSA. It is alleged that, at that time, the PMs were responsible for 99% of cigarette sales.1
In general, the MSA imposes numerous restrictions and requirements in connection with the PMs' sales, marketing, advertising, lobbying, research, education, and disclosure practices. See MSA at 15-37. It also requires annual payments by the OPMs to the Settling States,2 see MSA at 46-48, and releases the PMs from future claims by the Settling States, see MSA at 11-12, 93-101. Any non-participating cigarette manufacturer ("Non-Participating Manufacturer," hereinafter "NPM") may become a SPM by signing the MSA and making the payments that would have been due had it been a signatory as of the MSA execution date. MSA at 9, 13.
The OPMs' overall annual payment obligation is specified in the MSA.3 See MSA at 47-48. This obligation is allocated among the OPMs in accordance with their relative market shares. See MSA at 48. Annual payments to the Settling States are to be adjusted according to changes in the overall volume of cigarette sales. See MSA at 48 & Exhibit E. A significant reduction in sales will therefore lead to a reduction in payments and state revenue.
We turn now to the specific provisions of the MSA that give rise to the present action. In addition to the link between overall cigarette sales and payments to the Settling States noted above, there are provisions for changes in the payments required of particular companies due to changes in their market share. One such provision applies to market share losses by any OPM to other PMs. In general, an OPM losing market share pays less to the states; an OPM gaining market share pays more. See MSA at 46-47. Future payment obligations of SPMs — those arising after the initial...
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