City of New York v. Golden Feather Smoke Shop

• Citation: 597 F.3d 115
• Decision Date: 04 March 2010
• Docket Number: No. 09-3997-cv (CON).,No. 09-3942-cv (L).,09-3942-cv (L).,09-3997-cv (CON).
• Parties: The CITY OF NEW YORK, Plaintiff-Appellee, v. GOLDEN FEATHER SMOKE SHOP, INC., Kimo Smoke Shop, Inc., Smoke and Rolls, Inc., Shawn Morrison, Kiana Morrison, in her individual capacity, Jessey Watkins, Tony D. Phillips, Defendants, Monique's Smoke Shop, Ernestine Watkins, in her individual capacity, Wayne Harris, Red Dot & Feathers Smoke Shop, Inc., Raymond Hart, in his individual capacity, Smoking Arrow Smoke Shop, Denise Paschall, in her individual capacity, TDM Discount Cigarettes, Thomasina Mack, in her individual capacity, Peace Pipe Smoke Shop, Rodney Morrison, Charlotte Morrison, in her individual capacity, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

597 F.3d 115

The CITY OF NEW YORK, Plaintiff-Appellee, v. GOLDEN FEATHER SMOKE SHOP, INC., Kimo Smoke Shop, Inc., Smoke and Rolls, Inc., Shawn Morrison, Kiana Morrison, in her individual capacity, Jessey Watkins, Tony D. Phillips, Defendants Monique's Smoke Shop, Ernestine Watkins, in her individual capacity, Wayne Harris, Red Dot & Feathers Smoke Shop, Inc., Raymond Hart, in his individual capacity, Smoking Arrow Smoke Shop, Denise Paschall, in her individual capacity, TDM Discount Cigarettes, Thomasina Mack, in her individual capacity, Peace Pipe Smoke Shop, Rodney Morrison, Charlotte Morrison, in her individual capacity, Defendants-Appellants.

No. 09-3942-cv (L).

No. 09-3997-cv (CON).

United States Court of Appeals, Second Circuit.

Argued: January 14, 2010.

Decided: March 4, 2010.

James M. Wicks, Farrell Fritz, P.C., Uniondale, N.Y. (George C. Pratt, Hillary A. Frommer, Farrell Fritz P.C., James F. Simermeyer, Law Offices of James F. Simermeyer, P.C., on the brief), for Defendants-Appellants Monique's Smoke Shop, Inc., Ernestine Watkins, Wayne Harris, Red Dot & Feather Smoke Shop, Inc., Raymond Hart, Smoking Arrow Smoke Shop, Denise Paschall, TDM Discount Cigarettes, and Thomasina Mack.

Daniel Noble, Law Office of Daniel Noble, New York, NY, for Defendants-Appellants Peace Pipe Smoke Shop, Rodney Morrison and Charolette Morrison s/h/a Charlotte Morrison.

Richard Levitt, Levitt & Kaizer, New York, NY, for Defendant-Appellant Wayne Harris.

Victoria Scalzo, New York, N.Y. (Stephen J. McGrath and Eric Proshansky, on the brief), for Michael A. Cardozo, Corporation Counsel of the City of New York, for Plaintiff-Appellee.

Before HALL and LIVINGSTON, Circuit Judges, and CHIN, District Judge.^*

HALL, Circuit Judge:

Defendants-appellants appeal the order of the Eastern District of New York (Amon, J.), preliminarily enjoining the sale of untaxed cigarettes to anyone not a member of the Unkechauge Nation. We consider here whether the City of New York (the "City") has demonstrated that it is entitled to a preliminary injunction. In order to effectuate our analysis, for the reasons that follow, we certify to the New York Court of Appeals two questions regarding the effect of §§ 471 and 471-e of the New York Tax Code on cigarette sales on Native American reservation land.

BACKGROUND

The Unkechauge Indian Nation has existed in New York State for hundreds of years. Its current lands lie in Mastic, Long Island, on the Poospatuck Reservation. The population and territorial reach of the Unkechauge has diminished over the years, but the Unkechauge still maintain a sovereign-to-sovereign relationship with New York State. Appellants are businesses and proprietors that sell cigarettes on the Poospatuck Reservation to members of the Unkechauge Nation and the general public alike.

On September 29, 2008, the City filed a complaint against the above-named defendants and defendants-appellants, seeking injunctive relief, penalties, and damages under the Contraband Cigarette Trafficking Act, 18 U.S.C. § 2341 et seq., (the "CCTA")¹ and the Cigarette Marketing Standards Act, N.Y. Tax Law § 483 et seq. (the "CMSA").² The City filed its complaint in federal court, asserting that federal jurisdiction lies under 28 U.S.C. § 1331 for the CCTA claim and supplemental jurisdiction lies under 28 U.S.C. § 1367(a) for the CMSA claim. The district court, as provided for in § 1367(a), accepted the claims asserting both the federal and the state law violations.

The complaint alleges that the reservation vendors sell untaxed cigarettes in bulk to "bootleggers" who then resell them in the City, causing a significant loss of tax revenue to both the City and New York State. In October 2008 the City moved for a preliminary injunction, arguing irreparable harm in lost tax revenues should the vendors continue their sales practice. Defendants Monique's Smoke Shop, Ernestine Watkins, Wayne Harris, Red Dot & Feather Smoke Shop, Inc., Raymond Hart, Smoking Arrow Smoke Shop, Denise Paschall, TDM Discount Cigarettes, Thomasina Mack, Kimo Smoke Shop, Golden Feather Smoke Shop, Smoke and Rolls, and Kiana Morrison (the "Moving Defendants") filed a motion to dismiss the City's claims under Federal Rule of Civil Procedure 12(b)(1) for a lack of subject matter jurisdiction on the grounds of Tribal sovereign immunity. The district court denied this motion on March 16, 2009, concluding that the entities are private businesses rather than arms of the Tribe.

The Golden Feather Smoke Shop, Inc., Kimo Smoke Shop, Inc., Shawn Morrison, and Kiana Morrison entered into a consent injunction on May 14, 2009 and are not part of this appeal. Smoke and Rolls no longer operates as a business. Both Tony D. Phillips and Jessey Watkins currently have a motion for default judgment pending against them in the district court; they also are not part of this appeal. The remaining Moving Defendants filed a motion for reconsideration of their motion to dismiss. On August 25, 2009, the district court denied the motion for reconsideration and granted the City a preliminary injunction. This Court held a hearing on an emergency motion to lift the preliminary injunction and issued its order denying that request. We also asked the parties to brief whether to certify questions to the New York Court of Appeals on the applicability of New York Tax Law §§ 471 and 471-e to cigarette sales by reservation vendors.

Factual Findings

In its August 25, 2009 decision the district court made numerous factual findings regarding the actions of the various defendant smoke shops and proprietors. These findings were based upon testimony of cigarette bootleggers who did business with the shops as well as testimony of investigators from the Department of Taxation and Finance (the "DTF"). See City of New York v. Golden Feather Smoke Shop, Inc., 2009 WL 2612345, at *7-8, *10 (E.D.N.Y. Aug.25, 2009). The facts are essentially unchallenged at this stage.

Monique's Smoke Shop, Peace Pipe Smoke Shop, Red Dot and Feather Smoke Shop, Smoking Arrow Smoke Shop, and TDM Discount Cigarettes, along with the proprietors of the shops, were found to have participated in bulk sales of unstamped cigarettes, often selling hundreds of cartons of unstamped cigarettes at a time, in blatant violation of the CCTA. The district court also found that these sales were likely to continue based on the high-volume sales practices of each of the defendant businesses.

The court calculated the minimum price for which a retail dealer in New York State could sell a carton of Newport and Marlboro brand cigarettes in the years 2006 to 2009 based on the minimum price requirements of the CMSA, which includes the required State and local taxes. Considering the testimony of the proprietors and informants, the court found that because the smoke shops were regularly selling unstamped cartons, they were selling them for less than the minimum prices set by the CMSA throughout the years identified by the complaint. Based on their past practices, the court also found that the vendors were likely to continue selling these violative quantities of unstamped cigarettes in the future.

In addition to making findings about the defendants-appellants' business operations, the court found that these operations caused injury to the City because "large quantities of untaxed cigarettes are purchased in defendants' stores and trafficked into the City where they are resold at below-market prices, without the payment of City or State taxes." Golden Feather Smoke Shop, Inc., 2009 WL 2612345, at *22. The district court based this finding on the evidence from the bootleggers, DTF investigators, and arrest reports from Suffolk County documenting "that numerous individuals arrested in Suffolk County for transporting or possessing unstamped cigarettes have New York City addresses." Id. This "substantial trade in unstamped cigarettes between the Poospatuck Reservation and New York City" caused injury to the City in the loss of "significant tax revenue." Id. at *23. The court also found concomitant effects on the public health "due to the relationship between cigarette price and smoking behavior." Id.

Two expert witnesses testified about the harm to the City from the availability of unstamped, cheap cigarettes. The then-Commissioner of the City's Department of Health and Mental Hygiene, Dr. Thomas Frieden, testified that cigarette use has a price elasticity of -0.4, meaning "that for every 10% increase in the price of cigarettes, there is a 4% decline in smoking." Id. Dr. Frieden attributed half the decline to smokers quitting, while the other half was smokers who reduced their consumption. Dr. W. Kip Viscusi testified on behalf of the defendants, asserting that higher cigarette taxes do not induce smokers to quit, and that higher costs only lead to reduced consumption. Id.

DISCUSSION

Standard of Review

We have jurisdiction in this appeal under 28 U.S.C. § 1292(a)(1), which provides in relevant part that "the courts of appeals shall have jurisdiction of appeals from [i]nterlocutory orders of the district courts of the United States ... granting ... injunctions." We review the district court's grant of a preliminary injunction to the City for abuse of discretion. SEC v. Dorozhko, 574 F.3d 42, 45 (2d Cir.2009). An abuse of discretion exists if the district court "(1) based its ruling on an erroneous view of the law, (2) made a clearly erroneous assessment of the evidence, or (3) rendered a decision that cannot be located within the range of permissible decisions." Lynch v. City of New York, 589 F.3d 94, 99 (2d Cir.2009) (internal quotation marks omitted).

The district court, however, does not receive "equal deference to every aspect of [its] decision. The abuse of discretion standard is used to evaluate the ... court's application of the facts to the appropriate legal standard, and the factual findings and legal conclusions underlying such decisions are evaluated...