S&M Brands, Inc. v. Stein

Decision Date02 April 2018
Docket Number17 CVS 6894
CourtSuperior Court of North Carolina
PartiesS&M BRANDS, INC., Plaintiff, v. JOSH STEIN, in his official capacity as the Attorney General of the State of North Carolina, and the STATE OF NORTH CAROLINA, Defendants.

Troutman Sanders LLP by Christopher G. Browning, Jr. and Bryan M. Haynes for Plaintiff S&M Brands, Inc.

The North Carolina Department of Justice by Lauren M. Clemmons for Defendants Josh Stein and the State of North Carolina.

Gregory P. McGuire Special Superior Court Judge

THIS MATTER comes before the Court on Defendants' Motion to Dismiss Plaintiff's Amended Complaint ("Motion to Dismiss"; ECF No. 43).

THE COURT, after considering the Motion, the briefs in support and in opposition to the Motion, the supporting materials filed by the parties, the arguments of counsel at the hearing, and other appropriate matters of record, concludes that Defendants' Motion to Dismiss is DENIED for the reasons set forth below.


1. The Court does not make findings of fact on motions to dismiss under Rule 12(b)(6), but only recites those facts drawn from the Amended Complaint (ECF No. 36) that are relevant to the Court's determination of the motion.

A. The parties

2. Plaintiff S&M Brands, Inc. ("Plaintiff") is a Virginia corporation formed in 1994 with its principal place of business in Keysville, Virginia. Plaintiff is in the business of manufacturing tobacco products, including cigarettes. Plaintiff sells its products primarily in the southeastern United States, including North Carolina.

3. Defendant Josh Stein is the Attorney General of the Defendant State of North Carolina ("Attorney General"; collectively, Josh Stein and the State of North Carolina are "Defendants"). Plaintiff alleges that at all times Stein acted under color of State authority and sues Stein only in his official capacity. (ECF No. 36 at ¶¶ 13- 14.)

B. The Master Settlement Agreement and the Qualifying Statute

4. In or around 1994, numerous states sued the four major tobacco companies - Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard - alleging that they had deceived the public about the dangers of smoking cigarettes and had engaged in other unlawful conduct designed to mislead consumers. (Id. at ¶¶ 21-24.) The lawsuit made claims for, inter alia, antitrust, fraud, racketeering, and conspiracy. (Id.)

5. On November 23, 1998, forty-six states, the District of Columbia, and five territories (the "Settling States") settled the lawsuit with Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard. (Id. at ¶ 26.) Four states (Florida, Minnesota, Mississippi, and Texas) had previously settled separately with Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard. (Id.)

6. Philip Morris, R.J. Reynolds, Brown & Williamson, Lorillard, and the Settling States executed a Master Settlement Agreement (the "MSA"). (ECF No. 36.1) Under the terms of the MSA, Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard (in the MSA, the four signatory tobacco companies are for some purposes referred to as the "Original Participating Manufacturers" and will hereinafter in this order be referred to collectively as the "OPMs") agreed to make annual settlement payments to the Settling States in perpetuity. The settlement payments are first made into a national escrow fund and are then distributed to the Settling States according to each state's "allocable share." (Id. at ¶ 30.) The settlement payments from the OPMs are linked to the OPMs' respective shares of the cigarette market; in other words, to the extent an OPM increases its market share in a given year, its settlement payments increase. (ECF No. 36 at ¶ 33.) The revenues generated from the OPMs' sales, however, are not considered in determining the payments. (Id.) Plaintiff alleges that under this method, the OPMs are discouraged from "trying to increase revenue by lowering prices" because increasing sales, and market share, would cause higher settlement payments. (Id.) Instead, Plaintiff alleges that the MSA payment scheme encourages the OPMs to raise prices as a means of increasing revenue without increasing market share. (Id.)

7. In the MSA, the OPMs agreed to substantial restrictions on their marketing, advertising, and lobbying activities. The OPMs also agreed to restrict their trade association activities and to relinquish any challenges to state laws and rules regarding tobacco. (Id. at ¶ 34.)

8. The MSA permits cigarette manufacturers who were not sued by the Settling States to sign the MSA along with the OPMs. Manufacturers who signed the MSA after the OPMs are known as "Subsequent Participating Manufacturers" ("SPMs"). (ECF No. 36.1 at p. 16.) If an SPM signed the MSA within sixty days of the MSA's execution and had a market share of cigarette sales in 1997 or 1998, that SPM had its market share "grandfathered" under the MSA and is only required to make settlement payments to the extent that the SPM's sales exceeded its 1998 market share or 125% of its 1997 market share in any given year. (Id. at pp. 78-80.) If the SPM either signed the MSA more than sixty days after the MSA's execution or had no market share in 1997 or 1998, that SPM must make yearly payments based on its market share for the year prior to the payment. (Id.)

9. Cigarette manufacturers who were not sued by the Settling States and who did not join the MSA are called "Non-Participating Manufacturers" ("NPMs"). (ECF No. 36.1 at p. 9.)

10. In order to prevent NPMs from having a competitive advantage over the OPMs and SPMs (collectively, the "Participating Manufacturers" ("PMs")), the MSA required each Settling State to enact a "Qualifying Statute." (ECF No. 36.1 at p. 65.) The MSA defines a Qualifying Statute as a "statute, regulation, law and/or rule (applicable everywhere the Settling State has authority to legislate) that effectively and fully neutralizes the cost disadvantages that the [PMs] experience vis-à-vis [NPMs] within such Settling State as a result of [the MSA]." (Id.) The MSA included, as an exhibit, a model Qualifying Statute that would satisfy terms of the MSA. (ECF 36.1, Ex. T.) North Carolina enacted a Qualifying Statute (the "NC Qualifying Statute") based on the model Qualifying Statute in July 1999. N.C. Gen. Stat. §§ 66-290-294.2 (hereinafter, references to the North Carolina General Statutes shall be referred to as "G.S.").

11. The NC Qualifying Statute requires that NPMs pay a statutorily-prescribed annual amount into a "Qualified escrow fund" ("Escrow Fund"). G.S. § 66-291(a)(2). Each NPM establishes its own individual Escrow Fund. An NPM's payment is calculated based on a set amount paid for each cigarette sold in North Carolina in the prior year. (Id.) The NPM receives any interest or appreciation on the amounts held in its Escrow Fund. Otherwise, the amounts held in the Escrow Fund can only be released: (1) to pay a judgment or settlement on certain claims by the Settling State against the NPM; (2) to refund the NPM for any overpayments into its Escrow Fund; or (3) to revert back to the NPM twenty-five years after the specific funds were paid into the Escrow Fund. G.S. § 291(b). The Attorney General is charged with administration of the Escrow Funds established by NPMs. (ECF No. 36 at ¶ 63.)

12. With regard to refunds for overpayments by a NPM into its Escrow Fund, the NC Qualifying Statute provides as follows:

To the extent that a tobacco product manufacturer establishes that the amount it was required to place into escrow on account of units sold in the State in a particular year was greater than the Master Settlement Agreement payments, as determined pursuant to Section IX(i) of that agreement, including after final determination of all adjustments, that the manufacturer would have been required to make on account of the units sold had it been a participating manufacturer, the excess shall be released from escrow and revert back to such tobacco product manufacturer . . . .

G.S. § 66-291(b)(2). The reference to Section IX(i) of the MSA is to the provisions regarding the payment obligations of SPMs. In other words, the NC Qualifying Statute permits release of the amount paid into an Escrow Fund by an NPM to the extent it exceeds what the NPM would have been required to pay for that year had it signed onto the MSA and was an SPM.

13. One of the adjustments required in order to determine whether an NPM has made an overpayment is the "NPM Adjustment." (ECF No. 36 at ¶¶ 46-48.) The MSA provides that if a Settling State fails to enact or fails to "diligently enforce" a Qualifying Statute, the PMs' payments to that Settling State may be reduced under the NPM Adjustment. (Id.) Determinations of whether the Settling States "diligently enforced" their Qualifying Statutes are made in national arbitration by a panel of three retired Article III judges. (ECF No. 36.1 at p. 88.) The arbitration process can take years to complete; for example, Defendants note in their brief that an NPM adjustment determination for MSA payments for the sales year 2003 was not finalized until 2013. (Defs.' Br. Supp. Mot. Dismiss Pl.'s Am. Compl., ECF No. 44 at p. 10.) The arbitration for sales year 2004 has not yet been completed.

C. Plaintiff's attempt to obtain refunds of overpayments into its Escrow Fund and the lawsuit

14. Plaintiff did not sign the MSA and is considered an NPM under the MSA and the NC Qualifying Statute. Plaintiff established an Escrow Fund and has made yearly payments into its Escrow Fund since the NC Qualifying Statute was enacted in 1999. Plaintiff alleges it paid more into its Escrow Fund for the sales years 2005 through 2015 than it would have paid as an...

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