S&M Brands, Inc. v. Stein
| Decision Date | 24 March 2020 |
| Docket Number | 17 CVS 6894 |
| Court | Superior Court of North Carolina |
| Parties | S&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. Hayne, s for Plaintiff S&M Brands, Inc.
The North Carolina Department of Justice, by Gary D. Wilson Lauren M. Clemmons, and Laura H. McHenry, for Defendants Josh Stein and the State of North Carolina.
ORDER AND OPINION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
THIS MATTER comes before the Court on Plaintiff's Motion for Partial Summary Judgment ("Plaintiff's Motion," ECF No. 122), and Defendants' Motion for Summary Judgment ("Defendants' Motion," ECF No. 117) (collectively, the "Summary Judgment Motions").
THE COURT, having considered the Summary Judgment Motions, the evidentiary materials and briefs filed in support of and in opposition to the Summary Judgment Motions, the arguments of counsel at the hearing, the applicable law, and other appropriate matters of record, CONCLUDES, that the Plaintiff's Motion should be GRANTED, in part, and DENIED, in part, and that the Defendants' Motion should be GRANTED, in part, and DENIED, in part, for the reasons set forth below.
1. Ehmann v. Medflow, Inc., 2017 NCBC LEXIS 88, at *6 (N.C. Super. Ct. Sept. 26, 2017).
2. At all times relevant to this action, Plaintiff S&M Brands, Inc. ("Plaintiff") was a small, regional manufacturer of tobacco products, including cigarettes, based in Keysville, Virginia. Plaintiff sold its products primarily in the southeastern United States, including North Carolina. On or about March 7, 2019, Plaintiff sold its cigarette business and ceased manufacturing cigarettes. (See ECF No. 100.) The sale did not include any rights or other interests in Plaintiff's escrow account payments that are at issue in this lawsuit. (ECF No. 108, at p. 3 n.2.) Plaintiff has confirmed that it "does not, at this time, intend to sell cigarettes to distributors and retailers for resale in North Carolina on or after May 1, 2019." (Plaintiff's Objections and Responses to Defendants' Discovery Requests in Reopened Discovery, ECF No. 111.3 at Exhibit 3, p. 4.)
3. Defendant Josh Stein is the Attorney General of 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.)
4. In or around 1994, numerous states sued the then existing four major tobacco companies-Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard ("Big Four")-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. In November 1998, forty-six states, including North Carolina and the District of Columbia and five United States territories (the "MSA States") settled the lawsuit with the Big Four. (Id. at ¶ 26.) Four states (Florida, Minnesota, Mississippi, and Texas) had previously settled separately with the Big Four. (Id.)
6. Effective November 23, 1998, the Big Four and the MSA States executed a Master Settlement Agreement (the "MSA"). (Master Settlement Agreement, ECF No. 36.1-36.3; hereinafter referred and cited to as "MSA" followed by a section number.) Under the terms of the MSA, the Big Four (in the MSA, the Big Four 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" of the payments as set forth in the MSA ("Allocable Share"). The settlement payments made by the OPMs are determined by the OPMs' respective shares of the cigarette market in the United States, the District of Columbia, and Puerto Rico (defined in the MSA as "Market Share") during a sales year.[1] In other words, to the extent an OPM increases its Market Share in a given year, its settlement payment obligation increases. (ECF No. 36, at ¶ 33.) The revenues generated from the OPMs' sales, however, are not considered in determining their payment obligations. (Id.) Plaintiff alleges that under this method, the OPMs are discouraged from "trying to increase revenue by lowering prices" because increasing sales, and thus 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 also agreed to substantial restrictions on their marketing, advertising, lobbying, and trade association activities. Additionally, the OPMs agreed to relinquish any challenges to state laws and rules regarding tobacco. (Id. at ¶ 34.) In exchange, the MSA States released the OPMs from certain claims arising out of the OPM's past conduct.
8. The MSA permits cigarette manufacturers who were not sued by the MSA States to voluntarily sign the MSA along with the OPMs. Manufacturers who signed the MSA after the OPMs are known as "Subsequent Participating Manufacturers" ("SPMs"). SPMs are bound by the same payment obligations, in perpetuity, and the same restrictions on their activities, as the OPMs (collectively, the OPMs and SPMs are referred to as the "Participating Manufacturers" ("PMs")). As an incentive for cigarette manufacturers to voluntarily join the MSA, the MSA provides that SPMs that signed the MSA within ninety days[2] of the MSA's execution and had a Market Share of cigarette sales in 1997 or 1998 were "grandfathered" under the MSA, and are only required to make settlement payments to the extent that the SPM's Market Share for a given year exceeds its 1998 Market Share or 125% of its 1997 Market Share. (MSA § IX(i).) If the SPM either signed the MSA more than ninety 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 at issue without the benefit of subtracting a grandfathered Market Share. Section IX(i) of the MSA provides in relevant part as follows:
9. As of October 2019, there were more than 60 PMs listed as participants in the MSA. See Participating Manufacturers under the Master Settlement Agreement, National Association of Attorneys General (Oct. 4, 2019), https://www.naag.org/assets/redesign/files/msa-tobacco/2019-10-04%20PM%20List%20.pdf.
10. The payments due from the PMs are calculated each year by an Independent Auditor selected by the MSA States and OPMs. (MSA § XI(a).) It is undisputed that PriceWaterhouseCoopers LLP ("PwC") has acted as the Independent Auditor under the MSA. PwC "calculate[s] and determine[s] the amount of all payments owed pursuant to [the MSA]," including all "adjustments, reductions and offsets . . . ." (Id.) Payments are due from the PMs on April 15 every year. PwC is required to provide each PM with a "Preliminary Calculation" of the amount due from the PM forty days prior to April 15, and a "Final Calculation" fifteen days before April 15. (MSA §§ XI(d)(2), (4); Dep. of PwC, ECF No. 121.1, at Ex. G [SEALED].) The PMs are provided an opportunity to dispute the Preliminary Calculation made by PWC. Nevertheless, by April 15 of a payment year, a PM must pay the undisputed portion of the Final Calculation. (MSA § XI(d)(7).) The PM may either withhold the disputed portion of the Final Calculation or may pay the disputed portion into a Disputed Payments Account until final determination of its payment obligation. (MSA § XI(d)(8).) To the extent it is determined that the PM owed the disputed portion, the PM is not liable for the interest on the disputed payment that it pays into a Disputed Payments Account. (Id.)
11. The Final Calculations, however, are subject to revision by PwC. XXXXX (ECF No. 121.1, at Ex. G [SEALED].) If a PM disputes PwC's Final Calculation, the dispute must be resolved by binding arbitration before a panel of three arbitrators. (MSA § XI(c).) It is undisputed that it can take many years for a final determination of all disputed payments to occur.
12. Cigarette manufacturers who were not sued by the Settling States and who chose not to voluntarily sign the MSA...
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