Benedicto v. Porto Rican American Tobacco Co.

• Decision Date: 19 March 1919
• Docket Number: 1368.
• Citation: 256 F. 422
• Parties: BENEDICTO, Treasurer, v. PORTO RICAN AMERICAN TOBACCO CO.
• Court: U.S. Court of Appeals — First Circuit

256 F. 422

BENEDICTO, Treasurer, v. PORTO RICAN AMERICAN TOBACCO CO.

No. 1368.

United States Court of Appeals, First Circuit.

March 19, 1919

Col Edward S. Bailey, Asst. Judge Advocate General, War Department, of Washington, D.C. (Howard L. Kern, Atty. Gen of Porto Rico, on the brief), for appellant.

H. L Brown, of New York City (A. H. Burroughs, of New York City and J. H. brown, of San Juan, Porto Rico, on the brief), for appellee.

Before BINGHAM, JOHNSON, and ANDERSON, Circuit Judges.

ANDERSON Circuit Judge.

This an appeal from an interlocutory decree of the District Court of the United States for the District of Porto Rico granting a temporary injunction restraining the defendant below, who is treasurer of Porto Rico, from seizing cigars or little cigars of the plaintiff below, found in unstamped packages, and from prosecuting the plaintiff or any of its officers by reason of omitting to affix guarantee stamps on packages containing cigars and little cigars before exporting the same or removing them from its factory for consumption in Porto Rico.

The plaintiff is a New Jersey corporation engaged in the manufacture of cigars, little cigars, and cigarettes in Porto Rico, and has there invested in its plant, machinery, and land more than $5,000,000. Its average weekly output in its Porto Rican factories is about 4,000,000 cigars and 1,500,000 little cigars. More than 90 per cent. of its cigars and practically all of its little cigars are exported to the United States. The cigars are packed and sold in boxes containing from 5 to 50 each; the little cigars, in boxes of 10 each.

The Legislature of Porto Rico passed an act approved on December 3, 1917, entitled:

'An act to amend an 'act entitled an act to protect Porto Rican cigars from fraudulent misrepresentation, by providing for adequate expert inspection, and the issue of stamps of guarantee covering the origin of tobacco used in the manufacture of such cigars, intended for exportation and for other purposes,' approved March 11, 1915.'

This act requires the treasurer of Porto Rico to furnish to the manufacturers of cigars or exporters of leaf tobacco stamps to be known as guarantee stamps for cigars intended for exportation or consumption in Porto Rico and for leaf tobacco for exportation, and said--

'stamps shall be necessarily affixed to each original box or package, regardless of its capacity, so as to be visible to the consumer before they are removed from the place of manufacture or place of preparation, for exportation, or consumption in Porto Rico.'

See section 2.

In section 3 it is provided that--

'The denomination of each guarantee stamp for original boxes or packages containing cigars for export or consumption in Porto Rico shall be one cent each, and twenty-five cents each for packages containing leaf tobacco, scraps or stripped tobacco for export.'

The defendant construes this act to cover the plaintiff's little cigars and to require a one-cent stamp to be affixed to each box of 10 little cigars. The act so construed throws upon the plaintiff an expense of $1 per 1,000 for its little cigars, amounting to $125,000 a year for stamps on little cigars alone. The little cigars are mostly tobacco cigarettes, and are claimed by the plaintiff to differ radically from cigars in size, shape, contents, and cost. The act also requires a stamp to be affixed to each box of from 5 to 50 cigars, which imposes upon the plaintiff for stamps a cost of from 25 cents to $2 per 1,000 cigars. The total expense to the plaintiff of the act as construed by the defendant is not less than $150,000 per year.

Section 1 of the act provides for the employment of three additional internal revenue agents, who shall be tobacco experts, at salaries of $1,500 each per annum, charged with the duty of registering brands of cigars manufactured in Porto Rico, of securing and preserving statistics in relation to leaf tobacco grown in Porto Rico and exported therefrom, as well as the inspection and examination of all tobacco on the premises of manufacturers of cigars and cigarettes for the purpose of preventing and detecting fraudulent use of guarantee stamps issued for cigars manufactured in Porto Rico, and for the purpose of detecting in the exportation of cigars or leaf tobacco such as are wrongly marked, misbranded, or falsely advertised as Porto Rican.

Although the aggregate salaries of the three inspectors of internal revenue agents provided for is only $4,500, the defendant claims that the total annual expenditure entailed by the enforcement of the act will somewhat exceed $21,500.

The tobacco business is one of the chief industries of Porto Rico, and statistics were available to the Legislature before the passage of the amended act from which the approximate amount of revenue derivable under the provisions of the act could be easily ascertained. The plaintiff alleges, and on this record it must be taken as established, that the Legislature intended to realize under this act a revenue of at least $80,000 above the expense of collection.

The plaintiff has invested a large part of its capital in various brands of little cigars, and claims a trade and good will therein worth $500,000. The plaintiff's little cigars are sold mainly to dealers and distributors in the United States at prices ranging from $9 to $13 per thousand. The cost of $1 per thousand for stamps required by this act represents from 8 per cent. to 11 per cent. of the wholesale price, and is alleged to be in excess of the plaintiff's profit on such sales. On Porto Rican tobacco used by the plaintiff's competitors in the United States and exported by the bale, such competitors would have to pay for stamps only 25 cents on each bale, from which 16,000 to 18,000 little cigars could be manufactured. But the stamps on a like number of little cigars manufactured by the plaintiff in Porto Rico, for sale in competition with manufacturers in the United States using similar tobacco, would be more than 50 times the stamp charge imposed under this act on the tobacco exported by the bale and manufactured in the United States. The result, as the plaintiff claims, will be, if the stamp charge is continued, to destroy its business, good will, and property in its brands of little cigars, worth at least $500,000.

Shortly after this act became operative, the defendant notified the plaintiff that, if it failed or refused to affix stamps both to its packages of cigars and little cigars, he would, under the provisions of the act, seize and confiscate them and institute criminal prosecution besides. On March 3, 1918, the defendant threatened to seize and confiscate, at San Juan, 72 cases, containing 765,000 little cigars intended for shipment from San Juan to New York, unless stamps were affixed thereon. The plaintiff thereupon affixed said stamps, under protest, in order to ship these little cigars to New York. The defendant actually seized 15,000 cigars and little cigars which had been sold and delivered by the plaintiff to local dealers in San Juan without stamps, and threatened criminal prosecution for violation of the act. The plaintiff, claiming that the stamp charge was entirely confiscatory as applied to the little cigars, and that the act was being wrongly construed by the defendant, refused to attach guarantee stamps. Thereupon, on April 3d, the defendant seized some 10,000 cigars and 10,000 little cigars intended for shipment from San Juan to New York, and 2,000 little cigars which had been sold to local dealers, and threatened criminal prosecution. Other facts are alleged showing disorganization of plaintiff's business by the defendant, and irreparable injury done or threatened, or both. The bill was filed on April 6, 1918, and supported by affidavit. A restraining order was issued on the same day. On April 8, 1918, the defendant appeared specially by the Attorney General of Porto Rico, and by a special motion urged that the proceedings should conform to section 266 of the Judicial Code of the United States (Act March 3, 1911, c. 231, 36 Stat. 1162 (Comp. St. Sec. 1243)). This motion was denied on April 29, 1918, with an opinion. On April 26, 1918, the defendant appeared specially and by special answer set up that the bill was in reality against the people of Porto Rico and that the court was therefore without jurisdiction. In substance the defendant either pleaded ignorance of admitted the material allegations of the bill.

The defendant's justification of his proceedings was supported by an affidavit of himself and of one Rivera, an internal revenue agent. The counter affidavit of one Toro, the president of the plaintiff company, was filed on May 20, 1918. On August 26, 1918, the District Judge, in a careful opinion, sustained the jurisdiction and ordered a preliminary injunction issued substantially as prayed for.

The plaintiff's chief contentions, all in effect sustained by the District Court, are as follows:

'(1) That the act is void, because it violates the provisions of the Organic Law of Porto Rico as to entitling-- in that while the title of the act gives notice of an inspection purpose only, the act is in fact essentially a tax measure, and extends to cigars for local consumption and to export leaf while the title is limited to cigars for export.

'(2) That the tax imposed under the guise of inspection deprives plaintiff of its property without due process of law, and denies it the equal protection of the law.

'(3) That the act unduly burdens interstate commerce, and is also void because it imposes a tax on exports in violation of the Organic Law, and otherwise exceeds the powers granted the local Legislature by the Organic Act.'

It is manifest that the defendant's actual and...