Carter v. Carolina Tobacco Co., Inc.

• Decision Date: 17 September 2007
• Docket Number: No. 49A04-0503-CV-151.,49A04-0503-CV-151.
• Citation: 873 N.E.2d 611
• Parties: Steve CARTER, in his official capacity as Attorney General of the State of Indiana, and Adam M. Warnke, in his official capacity as Deputy Attorney General and Section Chief for Tobacco Litigation, Appellants-Defendants, v. CAROLINA TOBACCO COMPANY, INC., Appellee-Plaintiff.
• Court: Indiana Appellate Court

873 N.E.2d 611

Steve CARTER, in his official capacity as Attorney General of the State of Indiana, and Adam M. Warnke, in his official capacity as Deputy Attorney General and Section Chief for Tobacco Litigation, Appellants-Defendants, v. CAROLINA TOBACCO COMPANY, INC., Appellee-Plaintiff.

No. 49A04-0503-CV-151.

Court of Appeals of Indiana.

September 17, 2007.

Steve Carter, Attorney General of Indiana, Lawrence J. Carcare, Deputy Attorney General, Indianapolis, IN, Attorneys for Appellants.

Jackie M. Bennett, Jr., F. Anthony Paganelli, Sommer Barnard PC, Indianapolis, IN, Attorneys for Appellee.

OPINION

BAKER, Chief Judge.

Today we are asked to determine what it means to manufacture cigarettes under Indiana law. The trial court determined that the Indiana Office of Attorney General (OAG), the appellant-defendant in this case, erroneously refused to list the "Roger" brand of cigarettes in its Directory of Cigarettes Approved for Stamping and Sale (the Directory) because appellee-plaintiff Carolina Tobacco Company, Inc. (CTC) allegedly was not a tobacco product manufacturer (TPM). In essence, if CTC is not the manufacturer of "Roger" cigarettes, CTC may not sell that product in Indiana.

Steve Carter and Adam Warnke in their official capacities as Attorney General and Deputy Attorney General and Section Chief for Tobacco Litigation, respectively, claim that the trial court erred in entering injunctive and declaratory relief against them requiring that CTC and Roger cigarettes be certified and listed as a non-participating TPM in the Directory. Put another way, the OAG asserts that CTC did not manufacture Roger cigarettes and thus is precluded from selling cigarettes in Indiana. Alternatively, the OAG maintains that even if CTC can be deemed the manufacturer of the cigarettes, the trial court's order granting CTC's request for injunctive relief was overly broad. Concluding that the trial court properly determined that CTC was the manufacturer of the cigarettes and finding no other error, we affirm.

FACTS

Statutory Background

In November 1998, major tobacco companies entered into a Master Settlement Agreement (the MSA) with the representatives of 46 states, including Indiana. In accordance with the MSA, those states (the Settling States) agreed to dismiss their lawsuits or refrain from filing suit against the tobacco companies. The tobacco companies agreed to make yearly payments to the Settling States, and those payments were to be used to defray healthcare costs from smoking-related illnesses and to fund smoking prevention programs.

The TPMs that elect to participate in the MSA are known as participating manufacturers. However, the MSA does not — and cannot—require all manufacturers to participate. Thus, tobacco manufacturers that choose not to participate in the MSA are known as non-participating manufacturers (NPMs). CTC is an NPM.

In order to obtain the maximum benefits under the MSA, the states were required to enact certain legislation known as Qualifying Statutes. These statutes require, among other things, that NPMs make annual payments based on their annual cigarette sales, into an interest-earning escrow account. The escrowed funds are used to pay any judgment or settlement of claims brought against the NPMs.

Gary Wilson, a consultant to a number of state attorneys general across the country, testified that the purpose of the MSA

[was] to get as many cigarettes subject to all of the marketing and other controls of the MSA, and to have the companies pay a portion of the costs of— that were being inflicted on the States — by the cigarettes—that were being (inaudible) in the States. Alternatively, because an agreement wouldn't bind people who didn't sign on to it. The escrow statute prevents free rider problems and economic externalities from sitting out there that would allow companies to exploit the position of not being a member.

Tr. p. 443. Prior to the changes in the escrow amounts that were required to be paid, NPMs concentrated their sales in particular states and made only nominal payments to the accounts.

Indiana's Qualifying Statute is codified at Indiana Code section 24-3-3-1 et seq. Thereafter, in July 2003, our General Assembly enacted additional Indiana "complementary" legislation relating to the Qualifying Statute (the Complementary Statute), which is codified at Indiana Code section 24-3-5.4-1 et seq. This statute requires, among other things, that TPMs file an annual certification with the Indiana Department of Revenue and with the Office of the Indiana Attorney General.

In accordance with the Qualifying Statute, a TPM is generally defined as the entity that "directly (and not exclusively through any affiliate) ... manufactures" the cigarettes for which it seeks certification under the Complementary Statute. I.C. § 24-3-3-10.¹ However, neither the MSA, the Qualifying Statute, nor the Complementary Statute offer any definition of "manufacture" or "directly manufacture."

Pursuant to the certification that must be filed with the state agencies, a company signifies its intent to sell its product in Indiana. An applicant also certifies: (i) the number of cigarettes it sold in Indiana during the prior year; (ii) the amount deposited into its escrow account during the current year for prior year sales; and (iii) its status as a TPM of its identified brand families as of the date the form is completed. The Complementary Statute further requires the Indiana Attorney General to develop and publish on a web-site a directory listing all TPMs that have provided current and accurate certifications, as well as the tobacco brand families that are listed on the certification forms (the Directory). Additionally, the Complementary Statute provides that it is unlawful for any person to tax, stamp, sell, offer to sell, or possess for sale, cigarettes of a TPM or brand family that is not included in the Directory.

The NPMs do not pay as much into the fund as do the participating manufacturers under the MSA. Hence, the OAG seeks manufacturers of cigarettes to be participants under the fund. Thus, in the event that CTC is not considered the "manufacturer" of Roger cigarettes, its product will be considered contraband and CTC will be removed from the OAG's directory.

Roger Brand Cigarettes

In 1993, David Redmond formulated a business plan for manufacturing, shipping, distributing, and selling cigarettes in Eastern Europe. That same year, Redmond coined the name "Roger" for his new cigarette, which was initially sold in the former Soviet Union and other Eastern Bloc countries. From 1993 to 1995, Roger brand cigarettes were assembled in the Phillipines by the Sterling Tobacco Corporation (Sterling Tobacco). Redmond then moved the production of the cigarettes to Malaysia, where the cigarettes were produced through the end of 1996. Thereafter, Redmond decided temporarily to suspend the production of Roger cigarettes so he could change the strategy for the brand's production and distribution in light of increasing competition in the former Soviet Union and other Eastern Bloc countries. In late 1997, Redmond sought the input of consultants in the tobacco industry to formulate a plan to sell Roger cigarettes in North America.

Anticipating the settlement of the ongoing tobacco litigation and cigarette price increases that would inevitably result from such a settlement, Redmond determined that there was a market in the United States for an inexpensive "price value" cigarette, which was also known as a fourth-tier cigarette. Tr. p. 51-52. Thus, Redmond prepared, tested, and completed a business plan for manufacturing, shipping, distributing, and selling Roger brand cigarettes in the United States.

Sometime in late 1998 or early 1999, Redmond contacted House of Prince Riga (HOPR) in Latvia about becoming the next assembly site for Roger cigarettes and asked HOPR to prepare some test samples for evaluation. Prior to this contact, HOPR had no involvement whatsoever with Roger cigarettes. In August 1999, Redmond formed CTC to produce the Roger brand of cigarettes in the United States.²

In November 1999, CTC signed a contract with HOPR, setting forth the terms under which HOPR would make Roger cigarettes for CTC. HOPR assembled Roger cigarettes to conform with Redmond's standards from 1999 through April 2003. During that time, Redmond and several CTC employees spent a number of months in Latvia, where they oversaw the setup and startup of assembly. Redmond personally supervised everything from paper stock and printing proofs to filter paper to raw tobacco. Although HOPR owned the building, Redmond spot-checked everything from production efficiency and quality control to labor relations at the plant. CTC's control of the HOPR factory was so extensive that when HOPR desired excess capacity in the factory to produce cigarettes for another company, HOPR was required to obtain CTC's permission to do so in the form of an amendment to the parties' original contract.

As early as June 14, 2001, HOPR was concerned that it might be deemed the manufacturer of Roger brand cigarettes. Even though Redmond saw no competitive advantage for a company to be an NPM—as compared to being a subsequent participating manufacturer under the MSA—he acknowledged that NPMs previously had a competitive advantage because they were able to obtain refunds of escrow payments if they exceeded certain amounts.

In early 2003, CTC's relationship with HOPR began to deteriorate and, in April 2003, HOPR terminated its relationship with CTC. From 1999 to 2002, CTC deposited a total of $816,566.72 into an escrow account for sales made in Indiana. The Indiana Department of Revenue determined that Roger brand sales from 1999 to 2002 amounted to 283,885,000 cigarettes.

Anticipating the need to locate another factory for the production of his cigarettes, Redmond began consulting with various entities in South Africa about becoming the next...