Grand River Enterprises Six Nations, Ltd. v. Pryor, 092905 FED2, 03-9179

Docket Nº:03-9179
Party Name:Grand River Enterprises Six Nations, Ltd., Nationwide Tobacco, Inc., and 3b Holdings, Inc., Plaintiffs-Appellants, Jash International, Inc., International Tobacco Partners, Ltd., and Sun Tobacco, Inc., Plaintiffs, v. William Pryor, Bruce M. Botelho, Janet Napolitano, Bill Lockyer, Ken Salazar, M. Jane Brady, Thurbert E. Baker, Allan G. Lance, Jim R
Case Date:September 29, 2005
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Grand River Enterprises Six Nations, Ltd., Nationwide Tobacco, Inc., and 3b Holdings, Inc., Plaintiffs-Appellants,

Jash International, Inc., International Tobacco Partners, Ltd., and Sun Tobacco, Inc., Plaintiffs,


William Pryor, Bruce M. Botelho, Janet Napolitano, Bill Lockyer, Ken Salazar, M. Jane Brady, Thurbert E. Baker, Allan G. Lance, Jim Ryan, Steve Carter, Thomas J. Miller, Carla J. Stovall, Albert Benjamin Chandler, III, Richard P. Ieyoub, G. Steven Rowe, J. Joseph Curran, Jr., Thomas F. Reilly, Jennifer Granholm, Jeremiah W. Nixon, Michael Mcgrath, Don Stenberg, Eliot Spitzer, Roy Cooper, Betty D. Montgomery, Hardy Myers, Charles Condon, Mark Barnett, Paul G. Summers, Christine O. Gregoire, James E. Doyle, and Hoke Macmillan, Each In Their Official Capacity As Attorneys General of The States of Alabama, Alaska, Arizona, California, Colorado, Delaware, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nebraska, New York, North Carolina, Ohio, Oregon, South Carolina, South Dakota, Tennessee, Washington, Wisconsin, and Wyoming, Respectively, Defendants-Appellees.

No. 03-9179

United States Court of Appeals, Second Circuit

September 29, 2005

Argued: May 11, 2005

Decided: September 28, 2005

Appeal from an amended judgment of the United States District Court for the Southern District of New York (John F. Keenan, Judge) granting Federal Rule of Civil Procedure 54(b) certification for review of its dismissal of all non-New York defendants-appellees for lack of personal jurisdiction and its dismissal of all substantive causes of action, except an antitrust claim, challenging state statutes enacted pursuant to a nationwide tobacco-settlement agreement.

AFFIRMED in part, REVERSED in part, and REMANDED.

LEONARD VIOLI, Mamaroneck, NY, for Plaintiffs-Appellants.

AVI SCHICK, Deputy Counsel to the Attorney General of New York (Eliot Spitzer, Attorney General of the State of New York, David Nocenti, Counsel to the Attorney General, Lewis Polishook, Assistant Attorney General, on the brief) New York, NY, for Defendants-Appellees .

Before: WALKER, Chief Judge, SACK and RAGGI, Circuit Judges.

JOHN M. WALKER, JR., Chief Judge:

This appeal involves challenges to certain state statutes enacted pursuant to the $206 billion dollar Master Settlement Agreement ("MSA") settling litigation between forty-six states, as well as the District of Columbia and five U.S. territories,1 and the four major tobacco companies. The three plaintiffs-appellants are Grand River Enterprises Six Nations, Ltd. ("Grand River"), a Canadian cigarette manufacturer; Nationwide Tobacco, Inc., a Washington State company that distributes cigarettes manufactured in the Philippines; and 3B Holdings, Inc., a Washington State manufacturer of loose tobacco. Defendants-appellees are thirty-one current and former state attorneys general sued in their official capacities.

Appellants appeal from the November 8, 2004, amended judgment of the United States District Court for the Southern District of New York (John F. Keenan, Judge) dismissing all of the non-New York defendants for lack of personal jurisdiction and all of the causes of action, except an antitrust claim, attacking these statutes. Appellants argue that these dismissals were erroneous. Appellees contend that the district court improperly granted certification under Federal Rule of Civil Procedure 54 (b), which was necessary to permit this appeal to be heard, and, in any event, that the district court properly granted the motions to dismiss. For the following reasons, we conclude that the district court was correct in granting Rule 54(b) certification and in dismissing all but one of the substantive challenges (a commerce clause claim), and erred in finding no personal jurisdiction over the non-New York defendants.


Between 1994 and 1998, many states sued the country's major tobacco companies (Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard, collectively the "majors") in an attempt to recover the costs that the states had incurred in treating smoking-related illnesses. During the five months leading up to November 1998, the representatives of forty-six states (including New York) held numerous meetings with the majors in New York to negotiate and draft a nationwide settlement. The result was a Master Settlement Agreement, entered into on November 23, 1998, that resolved the pending lawsuits and released the majors from any future suits that the states might bring arising out of cigarette sales. Liggett, another tobacco company, previously settled with twenty-two of the states and was not party to the MSA. Four states (Florida, Minnesota, Mississippi, and Texas) had already settled independently with the majors.

Under the MSA, the majors agreed to pay the states $206 billion over the first twenty-five years of the agreement and, in addition, to accept advertising and marketing restrictions aimed primarily at reducing youth smoking. The majors, which manufactured approximately 97.5% of all cigarettes sold in the country when the MSA was signed, are referred to in the MSA as Original Participating Manufacturers ("OPMs").

The MSA included a provision authorizing other cigarette manufacturers to join the MSA as Subsequent Participating Manufacturers ("SPMs") and thereby resolve any claims that the states could otherwise assert against them. SPMs that signed onto the MSA within ninety days of its execution are not required to make any payments to the states unless their respective nationwide market shares exceed the greater of their 1998 market share or 125% of their 1997 market share — the so-called grandfather share. SPMs that did not join within ninety days received no grandfather share. SPMs, to the extent they exceed their grandfather share, if applicable, pay approximately two cents per cigarette as part of their settlement, which is identical to the per-cigarette OPM payment. Since November 1998, more than forty companies have joined the MSA as SPMs.

During negotiations, the majors expressed their concern that they would face increased competition (and a resulting loss of market share) from smaller manufacturers that did not join the MSA, so-called Non-Participating Manufacturers ("NPMs"), because the majors would have to raise prices to fund the MSA settlement and would be subject to advertising restrictions. For their part, the states were worried that NPMs could cause the states to continue to incur significant tobacco-related health costs while avoiding liability. To address these concerns, the MSA includes an "NPM Adjustment," which provides for a potential reduction in annual payments by Participating Manufacturers (i.e., both OPMs and SPMs, collectively "PMs") to the states if, inter alia, there is an aggregate market share loss by PMs to NPMs since 1997.

In addition, the MSA provides that the NPM adjustment does not apply to states that enact "Escrow Statutes," also known as "Qualifying Statutes" (the "Statutes"). These Statutes require each NPM to either (1) join the MSA as an SPM or (2) establish and fund an escrow or reserve account in an amount determined by the manufacturer's sales volume in the state. The per-cigarette amount is roughly equal to what an OPM or SPM would pay under the MSA. If the total amount that an NPM places into escrow in a given year exceeds what it would have paid under the MSA were it an SPM, the excess is refunded to the NPM. Unlike PMs who pay outright into the settlement fund, NPMs retain title to the escrowed funds and the interest on those funds. The funds are security for potential future damage awards resulting from cigarette-related claims. After 25 years, the escrow account will be restored to the NPM, minus any payments in respect of judgment against, or settlement by, the NPM because of its cigarette sales in a given state.

It is undisputed that the Escrow Statutes are an integral part of the nationwide settlement effected by the MSA. In order to facilitate passage of these Escrow Statutes, the majors and the states specifically negotiated in New York model escrow legislation that was ultimately included in the MSA's appendix. Each of the defendants'states independently enacted Escrow Statutes that are substantially identical to that suggested in the MSA. See, e.g., N.Y. Pub. Health Law § 1399-nn et seq.

After enactment of the Escrow Statutes, New York and the other states passed "Contraband Statutes," or "Certification Statutes," to help ensure compliance with the Escrow Statutes. See, e.g., N.Y. Tax Law §§ 480-b, 481(1) (c), 1846 (a-1). These laws require cigarette manufacturers, other than OPMs, that sell products in a state to certify annually to the state attorney general that they are either (1) meeting their obligation as an SPM under the MSA or (2) making escrow deposits as an NPM. Each statute penalizes noncompliance by denying a tax stamp, and thereby prohibiting the sale of cigarettes in that state by the non-complying manufacturer.

In their complaint, the NPM appellants alleged that the defendants have commenced or threatened enforcement actions against them for failure to establish escrow funds or for failure to adequately fund their escrow accounts. Appellants contend that they should be held not to be subject to these NPM requirements because the Escrow and Certification Statutes are unconstitutional under a variety of theories, violate Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and are preempted by the Federal Cigarette Labeling and Advertising Act ("FCLAA"), 15 U.S.C. § 1334(b). All of the non-New York defendants subsequently moved to dismiss for lack of personal jurisdiction, and all of the defendants moved to dismiss under Federal Rule of Civil Procedure 12 (b) (6) .

By opinion and order, the district court dismissed the plaintiffs' complaint in its...

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