Grand River Enterprises Six Nations v. King

• Decision Date: 17 March 2011
• Docket Number: No. 02 Civ. 5068(JFK).,02 Civ. 5068(JFK).
• Parties: GRAND RIVER ENTERPRISES SIX NATIONS, LTD., Plaintiff,v.Troy KING et al., Defendants.
• Court: U.S. District Court — Southern District of New York

783 F.Supp.2d 516

2011-2 Trade Cases P 77,561

GRAND RIVER ENTERPRISES SIX NATIONS, LTD., Plaintiff,

v.Troy KING et al., Defendants.

No. 02 Civ. 5068(JFK).

United States District Court, S.D. New York.

March 17, 2011.

Leonard Violi, Esq., Robert Luddy, Esq., Windels Marx Lane & Mittendorf, LLP, Marvin Lange, Esq., Marc Mukasey, Esq., Bracewell & Giuliani, LLP, for Plaintiff.Office of the Attorney General of the State New York, of Counsel: Christopher Leung, Esq., New York City Law Department, Office of the Corporation Counsel, of Counsel: Dana Biberman, Esq., for Defendants.

Opinion and Order

JOHN F. KEENAN, District Judge:

Plaintiff Grand River Enterprises Six Nations, Ltd. (“Grand River” or “Plaintiff”) brings this action against the Attorneys General of Alabama, Alaska, Arizona, California, Colorado, Delaware, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nebraska, New York, North Carolina, Ohio, Oregon, South Carolina, South Dakota, Tennessee, Washington, Wisconsin, and Wyoming (collectively, the “States” or “Defendants”) asserting Commerce Clause and Sherman Act violations stemming from each state's participation in a tobacco Master Settlement Agreement (“MSA”). Before the Court are Defendants' motions to exclude the expert reports of Drs. Eisenstadt and Bulow as well as cross motions for summary judgment.

I. Background

The following facts are undisputed unless otherwise noted.¹

A. Overview of the MSA

In November 1998, the nation's four largest cigarette manufacturers entered into an agreement with forty-six states ² and certain other jurisdictions (the “Settling States”) settling pending and future claims in exchange for annual payments by the cigarette companies to compensate the states for health care costs associated with the treatment of tobacco-related illnesses. This agreement is embodied in the MSA. The four major tobacco companies who initially negotiated and signed onto the MSA are known as the original participating manufacturers (“OPMs”). Other tobacco manufacturers may elect to participate in the MSA at any time and be released from liability for any claims the Settling States could bring in exchange for specified settlement payments; these are known as subsequent participating manufacturers (“SPMs”). To encourage early participation, the MSA created special incentives for any manufacturer that signed on within sixty (later changed to ninety) days of its execution; this subset of manufacturers is known as the “grandfathered SPMs.” Some manufacturers continue to sell cigarettes in the United States without joining the MSA; these are referred to as non-participating manufacturers (“NPMs”). Each Settling State receives a stipulated portion or “allocable share” of annual MSA payments. For example, New York receives 12.76% of total OPM, SPM, and grandfathered SPM MSA payments each year. (MSA Ex. A).

The MSA defines settlement payments for each group of tobacco manufacturers that participate in the MSA. With respect to OPMs, the MSA sets forth base amounts these companies collectively are required to pay to the Settling States each year. For example, in 2011, the base payment for OPMs is $8.139 billion. (MSA § IX(c)(1)). Each OPM pays a proportion of the base amount equal to its relative market share of the total number of cigarettes shipped by the OPMs in or to the fifty states, the District of Columbia, and Puerto Rico during the preceding year. ( Id.; MSA § II(mm)). These base payments are subject to certain adjustments, including: (1) an upward adjustment for inflation (MSA § IX(c)(1); Ex. C); (2) a “volume adjustment” that reduces the base payment if the total number of cigarettes shipped in or to the U.S. market drops below a specified level (MSA § IX(c)(1); Ex. E); and (3) a downward “NPM Adjustment” that generally reduces the base payment by three times the amount of any market share OPMs lost to NPMs in a preceding year. (MSA § IX(d)).³

SPMs pay a percentage of OPM base payments depending in part on their relative market shares. (MSA § IX(i)). SPM payments are also subject to the inflation adjustment and the NPM Adjustment. (MSA § IX(i)(3)). However, grandfathered SPMs are permitted to exempt a certain number of cigarettes from their payment obligations. This “grandfathered share” is equal to the greater of 125% of an SPM's 1997 market share of total U.S. cigarette sales or 100% of its 1998 market share of total U.S. cigarette sales. (MSA § IX(i)(1)). Thus, grandfathered SPMs only make MSA payments on cigarettes sold in excess of their grandfathered share.

B. Escrow and Contraband Statutes

Since NPMs do not make MSA payments, there was a concern that they could use this advantage to gain market share from OPMs and SPMs, in turn imposing unreimbursed healthcare costs on the Settling States. The MSA's solution to this problem came in the form of Escrow Statutes, with model legislation included at Exhibit T to the agreement. The Escrow Statutes aim to “effectively and fully neutralize[ ] the cost disadvantages that the Participating Manufacturers experience vis-à-vis Non–Participating Manufacturers within such Settling State as a result of the provisions of this Agreement,” (MSA § IX(d)(2)(E)), by requiring NPMs that sell cigarettes in-state either to: (1) join the MSA and make settlement payments; or (2) pay a specified amount per cigarette sold in-state into an escrow fund used to satisfy any judgment the Settling State should win against the NPM. All of the Defendant States, along with all other Settling States, have enacted substantially similar Escrow Statutes. See Ala.Code § 6–12–3; Alaska Stat. § 45.53.020; Ariz.Rev.Stat. Ann. § 44–7101; Cal. Health & Safety Code § 104557; Colo.Rev.Stat. Ann. § 39–28–203; Del.Code Ann. tit. 29, § 6082; Ga.Code Ann. § 10–13–3; Idaho Code Ann. § 39–7803; 30 Ill. Comp. Stat. 168/15; Ind.Code § 24–3–3–12; Iowa Code § 453C.2; Kan. Stat. Ann. § 50–6a03; La.Rev.Stat. Ann. § 13:5063; Me.Rev.Stat. Ann. tit. 22, § 1580–I; Md.Code Ann. Bus. Reg. § 16–403; Mass. Gen. Laws Ann. ch. 94E, § 2; Mich. Comp. Laws § 445.2052; Mo. Ann. Stat. § 196.1003; Mont.Code Ann. § 16–11–403; Neb.Rev.Stat. § 69–2703; N.Y. Pub. Health Law § 1399–pp; N.C. Gen.Stat. § 66–291; Ohio Rev.Code Ann. § 1346.02; Or.Rev.Stat. § 323.806; S.C.Code Ann. § 11–47–30; S.D. Codified Laws § 10–50B–7; Tenn.Code Ann. § 47–31–103; Wash. Rev.Code Ann. § 70.157.020; Wis. Stat. § 995.10; Wyo. Stat. Ann. § 9–4–1202. The NPM retains ownership of and earns interest on the funds while they are held in escrow, a period generally lasting twenty-five years.

As originally enacted, the Escrow Statutes included an “allocable share release” provision through which an NPM could secure release of any escrow funds in excess of “the State's allocable share of the total payments that such manufacturer would have been required to make in that year under the Master Settlement Agreement ... had it been a participating manufacturer.” (Model Escrow Statute, MSA Ex. T–4). In other words, an NPM could recoup any escrow funds that exceeded the amount the Settling State would have received in MSA payments had the NPM been an SPM. This loophole allowed an NPM that concentrated its sales in a single state or small number of states to obtain release of most of its escrow deposits. Therefore, beginning in 2003, all of the Settling States except Missouri amended the allocable share release provision in their Escrow Statutes such that an NPM is entitled to the release of escrow only to the extent the escrow deposit in a given state exceeds the amount the NPM would have paid had it joined the MSA as an SPM. See, e.g., N.Y. Pub. Health Law § 1399–pp(2)(b)(ii).

In order to enforce compliance with the Escrow Statutes, the Settling States enacted complementary Contraband Statutes. The Contraband Statutes generally provide that an NPM's cigarettes cannot receive an excise tax stamp for sale, and therefore cannot be sold, in a Settling State absent an NPM's certification that it is in compliance with the state's Escrow Statute. Violation of a Contraband Statute may result in civil monetary penalties, suspension or cancellation of a distributor's license to stamp cigarettes, and/or seizure of an NPM's cigarettes. See, e.g., N.Y. Tax Law §§ 480–b, 481(1)(c), 1846. In some states, these statutes, known as “complementary legislation,” establish a directory of manufacturers approved to sell cigarettes in-state. See, e.g., Ala.Code § 6–12A–3.

C. Payments to the Settling States

The following information is taken from the report of the States' expert Dr. Jonathan Gruber. The Court emphasizes that Plaintiff has not objected to the admissibility of Dr. Gruber's report, nor has it submitted contradictory empirical data. OPM MSA payments in 2007 were approximately $5.29953 per carton or $0.02650 per cigarette. (Gruber Rep. ¶ 5). SPM MSA payments in 2007 for cigarettes sold in excess of any grandfathered share were approximately $5.06638 per carton or $0.02533 per cigarette. ( Id. ¶ 7). NPM escrow payments in 2007 were approximately $5.02138 per carton or $0.025107 per cigarette. ( Id. ¶ 8).

Grandfathered SPM payments are slightly different. Grandfathered SPMs that sell at or below their grandfathered share make no MSA payments. Plaintiff submits that this exemption provides grandfathered SPMs with a competitive advantage over NPMs. However, Dr. Gruber notes that the vast majority of grandfathered SPMs sell above their grandfathered share, at which point they made the 2007 $0.02533 per-cigarette MSA payment. ( Id. ¶ 17; Leung Decl., Ex. Z (listing fifteen grandfathered SPMs in 2008, only three of which sold below their grandfathered share)). While a grandfathered SPM's average per-cigarette MSA payment is lower than both OPM MSA payments and NPM escrow payments, the marginal cost of producing each cigarette above the grandfathered share is still higher than the...