International Tobacco Partners, Ltd. v. Kline, Civil Action No. 05-2319-KHV.

• Decision Date: 08 February 2007
• Docket Number: Civil Action No. 05-2319-KHV.
• Court: U.S. District Court — District of Kansas
• Parties: INTERNATIONAL TOBACCO PARTNERS, LTD., Plaintiff, v. Phill KLINE, in his official capacity as Attorney General of the State of Kansas, Defendant.

475 F.Supp.2d 1078

INTERNATIONAL TOBACCO PARTNERS, LTD., Plaintiff, v. Phill KLINE, in his official capacity as Attorney General of the State of Kansas, Defendant.

Civil Action No. 05-2319-KHV.

United States District Court, D. Kansas.

February 8, 2007.

David F. Dobbins, Walter M. Luers, Patterson, Belknap, Webb & Tyler, New York, NY, William M. Modrcin, Stinson Morrison Hecker LLP, Kansas City, MO, for Plaintiff.

Gary D. Wilson, Washington, DC, Michael C. Leitch, Spencer Fane Britt & Browne, Kansas City, MO, for Defendant.

MEMORANDUM AND ORDER

VRATIL, District Judge.

International Tobacco Partners, Ltd., brings suit against the Attorney General of the State of Kansas, challenging statutes relating to the Master Tobacco Settlement Agreement reached by 46 states and four major cigarette manufacturers in 1998. Specifically, plaintiff alleges that federal law preempts the Kansas Escrow Statute, K. S.A § 50-6a-01 et seq., as amended by the Allocable Share Release Repealer, and the Kansas Contraband Statute, K.S.A. § 50-6a-04, because those statutes implement an output cartel which is illegal per se under Section 1 of the Sherman Act, 15 U.S.C. § 1. Plaintiff also alleges that the state statutes violate the dormant Commerce Clause, U.S. Const. Art 1, § 8, cl. 3.¹ This matter comes before the Court on Defendant's Motion To Dismiss Or, In The Alternative, Motion For Summary Judgment (Doc. # 55) filed February 28, 2006 and Plaintiff's Motion For Summary Judgment (Doc. # 63) filed April 24, 2006. For reasons set forth below, the Court finds that defendant's motion for summary judgment should be sustained and that plaintiff's motion should be overruled as moot.

Legal Standards

Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. See Fed.R.Civ.P. 56(c); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Vitkus v. Beatrice Co., 11 F.3d 1535, 1538-39 (10th Cir.1993). A factual dispute is "material" only if it "might affect the outcome of the suit under the governing law." Anderson, 477 U.S. at 248, 106 S.Ct. 2505. A "genuine" factual dispute requires more than a mere scintilla of evidence. Id. at 252, 106 S.Ct. 2505.

The moving party bears the initial burden of showing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Hicks v. City of Watonga, 942 F.2d 737, 743 (10th Cir.1991). Once the moving party meets its burden, the burden shifts to the nonmoving party to demonstrate that genuine issues remain for trial "as to those dispositive matters for which it carries the burden of proof." Applied Genetics Int'l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir.1990); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th Cir.1991). The nonmoving party may not rest on its pleadings but must set forth specific facts. Applied Genetics, 912 F.2d at 1241.

"[W]e must view the record in a light most favorable to the parties opposing the motion for summary judgment." Deepwater Inns., Ltd. v. Jackson Hole Ski Corp., 938 F.2d 1105, 1110 (10th Cir.1991). Summary judgment may be granted if the nonmoving party's evidence is merely colorable or is not significantly probative. Anderson, 477 U.S. at 250-51, 106 S.Ct. 2505. "In a response to a motion for summary judgment, a party cannot rely on ignorance of facts, on speculation, or on suspicion, and may not escape summary judgment in the mere hope that something will turn up at trial." Conaway v. Smith, 853 F.2d 789, 794 (10th Cir.1988). Essentially, the inquiry is "whether the evidence presents a sufficient disagreement to require submission to the jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson, 477 U.S. at 251-52, 106 S.Ct. 2505.

"Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein." Fed.R.Civ.P. 56(e). Rule 56(e) also requires that "copies of all papers or parts thereof referred to in an affidavit be attached thereto or served therewith." To enforce this rule, the Court ordinarily does not strike affidavits but simply disregards those portions which are not shown to be based upon personal knowledge or otherwise do not comply with Rule 56(e). Maverick Paper Co. v. Omaha Paper Co., 18 F.Supp.2d 1232, 1234-35 (D.Kan.1998).

II. Facts

Except where otherwise noted, the following facts are undisputed.²

International Tobacco Partners, Ltd. imports and resells cigarettes which are distributed and sold in Kansas. In the mid-1990s, a number of states brought suits against four major cigarette manufacturers to recover Medicaid and other health care costs which the states had incurred because their citizens used cigarettes. In 1998, those defendants [Phillip Morris, Lorillard, Brown & Williamson and R.J. Reynolds, collectively referred to as the "Original Participating Manufacturers" or "OPMs"] agreed to a Master Settlement Agreement ("MSA").³ In exchange for a release from future liability, the OPMs agreed to make annual payments to the states, in perpetuity, to offset costs imposed on the states by tobacco-related diseases⁴ See MSA § IX.

The MSA requires the OPMs to make annual per-carton payments to the settling states. MSA § IX(c)(1). The MSA provides a "base amount" for the total OPM payment each year. That amount (currently $8 billion) is subject to an adjustment for inflation and a "previously settled states reduction" which is currently 12.45 per cent. If the OPMs collectively sell fewer cigarettes in the current year than they did in 1997, the base amount is reduced by approximately the percentage of the decrease.⁵ Each OPM then pays a portion of the adjusted settlement amount, based on its percentage of total OPM sales for the current year.

Four states (Mississippi, Florida, Texas and Minnesota) settled with the OPMs before the MSA. The OPMs pay those four states (the "previously settled states") 17 per cent of the MSA per-cigarette payment amount for each cigarette sold in any state. Thus, the OPMs pay the settling and previously settled states 104.55 per cent of the per-cigarette amount for each cigarette sold. In 2005, OPM payments totaled about 2.2 cents per cigarette or 84.40 per carton.

The MSA allowed other cigarette manufacturers to join the agreement. MSA § II(tt). Subsequent participating manufacturers ("SPMs") who joined within 90 days are exempt from annual payments if they meet certain conditions.⁶ SPMs who joined after 90 days make settlement payments according to a basic formula which governs SPM per-cigarette payments.⁷ SPMs do not make payments to the previously settled states and they therefore do not receive the previously settled states reduction. As a result, their total per-cigarette annual payment amount is 4.55 per cent less than that of the OPMs. Id. For 2005, the SPM payment amount was approximately 2.1 cents per cigarette or $4.20 per carton.

The MSA collectively refers to the OPMs and SPMs as the PMs ("participating manufacturers"). The annual payments of the PMs are allocated among the settling states according to a fixed formula. Under this formula, Kansas has an "allocable share" of .8336712 per cent.

Manufacturers who have not joined the MSA are non-participating manufacturers ("NPMs"). The NPMs do not make payments under the MSA and are not obligated to follow the MSA public health education provisions or promotion restrictions. The settling states were concerned that NPMs might not be able to pay future judgments for state health care costs related to smoking. The states also wanted to be sure that NPMs did not take advantage of their relative lower costs to expand their markets, thus increasing use of tobacco and creating higher health care costs. Therefore all 46 of the settling states, including Kansas, have enacted escrow statutes in substantially identical form to a model escrow statute set forth in the MSA. See MSA Exhibit T, PXs 116-117. The model escrow statute requires NPMs to comply with the MSA public health and payment provisions. See K.S.A. § 50-6a01 et seq. Based on their product sales in the state, the Kansas Escrow Statute requires all NPMs to make per-cigarette deposits into an escrow fund to fund future liability for tobacco related health care costs. K.S.A. § 50-6a03(b)(1). These deposits are slightly less than the per-cigarette payments that SPMs make under the MSA. In 2005, the NPM obligation in Kansas was approximately 2.08 cents per cigarette, or $4.16 per carton.⁸

The original escrow statutes, including the Kansas Escrow Statute, provided that NPM payments would remain in escrow for 25 years, but authorized an early release of any escrow amount which was greater than the allocable share which that state would have received if the NPM had been an SPM.⁹ This "Allocable Share Release Provision" was intended to create substantial equivalence between the escrow obligation of NPMs under the escrow statutes and the amounts the NPMs would have paid if they had they joined the MSA. See K.S.A. § 50-6a03(b)(2)(B). If an NPM made the bulk of its sales in a few states, however, it could obtain a refund of those escrow payments in excess of what it would have paid each of those States had it been an SPM. For example, an NPM which made 50 per cent of its sales in Kansas (which has a relatively low allocable share) would obtain a release from its Kansas escrow fund of more than 49 per cent of its full escrow...