Legato Vapors LLC v. Cook

• Decision Date: 30 June 2016
• Docket Number: 1:15-cv-00761-SEB-TAB
• Parties: LEGATO VAPORS LLC, a Kentucky limited liability company, et al., Petitioners, v. David COOK in his official capacity as Chairman of the Indiana Alcohol and Tobacco Commission, et al. Respondents.
• Court: U.S. District Court — Southern District of Indiana

193 F.Supp.3d 952

LEGATO VAPORS LLC, a Kentucky limited liability company, et al., Petitioners,
v.
David COOK in his official capacity as Chairman of the Indiana Alcohol and Tobacco Commission, et al. Respondents.

1:15-cv-00761-SEB-TAB

United States District Court, S.D. Indiana, Indianapolis Division.

Signed June 30, 2016

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J. Gregory Troutman, Louisville, KY, for Petitioners.

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David A. Arthur, Office of the Attorney General, Jonathan Paul Nagy, Joshua Robert Lowry, Indiana Attorney General, Indianapolis, IN, for Respondents.

ORDER ON PENDING MOTIONS

SARAH EVANS BARKER, JUDGE

This litigation challenges the constitutionality of Indiana Code § 7.1-7–1 et seq. , which places certain requirements on the manufacture of e-liquids used in e-devices sold in Indiana. Petitioners Legato Vapors, LLC, Jet Setter Juice LLC, Rocky Mountain Ecigs LLC, and Derb E Cigs Indiana LLC and the Intervenor-Petitioner, the Right to Be Smoke-Free Coalition, Inc. (collectively referred to as "Petitioners") filed a Motion for Preliminary Injunction [Dkt. No. 55] and Motion for Summary Judgment [Dkt. No. 56] to enjoin enforcement of IC 7.1-7–1 et seq. and declare it unconstitutional.¹ Respondents, the commissioners of the Indiana Alcohol and Tobacco Commission (the "ATC"), the Superintendent of the Indiana Excise Police, and the State of Indiana, along with Amici Curiae Indiana Vapor Co., LLC and Buy Rite, Inc. (collectively "Respondents") defend the Act, arguing in favor of its constitutionality and seeking summary judgment in their favor [Dkt. No. 70; Dkt. No. 90].² For the reasons explained below, we DENY Petitioners' Motion Summary Judgment and GRANT Respondents' Cross-Motion for Summary Judgment and

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DENY Petitioners' Motion for Preliminary Injunction as MOOT .³

Background and Undisputed Material Facts

The parties have stipulated to certain uncontested facts [Dkt. No. 53], which we have incorporated in the following material facts as well as other facts that are likewise undisputed.

The statute at issue regulates the manufacture and sale of e-vapor devices. E-vapor devices, designed to evaporate (or aerosolize) an e-liquid, first arrived in the United States in approximately 2007. E-liquids typically are made from a mixture of propylene glycol and/or vegetable glycerin, flavorings, nicotine and water, and are sold with a range of nicotine concentrations, including nicotine-free. Although e-liquids may contain nicotine, as extracted from certain plants, e-liquids do not contain tobacco and do not generate smoke because there is no combustion. E-vapor devices are considered "tobacco harm reduction products," sometimes used to help stop tobacco use. The British government recently concluded that e-vapor products are 95% less harmful to humans than tobacco cigarettes; however, given the relative newness of e-liquids, long-term effects of their use has not yet been determined.

There are three major components of all e-vapor devices: a battery (usually a lithium battery), an atomizer, and a fluid-filled cartridge or tank. The atomizer has a heating element that uses the battery's power to evaporate the e-liquid solution in the cartridge or tank. Once the e-liquid is heated and vaporized, the user inhales the vapor through a mouthpiece creating a flavor and sensation similar to smoking a traditional cigarette.

There are two main categories of e-vapor devices. The first category is designed to look like a traditional or "slim" cigarette—often called a "cigalike." These devices have smaller lithium batteries that are disposable (used only once) or rechargeable. Due to the lower battery power, their vapor production is relatively low. Cigalikes are sometimes called first generation e-vapor devices, are referred to as "closed systems", and are sold mostly in convenience stores, gas stations, grocery stores, and pharmacies. The following diagram illustrates these design features:

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The second device category includes "eGos" and Vapor-Tanks-Mods ("VTMs"), which differ as to their size and shape, being somewhat larger than cigalikes. These devices contain higher capacity and rechargeable lithium batteries that can produce relatively more vapor. VTMs also provide the user with variable voltage and/or temperature control settings that can regulate the quality of the vaping experience. eGos and VTMs are often referred to as second and third generation devices and are called "open systems" or sometimes "vapor pens". These "open systems" have tanks that are designed to be refilled with any type or flavor of e-liquid that is sold in separate bottles, as shown below:

As an alternative to tobacco cigarettes, e-vapor devices have enjoyed rapid growth, resulting in over 8,500 brick-and-mortar vape shops springing up around the country; at least 94 are located within the state of Indiana. According to the managing member of two of the Petitioners, open system devices and e-liquids comprise 60% of the marketplace, whereas closed system devices comprise the remaining 40%. [Decl. of Troy LeBlanc ¶ 5.] Vape shops typically sell open system devices; the industry generates $4.6 billion annually with estimates of projected earnings by 2020 reaching $11.6 billion. Indiana's market share of revenue from open system devices and e-liquids is currently approximately $77.2 million per annum. Approximately 164 out-of-state manufacturers account for 90% of name-brand e-liquids sold in Indiana.

The statute at issue originated with House Bill 1432, which was amended by

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Senate Bill 463 and codified as IC 7.1-7–1 et seq. Following the commencement of this litigation, IC 7.1-7–1 et seq. was amended apparently to address some of Petitioners' challenges. Indiana Code 7.1-7–1, et seq. , as amended, is referred to herein as the "Act." A video was presented to the General Assembly depicting a pharmacist testing open system e-liquids. One sample showed nicotine levels that substantially varied from the data on the label of the bottle and another sample proved to be untestable. These results are problematic because nicotine overdoses can be toxic. This information, along with the lack of any federal regulation of e-liquids, prompted the Indiana General Assembly to enact the statute at issue here based on three primary purposes, to wit, "to protect public health and safety by: (1) ensuring the safety and security of e-liquid manufactured for sale in Indiana; (2) ensuring that e-liquid manufactured or sold in Indiana conforms to appropriate standards of identity, strength, quality, and purity; and (3) ensuring that e-liquid is not contaminated or adulterated by the inclusion of ingredients or other substances that might pose unreasonable threats to public health and safety." To that end, IC 7.1-7–4 requires "manufacturers", defined as "a person or cooperative, located inside or outside Indiana, that is engaged in manufacturing e-liquid" (IC 7.1–7–2–15 ) to obtain a permit from the ATC before June 30, 2016, "before mixing, bottling, packaging, or selling e-liquid to retailers or distributors in Indiana." IC 7.1–7–4–1(a).⁴

An application to obtain a permit requires, among other things, evidence of: a "clean room space where all mixing and bottling activities will occur" (IC 7.1–7–4–1(d)(1)(A) ) and which complies with Indiana Commercial Kitchen Code (IC 7.1–7–2–4 ), a service agreement with a single security firm (i.e., subcontracting is not permitted) valid for five years (IC 7–7–4–1(2)), and consent to allow the ATC to inspect the manufacturing location and take samples of the product(s) manufactured there (IC 7.1-7–4(d)(10)). The security firm must employ employees accredited or certified by the Door and Hardware Institute as an Architectural Hardware Consultant and the International Door Association as a certified Rolling Steel Fire Door Technician, and provide 24/7 offsite video surveillance, a high security key system with remote monitoring, and expertise in doors and locking systems. IC 7.1–7–4–1(d)(3).⁵

The Act regulates only e-liquids used in open systems, although the e-liquids used in open and closed systems are subject to the same production processes which, for some manufacturers, are conducted in the same facilities using the same equipment. Although e-liquids do not contain tobacco, the Act defines "tobacco products" to include any "e-liquid that contains nicotine." IC 7.1–1–3–47.5 (as amended); id. 7.1-6-1-

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3. As a result, retailers of open system e-liquids must obtain a valid tobacco distributor license under Indiana tobacco regulations. See id. 7.1-7-5-1(c).

Petitioners challenge the Act as a violation of the Dormant Commerce Clause, the Equal Protection Clause, and the Indiana Constitution.⁶

Summary Judgment Standard

Summary judgment is appropriate when the record establishes that there is "no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of...