People ex rel. Becerra v. Native Wholesale Supply Co.

• Decision Date: 02 July 2019
• Docket Number: C084031, C084961
• Citation: 249 Cal.Rptr.3d 445,37 Cal.App.5th 73
• Court: California Court of Appeals Court of Appeals
• Parties: The PEOPLE EX REL. Xavier BECERRA, as Attorney General, etc., Plaintiff and Respondent, v. NATIVE WHOLESALE SUPPLY COMPANY, Defendant and Appellant.

37 Cal.App.5th 73

249 Cal.Rptr.3d 445

The PEOPLE EX REL. Xavier BECERRA, as Attorney General, etc., Plaintiff and Respondent,

v.NATIVE WHOLESALE SUPPLY COMPANY, Defendant and Appellant.

C084031, C084961

Court of Appeal, Third District, California.

Filed July 2, 2019

Certified for Partial Publication.^*

Lipsitz Green Scime Cambria and Paul J. Cambria, Jr., Erin E. McCampbell and Patrick J. Mackey, for Defendant and Appellant.

Xavier Becerra, Attorney General, Karen Leaf, Senior Assistant Attorney General; Nicholas M. Wellington, Michael M. Edson, and Nora Flum Deputy Attorneys General, for Plaintiff and Respondent.

Robie, J. Defendant Native Wholesale Supply Company (NWS), an Indian-chartered corporation headquartered on a reservation in New York, sold over a billion contraband cigarettes to an Indian tribe in California, which then sold the cigarettes to the general public in California. ( People ex rel. Harris v. Native Wholesale Supply Co. (2011) 196 Cal.App.4th 357, 362-364, 126 Cal.Rptr.3d 257 ( Harris ).) The cigarettes were imported from Canada, stored at various places in the United States (not including California), and then shipped to California after they were ordered from the reservation in New York. The Attorney General succeeded on his motion for summary judgment holding NWS liable for civil penalties in violation of two California cigarette distribution and sale laws and Business and Professions Code section 17200 (the unfair competition law), and obtained a permanent injunction precluding NWS from making future sales. The Attorney General further obtained an award of attorney fees and expert expenses.

NWS appeals from the judgment and the attorney fee order. We affirm.

BACKGROUND

I

Factual Background -- The Cigarette Sales Transactions

The material facts are undisputed.¹ NWS is a corporation chartered under the laws of the Sac and Fox Nation of Oklahoma (Sac and Fox), a federally-recognized Indian tribe, headquartered on the Seneca Nation of Indians' (Seneca) reservation in New York.² Arthur Montour, an enrolled Seneca member, is NWS's sole owner. NWS's principal business is the sale of tobacco products produced and packaged by Grand River Enterprises Six Nations Ltd. (Grand River), a Canadian corporation located in Ontario, Canada. Grand River has never been listed on the California Attorney General's Tobacco Directory as specified in Revenue and Taxation Code section 30165.1.

NWS imported Grand River's cigarettes and stored them in rented space at one of the following three federally regulated facilities before shipping them to customers: (a) the Western New York Foreign Trade Zone in Lackawana, New York; (b) the Southern Nevada Foreign Trade Zone in Las Vegas, Nevada; or (c) a bonded warehouse located on the Seneca reservation in New York.

Between 2004 and 2012, NWS sold and shipped 98,540 cases of Grand River cigarettes (equaling more than 54.5 million cigarette packs or over a billion cigarettes) to the Big Sandy Rancheria Band of Mono Indians (Big Sandy), a small Indian tribe residing in California.³ The sales occurred in 476 invoiced transactions, with a total value of almost $67.5 million. NWS used a customs broker located in Woodland Hills, California, to assist with some of the transactions, and paid shipping carriers headquartered in Texas, Nebraska, and New York to deliver the cigarettes.

II

Legal Background -- The Cigarette Distribution And Sale Statutes

To provide context for the trial court's rulings and the discussion that follows, we briefly summarize the two pertinent sets of statutes governing different aspects of the sale and distribution of cigarettes in California -- the Directory Statute ( Rev. & Tax. Code, § 30165.1 ) and the California Cigarette Fire Safety and Firefighter Protection Act (Fire Safety Act) ( Health & Saf. Code, § 14950 et seq. ).

A

The Directory Statute

In 1998, California and 45 other states entered into a master settlement agreement (the MSA) with the four largest American tobacco product manufacturers. ( State ex rel. Edmondson v. Native Wholesale Supply (2010) 2010 OK 58 ( Edmondson ); Harris, supra , 196 Cal.App.4th at p. 363, 126 Cal.Rptr.3d 257 ; see Health & Saf. Code, § 104555, subd. (e).) The states had sued the manufacturers to recoup health care expenses incurred by the states because of cigarette smoking. ( Edmondson , at p. 203.) "In exchange for a liability release from the states for smoking-related public healthcare costs, the settling manufacturers agreed to limit their marketing and to pay the settling states billions of dollars in perpetuity" ( Harris , at p. 363, 126 Cal.Rptr.3d 257 ) by making "an annual payment to each settling state computed in relation to that manufacturer's volume of cigarette sales in the state" ( Edmondson , at p. 203, ).

"In order to prevent tobacco manufacturers not participating in the MSA from gaining a cost advantage over the settling manufacturers and to provide the states with a source of money from which to recover tobacco-related health care costs attributable to the sales of cigarettes by non-participating manufacturers, the MSA calls for each settling state to enact and enforce a statute (a ‘qualifying statute’) requiring all tobacco manufacturers not participating in the MSA who sell cigarettes in a state to make annual payments into an escrow account based on the manufacturer's relative market share in such state." ( Edmondson , supra , 237 P.3d at p. 203.)

California's "qualifying statute" is commonly referred to as the Escrow Statute. It provides that cigarettes sold in this state must be produced by manufacturers who either (a) have signed the MSA, or "(b) in lieu of signing the MSA, have agreed to pay sufficient funds into a reserve fund in escrow to guarantee a source of compensation should liability arise." ( People ex rel. Becerra v. Huber (2019) 32 Cal.App.5th 524, 530, 244 Cal.Rptr.3d 79.)

The Directory Statute serves as a complement to the Escrow Statute, to ensure compliance with its provisions. "Under the Directory [Statute], the Attorney General maintains a published list of all cigarette manufacturers who have annually certified their compliance with the requirements of the MSA or the alternative escrow funding requirements." ( People ex rel. Becerra v. Huber , supra , 32 Cal.App.5th at p. 530, 244 Cal.Rptr.3d 79 ; Rev. & Tax. Code, § 30165.1, subds. (b) - (c).) The Directory Statute prohibits any person from selling, offering, or possessing for sale in California, or shipping or otherwise distributing into or within California any cigarettes not listed as legal for sale on the Attorney General's directory. ( Rev. & Tax. Code, § 30165.1, subd. (e)(2).) Revenue and Taxation Code section 30165.1, subdivision (e)(3) prohibits persons from selling, distributing, acquiring, holding, owning, possessing, importing, transporting, or causing to be imported, cigarettes that the person knows or should know are intended to be distributed in violation of subdivision (e)(2).

B

The Fire Safety Act

"[U]nder the Fire Safety Act, any manufacturer of cigarettes sold in California must meet specified testing, performance, and packaging standards established for the purpose of minimizing the fire hazards caused by cigarettes. [Citations.] This statute provides that all cigarettes sold in this state must, among other things, be packaged in a specified manner and certified with the State Fire Marshal as compliant with these safety standards. [Citation.] It is categorically illegal for any ‘person’ to ‘sell, offer, or possess for sale in this state cigarettes’ that do not comply with the Fire Safety Act." ( People ex rel. Becerra v. Huber , supra , 32 Cal.App.5th at pp. 530-531, 244 Cal.Rptr.3d 79.)

III

Procedural Background

The Attorney General filed a civil enforcement action against NWS in 2008, seeking an injunction, civil penalties, contempt and other relief for violations of the Directory Statute and Fire Safety Act, violation of Business and Professions Code section 17200 predicated on violations of the Directory Statute, Fire Safety Act, and a federal statute, and violation of an injunction.

NWS filed a motion to remove the case to federal court, but the case was remanded back to state court for lack of federal subject matter jurisdiction.

In state court, NWS filed a motion to quash service for lack of personal jurisdiction, which culminated in our 2011 opinion concluding NWS is subject to personal jurisdiction in California for the claims asserted against it in this action. This court held that, among other things, NWS purposefully availed itself of the substantial benefits of conducting activities in California (i.e., it had minimum contacts) because the cigarettes it sold to Big Sandy were in turn sold to the general public in California. (See Harris , supra , 196 Cal.App.4th at pp. 360, 362-365, 126 Cal.Rptr.3d 257.) NWS then filed a demurrer to all the causes of action. The trial court sustained the demurrer with respect to the injunction violation cause of action and overruled it with respect to the remaining causes of action.

The parties subsequently engaged in discovery, resulting in several motions and rulings, five of which are the subject of this appeal. Those motions and rulings are discussed in greater detail in the pertinent Discussion section below.

In August 2016, the Attorney General and NWS filed their respective motions for summary judgment. The Attorney General argued NWS did not dispute the essential facts supporting the causes of action. NWS argued: (1) the Indian Commerce Clause preempted the claims against NWS because the "transactions occurred on a reservation solely among various Indian-owned entities"; and (2) injunctive relief would be unnecessary and ineffectual because NWS is a bankrupt entity and voluntarily discontinued selling cigarettes within California in 2012.

NWS raised the same preemption and injunctive relief arguments in its opposition to the Attorney General's motion for...