Philip Morris USA Inc. v. Vilsack

• Citation: 896 F.Supp.2d 512
• Decision Date: 09 October 2012
• Docket Number: Civil Action No. 3:11CV87–HEH.
• Court: U.S. District Court — Eastern District of Virginia
• Parties: PHILIP MORRIS USA INC., Plaintiff, v. Thomas VILSACK, Secretary of Agriculture, and United States Department of Agriculture, Defendants, Cigar Association of America, Inc., Defendant–Intervenor.

896 F.Supp.2d 512

PHILIP MORRIS USA INC., Plaintiff,

v. Thomas VILSACK, Secretary of Agriculture, and United States Department of Agriculture, Defendants,Cigar Association of America, Inc., Defendant–Intervenor.

Civil Action No. 3:11CV87–HEH.

United States District Court,

E.D. Virginia,

Richmond Division.

Oct. 9, 2012.

Thomas Richard Waskom, Hunton & Williams LLP, Richmond, VA, Lauren Rosenblum Goldman, Mayer Brown LLP, New York, NY, Wilson Parker Moore, Beveridge & Diamond PC, Washington, DC, for Plaintiff.

Jonathan Holland Hambrick, Office of the U.S. Attorney, Richmond, VA, Elisabeth Layton, U.S. Department of Justice, John Norman Hanson, Beveridge & Diamond PC, Washington, DC, for Defendants.

Daniel G. Jarcho, Timothy Kamp Halloran, McKenna Long & Aldridge LLP, Washington, DC, for Defendant–Intervenor.

MEMORANDUM OPINION

(Cross Motions for Summary Judgment)

HENRY E. HUDSON, District Judge.

Distilled to its essence, this lawsuit challenges the methodology used by the UnitedStates Department of Agriculture (“USDA”) in determining assessments levied against the manufacturers and importers of tobacco products under the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”), 7 U.S.C. §§ 518–519(a). More sharply focused, the controversy centers on whether the USDA should use the current federal excise tax rates, or the rates that were in effect when FETRA was enacted, to allocate the share of liability for those assessments among the six classes of tobacco products that are established by FETRA. Although the reasoning underlying the algorithm currently employed by USDA to calculate the assessment is clear, the underlying logic is a little more murky.

Presently before the Court are motions for summary judgment filed by each of the parties, accompanied by detailed memoranda supporting their respective positions. The Court heard oral argument on September 13, 2012 and invited supplemental briefing on the pivotal question in controversy.

I.

Although the administrative record is extensive, it does not appear that any material facts are in dispute. This case appears to turn on whether the USDA properly implemented the underlying legislation. Because the evolution of the algorithm at issue involves a series of congressional enactments, some discussion of the legislative history is instructive.

In order to stabilize the tobacco industry, Congress, in 1938, adopted a system of price-support programs and marketing quotas. When this price stabilization scheme proved to be more costly than expected, it was repealed by Congress. In its place Congress adopted FETRA, which established a transitional compensation program providing annual installment payments over a period of ten years to tobacco growers to help in their adjustment to a free market. This was known as the Tobacco Transition Payment Program. To implement this buyout scheme, responsibility for its administration was delegated to the Commodity Credit Corporation, an agency of the USDA. The Commodity Credit Corporation was charged with the task of collecting assessments from manufacturers and importers of tobacco products and depositing those funds into the Tobacco Trust Fund. Transitional payments to tobacco growers are made from this fund.

Under FETRA, Congress established a two-step process for the USDA to determine the assessments owed by each tobacco product manufacturer or importer. These are commonly referred to as Step A and Step B. 7 U.S.C. § 518d(c)(1) and (e). Only elements of Step A are at issue in this case. Step A of the assessment equation adopted by the USDA allocates the assessments among six product classes. These classes include cigarettes, cigars, chewing tobacco, pipe tobacco, snuff, and roll-your-own tobacco. See7 U.S.C. § 518d(c)(1). This process is intended to divide the assessment among these classes based on each class's current share of the overall market for tobacco products. Because different metrics ¹ are used to measure the volume of the various tobacco products, the USDA decided to use the maximum federal excise tax (“FET”) rate in place when FETRA was enacted as the common unit of measure for each product class. This methodology appears to be modeled after the example provided by Congress in the text of FETRA. Congress specifically delegated the authority to “promulgate such regulations as are necessary to implement [FETRA]” to the Secretary of Agriculture. 7 U.S.C. § 519a(a).

In making the first year calculations, Congress determined the assessments by multiplying the volume of taxable units of product removed into domestic commerce by manufacturers and importers in each class by the 2005 maximum FET rate for that class.² FETRA authorized the Secretary of Agriculture to adjust the percentages assessed against the six classes of tobacco manufacturers in subsequent years. Specifically, Congress directed the Secretary for the years 2006–2014 to “periodically adjust the percentage of the total amount required ... to be assessed against, and paid by, ... each class of tobacco product ... to reflect changes in the share of gross domestic volume held by that class of tobacco product.” 7 U.S.C. § 518d(c)(2).

In order to achieve what it views to be consistency, the USDA continued to utilize the 2005 maximum FET rate rather than the current maximum FET rate to adjust the Step A assessments each quarter. According to the USDA, this enables the agency “to adjust assessments based solely upon any increases or decreases in the volume of each of the six types of tobacco products, as required by FETRA.” (Defs.' Mem. of P. & A. in Support of Defs.' Cross Mot. Summ. J. and Opp'n to Pl.'s Mot Summ. J. 2; ECF No. 53 (hereinafter “USDA Memo”).) ³

In its attempt to fashion a computational methodology that reflects the intent of Congress, the USDA adopted a formula in which the 2005 federal excise tax is the constant, and gross domestic volume the variable. The USDA maintains that this method insures that share of gross domestic volume is the controlling factor in periodically reassessing class allocation. (USDA Memo 15.) Plaintiff disagrees contending that “it is a dual variable equation because the share is something that has to be determined by converting to a common method.” (Sept. 13, 2012 Hrg. Tr. at 50:20–23.) The necessity for conversion to a common industry-wide method does not appear to be in dispute. The debate turns on which method of conversion most accurately captures the share of gross domestic volume.

The principal focus of Plaintiff's challenge in this case is the USDA's practice through implementing regulation of using the 2005 maximum FET rate rather than the current FET rate as the conversion factor in Step A. Plaintiff urges this Court to direct the USDA to promulgate a rule requiring the use of current FET rates in past, present, and future Step A calculations and refund amounts erroneously assessed. Although courts “ordinarily wade into a statute's legislative history only after deeming the statute ambiguous,” a review of subsequent congressional action provides useful context. Nat'l Elec. Mfrs. Ass'n v. U.S. Dep't of Energy, 654 F.3d 496, 504 (4th Cir.2011).

The Children's Health Insurance Program Reauthorization Act (“CHIPRA”), enacted by Congress in 2009, brought significant increases in the maximum excise tax rates on all classes of tobacco. 26 U.S.C. § 5701. The legislation, however, had a disproportionate impact on those classes. The maximum FET rate on cigars increased considerably. As Defendant–Intervenor Cigar Association of America, Inc. points out in its Memorandum in Support of Cross Motions for Summary Judgment and Opposition to Plaintiff's Motion for Summary Judgment, if current FET rates were used as the conversion factor, as urged by Plaintiff, the Step A class allocation for cigars would increase significantly and that for cigarettes dramatically decrease, without any consideration of changes in volume. CHIPRA, however, makes no express adjustment to either the formula for the Step A allocations under FETRA or the excise tax rate to be used in those calculations.

Congress also enacted the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) in 2009. This enactment shifted some regulatory authority over tobacco products to the Food and Drug Administration (“FDA”). To underwrite the costs of this regulatory program, Congress authorized the FDA to impose an additional assessment on a number of classes of tobacco products as a user fee. 21 U.S.C. § 387s. Plaintiff is correct that Congress refers to the FETRA methodology and accompanying regulations in prescribing how the FSPTCA user fees will be allocated among the various classes of tobacco products described in 21 U.S.C. § 387s(b)(2)(B)(i). The first reference is found in 21 U.S.C. § 387s(b)(2)(B)(ii), “[A]llocations.—The applicable percentage of each class of tobacco product described in clause (i) [setting forth the various classes of tobacco products] for a fiscal year shall be the percentage determined under section 625(c) of Public Law 108–357 [7 U.S.C. § 518d(c) ] for each such class of product for such fiscal year.” This provision appears to direct the FDA to use the class percentages calculated under FETRA to determine the allocation of user fees for each fiscal year. A plain reading of the statute does not suggest any intention on the part of Congress to modify the Step A calculation scheme used by the USDA under FETRA. The FETRA methodology is also mentioned in 21 U.S.C. § 387s(b)(4). But again, there is no indication within the text that 2008 FET rates adopted in CHIPRA should be used with the referenced Step A FETRA calculations.⁴

Despite urging by several segments of the tobacco industry and a number of members of Congress, the USDA declined to alter its Step A assessment methodology to reflect the actual revised federal excise tax rates. To formalize its policy decision, the USDA published a “technical amendment” to its 2005...