Pti, Inc. v. Philip Morris Inc., CV 99-8235 NM (EX).

• Decision Date: 25 May 2000
• Docket Number: No. CV 99-8235 NM (EX).,CV 99-8235 NM (EX).
• Court: U.S. District Court — Central District of California
• Parties: PTI, INC., et al., Plaintiffs, v. PHILIP MORRIS INCORPORATED, et al., Defendants.

Page 1179

100 F.Supp.2d 1179

PTI, INC., et al., Plaintiffs, v. PHILIP MORRIS INCORPORATED, et al., Defendants.

No. CV 99-8235 NM (EX).

United States District Court, C.D. California.

May 25, 2000.

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Joel R. Bennett, Matthew J. Fairshter, Timothy L. Hayes, Bennett & Fairshter, Pasadena, CA, for plaintiffs.

John Joseph Quinn, Jr., James F. Speyer, John D. Lombardo, Arnold & Porter, Los Angeles, CA, Mark R. Merley, Douglas L. Wald, Michael Yeh, Mark J. Montano, Anne M. Walker, Arnold & Porter, Washington, DC, for Philip Morris Inc., R.J. Reynolds Tobacco, Inc.

Tony L. Richardson, Adam Joshua Chester, Los Angeles, CA, Peter A. Bellacosa, Kirkland & Ellis, New York City, for Brown & Williamson Tobacco Corp. and Lane Limited.

Jeffrey M. Shohet, Maria R. Acker, Gray, Cary, Ware & Freidenrich, San Diego, CA, Jeffrey S. Nelson, Joseph A. Lanahan, Shook, Hardy & Bacon, Kansas City, MO, for Lorillard Tobacco Co.

Gouglas L. Carden, Floey & Lardner, Los Angeles, CA, Bernard J. Rosenthal, Gilbert, Segall & Young, New York City, for Japan Tobacco Int'l USA, Inc.

Robert E. Boone, III, Jennifer A. Jackson, Bryan Cave, Santa Monica, CA, Robert W. Shely, Rodney W. Ott, Phoenix, AZ, for Lignum-2, Inc.

P. John Owen, William M. Modrcin, Morrison & Hecker, ZKansas City, MO, Meryl Macklin, Cohen & Grigsby, Pittsburg, PA, John W. Amberg, Adam J. Thurston, Santa Monica, CA, for The Medallion Co., Inc. and Premier Marketing, Inc.

Donald S. Urrabazo, Proskauer Rose, Martha E. Gifford, Los Angeles, CA, for Societe D'Nationale D'Exploitation Industrialle Des Tabacs Et Allumettes.

Bruce L. Ishimatsu, Santa Monica, CA, Bradford C. Berge, Campbell, Carr, Berge & Sheridan, Santa Fe, NM, for Santa Fe Natural Tobacco Co., Inc.

John Y. Yoon, Lee & Hong, Los Angeles, CA, Robert J. Lane, Jr., Hodgson, Russ, Andrews, Woods & Goodyear, Buffalo, NY, for Kingmaker Marketing, Inc.

Dennis Eckhart, CAAG-Office of Atty., General of Calif., Sacramento, CA, Emily B. Myers, Nat'l Assoc. of Attys. General, Washington, DC, for Nat'l Assoc. of Atty. Generals.

ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS PLAINTIFFS' FIRST AMENDED COMPLAINT

MANELLA, District Judge.

I Introduction

In November 1998, the five major domestic tobacco companies¹ entered into a contract, termed the Master Settlement Agreement ("MSA"), with representatives of forty-six states, the District of Columbia, and five territories.² Pursuant to the MSA, the states agreed to dismiss their pending suits (or to refrain from filing suit) against the tobacco companies in exchange for yearly payments, to be used to defray health costs from smoking-related illnesses and to fund smoking prevention programs. See M.S.A. § at 2. This suit is one of a series of legal challenges to the M.S.A. § and statutes passed in conjunction with it. To date, these suits have been uniformly unsuccessful.³

Plaintiffs in the instant dispute are entities engaged in the business of cigarette re-entry and/or importation of cigarettes into the United States. See First Amended Complaint ("FAC") ¶¶ 12-20. They deal in "repatriated" cigarettes, defined as those produced domestically for sale abroad that are later imported back into the United States, and "gray market" cigarettes, defined as those produced abroad for sale in foreign markets by domestic cigarette manufacturers that are later imported into the United States. On August 13, 1999, plaintiffs filed this suit against the tobacco companies who had signed the M.S.A. § (designated in the Complaint as Original Corporate Defendants, or "OCDs," and Subsequent Participating Manufacturers, or "SPMs"), alleging violations of federal antitrust laws, the Constitution, and various state laws. After both the state defendants and the private defendants filed motions to dismiss the complaint, plaintiffs filed a First Amended Complaint February 1, 2000. The FAC again alleged violations based on antitrust, constitutional, and state law. The private defendants and state defendants filed the instant motions to dismiss March 3, 2000.

II Factual Summary

According to the M.S.A. § recitals, more than 40 states commenced litigation against the tobacco companies seeking monetary, equitable and injunctive relief. Those states that had not yet filed such a suit had the potential to do so. See M.S.A. § at 1. Citing the importance to both the states and the tobacco manufacturers of "reducing underage tobacco use by discouraging such use and by preventing [y]outh access to [t]obacco [p]roducts," the settling states and the participating manufacturers agreed to the MSA. Id. at 2. Under the MSA, the states agreed to dismiss their litigation against the tobacco companies in exchange for guaranteed payments, which the states would use for health care costs and to initiate various public health measures. The tobacco companies also agreed to certain restrictions on their advertising and promotional activities. See M.S.A. §§ III.

The FAC begins with the declaration that plaintiffs "seek to invalidate the Master Settlement Agreement." FAC ¶ 1. The bulk of the complaint focuses on a challenge to two related statutes that many signatory states have enacted, referred to in the FAC as the Qualifying Statute and the Model Act. The Qualifying Statute — sometimes referred to as the "Escrow Statute"—applies to "tobacco product manufacturers,"⁴ and aims to ensure "that the state will have an eventual source of recovery from them if they are proved to have acted culpably." Cal. Health & Safety Code § 104555(f) (West 1999). The statute requires those who decide not to join the MSA — designated Non-Participating Manufacturers ("NPM") — to make annual payments, based on the manufacturer's annual sales, into an interest-earning escrow account. See, e.g., id. § 104557 (West 1999). The escrow funds are to be used to pay any judgment or settlement of claims brought against the manufacturer. See, e.g., id. § 104557(b). The amount paid into the account is not to exceed the amount the tobacco product manufacturer would owe if it elected to join the MSA; if a manufacturer is able to show that its payment exceeds "the state's allocable share of the total payments that the manufacturer would have been required to make" under the MSA, the manufacturer is entitled to the excess. Id. § 104557(b)(2). If, after 25 years, the funds have not been used, they revert to the manufacturer. See, e.g., id. § 104557(b)(3). States have a financial incentive under the M.S.A. § to pass the Qualifying Statute: the amount of money they receive from the settlement fund is significantly reduced if the state has not passed a Qualifying Statute, or if the statute has been struck down by a court of competent jurisdiction. See M.S.A. § § IX(d).⁵

The Model Act — also referred to as the "Gray Market Statute" — is not specifically mentioned in the MSA. The Model Act bans repatriators from importing cigarettes labeled "For Export Only," "U.S. Tax Exempt," "For Use Outside U.S.," or with similar wording. See, e.g., Cal. Rev. & Tax.Code § 30163(b) (West 1999). The statute is an attempt to ensure that products created specifically for overseas use are not brought into the United States.⁶ "By preventing the sale and distribution of these repatriated cigarettes, the state is attempting to assure all cigarettes and tobacco products sold in [the state] are contributing to the tobacco settlement funds." Premium Tobacco Stores, Inc. v. Fisher, 51 F.Supp.2d 1099, 1102 (D.Colo.1999). To date, many — but not all — of the states have passed a version of the Model Act.⁷

The FAC refers to several groups of defendants: the OCDs and cigarette manufacturers and distributors who later joined the M.S.A. § are collectively denominated the "participating manufacturers"; all state officials involved in the negotiation of the M.S.A. § (mostly current or former state attorneys general) are termed the "politician defendants"; and the officials in charge of enforcing the states' versions of the Model Act are referred to as the "agency defendants." The FAC also names the National Association of Attorneys General ("NAAG") as a defendant.

Plaintiffs allege that all defendants have violated federal and state antitrust laws. See FAC ¶¶ 343-376. They also allege that, through their enactment of Qualifying Statutes and Model Acts, the politician defendants and agency defendants (collectively referred to as the "state defendants") have violated a number of constitutional provisions: the Interstate Compact Clause, the prohibition against bills of attainder, the Commerce Clause, the Import-Export Clause, the Supremacy Clause, the First Amendment, the Equal Protection Clause, and the Due Process Clause. The FAC contends that these constitutional violations amount to a violation of 42 U.S.C. § 1983 on the part of the politician defendants in their individual capacities. Plaintiffs seek declaratory, injunctive and equitable relief, as well as damages for the alleged antitrust and § 1983 violations. Finally, they include three claims under California state law: a violation of the Unfair Competition Act (Cal. Bus. & Prof.Code §§ 17200 et seq.), intentional interference with prospective business advantage, and trade libel and disparagement. They seek injunctive relief for the Unfair Competition Act claim and damages for the other two. Defendants argue that all claims should be dismissed.

III Legal Standard

A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the complaint. A Rule 12(b)(6) dismissal is proper only where there is either a "lack of a cognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.1998). The court must deny the motion unless it appears that plaintiffs can prove no set of facts that would...