Reedom Holdings, Inc. v. Spitzer, 02 Civ. 2939(AKH).

• Decision Date: 14 September 2004
• Docket Number: No. 02 Civ. 2939(AKH).,02 Civ. 2939(AKH).
• Citation: 447 F.Supp.2d 230
• Parties: FREEDOM HOLDINGS, INC., d/b/a, North American Trading Company, and International Tobacco Partners, Ltd., Plaintiffs, v. Eliot SPITZER, in his official capacity as Attorney General of the State of New York, and Arthur J. Roth, in his official capacity as Commissioner of Taxation and Finance of the State of New York, Defendants.
• Court: U.S. District Court — Southern District of New York

Page 230

447 F.Supp.2d 230

FREEDOM HOLDINGS, INC., d/b/a, North American Trading Company, and International Tobacco Partners, Ltd., Plaintiffs, v. Eliot SPITZER, in his official capacity as Attorney General of the State of New York, and Arthur J. Roth, in his official capacity as Commissioner of Taxation and Finance of the State of New York, Defendants.

No. 02 Civ. 2939(AKH).

United States District Court, S.D. New York.

September 14, 2004.

COPYRIGHT MATERIAL OMITTED

David F. Dobbins, Sr., Walter Michael Luers, Patterson, Belknap, Webb & Tyler LLP, New York City, for Plaintiffs.

Avi Schick, New York State Department of Law(EPB), Albany, NY, Christine E. Morrison, Eliot Spitzer, Attorney General of the State of NY, New York City Julie Simone Brill, VT, Attorney General's Office, Montpelier, VT, Lewis Aaron Polishook, New York State Office of the Attorney General, New York City, for Defendants.

Leonard Violi, Law Offices of Leonard Violi, LLC, Mamaroneck, NY, for Movant.

OPINION AND ORDER PARTIALLY GRANTING AND PARTIALL DENING PRELIMINARY INJUNCTION

HELLERSTEIN, District Judge.

On January 6, 2004, the Court of Appeals for the Second Circuit, affirming and reversing my decision of May 14, 2002, remanded this case to me for further proceedings not inconsistent with its rulings. Freedom Holdings Inc., et al., v. Spitzer, et al., 357 F.3d 205 (2d Cir.2004) (Freedom Holdings I), reh'g denied, Freedom Holdings Inc., et al., v. Spitzer, et al., 363 F.3d 149 (2d Cir.2004) (Freedom Holdings II). The Court of Appeals affirmed my dismissal of the dormant Commerce Clause claim, reversed my dismissal of the Sherman Act claim, and vacated my dismissal of the Equal Protection claim.

The Mandate issued on April 30, 2004. Almost immediately afterwards, plaintiffs filed an amended complaint, a motion for summary judgment (the briefing of which is incomplete), and, by Order to Show Cause, a motion for a preliminary injunction. This last motion is before me now, and was the subject of oral argument on May 24 and June 2, 2004. For the reasons stated below, I grant the motion in part and deny it in part. I deny plaintiffs' motion to the extent that it seeks an injunction against enforcement of the Master Settlement Agreement between forty-six states and the four major cigarette companies and subsequently agreeing cigarette companies. I deny plaintiffs' motion to the extent that it seeks an injunction against enforcement of the Escrow Statute, N.Y. Pub. Health Law §§ 1399-nn-pp, and the Contraband Statute, N.Y. Tax Law §§ 480(b), 481, 1846. However, I grant plaintiffs' motion to the extent that it seeks an injunction against enforcing the repeal of the Allocable Share Release provision of the Escrow Statute, N.Y. Pub. Health Law § 1399-pp, as amended, 2003 N.Y. Laws 666, eff. Oct. 15, 2003.

I. Factual Background

Cigarette smoking is a scourge to our society. Before modern prohibitions against smoking in public institutions, cigarette smoke hung like a pall over baseball, basketball, and hockey stadia, fouled the air in the offices where we worked and the homes where we lived, and coated our lungs with tars and other poisons, shortening our lives and injuring our health.

In recent decades, many injured parties sued the tobacco companies, with mixed results. In the 1990s, governmental entities brought their own lawsuits, seeking to recover their damage—billions of dollars spent on Medicaid and other health costs caused by cigarette smoking—and to restrict and prevent various advertising and marketing practices of the cigarette manufacturers that tended to popularize cigarette smoking and cause young people to become addicted.

On November 23, 1998, a settlement was reached between forty-six states, the District of Columbia and several territories, and the four major cigarette companies, Philip Morris, Inc. ("Philip Morris," now Altria Group, Inc.), R.J. Reynolds Tobacco Co. ("R.J.Reynolds"), Brown and Williamson Tobacco Co. ("Brown & Williamson"), and Lorillard Tobacco Co. ("Lorillard"). The Master Settlement Agreement ("MSA"), a long and complicated agreement with many annexes, provided for substantial payments by the cigarette companies to the states, an ability to recoup settlement costs by passing them on to consumers, incentives to other cigarette companies to join the settlement and protections against those that would not join, and various marketing and advertising restrictions intended to reduce the attraction of cigarettes, especially to young people.

A. The MSA

The manufacturers who signed the MSA consented to a variety of marketing and advertising restrictions. Signatory manufacturers agreed that they would not "take any action, directly or indirectly, to target Youth within any Settling State in the advertising, promotion or marketing of Tobacco Products." MSA Art. III(a). They agreed not to use cartoons such as Joe Camel in advertising or promotions, MSA Art. III(b), sponsor concerts or major sporting events using tobacco brand names, MSA Art. III(c)(1), or advertise on billboards, in shopping malls, or in transit systems. MSA Art. III(d). They agreed to refrain from selling clothing or other merchandise bearing a tobacco brand name, MSA Art. III(f), and from giving free samples or gifts based on proofs of purchase to youths under age eighteen. MSA Art. III(g), (h). They pledged not to pay for product placement in movies, television shows, theatrical performances, or video games, MSA Art. III(e), nor to enter into agreements restricting anti-tobacco advertising. MSA Art. III(d)(4).

Participating manufacturers also accepted limitations on their lobbying rights. They are prohibited from opposing state or local legislation "intended ... to reduce Youth access to, and the incidence of Youth consumption of, Tobacco Products." MSA Art. III(m)(1). They also may not support congressional legislation which would override the MSA, or challenge state tobacco-related statutes, MSA Art. III(m)(3), V, or promote the diversion of MSA proceeds to uses that are not healthrelated. MSA Art. III(n). The MSA requires participating manufacturers to develop corporate principles that express their commitment to reducing youth smoking, to communicate those principles clearly to employees and customers, and to designate an executive level manager responsible for identifying methods of reducing youth smoking. MSA Art. III(i)(1), (2).

The MSA provides for the dissolution of several tobacco industry nonprofit research or trade organizations, and provides for state governmental oversight of any new tobacco-related trade organizations. MSA Art. III(o), (p). The MSA establishes a National Public Education Fund, financed by proceeds from payments under the MSA, to study and support the reduction of youth smoking and of smoking-related diseases. MSA Art. VI(a). For instance, the fund is authorized to support "sustained advertising and education programs" to counter youth smoking. MSA Art. III(g).

The four major tobacco companies, who were the original participating manufacturers to the settlement ("OPMs"), agreed under the MSA to make three sets of payments for a combined value of approximately $2.4 billion in the first year and $225 billion dollars over twenty-five years. See MSA Art. IX(b), (c).¹ The payments of the OPMs were to be adjusted each year to reflect inflation, miscalculations of relative shares, and various other factors. See MSA Art. IX(b), (c). A Volume Adjustment, MSA Art. II(aaa), Exh. E, adjusts aggregate payments by the OPMs according to yearly changes in the quantity of cigarettes that they ship in or to the United States. If total shipments increase, the base payment is increased proportionally; if total shipments decrease, the base payment is decreased by 98 percent of the proportion of decrease. MSA Exh. E(A), (B)(i).²

The payments of each individual OPM were to be adjusted yearly as well, according to changes in its share of the entire United States market for cigarette sales, relative to the shares of the other three OPMs. As an OPM's market share increased relative to the other OPMs' shares of the market, so did that OPM's burden of payments relative to those of the other OPMs; as its relative market share decreased, so did its relative burden. MSA Art. II(mm).³

The settling states and territories agreed to allocate amongst themselves the moneys derived from the OPMs' payments under the MSA. Art. II(f), at 4, Exh. A. The percentages, or allocable shares, were negotiated among the settling states to reflect total smoking population, health care costs, and other relevant considerations. By far the largest allocable shares are those of California, 12.7639554 %, and New York, 12.7620310 %. The next largest allocable share is Pennsylvania's, which is 5.7468588 %, less than half of New York's. Kentucky's allocable share is 1.7611586 %.

The MSA provides an incentive for other cigarette manufacturers to join the payments scheme. Subsequent participating manufacturers ("SPMs") who agreed to join the MSA within the first sixty days after its execution by the OPMs were "grandfathered" into their 1998 market share or 125 % of their 1997 market share, whichever is greater. Grandfathered SPMs become liable for payments to the states only to the extent that their market share increases above those grand-fathered levels; above those levels, their required payments are measured by the degree to which their yearly market shares increase relative, not to the entire market, but to the aggregate market share of the OPMs. MSA Art. IX(i). The relationship is reflected in the formula: (current market share-1998 [or 125 % of 1997] market share) / (current aggregate market share of OPMs).⁴ As the Court of Appeals observed the formula imposes on SPMs a payment obligation that increases by more than its proportional growth of market share:

If the denominator were current aggregate market share of OPMs and SPMs, gaining market...