S & M Brands, Inc. v. Cooper

• Decision Date: 13 May 2008
• Docket Number: No. 06-5828.,No. 06-5829.,06-5828.,06-5829.
• Citation: 527 F.3d 500
• Parties: S & M BRANDS, INC.; International Tobacco Partners, Ltd., Plaintiffs-Appellees/Cross-Appellants, v. Robert E. COOPER, Jr., in his official capacity as Attorney General of the State of Tennessee, Defendant-Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

527 F.3d 500

S & M BRANDS, INC.; International Tobacco Partners, Ltd., Plaintiffs-Appellees/Cross-Appellants, v. Robert E. COOPER, Jr., in his official capacity as Attorney General of the State of Tennessee, Defendant-Appellant/Cross-Appellee.

No. 06-5828.

No. 06-5829.

United States Court of Appeals, Sixth Circuit.

Argued: April 26, 2007.

Decided and Filed: May 13, 2008.

ARGUED:

John H. Sinclair, Jr., Office of the Attorney General, Nashville, Tennessee, for Appellant. David F. Dobbins, Patterson, Belknap, Webb & Tyler, New

York, New York, for Appellees.

ON BRIEF:

John H. Sinclair, Jr., Office of the Attorney General, Nashville, Tennessee, for Appellant. David F. Dobbins, Patterson, Belknap, Webb & Tyler, New York, New York, for Appellees.

Before: KENNEDY, MOORE, and McKEAGUE, Circuit Judges.

McKEAGUE, J., delivered the opinion of the court, in which KENNEDY, J., joined. MOORE, J. (pp. ___ - ___), delivered a separate dissenting opinion.

OPINION

McKEAGUE, Circuit Judge.

S & M Brands, Inc. and International Tobacco Partners, Ltd. ("ITP") sued the Attorney General of the State of Tennessee in his official capacity.¹ They claim that the State of Tennessee has violated federal antitrust law and the U.S. Constitution in its implementation and application of the Master Settlement Agreement ("MSA") between various States and major tobacco manufacturers. The only claim before us in this appeal and cross-appeal is whether the Attorney General's enforcement of an amended escrow provision has had an impermissible retroactive effect in violation of the Plaintiffs' rights to due process.²

The district court concluded that, although ITP is not a tobacco product manufacturer, it had standing to seek a release of funds from escrow. On the merits of the Plaintiffs' due-process claim, the district court granted summary judgment in favor of the Attorney General except as to ITP's claim for a release of escrow funds associated with cigarette sales in 2003. For the reasons set forth below, we reverse and remand to the district court with instruction to dismiss the case without prejudice on grounds of sovereign immunity.

I

A. The MSA

By the mid-1990s, numerous States and other governments had sued tobacco manufacturers, alleging a wide range of deceptive and fraudulent practices by the companies. After a protracted period of negotiation, the attorneys general of forty-six States as well as the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands (the "Settling States") entered into the MSA with four major tobacco companies, Brown & Williamson, Lorillard Tobacco, Phillip Morris, and RJ Reynolds. The Settling States agreed to dismiss their lawsuits against Participating Manufacturers ("PMs") in exchange for yearly payments and restrictions on tobacco advertising and marketing.

PMs actually consist of two separate groups of tobacco product manufacturers-Original Participating Manufacturers ("OPMs") and Subsequent Participating Manufacturers ("SPMs"). The four original signatories are the OPMs. SPMs are generally smaller tobacco manufacturers which have subsequently agreed to the terms and conditions of the MSA (e.g. Liggett Group, Tobacco & Candy International). There is a third group of manufacturers defined under the MSA-Non-Participating Manufacturers ("NPMs"). Any tobacco product manufacturer that has not joined the MSA is considered an NPM.

All PMs make annual payments based on several factors, the primary factor being the number of cigarettes sold domestically. These payments are pooled together, and the total amount is divided between the Settling States according to set allocation percentages. Tennessee's allocation percentage equals 2.4408945%. MSA Ex. A.

B. The Escrow Statute

Because they have not agreed to adopt the MSA, NPMs are not subject to its payment requirements or other restrictions. However, the Settling States have passed complementary legislation to cover NPMs. As part of its implementation of the MSA, Tennessee passed the Tennessee Tobacco Manufacturers' Escrow Fund Act of 1999 (the "Escrow Statute"), Tenn.Code § 47-31-101 et seq., which was based on a model statute in the MSA. MSA Ex. T. As explained in that model statute,

It would be contrary to the policy of the State if tobacco product manufacturers who determine not to enter into such a settlement could use a resulting cost advantage to derive large, short-term profits in the years before liability may arise without ensuring that the State will have an eventual source of recovery from them if they are proven to have acted culpably. It is thus in the interest of the State to require that such manufacturers establish a reserve fund to guarantee a source of compensation and to prevent such manufacturers from deriving large, short-term profits and then becoming judgment-proof before liability may arise.

Id.

Thus, under § 47-31-103(a)(2)(A), NPMs selling cigarettes in Tennessee are required to deposit funds annually into an escrow account in an amount based upon the number of cigarettes sold in the state during the year. NPMs receive the interest that accrues on the deposited funds. As for the principal, the Escrow Statute originally provided for the release of funds under any of the following circumstances:

(i) To pay a judgment or settlement on any released claim brought against such tobacco product manufacturer by the state or any releasing party located or residing in the state. ...;

(ii) To the extent that a tobacco product manufacturer establishes that the amount it was required to place into escrow in a particular year was greater than the state's allocable share of the total payments that such manufacturer would have been required to make in that year under the master settlement agreement (as determined pursuant to § IX(i)(2) of the master settlement agreement, and before any of the adjustments or offsets described in § IX(i)(3) of that agreement other than the inflation adjustment) had it been a participating manufacturer, the excess shall be released from escrow and revert back to such tobacco product manufacturer; or

(iii) To the extent not released from escrow under subdivision (a)(2)(B)(i) or (ii), funds shall be released from escrow and revert back to such tobacco product manufacturer twenty-five (25) years after the date on which they were placed into escrow.

Tenn.Code § 47-31-103(a)(2)(B) (2003). Subsection (ii) is commonly referred to as the Allocable Share Release ("ASR") provision. The pre-2004 version is called the "Original ASR Provision."

However, the Original ASR Provision contained, in the words of the Attorney General, a "loophole." Rather than equalizing the payments an NPM would have to make under either the MSA or the Escrow Statute, the Original ASR Provision permitted small, regional NPMs to receive a refund of most of their annual escrow deposits. Specifically, because Tennessee's allocable share under the MSA is only 2.4408945%, the "total payments" that an NPM "would have been required to make" to Tennessee under the MSA were correspondingly small. Other Settling States experienced similar problems. If an NPM sold cigarettes in only one or a few of the Settling States, it could get back most of the escrow deposits it made in those states. Only when an NPM reached a national level would it have to make aggregate escrow deposits that approached the full payments it would have had to make under the MSA.

The NPMs used this cost advantage to gain market share against the PMs. In 2000, PMs had a combined market share of 97.7%. By 2003, that market share had fallen to 93.8%.

In response, Tennessee (along with most of the other Settling States) amended its Escrow Statute. Effective April 20, 2004, Tennessee repealed Subsection (ii) and replaced it with the following:

(ii) To the extent that a tobacco product manufacturer establishes that the amount it was required to place into escrow on account of units sold in the state in a particular year was greater than the master settlement agreement payments, as determined pursuant to § IX(i) of the master settlement agreement including after final determination of all adjustments, that such manufacturer would have been required to make on account of such units sold had it been a participating manufacturer, the excess shall be released from escrow and revert back to such tobacco product manufacturer; or

Id. § 47-31-103(a)(2)(B)(ii) (2004 Supp.) (the "ASR Amendment"). The new ASR Amendment no longer calculates a refund based on Tennessee's allocable share percentage. Instead, it provides a refund of any amount paid into escrow that the NPM establishes was in excess of the total amount it would have had to pay under the MSA for the year in question. This results in a smaller refund for NPMs that, like the Plaintiffs, sell cigarettes on a regional, rather than national, level.

C. The Contraband Statute

Tennessee also enacted complementary tax and license legislation, referred to by the Plaintiffs as the "Contraband Statute." Id. § 67-4-2601 et seq. The primary requirement of the Contraband Statute is an annual certification by each manufacturer that it is in compliance with either the MSA or the Escrow Statute before being included on a directory of tobacco product manufacturers authorized to sell cigarettes in Tennessee. Id. § 67-4-2602. The Contraband Statute prohibits anyone from selling, possessing, or affixing tax stamps to cigarettes sold by any manufacturer or importer not included on the directory. Id. § 67-4-2602(c).

D. The Plaintiffs' Refund Claims

The Escrow Statute (pre- and post-amendment) requires any NPM, for each year during which it sells cigarettes in Tennessee, to deposit the requisite amount into escrow for that year no later than April 15th of the following year. Id. § 47-31-103(a)(2). For instance, the escrow payment for cigarettes sold in 2003 was due no later than April 15, 2004. On...