Smith v. State, 122820 CODC, C. A. 20-cv-03107-RM-KLM

Docket NºCivil Action 20-cv-03107-RM-KLM
Party NameJENNIFER ANN SMITH, a citizen and taxpayer of the State of Colorado, LIGGETT GROUP LLC, VECTOR TOBACCO INC., and XCALIBER INTERNATIONAL LTD., LLC, Plaintiffs, v. STATE OF COLORADO, by and through JARED S. POLIS, in his official capacity as Governor of Colorado, PHILIP J. WEISER, in his official capacity as Attorney General of Colorado, and HEID...
Case DateDecember 28, 2020
CourtUnited States District Courts, 10th Circuit, District of Colorado

JENNIFER ANN SMITH, a citizen and taxpayer of the State of Colorado, LIGGETT GROUP LLC, VECTOR TOBACCO INC., and XCALIBER INTERNATIONAL LTD., LLC, Plaintiffs,


STATE OF COLORADO, by and through JARED S. POLIS, in his official capacity as Governor of Colorado, PHILIP J. WEISER, in his official capacity as Attorney General of Colorado, and HEIDI HUMPHREYS, in her official capacity as Interim Executive Director of the Colorado Department of Revenue, Defendants.

Civil Action No. 20-cv-03107-RM-KLM

United States District Court, D. Colorado

December 28, 2020



On November 3, 2020, a majority of voters in Colorado approved “Proposition EE, ” also known as House Bill 20-1427 (“HB 1427”). Section 10 of HB 1427 requires a minimum retail sales price of $7.00 per pack of 20 cigarettes. Defendants contend Section 10 is intended to reduce overall cigarette usage, especially among youth and young adults, and provide revenue mainly for Colorado's preschool program. Plaintiffs, however, challenge the constitutionality of Section 10 under the United States Constitution. At issue before the Court is Plaintiffs' Motion for Preliminary Injunction (the “Motion”) seeking to enjoin Defendants from enforcing Section 10 which goes into effect on January 1, 2021. Due to the exigency of the matter, the Court ordered expedited briefing on the Motion and allowed the parties to conduct limited expedited discovery. In addition, on December 21, 2020, the Court held a hearing where the parties presented evidence and oral argument. The parties also provided supplemental briefing on the standard of review. After considering the Motion, the court record, the matters presented at the hearing, and the applicable law, and being otherwise fully advised, the Court finds and orders as follows.


Plaintiffs are Liggett Group LLC, Vector Tobacco Inc., and Xcaliber International LTD., LLC, three out-of-state discount cigarette manufacturers (collectively, the “Discount Manufacturers”), and Jennifer Ann Smith (“Ms. Smith”), a Colorado citizen who states she voted for Proposition EE. They have sued Defendants alleging Section 10 violates the dormant Commerce Clause.1 The background which gives rise to this action and the Motion is as follows.

The cigarette supply chain generally consists of manufacturers, intermediaries (e.g., distributors), and retailers. This is true for discount and premium brand cigarette manufacturers, including Discount Manufacturers.

Discount Manufacturers - and all other cigarette manufacturers - are located out-of-state. Discount Manufacturers sell discount brand cigarettes primarily to distributors, [2] who then sell them to retailers. The retailers sell to consumers; the Discount Manufacturers operate no retail stores and they do not sell directly to consumers. The cigarette manufacturers and distributors set their own prices and the retailer sets the final price to be sold to the consumer.

Discount Manufacturers compete with other cigarette manufacturers - discount and premium - mainly by pricing their products lower than other domestically sold brands of cigarettes.3 And, no one disputes that if prices increase, the sales of cigarettes would decrease. Effective January 1, 2021, with the passage of HB 1427 and Section 10, all other things being unchanged, the price differential between discount brand and premium brand cigarettes would decrease while the retailers' profit margins would increase.4

Specifically, HB 1427 increases the excise tax for cigarettes to $1.10 per pack and, under Section 10, sets a minimum retail sales price of $7.00 per pack. The price differentials and margin increases are demonstrated by Figure 2 in Discount Manufacturers' expert's report, which figures the Court assumes are true for the purposes of the Motion. Thus, using Pyramid cigarettes as an example, assuming a current retail price of $5.28 per pack, the $1.10 excise tax would increase the price to $6.38 per pack. However, in order to comply with the $7.00 minimum price, the retailer would sell the Pyramid cigarettes for at least $7.00. The increase in profit margin of $0.62 would be retained by the retailers.5 And, the price differential between Camel, a premium brand, and Pyramid would decrease from $1.10 ($6.38 - $5.28) to $0.48 ($7.48 - $7.00).

(Image Omitted)

(ECF No. 48-2, p. 15; Ex. 35, p. 15.)

According to Discount Manufacturers' theory, because they compete by having lower prices, the $7.00 price floor would result in (1) smaller price differences between discount and premium brands of cigarettes, which will cause a significant decrease in sales of Discount Manufacturers' discount brands of cigarettes as consumers would shift to buying premium brands from other interstate cigarette manufacturers and (2) an increase in profits to in-state retailers at Discount Manufacturers' expense, with whom Discount Manufacturers allegedly compete. Thus, Discount Manufacturers assert, Section 10 discriminates between competitors - in-state retailers and out-of-state discount cigarette manufacturers - in the cigarette market and unduly burdens interstate commerce. Hence, Plaintiffs' Motion seeking to enjoin Section 10 from going into effect on January 1, 2021 followed.


“A preliminary injunction is an extraordinary remedy, the exception rather than the rule.” Free the Nipple-Fort Collins v. City of Fort Collins, Colo., 916 F.3d 792, 797 (10th Cir. 2019) (quotation marks and citation omitted). Before this remedy may be granted, the moving parties must establish: “‘(1) a substantial likelihood of prevailing on the merits; (2) irreparable harm unless the injunction is issued; (3) that the threatened injury outweighs the harm that the preliminary injunction may cause the opposing party; and (4) that the injunction, if issued, will not adversely affect the public interest.'” Diné Citizens Against Ruining our Environment v. Jewell, 839 F.3d 1276, 1281 (10th Cir. 2016) (quoting Davis v. Mineta, 302 F.3d 1104, 1111 (10th Cir. 2002)). The last two factors merge when the government is the opposing party. Nken v. Holder, 556 U.S. 418, 435 (2009). And, because it is an extraordinary remedy, the party's right to relief must be clear and unequivocal. Schrier v. Univ. of Colo., 427 F.3d 1253, 1258 (10th Cir. 2005).6




Defendants do not challenge, for the purposes of the Motion, whether Discount Manufacturers will suffer irreparable harm should an injunction not enter. Accordingly, the Court will not address this requirement but will assume this factor is met.


Under the Constitution's Commerce Clause, Congress has the power “[t]o regulate commerce ... among the several States.” U.S. Const. art. I, § 8, cl. 3. “‘[T]he Clause has [also] long been recognized as a self-executing limitation on the power of the States to enact laws imposing substantial burdens on such commerce.'” Kleinsmith v. Shurtleff, 571 F.3d 1033, 1039 (10th Cir. 2009) (quoting S.-Cent. Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 87 (1984)). This limitation is commonly called the “dormant” Commerce Clause. Id. It is “driven by concern about economic protectionism - that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.” Id.

The Tenth Circuit has stated a state statute may violate the dormant Commerce Clause in the following three ways: • “First, a statute that clearly discriminates against interstate commerce in favor of intrastate commerce is virtually invalid per se and can survive only if the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism.”

“Second, if the statute does not discriminate against interstate commerce, it will nevertheless be invalidated under the Pike v. Bruce Church Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 25 L.Ed.2d 174 ... (1970) balancing test if it imposes a burden on interstate commerce incommensurate with the local benefits secured.”

“Third, a statute will be invalid per se if it has the practical effect of extraterritorial control of commerce occurring entirely outside the boundaries of the state in question.”

KT & G Corp. v. Attorney Gen. of State of Okla., 535 F.3d 1114, 1143 (10th Cir. 2008) (quotation and citation omitted). See also Energy & Env't Legal Inst. v. Epel, 793 F.3d 1169, 1171-1172 (10th Cir. 2015) (discussing the “three varieties” of dormant Commerce Clause cases, i.e., cases applying the Pike balancing test, the “clearly discriminates” Philadelphia7 test, and the laws-that-control-extraterritorial-conduct Baldwin

8test). Plaintiffs contend Defendants violate the dormant Commerce Clause under the first two ways.9 The Court examines the record to determine if Plaintiffs have shown they are likely to prevail under either of these two theories.

a) “Clearly Discriminates” Facially or in Effect

Discount Manufacturers contend Section 10 clearly discriminates against out-of-state manufacturers by benefiting in-state retailers; that retailers and manufacturers compete with each other. Defendants counter that the in-state retailers and out-of-state cigarette manufacturers are not “similarly situated” - i.e., they are not competitors. In other words, there must be actual or prospective competition between the favored and disfavored entities in a single market and, here, there is not. See General Motors v. Tracy, 59 U.S. 278, 300 (1997) (there can be no local preference “in the absence of actual or prospective competition between the supposedly favored and disfavored entities in a...

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