Speaks v. U.S. Tobacco Coop., Inc.

• Decision Date: 15 September 2020
• Docket Number: No. 5:12-CV-729-D,5:12-CV-729-D
• Citation: 486 F.Supp.3d 974
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: Teresa M. SPEAKS, Toby Speaks, Stanley Smith, Eddie Brown, Robert Poindexter, Mike Mitchell, Roy L. Cook, Alex Shugart, H. Randle Wood, Robin Rogers, and Daniel Lee Nelson, Plaintiffs, v. U.S. TOBACCO COOPERATIVE, INC. f/k/a Flue-Cured Tobacco Cooperative Stabilization Corporation, Defendant.

486 F.Supp.3d 974

Teresa M. SPEAKS, Toby Speaks, Stanley Smith, Eddie Brown, Robert Poindexter, Mike Mitchell, Roy L. Cook, Alex Shugart, H. Randle Wood, Robin Rogers, and Daniel Lee Nelson, Plaintiffs,

v.U.S. TOBACCO COOPERATIVE, INC. f/k/a Flue-Cured Tobacco Cooperative Stabilization Corporation, Defendant.

No. 5:12-CV-729-D

United States District Court, E.D. North Carolina, Western Division.

Signed September 15, 2020

Gary K. Shipman, Shipman & Associates, LLP, William Grainger Wright, Sr., Shipman and Wright, LLP, Wilmington, NC, Namon Leo Daughtry, Daughtry, Woodard, Lawrence & Starling, Smithfield, NC, for Plaintiffs.

Derek Lawrence Shaffer, Quinn Emanuel Urquhart & Sullivan, Washington, DC, Lee M. Whitman, Benjamin N. Thompson, Paul J. Puryear, Jr., Wyrick Robbins Yates & Ponton, LLP, Raleigh, NC, Scott L. Watson, Quinn Emanuel Urquhart & Sullivan, LLP, Los Angeles, CA, for Defendant.

ORDER

JAMES C. DEVER III, United States District Judge

On July 26, 2019, U.S. Tobacco Cooperative, Inc. (the "Cooperative" or "defendant") moved to dismiss plaintiffs’ amended and supplemental class action complaint [D.E. 321] and filed a memorandum in support [D.E. 322]. On August 16, 2019, plaintiffs responded in opposition [D.E. 323]. On September 6, 2019, the Cooperative replied [D.E. 325]. As explained below, the court grants the Cooperative's motion to dismiss and dismisses the amended complaint.

I.

The parties are familiar litigants. In a previous order, the court discussed at length the Cooperative's history, the flue-cured tobacco industry, and the effect of the Fair and Equitable Tobacco Reform Act. See [D.E. 267] 3–17. The court incorporates that discussion by reference.

From 2013 to 2018, flue-cured tobacco farmers experienced a decline in both revenues and profits. See Am. Compl. [D.E. 320] ¶ 67. Additionally, flue-cured tobacco farmers and the flue-cured tobacco industry today face numerous challenges. The capital-intensive nature of modern tobacco farming has led farmers to reduce the size of their work forces. See id. at ¶ 68. Consumer demand for tobacco products has fallen. See id. at ¶ 69. Moreover, federal, state, and local governments are increasing regulations on the tobacco industry. See id. at ¶ 71. For example, the United States Center for Disease Control revamped its guidance concerning tobacco control programs to reduce use of tobacco. See id. at ¶ 72. The Food and Drug Administration ("FDA") issued guidance concerning the prevention of 12 to 17 year-old's use of tobacco. See id. The FDA also extended its oversight authority concerning tobacco products, and issued a final rule requiring a graphic health warning on cigarette products. See id. at ¶¶ 76, 78. Congress passed the Patient Protection and Affordable Care Act, which provides a benefit to individuals who quit smoking. See id. at ¶ 74. In 2014, the National Institute of Health issued a publication that discussed health benefits of raising the age at which an individual can purchase tobacco to 21. Seven states and 440 local governments have adopted this recommendation. See id. at ¶ 75. Beginning in 2012, 37 states and the District of Columbia increased cigarette taxes. The tax increases, along with local government limits on tobacco advertising and public smoking of tobacco, decrease demand for tobacco. See id. at ¶¶ 79, 99.

The flue-cured tobacco industry also faces challenges in the international tobacco markets. After the end of the Tobacco Price Support Program, the tobacco industry relied more heavily on exports. In 2004, exports accounted for approximately 46% of revenues in the tobacco industry. In 2018, exports were 63% of tobacco industry revenues. See id. at ¶¶ 88–90. U.S. tariffs and the monetary exchange rate have decreased demand from international buyers of tobacco from the Cooperative. See id. at ¶¶ 96–97. China was a particularly important market for the Cooperative. In 2018, the Cooperative was made aware that any further purchases from China were suspended. The decrease in demand for U.S. tobacco from China led to an 80% decrease in Cooperative contract volume and the closure of two Cooperative marketing centers. See id. at ¶¶ 91–92, 94.

Additionally, U.S. tobacco farmers face challenges to their market share from alternative products and tobacco importers. Electronic cigarettes, produced and imported from India, China, and other Eastern European countries, use "dark" tobacco and burley tobacco, not flue-cured tobacco. See id. at ¶ 101. Additionally, Congress passed legislation requiring 75% of tobacco in U.S. manufactured cigarettes to be grown in the United States (the "Tariff Rate Quota"). The Tariff Rate Quota increased imports of cheaper, international tobacco to the United States. Specifically, use of imported tobacco in U.S. manufactured cigarettes increased between 13% to 55%. See id. at ¶¶ 112–113.

On February 13, 2019, the Cooperative sent a letter to Cooperative members that stated:

Current market conditions and tremendous uncertainty in the export markets for the pending 2019 crop year have forced the Cooperative to make an approximate 80% reduction in leaf purchases from its 2018 contracted poundage. The impact of this decision has enormous consequences for our leaf business and more importantly for our member growers’ tobacco production and financial wellbeing.

Since it is the Cooperative's desire and intent to maintain our membership and for each member grower to retain their right to be members, all member growers will be given a choice to grow and sell or to not sell their contracted pounds to the Cooperative for crop year 2019. As you know, all tobacco sold by a member grower under contract to the Cooperative must be grown by that member. By signing the 2019 Marketing Agreement, the member grower is eligible for membership for the 2020 crop, even if the member grower chooses not to sell to the Cooperative in 2019. The member grower will indicate his or her choice by electing to grow and sell or to not sell to the Cooperative when signing their 2019 Marketing Agreement.

Id. at ¶ 114.

Plaintiffs allege that Cooperative members do not have another market in which the members can sell tobacco that the Cooperative does not purchase. See id. at ¶¶ 115, 130. Furthermore, the Cooperative's strategy extends the Cooperative's benefits to some Cooperative members, not all members. See id. at ¶ 129. The plaintiffs attribute the Cooperative's choice to buy tobacco from some Cooperative members, but not others, to the Cooperative's or other processor's buying preferences. See id. at ¶ 119. Plaintiffs also allege that the Cooperative has not "broadened its market share for flue-cured tobacco so as to provide both a market and stable price for the flue-cured tobacco that its Members could produce." Id. at ¶ 125.

Plaintiffs allege that the Cooperative's efforts to vertically integrate its business have failed because the Cooperative members have not received the economic benefits associated with Cooperative membership. Specifically, the Cooperative "is not capable of providing direct economic benefit to its current or former Members[,] ... has not been able to combat the market power" of big tobacco companies, and cannot control the increased regulation and taxing of tobacco. Id. at ¶ 122; see id. at ¶¶ 81–83, 120–21, 123. Additionally, the Cooperative is not using the Cooperative capital reserves to help flue-cured tobacco farmers to "compete and stabilize prices" or to bolster the "market strength" and to "improve[ ]" the business of those farmers. Id. at ¶ 132. The Cooperative has used the Cooperative reserves to finance purchases of tobacco from Cooperative members, but the Cooperative cannot purchase all tobacco the Cooperative members "can and want to grow." Id. at ¶¶ 85–87. Moreover, the Cooperative purchased this tobacco from its members even though the Cooperative knew that it could not currently resell the crop. Rather, plaintiffs allege that it can take approximately three years for the Cooperative to resell. See id.

In sum, plaintiffs allege that, due to market forces, the Cooperative can no longer achieve its central purpose of providing market stability to flue-cured tobacco farmers. See id. at ¶¶ 127–28, 152. Alternatively, plaintiffs allege that the Cooperative members’ known or assumed expectations concerning the Cooperative are frustrated. See id. ¶ 153. Accordingly, plaintiffs seek judicial dissolution of the Cooperative and declaratory relief. See id. at ¶¶ 148–55.

II.

A motion to dismiss under Rule 12(b)(6) tests the complaint's legal and factual sufficiency. See Ashcroft v. Iqbal, 556 U.S. 662, 677–80, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; Bell Atl. Corp. v. Twombly, 550 U.S. 544, 554–63, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; Coleman v. Maryland Court of Appeals, 626 F.3d 187, 190 (4th Cir. 2010), aff'd, 566 U.S. 30, 132 S.Ct. 1327, 182 L.Ed.2d 296 (2012) ; Nemet Chevrolet, Ltd. v. Consumeraffairs.com. Inc., 591 F.3d 250, 255 (4th Cir. 2009) ; Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008). To withstand a Rule 12(b)(6) motion, a pleading "must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quotation omitted); see Twombly, 550 U.S. at 570, 127 S.Ct. 1955 ; Giarratano, 521 F.3d at 302. In considering the motion, the court must construe the facts and reasonable inferences "in the light most favorable to the [nonmoving party]." Massey v. Ojaniit, 759 F.3d 343, 352 (4th Cir. 2014) (quotation omitted); see Clatterbuck v. City of Charlottesville, 708 F.3d 549, 557 (4th Cir. 2013), abrogated on other grounds by Reed v. Town of Gilbert, 576 U.S. 155, 135 S.Ct. 2218, 192 L.Ed.2d 236 (2015). A court need not accept as true a complaint's legal conclusions, "unwarranted inferences, unreasonable conclusions, or arguments." Giarratano, 521 F.3d at 302 (quotation omitted); see Iqbal, 556 U.S. at 678–79, 129...