State v. NV Sumatra Tobacco Trading Co., No. M2010-01955-COA-R3-CV

CourtCourt of Appeals of Tennessee
Writing for the CourtJ. STEVEN STAFFORD.
PartiesSTATE OF TENNESSEE, by and through Robert E. Cooper, Jr., Attorney General and Reporter for the State of Tennessee v. NV SUMATRA TOBACCO TRADING COMPANY
Docket NumberNo. M2010-01955-COA-R3-CV
Decision Date28 June 2011

STATE OF TENNESSEE, by and through Robert E. Cooper, Jr., Attorney General
and Reporter for the State of Tennessee

No. M2010-01955-COA-R3-CV


May 3, 2010 Session
Filed June 28, 2011

Direct Appeal from the Chancery Court for Davidson County
No. 03-1613(II) Carol L. McCoy, Chancellor

This appeal involves in personam jurisdiction over a foreign defendant. Appellant State of Tennessee brought suit against Appellee tobacco product manufacturer, under the Tobacco Escrow Fund Act, Tennessee Code Annotated Sections 47-31-101 et seq., alleging that Appellee had failed to make escrow deposits, as required under the Act, for cigarettes sold in Tennessee. Based upon the trial court's finding that it lacked personal jurisdiction over the Appellee, it entered summary judgment in favor of the manufacturer. The State appeals. Upon review, we conclude that: (1) the facts of this case show that the manufacturer intentionally used a distribution system with the desired result of selling its product in all fifty states, including Tennessee, so as to support a finding that the manufacturer had minimum contacts with the State necessary to invoke the exercise of personal jurisdiction; (2) the exercise of personal jurisdiction, under the facts of this case, is reasonable and fair; (3) the manufacturer is subject to regulation under the Act; and (4) the Act is not unconstitutional. Moreover, we conclude that: (1) Appellee is a tobacco products manufacturer, as defined by the Escrow Fund Act; (2) Appellee's cigarettes were sold in Tennessee; and (3) Appellee is, therefore, liable for escrow payments under the Escrow Fund Act. Consequently, we grant the State's motion for summary judgment. The order of the trial court is reversed, and the matter is remanded for entry of summary judgment in favor of Appellant State and for calculation of the escrow amount owed by Appellee and entry of judgment thereon.

Tenn. R. App. P. 3. Appeal as of Right; Judgment of the Chancery Court Reversed, Summary Judgment granted to the State and case Remanded for Calculation of Escrow Funds Owed

J. STEVEN STAFFORD, J., delivered the opinion of the Court, in which ALAN E. HIGHERS, P.J., W.S., and HOLLY M. KIRBY, J., joined.

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Robert E. Cooper, Jr., Attorney General and Reporter; and Joseph F. Whalen, Solicitor General; Rebekah A. Baker, Assistant Attorney General, for appellant, State of Tennessee.

Steven C. Douse, Nashville, TN and Christopher L. Rissetto, Washington. D.C, for the appellee, NV Sumatra Tobacco Trading Company.


On May 26, 1999, the Tennessee Legislature enacted the Tennessee Tobacco Manufacturers' Escrow Fund Act of 1999, Tennessee Code Annotated Sections 47-31-101 et seq. (the "Escrow Fund Act," or "Act"). The Act requires a "tobacco product manufacturer selling cigarettes1 to consumers within the state of Tennessee, whether directly or through a distributor, retailer or similar intermediary or intermediaries, after May 26, 1999, to either [b]ecome a participating manufacturer, as defined in § II(jj) of the Master

Settlement Agreement ("MSA"),2 and generally perform its financial obligations under the master settlement agreement"; or to make annual deposits into a qualified escrow fund based on the number of its cigarettes sold in Tennessee.3 Tenn. Code Ann. §47-31-103. The Act specifies the amount of money per unit that must be placed in escrow, and further specifies that the amount must be adjusted for inflation according to a formula set forth in the MSA. Tenn. Code Ann. §§ 47-31-102(2) and 103(a)(2)(A). The Act further requires tobacco product manufacturers who do not join the MSA to certify annually, to the Attorney General, that they have complied with the escrow requirements. Tenn. Code Ann. § 47-31-103(a)(3). A "tobacco product manufacturer" is defined, in relevant part, as an entity that "after May 26, 1999, directly and not exclusively through any affiliate4: (i) Manufactures cigarettes

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anywhere that such manufacturer intends to be sold in the United States, including cigarettes intended to be sold in the United States through an importer . . . ." Tenn. Code Ann. § 47-31 -102(9)(A). If a tobacco product manufacturer fails to make the required escrow deposit, the Attorney General may "bring a civil action on behalf of the state against [that] tobacco product manufacturer." Tenn. Code Ann. § 47-31-103(a)(3).

Appellee NV Sumatra Tobacco Trading Company ("Sumatra") is a corporation organized under the laws of the Republic of Indonesia, which has its principal place of business at Jalan Pattimura No. 3, Sumatra Ultra, Prematang Siantar 21132 Indonesia. Sumatra produces a number of tobacco products, including cigarettes. As is relevant to the instant appeal, during the years 2000 through 2002, Sumatra made the "United" brand of cigarettes. It is undisputed that Sumatra is not a party to the 1998 MSA.

Sumatra owned the United States trademark for the "United American Blend & Design" cigarettes during the years 1999 through 2001; the United brand cigarettes were packaged at Sumatra's facility in Indonesia. On July 9, 2001, Timin Bingei, Executive Director of Sumatra, certified that the company owned the "United" trademark, which was registered with the United States Patent and Trademark Office.5 Mr. Bingei further certified that Sumatra had consented to allow UNICO Trading Pte. Ltd., a corporation organized under the laws of Singapore, to appoint Silmar Trading Limited, a British Virgin Islands corporation, to be its exclusive buyer to distribute United brand cigarettes for sale in the United States. The certification states that it is to remain valid until December 31, 2001. We note that Sumatra does not have a direct contractual relationship with Silmar Trading specifically authorizing the sale of Sumatra's products in Tennessee.

In connection with its trademark application, on July 9, 2001, Sumatra submitted a list of ingredients contained in the United brand, for the time period January 1, 2000 through the year 2001. United cigarettes were found to be in full compliance with the reporting requirements of the Comprehensive Smoking Education Act. The United brand cigarettes, which were sold in the United States, all bore the required Surgeon General's warning, and the warnings were placed on the packages before they were shipped to the United States.

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Basil Battah is the owner of American Automotive Security Products, d/b/a FTS Distributors ("FTS"). FTS is a corporation organized under the laws of the State of Florida, with its principal place of business located in Miami. FTS imported tobacco products into the United States, including the United brand cigarettes, from 1999 through 2001. FTS first became involved with the United brand when, sometime between 1999 and 2001, Pacific Coast Duty Free, a company located in California, asked FTS to purchase United brand cigarettes from them. Although Sumatra now argues that FTS acted on its own initiative in importing United brand cigarettes into the United States and distributing them in Tennessee, Mr. Battah's uncontested testimony indicates that FTS and Sumatra did have some sort of agreement, whereby FTS would be Sumatra's sole United States distributor:

Q. Mr. Battah, at any time did you enter into a written or oral contract with anyone from . . . Sumatra about distributing their cigarettes?
* * *
A. We had an oral agreement that I was their exclusive distributor. We wanted to put it in writing but we never got that far because they just stopped selling us cigarettes completely.

Despite the lack of a written contract, it is undisputed that FTS was the importer of all United brand cigarettes sold in the State of Tennessee during the years 2000 through 2002. Mr. Battah testified that he would typically place orders for United brand cigarettes with UNICO, Silmar, or Sumatra via facsimile or telephone. Mr. Battah further testified that a meeting took place in Beijing, China, with representatives from both UNICO and Sumatra, including Timin Bingei, the Executive Director of Sumatra. The purpose of this meeting was to discuss whether the packaging for the United brand cigarettes should be changed, whether Sumatra would join the MSA, and sales forecasts concerning where the United brand was selling well and where it was not. Mr. Battah testified that, at that meeting, he gave a presentation concerning where the United brand cigarettes were being sold across the United States. Mr. Battah's presentation included a chart, which showed the number of cigarettes sold in each state (i.e., the "stick count"). Mr. Battah testified that this presentation was prepared at the request of Sumatra. Specifically, Mr. Battah testified:

Q. Can you describe the meeting, what was discussed at the meeting?
A. The meeting was to discuss joining the master settlement agreement or remaining an NPM [i.e., non-participating

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member]; changing the packaging and deciding on the new colors and new packaging and "Made in Indonesia" or removing "U.S." from the front of it; sales forecasts, where we were strong, what states we were strong in. We presented all of the facts of every sale, where it went, which states we needed to target and continue our business.
Q . And was there any discussion about sales occurring in Tennessee?
A. I don't know if there were particular discussions but we listed all the states and gave them a graph, a pie graph of where we were

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