Xcaliber Int'l, Ltd. v. State

• Decision Date: 30 May 2017
• Docket Number: CIVIL ACTION NO. 1:16-CV-3665-SCJ.
• Parties: XCALIBER INTERNATIONAL, LTD. LLC, Plaintiff, v. State of GEORGIA EX REL. Christopher M. CARR, Attorney General, Defendant.
• Court: U.S. District Court — Northern District of Georgia

253 F.Supp.3d 1220

XCALIBER INTERNATIONAL, LTD. LLC, Plaintiff,

v.State of GEORGIA EX REL. Christopher M. CARR, Attorney General, Defendant.

CIVIL ACTION NO. 1:16-CV-3665-SCJ.

United States District Court, N.D. Georgia, Atlanta Division.

Signed May 30, 2017

Filed May 31, 2017

Bryan Michael Haynes, Troutman Sanders, LLP, Richmond, VA, Seth T. Ford, John Sikes Gibbs, III, Troutman Sanders, LLP, Atlanta, GA, for Plaintiff.

Robin Ginsburg Cohen, State of Georgia Law Department, Atlanta, GA, for Defendant.

ORDER

HONORABLE STEVE C. JONES, UNITED STATES DISTRICT JUDGE

Before the Court in this 42 U.S.C. § 1983 case is the State of Georgia's motion to dismiss Xcaliber International, Ltd. LLC's complaint. Doc. 14.¹ Xcaliber, a tobacco product manufacturer, asserts that pieces of Georgia's tobacco regulatory regime violate the Constitution's Contracts and Equal Protection Clauses, as well as state law. Georgia insists that those causes of action all fail, either because the Court lacks subject matter jurisdiction, or because they do not state claims. Because the State is correct on both scores, its motion is GRANTED and Xcaliber's complaint DISMISSED.

I. BACKGROUND²

In 1998, 52 jurisdictions, including Georgia, entered into a Master Settlement Agreement (MSA) with large tobacco manufacturers to resolve lawsuits brought to recover smoking-related health care costs. Doc. 1 at 4. Manufacturers that signed the MSA are "participating manufacturers" (PMs), while those, like Xcaliber, who did not are "non-participating manufacturers" (NPMs). Id. at 5. PMs agreed to make settlement payments to settling states in perpetuity (id. ) and limit their "advertising, sponsorship, lobbying, and litigation activities," among other restrictions. KT&G Corp v. Att'y Gen. of State of Okla., 535 F.3d 1114, 1119 (10th Cir. 2008) ; Doc. 1 at 5–6. NPMs, on the other hand, make no settlement payments and suffer no limitations on their First Amendment activities.

The MSA contains a number of provisions designed to counterbalance the competitive disadvantages it imposed on PMs³ and "protect the public health gains [it] achieved." Doc. 1–1 at 55. One, the "NPM Adjustment," reduces settlement payments by PMs if they experience market share loss "as a result of the provisions of" the MSA. Id. at 56. PMs "shall not be subject to an NPM Adjustment" in a given settling state, however, if the state enacts and diligently enforces a "Qualifying Statute." Id. at 58–59. The MSA, in turn, defines that as a statute "that effectively and fully neutralizes the cost disadvantages that the [PMs] experience vis-a-vis [NPMs] ... as a result of the provisions of" the MSA. Id. at 58–60. The MSA stipulates that its Model Escrow Statute, "if enacted without modification or addition ... shall constitute a Qualifying Statute." Id. at 60.

A. Georgia's Qualifying Statute

Georgia enacted that Model Escrow Statute after finding that "[c]igarette smoking presents serious public health concerns" that create "serious financial concerns for the state" which are best "borne by tobacco product manufacturers." See O.C.G.A. §§ 10–13–1(a) - (d). The legistlature also concluded that "[i]t 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." O.C.G.A. § 10–13–1(f). Under Georgia's Qualifying Statute, then, NPMs can either sign the MSA and become a PM, or remain an NPM and deposit money (approximately $0.02 per cigarette sold) into a "qualified escrow fund." O.C.G.A. § 10–13–3.

A "qualified escrow fund" is

an escrow arrangement with a federally or state chartered financial institution having no affiliation with any tobacco product manufacturer and having assets of at least $1 billion where such arrangement requires that such financial institution hold the escrowed funds' principal for the benefit of releasing parties and prohibits the tobacco product manufacturer placing the funds into escrow from using, accessing, or directing the use of the funds' principal except as consistent with subparagraph (B) of paragraph (2) of Code Section 10–13–3. The principal balance in the qualified escrow fund must always be maintained so that both the face value and the cost basis of the account are each equal to or greater than the accumulated principal deposits.

O.C.G.A. § 10–13–2(7) (emphasis added); see also O.C.G.A. § 10–13A–2(14) (same). NPMs "shall receive the interest and other appreciation on such funds," but the "funds themselves shall be released from escrow only": (1) to pay a judgment or settlement of a claim that the MSA released if asserted against a PM; (2) if the amount placed in escrow exceeded the amount a PM would have paid under the MSA (only the excess amount is released); or (3) after 25 years. O.C.G.A. § 10–13–3(B).

NPMs must make quarterly escrow deposits, while PMs pay annually. Doc. 1 at 16; O.C.G.A. § 10–13–3(2)(A). NPMs also must appoint and maintain a registered agent for service of process, while PMs need not. Doc. 1 at 17; O.C.G.A. § 10–13A–3(d)(1). Finally, NPMs, but not PMs, must post a bond—which the State may execute if the NPM misses an escrow deposit—the amount of which "shall be the greater of: (1) Fifty thousand dollars; or (2) The highest amount of escrow owed in Georgia by the nonparticipating manufacturer or its predecessor in the last 12 quarters." O.C.G.A. § 10–13A–7(b).

B. Georgia's Model Escrow Agreement

Georgia's Attorney General plays an integral role in administering and enforcing the escrow statute. He maintains a directory of approved tobacco manufacturers ( O.C.G.A. § 10–13A–4 ), receives annual compliance certifications from those manufacturers ( O.C.G.A. § 10–13A–3 ), and reviews and approves all proposed escrow agreements. Id. at (d). He also has authority to promulgate rules and regulations necessary to implement the escrow statute. O.C.G.A. § 10–13A–8(f) ; see also O.C.G.A. § 10–13A–10(c) ("The Attorney General may promulgate rules and regulations necessary to effect the purposes of this chapter.").

To "facilitate compliance" with "qualified escrow fund" requirements, and pursuant to his review authority, the Attorney General promulgated a Model Escrow Agreement "for use by NPMs and their escrow agents." Doc. 14–1 at 6 (citing doc. 1 at 9). Among other things, that agreement "restricts the types of investments that may be included in an NPM's escrow account." Id. The State concedes that "[t]he AG will not approve an escrow agreement unless it limits the investments in an NPM's escrow account consistently with the model escrow agreement." Id.

From 1998 until recently, the model agreement provided that:

The escrow agent shall invest and reinvest all amounts from time to time credited to the Accounts in (a) the Escrow Agent's U.S. Treasury money market fund; (b) direct obligations of, or obligations the principal and interest on which are unconditionally guaranteed by, the United States of America; (c) repurchase agreements fully collateralized by securities described in clause (b) above; (d) money market accounts maturing within 30 days of the acquisition thereof and issued by a bank or trust company organized under the laws of the United States of America or any of the 50 states thereof (a "United States Bank") and having combined capital, surplus and undistributed profits in excess of $500,000,000; (e) demand deposits with any United States Bank having combined capital, surplus and undistributed profits in excess of $500,000,000.

Doc. 1–5 at 7. Those investment terms "are modeled on and nearly identical to the investment terms negotiated by the Settling States and the PMs for the investment of MSA funds." Doc. 1 at 12.

In compliance with those terms, Xcaliber's current investment mix includes Ginnie Mae bonds that "consist of home mortgages bought by the Government National Mortgage Association" (Ginnie Mae). Doc. 1 at 13. "Both the principal and interest of the Ginnie Mae bonds ... are guaranteed by the full faith and credit of the United States. Id. at 13–14. "Traditionally," those bonds "offer a higher return to investors than Treasury Securities" while containing less volatility. Id. at 14.

In August 2016, however, the Georgia Legislature began to require that an escrow fund's "principal balance" never diminish to the "qualified escrow fund" definition. O.G.G.A. § 10–13–2(7). In response, the Attorney General changed the Model Escrow Agreement. Now, "permitted investments" are "limited to the following: (a) United States Treasury Securities, (b) cash, or (c) Money Market Fund." Doc. 1–8 at 4. "United States Treasury Securities" in turn means "bills, notes, and bonds issued by the United States Treasury (i) maturing no more than (20) twenty years from the date of purchase ...." Id. at 5. Investment vehicles for MSA funds escrowed by PMs have not been similarly limited. Doc. 1 at 13.

C. Xcaliber's Complaint

On August 2, 2016, the Attorney General notified Xcaliber and other NPMs that they had to submit new escrow agreements that mirrored the Revised MEA no later than September 1, 2016. Doc. 1–2. The parties attempted to negotiate modifications to the Revised MEA, but could not come to an agreement. Xcaliber filed its complaint on September 29, 2016 (doc. 1), the day before the Attorney General's September 30, 2017 deadline for deciding whether to remove Xcaliber from the State's list of approved tobacco product manufacturers. See doc. 1–3 at 2–3.

In it, Xcaliber asserts five claims. It first contends that imposition of the Revised MEA, by forcing Xcaliber to terminate its existing escrow agreement, amounts to an unconstitutional impairment of contract. Doc. 1 at 21–23. Because the Revised MEA more severely restricts NPM escrow investments than the MSA...