A B Coker Co., Inc., et al v. James Caldwell

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IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
August 10, 2010 N o . 09-30985 Lyle W. Cayce Clerk

S & M BRANDS INC.; TOBACCO DISCOUNT HOUSE #1 INC.; MARK HEACOCK, Plaintiffs - Appellants v. J A M E S D. "BUDDY" CALDWELL, in his official capacity as Attorney G e n e r a l State of Louisiana, Defendant - Appellee

A p p e a l from the United States District Court fo r the Western District of Louisiana

B e fo r e DAVIS, SMITH, and HAYNES, Circuit Judges. W . EUGENE DAVIS, Circuit Judge: P la in t iffs appeal the district court's grant of summary judgment in favor o f the Attorney General of Louisiana. This case arises out of the Master

S e t t le m e n t Agreement ("MSA") reached in the 1990s between the four largest t o b a c c o manufacturers and the several states. The plaintiffs--who are not s ig n a t o r ie s to the MSA--sued the Louisiana Attorney General, alleging that the M S A and the Louisiana Escrow Statute, LA. REV. STAT. § 13:5061, et seq., violate t h e Compact Clause, First Amendment, Federal Cigarette Labeling and

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No. 09-30985 A d v e r t is in g Act ("FCLAA"), Commerce and Due Process Clauses, and federal a n t it r u s t laws. For the following reasons, we AFFIRM.

I. I n 1994, several states, including Louisiana, brought lawsuits against the fo u r largest tobacco manufacturers: Philip Morris, R.J. Reynolds, Lorillard, and B r o w n & Williamson (collectively referred to as the Original Participating M a n u fa c t u r e r s "OPMs"). The states alleged that the OPMs' tobacco products, a s well as the marketing related to their tobacco products, cost the states billions o f dollars in increased health care costs. In 1998, the OPMs reached a settlement agreement, the MSA, with fiftyt w o governmental entities (collectively referred to as the "Settling States"), in c lu d in g Louisiana. The MSA released the OPMs from past, present, and fu t u r e tobacco-related legal claims. In return, the OPMs were prohibited from p a r tic ip a t in g in certain types of tobacco-related state and federal lobbying, e n g a g in g in litigation adverse to the MSA or its enacting state statutes, and v a r io u s types of advertising. The OPMs also were required to make annual p a y m e n t s into a fund (hereinafter "the MSA fund") based on their present m a r k e t share. Money paid into the MSA fund is paid out in fixed shares to the in d iv id u a l Settling States. Smaller tobacco manufacturers that were not part of the OPMs were p e r m it ted to join the MSA as Subsequent Participating Manufacturers ("SPMs"). The MSA created two groups of SPMs. The first group (hereinafter the

" g r a n d fa t h e r e d SPMs") included those SPMs that signed on to the MSA within t h e first 90 days of its execution. As a means of encouraging smaller tobacco m a n u fa c t u r e r s to become grandfathered SPMs, the MSA provides that g r a n d f a t h e r e d SPMs do not have to pay into the MSA fund, so long as their m a r k e t share does not exceed the greater of their 1998 sales or 125% of their 2

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No. 09-30985 1 9 9 7 sales. The second group (hereinafter the "non-grandfathered SPMs") are t h o s e SPMs that joined the MSA after 90 days of its execution. Non-

g r a n d fa t h e r e d SPMs must pay into the MSA fund based on their annual market s h a r e , but unlike grandfathered SPMs, they need not remain at the same m a r k e t size as when the MSA was executed. Both grandfathered SPMs and n o n -g r a n d fa t h e r e d SPMs must abide by the aforementioned prohibitions in lo b b y in g , litigation, and advertising that OPMs are subject to under the MSA. I n return for the above concessions, the MSA encourages, but does not d e m a n d , that the Settling States pass a Model Statute (hereinafter the "Escrow S ta tu te "). The Escrow Statute requires that tobacco manufacturers not

p a r tic ip a t in g in the MSA (referred to as Non-Participating Manufacturers (" N P M s " )) and selling tobacco products in the state either (1) join the MSA or (2) m a k e an annual deposit into a qualified escrow account based on the quantity o f cigarettes the NPM sold in the state during the previous calendar year. To e n c o u r a g e the Settling States to pass the Escrow Statute, the NPM Adjustment w a s created. The MSA provides that if any of the OPMs, grandfathered SPMs, o r non-grandfathered SPMs (collectively the "PMs") lose its market share, a n a t io n a lly -r e c o g n iz e d firm of economists will be hired to determine whether the lo s s in market share is due to the aforementioned restraints in lobbying, lit ig a t io n , and advertising required by the MSA. If those restraints are

d e t e r m in e d by the economists to be a significant factor contributing to the loss o f market share, then the PM may reduce the amount it pays into the MSA fund. This reduction is the NPM Adjustment, which is borne only by the Settling S t a te s that have not enacted the Escrow Statute. Louisiana enacted an Escrow S t a tu t e , LA. REV. STAT. § 13:5061, et seq. Under the Louisiana Escrow Statute, if an NPM fails to join the MSA or fails to make the appropriate annual deposit in t o a qualified escrow account, the NPM is subject to civil and criminal p e n a lt ie s . LA. REV. STAT. §§ 13:5073, 5076. However, if an NPM pays more to 3

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No. 09-30985 t h e qualified escrow account than it would have to pay if it were a nong r a n d fa t h e r e d SPM, the NPM is entitled to a refund of the excess amount it p a id . LA. REV. STAT. § 13:5063(C)(2)(b).

II. S in c e its implementation, several NPMs and smokers have challenged the v a lid it y of the MSA and state Escrow Statutes before a number of courts, in c lu d in g , most recently, this court.1 This case is yet another challenge to the M S A and Louisiana Escrow Statute. The plaintiffs 2 filed suit against the defendant, Louisiana Attorney G e n e r a l Buddy Caldwell, seeking to invalidate the MSA and Louisiana Escrow S t a tu t e on the grounds that they were unconstitutional because they violated t h e Compact Clause, the First Amendment, the Commerce Clause, and the Due P r o c e s s Clause. The plaintiffs further alleged the MSA and Escrow Statute v io la t e d federal antitrust laws, the FCLAA, and the Bankruptcy Code. Following proceedings before the district court, both parties filed motions fo r summary judgment. Finding there were no genuine issues of material fact, a n d that the plaintiffs' claims failed as a matter of law, the district court granted t h e Attorney General's motion for summary judgment and dismissed the p la in t iffs ' claims with prejudice. The plaintiffs timely filed this appeal. On a p p e a l, the plaintiffs press all of the aforementioned challenges except for their a lle g a t io n that the MSA and Escrow Statute violate the Bankruptcy Code.

See, e.g., Xcaliber Int'l Ltd. LLC v. Caldwell, No. 09-30492, 2010 U.S. App. LEXIS 14513 (5th Cir. Jul. 15, 2010); Grand River Enters. Six Nations v. Beebe, 574 F.3d 929 (8th Cir. 2009); KT&G Corp. v. Six, 535 F.3d 1114 (10th Cir. 2008); Grand River Enters. Six Nations v. Pryor, 425 F.3d 158 (2d Cir. 2005); Star Sci., Inc. v. Beales, 278 F.3d 339 (4th Cir. 2002). The specific parties in this case include a cigarette manufacturer who has not joined the MSA, i.e. an NPM (S&M Brands, Inc.), a cigarette dealer (Tobacco Discount House #1), and a smoker (Mark Heacock) (collectively, "the plaintiffs").
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No. 09-30985 W e review the district court's grant of summary judgment de novo. Breaux v . Halliburton Energy Services, 562 F.3d 358, 364 (5th Cir. 2009) (citing LeMaire v . La. Dep't of Transp. & Dev., 480 F.3d 383, 386 (5th Cir. 2007)).

III. W e first address the plaintiffs' assertion that the MSA violates the C o m p a c t Clause, U.S. CONST., Art. I, § 10, cl. 3, because it is an agreement a m o n g the Settling States that has the potential to interfere with the plaintiffs' c o n s t it u t io n a l rights and has not been approved by Congress. The district court fo u n d that the proper analysis to determine whether congressional approval is r e q u ir e d under the Compact Clause is the test provided in United States Steel C o r p . v. Multistate Tax Commission, 434 U.S. 452, 473 (1978): "whether the C o m p a c t enhances state power quoad the National Government." Because the M S A only increases states' power vis-a-vis the PMs and not in relation to the fe d e r a l government, the district court concluded there was no violation of the C o m p a c t Clause. T h e Fourth Circuit in Star Sci. reached this same end. See 278 F.3d at 3 5 9 ­ 6 0 . The Star Sci. court stated: A lt h o u g h the Master Settlement Agreement implicates the Compact C la u s e , we see no reason to conclude that it encroaches on federal p o w e r . In Multi-State Tax Commission, the Supreme Court upheld a compact resulting in reciprocal State legislation and establishing a n administrative body to coordinate State taxation of certain e n t i t i e s . The Court noted that the compact might result in an in c r e a s e in bargaining power of the member States with respect to t h e corporations subject to their taxing jurisdictions, but it found s u c h an increase in power to be acceptable because "the test is w h e t h e r the Compact enhances state power quoad the National G o v e r n m e n t ." Similarly, the Master Settlement Agreement may r e s u lt in an increase in bargaining power of the States vis-a-vis the t o b a c c o manufacturers, but this increase in power does not interfere w it h federal supremacy because the Master Settlement Agreement 5

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No. 09-30985 " d o e s not purport to authorize the member States to exercise any p o w e r s they could not exercise in its absence." 2 7 8 F.3d at 360. See also VIBO Corp. v. Conway, 594 F. Supp. 2d 758, 785­86 (W .D . Ky. 2009) (finding that the MSA does not violate the Compact Clause b e c a u s e "[a]n increase in the states' collective bargaining power does not result in an accompanying decrease of federal power"). We agree with the reasoning expressed by the Fourth Circuit and the d is t r ic t court in the instant case, and accordingly find no merit in the plaintiffs' C o m p a c t Clause challenge.

IV . T h e plaintiffs also argue that the MSA and Escrow Statute are per se v io la t io n s of the Sherman Act, 15 U.S.C. § 1, because the structure of the MSA c r e a t e s a national cigarette cartel designed to increase the prices paid out to the O P M s and protect the OPMs market share. The plaintiffs further assert that t h e only defense potentially available to the Attorney General is the implied s t a t e - a c t io n immunity found under Parker v. Brown, 317 U.S. 341 (1943), but t h a t such immunity does not apply in this case where Louisiana acted as a p r iv a t e player when it entered an agreement with other states and the OPMs to r e s t r a in trade. T h e plaintiffs' argument that the Escrow Statute is a per se violation of the S h e r m a n Act is foreclosed by this court's recent decision in Xcaliber. The

X c a lib e r court concluded that the Escrow Statute did not "mandate or authorize c o n d u c t that necessarily constitutes a violation of the antitrust laws in all cases." 2010 U.S. App. LEXIS 14513, at *14 (quoting Rice v. Norman Williams Co., 458 U .S . 654, 661 (1982)). Moreover, the Xcaliber court found that the Escrow S t a tu t e did not "pressure [NPMs] to conspire together to set a specific price, to c a r v e up markets, or otherwise to violate antitrust law." Id. (citation omitted). 6

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No. 09-30985 T h u s , this court's precedent in Xcaliber precludes the plaintiffs' argument that t h e Escrow Statute violates the Sherman Act. This court's decision in Xcaliber, however, does not complete our antitrust a n a ly s is . In Xcaliber, the court was faced with a challenge to only the Escrow S t a tu t e . See id. at *12 n.5. In the present case, the plaintiffs challenge both the E s c r o w Statute and the MSA. Thus, we must also consider whether the MSA a n d Escrow Statute working together create an antitrust violation. W h e t h e r the MSA and Escrow Statute violate federal antitrust laws has b e e n addressed by the Sixth, Eighth, and Ninth Circuits, and all of those courts h a v e rejected the plaintiffs' arguments. See Grand River Enters. Six Nations, 5 7 4 F.3d at 936­38; Sanders v. Brown, 504 F.3d 903, 908­11 (9th Cir. 2007); T r ite n t Int'l Corp. v. Kentucky, 467 F.3d 547, 557 (6th Cir. 2006). See also S&M B r a n d s , Inc. v. Summers, 393 F. Supp. 2d 604, 622 (M.D. Tenn. 2005), aff'd by, S & M Brands, Inc. v. Summers, 228 F. App'x 560 (6th Cir. 2007) (finding that the M S A and Escrow Statute were immune from challenge on antitrust grounds u n d e r the state-action doctrine). The Sixth Circuit in Tritent aptly described the a r g u m e n t the present plaintiffs raise and why it must be rejected: T h e PMs' practice of increasing cigarette prices, thus keeping sales v o lu m e down, has allowed them to maintain a stable market share. This has resulted in lower payments to the settling states. If T r it e n t and the other NPMs had chosen not to raise their prices in r e s p o n s e to the PMs' price increase, the NPMs' market share would h a v e presumably increased, but this would have subjected them to h ig h e r payments under the Escrow Statute. Kentucky's current s t a t u t o r y scheme . . . thus provides a disincentive for the NPMs to e n g a g e in price competition with the PMs. The genesis of this a n t ic o m p e t it iv e behavior, however, stemmed neither from the MSA n o r the complementary legislation that Kentucky enacted to give e ffe c t to the MSA's provisions. Instead, the behavior with which T r it e n t really takes issue is the behavior of the PMs following the M S A 's enactment. Because such behavior was neither mandated n o r explicitly authorized by the state of Kentucky, McNeilus [Truck

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No. 09-30985 & Mfg., Inc. v. State ex rel. Montgomery, 226 F.3d 429 (6th Cir. 2 0 0 0 )] forecloses Tritent's argument on this issue. 4 6 7 F.3d at 557. W e agree with the Sixth Circuit and the other circuits that have already c o n s id e r e d the issue of whether the MSA and Escrow Statute violate the S h e r m a n Act, and we adopt their rationale. Accordingly, we find no merit to the p la in t iffs arguments that the MSA and Escrow Statute violate federal antitrust la w s .

V. T h e plaintiffs also briefly argue that the MSA and Escrow Statute violate t h e Commerce Clause and Due Process Clause because they create e x t r a t e r r it o r ia l price increases. The plaintiffs' claims have been soundly rejected by the Fourth, Eighth, a n d Tenth Circuits. See Grand River Enters. Six Nations, 574 F.3d at 943­44; K T & G Corp., 535 F.3d at 1145­46; Star Sci., Inc., 278 F.3d at 356­57. In e x a m in in g whether the Arkansas Escrow Statute created extraterritorial price in c r e a s e s , the Eighth Circuit stated, NPM escrow payments are entirely a function of an NPM's sales in A r k a n s a s . The payments are not based on nationwide sales. Nor h a s there been a showing by appellants that escrow payments by N P M s in Arkansas have any effect, either directly or indirectly, on c ig a r e t t e prices in other states. NPMs must make escrow payments to Arkansas based on that NPM's cigarette sales in Arkansas. Arkansas has no control over cigarette prices in other states. The M S A calculates an NPM's hypothetical MSA payment in order to r e fu n d the excess back to that NPM, but it does not allow Arkansas t o control commerce in other states. Grand River Enters. Six Nations, 574 F.3d at 944. We agree with the Eighth C ir c u it 's analysis. The Louisiana Escrow Statute and the MSA only allow

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No. 09-30985 L o u is ia n a to regulate and collect escrow payments based on the sale of cigarettes w it h in Louisiana's jurisdiction. Therefore, there is no violation of the Due P r o c e s s or Commerce Clause.

V I. T h e remaining challenges brought by the plaintiffs rest on the underlying a r g u m e n t that NPMs are compelled to join the MSA to avoid the economic b u r d e n s imposed on them by the Escrow Statute. This argument, however, is a ls o foreclosed by this court's recent decision in Xcaliber. In Xcaliber, the

p la in t iff asserted that the Escrow Statute "makes doing business as an NPM so u n a t t r a c t iv e that it compels NPMs to join the MSA . . . ." 2010 U.S. App. LEXIS 1 4 5 1 3 , at *28.3 The court disagreed, finding that there was no evidence that the L o u is ia n a Escrow Statute created a price or non-price disadvantage for NPMs. Id. at *29­31. Because no disadvantage is created for NPMs by remaining as N P M s , NPMs are not compelled to join the MSA. Id. at *31. B a s e d on the Xcaliber court's conclusion that the Escrow Statute does not c o m p e l NPMs to become signatories to the MSA, any argument by the plaintiffs b a s e d on this premise is foreclosed. With this in mind, we turn to the plaintiffs' c la im s that the MSA and the Louisiana Escrow Statute violate the First A m e n d m e n t , the FCLAA, the Commerce Clause and the Due Process Clause, a n d antitrust laws. A. The plaintiffs argue that the MSA and Louisiana Escrow Statute violate t h e First Amendment because the MSA directly restrains the speech of PMs by
In Xcaliber, the plaintiff challenged the Allocable Share Revocation ("ASR"). The ASR was an amendment that Louisiana, and all Settling States, passed to the original escrow statutes in order to close a loophole in the original escrow statutes that was advantageous to NPMs. See 2010 U.S. App. LEXIS 14513, at *6­7 (discussing the reason for the ASR). The Louisiana Escrow Statute considered in the plaintiffs' instant challenge incorporates the alteration of the ASR.
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No. 09-30985 fo r b id d in g various forms of lobbying and petitioning activity concerning tobacco p r o d u c t s and the MSA itself, as well as prohibiting numerous forms of cigarette a d v e r tis in g . T h is same argument was raised in S&M Brands, Inc. v. Summers, 393 F. S u p p . 2d 604 (M.D. Tenn. 2005), aff'd, S&M Brands, Inc. v. Summers, 228 F. A p p 'x 560, 563 (6th Cir. 2007). In that case, the court stated, The Escrow Act . . . leaves [NPMs] no worse off financially than they w o u ld be under the MSA, because it expressly provides that [NPMs] a r e entitled to a refund on any amounts paid into escrow that they c a n demonstrate is in excess of the amount they would have paid u n d e r the MSA. Further, [NPMs] retain all of the First Amendment a n d other rights that the PMs gave up when they signed the MSA. I d . at 638. See also KT&G Corp., 535 F.3d at 1134­36 (holding that an escrow s t a t u t e did not violate NPMs First Amendment rights). W e agree with this reasoning. While the MSA does restrict the speech a c t iv it ie s of PMs, the plaintiffs are not PMs and, as previously noted, are not c o e r c e d to become PMs. The only statute applicable to the plaintiffs is the L o u is ia n a Escrow Statute, which in no way compels or abridges speech. Therefore, we find no merit to the plaintiffs' First Amendment claims. B. T h e FCLAA states that "[n]o requirement or prohibition based on smoking a n d health shall be imposed under State law with respect to the advertising or p r o m o t io n of any cigarettes the packages of which are labeled in conformity with t h e provisions of this chapter." 15 U.S.C. § 1334(b). The plaintiffs argue that t h e MSA and Escrow Statute violate the FCLAA because the FCLAA preempts s t a t e regulations targeting cigarette advertising, and the MSA and Escrow S t a tu t e prohibit certain forms of cigarette advertising. This same argument has been raised and rejected in Grand River Enters. S ix Nations, Ltd. v. Pryor, 2003 U.S. Dist. LEXIS 16995, at *48­50 (S.D.N.Y.

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No. 09-30985 2 0 0 3 ), aff'd by, Grand River Enters Six Nations, Ltd., 425 F.3d at 175, and PTI, I n c . v. Philip Morris Inc., 100 F. Supp. 2d 1179, 1205 (C.D. Cal. 2000). Like the d is t r ic t court below, we agree with the rationale expressed in those decisions. The plaintiffs are not compelled to join the MSA and the Louisiana Escrow S t a tu t e "does not have any connection whatsoever with cigarette packaging, a d v e r t is in g , or promotion." PTI, Inc., 100 F. Supp. 2d at 1205. Therefore, the p la in t iffs ' FCLAA argument must fail.

C O N C L U S IO N F o r the above reasons, we AFFIRM the district court's grant of summary ju d g m e n t in favor of the Attorney General. AFFIRMED.

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