Opinion
02 Civ. 5068 (JFK)
September 29, 2003
Leonard Violi, Esq., Alan R. Wentzel, Esq., WINDELS MARX LANE MITTENDORF, LLP, New York, New York, for Plaintiffs
ELIOT SPITZER, New York, New York, Attorney General of the State of New York, for Defendants
OPINION ORDER
Background
The defendants in this case are 31 current or former state's attorneys general (collectively the "Attorneys General"). Plaintiffs are cigarette manufacturers, importers and wholesalers. This litigation is brought in response to the enactment of certain state statutes in each of the 31 states in which the individual defendants presently or at one time served. Defendants have made two motions to dismiss. One motion is brought by the 30 non-New York defendants seeking dismissal for lack of personal jurisdiction (Fed.R.Civ.P. 12(b)(2)). The other motion, brought by all 31 defendants, seeks to dismiss each of plaintiffs' claims for failure to state a claim on which relief can be granted (Fed.R.Civ.P. 12(b)(6)) and lack of subject matter jurisdiction (Fed.R.Civ.P. 12(b)(1)).
Facts
In the spring of 1994, several states sued the nation's five largest cigarette manufacturers — Phillip Morris Inc., R.J. Reynolds Tobacco Company, Brown Williamson Tobacco Corp., Lorillard Tobacco Company (collectively the "Majors") and Liggett Corp. — in an attempt to recover their costs incurred in treating cigarette-related illnesses. Compl. ¶ 64. Additionally, the state suits sought to address the manufacturers' marketing practices, and alleged violations of consumer protection, antitrust and other state laws. See Schick Decl. Ex. B. From 1994 until 1997 the Majors and Liggett Corp. mounted a strenuous defense to the suits. In early 1997, however, Liggett Corp. broke ranks and settled 22 of the suits. Not long after, the Majors settled cases brought by the states of Mississippi, Florida, Texas and Minnesota. Compl. ¶¶ 66-67.
On November 23, 1998, the Majors entered into a global settlement agreement with the 46 remaining states, Puerto Rico and four territories (collectively the "States"). The global settlement, known as the Master Settlement Agreement ("MSA"), resolved the pending law suits and released the defendants from future suits that the States might bring against the Majors arising out of the sales of their cigarettes. Compl. ¶ 69. In return, the Majors agreed to pay the States $206 billion over the course of the first 25 years of the agreement. In addition, the Majors agreed to a number of advertising and marketing restrictions. See MSA § III. The advertising and marketing restrictions are targeted primarily at reducing smoking by youths. See Def. Mem. in Supp. of 12(b)(6) Motion at 8.
Although initially signed only by the Majors, referred to by the MSA as the Original Participating Manufacturers ("OPMs"), the MSA permits other tobacco companies to participate in the agreement as Subsequent Participating Manufacturers ("SPMs"). See MSA § II(tt). Thirty-six additional tobacco companies have joined the MSA as SPMs. Def. Mem. in Supp. of 12(b)(6) Motion at 6. SPMs that signed on to the MSA within 910 days of the MSA's execution date (November 23, 1998) are not required to make any payments to the states unless their share of the national cigarette market exceeded the greater of their 1998 market share or 125% of their 1997 market share. Compl. ¶ 74.
During the settlement discussions the concern emerged that Non-Participating Manufacturers ("NPMs") would take advantage of the fact that the OPMs and SPMs were subject to advertising and marketing restrictions and faced a significant price increase to pay the cost of the settlement to increase their sales in the States. The participating manufacturers were likely concerned that they faced the threat of a greatly diminished market share, and the States feared that NPMs could cause the States to continue to incur significant tobacco-related health care costs while avoiding liability. To alleviate these concerns, the MSA requires each of the States to enact "Qualifying Statutes." States that choose not to enact the Qualifying Statutes will have their individual portions of the settlement fund reduced. In order to facilitate passage of these statutes, model language was appended to the MSA. See Compl. ¶¶ 79-80. Each of the 31 defendants' states enacted the Qualifying Statutes in essentially the language suggested by the MSA.
At issue in this action are two statutes in particular, the Escrow and Certification statutes (collectively the "Statutes"). An Escrow Statute requires each NPM to establish and fund an escrow account in an amount determined by the manufacturer's sales volume — as measured by the number of cigarettes on which state excise taxes are paid — in that state. If the amount an NPM puts into escrow in a particular year exceeds what it would have paid were it an SPM, the excess is refunded to the NPM at the end of the year. At the end of the 25 year period, provided no judgment has been entered against the NPM, the entire fund is refunded to the NPM. While the money is in escrow, the NPM collects any interest earned on it. The Certification Statute is a companion to the Escrow Statute and prohibits the sale of cigarettes in a state (by denying the manufacturers a stamp — the equivalent of a license) by companies that fail to comply with the Escrow Statute. The Plaintiffs allege that the Statutes are unconstitutional (under a number of theories), violate antitrust laws, are preempted by federal statute and constitute a Civil Rights Act violation.
Now before the Court are two motions by the defendants. The first motion is to dismiss the complaint for lack of personal jurisdiction as to the defendant attorneys general from states other than New York. The second is a motion to dismiss each of plaintiffs causes of action for failure to state a claim upon which relief can be granted, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
Discussion
I. JURISDICTIONAL AND PROCEDURAL MOTIONS Personal Jurisdiction
The 30 non-New York Attorneys General have moved to have this action dismissed on the basis that this Court lacks personal jurisdiction over them. In response, plaintiffs claim this Court can exert general jurisdiction over eleven of the 30 non-New York defendants and specific jurisdiction over all of them. "Prior to discovery, a plaintiff challenged by a jurisdiction testing motion may defeat the motion by pleading in good faith, legally sufficient allegations of jurisdiction. At that preliminary stage, plaintiff's prima facie showing may be established solely by allegations." Bruce Ball v. Metallurgie Hoboken-Overpelt, 902 F.2d 194, 197 (2d Cir. 1990) (citation omitted);see also Cutco Indus., Inc. v. Naughton, 806 F.2d 361, 364 (2d Cir. 1986). In a federal question case, provided the federal statutes at issue do not specifically provide for national service of process, questions of jurisdiction are resolved by looking to the law of the forum state. See PDK Labs, Inc. v. Friedlander, 103 F.3d 1105, 1108 (2d Cir. 1997).
Discovery has yet to be conducted in this action.
Determining whether a court has jurisdiction over an out-of-state defendant turns on a two-part analysis. First, the forum state's long-arm statute must permit the assertion of personal jurisdiction over the defendant. Second, the assertion of jurisdiction must not violate federal due process. Both prongs must be satisfied for a court to claim jurisdiction over an out-of-state defendant. See Graphic Controls Corp. v. Utah Med. Prod., Inc., 149 F.3d 1382, 1385 (Fed. Cir. 1998); see also Bank of Brussels Lambert v. Fiddler Gonzalez Rodriguez, 171 F.3d 779, 784 (2d Cir. 1999).
1. General Jurisdiction
A court's general jurisdiction is based on a defendant's general business contacts with the forum state and permits a court to exercise jurisdiction in a case where the subject matter is unrelated to the defendant's business contacts. Metro. Life Ins. Co. v. Robertson-CECO Corp., 84 F.3d 560, 568 (2d Cir. 1996). Section 301 of the New York Civil Practice Law and Rules ("NYCPLR") provides, "A court may exercise such jurisdiction over persons, property, or status as might have been exercised heretofore." New York courts have construed this section to permit the exercise of jurisdiction over a foreign corporation on any cause of action if the defendant is engaged in a continuos and systematic course of "doing business" in New York so as to warrant a finding of its "presence" in New York. Landoil Res. Corp. v. Alexander Alexander Servs., 918 F.2d 1039, 1043 (2d Cir. 1990); Hoffritz For Cutlery. Inc. v. AMJAC, Ltd., 763 F.2d 55, 58 (2d Cir. 1985); McGowan v. Smith, 52 N.Y.2d 268, 272 (1981). That the presence is continuos and systematic, not occasional or casual is critical to a finding that a basis for general jurisdiction exists. Tauza v. Susquehanna Coal Corp., 220 N.Y. 259, 267 (1917). For that reason, Courts employ a pragmatic test that relies heavily on basic indicia of "doing business" and "presence." Those indicia include: the existence of an office in New York, the solicitation of business in New York, the presence of bank accounts or other property in New York, and the presence of employees or agents in New York. Landoil Res. Corp., 918 F.2d at 1043.
Plaintiffs argue that general jurisdiction is appropriate with respect to eleven of the defendants. The basis for the allegation is that each of the states represented by these eleven Attorneys General has a revenue office in either New York or New Jersey. These offices were established and are maintained by the eleven states for the purpose of raising state revenues — through tax audits and enforcement activities — in New York. According to plaintiffs, this indicates that those states are "doing business" in New York, and as agents of the states the Attorneys General are within the Court's jurisdictional reach.
Actually, plaintiffs attempt to persuade this Court to exert general jurisdiction over the attorneys general of twelve states. Included in the list of twelve is the attorney general of Minnesota. See Pl. Brief in Opp. 12(b)(2) Motion at 9. There are two significant and fatal flaws to plaintiffs argument with respect to the attorney general of Minnesota. First, and foremost, he is not a defendant in this action. Second, Minnesota struck its own settlement with the Majors and is not a signatory of the MSA. The Court will assume that the inclusion of Minnesota in plaintiffs' brief and the reference to it in the Wentzel Affidavit are merely mistakes to be ignored.
The eleven are: Bill Lockyer (California), Ken Salazar (Colorado), Jim Ryan (Illinois), Clara J. Stovall (Kansas), Thomas F. Reilly (Massachusetts), Jennifer Granholm (Michigan), Jeremiah W. Nixon (Missouri), Betty D. Montgomery (Ohio), Paul G. Summers (Tennessee), Christine O. Gregoire (Washington) and James E. Doyle (Wisconsin).
Plaintiffs rely heavily on a Southern District of Texas Case, Stroman Realty, Inc. v. Antt, 20 F. Supp.2d 1050 (S.D.Tx. 1998). Stroman was a suit to enjoin California and Florida state officials from enforcing state regulatory statutes against a Texas broker operating in their states. The court determined that it could exert jurisdiction on the basis that the states each had offices in Houston. See id. at 1053-54. This decision is not binding on this Court and has not been followed by any courts in this district. Even if the Court were inclined to accept the notion that maintaining a revenue office in New York amounted to "doing business" in New York, which it is not inclined to do, due process considerations would prevent the Court from claiming to have jurisdiction over the eleven defendants.
The purpose of the due process analysis with respect to personal jurisdiction is to "protect a person without meaningful ties to the forum state from being subjected to binding judgments within its jurisdiction." Metro. Life Ins., 84 F.3d at 567. Requiring meaningful ties provides individuals with fair warning that their conduct in a certain forum may lead them to be forced into court in that forum. In turn, this "gives a degree of predictability to the legal system that allows potential defendants to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit." World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980).
The constitutional touchstone of the due process analysis is whether the defendant purposefully established "minimum contacts" in the forum state. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474 (1985). The requirement of minimum contacts is meant to ensure that a prospective defendant could reasonably anticipate being forced to appear in the court of the particular forum, and that compelling the defendant to do so does not offend the traditional notions of fair play and substantial justice.See Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). Thus, contacts unilaterally forged by a resident of the forum with an out-of-state defendant will not suffice. Instead, "there must be some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws." Burger King, 471 U.S. at 475. The necessary "purposeful availment" exists "where the defendant deliberately has engaged in significant activities within a State, or has created continuing obligations between himself and residents of the forum." Id. at 475-76 (internal quotation marks and citation omitted).
Essentially, plaintiffs argue that because the eleven states have offices in New York they have purposefully availed themselves of the privilege of conducting activities in New York. This purposeful availment, they allege, was such that the Attorneys General should have reasonably anticipated being haled into a New York court to defend statutes passed by their home states' legislatures. Such a proposition cannot be accepted. For this Court to compel the Attorneys General of other states to defend the laws of their home states in New York solely on the basis of the existence of revenue offices in New York would offend the very notions of traditional fair play and substantial justice that federal due process is meant to protect. The eleven Attorneys General, therefore, are not subject to the general jurisdiction of this Court.
2. Specific Jurisdiction
Specific jurisdiction exists when the exercise of jurisdiction arises out of or is related to the defendant's contacts with the forum. See Metro. Life Ins., 84 F.3d at 568. The long-arm statute governing the exercise of personal jurisdiction by New York courts is NYCPLR § 302. Plaintiffs claim that either of two subsections of § 302(a) provide the Court with specific jurisdiction over all 31 defendants. The Court will address each subsection in turn.
A. § 302(a)(1)
In pertinent part, NYCPLR § 302(a)(1) states that jurisdiction exists over a non-domiciliary that — in person or through an agent — transacts business within the state, provided the cause of action arises out of the in-state transaction. "A nondomiciliary `transacts business' under CPLR 302(a)(1) when he `purposefully avails [himself] of the privilege of conducting activities within [New York], thus invoking the benefits and protections of its laws." CutCo Indus., Inc. v. Naughton, 806 F.2d 361, 365 (2d Cir. 1986) (quoting McKee Elec. Co. v. Rauland-Borg Corp., 20 N.Y.2d 377, 382 (1967)). Whether a defendant engaged in purposeful availment so as to have transacted business in New York is determined by looking at factors such as: whether the defendant has an on-going contractual relationship with a New York corporation; whether the defendant negotiated or executed a contract in New York, and whether the defendant visited New York after executing the contract to meet with the parties; the choice of law in any such contract; and whether the contract requires the party to send notices and payments to New York. See Agency Rent a Car Sys., Inc. v. Grand Rent a Car Corp., 98 F.3d 25, 29 (2d Cir. 1996). Each factor is considered informative, but no one factor is dispositive. Id. Proof of a single transaction in New York satisfies the "transacting business" requirement. Parke-Bernet Gallaries, Inc. v. Franklyn, 26 N.Y.2d 13, 16 (1970) (quoting Longines-Wittnauer Watch Co. v. Barnes Reinecke, 15 N.Y.2d 443, 456 (1965)).
A claim "arises out of" a defendant's transaction of business in New York when there exists a substantial nexus between the business transacted and the cause of action sued upon. See Hoffritz for Cutlery. Inc., 763 F.2d at 59. "[P]laintiffs need show only that the cause of action is sufficiently related to the business transacted that it would not be unfair to deem it to arise out of the transacted business, and to subject the defendants to suit in New York." Id. As with general jurisdiction, specific jurisdiction must comport with the standards of due process. See Burger King, 471 U.S. at 472-73. The due process analysis for specific jurisdiction is identical to that of general jurisdiction. Naturally, the minimum contacts aspect is met if the "transacting business" requirements of section 302(a) are satisfied.
In support of their argument that the defendants transacted business in New York, plaintiffs point to the fact that from mid — June until mid-November 1998 the defendants, or their agents, met in New York City to negotiate the terms of the MSA. In addition, plaintiffs point to the fact that, the MSA required the settling parties to enter into an escrow agreement that appointed a New York City bank, Citibank, N.A., as the escrow agent. Plaintiffs note that the same escrow agreement contained a choice of New York law provision. Finally, plaintiffs point to the choice of a New York firm, PricewaterhouseCoopers, as the independent auditor responsible for calculating the payments to be made by the OPMs to the States.
Plaintiffs' strongest argument is the nearly five months the defendants, or their agents, spent negotiating the terms of the MSA in New York. That, however, is plaintiffs only legitimate argument in support of finding that defendants transacted business in New York. The non-New York defendants' contacts with the escrow agent and the independent auditor, and the grant of jurisdiction to New York state courts over disputes arising under the escrow agreements entered into by the participating manufacturers, have nothing to do with plaintiffs' allegations regarding the invalidity of the Escrow and Certification Statutes. Although the negotiations provide some support for finding that the defendants transacted business in New York, that determination must be made by looking at the totality of the circumstances. See Agency Rent a Car, 98 F.3d at 29.
When the negotiations are considered in the broader scope of the totality of the circumstances, it becomes clear that they alone do not provide a basis for finding jurisdiction to exist in New York. At no point did the defendants attempt to avail themselves of the protections of New York law. Nor have the defendants returned to New York to meet with the parties to the MSA, an important part of the "negotiation factor". Their presence in New York was purely coincidental. The negotiations could easily have been held anywhere, the fact that the negotiations took place in New York was entirely "fortuitous." See CutCo Indus., 806 F.2d at 365. It is unlikely that any of the defendants could have foreseen the possibility that negotiations related to the settlement of lawsuits against the Majors would lead to them being sued in New York by non-parties to the MSA challenging statutes passed by their home-state legislatures. See SAS Group. Inc. v. Worldwide Inventions. Inc., 245 F. Supp.2d 543, 548 (S.D.N.Y. 2003) ("The requisite minimum contacts must provide a fair warning to the defendant of a possibility of being subject to courts of the forum state."). It should also be noted that these negotiations were not part of an attempt to formulate a business or commercial contract, as has traditionally been the situation in the case law that has found New York negotiations sufficient to satisfy the transaction of business requirement. Rather, these negotiations were part of an attempt to settle civil litigation. Considering these realities, the Court concludes that the defendants did not purposely avail themselves of the privilege of doing business in New York, and therefore, cannot be subject to the long-arm jurisdiction of the state.
This determination is consistent with the words of caution expressed by New York's highest court: "In our enthusiasm to implement the reach of the long-arm statute, we should not forget that defendants, as a rule, should be subject to suit where they are normally found, that is, at their pre-eminent headquarters, or where they conduct substantial general business activities. Only in a rare case should they be compelled to answer a suit in a jurisdiction with which they have the barest contact."McKee Elec. Co., Inc., 20 N.Y.2d at 383. It is difficult to imagine that challenges to the statutes of other states, reviewed, passed and enforced by other state governments, are the rare cases that the Court of Appeals envisioned properly finding their way into New York courts.
B. § 302(a)(2)
NYCPLR § 302(a) provides New York courts with jurisdiction over any non-domiciliary who "commits a tortious act within the state." The tort on which plaintiffs rely in claiming jurisdiction exists under section 302(a)(2) is violation of antitrust laws. As is discussed in detail infra, defendants did not violate antitrust laws. As such, defendants have not committed a tort and jurisdiction, therefore, cannot be predicated on section 302(a)(2).
In sum, plaintiffs have failed to demonstrate that this Court has the power to exert personal jurisdiction over the 30 non-New York defendants. This fact alone is enough to warrant dismissing the complaint as to the non-New York defendants. Nonetheless, in light of the fact that Court does have personal jurisdiction over New York Attorney General Eliot Spitzer, it must address the substantive claims raised by the plaintiffs. A substantive review indicates that even if the Court were inclined to find that it could exert personal jurisdiction over the non-New York defendants the complaint should be dismissed.
II. MOTIONS TO DISMISS PURSUANT TO RULE 12(b)(6) Standard of Review
In deciding a 12(b)(6) motion, a court must construe all well-pleaded factual allegations in the complaint in the favor of the plaintiff. See Alien v. Westpoint-Pepperell Inc., 945 F.2d 40, 44 (2d Cir. 1991). In order for the defendants to succeed in having plaintiffs' claims dismissed, it must "appear beyond doubt that the plaintiff [s] can prove no set of facts in support of [their] claim[s] which would entitle [them] to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Rule 8
Rule 8 of the Federal Rules of Civil Procedure provides that a complaint "shall contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief." The purpose of the complaint is to provide the adverse party with fair notice of the claims against it so as to allow for trial preparation. See Salahuddin v. Cuomo, 861 F.2d 40, 42 (2d Cir. 1988). When a complaint is so confused as to lack such fair notice a court has the discretion to dismiss the complaint. See Elliott v. Bronson, 872 F.2d 20 (2d Cir. 1989). Dismissal, however, is a harsh remedy and should only be used when "the complaint is so confused, ambiguous, vague, or otherwise unintelligible that its true substance, if any, is well disguised." Salahuddin, 861 F.2d at 42. When a court does dismiss a complaint, it is expected to allow the plaintiff to re-file. See id.
The defendants claim the complaint fails to give each individual defendant notice of the specific claims raised against him or her. They claim that because the defendants and plaintiffs are each aggregated, no defendant knows which claims are particular to him or her or which plaintiff — because each is a different company differently situated — is asserting which claims. Although it is true that the plaintiffs and defendants are aggregated, this is not enough to warrant a finding that the complaint is so confused as to prevent the defendants from preparing for trial. The complaint's claims are directed at the nearly identical Escrow and Certification Statutes of the 31 States. That the manner in which each defendant has threatened the enforcement of the Statutes differs is not enough to render the complaint fatally flawed. That the defendants are fully capable of deciphering the claims is borne out by the more than 120 pages of detailed response offered by the defendants in support of this motion. The Court, therefore, denies the motion to dismiss the complaint as not in compliance with Rule 8.
Subject Matter Jurisdiction
Defendants allege the Court lacks subject matter jurisdiction over plaintiffs' claims. According to the defendants, plaintiffs do not have standing to bring this action seeking injunctive relief. Even if the Court is to believe the plaintiffs have standing, defendants believe the Court has an obligation to abstain from exercising jurisdiction in order to allow the individual states to address plaintiffs' claims.
Standing is a function of Article III of the Constitution, which limits the authority of the federal courts to decide only actual cases and controversies. The doctrine of standing has been developed to ensure that the parties are sufficiently adverse so as to fulfill the requirement of a true "case or controversy." Lee v. Bd. of Govs. of the Fed. Reserve Sys., 118 F.3d 905, 910 (2d Cir. 1997). "In essence the question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues. This inquiry involves both constitutional limitations on federal-court jurisdiction and prudential limitations on its exercise." Warth v. Seldin, 422 U.S. 490, 498 (1975). Standing requires a plaintiff to allege such a personal stake in the outcome of the case as to warrant its invocation of federal-court jurisdiction and justify the court's remedial powers on its behalf. Id. at 498-99.
The Supreme Court has established three elements of standing. A plaintiff must demonstrate (1) that it has suffered an injury that is (a) concrete and particularized and (b) actual and imminent — not conjectural or hypothetical; (2) that there is a traceable causal connection between the injury and the conduct complained of; and (3) that it is likely the injury will be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). If any one of the elements is not fulfilled, the plaintiff is considered to lack standing and its action must be dismissed. At the pleading stage, general factual allegations of injury are sufficient. See id. at 561.
It is the defendants' position that the plaintiffs have failed to articulate a particular injury that is traceable to a particular defendant. The injury alleged by the plaintiffs is the one it claims to be imminent as a result of the clear threats of prosecution for violation of what the plaintiffs believe to be unconstitutional statutes. The Supreme Court has held that a well-founded fear that a statute will be enforced against a particular plaintiff satisfies the standing requirement. See Virginia v. Booksellers Ass'n, 484 U.S. 383, 384 (1988); Ex Parte Young , 209 U.S. 123, 155 (1908) (permitting plaintiff to sue a state officer to enjoin the enforcement of an unconstitutional act); see also Allstate Ins. Co. v. Serio, 2000 WL 554221 at *13 (S.D.N.Y. May 5, 2000) (finding standing where state threatened plaintiff with a fine). Although the defendants are aggregated, each has threatened to enforce nearly identical statutes alleged to have common constitutional flaws. Thus, the claimed injuries are traceable and defendants argument that the complaint lacks the specificity necessary for a fair evaluation of standing rings hollow.
The defendants argue that even if the Court finds the plaintiffs to have standing, which it does, it should nonetheless abstain from exerting subject matter jurisdiction over the action. Federal courts are generally required to abstain from taking jurisdiction over federal constitutional claims that involve or call into question ongoing state proceedings.Diamond "D" Constr. Corp. v. McGowan, 282 F.3d 191, 198 (2d Cir. 2002). The abstention doctrine is born of the belief that comity among
the several states and the federal courts is best served by allowing the state courts to decide issues of legitimate state interest without interference from the federal courts. In Younger v. Harris, 401 U.S. 37, 43-45 (1971), the Supreme Court held abstention to be appropriate when (1) there is an on-going state proceeding relative to the issue; (2) an important state interest is implicated; and (3) the state proceeding affords the federal plaintiff an adequate opportunity for judicial review of the federal claims. See also Grieve v. Tamerin, 269 F.3d 149, 152 (2d Cir. 2001). The importance of comity from a public policy perspective translates into a strong preference for abstention. See Diamond "D", 282 F.3d at 198; Penzoil Co. v. Texaco, Inc., 481 U.S. 1, 11 (1987) (directing federal courts to abstain "if the State's interests in the proceedings are so important that exercise of federal judicial power would disregard the comity between the States and the National Government."). When a court does opt to abstain, Younger contemplates the actions outright dismissal by the federal court. See Gibson v. Berryhill, 411 U.S. 564, 577 (1973).
Applying the Younger factors to this case, defendants proffer that there are ongoing state actions to enforce the Escrow Statute in nine of the states. The ability of states to insure themselves against the possibility of high health care costs that could wreak havoc on future budgets is without question an important state interest. And, the defendants should be able to raise the very claims they raise in this action as defenses or counterclaims in the state actions. With respect to the nine states in which there are ongoing state actions, the factors that typically lead to abstention appear to be present.
Those states are: Arizona, Kansas, Michigan, Montana, Nebraska, North Carolina, South Dakota, Washington and Wyoming, See Schick Reply Decl. ¶ 2.
There exists, however, an exception to the abstention doctrine. A federal court can exercise its judicial powers if "extraordinary circumstances" exist. Diamond "D", 282 F.3d at 198. The burden of demonstrating the presence of extraordinary circumstances rest squarely with the plaintiff. See id. A plaintiff must demonstrate that (1) there is no state remedy available to meaningfully, timely and adequately remedy the alleged constitutional violation; and (2) the plaintiff will suffer great and immediate harm if the federal court does not intervene.Id. at 201. Plaintiffs argue that bringing 31 separate actions in 31 states is far from a meaningful, timely or adequate remedy. Furthermore, they claim that the time and cost associated with litigating 31 separate state actions would drive them out of business long before their actions are resolved.
In fact, two exceptions exist. The other exception is reserved for bad faith or harassment in criminal proceedings Clearly this exception does not apply here.
Plaintiffs argument that the time and cost of bringing 31 nearly identical state actions prevent them from having a meaningful, timely or adequate state remedy carries great weight. Although the terms "meaningful, timely and adequately" are intended to refer to the specific nature of the state remedy and are not concerned with external logistics, the reality is that the state remedies are rendered meaningless, untimely and inadequate by the present circumstances. Combined with the fact that plaintiffs have proffered the very real harm of going out of business if the Court does not intervene, this action qualifies as within the ambit of the extraordinary circumstances exception. In fact, this action seems to be very much the type the court in Younger had in mind when it stated, "Other unusual situations calling for federal intervention might also arise." Younger, 401 U.S. at 54. For this reason, and because the defendants have only established ongoing state actions in nine of the 31 states, the Court will not abstain from taking subject matter jurisdiction over this action.
Commerce Clause
1. The Dormant Commerce Clause
Plaintiffs contend that the Statutes violate the Constitution's Commerce Clause. The Commerce Clause gives Congress the power "[t]o regulate commerce with foreign Nations, and among the several states, and with the Indian Tribes." U.S.
Const. Art I, § 8, cl. 3. Although the Commerce Clause is phrased as an affirmative grant of power, courts have long understood it to have a negative corollary. This negative corollary, referred to as the "dormant commerce clause", prevents the states from unjustifiably discriminating against or burdening the flow of interstate commerce. See Wyoming v. Oklahoma, 502 U.S. 437, 454 (1992). Plaintiffs claim that the Statutes directly regulate interstate commerce that occurs wholly outside the boundaries of the various states.The Supreme Court has set forth what is essentially a two-tiered approach to analyzing regulatory efforts by states relative to the Commerce Clause. When a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, courts generally strike down the statute without further inquiry. Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 579 (1986); United Haulers Ass'n, Inc. v. Oneida-Herkimer Solid Waste Mgmt. Auth., 261 F.3d 245, 255 (2d Cir. 2001). When, however, "the statute regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits." Pike v. Bruce Church. Inc., 397 U.S. 137, 142 (1970). Assuming a legitimate local purpose exists, a court must determine whether the interest is sufficiently significant to justify the burden on interstate commerce and whether the same purpose could be accomplished in some other manner that does not impose as great a burden. See id.
Plaintiffs claim that the Statutes directly regulate interstate commerce that occurs wholly outside the boundaries of the various states. Plaintiffs reason by analogy to two liquor-price affirmation cases, Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth, and Healy v. The Beer Institute, 491 U.S. 324 (1989). In Brown-Forman and Healy the Supreme Court struck down state statutes that regulating liquor prices. Each of these cases is distinguishable, however, in that each involved statutes effectively establishing liquor prices in neighboring states. Unlike the statutes involved in those cases, the Escrow and Certification Statutes do not insist on price parity with cigarettes sold in other states. The Statutes "therefore [do] not have the `practical effect' of controlling prices or transactions occurring wholly outside of the boundaries of [the various States], as was the case in Brown-Forman andHealy. Thus, the rule of per se invalidity does not apply to the qualifying statute [s]." Star Scientific. Inc. v. Beales, 278 F.3d 339, 356 (4th Cir. 2002) (rejecting a similar Commerce Clause challenge to Virginia's versions of the Statutes).
Plaintiffs contend that the Escrow Statutes are discriminatory because they favor NPMs who sell cigarettes in only one state. A statute is discriminatory if it benefits instate economic interests and burdens out-of-state economic interests. See Oregon Waste Sys., Inc. v. Dep't of Envtl. Quality, 511 U.S. 93, 99 (1994); Nat'l Elec. Mfrs. Ass'n v. Sorrell, 272 F.3d 104, 109 (2d Cir. 2001). In this instance there is no local economic interest that is favored. The Statutes treat all cigarette manufacturers equally. Regardless of whether they are in-state or out-of-state manufacturers, all NPMs must satisfy the same requirements. As there is no preference to local commercial interest or unequal burden on out-of-state interests, there is no discrimination. See Freedom Holdings. Inc. v. Spitzer, 02 Civ. 2929 (AKH) (S.D.N.Y. May 14, 2002) (rejecting a Commerce Clause challenge to New York's Statutes).
In addition, the plaintiffs claim the Statutes discriminate between OPMs/SPMs and NPMs. Again, the Commerce Clause is concerned with discrimination in favor of in-state interests to the detriment of out-of-state interests. The only distinctions made by the stautes are among manufactures that have signed the MSA and those that have not. Such a distinction is not discriminatory under Commerce Clause jurisprudence. Furthermore, the distinction made by the Statutes is acceptable because it bears a rational relationship to a legitimate state interest. The Commerce Clause does not prevent a state from legislating or regulating in the interests of the health, safety or welfare of its citizenry. See Huron Portland Cement Co. v. Detroit, 362 U.S. 440 (1960). The Statutes are part of an attempt by states to restrict cigarette consumption and reduce health care costs. Given the importance of the states' interest and the benefits of reducing cigarette consumption, the burden placed on manufacturers is far from excessive. See Star Scientific, 278 F.3d at 357.
2. Foreign Commerce Clause
Plaintiffs claim that the Statutes impermissibly encroach upon the federal government's commerce-clause power to regulate commerce with foreign nations. It is plaintiffs' assertion that the Statutes prevent the federal government from speaking with one voice. Plaintiffs note that some of the plaintiffs are foreign corporations, and that the federal government has engaged in a trade initiative with Colombia that removes duties on tobacco imports in exchange for replacing coca crops with tobacco crops.
A statute violates what is referred to as the foreign commerce clause when it creates the risk of international multiple taxation or prevents the federal government from speaking with one voice when regulating commercial relations with foreign governments. See Japan Line, Ltd, v. Los Angeles, 441 U.S. 434, 452 (1979). The Statutes at issue neither create a risk of multiple taxation nor prevent the federal government from speaking with one voice. Any indirect impact the Statutes might have on the Colombian crop initiative is far too attentuated to be considered a threat to the federal government's ability to speak with on clear voice.
3. Indian Commerce Clause
Plaintiffs also claim that the Statutes violate the Commerce Clause by regulating Grand River, a Canadian company located on tribal land in Ontario. The Indian Commerce Clause applies only to Native-American tribes recognized by the federal government and operating within the United States. Plaintiffs' argument appears to be that Grand River is covered by the Indian Commerce Clause because Grand River conducts business on Iroquois property in the United States. Even if this suggestion is accepted as true and sufficient for coverage, an NPM's escrow obligation arises solely from its sales of cigarettes occurring off-reservation. It is well-settled that a state can regulate (i) off-reservation transactions conducted by native Americans; (ii) on-reservation sales to persons other than Native Americans; and (iii) impose certain requirements upon Native Americans in regulating those sales. Dep't of Taxation Finance v. Attea, 512 U.S. 61 (1994);Washington v. Confederated Tribes of Colville Reservations, 447 U.S. 134 (1980). The requirements of the Statutes are entirely consistent with these principles. Thus, there is no violation of the Commerce Clause.
Sherman Act
The Sherman Act, 15 U.S.C. § 1, bans contracts, conspiracies and combinations that act as a restraint on trade. Combinations formed for the purpose and with the effect of raising, depressing, fixing, pegging or stabalizing the price of a commodity in interstate or foreign commerce are illegal per se. See Catalanato, Inc. v. Target sales, Inc., 466 U.S. 643, 647 (1980). Plaintiffs claim that the Escrow Statutes require NPMs to enter into one of two agreements, either the MSA or an escrow agreement with the state, each of which has the express purpose and effect of restraining trade among competitors.
Regardless of whether the Escrow Statutes have the purpose or effect of restraining trade, the reality is that the Escrow Statutes represent "state actions" and are, therefore, afforded immunity under the Parker doctrine. In Parker v. Brown, 317 U.S. 341, 350 (1943), the Supreme Court found "nothing in the language of the Sherman Act or in its history [to] suggest that its purpose was to restrain a state or its officers or agents from activities directed by its legislature." "The rationale ofParker was that, in light of our national commitment to federalism, the general language of the Sherman Act should not be interpreted to prohibit anticompetitive actions by the States in their governmental capacities or as sovereign regulators." City of Columbia v. Omni Outdoor Adver., 499 U.S. 365, 374 (1991).
To qualify as a state action entitled to immunity the action must be clearly articulated and expressed as a state policy, and be actively supervised by the state itself. Cal. Retail Liquor Dealers Ass'n v. Midical Aluminum. Inc., 445 U.S. 97, 104 (1980); see also Fed. Trade Comm'n v. Ticor Title Ins. Co., 504 U.S. 621, 633 (1992); S. Motor Carriers Rate Conf. v. United States, 471 U.S. 48, 57 (1985). When a state action is the result of legislative action, as in this instance, the state is deemed to have clearly articulated a state policy actively supervised by the state itself. See Cine 42 So. Theater Corp. v. Nederlander Org., Inc., 790 F.2d 1032, 1042 (1986) ("[W]hen the anticompetitive conduct is undertaken by the sovereign itself, for example, through its legislature or its Supreme Court, that activity isipso facto immune from federal antitrust laws. No further inquiry need be made."); PTI, Inc. v. Phillip Morris Inc., 100 F. Supp.2d 1179, 1195-96 (C.D. Cal. 2000) ("The test to determine sufficient state involvement as sovereign is unnecessary when the state legislature or state supreme court acts directly."); see also Freedom Holdings, Inc. v. Spitzer, 02 Civ. 2929 (AKH) (S.D.N.Y. May 14, 2002). Thus, the Escrow Statutes are not violative of the Sherman Act. A point plainly stated by Judge Hellerstein in analyzing a Sherman Act claim against New York's escrow statute; "New York was not seeking to create any benefit to the cigarette manufacturing companies or the Majors or the Subsequent Participants. New York was dealing, as was the other states, in a very important local health interest. It enacted legislation that it considered appropriate to remedy these interests. That's the very thing that Parker v. Brown immunizes." Freedom Holdings, at Tr. 49.
It is also worth noting that plaintiffs contention that the Sherman Act preempts the Escrow Statutes is without merit. "A party may successfully enjoin the enforcement of a statute only if the statute on its face unreconcilably conflicts with federal antitrust policy." Rice v. Norman Williams Co., 458 U.S. 654, 659 (1982); City of Columbia 499 U.S. at 374. No such conflict exists between the Sherman Act and the Escrow Statutes.
Equal Protection
Plaintiffs next argue that the Escrow Statutes violate their rights under the Equal Protection Clause. The Equal Protection Clause of the Fourteenth Amendment directs that no state shall "deny to any person within its jurisdiction the equal protection of the laws." Const., Amend XIV, § 1. Plaintiffs contend the Escrow Statutes essentially have the effect of bringing them within the confines of the MSA without providing them any of the benefits of the MSA. They claim the governments have created separate classes — OPMs/SPMs and NPMs — without setting forth a legitimate basis for the distinction. Plaintiffs also believe the Escrow Statutes create classes among NPMs by including out-of-state sales in the escrow formula.
The Equal Protection Clause does not forbid classifications so long as they are not made along suspect lines. See Nordlinger v. Hahn, 505 U.S. 1, 10 (1992); Jankowski-Burczyk v. INS, 291 F.3d 172, 176 (2d Cir. 2002). In fact statutory classifications that relate to social or economic policies are given great deference. See City of Celburne v. Celburne Living Ctr., 473 U.S. 432, 440 (1985); City of New Orleans v. Dukes, 427 U.S. 297, 304 (1976). "[E]qual protection is not a license for courts to judge the wisdom, fairness or logic of legislative choices. In areas of social and economic policy, a statutory classification that neither proceeds along suspect lines nor infringes constitutional rights must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification."Fed. Communications Comm'n v. Beach Communications. Inc., 508 U.S. 307, 313 (1993). Thus, social and economic policies, such as the ones at issue in this action, are to be upheld so long as their classifications rationally further state interests. See Nordlinger, 505 U.S. at 10. In this instance the classifications created by the Statutes are rationally related to the States' interests in reducing smoking, limiting the health care costs born by the States as a result of cigarette consumption and ensuring that they are able to recover health care costs from all cigarette manufacturers. These are interests that fall squarely within a State's police power to promote the public health of its populace. See Star Scientific, 278 F.3d at 352; see also FDA v. Brown Williamson Tobacco Corp., 529 U.S. 120, 125 (2000) (referring to the tobacco-related deaths as "one of the most troubling public health problems facing our Nation today").
Whether the Court believes in the logic of the States' decisions to pass the Statutes is wholly irrelevant. "States are not required to convince courts of the correctness of their legislative judgments."Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 464 (1981). A state need not even articulate its reasons for enacting a statute. Beach, 508 U.S. at 315. Nor is it enough to challenge a distinction on the basis that it was made with substantially less than mathematical exactitude.City of New Orleans, 427 U.S. at 304. Rather, "those challenging the legislative judgment must convince the court that the legislative facts on which the classification is apparently based could not reasonably be conceived to be true by the governmental decisionmaker." Beatie v. City of New York, 123 F.3d 707, 712 (2d Cir. 1997) (quoting Vance v. Bradley, 440 U.S. 93, 111 (1979)). Plaintiffs have failed to meet this burden. Thus, because the distinctions created by the Escrow Statutes are rationally related to legitimate state interests and not arbitrary or irrational, the Escrow Statutes do not violate the plaintiffs' rights under the Equal Protection Clause. Due Process Clause
Plaintiffs' contention that the Escrow Statutes warrant a Strict Scrutiny analysis because they contain advertising restrictions is incorrect. As discussed infra free speech rights are not implicated by the Escrow Statutes.
Plaintiffs argue that the Escrow Statutes violate their due process rights. The Due Process Clause of the Fourteenth Amendment contains a substantive component that protects against government interference with individuals' property interests. See Concrete Pipe Prods, of Cal., Inc. v. Constr. Laborers Pension Trust for S. Cal., 508 U.S. 602, 636-37 (1993). The scope of this protection is, however, extremely narrow. This is particularly true with regard to economic legislation. Economic legislation enjoys a presumption of constitutionality and those who challenge economic legislation must overcome an enormous burden to prove it violates the Due Process Clause. See Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15 (1976) ("It is by now well established that legislative Acts adjusting the burdens and benefits of economic life come to the Court with a presumption of constitutionality, and that the burden is on one complaining of a due process violation to establish that the legislature has acted in an arbitrary and irrational way."); see also Duke Power Co. v. Carolina Envtl. Study Group. Inc., 438 U.S. 59, 83 (1978). As such, the challenged legislation need only be rationally related to a legitimate state interest. See Concrete Pipe, 508 U.S. at 637.
Plaintiffs contend that the Escrow Statutes are not rationally related to a legitimate state interest. The gravamen of plaintiffs' argument is that there is no proof that they will owe the States money or of how much they might owe in the future. Without such proof, plaintiffs insist, there is no rational basis for the Escrow Statutes. In reaching the conclusion that the Escrow Statutes do not violate the Equal Protection Clause, the Court has already determined that the Escrow Statutes are rationally related to a legitimate state interest. That the States cannot determine the precise amount the NPMs might owe in the future does not mean the Escrow Statutes are not rationally related to a legitimate state interest. See Duke Power, 438 U.S. at 83 (holding legislature's prognostication of liability did not violate due process); Beatie, 123 F.3d at 712 ("[D]ue process does not require a legislative body to await concrete proof of reasonable but unproven assumptions before acting to safeguard the health of its citizens.").
In addition, plaintiffs claim that the States lack legislative jurisdiction over the foreign NPMs that is required by due process jurisprudence. Like personal jurisdiction, legislative jurisdiction requires minimum contacts and reasonableness. The critical question, again, is whether the company has purposefully availed itself of the privileges of doing business within that legislature's jurisdiction. See World-Wide Volkswagen Corp., 444 U.S. at 291-92. Because an NPM's escrow obligation is determined by the extent of its activity within the state, the necessary contacts and nexus exist to satisfy due process considerations.
Plaintiffs also claim that the Statutes are unconstitutionally vague. To assert such a claim, the plaintiffs must prove that the Statutes are vague in each and everyone of their applications. See Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 494-95. In order to avoid being void for vagueness, the Statutes must provide a reasonable person notice of what is prohibited and provide explicit enforcement standards to those charged with enforcement. Id. Plaintiffs assert that the Escrow Statutes fail to provide how future liability would be calculated. Although an NPM may in the future dispute a state's calculation of its liability, that the specific calculation is not set forth in the Escrow Statute does not render the legislation unconstitutionally vague.
Also without merit is the plaintiffs' procedural due process claim. The scope of procedural due process protection is, in the context of this action, quite narrow. See Dist. 28, United Mine Workers of Am., Inc. v. Wellmore Coal Corp., 609 F.2d 1083, 1086 (4th Cir. 1979). The escrow accounts function as a surety bond for the States, not as prejudgment remedies. In the event that a state attempts to withdraw funds from a plaintiff's escrow account, the plaintiff will have the opportunity to contest both its liability and the calculation of its liability. Thus, the Escrow Statutes do not impose prejudgment remedies and are not, therefore, subject to the notice and hearing requirements mandated by due process jurisprudence. See Texaco, Inc. v. Short, 454 U.S. 516, 537 (1982); Interport Pilots Agency. Inc. v. Sammis, 14 F.3d 133, 142-43 (2d Cir. 1994).
Federal Cigarette Labeling and Advertising Act
The Federal Cigarette Labeling and Advertising Act ("FCLAA") states in relevant part: "No requirement or prohibition based on smoking and health shall be imposed under state law with respect to the advertising or promotion of any cigarettes, the packages of which are labeled in conformity with the provisions of this chapter." 15 U.S.C. § 1334(b). Plaintiffs claim the FCLAA preempts the Statutes. A federal law supersedes state law when Congress expressly states an intention to preempt state law or when the federal regulatory scheme is so comprehensive as to imply congressional intent to occupy the entire field. See Hillsborouqh County v. Automated Medical Lab., Inc., 471 U.S. 707, 712 (1985); Vango Media, Inc. v. City of New York, 34 F.3d 68, 72 (2d Cir. 1994) ("Federal law may preempt state law explicitly, by stating that fact in the statute; impliedly, where the comprehensiveness of the federal legislation in a given field leaves no room for a state to act; and where state law actually conflicts with federal law so that compliance with both is impossible."). Plaintiffs believe the plain language of the FCLAA preempts the Escrow and Certification Statutes because those Statutes have the effect of forcing manufacturers to join the MSA. The MSA, in turn, contains advertising restrictions.
The Escrow and Certification Statutes do not, however, force manufacturers to join the MSA. In fact, the Statutes apply only to those manufactures that chose not to join the MSA. The very argument that plaintiffs raise in this action was raised and rejected in PTI, Inc. v. Philip Morris Inc., 100 F. Supp.2d 1179 (C.D. Cal. 2000). The court inPTI held that the Escrow Statute "does not have any connection whatsoever with cigarette packaging, advertising, or promotion. To the extent plaintiffs object to the voluntary advertising restrictions to which signatories to the MSA have agreed, they lack standing to challenge these provisions. Moreover, the restrictions are not legislatively required."Id. at 1205. As there is nothing in the FCLAA to indicate Congress's intention to preempt the entire field of cigarette regulation and nothing in the Statutes having to do with advertising, the FCLAA does not preempt the Statutes.
First Amendment Claim
Plaintiffs claim that the Statutes violate the First Amendment by effectively conditioning their ability to exercise their First Amendment rights on making escrow payments. The Escrow Statutes do not, however, contain any conduct-based restrictions. Nothing in the Escrow Statutes prevents an NPM from exercising its First Amendment rights. If an NPM does not enter into an escrow agreement, it maintains its First Amendment rights, but it may be enjoined from selling cigarettes in those States where it has failed to comply with the Statutes.
Additionally, plaintiffs allege that the OPMs and SPMs received a financial benefit not available to plaintiffs for agreeing to restrict their First Amendment rights. Plaintiffs' argument that they would not be afforded the same financial benefit were they to join the MSA now as those manufacturers who joined earlier received has nothing to do with the constitutionality of the actual Escrow Statutes. Because the MSA itself is not the subject of this action, only the Statutes are, plaintiffs claim must be dismissed.
Section 1983 Claim
Plaintiffs claim they are entitled to relief under 42 U.S.C. § 1983. Section 1983 does not create any substantive rights, but merely creates a mechanism for plaintiffs to pursue remedies for violations of federal law committed by governmental officials. See Sykes v. James, 13 F.3d 515, 519 (2d Cir. 1993) (citing City of Oklahoma City v. Tuttle, 471 U.S. 808, 816 (1985)). Thus, In order to prevail on a section 1983 claim, the plaintiffs must demonstrate that the Statutes deprive them of a federal right. Id. In light of the fact that the Court is dismissing each of plaintiffs' federal claims, plaintiffs have failed to meet their burden. Plaintiffs' section 1983 claim must, therefore, be dismissed.
Conclusion
For the reasons set forth herein, the motion of the 30 non-New York defendants to dismiss the complaint as against them for lack of personal jurisdiction is granted. In addition, the motion of all 31 defendants to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure is also granted. The complaint is hereby dismissed. The Court orders this case closed and directs the Clerk of Court to remove it from the Court's active docket.
SO ORDERED.