Opinion
Cause No. IP01-0838-C-T/G
August 20, 2001
ENTRY ON DEFENDANT'S MOTION TO DISMISS AND PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION
Though this Entry is a matter of public record and is being made available to the public on the court's web site, it is not intended for commercial publication either electronically or in paper form. The reason for this caveat is to avoid adding to the research burden faced by litigants and courts. Under the law of the case doctrine, the ruling or rulings in this Entry will govern the case presently before this court. See, e.g., Trs. of Pension, Welfare, Vacation Fringe Benefit Funds of IBEW Local 701 v. Pyramid Elec., 223 F.3d 459, 468 n. 4 (7th Cir. 2000); Avitia v. Metro. Club of Chicago, Inc., 49 F.3d 1219, 1227 (7th Cir. 1995). However, a district judge's decision has no precedential authority and, therefore, is not binding on other courts, on other judges in this district, or even on other cases before the same judge. See, e.g., Howard v. Wal-Mart Stores, Inc., 160 F.3d 358, 359 (7th Cir. 1998) ("a district court's decision does not have precedential authority"); Malabarba v. Chicago Tribune Co., 149 F.3d 690, 697 (7th Cir. 1998) ("district court opinions are of little or no authoritative value"); United States v. Articles of Drug Consisting of 203 Paper Bags, 818 F.2d 569, 571 (7th Cir. 1987) ("A single district court decision . . . has little precedential effect. It is not binding on the circuit, or even on other district judges in the same district."). Consequently, though this Entry correctly disposes of the legal issues addressed, this court does not consider the discussion to be sufficiently novel or instructive to justify commercial publication of the Entry or the subsequent citation of it in other proceedings.
Plaintiffs, Star Scientific, Inc., and Star Tobacco Pharmaceuticals, Inc. (collectively referred to as "Star"), sued Defendant, Steve Carter, in his official capacity as Attorney General of the State of Indiana, in a five Count Amended Complaint alleging a number of constitutional violations. More specifically, in its Amended Complaint, Plaintiffs challenge the constitutionality of the Master Settlement Agreement (the "MSA") executed by forty-six states (including Indiana), the District of Columbia and five other federal jurisdictions, and the major cigarette manufacturers in the United States, and the Indiana Qualifying Statute, codified at Indiana Code § 24-3-3-1 through § 24-3-3-14, enacted pursuant to the MSA. Plaintiffs allege that the MSA and the Qualifying Statute together violate the Compact and Commerce Clauses of the United States Constitution and also that the Qualifying Statute by itself violates the Equal Protection, Due Process, and Commerce Clauses of the Constitution. In this Entry, for reasons explained below, the court addresses only one aspect of Count V of Plaintiffs' Amended Complaint, which in general terms alleges that the State of Indiana, by enforcing the Qualifying Statute, deprives Plaintiffs the rights secured to them by the Commerce Clause in violation of 42 U.S.C. § 1983.
I. PROCEDURAL BACKGROUND
On June 20, 2001, Star moved, pursuant to Federal Rule of Civil Procedure 65 and Southern District of Indiana Local Rule 65.2, for a preliminary injunction against the enforcement of the Indiana Qualifying Statute on the ground that statute violates the Commerce Clause as alleged in Count V of the Amended Complaint. (See Am. Compl. at Count V.) Star has not sought preliminary injunctive relief as to the constitutional challenges raised in Counts I through IV of its Amended Complaint. In Count V, the only Count at issue here, Star asserts that the Qualifying Statute violates the Commerce Clause because (1) the State of Indiana is without power to impose an escrow obligation on Star because it has no substantial nexus with the State (the "substantial nexus" argument), see Quill Corp. v. North Dakota, 504 U.S. 298 (1992), (2) the Qualifying Statute has the effect of controlling conduct wholly outside Indiana (the "extraterritorial" argument), see Healy v. Beer Institute, 491 U.S. 324 (1989), and (3) the Qualifying statute excessively burdens interstate commerce (the "excessive burden" argument), see Pike v. Bruce Church, Inc., 397 U.S. 137 (1970).
Star has made clear its position that it is challenging the constitutionality of the Qualifying Statute both on its face and as it is applied.
Star's motion for preliminary injunction is based only on the substantial nexus argument. Although Star, in a number of pleadings, has presented this court with arguments in support of its extraterritorial and excessive burden arguments, Star did not seek preliminary injunctive relief based on those grounds. That much is clear to the court based on the unequivocal language Star used in numerous pleading throughout the pendency of this case. Paragraph numbered 3. in "Plaintiff's Motion For Preliminary Injunction" states in its entirety,
By this motion for preliminary injunction, Star Scientific emphasizes one of the constitutional challenges it has asserted in its Complaint. Specifically, Star Scientific seeks a preliminary injunction on the ground that the State of Indiana, by enacting and enforcing the Qualifying Statute, violates the Commerce Clause by imposing a statutory financial obligation on a company that has no substantial nexus to the State. See Quill Corporation v. North Dakota, 504 U.S. 298, 309-318 (1982) [sic].
Also, in "Star Scientific's Reply To Defendant's Opposition To The Motion For Preliminary Injunction," at page 1, the language used was unequivocal:
Star Scientific seeks preliminary relief from the operation of Indiana's Qualifying Statute on the grounds that it violates the dormant Commerce Clause. The company asserts only one basis for the relief: The State of Indiana, cannot, consistently with the Commerce Clause, force a company engaged in interstate commerce which has no substantial nexus with the State to pay substantial amounts of money into escrow.
Immediately following this latter sentence, Star attached a footnote which reads:
The parties entered an Agreed Stipulation filed on July 3, 2001, that the only claim to be presented in connection with the Motion for Preliminary Injunction would be this substantial nexus claim.
And, finally, in its most recent filing in this case, "Star Scientific's Motion To Advance The Trial On The Merits And To Consolidate It With The Application For Preliminary Injunction," filed August 8, 2001, Star acknowledged that, "Nevertheless, Star Scientific has made reference to the other two claims in Count V of its First Amended Complaint so as to not waive those claims but Quill was the basis for Plaintiffs' Motion for Preliminary Injunction." (Id. at 2) (emphasis added). Accordingly, despite the numerous pages of Star's submissions in support of its motion for preliminary injunction dedicated solely to advancing Star's extraterritorial and excessive burden arguments, the only argument for the court to consider in this motion for preliminary injunction is the substantial nexus argument based on Quill Corp. v. North Dakota, 504 U.S. 298.
On July 5, 2001, Defendant responded to Star's motion for preliminary injunction by moving to dismiss the Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Defendant moved to dismiss all five Counts of Star's Amended Complaint.
Star's Amended Complaint was filed on July 12, 2001. Thereafter, Defendant moved to dismiss the Amended Complaint and incorporated its arguments from its motion to dismiss the original Complaint.
As to Counts I through IV, Defendant argues that these claims fail as a matter of law and that they are barred by principles of collateral estoppel or issue preclusion as they were litigated in Star Scientific, Inc. v. Earley, Civ. No. 3:00CV835, and are currently pending on appeal before the Fourth Circuit as Star Scientific, Inc. v. Beales, Record No. 01-1502.
Before Defendant filed its motion to dismiss, however, this court, on June 28, 2001, entered an agreed order which, in addition to setting a briefing schedule for Defendant's subsequently filed motion to dismiss and Star's motion for preliminary injunction, limited briefing on those motions to Count V of the Complaint. Consequently, as the parties have not addressed the merits, at least in this court, of Counts I through IV, Defendant's motion to dismiss those Counts is not properly before the court. This court will reserve its ruling as to Counts I through IV until the Fourth Circuit issues its ruling in Star Scientific, Inc., v. Beales, at which time a ruling by this court may be unnecessary. Therefore, despite the language of Defendant's motion, the only Count of the Amended Complaint that is properly before this court on Defendant's motion to dismiss is Count V.
Count V of the Amended Complaint raises the same claim, and presents the same arguments is support thereof, as did Count V of the original Complaint filed in this court.
On August 2, 2001, a hearing was held on Plaintiffs' motion for preliminary injunction. After carefully considering the voluminous filings in this matter and the evidence presented and the arguments made at the August 2 hearing, the court rules as follows.
Because the court is deciding both Defendant's motion to dismiss and Star's motion for preliminary injunction in the same Entry, the court has not made any findings of fact, which is the usual course when deciding a motion for preliminary injunction, but rather has accepted all facts alleged in the Amended Complaint as true and has drawn all reasonable inferences from those facts in favor of Star, which is, of course, the proper approach when deciding a motion to dismiss. See, e.g., Jackson v. E.J. Brach Corp., 176 F.3d 971, 977-78 (7th Cir. 1999) (citation omitted). As an aside, the material facts that are necessary for resolution of the current issue before the court are largely, if not entirely, undisputed.
Star Scientific, Inc., is a Delaware corporation with corporate, sales, manufacturing and processing facilities in Virginia and executive, regulatory and scientific offices in Maryland. (Am. Compl. at ¶ 15.) Star Scientific, Inc., is in the business of selling cigarettes. (Id. at ¶ 16.) Specifically, Star Scientific, Inc., has begun development of new technologies which reduce carcinogenic toxins in cigarettes, producing a safer cigarette. (Id. at ¶¶ 18-20.) Star Tobacco Pharmaceuticals, Inc., a Virginia corporation, is a wholly owned subsidy of Star Scientific, Inc., and is the company through which Star Scientific, Inc., sells cigarettes. (Id. at ¶ 16.)
Star distributes and sells cigarettes in interstate commerce. (Id. at ¶ 25.) Star does not directly sell its cigarettes to consumers. (Id. at ¶ 112.) Rather, Star ships cigarettes by common carrier to more than 225 independent distributors and wholesalers throughout the United States, some located in Indiana. (Id. at ¶¶ 25, 112, 115.) Some of those distributors and wholesalers then ship the cigarettes from their central distribution centers interstate to their own distribution facilities operated by other independent distributors or directly to retailers. (Id.)
In addition to selling its products to independent distributors in Indiana, Star has few contacts with the State of Indiana. In sum, those contacts include the following. From July 2000 until July 2001 a Star curing barn and related handling equipment was located in Warrick County, Indiana. (Id. at ¶ 113.) The barn and equipment are the property of Star but are used by an independent tobacco grower. (Id.) Also, an independent contractor residing in the State of Michigan, Greg Morano, made approximately four trips to Indiana in 1997, five trip in 1998, and five trips in 1999 for the purpose of soliciting business from independent distributors. (Id. at ¶ 114.) Mr. Morano became a full time employee of Star on January 1, 2000, and in that same year made one trip to Indiana for the same purpose as were his previous trips. (Id.) On two occasions, a Star scientific employee from Virginia accompanied Morano. (Morano Dep. at 53.) Star does not employ any personnel in the State of Indiana, nor does it store any goods there. (Am. Compl. at ¶ 112.) Furthermore, Star maintains no offices, warehouse or manufacturing facilities, nor does it own any real property, in Indiana. (Id. at ¶ 112.)
This current litigation stems from a lawsuit that was filed in 1997. In February of that year, then Indiana Attorney General Jeffrey Modisett filed a state court action on behalf of the State of Indiana against the major cigarette manufacturers. (Id. at ¶ 56, Ex. 10.) Star was a not a defendant to that action. (Id.) During the action's pendency, several states' Attorneys General and two of the major cigarette manufacturers negotiated the MSA, which was executed in November 1998. (Id. at ¶¶ 50, 51.) Indiana was among the states to join the MSA, thereby settling its claims against the participating cigarette manufacturers. (Id. at ¶¶ 6, 57, Ex. 1.) Star elected not to join the MSA and is thus considered a non-participating manufacturer ("NPM"). (Id. at ¶ 38.) Under the terms of the MSA, the participating states were to receive payments from the major cigarette manufactures. (Id. at ¶ 58.) However, also under the terms of the MSA, to avoid reduction, or possible elimination, of the state's allocated payments, each state was required to enact a Qualifying Statute. (Id.) In 1999, pursuant to the MSA, Indiana enacted its version of the Qualifying Statute. (Id.); see IND. CODE §§ 24-3-3-1 through 24-3-3-14.
Steve Carter was elected Indiana Attorney General in November 2000.
The Indiana Qualifying Statute requires Star, and other NPMs who sell cigarettes in Indiana, to pay into escrow each year a designated amount of money per cigarette sold in Indiana. (Id. at ¶ 6.); see IND. CODE § 24-3-3-12. The purpose of this escrow requirement is to prohibit NPMs from using the cost advantage that derives from their non-participation in the MSA to reap large profits from the sale of cigarettes "without ensuring that the state will have an eventual source of recovery from them if they are proven to have acted culpably." IND. CODE § 24-3-3-1(6). The amount of money paid into escrow each year, to the extent that it is not used to pay a judgment or settlement, is released and reverts back to the payer NPM twenty-five years after the funds were placed into escrow. See IND. CODE § 24-3-3-13. Also, the interest earned on the amount in escrow is received by the NPM as it is earned. Id. In April 2000, Star paid $445,198.62 into escrow, which was the net amount attributable to the sale of its cigarettes in Indiana under the Indiana Qualifying Statute. (Am. Compl. at ¶ 111.) In April 2001, that figure rose to $1,033,078.21. (Id.)
In this current litigation, Star, in Count V of its Amended Complaint, challenges the constitutionality of the Indiana Qualifying Statute under the Commerce Clause.
III. DISCUSSION
A. Standards
1. Motion To Dismiss
A motion to dismiss tests the sufficiency of the complaint, not the merits of the suit. See Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990) (citation omitted). "A complaint may not be dismissed unless it is impossible to prevail `under any set of facts that could be proved consistent with the allegations.'" Moriarity v. Larry G. Lewis Funeral Dirs. Ltd., 150 F.3d 773, 777 (7th Cir. 1998) (quoting Hishon v. King Spalding, 467 U.S. 69, 73 (1984)) (citations omitted). When considering a motion to dismiss, all well-pleaded facts are accepted as true, and all reasonable inferences are drawn in favor of the plaintiff. See, e.g., E.J. Brach Corp., 176 F.3d at 977-78.
2. Preliminary Injunction
"[A] preliminary injunction is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion." Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (quotation omitted); see also Caf~ 207, Inc. v. St. Johns County, 989 F.2d 1136, 1137 (11th Cir. 1993) ("A preliminary injunction is a drastic remedy[.]") (quotation omitted). A party seeking a preliminary injunction must show (1) some likelihood of success on the merits, (2) irreparable harm if the preliminary injunction is denied, and (3) the inadequacy of any remedy at law. See, e.g., Ty, Inc. v. Jones Group, Inc., 237 F.3d 891, 895 (7th Cir. 2001); Cooper v. Salazar, 196 F.3d 809, 813 (7th Cir. 1999). Thus, if the party seeking the preliminary injunction cannot show some likelihood of success on the merits, then the injunction is denied and the court need not consider the other factors in determining whether to issue such an injunction.
B. Motion To Dismiss
The Commerce Clause bestows upon Congress the power "[t]o regulate Commerce . . . among the several states." U.S. Const. Art. I, § 8, cl. 3. While the Constitution "says nothing about the protection of interstate commerce in the absence of any action by Congress," the Supreme Court has long recognized that "the Commerce Clause is more than an affirmative grant of power; it has a negative sweep as well." Quill, 504 U.S. at 309 (citing Gibbons v. Ogden, 9 Wheat. 1, 231-232, 239, 6 L.Ed. 23 (1824) (Johnson, J. concurring)). "The negative [or dormant] Commerce Clause limits the power of states `to erect barriers against interstate trade.'" Ferndale Labs., Inc. v. Cavendish, 79 F.3d 488, 492 (6th Cir. 1996) (quoting Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 35 (1980)). This case involves the negative, or dormant, Commerce Clause.
As stated above, in Count V of its Amended Complaint, Star asserts that the Qualifying Statute violates the dormant Commerce Clause because (1) the State of Indiana is without power to impose an escrow obligation on Star because it has no substantial nexus with the State, (2) the Qualifying Statute has the effect of controlling conduct wholly outside Indiana, and (3) the Qualifying statute excessively burdens interstate commerce. Defendant argues that Count V of the Amended Complaint should be dismissed (1) because the substantial nexus argument does not apply to this case and (2), to the extent that Star is not precluded, by its arguments made in Star Scientific, Inc. v. Earley and Star Scientific, Inc. v. Beales, from asserting its excessive burden argument here, the Indiana Qualifying Statute easily satisfy's the balancing test set forth in Pike v. Bruce Church, 397 U.S. 137. This Entry addresses only the first of Defendant's arguments because the second in not properly before the court.
Defendant's second argument, although asserted in both the brief in support of the motion to dismiss and the reply brief, has not been sufficiently addressed by the parties for the court to render an informed decision at this time. This is due in large part to the conclusory nature with which Defendant presents his second argument in both the brief in support and the reply brief, and Star's failure to address this argument in its response brief, due to an apparent misunderstanding of the agreed entry signed by this court on June 28, 2001. Moreover, depending upon the Fourth Circuit's resolution of the Beales case, this court may not need to address the excessive burden argument or the preclusion argument, which would necessarily be addressed before the court was to reach the merits of the excessive burden argument. Accordingly, the court will not rule on the merits of Star's excessive burden claim or Defendant's preclusion argument until those arguments are both fully and properly in front of this court. Thus, the only issue before the court at this time is the substantial nexus argument based on Quill, 504 U.S. 298.
In Quill, the Supreme Court, relying in large part on its holding in National Bellas Hess, Inc. v. Department of Revenue of the State of Illinois, 386 U.S. 753 (1967), and principles of stare decisis, held that North Dakota's enforcement of a use tax, a corollary to the State's sales tax, placed an unconstitutional burden on interstate commerce. 504 U.S. at 301-02. The tax at issue in Quill required an out-of-state mail-order house with no substantial nexus to North Dakota "to collect and pay a use tax on goods purchased for use within the State." Id. at 301. The Quill court, in striking down the statute, reaffirmed the bright-line rule of Bellas Hess, which held that a state could not require a mail-order vendor that lacked a physical presence in the taxing state to collect a use tax. See Quill, 504 U.S. at 311, 317. Star contends that the escrow requirement imposed by the Qualifying Statute should be analyzed under this bright-line physical-presence rule articulate in Bellas Hess and Quill.
Star asserts that the Bellas Hess/Quill bright-line rule applies to the escrow requirement at issue here. In doing so, Star contends that Quill applies to more than just state sales and use taxes, but applies to financial burdens, such as the escrow obligation, imposed by a state on a company which does not have a substantial nexus with that state.
Star recognizes that the Supreme Court has never directly addressed whether the Bellas Hess/Quill bright-line rule applies to a state imposed financial burden that is not a sales or use tax. Accordingly, it is appropriate to look directly to the language the Supreme Court used in Bellas Hess and Quill, and subsequent opinions by lower courts if necessary, to determine whether the Bellas Hess/Quill bright-line rule would apply to the financial obligation imposed in this case.
The language used in Quill itself is a strong indication that the Supreme Court intended that the bright-line physical-presence test apply only to state sales and use taxes.
Most telling is the following language:
In sum, although in our cases subsequent to Bellas Hess and concerning other types of taxes we have not adopted a similar bright-line, physical-presence requirement, our reasoning in those cases does not compel that we now reject the rule that Bellas Hess established in the area of sales and use taxes. To the contrary, the continuing value of a bright-line rule in this area and the doctrine and principles of stare decisis indicate that the Bellas Hess rule remains good law.
Id. at 317. Similar language used by the Court throughout the opinion leads to the same conclusion. For instance, the Court opined, "Although we have not, in our review of other types of taxes, articulated the same physical-presence requirement that Bellas Hess established for sales and use taxes, that silence does not imply repudiation of the Bellas Hess rule." Id at 314. Also, "Moreover, a bright-line rule in the area of sales and use taxes also encourages settled expectations and, in doing so, fosters investment by businesses and individuals." Id. at 316. It is clear to this court from the explicit and narrow language used in Quill that the bright-line rule articulated in Bellas Hess and reaffirmed in Quill applies only to state sales and use taxes.
This court is not alone in opining that the Bellas Hess/Quill bright-line rule is limited to sales and use taxes. Most recently, in American Target Advertising, Inc. v. Giani, 199 F.3d 1241, 1254-55 (10th Cir. 2000), the Tenth Circuit, in dicta, rejected American Target's attempted application of Bellas Hess and Quill to the facts of that case. In American Target, an out-of-state professional fundraising consulting firm challenged a Utah Act which required it, and all out-of-state professional fundraising consultants, to register with the State and obtain a permit. American Target asserted a number of constitutional theories as grounds for its attack, including that the Act violated the Commerce Clause. The court rejected American Target's argument, based on Quill and Bellas Hess, that there exists a bright-line rule which prohibits "the regulation of interstate commerce where the regulated entity's only connection to the state is by common carrier or the U.S. mails." Id. at 1255. The Tenth Circuit opined,
Both Bellas Hess and Quill concern the levy of taxes upon out-of-state entities. The Supreme Court in Quill repeatedly stressed that it was preserving Bellas Hess' bright-line rule `in the area of sales and use taxes.' Quill, 504 U.S. at 316; see also id. at 311 ("Bellas Hess . . . stands for the proposition that a vendor whose only contacts with the taxing State are by mail or common carrier lacks the `substantial nexus' required by the Commerce Clause."); id. at 317 ("[O]ur reasoning . . . does not compel that we now reject the rule that Bellas Hess established in the area of sales and use taxes."). The Utah Act imposes licensing and registration requirements, not tax burdens. The Bellas Hess/Quill bright-line rule in therefore inapposite.
Id. (emphasis in original) (internal parallel citations omitted).
Although the bright-line physical-presence rule articulated in Bellas Hess and Quill does not apply to this case, Star's substantial nexus argument is not necessarily dead. The substantial nexus test survived the general balancing test articulated in Pike, 397 U.S. 137, and still, at least in part, governs the validity of state taxes which affect interstate commerce. See Quill, 504 U.S. at 310-12 (holding that the four-part test articulated in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977), "continues to govern the validity of state taxes under the Commerce Clause"). Under the four part-test articulated in Complete Auto, a challenge to a state tax based on the Commerce Clause is to be denied so long as the "tax [1] is applied to an activity with a substantial nexus with the taxing State,
[2] is fairly apportioned, [3] does not discriminate against interstate commerce, and [4] is fairly related to the services provided by the State." Complete Auto, 430 U.S. at 279
(quoted in Quill, 504 U.S. at 311.) Thus, the substantial nexus test is alive and well in cases challenging the constitutionality of a state tax under the Commerce Clause.
Star attempts to take this line of argument one step further by asserting that the substantial nexus requirement applies to all financial burdens placed on interstate commerce, not just to state taxes which affect interstate commerce. Star's arguments in this regard, however, are not persuasive. For instance, during the preliminary injunction hearing, Star placed great emphasis on Justice Jackson's broad language in the following sentence of Norton Co. v. Department of Revenue of State of Illinois, 340 U.S. 534, 537 (1951): "Where a corporation chooses to stay at home in all respects except to send abroad advertising or drummers to solicit orders which are sent directly to the home office for acceptance, filling, and delivery back to the buyer, it is obvious that the State of the buyer has no local grip on the seller." Star vehemently maintained that this language was strong support for its argument that substantial nexus requirement should be applied to the escrow obligation imposed by the Indiana Qualifying Statute. In Norton, however, the plaintiff was challenging the constitutionality of the application of the Illinois Occupation Tax. See id. at 535-36. So, while the court has no doubt as to validity of Justice Jackson's language, the court is equally convinced that the language he used referred to a situation in which a state government was attempting to tax an out-of-state vendor who had no substantial nexus with the state. Indeed, the sentence following that which Star places such emphasis reads, "Unless some local incident occurs sufficient to bring the transaction within its taxing power, the vendor is not taxable." Id. at 537. Accordingly, Norton does not advance Star's argument or extension of the substantial nexus requirement. Likewise, the old line of Supreme Court cases discussing state taxation of out-of-state drummers and peddlers does not persuade this court that the substantial nexus requirement articulated in Bellas Hess, Quill and Complete Auto extends beyond state taxes and applies to all financial burdens imposed by a state which may have an affect on interstate commerce.
The peddler and drummer cases upon which Star relies, to the extent they are still good law, dealt with state taxation, not state regulation under its general police powers. See generally Nippert v. City of Richmond, 327 U.S. 416 (1946) (holding that a license tax placed on interstate commerce violated the Commerce Clause); Crenshaw v. Arkansas, 227 U.S. 389 (1913) (same); Robbins v. Shelby County Taxing Dist., 120 U.S. 489 (1887) (same); see also Memphis Steam Laundry Cleaner, Inc. v. Stone, 342 U.S. 389, 392-93 (1952) ("In the long line of `drummer' cases . . ., this Court has held that a tax imposed upon the solicitation of interstate business is a tax upon interstate commerce itself.") (internal citation omitted); cf. Homier Distrib. Co. v. City of Albany, 681 N.E.2d 390, 396 (N.Y. 1997) ("[T]he principles and distinctions discussed in the `peddler' and `drummer' cases have been superceded by the modern approach to Commerce Clause taxation questions that was first outlined in Complete Auto. . . ."). Therefore, only if the escrow requirement is a tax, rather than an exercise of the state's police power, would the Qualifying Statute violate the Commerce Clause if there is no substantial nexus between such tax and the State of Indiana.
This court is not the only court to limit the substantial nexus requirement to cases challenging a state tax. In Ferndale Laboratories, Inc. v. Cavendish, 79 F.3d at 488, the Sixth Circuit refused to invalidate under the Commerce Clause an Ohio statute which required wholesale distributors of pharmaceuticals to register and pay a license fee to the State. Ferndale, a Michigan distributor, charged that the statute violated the Commerce Clause, arguing a number of different theories. One such theory — that the statute violated the Commerce Clause because Ferndale did not have a substantial nexus with Ohio — was based on the Supreme Court's decision in Quill. Id. at 493. The defendants responded "that Quill concerned only a state's attempt to extend its taxing power beyond its boundaries and that the decision has no application to cases not involving a state's attempt to collect taxes on interstate trade and commerce." Id. The Sixth Circuit agreed holding,
We . . . agree with the defendants that Quill does not mandate a separate finding of a substantial nexus as a requirement for upholding a state statute that does not attempt to tax interstate transactions, but merely has an incidental impact on such trade. Quill involved a tax that directly burdened interstate commerce, and virtually every precedent relied upon by the Court in deciding Quill was concerned with attempts by states to tax interstate commerce directly. In contract, [the challenged statute] is a statute passed by Ohio under its police powers; it aims to protect Ohio's citizens from mislabeled or adulterated prescription drugs rather than simply trying to collect a tax.
Id. at 494. After distinguishing the registration fee from a tax, the court held, "This is not a case where a state has attempted to tax interstate transactions; thus, Ferndale's reliance on Quill is misplaced." Id.
Like the Ohio statute in Ferndale, the escrow obligation imposed by the Qualifying Statute is not a revenue-raising measure designed to line the State's coffers. See Ferndale, 79 F.3d at 494. Rather, the escrow requirement is a prophylactic measure designed to protect the State fisc should a judgment be entered against Star at some point in the not-to-distant future. The payments that Star is required to make into the escrow fund cannot be used by the State of Indiana until and unless a judgment is rendered in the State's favor. By no means does the escrow obligation cause Star to bear a share of the cost of State government from which it receives no benefits. See Bellas Hess, 386 U.S. at 756-60. Although the escrow requirement does have the effect of placing a financial burden on Star, it is not a tax.
Star's substantial nexus argument therefore fails because the escrow requirement is not a tax placed on interstate commerce, but is rather an exercise of the state's police powers. Accordingly, the correct standard by which to weigh the constitutionality of the Indiana Qualifying Statute under the Commerce Clause is that articulated in Pike, 397 U.S. at 142 — "Where 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." Of course, as discussed above, the court has reserved judging the escrow statute under the Pike test until the Fourth Circuit has decided Beales.
Star does not allege that the Indiana Qualifying Statute clearly discriminates against interstate commerce, in which case the statute would be unconstitutional "unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism." Gov't Suppliers Consolidating Servs., Inc. v. Bayh, 975 F.2d 1267, 1277 (7th Cir. 1992) (internal quotations omitted). Indeed, the Indiana Qualifying Statute does not clearly discriminate against interstate commerce as the Statute requires the same escrow payments by in-state NPMs as it does out-of-state NPMs.
The court again stresses that its holding here is limited to a very, very narrow issue — whether the State of Indiana has authority to impose an escrow obligation on Star because, Star maintains, it has no substantial nexus with the State. This Entry does not address the merits of any other aspect of this complex case.
C. Preliminary Injunction
Because the court has found that Star's substantial nexus argument fails as a matter of law and that is the only theory upon which Star sought a preliminary injunction, it necessarily follows that Star cannot show any likelihood of success on the merits of that theory. Accordingly, a preliminary injunction cannot issue as to the substantial nexus argument, and thus, Star's motion for preliminary injunction will be denied.
IV. CONCLUSION
For the foregoing reasons, Defendant's motion to dismiss the substantial nexus argument asserted in Count V of the Amended Complaint is GRANTED. The court expresses no opinion as to Defendant's motion to dismiss Counts I through IV of the Amended Complaint, nor does the court express an opinion on the merits of Star's extraterritorial argument or excessive burden argument, both asserted in Count V of the Amended Complaint. Also, Plaintiffs' motion for preliminary injunction is DENIED.