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HCI Distribution, Inc. v. Peterson

United States District Court, D. Nebraska

December 19, 2018

DOUGLAS PETERSON, Nebraska Attorney General, and TONY FULTON, Nebraska Tax Commissioner, Defendants.


          John M. Gerrard Chief United States District Judge.

         The plaintiffs seek a declaration of rights pursuant to 28 U.S.C. § 2201, and injunctive relief pursuant to 28 U.S.C. § 2202, regarding the enforcement of Nebraska's statutes regulating tobacco product manufacturing and distribution. The defendants are the duly elected state officers whose offices are charged with enforcement of the statutes from which the plaintiffs seek relief. The defendants jointly filed a motion to dismiss (filing 27) the plaintiffs' complaint for lack of subject-matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1) and failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6). The defendants' motion will be sustained in part and denied in part.


         A motion pursuant to Rule 12(b)(1) challenges whether the court has subject matter jurisdiction. The party asserting subject matter jurisdiction bears the burden of proof. Great Rivers Habitat Alliance v. FEMA, 615 F.3d 985, 988 (8th Cir. 2010).

         A court deciding a motion under Rule 12(b)(1) must distinguish between a "facial attack"' and a "factual attack." Branson Label, Inc. v. City of Branson, Mo., 793 F.3d 910, 914 (8th Cir. 2015). A facial attack concerns a failure to allege sufficient facts to support subject matter jurisdiction, whereas a factual attack concerns the veracity of the pled facts supporting subject matter jurisdiction. See Davis v. Anthony, Inc., 886 F.3d 674, 679 (8th Cir. 2018). In a facial attack, the Court merely needs to look and see if the plaintiffs have sufficiently alleged a basis of subject matter jurisdiction and accepts all factual allegations in the pleadings as true and views them in the light most favorable to the nonmoving party. Branson Label, 793 F.3d at 914. Here, the defendants are advancing a "facial attack" to subject matter jurisdiction, based on the pleadings. See Id. Accordingly, the Court restricts itself to the pleadings and the plaintiffs receive the same protections as they do under Rule 12(b)(6). Hastings v. Wilson, 516 F.3d 1055, 1058 (8th Cir. 2008).

         To survive a Rule 12(b)(6) motion to dismiss, a complaint must set forth a short and plain statement of the claim showing that the pleader is entitled to relief. Fed.R.Civ.P. 8(a)(2). This standard does not require detailed factual allegations, but it demands more than an unadorned accusation. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). For the purposes of a motion to dismiss a court must take all the factual allegations in the complaint as true, but is not bound to accept as true a legal conclusion couched as a factual allegation. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).


         The plaintiffs, HCI Distribution, Inc., and Rock River Manufacturing, Inc., are wholly owned subsidiaries of Ho-Chunk, Inc. Filing 1 at 6. Ho-Chunk is the economic development arm of the Winnebago Tribe. Both HCI and Rock River are incorporated under Tribal law. The Tribe is a federally recognized Indian tribe eligible to receive services from the United States Bureau of Indian Affairs with its reservation land sited within the boundaries of Nebraska. Filing 1 at 6; seeIndian Entities Recognized and Eligible To Receive Services From the United States Bureau of Indian Affairs, 83 Fed. Reg. 4, 235 (Jan 30, 2018).

         HCI's business consists of purchasing and reselling tobacco goods exclusively in Indian country throughout the United States. Filing 1 at 7. HCI sells to reservation-based wholesalers and retailers exclusively in Indian country. All tobacco products HCI ships are affixed with tax stamps in accordance with Tribal law. HCI employs tribal members and allocates 20 percent of its net profits to support tribal welfare programs, which in 2017 allowed HCI to contribute $157, 381 to the tribe.

         Rock River is a federally licensed cigarette manufacturer with its facilities on the Tribe's reservation. Filing 1 at 8. All Rock River's products are manufactured on the reservation. Rock River's products are distributed by HCI and other distributors, and are sold by such distributors to retailers nationwide. All Rock River's tobacco products bear the tribal stamp for each jurisdiction where its products are sold.

         In 1998, Nebraska and 45 other states settled lawsuits with several tobacco manufacturers and trade organizations. The parties' Master Settlement Agreement (MSA) required the tobacco manufacturers to place restrictions on tobacco product advertising and marketing, as well as make cash payments in perpetuity to the settling states. Filing 1 at 2; see also Omaha Tribe of Nebraska v. Miller, 311 F.Supp.2d 816, 818 (S.D. Iowa 2004). Later, additional tobacco manufacturers signed onto the MSA. These subsequent participating manufacturers, together with the original participating manufacturers are referred to collectively as the participating manufacturers. Filing 1 at 2.

         Not all tobacco manufacturers signed onto the MSA. Those that did not are called non-participating manufacturers. Rock River is one such non-participating manufacturer. Filing 1 at 8. The settling states became concerned that the non-participating manufacturers could avoid liability for the harm that their tobacco products could cause, and the participating manufacturers were concerned that the non-participating manufacturers would be able to unfairly compete in the market without incurring costs similar to the costs associated with participation in the MSA. Miller, 311 F.Supp.2d at 818; filing 1 at 3. In response, the participating manufacturers and the settling states agreed to enact variations of a model statutory scheme that imposed fees and other regulations on non-participating manufacturers. Filing 1 at 3. Those statutes are often referred to as qualifying or escrow statutes. Filing 1 at 9.

         Nebraska enacted its version of an escrow statute in 1999. Neb. Rev. Stat. §§ 69-2701 to 69-2703.01. Section 69-2703 essentially provided that tobacco manufacturers selling cigarettes within the state could either join the MSA as a participating manufacturer or be required to fund an escrow account by placing funds into an account on a quarterly basis regarding the manufacturer's unit sales of tobacco products. Violation of the escrow requirements could result in civil penalties and possible exclusion from selling tobacco products in the state.

         The terms of the MSA required the settling states to diligently enforce their escrow statute. Filing 1 at 9-10. When enforcement proved difficult, the states enacted further model legislation referred to as the directory statute. The purpose of this legislation was to publish a list of tobacco product manufacturers and tobacco products that were in full compliance with the escrow statute and other tobacco manufacturing and licensing laws. Filing 1 at 10. Tobacco products not on the directory list could not be sold in the state. Nebraska's directory statute, enacted in 2003, is found at §§ 69-2704 to 69-2707.01. Together, the escrow and directory statutes are often referred to as the MSA laws.

         Still claiming that the settling states were not diligently enforcing the escrow requirements, the participating manufacturers initiated an arbitration proceeding to reduce the payments owed to the settling states. Filing 1 at 12. Of particular concern were tobacco producer sales in Indian country. Filing 1 at 13. Some of the settling states, including Nebraska, were pressured into including new statutory provisions aimed at the tribal tobacco business. Filing 1 at 12; see alsofiling 1-5.

         The plaintiffs and the Tribe have always maintained that their sovereign authority precluded the state's authority to regulate their on-reservation tobacco manufacturing and tobacco distribution business. Filing 1 at 11. In 2011, the Nebraska Attorney General's office worked with representatives of the tobacco manufacturers to devise model legislation aimed at regulating tribal tobacco manufacturing and distribution, and require tribes to comply with Nebraska's MSA laws. Filing 1-1. That same year, legislation was enacted that purportedly brought tribal tobacco product manufacturing and distribution within the regulations imposed by the escrow statute, but also purported to provide a release of funds for "cigarettes sold on an Indian tribe's Indian country to its tribal members"-but only if there was an agreement with the Governor, in which a tribe was required to accept state regulation of the tribe's cigarette manufacturing and distribution business. See §§ 69-2703(2)(b)(iv) and 77-2602.06.

         In December 2015, the Tribe, and the plaintiffs in April 2016, entered into an agreement of their own separate from their negotiations with the State. This agreement is called the "Universal Tobacco Settlement Agreement." The agreement purported to regulate cigarette sales in Indian country, as well as create a fund that would allow the tobacco product manufacturers participating in this new agreement to obtain a release of all claims that may arise out of the sale of their products. Filing 1 at 11-12; filing 1-2. In addition to regulating cigarette marketing, the agreement required the participating tobacco product manufacturers to make quarterly payments to a settling tribe regarding the number of cigarettes sold in that tribe's jurisdiction. Filing 1-2 at 6-7. In 2017, the Tribe received fees pursuant to the agreement totaling $31, 681.00. Filing 1 at 11-12. In addition, the Tribe imposes a tax on the sale of cigarettes within its jurisdiction. In 2017 the Tribe collected $122, 658 in cigarette tax revenue. Id.

         In 2014, at approximately the same time the Tribe was considering participation in the Universal Tobacco Settlement Agreement, the Nebraska Department of Revenue issued tax statements to several reservation-based cigarette retailers. Filing 1 at 14. According to the plaintiffs, the issuance of tax statements prompted them to engage in negotiations with the defendants to settle their disagreement regarding whether their tobacco manufacturing and distribution business was subject to Nebraska's MSA laws. The plaintiffs contend that the negotiations were unsuccessful due to the defendants' insistence that the plaintiffs were not excused from strict compliance with Nebraska's MSA laws. The plaintiffs represent that since March 2014, they have operated under a cloud of uncertainty regarding the threat of penalties and retaliation by the defendants, which has created an impediment to their business operations and ability to expand economically. Filing 1 at 15.


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