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R.J. Reynolds Tobacco Co. v. United States Department of Agriculture

United States District Court, D. Columbia.

September 17, 2015

R.J. REYNOLDS TOBACCO COMPANY, et al., PLAINTIFFS,
v.
UNITED STATES DEPARTMENT OF AGRICULTURE, et al., DEFENDANTS

Page 357

          For R.J. REYNOLDS TOBACCO COMPANY, SANTA FE NATURAL TOBACCO COMPANY, INC., Plaintiffs: Ashley Charles Parrish, Jeffrey S. Bucholtz, Mark Steven Brown, KING & SPALDING, LLP, Washington, DC.

         For UNITED STATES DEPARTMENT OF AGRICULTURE, FARM SERVICE AGENCY, COMMODITY CREDIT CORPORATION, THOMAS J. VILSACK, in his official capacity as Secretary of the U.S. Department of Agriculture, JUAN M. GARCIA, in his official capacity as the Administrator of the Farm Service Agency and Executive Vice President of the Commodity Credit Corporation, Defendants: Peter J. Phipps, LEAD ATTORNEY, U.S. DEPARTMENT OF JUSTICE, Civil Division, Federal Programs Branch, Washington, DC.

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         MEMORANDUM OPINION

         KETANJI BROWN JACKSON, United States District Judge.

         Congress enacted the Fair and Equitable Tobacco Reform Act of 2004 (the " FETRA" ), Pub. L. 108-357 § 601, 118 Stat. 1418, 1521 (2004) (codified at 7 U.S.C. § § 518 et seq. ), to wean tobacco farmers off of U.S. government subsidies at the expense of the manufacturers and importers of cigarettes and other tobacco products. Pursuant to the FETRA, the manufacturers and importers of tobacco products assume financial responsibility for making subsidy payments to tobacco growers for a period of ten years, and the Commodity Credit Corporation (" CCC" ), an agency within the United States Department of Agriculture (" USDA" ), determines on a quarterly basis the particular FETRA payments that each manufacturer or importer has to make--a determination that, by statute, must be based upon the manufacturer's or importer's relative share of the overall domestic market for tobacco products. Plaintiffs R.J. Reynolds Tobacco Company and Santa Fe Natural Tobacco Company (" Plaintiffs" ) have long believed that the CCC has underestimated the size of the overall domestic market by excluding illegal cigarette sales from the FETRA calculation and, thereby, has overcharged Plaintiffs with respect to their quarterly FETRA assessments.

         To support their contention that the domestic market for cigarette sales is larger (and, thus, Plaintiffs' relative market share smaller) than the figures that the CCC has used to calculate FETRA assessments, Plaintiffs commissioned a private investigation in 2012 that, according to Plaintiffs, proves that two Native American tribes in upstate New York are engaged in the unlawful manufacturing and selling of cigarettes. Plaintiffs then launched administrative challenges to two of their 2013 quarterly FETRA assessments based on the findings of their own report, insisting that the CCC had no choice but to credit their study's conclusions and adjust the assessments accordingly. When the agency announced that it would not accept Plaintiffs' findings regarding illegal sales because they were not relevant to the FETRA calculation insofar as the figures were imprecise and had not been substantiated by another federal agency, Plaintiffs filed the instant lawsuit against the USDA, the Farm Service Agency, the CCC, Tom Vilsack (in his official capacity as Secretary of the USDA), and Juan Garcia (in his official capacity as Administrator of the Farm Services Agency and Executive Vice President of the CCC), claiming that the agency's refusal to accept their findings violates both the terms of the FETRA and the prohibition against arbitrary and capricious decision making that appears in the Administrative Procedure Act (" APA" ). ( See Compl., ECF No. 1, ¶ ¶ 194-95 (Count One: FETRA); 200-09 (Count Two: APA).)

         Before this Court at present is Defendants' motion to dismiss Plaintiffs' complaint. Defendants assert that the allegations of Plaintiffs' complaint establish that the USDA has complied with the FETRA and the APA as a matter of law, and thus that Plaintiffs' complaint fails to state a claim upon which relief can be granted. For the reasons explained below, this Court agrees with Defendants that the FETRA permits the agency to decide to credit only precise figures that other government agencies have already substantiated, and therefore, the CCC's refusal to accept Plaintiffs' study was consistent with the law. See Skidmore v. Swift & Co., 323 U.S. 134, 139-140, 65 S.Ct. 161, 89 L.Ed. 124 (1944). The Court also agrees with

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Defendants that Plaintiffs' APA claim cannot proceed because the FETRA provides an adequate remedy for their grievances. Consequently, Defendants' motion to dismiss Plaintiffs' complaint will be GRANTED.

         A separate order consistent with this Memorandum Opinion will follow.

         I. BACKGROUND

         A. The Fair and Equitable Tobacco Reform Act of 2004

         The Fair and Equitable Tobacco Reform Act of 2004 (" FETRA" ) puts an end to federal tobacco subsidy and price support programs. See 7 U.S.C. § § 518 et seq. Price supports and marketing quotas for U.S. tobacco growers were initially established during the Great Depression as a means of stabilizing the domestic tobacco market. See generally Agricultural Adjustment Act of 1938, 7 U.S.C. § § 1281-1407.[1] The subsidy system functioned relatively well for nearly 70 years but, beginning in the early 1990s, several factors converged to convince Congress that the time had come to terminate the tobacco subsidy program. See, e.g., State v. Philip Morris USA Inc., 359 N.C. 763, 618 S.E.2d 219, 220 (N.C. 2005) (explaining that tobacco quotas and price supports began to " work[] at cross-purposes" ); A.D. Bedell Wholesale Co. v. Philip Morris Inc., 263 F.3d 239, 241-42 (3d Cir. 2001) (discussing the nationwide mass tort lawsuit that state attorneys general brought against tobacco-product manufacturers); see also Craig P. Raysor, From the Sword to the Pen: A History and Current Analysis of U.S. Tobacco Marketing Regulations, 13 Drake J. Agric. L. 497, 528 (2008). Instead of abruptly terminating seven decades of tobacco-production subsidies, however, Congress chose to taper off the payments to tobacco growers slowly, through a new system called the Tobacco Transition Payment Program (" TTPP" ). See Pub. L. No. 108-357 § § 601-43, 118 Stat. 1418, 1522-36 (Oct. 22, 2004) (codified in part as amended at 7 U.S.C. § § 518-19a). Pursuant to the TTPP, tobacco growers who had previously benefited from the repealed subsidy programs became eligible for ten years of transition payments, from fiscal year 2005 through fiscal year 2014. See 7 U.S.C. § 518d(b)(1)--(2); id. § 518d(k).

         The TTPP served two purposes. First, the transitional payments served to " cushion" tobacco growers against " the initial shock" of the rapid price plummet that the move to a free market precipitated. Raysor, supra, at 536. " According to the legislative

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history," Congress hoped that during this ten-year buyout period " [t]obacco [g]rowers would either become more competitive with the free market or would transition to new crops or would move to entirely different means of earning a living. " In re Int'l Tobacco Partners, Ltd., 468 B.R. 582, 585 (Bankr. E.D.N.Y. 2012) (citing 150 Cong. Rec. H8704-03, at *H8717-18). Second, the payments relieved the federal government of its responsibility for subsidizing the tobacco growers out of the public fisc and intentionally transferred that responsibility to tobacco-product manufacturers and importers. See 7 U.S.C. § 518d(b)(1)--(2); see also State v. Philip Morris USA Inc., No. 98 CVS 14377, 2004 WL 2966013, at *4 (N.C. Super. Ct.) (noting that " [s]ince the dismantling of [the quota] systems benefits the tobacco companies, Congress made them pay for it" ), rev'd on other grounds by State v. Philip Morris USA Inc., 359 N.C. 763, 618 S.E.2d 219 (N.C. 2005). Tobacco-product manufacturers understood and accepted this shift in responsibility for making the subsidy payments to tobacco farmers; in fact, this financial obligation was specifically envisioned during the negotiations that preceded the 1998 nationwide settlement of mass tort litigation that state attorneys general had brought against Big Tobacco. See generally Raysor, supra, at 524-31.[2]

         1. The Commodity Credit Corporation

         The FETRA established the Commodity Credit Corporation (" CCC" ) as an agency within the USDA that was charged with the responsibility of managing the process of administering the transfer of payments from tobacco-product manufacturers to tobacco growers. See 15 U.S.C. § 714 (creating a " body corporate to be known as Commodity Credit Corporation . . . , which shall be an agency and instrumentality of the United States, within the Department of Agriculture, subject to the general supervision and direction of the Secretary of Agriculture" ); see also 7 U.S.C. § 518d(b)--(c) (noting that " [t]he Secretary,

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acting through the Commodity Credit Corporation, shall impose quarterly assessments" pursuant to FETRA). Congress authorized the CCC to issue regulations to govern the process for collecting money from the manufacturers and importers, see 7 U.S.C. § 519(a), and also specifically determined that the CCC could promulgate these regulations without having to adhere to the Administrative Procedure Act's notice and comment provisions, see id. § 519(b)(1). As outlined in the regulations that the CCC promulgated, the agency was to collect payments--termed " assessments" --from the manufacturers and importers of tobacco products on a quarterly basis (totaling approximately one billion a year) and deposit those assessments into the " Tobacco Trust Fund," which is a revolving trust fund that Congress created to carry out the FETRA's purposes. See 7 U.S.C. § 518e(a); 7 C.F.R. § 1463.8. So collected, those funds would then be distributed by the CCC to eligible tobacco growers and quota holders. See 7 U.S.C. § 518a (providing for payments for tobacco quota holders), id. § 518b (providing for payments for producers of quota tobacco).

         By statute, the FETRA assessment, collection, and distribution process concluded in 2014. See 7 U.S.C. § 518d(k). Over the ten-year life of the program, the CCC collected more than $10 billion in assessments from tobacco-product manufacturers and importers and distributed them to program beneficiaries in accordance with FETRA's terms. See USDA, Tobacco Transition Payment Program; Cigar and Cigarette Per Unit Assessments, 76 Fed.Reg. 15,859 (Mar. 22, 2011); see also 7 U.S.C. § 518f.

         2. The Process By Which The CCC Calculated Assessments

         The CCC's determination of the amount of the TTPP quarterly assessment to be paid by each tobacco-product manufacturer or importer involved several calculations. See generally Determination of the Administrator of the Farm Service Agency and Executive Vice President of the Commodity Credit Corporation Regarding the Current " Step A" and " Step B" Assessment Methods in the Tobacco Transition Payment Program, Nov. 16, 2011.[3] First, the CCC determined the amount of the national assessment needed to make subsidy payments to tobacco growers overall, and then the CCC used a two-step process to allocate payment responsibility for that national assessment amount among the tobacco-product manufacturers and importers. See 7 U.S.C. § 518d(b)(2); 7 C.F.R. § 1463.4; see also Prime Time Int'l Co. v. USDA, 753 F.3d 1339, 1340, 410 U.S. App.D.C. 172 (D.C. Cir. 2014); Philip Morris USA, Inc. v. Vilsack, 736 F.3d 284, 285-86 (4th Cir. 2013). In Step A, the overall national assessment amount that was to be collected from the various tobacco manufacturers and importers was allocated based on the six classes of tobacco products: cigarettes, cigars, snuff, roll -your-own tobacco, chewing tobacco, and pipe tobacco. See 7 U.S.C. § 518d(c)(1)--(2); 7 C.F.R. § § 1463.3, 1463.5; see also Prime Time, 753 F.3d at 1340; Philip Morris, 736 F.3d at 286.[4] In Step B, the CCC determined each manufacturer's or importer's particular " market share" within each of the classes of tobacco products. See 7 U.S.C. § 518d(a)(2)-(3), (e)(1). Per the FETRA, that determination was made

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by dividing each individual manufacturer's and importer's volume of domestic sales of the particular class of tobacco product by the total volume of domestic sales of that product. See id. § 518d(a)(3); see also id. § 518d(f).

         Significantly for present purposes, Congress specified that the volume of domestic sales for each product class was a figure that the CCC must determine based on all of the non-tax-exempt tobacco products that are " removed" into domestic commerce during the assessment period. See id. § § 518d(a)(2)(A), (g)(2). The term " removed" as used in the FETRA is a term of art--it incorporates the Internal Revenue Code's definition, which broadly includes any means of placing tobacco products into the stream of commerce, including taking domestically manufactured products " from the factory" or " releas[ing] [imported products] from customs custody," and it also includes employing wrongful means of sale or distribution such as " smuggling or other unlawful importation." 26 U.S.C. § 5702(j).

         Notably, the FETRA contains a provision that speaks specifically to the authorized sources of information that the CCC can rely upon to determine the overall volume of sales for each class of tobacco product that has been removed into domestic commerce:

(g) Determination of volume of domestic sales

         

(1) In general

The calculation of the volume of domestic sales of a class of tobacco product by a manufacturer or importer, and by all manufacturers and importers as a group, shall be made by the Secretary based on information provided by the manufacturers and importers pursuant to subsection (h), as well as any other relevant information provided to or obtained by the Secretary.

7 U.S.C. § 518d(g)(1) (emphasis added). Subsection (h)--entitled " Measurement of volume of domestic sales" --requires each manufacturer and importer of tobacco products to submit to the CCC " a certified copy of each of the returns or forms described by paragraph (2) that are required to be filed with a Federal agency[,]" which must be provided " on the same date that those returns are filed, or required to be filed, with the agency." See id. § 518d(h)(1). And paragraph (2) of subsection (h) establishes that these required submissions consist of " returns and forms" tobacco manufacturers and importers file regarding " the removal of tobacco products into domestic commerce[,]" and " the payment of taxes imposed under" chapter 52 of Title 26 of the U.S. Code. See id. § § 518d(h)(2).[5] Thus, section 518d(g)(1) of the FETRA essentially directs the CCC to calculate the " volume of domestic sales" based on certified excise tax and customs forms and also " any other relevant information provided to or obtained by the Secretary." Id. § 518d(g)(1).

         As mentioned, the FETRA provides that once the CCC has determined the total volume of domestic sales for each class of tobacco product, it must then calculate the market share of each tobacco-product manufacturer and allocate the national assessment amount for each class of tobacco product to each manufacturer or importer according to that entity's market share.

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See id. § 518d(e)(1) (" The assessment for each class of tobacco product . . . shall be allocated on a pro rata basis among manufacturers and importers based on each manufacturer's or importer's share of gross domestic volume." ); see also id. § § 518d(a)(3) (defining " market share" ); id. § 518d(f) (requiring that " [t]he amount of the assessment for each class of tobacco product" shall be " determined . . . by multiplying" the market share of that manufacturer or importer by " the total amount of the [national] assessment for that quarterly payment period . . . for [that] class of tobacco product" ). The FETRA statute also makes clear that " [n]o manufacturer or importer shall be required to pay an assessment that is based on a share that is in excess of the manufacturer's or importer's share of domestic volume." Id. § 518d(e)(2).

         3. The Process By Which Manufacturers And Importers Challenge FETRA Assessments

         The FETRA and its implementing regulations also provide an administrative mechanism for challenging the assessment amounts that the CCC prescribes. Within 30 days of receiving notice of the assessment, a manufacturer or importer may submit a written statement to the agency that sets forth the basis for the challenge. See 7 U.S.C. § 518d(i)(1); 7 C.F.R. § 1463.11(a). And the FETRA specifies that, " [i]n challenging the assessment, the manufacturer or importer may use any information that is available, including third party data on industry or individual company sales volumes." 7 U.S.C. § 518d(i)(2). The CCC's Executive Vice President then assigns a person to act as a hearing officer--that individual prepares an administrative record to provide the Executive Vice President with the information necessary to render a final determination on the matter in dispute. See 7 C.F.R. § 1463.11(b). The FETRA also establishes that manufacturers and importers have a right to sue in federal court: upon conclusion of the process for challenging an assessment outlined in the regulations, a manufacturer may seek federal court review of the agency's final determination. See 7 U.S.C. § 518d(j); see also 7 C.F.R. § 1463.11(c) (noting that administrative remedies are deemed exhausted for purposes of 7 U.S.C. § 518d(j)(1) if 30 calendar days elapse following the manufacturer's or importer's final submission of challenge-related documentation to the CCC).

         B. Plaintiffs' 2013 Assessments, Independent Investigation, And Appeal

         Plaintiffs R.J. Reynolds Tobacco Company (" RJRT" ) and Santa Fe Natural Tobacco Company (" Santa Fe" ) are cigarette manufacturers that the CCC has required to pay TTPP assessments. ( See Compl. ¶ ¶ 22-23, 192.)[6] The instant action involves two sets of quarterly assessments that the CCC charged to these manufacturers: (1) the second-quarter assessments of 2013 (dated September 1, 2013), which amounted to approximately $49.073 million by RJRT and approximately $2.746 million by Santa Fe ( Id. ¶ 82), and (2) the third-quarter assessments of 2013 (dated December 1, 2013) in the amount of approximately $49.301 million by RJRT and approximately $3.069 million by Santa Fe ( see id. ¶ 101). These assessments were based on the CCC's calculation of RJRT's and Santa Fe's market shares during the assessment period, as described above. ( See supra Part I.A.2.) It is undisputed that, when the CCC calculated the total volume of domestic tobacco-product sales

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upon which the market shares of individual manufacturers and importers are based, it did not take into account the volume of sales resulting from any illegal manufacturing of tobacco products, which, according to Plaintiffs, unlawfully skewed the FETRA calculations. ( See id. ¶ 130.)

         1. Plaintiffs Hire A Business Investigation Firm To Estimate How Many Cigarettes Are Sold By Two Non-Reporting, ...


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