Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-16-03071/USCOURTS-ca7-16-03071-0/pdf.json

Nature of Suit Code: 440
Nature of Suit: Other Civil Rights
Cause of Action: 

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In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 16-3071

LEGATO VAPORS, LLC, et al.,

Plaintiffs-Appellants,

and

RIGHT TO BE SMOKE-FREE COALITION, INC.,

Intervenor-Appellant,

v.

DAVID COOK, et al.,

Defendants-Appellees.

____________________

Appeal from the United States District Court for the

Southern District of Indiana, Indianapolis Division.

No. 1:15-cv-00761-SEB/TAB — Sarah Evans Barker, Judge.

____________________

ARGUED DECEMBER 8, 2016 — DECIDED JANUARY 30, 2017

____________________

Before MANION, KANNE, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge. In 2015 the State of Indiana enacted the Vapor Pens and E-Liquid Act to regulate the manufacture and distribution of vapor pens and the liquids used in 

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so-called e-cigarettes. 2015 Ind. Acts 1870, Ind. Code §§ 7.1-7-

1-1 et seq. The Act is written so as to have extraterritorial reach 

that is unprecedented, imposing detailed requirements of Indiana law on out-of-state manufacturing operations. The Act 

regulates the design and operation of out-of-state production 

facilities, including requirements for sinks, cleaning products, 

and even the details of contracts with outside security firms 

and the qualifications of those firms’ personnel. Imposing 

these Indiana laws on out-of-state manufacturers violates the 

dormant Commerce Clause of the United States Constitution.

The federal Constitution leaves Indiana ample authority 

to regulate in-state commerce in vapor pens, e-liquids, and ecigarettes to protect the health and safety of its residents. For 

example, the Act’s prohibitions on sales to minors, its requirements for child-proof packaging, ingredient labeling, and purity, and requirements for in-state production facilities pose 

no inherent constitutional problems. Indiana may not, however, try to achieve those health and safety goals by directly 

regulating out-of-state factories and commercial transactions. 

As applied to out-of-state manufacturers, the challenged provisions of the Act violate the dormant Commerce Clause prohibition against extraterritorial legislation.

We reverse the judgment of the district court dismissing 

this case and remand with instructions to enjoin enforcement 

of the challenged provisions against the plaintiffs and to declare the challenged provisions unenforceable against out-ofstate manufacturers. To explain our reasons, we first review 

the statutory provisions and procedural history of the case. 

Then we apply the Commerce Clause analysis to three categories of challenged provisions: security terms, clean room 

specifications, and audit requirements.

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I. Factual and Procedural Background

In 2015, the Indiana legislature passed the Vapor Pens and 

E-Liquid Act, regulating the production and sale of e-liquid 

solutions. E-liquid solutions—generally consisting of a mixture of propylene glycol, vegetable glycerin, flavorings, water, 

and a range of nicotine concentrations—are ingested by the 

consumer using an e-vapor device. E-vapor devices are often 

shaped like cigarettes. They use a battery and atomizer to turn 

an e-liquid solution into an aerosol that can be inhaled 

through a mouthpiece, simulating the act of smoking a cigarette. The popularity of “vaping” has increased dramatically 

since its introduction to the United States market in 2007. Currently, there are an estimated 138 brick-and-mortar “vape” 

shops in Indiana, and products are also available online to Indiana consumers. Total annual sales of vape devices and eliquids in the state are more than $77 million.

In some ways, the Act is unremarkable and uncontroversial. It regulates in-state sales of e-liquids with requirements 

for tamper-evident and child-proof packaging, as well as labels designating active ingredients, nicotine content, and expiration dates. Ind. Code § 7.1-7-4-6(b)(1)–(7). The Act prohibits sales to minors. § 7.1-7-6-2(a)(1). The Act itself explains that 

its purpose is to protect public health and safety in the use of 

these products “in the absence of federal regulations,” § 7.1-

7-1-2, since the federal government has not adopted comparable regulations for safety and purity of e-cigarette products.

What is remarkable, however, is the Act’s extensive regulation beyond the manufacture and sale of e-liquid solutions 

in Indiana. The statute requires not just that in-state and outof-state manufacturers meet stringent security standards, but 

it also goes so far as to require the manufacturer to contract 

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with an independent security firm rather than provide the security services in-house. It requires the manufacturer to enter 

a service agreement with a security firm that is valid for five 

years after the date of permit application. Ind. Code §§ 7.1-7-

4-1(d)(2)(B), (d)(3). The security firm must meet stringent certification standards and provide 24-hour video monitoring 

and high-security key systems. § 7.1-7-4-6(b)(12)–(13). The Act 

also dictates details for the construction, design, and operation of the manufacturing facility, including requiring a “clean 

room” for mixing and bottling that adheres to requirements 

of the Indiana Commercial Kitchen Code. §§ 7.1-7-4-1(d)(1), 

7.1-7-2-4(3).

The Act imposes each of these substantive requirements 

governing manufacturing processes and facilities as a condition of obtaining and keeping a permit. If a manufacturer’s 

products are sold in Indiana, the manufacturer must obtain a 

permit from the Indiana Alcohol and Tobacco Commission. 

§ 7.1-7-4-1(a). To obtain a permit, the substantial requirements 

for security and clean room facilities must be met, and audit 

provisions apply to ensure compliance after the permit is 

granted. See, e.g., § 7.1-7-4-6(b)(17). A permitted manufacturer “must submit to random audits,” § 7.1-7-4-6(b)(16), defined as procedures “performed by the commission, including inspection of manufacturing facilities and preparation areas, review of required records, compliance checks, and auditing of samples of e-liquid,” § 7.1-7-2-3. The Act defines a 

“manufacturer” as “a person or cooperative, located inside or 

outside Indiana, that is engaged in manufacturing e-liquid.” 

§ 7.1-7-2-15 (emphasis added).

The plaintiffs are three out-of-state manufacturers of regulated products: Legato Vapors, Rocky Mountain E Cigs, and 

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Derb E Cigs. They filed suit in the district court for injunctive 

and declaratory relief against members of the Indiana Alcohol 

and Tobacco Commission on several state and federal 

grounds. The parties filed cross-motions for summary judgment on stipulated facts. The district court granted summary 

judgment for the defendants. Legato Vapors LLC v. Cook, — F. 

Supp. 3d —, 2016 WL 3548658 at *18 (S.D. Ind. June 30, 2016).

Where the district court has decided cross-motions for 

summary judgment on stipulated facts, our review on appeal 

is de novo, without deference to the legal analysis of the district 

court. On appeal, plaintiffs have narrowed both their theory 

and the scope of their challenge. They have narrowed their 

legal theory to the argument that the Act, as applied to outof-state manufacturers, violates the dormant Commerce 

Clause prohibition on extraterritorial state regulation of commerce. Plaintiffs have narrowed their challenges to the Act’s 

direct regulations applicable to manufacturing facilities, including those regulating the physical manufacturing facility, 

security and cleaning arrangements, and facility audits. 

II. The Dormant Commerce Clause

The Commerce Clause gives Congress the power to regulate commerce “among the several States.” U.S. Const. art. I, 

§ 8, cl. 3; see Gibbons v. Ogden, 22 U.S. 1 (1824); Wilson v. BlackBird Creek Marsh Co., 27 U.S. 245 (1829). While the clause expressly grants power to Congress, since before the Civil War 

it has been settled that it also has an implicit or “dormant” 

dimension: “Although the Clause thus speaks in terms of 

powers bestowed upon Congress, the Court long has recognized that it also limits the power of the States to erect barriers 

against interstate trade.” Lewis v. BT Investment Managers, Inc., 

447 U.S. 27, 35 (1980); see also, e.g., CTS Corp. v. Dynamics 

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Corp. of America, 481 U.S. 69, 87 (1987), citing Cooley v. Board of 

Wardens, 53 U.S. 299 (1851).

For many years, dormant Commerce Clause jurisprudence drew a distinction between States’ direct and indirect 

regulation of interstate commerce. Direct interference with interstate commerce was invalid as a violation of the dormant 

Commerce Clause, but legislation having indirect effects remained permissible. See, e.g., Di Santo v. Pennsylvania, 273 

U.S. 34, 36–37 (1927) (state law seeking to prevent fraud by 

requiring state license to sell steamship tickets was invalid as 

direct regulation of foreign and interstate commerce).

The distinction between direct and indirect regulation 

proved to be less a bright line and more a matter of degree. 

The Supreme Court then began to rely more on a balancing 

test that weighs the regulating state’s interests against the burdens on interstate commerce (at least when the state does not 

actually discriminate against interstate commerce). See Southern Pacific Co. v. Arizona, 325 U.S. 761, 770–71, 783–84 (1945) 

(applying balancing test to hold that state law restricting 

length of interstate trains was invalid burden on interstate 

commerce); California v. Thompson, 313 U.S. 109, 116 (1941) 

(overruling Di Santo); South Carolina State Highway Dep’t v. 

Barnwell Bros., 303 U.S. 177, 196 (1938) (upholding state limits 

on size and weight of trucks on state highways).

Despite the fading reliance on the direct-indirect distinction and the further development of balancing tests for nondiscriminatory state laws, the Supreme Court has never held 

that a state may impose truly direct and burdensome state 

regulation of commerce beyond the state’s boundaries. See, 

e.g., Brown-Forman Distillers Corp. v. New York State Liquor AuCase: 16-3071 Document: 29 Filed: 01/30/2017 Pages: 22
No. 16-3071 7

thority, 476 U.S. 573, 584 (1986) (invalidating state’s price-affirmation law that directly regulated “interstate commerce”); 

Edgar v. MITE Corp., 457 U.S. 624, 642 (1982) (plurality opinion) (“[A] state statute which by its necessary operation directly interferes with or burdens [interstate] commerce is a 

prohibited regulation and invalid, regardless of the purpose 

with which it was enacted.”), quoting Shafer v. Farmers Grain 

Co., 268 U.S. 189, 199 (1925). The dormant Commerce Clause 

continues to prohibit “the application of a state statute to commerce that takes places wholly outside of the State’s borders, 

whether or not the commerce has effects within the State.” 

Healy v. Beer Institute, Inc., 491 U.S. 324, 336 (1989), quoting 

Edgar, 457 U.S. at 642–43. When a state directly regulates interstate commerce, it “exceeds the inherent limits of the enacting State’s authority and is invalid regardless of whether the 

statute’s extraterritorial reach was intended by the legislature.” Id.

Generally, courts will strike down a statute that “directly 

regulates or discriminates against interstate commerce, or 

when its effect is to favor in-state economic interests over outof-state interests,” without engaging in the more permissive 

balancing tests applied to non-discriminatory legislation. 

Brown-Forman Distillers, 476 U.S. at 578–79; Edgar, 457 U.S. at 

640, 643. See, e.g., Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). 

Laws that discriminate directly against interstate commerce 

are subject to what amounts to strict scrutiny. Maine v. Taylor, 

477 U.S. 131, 138 (1986). “[O]nce a state law is shown to discriminate against interstate commerce either on its face or in 

practical effect, the burden falls on the State to demonstrate 

both that the statute serves a legitimate local purpose, and 

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that this purpose could not be served as well by available nondiscriminatory means.” Id. (internal quotation marks and citations omitted).

In this case, plaintiffs do not contend that the Indiana Act 

discriminates against interstate commerce. They argue that 

the law violates the Commerce Clause by directly regulating 

commercial activity outside Indiana. Where the issue is the 

extraterritorial effect of a law, the focus is on its “practical effect.” Healy, 491 U.S. at 336. The practical effect is assessed by 

considering both the consequences of the law itself and how 

the law may interact with the legitimate regulatory regimes 

of other states—potential inconsistent legislation. Id.

Here, plaintiffs argue that the Indiana Act violates the 

Commerce Clause as extraterritorial regulation because it dictates how out-of-state manufacturers must build and secure 

their facilities, operate assembly lines, clean their equipment, 

and contract with security providers, if any of their products 

are sold in Indiana. Plaintiffs also argue that the Act puts outof-state manufacturers at risk of inconsistent regulations imposed by other states. The defendant state officials argue that 

the transactions regulated by the Act are not wholly outside 

Indiana and that the Act is facially neutral, without discriminating against interstate commerce. The Act applies equally 

to in-state and out-of-state manufacturers.

We assess only whether particular provisions of the Indiana Act, as applied to out-of-state manufacturers, are invalid 

as direct extraterritorial regulation. To figure out which provisions plaintiffs challenge, we note their general claim that 

“the security, clean room, and audit requirements” violate the 

Commerce Clause, their list of twenty-two challenged proviCase: 16-3071 Document: 29 Filed: 01/30/2017 Pages: 22
No. 16-3071 9

sions in the first amended complaint, and the imprecise disclaimer that plaintiffs are not challenging, or at least are no 

longer challenging, “local sales rules” in Ind. Code § 7.1-7-4-

6. The result, as we see it, is that plaintiffs continue to challenge the following sixteen provisions: Ind. Code §§ 7.1-7-4-

1(d)(1)–(3), (6), (8)–(10); 7.1-7-4-6(b)(8), (10)–(16), and (19). See 

Legato Vapors, 2016 WL 3548658, at *1 n.1 (district court’s observation that exact provisions plaintiffs challenged were not 

clear in the filings).

With almost two hundred years of precedents to consider, 

our review of prior dormant Commerce Clause decisions has

not revealed a single appellate case permitting any direct regulation of out-of-state manufacturing processes and facilities

comparable to the Indiana Act. The Supreme Court has issued 

a number of decisions in closer cases, such as challenges to 

price-affirmation laws and laws regulating in-state segments 

of interstate transportation. At first glance, both types of laws 

seem to regulate only in-state commerce. Those lines of cases 

reveal two facets of the basic rule prohibiting extraterritorial 

legislation. Price-affirmation laws can violate the Commerce 

Clause because they have ripple effects in other states, effectively setting the price for a commodity in transactions outside the regulating state. See, e.g., Healy, 491 U.S. 324; BrownForman Distillers, 476 U.S. 573. State regulation of in-state segments of interstate railroad and highway traffic can violate 

the Commerce Clause because national uniformity is “practically indispensable to the operation of an efficient and economical national railway system,” Southern Pacific, 325 U.S. at 

771, and the effect of one state’s regulation can place a “substantial burden on the interstate movement of goods,” Raymond Motor Transp., Inc. v. Rice, 434 U.S. 429, 445 (1978). Implicit in both lines of cases is the more general principle that a 

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state may not impose its laws on commerce in and between 

other states.

This court has struck down as extraterritorial state laws 

much less intrusive than the Indiana Act. For example, we invalidated a state law that attempted to regulate loan transactions entered into entirely out-of-state. In Midwest Title Loans, 

Inc. v. Mills, the plaintiff challenged an Indiana law that 

deemed a loan transaction to take place in Indiana and thus 

subject to Indiana law if the out-of-state lender advertised in 

Indiana, even if an Indiana resident entered into the transaction entirely in Illinois. 593 F.3d 660, at 661–62, 669 (7th Cir. 

2010). Indiana’s attempt to regulate loan transactions occurring wholly outside the state constituted impermissible extraterritorial regulation. Id. at 669. Similarly, in Dean Foods Co. v. 

Brancel, a Wisconsin law prohibited payment of volume premiums for bulk purchases of milk produced in Wisconsin. 187 

F.3d 609 (7th Cir. 1999). We held that Wisconsin could not apply its law to regulate the price of sales of milk produced in 

Wisconsin but where the sales took place outside the state, after the producers had transported the milk beyond the state 

boundary. Id. at 620.

In National Solid Wastes Management Association v. Meyer, a 

Wisconsin statute prohibited both in-state and out-of-state 

generators of solid waste from dumping certain materials in 

Wisconsin landfills unless they resided in a community that 

had adopted an “effective recycling program.” 63 F.3d 652, 

653–54 (7th Cir. 1995). We held that the law violated the Commerce Clause as extraterritorial regulation. Id. at 661–62. The 

law controlled the conduct of those engaging in commerce occurring wholly outside the state when it conditioned the “use 

of Wisconsin landfills by non-Wisconsin waste generators on 

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their home communities’ adoption and enforcement of Wisconsin recycling standards,” such that all persons in those 

communities outside Wisconsin had to “adhere to the Wisconsin standards whether or not they dump[ed] their waste 

in Wisconsin.” Id. at 658. That Wisconsin law also directly regulated out-of-state commerce and was invalid. Id. at 661.

It is useful to compare these cases on extraterritorial legislation to decisions dealing with state laws imposing product

labeling requirements for in-state sales, even when the product is produced out-of-state. The Second Circuit upheld a Vermont law requiring special labels for light bulbs containing 

mercury in National Electrical Manufacturers Association v. Sorrell, 272 F.3d 104 (2d Cir. 2001). The court found that the law 

was not extraterritorial in scope. Although the law may have 

required out-of-state manufacturers to “modify their production and distribution systems to differentiate” between light 

bulbs bound for Vermont and those bound elsewhere, the law 

was not invalid. Id. at 110. Nor did it matter that the law might 

compel manufacturers to withdraw from the Vermont market, or alternatively, to sell light bulbs with labeling conforming to Vermont’s requirements in other states. Id. at 110–11. 

The Second Circuit found that no conflict with other state regulatory schemes had been shown, so that the labeling law did 

not pose a risk of inconsistent regulation. Id. at 112.

The Sixth Circuit took a similar approach to uphold a 

state-specific labeling requirement in International Dairy Foods 

Association v. Boggs, 622 F.3d 628, 647–49 (6th Cir. 2010). An 

Ohio law said that labels on milk sold in the state could not 

carry certain claims about the absence of artificial hormones

and had to include a disclaimer for claims about the absence 

of artificial hormones in production processes. Id. at 632–34. 

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The Sixth Circuit held that the law was not invalid as extraterritorial despite out-of-state producers’ claims that it would 

burden interstate commerce. Id. at 649–50. The Sixth Circuit 

reasoned that the law had only indirect effects on out-of-state 

manufacturers, who may have needed to adjust their labels, 

and did not impede the flow of milk across state lines. Id. at 

647–48.

The contrast between the labeling laws and the extraterritorial laws we have struck down helps to mark the extent of 

the dormant Commerce Clause prohibition. When we compare the challenged provisions of the Indiana Act here, it becomes clear that they cannot be applied to out-of-state manufacturers of vaping products.

A. Security Provisions

We first consider the requirements for security contracts, 

beginning with Indiana Code § 7.1-7-4-1(d), which governs 

initial applications for e-liquid manufacturing permits. Paragraph 7.1.-7-4-1(d)(1) requires the permit application to include plans “for the construction and operation of the manufacturing facility that demonstrate that the facility design is ... 

capable of meeting ... the security requirements.” Paragraphs 

(d)(2) and (d)(3) make explicit the requirements referenced in 

(d)(1): the applicant-manufacturer must have entered into a 

service agreement that is valid for five years after the date of 

application, renewable for the entire duration the applicant 

holds a permit, and with a security firm that can certify that it 

meets the requirements of § 7.1-7-4-6(b)(10)–(15). 

The provisions of § 7.1-7-4-6(b)(10)–(15) in turn require the 

manufacturer to “take reasonable steps to ensure that all ingredients used in the production of e-liquid are stored in a 

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No. 16-3071 13

secure area accessible only by authorized personnel,” and 

“that only authorized personnel have access to secured areas;” to have “a remotely monitored security system” and “an 

exclusive high security key system;” to record 24-hour video 

surveillance; and to maintain samples from each production 

batch for not less than three years in areas with “recorded 

video surveillance.”

In remarkably specific provisions, § 7.1-7-4-1(d)(3) requires an applicant for a manufacturing permit to provide 

“verified documents” demonstrating that the “security firm 

has continuously employed” for not less than one year at least 

one employee certified by the Door and Hardware Institute 

and at least one employee certified as a Rolling Steel Fire Door 

Technician. The security firm must also have at least one year 

of commercial experience with “video surveillance system design and installation with remote viewing capability from a 

secure facility,” owning and operating a security monitoring 

system with redundant offsite backup, and operating “a facility that modifies commercial hollow metal doors, frames, and 

borrowed lights with authorization to apply the Underwriters 

Laboratories label.” § 7.1-7-4-1(d)(3).

From the perspective of the dormant Commerce Clause, 

these are extraordinary provisions, at least as applied to outof-state manufacturers. At the most basic level, one might 

wonder why Indiana cares whether an out-of-state manufacturer provides for security at its facilities through a contract 

with an independent company rather than through its own 

employees. The specific provisions for the forms of security, 

including the types of systems and the use of on-site or offsite monitoring, raise more questions. The astoundingly specific provisions for the qualifications of the security firm that 

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the manufacturer must commit to hire for at least five years 

raise still more questions that go well beyond the Commerce 

Clause.

Another district court decision in Indiana recently found 

that only one company in the entire United States, located not 

so coincidentally in Indiana, satisfied the criteria of the Indiana Act and has the approval of the Indiana Alcohol and Tobacco Commission. GoodCat, LLC v. Cook, — F. Supp. 3d —, 

2016 WL 4734588 at *5–6 (S.D. Ind. Aug. 19, 2016). In fact, prior 

to an amendment to the bill that became the Act, not even that 

favored company would have met the Act’s requirements. Id. 

at *5. That lone company was neither required nor had the capacity to accept all contract applications. The result has been 

that the one security company serves six companies who 

sought security contracts with it. Id. at *5–6. Only those six 

companies may lawfully sell their vaping products in Indiana. 

Before the Act went into effect, ninety percent of e-liquid revenue in Indiana came from e-liquids manufactured out-ofstate. Now, only six manufacturers—compared to the more 

than one hundred selling in Indiana before the Act—supply 

e-liquids to Indiana retailers. Four of those six are in-state 

companies. Id. at *15.

These circumstances raise obvious concerns about protectionist purposes and what looks very much like a legislative 

grant of a monopoly to one favored in-state company in the 

security business. We can decide this case without pursuing 

all of those questions, however. As applied to out-of-state 

manufacturers, the security provisions of the Indiana Act violate the Commerce Clause for a more basic reason. They operate as extraterritorial legislation, governing the services and 

commercial relationships between out-of-state manufacturers 

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and their employees and contractors. With two hundred years 

of Commerce Clause precedents to draw from, the defendant 

state officials have offered no authority supporting such extraterritorial legislation.

We understand the State’s arguments that good security 

for manufacturing facilities is vital to protect vaping products 

from contamination. The Commerce Clause does not prohibit 

Indiana from imposing reasonable and even-handed purity 

requirements on vaping products sold in Indiana. It may not 

try to achieve that goal by direct extraterritorial regulation of 

the manufacturing processes and facilities of out-of-state 

manufacturers.1

Consideration of potential inconsistent regulation only reinforces our conclusion that, as applied to out-of-state manufacturers, the challenged provisions violate the Commerce 

Clause. Plaintiffs argue that now, ten years after the launch of 

the e-liquid market, states have had the opportunity to adopt 

their own distinct regulatory regimes for e-liquids. Plaintiffs 

point us to less stringent e-liquid laws in Arkansas and Utah, 

for example, but the threat of inconsistent regulation, not inconsistent regulation in fact, is enough to show why Indiana 

 

1 The Supreme Court has said that extraterritorial laws, like laws that 

discriminate against interstate commerce, are “virtually per se invalid” under the Commerce Clause. Brown-Forman Distillers, 476 U.S. at 579; see also

International Dairy Foods, 622 F.3d at 644–45. We understand the qualifier 

“virtually” to refer to unusual circumstances where the state law serves 

an important purpose and the state can show that no less restrictive or 

intrusive measures could serve that purpose, so that the law survives strict 

scrutiny, as in Taylor, 477 U.S. at 138 (upholding discriminatory state law 

under strict scrutiny). Indiana has not tried to satisfy that standard here. 

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cannot impose these security requirements on out-of-state 

manufacturers. See Dean Foods, 187 F.3d at 615.

The potential for conflicts in the remarkably specific security requirements is obvious. Suppose another state chose to 

enact a similarly specific security provision tailored to one of 

its own in-state security firms. Or suppose another state 

simply required manufacturers to provide adequate security 

through their own employees, without trying to contract out 

the service. Indiana responds that the e-liquid market is new 

and states are just beginning to regulate it, making the possibility of inconsistent regulation slight. We reject this argument. The very youth of the market and of state health and 

safety regulations cuts the other way. In the absence of 

preemptive federal laws, we can expect more states to enact 

their own laws (and to treat existing laws in other states, like 

Indiana, as models). In any event, the obvious risk of inconsistent regulation is enough here. See Healy, 491 U.S. at 336.

Taken together and individually, the security provisions 

amount to direct and unconstitutional extraterritorial regulation of out-of-state e-liquid manufacturers’ production facilities and their purchases of services in their home states. These 

requirements are not like the labeling cases, where an out-ofstate producer may comply by making minor adjustments to 

its production processes so that labeling will conform to the 

governing state’s requirements. The direct regulation of outof-state facilities and services has effects that are not comparable to mere incidental effects of a facially neutral law regulating labels, such as those on light bulbs or milk. Compare 

National Electrical Manufacturers Ass’n, 272 F.3d 104, and International Dairy Foods Ass’n, 622 F.3d 628, with Ind. Code § 7.1-

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7-4-6(b). More than just posing a significant threat of inconsistent regulation, the Indiana Act directly regulates specific 

elements of any security contract made by out-of-state manufacturers. These provisions control conduct “beyond the 

boundaries of the state” and tell out-of-state companies how 

to operate their businesses. See Edgar, 457 U.S. at 643 (citation 

omitted).

The defendant state officials have not tried to show that 

they can satisfy the “strictest scrutiny” that would be needed 

to uphold a discriminatory or extraterritorial law. See Taylor, 

477 U.S. at 144 (citation omitted). The defendants simply assert without support that “for a product such as e-liquids 

there is no practical way to regulate the quality of it without 

regulating the manufacturing process.” The asserted purpose 

of the statute—protecting the health and safety of Hoosiers 

who consume e-liquids—is of course legitimate. But the defendants have failed to offer any evidence that less intrusive 

alternatives to these unprecedented extraterritorial provisions are incapable of serving that purpose. See Taylor, 477 

U.S. at 138. Such direct extraterritorial legislation is invalid as 

applied to the plaintiffs and other out-of-state manufacturers. 

See Healy, 491 U.S. at 336.

B. Clean Room Requirements

The clean room provisions challenged by the plaintiffs require that the permit application include plans “for the construction and operation of the manufacturing facility that ... 

include a clean room space where all mixing and bottling activities will occur.” Ind. Code § 7.1.-7-4-1(d)(1). “The manuCase: 16-3071 Document: 29 Filed: 01/30/2017 Pages: 22
18 No. 16-3071

facturing facility must conduct all mixing and bottling activities in a clean room.”2 § 7.1-7-4-6(b)(8). The cleaning and sanitizing of equipment must be consistent with the Indiana 

standards for commercial kitchens in Indiana, and the equipment used in the production process must be “easily cleanable.” § 7.1-7-2-4; 410 Ind. Admin. Code § 7-24-1 et seq.; § 7-24-

27(a). The commercial kitchen standards referenced in the Act 

impose detailed requirements for everything from physical 

facilities such as the type of sinks and required cleaning 

equipment, 410 Ind. Admin. Code § 7-24-270), to production 

materials such as types of cleansers and utensils used, 410 Ind. 

Admin. Code §§ 7-24-294, -303).

Like the security provisions, the clean room provisions directly regulate the physical plants of out-of-state manufacturers. The clean room provisions also directly regulate the production processes of out-of-state manufacturers. Akin to telling out-of-state communities how to run their recycling programs, Indiana has gone so far as to order out-of-state e-liquid 

manufacturers to wash their equipment with specific cleansers in specific sinks. Compare National Solid Wastes Management Ass’n, 63 F.3d 652, with 410 Ind. Admin. Code §§ 7-24-

270, -294, -303. And again, the potential for inconsistent regulation is obvious. Of the many requirements, from sink size to 

cleanser type, there are countless possible variations. That one 

state might demand double-basin steel sinks and another demand single-basin porcelain sinks is just one example. The 

clean room provisions directly regulate interstate commerce 

 2 The statute defines “clean room” as any part of the facility where 

“the mixing and bottling activities are conducted in secure and sanitary 

conditions in a space that is kept in repair sufficient to prevent e-liquid 

from becoming contaminated.” Ind. Code § 7.1-7-2-4.

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No. 16-3071 19

and, as applied to out-of-state manufacturers, are invalid as 

extraterritorial laws.

C. Audits and Additional Provisions

The remaining provisions of the Indiana Act challenged 

by the plaintiffs fall into the loose category of “audits.” Indiana Code § 7.1-7-4-1(d)(10) requires the applicant-manufacturers to give their consent to the Indiana Alcohol and Tobacco Commission “to enter during normal business hours ... 

to conduct physical inspections, sample the product ... and 

perform an audit.” See also § 7.1-7-4-6(b)(16). Paragraph 7.1-

7-4-1(d)(9) requires the manufacturers to consent to state or 

national criminal background checks on anyone listed in the 

permit application, and § 7.1-7-4-6(b)(19) prohibits the manufacturer or any other person listed on the permit application 

from having been “convicted of a felony or an offense involving a controlled substance.” Another challenged provision is 

§ 7.1-7-4-1(d)(6), which requires a permit application to include the “projected output in liters per year of e-liquid of the 

manufacturing facility,” perhaps as the basis for a future audit. 

The record and parties’ arguments with respect to the audit provisions are not well developed. The record is sufficient 

for us to conclude, however, that audits and on-site inspections of out-of-state manufacturers are invalid direct regulations of interstate commerce insofar as they relate to enforcement of Indiana’s requirements for facility design and production operations. We leave room for future challenges, 

based on better developed records and arguments, to audit 

provisions such as taking product samples or other inspections not relating as directly to manufacturing facilities and 

production processes.

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20 No. 16-3071

D. Commercial Transactions Outside the State

Our conclusion that the Act is an impermissible “attempt 

to regulate activities in other states,” see Midwest Title, 593 

F.3d at 665, is supported by further analysis of commercial 

transactions taking place wholly outside the governing state. 

The plaintiffs argue that not only are the regulations direct 

extraterritorial regulations, as explained above, but also that 

three categories of commercial sales are impermissibly regulated by the Act because they take place wholly outside the 

state. See Healy, 491 U.S. at 336. The parties have agreed that 

the Act regulates: (1) sales by an out-of-state manufacturer to 

an out-of-state distributor if the distributor resells the e-liquids to Indiana retailers; (2) sales by an out-of-state manufacturer to an out-of-state online retailer if the online retailer sells 

the e-liquid to Indiana consumers; and (3) direct online sales 

by out-of-state manufacturers to Indiana consumers. Although not explicitly regulated, these transactions fall within 

the scope of the statute because in each case, the Indiana Alcohol and Tobacco Commission could enforce the provisions 

against a manufacturer whose product, either intentionally or 

unintentionally, reaches Indiana vape shops for sale. To avoid 

violating the Act, an out-of-state manufacturer who wishes to 

avoid regulation by Indiana and has not obtained an Indiana 

permit would need to include in its contracts with distributors 

and online retailers an effective, perhaps even foolproof, 

guarantee ensuring the e-liquid would not be resold to anyone in Indiana.

The first two categories of transactions are like the loan 

transactions in Midwest Title or milk sales in Dean Foods. They 

occur entirely outside the regulating state. Indiana’s governance of these transactions is impermissible extraterritorial 

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No. 16-3071 21

regulation. See Midwest Title, 593 F.3d 660; Dean Foods, 187 

F.3d 609. Whether the third category—the producer-asonline-retailer selling directly to an Indiana consumer—occurs wholly outside the state may be a more complex question. See generally Ind. Code § 26-1-2-401(2) (under UCC sales 

provision, title to goods passes at time and place of shipment 

unless otherwise specified); Quill Corp. v. North Dakota, 504 

U.S. 298, 311–13 (1992) (dormant Commerce Clause requires 

out-of-state seller to have substantial nexus with taxing/purchaser state in order for taxing state to collect taxes from outof-state seller). In any event, the other extraterritorial aspects 

of the challenged provisions are sufficient to hold that they 

may not be applied to out-of-state manufacturers, so the answer to the online sales question would not change our ultimate conclusion.

The regulations of clean rooms and security systems for eliquid manufacturers are akin to an attempt by Ohio to regulate not just milk labeling but also the heating, cooling, ventilation, plumbing, and locks for out-of-state barns where the 

cows are milked. The Indiana Act directly regulates the production facilities and processes of out-of-state manufacturers 

and thus wholly out-of-state commercial transactions. It poses 

the clear risk of multiple and inconsistent regulations that 

would unduly burden interstate commerce. As applied to 

out-of-state manufacturers, the challenged extraterritorial 

laws violate the Commerce Clause.

* * *

For these reasons, we REVERSE the district court’s grant 

of summary judgment to the defendant state officials and 

REMAND to the district court to declare the challenged provisions unenforceable against out-of-state manufacturers and 

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22 No. 16-3071

to enjoin their enforcement against the plaintiffs. These instructions apply to the following provisions: Indiana Code 

§§ 7.1-7-4-1(d)(1)–(3), (6), (8)–(10); 7.1-7-4-6(b)(8), (10)–(16),

and (19).

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