Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-arwd-5_05-cv-05097/USCOURTS-arwd-5_05-cv-05097-1/pdf.json

Nature of Suit Code: 950
Nature of Suit: Constitutionality of State Statutes
Cause of Action: 42:1983 Civil Rights Act

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IN THE UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF ARKANSAS

FAYETTEVILLE DIVISION

DOS SANTOS, S.A., and

CROSS BRIDGE, LLC PLAINTIFFS

v. Civil No. 05-5097

MIKE BEEBE, in his official

capacity as Attorney General,

State of Arkansas DEFENDANT

O R D E R

Now on this 22nd day of March, 2006, comes on for

consideration Plaintiffs’ Motion For Preliminary Injunction

(document #10), and from said motion, and the response thereto, the

Court finds and orders as follows:

1. Plaintiffs seek to enjoin, both preliminarily and

permanently, enforcement of A.C.A. §26-57-260-261, as amended by

Act 384 of 2005. This statute, in its pre-amended version, is

referred to herein as the Escrow Statute. The amended form is

referred to as the Allocable Share Amendment or simply the

Amendment. 

Plaintiffs initially contended that the Allocable Share

Amendment violates a number of constitutional and statutory

provisions. The Court dismissed all of plaintiffs’ claims except

their claims that retroactive application of the Allocable Share

Amendment violates substantive and procedural due process, and this

Order should be read in light of the factual background and legal

analysis of the Court’s March 6, 2006, Order addressing the motion

to dismiss. The Court now turns to the issue of whether a

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preliminary injunction against such retroactive application should

issue.

2. The standards by which a motion for preliminary

injunction should be judged are the familiar ones reiterated by the

court in Dataphase Systems, Inc. v. CL Systems, Inc., 640 F.2d 109

(8th Cir. 1981):

whether a preliminary injunction should issue involves

consideration of (1) the threat of irreparable harm to

the movant; (2) the state of balance between this harm

and the injury that granting the injunction will inflict

on other parties litigant; (3) the probability that

movant will succeed on the merits; and (4) the public

interest.

640 F.2d at 114. In applying this test, the court in Dataphase

emphasized that a pragmatic approach to the inquiry is called for.

“[T]he question is whether the balance of equities so favors the

movant that justice requires the court to intervene to preserve the

status quo until the merits are determined.” 

The burden of proving that these factors weigh in favor of

granting an injunction rests with the moving party, Dos Santos.

Jensen v. Dole, 677 F.2d 678 (8th Cir. 1982).

The Court will examine each of the Dataphase factors in turn.

3. The threat of irreparable harm to Dos Santos:

At a hearing on the pending motion, Dos Santos presented the

testimony of Mitchell Sivina, who testified that retroactive

application of the Allocable Share Amendment placed Dos Santos in

a loss position on its 2004 Arkansas sales. He testified that

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while Dos Santos, a Spanish corporation, was not going out of

business at the time of the hearing, it would not be able to

compete in the Arkansas market if it had to recoup, out of its 2005

and later years’ pricing, the funds it had expected to be refunded

under the Escrow Statute for 2004. To do so would price its

cigarettes out of the market in Arkansas.

Dos Santos also presented an affidavit from Sivina in

connection with the pending motion. Sivina therein avers that

because the funds escrowed by Dos Santos in 2004 were not released

as they would have been under the Escrow Statute, Dos Santos was

unable to meet its first quarterly escrow deposit for 2005 and, as

a result, its products have been decertified for sale in Arkansas.

Thus it is currently not able to do business in the State. Sivina

also averred that the retroactive increase in cost of doing

business “threatens Dos Santos’ and Cross Bridge’s fiscal

viability.”

In addition to this evidence of harm, the Court notes that

significant civil penalties attend failure to make the escrow

deposits required by the Escrow Statute - up to 300% of the amount

withheld - and two violations will result in decertification of a

tobacco manufacturer’s products for a period of two years. A.C.A.

§26-57-261. The exponential effects of these penalty provisions

is readily apparent, and, taken together with the evidence adduced

by Dos Santos, persuades the Court that Dos Santos has shown a

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threat of irreparable harm. Recoverable money loss may constitute

irreparable harm if the loss threatens the existence of a business.

Packard Elevator v. I.C.C., 782 F.2d 112 (8th Cir. 1986).

“Irreparable harm has been found when one’s allegedly unlawful

actions will . . . cause another’s ongoing business to terminate

absent an injunction.” Gelco Corp. v. Coniston Partners, 811 F.2d

414 (8th Cir. 1987).

4. The balance between the harm to Dos Santos if an

injunction is not granted, and the harm to Beebe if it is granted:

The harm to Beebe if an injunction is granted appears

relatively small. The nature of preliminary injunctive relief

sought by Dos Santos would require the State to treat 2004 escrow

funds under the Escrow Statute rather than the Allocable Share

Amendment. The Escrow Statute provided for a partial refund of

escrow deposits. The money that would be refunded is not money

belonging to the State, but rather funds which continue to belong

to Dos Santos unless and until the State files suit against Dos

Santos for tobacco-related health problems and obtains a favorable

result. Such a suit may never be filed. If it is, Dos Santos will

have been building a fund to answer any such judgment each year it

does business in Arkansas subsequent to 2004. Given the length of

time that it takes before tobacco-related health problems show up,

if Dos Santos continues to sell its products in Arkansas, a

significant escrow fund will have been accrued by the time it might

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In Grand River Enterprises Six Nations, Ltd., et al. v. Beebe, case number 05- 1

5051, the parties submitted an Agreed Order pursuant to which the plaintiff would

deposit into escrow “the net amount that would have been retained in escrow for sales

that occurred in 2004 if Act 384 of 2005 had not been enacted into law,” and that

plaintiff’s brands would not be decertified for failure to make the deposit that would

have been required under the Amendment, without waiving any rights under the Amendment.

In International Tobacco Partners, Ltd. v. Beebe, case number 05-5065, the parties

submitted an Agreed Order pursuant to which the State agreed to release certain funds

escrowed for 2004 to the plaintiff, without waiving any right to a full deposit under

the Allocable Share Amendment. 

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be needed, even if most of the 2004 escrow is refunded.

If the State ultimately prevails on the retroactivity issue

now before the Court, the refunded amount would not be lost. The

State can require Dos Santos to replace the funds in escrow, on

pain of not being allowed to continue to do business in the State

if it fails to do so.

In addition, as Dos Santos points out, the State was willing

to work with two other tobacco manufacturers to maintain the status

quo ante the Allocable Share Amendment on their 2004 escrow

deposits. This fact undermines the State’s position that it will 1

suffer greater harm than will Dos Santos if an injunction issues.

On balance, when the Court compares the harm that Dos Santos

has shown evidence it will suffer from retroactive application of

the amended statute to the harm the State claims will flow from

issuance of a preliminary injunction, this factor weighs in favor

of granting the preliminary injunction.

5. The probability that Dos Santos will succeed on the

merits of its case:

The Court finds that this factor also weighs in favor of

granting a preliminary injunction. As explained in the Court’s

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This sum is based on the Sivina Affidavit. 2

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Order dated March 6, 2006, defendant must show not only that the

Allocable Share Amendment is justified by a rational legislative

purpose, but also that its retroactive application is justified by

a rational legislative purpose. See, e.g., Pension Benefit

Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717 (1984). While

defendant justifies the Amendment as a benign effort to correct an

unforseen mistake in the Master Settlement Agreement, the

unforeseen loss of $490,000.00 can hardly seem benign to a

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commercial entity such as Dos Santos, and might well prove to be

harsh and oppressive - the jurisprudential opposite of rational

action.

6. The public interest in this matter:

The Court finds that the public has two types of interest in

this matter, and that the two weigh in favor of opposite parties.

One is the public health and safety concerns advanced by the

defendant as justifying the tobacco litigation Master Settlement

Agreement and the Escrow Statute and Allocable Share Amendment

which arose out of that settlement. The other is the public

interest in being able to rely on “settled expectations” with

regard to laws enacted by the Arkansas Legislature to govern the

business affairs of the State. The Court finds these interests to

be of roughly equal weight in the Dataphase balance. If anything,

the interest in knowing what law will govern business transactions

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appears stronger than the public health and safety concerns,

because the health and safety concerns are at this point

speculative vis a vis Dos Santos, whereas the interest in settled

transactional law is not.

7. Taking all of the foregoing into consideration, the Court

concludes that, as to the issue of whether retroactive application

of the Allocable Share Amendment violates substantive and

procedural due process, the balance of equities favors Dos Santos,

such that justice requires the Court to intervene to preserve the

status quo ante enactment of the Amendment until the merits of this

case are determined. The Court will, therefore, enjoin defendant -

on a preliminary basis - from enforcing the Allocable Share

Amendment retroactively, as against Dos Santos’ 2004 escrow

deposits.

8. Finding that preliminary injunctive relief is appropriate

does not end the Court’s inquiry, even as to preliminary

disposition in this complicated matter. Because Dos Santos’

products have already been decertified by the State, the Court

addresses the issue of whether the escrow funds in question should

be physically returned to Dos Santos, or applied to Dos Santos’

2005 escrow obligations. 

Defendant contends that Dos Santos cannot prove that the

Amendment caused whatever injury it might have sustained from the

decertification of its products. It claims that those products

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were decertified for three reasons:

* failure to provide required information on the annual

Manufacturer Certification required by A.C.A. §26-57-

1303(a)(2) for 2004;

* a shortfall in the 2004 escrow deposits of $5,003.41; and

* failure to make escrow deposits for the first quarter of

2005.

Dos Santos has offered evidence that it would have used its

2004 refund to make its 2005 quarterly deposits, and that such was

a part of its business plan. Had those deposits been made, Dos

Santos claims it would not have been decertified. Dos Santos does

not respond to defendant’s allegations that it did not fully comply

with the Manufacturer Certification requirements or pay the full

2004 escrow amount.

The Court believes this issue requires an examination of the

state of affairs as of the date the Motion For Preliminary

Injunction was filed, August 11, 2005. If the monies that would

have been refunded to Dos Santos from its 2004 escrow under the

Escrow Statute would have sufficed to pay its 2005 escrow deposits

up to that point, and if the other two alleged deficiencies would

not have resulted in decertification, it is possible that the

appropriate disposition of the funds affected by this Order would

be to apply them first to Dos Santos’ outstanding 2005 escrow

requirements, and to return any overage to Dos Santos. Because the

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Court does not have before it a sufficient evidentiary basis to

determine the appropriate disposition of the funds, it directs the

parties to confer, and if possible reach agreement on this matter.

Failing that, the parties are to file simultaneous position papers,

on or before April 28, 2006, as to the appropriate disposition of

the funds.

IT IS THEREFORE ORDERED that Plaintiffs’ Motion For

Preliminary Injunction (document #10) is granted, and defendant is

enjoined from enforcing A.C.A. §26-57-260-261, as amended by Act

384 of 2005, retroactively, as against Dos Santos’ 2004 escrow

deposits for the sales of tobacco products in the State of

Arkansas.

IT IS FURTHER ORDERED that the parties are to meet and confer

on the appropriate disposition of funds escrowed by Dos Santos for

2004 which would have been returned under the Escrow Statute, and

which are the subject of this Order. If the parties are unable to

agree on the disposition of such funds, they are to present

simultaneous position papers, on or before April 28, 2006, as to

the appropriate disposition of the funds.

IT IS SO ORDERED.

 /s/ Jimm Larry Hendren 

JIMM LARRY HENDREN

UNITED STATES DISTRICT JUDGE

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