Opinion ID: 8407619
Heading Depth: 2
Heading Rank: 2

Heading: Analysis of the Statute

Text: The State argues that the district court erred in finding that the Statute facially discriminates against interstate commerce. We agree. The court articulated two bases for its finding of facial discrimination: that the Statute (1) limits retail cigarette sales to in-state, face-to-face transactions, and (2) permits in-state brick-and-mortar businesses to circumvent the Statute’s prohibition on delivering cigarettes to residences, causing the Statute’s burdens to fall almost exclusively on out-of-state cigarette sellers. As we explain below, however, neither the Statute’s closure of a sales channel for retail cigarette sales nor the Statute’s delivery exemption discriminates against interstate commerce, facially or otherwise.
The district court stated that although the Statute’s “prohibitions apply to all direct sellers, the law, on its face, discriminates against interstate commerce by requiring that retail sales take place only instate.” Santa Fe, 2001 WL 636441, at . This determination is flawed in two respects. First, the district court erred in finding “facial” discrimination based upon its interpretation of the Statute’s effects. Second, the district court concluded that the Statute is invalid in large part based upon its analogy to a significantly different statute in an inapposite case, C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 114 S.Ct. 1677, 128 L.Ed.2d 399 (1994). First, the district court conducted a “facial” analysis by examining the Statute’s effects, thereby conflating two of the three inquiries relevant to determining whether a challenged statute or regulation discriminates against interstate commerce. The court stated that the Statute “requirfes] that retail sales take place only in-state,” Santa Fe, 2001 WL 636441, at . The Statute by its terms, however, does not impose such a requirement; it merely prohibits cigarette sellers from shipping, and common and contract carriers and others from transporting, cigarettes directly to New York consumers. Therefore, the court’s determination that the Statute forces all retail sales of cigarettes to occur in the state can only be the result of its interpretation of the Statute’s operation, or effect, rather than its terms. Second, in reaching its conclusion the court relied solely on C & A Carbone, 511 U.S. 383, 114 S.Ct. 1677, 128 L.Ed.2d 399. This reliance was misplaced because Car-bone is easily distinguishable from the case at bar. Carbone involved a local ordinance that by its terms required all solid waste leaving the municipality to be processed at a single designated facility in the town. Id. at 386-87, 114 S.Ct. 1677. This requirement applied to all other solid waste processing facilities regardless of their location, i.e., all solid waste leaving the municipality had to ‘be processed at the designated in-town facility whether it came ffom out-of-state facilities, in-state facilities, or even other in-town facilities. Id. at 390, 114 S.Ct. 1677. The stated purpose of the ordinance was to finance the $1.4 million it cost to construct the facility. Id. at 386-87, 114 S.Ct. 1677. This brief recitation of Carbone’s facts demonstrates its inapplicability to our case. The ordinance in Carbone discriminated on its face against commerce because, although it applied to all other solid waste processing facilities, it favored, in a blatantly protectionist manner, one particular local facility to the detriment of all others. Id. at 391, 114 S.Ct. 1677 (“The flow control ordinance discriminates, for it allows only the favored operator to process waste that is within the limits of the town.”). Thus, the ordinance did not regulate all processing facilities evenhandedly because it singled out for preferential treatment one local facility. That distinction demonstrated its facial discrimination. In contrast, the Statute at issue here does not by its terms make any such distinction; it does not on its face prefer either a particular in-state direct shipper of cigarettes or in-state direct shippers generally. Rather, by its terms, the Statute regulates evenhandedly the sale of cigarettes to New York consumers by all direct shippers and transporters regardless of where they are located. The court cited Carbone for the proposition that “a law may be discriminatory even though it limits activities of in-state as well as out-of-state business.” Santa Fe, 2001 WL 636441, at . While the Court in Carbone did note that “[t]he ordinance is no less discriminatory because instate or in-town processors are also covered by the prohibition,” 511 U.S. at 391, 114 S.Ct. 1677, the district court here failed to recognize that this statement was made within the context of the Court’s analysis of the ordinance’s discriminatory effects. Id. at 390-91, 114 S.Ct. 1677.
The district court’s second basis for finding facial discrimination is the so-called delivery exception of subdivision two. Santa Fe, 2001 WL 636441, at . Again, the court erred because it relied on the exception’s effect, rather than its terms, in reaching its conclusion. The court found that “the statute discriminates on its face against interstate commerce by providing a delivery exemption for New York brick- and-mortar businesses with their own delivery services.” Id. at . The exception, on its face, does no such thing. Instead, it permits any person, other than a common or contract carrier, to transport up to four cartons of cigarettes at any one time to any one person in New York State. N.Y. Pub. Health Law § 1399~ll (2). Whether the district court is correct regarding which businesses would and would not be able to take advantage of the exception, and therefore whether it discriminates against interstate commerce, is also a question of the exception’s effect. Santa Fe claims that “the cases finding facial discrimination do not depend on formalisms such as the particular language a statute uses to work its discrimination.” Santa Fe is mistaken. The cases cited by Plaintiffs undermine their contention because all do, in fact, rely on “the particular language” of the statute or regulation at issue. In South-Central Timber, the statute, as characterized by B & W, “require[d] that timber taken from state lands be processed within the state.” (emphasis added). Thus, the “particular language” of the statute demonstrated its facial discrimination because by its very terms it made a geographical distinction in favor of in-state businesses by requiring that a commercial activity be conducted within the state. The same is true with the remaining cases cited by the Plaintiffs. See SSC Corp. v. Town of Smithtown, 66 F.3d 502 (2d Cir.1995) (finding facial discrimination where flow ordinance required all town waste be directed to a single local disposal facility); Stephen D. DeVito, Jr. Trucking, Inc. v. Rhode Island Solid Waste Management Corp., 770 F.Supp. 775, 783 (D.R.I.) (finding facial discrimination where regulation required that all waste collected in the state be processed by in-state facilities), aff'd, 947 F.2d 1004 (1st Cir.1991). The Statute at issue in this case does not on its face limit any commercial activity to in-state or local transactions. Instead, by its terms, the Statute prohibits all direct shipments of cigarettes to New York consumers, whether the direct shippers be located within or without the state, with the limited exception that any person, again whether located within or without the state, may transport to a New York consumer up to four cartons of cigarettes by means other than that of a common or contract carrier. We decline to look beyond the “particular language” of the Statute in determining whether it is facially discriminatory because to do so would collapse the facial and effects analyses into one inquiry. We conclude that no reading of the language of the Statute supports the conclusion that it discriminates against interstate commerce on its face.
A statute or regulation may also be subject to strict scrutiny if it discriminates against interstate commerce in effect. Wyoming v. Oklahoma, 502 U.S. 437, 455, 112 S.Ct. 789, 117 L.Ed.2d 1 (1992). The district court concluded that in addition to facial discrimination, the Statute also discriminates against interstate commerce in effect. Santa Fe, 2001 WL 636441, at -17. We disagree. The court articulated the same two bases for its conclusion that the Stab-' ute in effect is discriminatory: (1) the retail cigarette market is effectively limited to in-state businesses, and (2) the delivery exception is likewise effectively limited to in-state brick-and-mortar outlets.
Following its citation to the Statute, the district court observed that “[t]he only way an out-of-state seller could legally sell retail cigarettes to New York consumers under [the Statute] is to establish a brick- and-mortar outlet in New York”. Id. at . The district court then credited the Plaintiffs’ testimony that “establishing instate brick-and-mortar outlets by plaintiffs would be 'unworkable’ and ‘uneconomic,’ ” and therefore the court concluded that “the effect of [the Statute] is to eliminate out-of-state direct sales retailers from the market by requiring face-to-face, in-state retail sales only.” Id. (internal citation omitted). Both the court’s reasoning and conclusion are flawed in a number of respects. First, even assuming the district court is correct that “[t]he only way an out-of-state seller could legally sell retail cigarettes to New York consumers ... is to establish a brick-and-mortar outlet in New York,” id., the same is true for in-state direct shippers. Thus, that consequence applies evenhandedly to both out-of-state and instate direct cigarette shippers and therefore does not discriminate against those located outside New York State. Second, even if the Plaintiffs’ evidence did demonstrate that it would be “unworkable” and “uneconomic” for them to establish brick-and-mortar outlets in New York, that is insufficient to establish a discriminatory effect. See Exxon, 437 U.S. at 127, 98 S.Ct. 2207 (finding that evidence which showed that at least three companies would be unable to continue doing business in the state as a result of the statute at issue did not constitute an impermissible burden on interstate commerce). “The fact that the burden of a state regulation falls on some interstate companies does not, by itself, establish a claim of discrimination against interstate commerce.” Id. at 126, 98 S.Ct. 2207. Moreover, nothing in the record suggests that any alleged hardship would be borne disproportionately by out-of-state direct cigarette shippers. In other words, an in-state direct shipper of cigarettes may well face the same difficulties as the out-of-state shipper. For instance, an individual or business operating an Internet, phone, or mail order direct cigarette sale business in New York State would also be required to establish a brick-and-mortar outlet in order to sell retail cigarettes directly to consumers. The Plaintiffs, who bear the burden of showing a discriminatory effect, have not shown that establishment of a brick-and-mortar outlet would not also be “unworkable” and “uneconomic” for an in-state direct shipper. Rather, they simply rely on evidence demonstrating that they themselves would face significant difficulties in establishing a retail outlet in New York. The fact that these particular Plaintiffs may be priced out of the retail cigarette market does not establish a discriminatory effect. As the Exxon Court noted, '“[t]he source of the consumers’ supply [of petroleum] may switch from [one group of suppliers to another], but interstate commerce is not subjected to an impermissible burden simply because an otherwise valid regulation causes some business to shift from one interstate supplier to another.” Id. at 127, 98 S.Ct. 2207. This is so because “the Clause protects the interstate market, not particular interstate firms, from prohibitive or burdensome regulations.” Id. at 127-28, 98 S.Ct. 2207. Third, the district court’s conclusion that “the effect of [the Statute] is to eliminate out-of-state direct sales retailers from the market by requiring face-to-face, in-state retail sales only,” Santa Fe, 2001 WL 636441, at , is only partially accurate: the effect of the Statute is to eliminate all sales of cigarettes to New York consumers that do not involve face-to-face sales or the transportation of fewer than four cartons of cigarettes to any one consumer. Indeed, that is the goal of the Statute. Thus, the Statute merely prohibits one manner in which cigarettes could otherwise be sold to New York consumers, namely through direct shipments. “We cannot ... accept [Plaintiffs’] underlying notion that the Commerce Clause protects the particular structure or methods of operation in a retail market.” Exxon, 437 U.S. at 127, 98 S.Ct. 2207. Fourth, the district court’s citations to Halliburton Oil, 373 U.S. at 72, 83 S.Ct. 1201, and South-Central Timber, 467 U.S. at 100, 104 S.Ct. 2237, for the proposition that “[a] state may not require an out-of-state operator ‘to become a resident in order to compete on equal terms,’ ” are misplaced. Santa Fe, 2001 WL 636441, at . Halliburton involved a Louisiana statute that imposed a greater tax burden on out-of-state businesses than similarly situated in-state businesses. Id. at 70-71, 83 S.Ct. 1201. The Supreme Court observed that “[i]f Louisiana were the only State to impose an additional tax burden for such out-of-state operations, the disparate treatment would be an incentive to locate within Louisiana ... in order to compete on equal terms.” Id. at 72, 83 S.Ct. 1201. The statute challenged in Halliburton, unlike the Statute at issue here, imposed a tax burden on out-of-state businesses but not on their in-state counterparts. Thus, it was discriminatory on its face. In our case, in-state direct shippers would also be required to establish brick- and-mortar outlets in order to sell cigarettes to New York consumers and the Statute therefore is not discriminatory against out-of-state direct sellers. In Southr-Central Timber, the Court stated that it “view[s] with particular suspicion state statutes requiring business operations to be performed in the home State that could more efficiently be performed elsewhere.” 467 U.S. at 100, 104 S.Ct. 2237 (quoting Pike, 397 U.S. at 145, 90 S.Ct. 844). In that case, Alaska imposed a requirement that all timber taken from lands within the state be processed in the state prior to exportation. Id. at 84, 104 S.Ct. 2237. The Court in Southr-Central Timber characterized the regulation as “a naked restraint on export of unprocessed logs.” Id. at 99, 104 S.Ct. 2237. The Statute challenged here is not analogous to the regulation in South-Central Timber because (1) it does not mandate that out-of-state businesses conduct a given commercial activity within New York State; (2) it does not restrain the flow of goods into New York; and (3) it does not distinguish between out-of-state and in-state direct shippers. It merely requires that cigarettes sales to New York consumers be conducted in such a way that age can be verified and tax collected, a requirement that applies to all direct shippers of cigarettes wherever they may be located. Finally,' and perhaps most importantly, the Statute at issue neither impedes nor obstructs the flow of cigarette's in interstate commerce. Cigarettes will continue to flow into New York State in the same manner they always have. The Statute does not prohibit New York consumers’ access to cigarettes; again, it merely requires that they purchase cigarettes in a manner that allows the seller to verify the buyer’s age and to collect the state excise tax. As in Exxon, “[t]he crux of [Plaintiffs’] claim is that, regardless of whether the State has interfered with the movement of goods in interstate commerce, it has interfered ‘with the natural functioning of the interstate market either through prohibition or through burdensome regulation.’” 437 U.S. at 127, 98 S.Ct. 2207 (quoting Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 806, 96 S.Ct. 2488, 49 L.Ed.2d 220 (1976)). The Supreme Court in Exxon rejected that argument, as dp we here.
The district court also found that the delivery exception has a discriminatory effect. Santa Fe, 2001 WL 636441, at . We disagree with this conclusion as well-. The State reiterates on appeal its argument that the exception only permits individual consumers, rather than brick-and-mortar retailers, to transport up to four cartons of cigarettes. We reject this restrictive interpretation and agree with the district court that the delivery exception applies to all transporters of cigarettes, except common or contract carriers. In reaching this conclusion, we adopt the district court’s observation that there “is nothing in the language of the statute that limits [the. exemption] to consumers. If the Legislature had wanted to restrict the exemption [only] to individual consumers ..., it could easily have defined the exemption accordingly.” Santa Fe, 2001 WL 636441, at . Subdivision two prohibits the “transport” of cigarettes by common or contract carriers to anyone in New York other than licensed cigarette tax agents, licensed dealers, export warehouse proprietors, customs bonded warehouses, or state and federal officials acting in furtherance of their duties. This subdivision also prohibits the “transport” of cigarettes by “any other person” to anyone other than persons in the permitted categories set out in the previous sentence. However, with respect to “any other person,” subdivision two creates an exception for the “transporting” of “not more than eight hundred cigarettes at any one time to any person in this state.” Subdivision one prohibits “any person engaged, in the business of selling cigarettes” from “shipfping] or caus[ing] to be shipped” any quantity of cigarettes to “any person” in New York who is not included in one of the permitted categories. Judge Cabranes posits that subdivision one, which prohibits shipping, somehow limits the reach of subdivision two’s “transporting” exception to individual'purchasers of cigarettes. ■ He does so despite the apparently bro'ad applicability of subdivision two to any person other than a common or contract carrier by distorting the commonly accepted meaning of “ship,” so that it means the same thing as “transport.” The first two definitions of “ship” listed in a commonly accepted dictionary are “to place or receive on board of a ship for transportation by water ...” and “to cause to be transported.” Webster’s Third New International Dictionary 2096 (1993). Both definitions connote one actor causing another to transport something. The action of a retailer who drives her delivery van to a long-term customer’s house does not fall comfortably within either definition. We would not say of this retailer, “she shipped 800 cigarettes to Mr. Jones in her delivery van.” Instead we would say that the retailer transported or carried the cigarettes to her customer. See id. at 2430 (listing “carry” as a synonym for “transport”). Because Section 1399-ll is a penal statute, one should not read “ship” in such a distorted fashion. Judge Cabranes’ reading would subject to criminal liability, see N.Y. Pub. Health L. § 1399-B(5), small retailers who, in rebanee on the common sense meaning of “ship” as it is used in subdivision one and in subdivision two’s exception, carry small quantities of cigarettes to customers in their own delivery vans. The district court found, and we agree, that the organization representing grocery stores in New York supported Section 1399-11 based, in part, on its understanding that a de minimis exception existed for the transportation of small quantities of cigarettes by cigarette sellers. See Santa Fe, 2001 WL 636441, at  & n. 25 (citing letter dated July 18, 2000, from Michael Rosen, Vice President and General Counsel of the Food Industry Alliance, to James M. McGuire, Counsel to the Governor, Pl.Ex. 211, Tab 32). Thus, it is probable that individual grocers would adopt our understanding of the statute and, under Judge Cabranes’ interpretation, be subject to prosecution. Finding no basis for the State’s interpretation of the subdivision two exception, we reject that interpretation. Although we agree with the district court’s interpretation of the delivery exception, for the reasons discussed below, we find that the exception does not in effect discriminate against interstate commerce. The district court credited the testimony of Robin Sommers, the President and Chief Executive Officer of Santa Fe, who, according to the district • court, testified “that it is not economically feasible for interstate companies to make deliveries to New York customers using then-own trucks.” Id. The court also credited the testimony of an expert for the Plaintiffs who explained that doing the delivery themselves just means that they are becoming a common carrier [and] economically they have to have the same [cost]-strueture as a common carrier in order to compete in-state. If for some reason or another they can’t dehver in the state at a cost that is similar to the common carrier, if they have to have a courier come from the retailer who is employed by the retailer, then make a face-to-face transaction at the house, that is the same as a ban because that’s going to be cost-prohibitive. That’s going to be, you can always get the same effect as a ban by making something so costly that nobody is going to do it. Id. The court then stated, quoting Hunt, 432 U.S. at 350-51, 97 S.Ct. 2434, that “the statute’s consequence of raising the costs of doing business in the New York market for interstate sellers, while leaving those of their New York counterparts unaffected, ... has the practical effect of not only burdening interstate sales ... but discriminating against them.” Santa Fe, 2001 WL 636441, at  (alterations omitted). The district court’s conclusion is erroneous. First, the exercise of the delivery exception does not leave “unaffected” the Plaintiffs’ New York counterparts. The Plaintiffs’ in-state counterparts are not New York brick-and-mortar retail outlets that sell cigarettes; rather, they are non-brick- and-mortar sellers who ship cigarettes directly to New York consumers following purchases made by Internet, telephone, or mail order. See Ford Motor Co. v. Texas Dep’t of Transp., 264 F.3d 493, 500 (5th Cir.2001) (“The [Supreme] Court’s jurisprudence finds discrimination only when a State discriminates among similarly situated in-state and out-of-state interests.”). Second, in order to show a discriminatory effect on interstate commérce, the Plaintiffs must demonstrate that the Statute confers on their in-state counterparts a competitive advantage.' The Plaintiffs cannot satisfy this burden merely by showing the difficulties they themselves would face in their efforts to continue selling cigarettes directly to New York consumers under the terms of the delivery exception. In other words, it may also not be economically viable for in-state direct shippers to “make deliveries to New York customers using their own trucks.” Id. at . A similarly situated in-state direct shipper who, for instance, currently receives cigarette orders on his' website and then ships cigarettes directly to the buyer’s residence, would also be required under the exception to maintain his own fleet of delivery trucks, employ drivers, and undertake any other necessary investment just as would the out-of-state direct shipper. The Plaintiffs have not demonstrated how or in what manner such an undertaking would be less onerous for their in-state counterparts. Even if the Plaintiffs’ instate counterparts include brick-and-mortar retail outlets, the delivery exception would only benefit those that already have a delivery system in place. The Plaintiffs have not introduced evidence indicating what portion of brick-and-mortar retail cigarette sellers currently offer delivery services. Thus, we are unable to conduct a comparative analysis of the advantages and disadvantages of the delivery exception to in-state as opposed to out-of-state sellers even were we to consider in-state brick-and-mortar outlets to be counterparts to the Plaintiffs. One can surely imagine, however, that of all in-state retail cigarette sellers, only a small percentage offer delivery service to their customers. In any event, to the extent that, for instance, a grocery store that currently delivers goods to its customers is permitted to include in a delivery up to four cartons of cigarettes, we find that de min-imis advantage to in-state brick-and-mortar retail sellers insufficient to establish a discriminatory effect. See Hunt, 432 U.S. at 349, 97 S.Ct. 2434 (“[N]ot every exercise of state authority imposing some burden on the free flow of commerce is invalid.”). Where a state restriction áffecting commerce applies evenhandedly to both instate and out-of-state businesses and does not impede the flow of goods in interstate commerce, the restriction neither discriminates against out-of-state entities nor unjustifiably burdens interstate commerce. For the reasons stated above, we conclude that the Statute is not discriminatory either on its face or in effect but instead has only incidental effects on interstate commerce. We therefore analyze its constitutionality under the'test established in Pike v. Bruce Church, Inc., 397 U.S. 137, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970).