Opinion ID: 2420919
Heading Depth: 1
Heading Rank: 8

Heading: The Flat Tax Imposed and Enforced by the Challenged Statutes Is Actively Supervised by the State

Text: Having concluded that the challenged statutes are clearly articulated and affirmatively expressed as state policy, we now consider whether they are actively supervised by the state. In Freedom Holdings I, we concluded that the state could not satisfy this requirement at the pleading stage because [n]either the New York statutes, the MSA, nor any other New York law or regulation `actively supervise[s]' the pricing decisions within the allegedly-anticompetitive market structure enforced by the Contraband Statutes. 357 F.3d at 231 (second alteration in original); accord Freedom Holdings II, 363 F.3d at 157 (observing that it was too soon to say whether the state will ultimately be able to elicit evidence sufficient to meet this second prong). We now consider the state's supervision of the challenged statutes in light of plaintiffs' trial failure to prove that the challenged statutes impose anything more anti-competitive than a flat tax on NPMs, and we conclude that the district court reasonably found the second Midcal requirement satisfied. The active supervision required to secure state action immunity necessarily depends on the facts of each case. As noted supra at [52-53], the laws challenged in Midcal and 324 Liquor effectively allowed one private party to set the prices charged by another private party. See 324 Liquor Corp. v. Duffy, 479 U.S. at 340, 107 S.Ct. 720; California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. at 103, 100 S.Ct. 937. Thus, the Supreme Court's determination that the state did not actively supervise the challenged programs in those cases relied on the fact that the state `neither establishes prices nor reviews the reasonableness of the price schedules.' 324 Liquor Corp. v. Duffy, 479 U.S. at 345, 107 S.Ct. 720 (quoting California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. at 105, 100 S.Ct. 937). By contrast, in this case, the state itself determines the increased cost to NPMs attributable to escrow payments. See N.Y. Pub. Health Law § 1399-pp(2). This case is thus more akin to the situation distinguished by the Court in 324 Liquor Corp., when it observed that a simple `minimum markup' statute ... may satisfy the `active supervision' requirement. 479 U.S. at 344 n. 6, 107 S.Ct. 720. In support, the Court cited Morgan v. Division of Liquor Control, 664 F.2d 353 (2d Cir.1981), in which this court upheld Connecticut's alcohol markup statute. In Morgan, we emphasized that the active supervision test was met by the state's structuring a detailed mechanism for determining prices for alcoholic beverages. Id. at 356. The critical difference then is that, in one case, a private party sets the minimum resale price (without state input or supervision) while, in the other, the state supplants normal market mechanisms only to the extent it mandates the markup. In the latter circumstance, although the hypothetical statute could eliminate price competition among retailers, that would result from the choice of the state rather than from the choice of the wholesaler. Similarly, the amount of the minimum markup would be determined by the state, not by the wholesaler.... Accordingly, there would be nothing to supervise. IA Areeda & Hovenkamp, supra, ¶ 226e, at 194; see also Costco Wholesale Corp. v. Maleng, 522 F.3d at 899 (upholding minimum markup on this ground). Here, plaintiffs' antitrust argument reduces to a claim that the challenged statutes, by raising their costs, have the effect of raising cigarette prices. It is undeniably the state, however, that determines the cost increase by fixing the required escrow payments. See, e.g., N.Y. Pub. Health Law § 1399-pp(2)(a)(v) (requiring NPMs to contribute for each of 2007 and each year thereafter: $.0188482 per unit sold); cf. Morgan v. Div. Liquor Control, 664 F.2d at 356 (referencing state's detailed mechanism for determining prices). Thereafter, normal market mechanisms function. Indeed, as plaintiffs acknowledged at oral argument, NPMs can charge whatever price they wish, as long as they make the specified escrow payments. Thus, like the hypothetical minimum markup in 324 Liquor, the increase in cigarette prices attributable to the challenged statutes result[s] from the choice of the state rather than from the choice of cigarette manufacturers. IA Areeda & Hovenkamp, supra, ¶ 226e, at 194. Accordingly, because the statute specifies the exact component of the inflated price attributable to the state, there is nothing that the state can `actively supervise' except to see that the statutory requirements are obeyedand there is no claim that the state has neglected this. Battipaglia v. N.Y. State Liquor Auth., 745 F.2d 166, 176 (2d Cir.1984) (Friendly, J.); see also IA Areeda & Hovenkamp, supra, ¶ 226e, at 194. Plaintiffs do not dispute that the state has engaged in this form of supervision. Indeed, the record shows that the state (1) reviews audit reports detailing the competitive effects of the MSA and challenged statutes, and (2) has responded to these reports by enacting (a) the Contraband Statute and (b) the allocable share release amendment. Rather, characterizing the state as an active participant[] in [a] commercial enterprise, plaintiffs maintain that it would be paradoxical for us to conclude that the state's active enforcement of the Escrow Statute satisfies the active supervision prong because, they claim, the statute is the primary tool for insulating the [participating manufacturers] from consumer oriented price competition. Appellants' Reply Br. at 29. We are not persuaded. As the Supreme Court noted in rejecting a conspiracy exception to Parker immunity, it is both inevitable and desirable that public officials often agree to do what one or another group of private citizens urges upon them. City of Columbia v. Omni Outdoor Adver., Inc., 499 U.S. at 375, 111 S.Ct. 1344. Depending on which party's brief one reads, the purpose and effect of the challenged legislation is either to destroy NPMs or to level the playing field. Compare Appellants' Br. at 22, with Appellees' Br. at 12, 50, 51 n. 13. A federal court cannot, however, use the antitrust laws to second-guess[] clearly articulated, properly supervised state policy judgments. Freedom Holdings I, 357 F.3d at 229; Massachusetts Food Ass'n v. Mass. Alcoholic Beverages Control Comm'n, 197 F.3d at 565. The purpose of Midcal analysis is simply to ascertain whether anticompetitive conduct engaged in by private parties should be deemed state action immune from antitrust laws. Patrick v. Burget, 486 U.S. at 100, 108 S.Ct. 1658. Thus, plaintiffs' intimation that the challenged statutes have harmed them is not relevant to a court's determination of whether it is the state itself that has imposed the very restraint about which they complain and satisfactorily supervised its operation. See Hoover v. Ronwin, 466 U.S. at 567-68, 104 S.Ct. 1989. Accordingly, we conclude that the trial record supports a finding that New York's control and active enforcement of escrow payment obligations satisfies the second Midcal requirement. Once again, we note the limited reach of our ruling, which does not foreclose challenges to other potentially anti-competitive conduct in the tobacco industry. In this regard, our decision is consistent with that of the Third Circuit in Bedell, on which Freedom Holdings I relied to conclude that the state had not satisfied the active supervision requirement at the pleading stage. The Bedell plaintiffs were a class of cigarette wholesalersnot NPMswho claimed to suffer losses because the major tobacco companies imposed artificially high prices on direct purchasers. 263 F.3d at 247 (internal quotation marks omitted). The Third Circuit concluded that such plaintiffs had standing to challenge the restraints imposed by the MSA itself, specifically the SPM pricing formula for allegedly penalizing gains in market share. See id. In this case, where plaintiffs' claim of antitrust injury derives from the Escrow and Contraband Statutes, see supra at [51-52 & n. 14], we hold simply that the district court reasonably concluded from the trial evidence that those legislative enactments of state policy neither mandate nor authorize private parties to exercise unsupervised power to restrain trade.
The Constitution's affirmative grant of power to Congress [t]o regulate Commerce ... among the several States, U.S. Const. art. I, § 8, cl. 3, has long been construed to imply a negative counterpart, commonly referred to as the dormant Commerce Clause, restraining state authority over interstate commerce, see, e.g., United Haulers Ass'n v. Oneida-Herkimer Solid Waste Mgmt. Auth, 550 U.S. 330, 338, 127 S.Ct. 1786, 167 L.Ed.2d 655 (2007); American Trucking Ass'ns v. Mich. Pub. Serv. Comm'n, 545 U.S. 429, 433, 125 S.Ct. 2419, 162 L.Ed.2d 407 (2005). In appealing the district court's rejection after trial of their dormant Commerce Clause challenge to New York's Escrow and Contraband Statutes, plaintiffs do not contendnor could theythat these laws discriminate against interstate commerce either facially or in incidental effect. See Freedom Holdings I, 357 F.3d at 217-19; see also Wyoming v. Oklahoma, 502 U.S. 437, 454-55, 112 S.Ct. 789, 117 L.Ed.2d 1 (1992); Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970). Instead, they submit that the district court erred in failing to hold the statutes invalid because the combined extraterritorial effects of (1) forty-six state escrow statutes, (2) forty-four contraband statutes, and (3) forty-four amended allocable share release provisions practically result in national regulation of cigarette prices, which may not be accomplished piecemeal through the extraterritorial reach of individual state statutes. Healy v. Beer Inst., 491 U.S. 324, 340, 109 S.Ct. 2491, 105 L.Ed.2d 275 (1989); accord Grand River Enters. Six Nations, Ltd. v. Pryor, 425 F.3d at 171. [18] In support, plaintiffs rely heavily on our decision in Grand River, which recognized a possible claim by a different group of NPMs: that the practical effect of the challenged statutes and the MSA is to control prices outside of the enacting states. 425 F.3d at 173. We took no position as to the ultimate viability of a dormant Commerce Clause challenge to the alleged arrangement. Id. Rather, we concluded that not dismissing this claim at the pleading stage is consistent with the district court's decision to reinstate the Sherman Act claim, which alleged that the MSA and interrelated statutes restrained trade and affected market prices. Id. In so holding we noted that the Grand River complaint alleged facts not pleaded in Freedom Holdings I: that the [challenged statutes] are inconsistent with the legitimate regulatory regimes of other states, that [they] force out-of-state merchants to seek New York regulatory approval before undertaking an out-of-state transaction, or that any sort of interstate regulatory gridlock would occur if `many or every' state adopted similar legislation. Id. at 171 (quoting Freedom Holdings I, 357 F.3d at 221). Although plaintiffs amended their complaint to conform with Grand River, they developed little evidence at trial to support the three allegations noted in that case. Nor do they offer much by way of analysis on appeal as to how the challenged statutes fall into any of the three categories. They simply label state statutes an interlocking grid and assume that judicial condemnation will follow under the Commerce Clause. Appellants' Br. at 55, 57; see also id. at 5, 53, 56; Appellants' Reply Br. at 3, 6. Like the district court, we are not persuaded. Two Supreme Court decisions provide useful guidance in reviewing Commerce Clause challenges to interlocking state statutes. First, in Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U.S. 573, 106 S.Ct. 2080, 90 L.Ed.2d 552 (1986), the Court invalidated a provision of New York's Alcoholic Beverage Control Law requiring distillers to affirm that the schedule of prices filed in New York is no higher than the lowest price at which such item of liquor will be sold ... anywhere in any other state of the United States during the month covered by the schedule, id. at 576, 106 S.Ct. 2080. Under the challenged law, the New York Liquor Authority prohibited payments of promotional allowances to wholesalers, a practice allowed in other states. See id. at 577-78, 106 S.Ct. 2080. The New York Liquor Authority could for good cause permit distillers to change their posted prices. Id. at 582 n. 5, 106 S.Ct. 2080. The Court held that the practical effect of the challenged regulatory regime was to control liquor prices in other States because, once a distiller posted prices in New York, it could not lower prices elsewhere in the country without obtaining New York's regulatory approval. Id. at 582-83, 106 S.Ct. 2080. Further, the Court noted that the proliferation of state affirmation laws ... has greatly multiplied the likelihood that a seller will be subjected to inconsistent obligations in different States. Id. at 583, 106 S.Ct. 2080. Because New York's position on promotional payments was inconsistent with that of other states, New York effectively forced Brown-Forman to abandon its promotional allowance program in States in which that program is legal. Id. at 584, 106 S.Ct. 2080. In Healy v. Beer Institute, 491 U.S. 324, 109 S.Ct. 2491, 105 L.Ed.2d 275, the Supreme Court invalidated a Connecticut law requiring beer shippers to affirm that their posted prices were no higher than prices in border states. Connecticut further made it unlawful to sell beer in that state at a price higher than that charged in bordering states during the month covered by the posting. See id. at 329, 109 S.Ct. 2491. The Court held that the practical effect of the statute must be evaluated not only by considering the consequences of the statute itself, but also by considering how the challenged statute may interact with the legitimate regulatory regimes of other States and what effect would arise if not one, but many or every, State adopted similar legislation. Id. at 336, 109 S.Ct. 2491. Noting that Massachusetts required brewers to post prices a month before they took effect, the Supreme Court concluded that the Connecticut law had the practical effect of requiring a brewer on January 1, when [he] posts his February prices for Massachusetts, [to] take account of the price he hopes to charge in Connecticut during the month of March. Id. at 338, 109 S.Ct. 2491. If the border states each enacted statutes essentially identical to Connecticut's, the problem was only compounded: Under those circumstances, in January, when a brewer posts his February prices in Connecticut and the border States, he must determine those prices knowing that the lowest bottle, can, or case price in any State would become the maximum bottle, can, or case price the brewer would be permitted to charge throughout the region for the month of March. This is true because in February, when the brewer posts his March prices in each State, he will have to affirm that no bottle, can, or case price is higher than the lowest bottle, can, or case price in the regionand these current prices would have been determined by the January posting. Put differently, unless a beer supplier declined to sell in one of the States for an entire month, the maximum price in each State would be capped by previous prices in the other States. This maximum price would almost surely be the minimum price as well, since any reduction in either State would permanently lower the ceiling in both. Id. at 339-40, 109 S.Ct. 2491. The Court described this scenario as price gridlock. Id. at 340, 109 S.Ct. 2491. Applying these principles to the challenged statutes, we conclude that plaintiffs failed to prove any similar gridlock here. By its terms, the Escrow Statute taxes only cigarettes sold in New York. See N.Y. Pub. Health Law § 1399-oo(10) (defining [u]nits sold for purposes of Escrow Statute as the number of individual cigarettes sold in the state  (emphasis added)); id. § 1399-pp(2) (specifying payments per unit sold); see also id. at § 1399-pp(2)(b)(ii) (releasing payments from escrow to the extent that a tobacco product manufacturer establishes that the amount it was required to place into escrow on account of units sold in the state in a particular year was greater than the [MSA] payments ... that such manufacturer would have been required to make on account of such units sold had it been a participating manufacturer (emphasis added)). Similarly, the Contraband Statute applies only to manufacturers whose cigarettes are sold for consumption in this state.  N.Y. Tax Law § 480-b(1) (emphasis added). Plaintiffs offered no evidence indicating that the practical effect of either of these statutes reaches beyond their terms to set minimum or maximum cigarette prices outside New York. We recognize that escrow payments, like any tax, increase the cost of cigarettes. Unlike the statute struck down in Healy, however, nothing prevents manufacturers from recouping increased costs imposed by New York law from New York consumers. See National Elec. Mfrs. Ass'n v. Sorrell, 272 F.3d 104, 110 (2d Cir.2001) (In cases like Healy, the state necessarily prevented firms from recouping any of the costs imposed by the state statute from the residents of the state itself. Here, the manufacturers remain free to charge higher prices only to Vermonters without risking violation of the statute.); see also Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 521, 55 S.Ct. 497, 79 L.Ed. 1032 (1935) (Cardozo, J.) (upholding injunction against enforcement of New York milk pricing statute because New York has no power to project its legislation into Vermont by regulating the price to be paid in that state for milk acquired there). In short, plaintiffs cannot show that the challenged statutes violate the Commerce Clause by depriv[ing] businesses and consumers in other States of `whatever competitive advantages they may possess' based on the conditions of the local market.' Healy v. Beer Inst., 491 U.S. at 339, 109 S.Ct. 2491 (quoting Brown-Forman Distillers Corp. v. N.Y. Liquor Auth., 476 U.S. at 580, 106 S.Ct. 2080); accord SPGGC, LLC v. Blumenthal, 505 F.3d 183, 193 (2d Cir.2007). Further, while the enactment of similar escrow and contraband statutes in most states has caused cigarette prices to rise nationwide, such statutes impose no inconsistent obligations, which might evidence extraterritorial regulation proscribed by the Commerce Clause. See Brown-Forman Distillers Corp. v. N.Y. Liquor Auth., 476 U.S. at 583, 106 S.Ct. 2080; see also CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 88-89, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987) (identifying no inconsistency violating dormant Commerce Clause when multiple states regulate voting rights of corporations created under their law). Certainly, plaintiffs point to no provision of New York law requiring cigarette manufacturers to obtain the state's regulatory approval before selling or pricing cigarettes in other states. Brown-Forman Distillers Corp. v. N.Y. Liquor Auth., 476 U.S. at 582, 106 S.Ct. 2080. Accordingly, plaintiffs failed to prove that the challenged statutes have any impermissible extraterritorial effect. Grand River is not to the contrary. Drawing all reasonable inferences in those plaintiffs' favor at the pleading stage, we concluded that they had stated a colorable claim that the practical effect of the challenged statutes and the MSA is to control prices outside of the enacting states by tying both the SPM settlement and NPM escrow payments to national market share, which in turn affects interstate pricing decisions. 425 F.3d at 173 (emphasis added). Such control is not evidenced simply by coincident obligations which may produce parallel price increases among the states. In Grand River, however, we suggested that a factfinder might be able to infer control from the fact that the allocable share release provision, which refunds payments made by NPMs in excess of what they would have paid as SPMs under the MSA, might effectively require NPMs to pay a national-market-share-dependent amount. Id. at 172. Plaintiffs submit that Grand River compels us to reverse the district court's Commerce Clause decision because, under the amended allocable share release provision, escrow payments are still keyed, in part, to MSA payments, which in turn depend on national market share. We disagree. Plaintiffs adduced no evidence showing that the amended release provision has ever been invoked. Funds are released from escrow to the extent escrow payments exceed MSA payments, see N.Y. Pub. Health Law § 1399-pp(2)(b)(ii), but the district court reasonably found that, in practice, MSA payments exceed escrow payments. In the absence of contrary evidence, the district court was hardly compelled to conclude that NPM escrow payments will actually be released from the state escrow fund in amounts calculated by reference to national market share. See International Tobacco Partners, Ltd. v. Kline, 475 F.Supp.2d 1078, 1090-91 (D.Kan.2007). Thus, even if such an indirect reference to national market share could, in some cases, raise concerns under the dormant Commerce Clause, plaintiffs simply have not proved that the challenged statutes have the practical effect of regulating commerce extraterritorially. Ultimately, plaintiffs' Commerce Clause claim fails, as we said in Freedom Holdings I, because [m]ere `upstream pricing impact' is not a violation of the dormant Commerce Clause, even if the impact is felt out-of-state where the stream originates. Freedom Holdings VI, 592 F.Supp.2d at 707 (quoting Freedom Holdings I, 357 F.3d at 220). Courts have consistently recognized that [t]he mere fact that state action may have repercussions beyond state lines is of no judicial significance so long as the action is not within that domain which the Constitution forbids. Osborn v. Ozlin, 310 U.S. 53, 62, 60 S.Ct. 758, 84 L.Ed. 1074 (1940); see also Healy v. Beer Inst., 491 U.S. at 345, 109 S.Ct. 2491 (Scalia, J., concurring) ([I]nnumerable valid state laws affect pricing decisions in other States.); National Elec. Mfrs. Ass'n v. Sorrell, 272 F.3d at 111 (noting that it is axiomatic that the increased cost of complying with a regulation may drive up the sales price and rejecting argument that such increased prices evidenced dormant Commerce Clause violation); National Paint & Coatings Ass'n v. City of Chicago, 45 F.3d 1124, 1130-31 (7th Cir.1995) (Easterbrook, J.) (observing that almost every state and local lawindeed, almost every private transactionaffects interstate commerce and warning that if dormant Commerce Clause applied to all laws affecting commercethat is, to all state and local laws addressing a subject that Congress could regulate, if it chosethen judicial review of statutory wisdom after the fashion of Lochner would be the norm (emphasis in original)). [19] A number of our sister circuits have concluded that state escrow and contraband statutes do not regulate commerce extraterritorially in violation of the Commerce Clause. See S & M Brands, Inc. v. Caldwell, 614 F.3d 172, 177-78 (5th Cir. 2010); Grand River Enters. Six Nations, Ltd. v. Beebe, 574 F.3d at 943-44 (8th Cir.2009); KT & G Corp. v. Attorney Gen. of Okla., 535 F.3d at 1143-46 (10th Cir. 2008); Star Scientific, Inc. v. Beales, 278 F.3d 339, 354-57 (4th Cir.2002). We reach the same conclusion in this case. Plaintiffs having been afforded the opportunity to prove at trial that New York's Escrow and Contraband Statutes did, in fact, impermissibly regulate interstate commerce, and having failed to carry their burden, we affirm the judgment of the district court in favor of defendants.