HCI Distribution, Inc. v. Hilgers

670 F.Supp.3d 896

HCI DISTRIBUTION, INC. and Rock River Manufacturing, Inc., Plaintiffs, v. Mike HILGERS, Nebraska Attorney General, and Glen A. White,Interim Nebraska Tax Commissioner,¹ Defendants.

8:18-CV-173

United States District Court, D. Nebraska

Signed April 27, 2023

Calandra S. McCool, Michael J. Novotny, Nicole E. Ducheneaux, Big Fire & Policy Group, Omaha, NE, for Plaintiffs.

Daniel J. Muelleman, Joshua E. Dethlefsen, Attorney General's Office, Lincoln, NE, for Defendants.

MEMORANDUM AND ORDER

John M. Gerrard, Senior United States District Judge

This case is about the constitutionality of some of the State of Nebraska's tobacco-related statutes as applied to the plaintiffs. The plaintiffs are wholly owned subsidiaries of an economic development company entirely controlled by a federally recognized Native American tribe, and they seek a declaration of rights pursuant to 28 U.S.C. § 2201 and injunctive relief pursuant to 28 U.S.C. § 2202. The defendants are the duly elected state officers whose offices are charged with enforcement of the statutes from which the plaintiffs seek relief.

This matter comes before the Court on the parties' cross-motions for summary judgment. Filing 123; filing 129. Both motions will be granted in part and denied in part. For tobacco products sold on the Winnebago Reservation, the Court will grant the relief sought by the plaintiffs. But, for tobacco products sold anywhere else in Nebraska, including on the Omaha Reservation, the State may enforce its tobacco regulations.

I. STANDARD OF REVIEW

Summary judgment is proper if the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a). The movant bears the initial responsibility of informing the Court of the basis for the motion, and must identify those portions of the record which the movant believes demonstrate the absence of a genuine issue of material fact. Torgerson v. City of Rochester, 643 F.3d 1031, 1042 (8th Cir. 2011) (en banc). If the movant does so, the nonmovant must respond by submitting evidentiary materials that set out specific facts showing that there is a genuine issue for trial. Id.

On a motion for summary judgment, facts must be viewed in the light most favorable to the nonmoving party only if there is a genuine dispute as to those facts. Id. Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the evidence are jury functions, not those of a judge. Id. But the nonmovant must do more than simply show that there is some metaphysical doubt as to the material facts. Id. In order to show that disputed facts are material, the party opposing summary judgment must cite to the relevant substantive law in identifying facts that might affect the outcome of the suit. Quinn v. St. Louis Cty., 653 F.3d 745, 751 (8th Cir. 2011). The mere existence of a scintilla of evidence in support of the nonmovant's position will be insufficient; there must be evidence on which the jury could conceivably find for the nonmovant. Barber v. C1 Truck Driver Training, LLC, 656 F.3d 782, 791-92 (8th Cir. 2011). Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial. Torgerson, 643 F.3d at 1042.

II. BACKGROUND

The issue in this case is whether the State of Nebraska can enforce certain tobacco product regulations against the plaintiffs. The plaintiffs, HCI Distribution, Inc. (HCID) and Rock River Manufacturing, Inc., are wholly owned subsidiaries of Ho-Chunk, Inc. Filing 130 at 2, 6. Ho-Chunk is a tribal company, meaning it is incorporated under the laws of and is wholly owned by the Winnebago Tribe of Nebraska, a federally recognized Native American tribe. Filing 124 at 10; filing 125-1 at 12; see also 25 U.S.C. § 5123; Restatement of the Law of American Indians § 50(d) (Am. L. Inst. 2022); Winnebago Tribal Code § 11B-108 (filing 125-3 at 131). Rock River manufactures and imports tobacco products, mostly cigarettes, and HCID purchases Rock River's products and distributes them to retailers on the Winnebago Reservation, other Native American reservations in Nebraska, and in other states. Filing 130 at 2, 9; filing 124 at 14-15, 17.

STATUTORY FRAMEWORK

Specifically, the parties disagree about whether the plaintiffs are required to pay deposits into a qualified escrow fund pursuant to Neb. Rev. Stat. § 69-2703 and post a bond securing such payments under Neb. Rev. Stat. § 69-2707.01 for tobacco products sold in Indian country, as defined by Neb. Rev. Stat. § 69-2702.² The State promulgated these regulations as part of its obligations under a 1998 settlement agreement. In this Master Settlement Agreement (MSA), Nebraska and 45 other states agreed to release some tobacco product manufacturers from past and future claims involving consumer protection, advertising, and adverse health effects of cigarettes, and the tobacco product manufacturers agreed to restrict the types of advertisements they used, and agreed to make annual settlement payments to the states in perpetuity. Nebraska relies on the MSA payments to support critical state services, such as the Health Care Cash Fund, which provides $60 million per year for state services like biomedical research, children's health insurance, tobacco prevention and control, and more. Filing 130 at 21.

As part of the MSA, the participating manufacturers were concerned about losing their share of the market because the perpetual settlement payments would increase their costs and would thus increase the price of cigarettes, and non-participating manufacturers would not incur these costs. The settling states agreed to enact model legislation intended to negate any competitive advantage earned by manufacturers who chose not to participate in the MSA. See Omaha Tribe of Nebraska v. Miller, 311 F.Supp.2d 816, 817 (2004); Grand River Enterprises Six Nations, Ltd. v. Pryor, 425 F.3d. 158, 163 (2d Cir. 2005). Nebraska law requires manufacturers to either, (1) join the MSA as participating manufacturers and make the required settlement payments, or (2) agree to make deposits into an escrow account based on the number of tobacco product sales within the state. Neb. Rev. Stat. § 69-2703. The amount of the escrow deposit per cigarette is intended to match the cost of the MSA settlement payments. See § 69-2703(b)(ii). Additional legislation was later enacted by the settling states, including Nebraska, to aid in enforcing the escrow payments. § 69-2704; see Pryor, 425 F.3d at 164.

Before selling cigarettes in Nebraska, tobacco product manufacturers must be listed in the Directory of Certified Tobacco Product Manufacturers and Brands. § 69-2706; see also http://bit.ly/3H9HXD8. To be listed in the directory, non-participating tobacco product manufacturers must certify their compliance with the escrow statutes. §§ 67-2706(1)(a) and 69-2703. The non-participating manufacturer must also post a bond "for the benefit of the state" of at least $100,000. § 69-2701.01. The escrow ensures that the State can collect judgment or settlement money for claims from which the participating manufacturers were released. And the bond further ensures such collection in the event the manufacturer does not make proper escrow payments.

The non-participating manufacturer is entitled to interest on the escrow, and the funds will revert back to the manufacturer after 25 years. The escrow funds may be released if the State secures a judgment or settlement against the manufacturer for claims related to: "(A) the use, sale, distribution, manufacture, development, advertising, marketing, or health effects of, (B) the exposure to, or (C) research, statements, or warnings regarding" tobacco products "manufactured in the ordinary course of business." §§ 69-2703(2)(b)(i), 69-2702(11); Master Settlement Agreement part II, cl. nn. Escrow payments may also be released if the escrow deposit amount exceeds the amount paid by participating manufacturers pursuant to the MSA.

The statute also contemplates releasing escrow deposits for "cigarettes sold on an Indian tribe's Indian country to its tribal members," but only if a tribe enters into an agreement with the State. Neb. Rev. Stat. § 69-2703(2)(b)(iv). As part of the agreement, both a tribe and the State waive sovereign immunity objections with respect to the agreement, divide the proceeds of the tax and escrow, and provide for reporting and auditing requirements and "other necessary and proper matters." § 77-2602.06. The plaintiffs attempted to negotiate such an agreement, but ultimately, those negotiations failed, in part because the parties could not agree on the scope of the waiver of sovereign immunity. Filing 124 at 23; filing 125-1 at 29-30.

THE PLAINTIFFS

Now, the plaintiffs argue that their status as subsidiaries of the Winnebago Tribe prevents State enforcement of the escrow laws. The Tribe is organized under Section 16 of the Indian Reorganization Act. See filing 125-1 at 12; 25 U.S.C. § 5123. Under this Act, the Tribe created its constitution and laws to be governed by, including a Business Corporation Code. The Tribe has the power to form wholly owned tribal companies, and it founded Ho-Chunk under its tribal code in 1994. Filing 124 at 10; Winnebago Tribal Code § 11B-108 (filing 125-3 at 131). The mission of Ho-Chunk is to create economic development and jobs for tribal members, and to "generate a sustainable, long-term income stream large enough for the Tribe to reach economic self-sufficiency." Filing 125-3 at 217.

Ho-Chunk's business model optimizes legal and economic benefits from the Tribe's unique sovereign status and from federal government programs like the 8(a) Business Development Program, 15 U.S.C. § 637(a). See id.; filing 125-3 at 209. Ho-Chunk's ventures include manufacturing and selling tobacco products, government contracting, construction,...