State v. Am. Tobacco Co.

537 P.3d 303

STATE of Washington, Respondent/Cross Appellant,

v.AMERICAN TOBACCO CO., Defendant,Commonwealth Brands Inc. ; Compania Industrial de Tabacos Monte Paz, SA; Daughters & Ryan, Inc.; Farmers Tobacco Co.; House of Prince A/S; ITG Brands, LLC, Japan Tobacco International USA, Inc.; King Maker Marketing Inc.; Kretek International; Liggett Group LLC ; P.T. Djarum; Peter Stokkebye Tobaksfabrik A/S; Philip Morris USA, Inc.; R.J. Reynolds Tobacco Company; Reemtsma Cigarettenfabriken GMBH; Santa Fe Natural Tobacco Company; Scandinavian Tobacco Group Lane Limited; Sherman's 1400 Broadway NYC, LLC ; Top Tobacco, LP; Von Eicken Group; and Wind River Tobacco Co. LLC, Appellants/Cross-Respondents.

No. 84265-0-I

Court of Appeals of Washington, Division 1.

Filed October 16, 2023

Logan Peppin, Attorney at Law, 999 3rd Ave. Ste. 3900, Seattle, WA, 98104-4076, Alexander Esq. Vitruk, Bakerhostetler, 999 3rd Ave. Ste. 3900, Seattle, WA, 98104-4076, Carey S. Busen, Evan M. Mannering, Elizabeth B. McCallum, Baker Law, 1050 Connecticut Avenue Nw., Suite 1100, Washington, DC, 20036, Bradley S. Keller, John Arthur Tondini, Byrnes Keller Cromwell LLP, 1000 2nd Ave. Ste. 3800, Seattle, WA, 98104-1062, Vanessa Soriano Power, Stoel Rives LLP, 600 University St. Ste. 3600, Seattle, WA, 98101-3197, Jenna Marie Esq. Poligo, Attorney at Law, 600 University St. Ste. 3600, Seattle, WA, 98101-4109, Mark A. Loyd, DENTONS BINGHAM GREENBAUM LLP, 3500 Pnc Tower, 101 South Fifth Street, Louisville, KY, 40202, Andrea Lauren Russow Nichols, Dentons Bingham Greenbaum LLP, 300 West Vine Street, Suite 1200, Lexington, KY, 40507, Elli Leibenstein, Gregory Ostfeld, Chicago, IL, 60601, Warren Joseph Rheaume, James Condon Grant, Davis Wright Tremaine LLP, 920 5th Ave. Ste. 3300, Seattle, WA, 98104-1610, Manvin Mayell, Alexander Shaknes, ARNOLD & PORTER KA YE SCHOLER LLP, 250 West 55th Street, New York, NY, 10019, for Appellant/Cross-Respondent.

Rene David Tomisser, Office of the Attorney General, 7141 Cleanwater Dr. Sw., Tumwater, WA, 98501-6503, Joshua Weissman, WA Atty. Generals Office, P.O. Box 40123, Olympia, WA, 98504-0123, Complex Litigation Division A.g. Office, Attorney at Law, P.O. Box 40111, Olympia, WA, 98504-0111, for Respondent/Cross-Appellant.

Chloe Thompson Villagomez, Foster Garvey PC, 1111 3rd Ave. Ste. 3000, Seattle, WA, 98101-3296, for Amicus Curiae on behalf of Quileute Tribe.

Timothy W. Woolsey, Suquamish Tribe, P.O. Box 498, Suquamish, WA, 98392-0498, Devon Joseph Tiam, Port Madison Enterprises, 15347 Suquamish Way Ne., Suquamish, WA, 98392-9649, for Amicus Curiae on behalf of Suquamish Tribe.

Earle David LeesIII, Attorney at Law, 80 N. Tribal Center Rd., Skokomish Nation, WA, 98584-9748, for Amicus Curiae on behalf of Skokomish Indian Tribe.

Kevin R. Lyon, Squaxin Island Legal Dept., 3711 Se. Old Olympic Hwy., Shelton, WA, 98584-7734, for Amicus Curiae on behalf of The Squaxin Island Tribe.

Lorraine Anne Parlange, Kalispel Tribe of Indians, 934 S. Garfield Rd., Airway Heights, WA, 99001-9030, for Amicus Curiae on behalf of Kalispel Tribe of Indians.

Rachel Sage, Swinomish Indian Tribal Community, 11404 Moorage Way, La Conner, WA, 98257-9450, for Amicus Curiae on behalf of Swinomish Indian Tribal Community.

Lori Bruner, Quinault Indian Nation, P.O. Box 613, Taholah, WA, 98587-0613, for Amicus Curiae on behalf of The Quinault Indian Nation.

Rachel Sage, Swinomish Indian Tribal Community, 11404 Moorage Way, La Conner, WA, 98257-9450, Lori Bruner, Quinault Indian Nation, P.O. Box 613, Taholah, WA, 98587-0613, Timothy W. Woolsey, Suquamish Tribe, P.O. Box 498, Suquamish, WA, 98392-0498, Devon Joseph Tiam, Port Madison Enterprises, 15347 Suquamish Way Ne., Suquamish, WA, 98392-9649, Harold Chesnin, Attorney at Law, 3201 14th Ave. S., Seattle, WA, 98144-6314, Kevin R. Lyon, Squaxin Island Legal Dept., 3711 Se. Old Olympic Hwy, Shelton, WA, 98584-7734, Earle David LeesIII, Attorney at Law, 80 N. Tribal Center Rd., Skokomish Nation, WA, 98584-9748, Lorraine Anne Parlange, Kalispel Tribe of Indians, 934 S. Garfield Rd., Airway Heights, WA, 99001-9030, for Counsel for Other Parties.

PUBLISHED OPINION

Smith, C.J.¶1 The United States Supreme Court has repeatedly recognized Indian tribal governments’ inherent sovereign power to tax.¹ That inherent sovereign power is at the heart of this case.

¶2 In the 1990s, several states, including Washington, sued major cigarette manufacturers, seeking to protect the public health and gain compensation for costs incurred from treating smoking-related illnesses. The participating manufacturers (PMs) and the states settled their dispute in the late 1990s and entered into a Master Settlement Agreement (MSA), which requires the manufacturers to make annual cash payments to the states in perpetuity. To keep non-participating manufacturers from evading liability, Washington State (State) enacted chapter 70.157 RCW, which requires all tobacco manufacturers selling in Washington to either join the MSA and make annual payments or remain outside the MSA and make escrow deposits for "units sold"—measured by excise taxes collected by the State on tobacco products bearing "the excise tax stamp of the State." At the end of each calendar year, the State can avoid a downward adjustment of its annual cash payment from the PMs if it demonstrates it "diligently enforced" chapter 70.157 RCW against the non-participating manufacturers.

¶3 In 2001, following years of contentious litigation over cigarette tax rights, the State enacted legislation authorizing compact agreements between the State and Indian tribal governments. Cigarettes sold under the compacts have tribal, rather than state, tax stamps and have not been deemed to be subject to chapter 70.157 RCW's required escrow deposits. Following conflicting arbitration orders defining "units sold," the State sought declaratory relief in King County Superior Court to clarify its enforcement obligations and the definition of "units sold." The State also requested that the court vacate the 2004 arbitration panel's (2004 Panel) award, arguing the 2004 Panel's interpretation of "units sold"—that they include cigarette packs with tribal stamps—constituted facial error. The court denied the State's motion to vacate but agreed that tribal compact cigarette sales were not "units sold" and granted the State's motion for declaratory relief on the issue. The participating tobacco manufacturers appealed the court's declaratory judgment. The State cross-appealed the court's denial of its motion to vacate. Because we agree with the trial court's definition of "units sold" and with its conclusion that the 2004 Panel did not exceed its powers, we affirm.

FACTS

The Master Settlement Agreement

¶4 In 1998, forty-six states, the District of Columbia, and five United States territories (collectively referred to as the States) settled a lawsuit against four major cigarette manufacturers, the "Original Participating Manufacturers", resulting in a Master Settlement Agreement (MSA). Other cigarette manufacturers signed onto the MSA later and are referred to as "Subsequent Participating Manufacturers." Collectively, manufacturers that are party to the MSA are called "Participating Manufacturers," or PMs.

¶5 The MSA has been referred to as a "landmark" public health agreement. State v. R.J. Reynolds Tobacco Co., 151 Wash. App. 775, 778, 211 P.3d 448 (2009). The MSA requires the PMs make substantial annual cash payments to the States in perpetuity, based on their annual nationwide cigarette sales, to offset increased costs to the States’ healthcare systems caused by smoking. In exchange, the States agreed to settle and release all past and future tobacco-related claims against the PMs.

The NPM Adjustment

¶6 Since the MSA's execution, over 50 tobacco manufacturers have agreed to be bound by its terms. Manufacturers that have not joined the MSA or agreed to its terms are referred to as "Non-Participating Manufacturers" (NPMs). During settlement negotiations, the PMs and the States recognized the need to impose corresponding financial obligations on these NPMs. The States feared the NPMs would become insolvent against future liability, and the PMs wanted to remain competitive in the market. To that end, the MSA provides the States an incentive to enact and diligently enforce a "Qualifying Statute" that requires NPMs to deposit funds in escrow on qualifying units of tobacco sold within a State's borders.² This incentive is the "NPM Adjustment."

¶7 The NPM Adjustment provides for a potential reduction in the PMs’ settlement payments in the event of an MSA-related market share shift to the NPMs above a specified threshold.³ But a State can avoid a reduction in its annual payment if it demonstrates that it "diligently enforced" its Qualifying Statute for that calendar year. If an individual State diligently enforced the provisions of its Qualifying Statute during the year in question, the NPM Adjustment still applies to the PMs’ collective MSA payments for that year, but that adjustment is reallocated to the States who failed to diligently enforce their Qualifying Statutes.⁴ The diligent enforcement exception thus operates as a heavy incentive to the States to enact and enforce the provisions of their Qualifying Statutes.

¶8 The MSA contains a "Model Statute" that, if enacted, constitutes a Qualifying Statute. The Model Statute requires tobacco manufacturers operating in a State to either join the MSA or make escrow deposits on "units sold." The Model Statute defines "units sold" as

the number of individual cigarettes sold in the State by the applicable tobacco product manufacturer (whether directly or through a distributor, retailer or similar intermediary or intermediaries) during the year in question, as measured by excise taxes collected by the state on packs (or ‘roll-your-own’ tobacco containers) bearing the excise tax stamp of the State.

¶9 Washington's Qualifying Statute conforms to the Model Statute and was enacted...