Grand River Enterprises v. Boughton

20-1044-cv
Grand River Enterprises v. Boughton
United States Court of Appeals
for the Second Circuit
_________________
AUGUST TERM 2020
ARGUED: OCTOBER 15, 2020 DECIDED: FEBRUARY 8, 2021
NO. 20-1044-CV
__________________
GRAND RIVER ENTERPRISES SIX NATIONS, LTD.,
Plaintiff-Appellant,
– v. –
MARK BOUGHTON, COMMISSIONER, CONNECTICUT DEPARTMENT OF
REVENUE SERVICES,
Defendant-Appellee. ∗
BEFORE:
LOHIER, WALKER, Circuit Judges, and STANCEU, Judge. ∗∗
∗
The Clerk of Court is directed to amend the caption as set forth
above.
Chief Judge Timothy C. Stanceu, of the United States Court of
∗∗
International Trade, sitting by designation.
Plaintiff-Appellant Grand River Enterprises Six Nations, Ltd.
(“Grand River” or “GRE”) appeals from a September 27, 2018
judgment of the United States District Court for the District of
Connecticut (Warren W. Eginton, Judge) dismissing its action pursuant
to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim
on which relief can be granted and a March 3, 2019 judgment (Jeffrey
A. Meyer, Judge) denying its motion for reconsideration.
Grand River, a Canadian cigarette manufacturer, sued Defen-
dant-Appellee Mark Boughton, the Commissioner of the Connecticut
Department of Revenue Services (“DRS”), raising constitutional
challenges to a Connecticut statute (the “Reconciliation Requirement,”
Conn. Gen. Stat. § 4-28m(a)(3)) that imposes certain reporting
requirements upon Grand River as a prerequisite to the sale of
GRE’s cigarette brands in Connecticut. Grand River claimed the
Reconciliation Requirement violates its due process rights and the
Supremacy and Commerce Clauses of the United States Constitution.
2
We agree with the District Court that Grand River’s Second
Amended Complaint fails to state a claim upon which relief can be
granted and, accordingly, AFFIRM the judgments of the District
Court.
__________________
ERICK M. SANDLER, Day Pitney LLP,
Hartford, CT (Stanley A. Twardy, Jr., Day
Pitney LLP, Stamford, CT and Matthew J.
Letten, Day Pitney LLP, Hartford, CT, on the
brief), for Plaintiff-Appellant.
HEATHER J. WILSON, Assistant Attorney
General, Hartford, CT (Joseph J. Chambers,
Assistant Attorney General, on the brief), for
Defendant-Appellee.
__________________
STANCEU, Judge:
The majority of cigarettes sold in the United States are produced
by manufacturers that have entered into a “Master Settlement
Agreement” (“Agreement”) with a coalition of state attorneys general.
Manufacturers that participate in the Agreement (“Participating
3
Manufacturers”) are subject to various requirements, including
restrictions on their advertising practices and the obligation to make
certain payments to state governments to offset harms caused by
smoking. To preserve a level playing field, the Agreement incentivizes
states that have signed the Agreement to impose by statute a slate of
restrictions and obligations on manufacturers that choose not to
participate (“Nonparticipating Manufacturers”).
Connecticut, a signatory to the Agreement, imposes upon
Nonparticipating Manufacturers a reporting requirement known as
the “Reconciliation Requirement.” Described in brief summary, the
Reconciliation Requirement directs each Nonparticipating Manufac-
turer to report annually to Connecticut’s Department of Revenue
Services its total nation-wide sales of cigarettes on which federal excise
tax is paid, its total interstate cigarette sales, and its total intrastate
cigarette sales. The Reconciliation Requirement is met if the total
nation-wide sales of a manufacturer’s cigarettes do not exceed the sum
4
of the interstate and intrastate sales by more than 2.5%. If this
threshold is exceeded, the manufacturer must explain to the State’s
satisfaction the reason for the discrepancy in order for its cigarette
brands to be sold within the State.
Grand River, a Nonparticipating Manufacturer, brought an
action in the District Court raising constitutional challenges to the
Reconciliation Requirement, claiming it abridges GRE’s rights under
the Fourteenth Amendment Due Process Clause of the U.S. Constitu-
tion (and also under the Connecticut State Constitution) for lack of a
rational justification and also is in violation of the Commerce and
Supremacy Clauses of the U.S. Constitution. Concluding to the
contrary, we hold that the Reconciliation Requirement has a rational
relationship to the State’s legitimate interests in collecting excise taxes
and combatting cigarette smuggling that satisfies both federal and
state due process requirements. We hold, further, that Connecticut has
violated neither the Commerce Clause nor the Supremacy Clause by
5
imposing the Reconciliation Requirement on a Nonparticipating
Manufacturer as a condition of permitting that manufacturer’s brands
to be sold within the State. For these reasons, we AFFIRM the
judgments of the District Court.
I. BACKGROUND
A. The Master Settlement Agreement
In November 1998, four of the largest tobacco manufacturers in
the United States and the attorneys general of forty-six states, 1 five
territories, and the District of Columbia executed the Master
Settlement Agreement, which sought to supplant further state
lawsuits against tobacco advertising practices and to require tobacco
manufacturers to pay damages to compensate states for healthcare
costs resulting from smoking-related conditions. Beyond the four
original signatory manufacturers, other tobacco manufacturers since
1Four states, Florida, Minnesota, Mississippi, and Texas, had reached
individual state-level agreements with tobacco manufacturers prior to the
Master Settlement Agreement.
6
have signed the Agreement, and as a result the vast majority of
cigarette sales in this country are of brands owned by Participating
Manufacturers.
Participating Manufacturers agreed, inter alia, to restrict
advertising and sponsorships, to dissolve three tobacco-related trade
organizations, and to accept restrictions on lobbying and trade
association activities. They also agreed to fund a youth smoking
prevention organization and to make payments to the settling states in
perpetuity, in amounts determined by each manufacturer’s market
share (with a system for adjusting these payments based on future
sales).
To ensure that Nonparticipating Manufacturers do not gain a
competitive advantage over Participating Manufacturers, the
Agreement incentivizes signatory states such as Connecticut to impose
by statute certain obligations on Nonparticipating Manufacturers.
Among other things, signatory states require Nonparticipating
7
Manufacturers to deposit into escrow certain amounts, based on sales
figures, to satisfy potential claims for damages resulting from cigarette
smoking, as a parallel to the market share payment obligations to
which the Participating Manufacturers agreed to be bound. See Master
Settlement Agreement § IX(d)(2)(B). Some states also impose
additional requirements, such as the Reconciliation Requirement at
issue here.
B. The Reconciliation Requirement
In Connecticut, tobacco manufacturers may not sell cigarettes in
the State unless their cigarette brands are listed in a “Directory”
published by the DRS. Conn. Gen. Stat. § 4-28m. To be included in
the Directory, a Participating Manufacturer must be “generally
perform[ing] its financial obligations under the Master Settlement
Agreement.” Id. § 4-28i(a)(1)(A). In contrast, a Nonparticipating
Manufacturer must satisfy the escrow payments described above and
comply with additional statutory requirements, including the
Reconciliation Requirement. Id. § 4-28l(a), (d).
8
The Reconciliation Requirement provides in pertinent part as
follows:
The commissioner shall not include or retain in the
directory any brand family of a nonparticipating
manufacturer if the commissioner concludes . . . a
nonparticipating manufacturer’s total nation-wide
reported sales of cigarettes on which federal excise tax is
paid exceeds the sum of (i) its total interstate sales, as
reported under 15 USC 375 et seq., as from time to time
amended, or those made by its importer, and (ii) its total
intrastate sales, by more than two and one-half per cent of
its total nation-wide sales during any calendar year,
unless the nonparticipating manufacturer cures or
satisfactorily explains the discrepancy not later than ten
days after receiving notice of the discrepancy.
Id. § 4-28m(a)(3). Connecticut asserts that the purpose of the
Reconciliation Requirement is to prevent Nonparticipating
Manufacturers from diverting cigarettes into an illicit market
that harms Connecticut residents and reduces the State’s ability
to collect taxes and escrow payments.
9
C. The Proceedings in the District Court
On June 29, 2016, Grand River commenced an action in the
District of Connecticut against the Acting Commissioner of the DRS
(“Commissioner”) to challenge the Reconciliation Requirement. GRE
amended its complaint on December 1, 2016. On February 17, 2017,
the Commissioner filed a motion to dismiss the action under Federal
Rule of Civil Procedure 12(b)(6). On July 5, 2017, the District Court
denied this first motion to dismiss. After Grand River filed a second
amended complaint on September 5, 2017, the Commissioner, on
November 17, 2017, again moved to dismiss under Rule 12(b)(6). On
September 26, 2018, the District Court granted this motion, holding
that the Reconciliation Requirement does not violate the Due Process,
Supremacy, or Commerce Clauses. The District Court also denied
Grand River’s claim for a declaratory judgment that it is in compliance
with the Reconciliation Requirement. The District Court entered
judgment on September 27, 2018. On October 3, 2018, GRE moved for
10
reconsideration of the dismissal of its claims under the Commerce
Clause and the Supremacy Clause in the District Court, a motion the
District Court denied on March 3, 2020. This appeal followed.
II. DISCUSSION
We exercise appellate jurisdiction according to 28 U.S.C. § 1291.
We review de novo the granting of a motion to dismiss, accepting all
factual allegations in the Amended Complaint as true and drawing all
inferences in favor of the nonmoving party. Littlejohn v. City of New
York, 795 F.3d 297, 306 (2d Cir. 2015). “To survive a motion to dismiss,
a complaint must contain sufficient factual matter, accepted as true, to
state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (internal quotation marks and citation omitted).
Grand River argues on appeal that the District Court erred in
holding that the Reconciliation Requirement does not violate
substantive due process and is not prohibited by the Commerce or
11
Supremacy Clauses of the U.S. Constitution. 2 In the alternative, Grand
River argues that the District Court erred in denying relief on its claim
for a declaratory judgment that GRE is in compliance with the
Reconciliation Requirement. The Commissioner disputes Grand
River’s arguments and further asserts that GRE lacks standing to
pursue this appeal. We address each of these arguments below.
A. Article III Standing
The Commissioner argues that we should dismiss this appeal
for lack of Article III standing, arguing that Grand River, being
currently listed in the Directory, suffers no injury in fact. While Grand
River’s second amended complaint alleges that it has incurred
2 GRE also argues that the District Court erred in holding that the
Reconciliation Requirement does not violate substantive due process under
the Connecticut Constitution. The requirements to state a violation of
substantive due process under the Connecticut Constitution are the same as
the requirements under the U.S. Constitution, so we analyze both claims
under the same framework. See Ramos v. Town of Vernon, 254 Conn. 799, 837,
761 A.2d 705, 727 (2000) (noting the coextensive nature of state and federal
due process protections while holding open the option to expand the
Connecticut Constitution’s due process rights in the future).
12
substantial costs to comply with the Reconciliation Requirement, the
Commissioner asserts that Grand River has failed to plead these costs
with sufficient particularity to meet its burden. We disagree with the
Commissioner and conclude that Grand River has adequately pleaded
an injury in fact sufficient to confer Article III standing.
The constitutional minimum of Article III standing is well
established. To meet its burden, a plaintiff must show that it has
“(1) suffered an injury in fact, (2) that is fairly traceable to the
challenged conduct of the defendant, and (3) that is likely to be
redressed by a favorable judicial decision.” John v. Whole Foods Mkt.
Grp., Inc., 858 F.3d 732, 736 (2d Cir. 2017) (quoting Spokeo, Inc. v. Robins,
136 S. Ct. 1540, 1547 (2016)). The Supreme Court has instructed that
an “injury in fact” is an invasion of a legally protected interest that is
both “concrete and particularized” and “actual or imminent, not
conjectural or hypothetical.” Lujan v. Defenders of Wildlife, 504 U.S. 555,
560 (1992) (internal quotation marks omitted). When “a plaintiff is
13
himself an object of the action (or foregone action) at issue . . . there is
ordinarily little question that the action or inaction has caused him
injury, and that a judgment preventing or requiring the action will
redress it.” Id. at 561–62.
A regulated entity may plead an “injury in fact” by plausibly
alleging compliance costs associated with an increased regulatory
burden. The Third Circuit has referred to economic injury in the form
of “compliance costs” as “a classic injury-in-fact,” Am. Farm Bureau
Fed’n v. EPA, 792 F.3d 281, 293 (3d Cir. 2015), and the Fifth Circuit has
held that “[a]n increased regulatory burden typically satisfies the
injury in fact requirement,” Contender Farms, L.L.P. v. U.S. Dep’t of
Agric., 779 F.3d 258, 266 (5th Cir. 2015). The D.C. Circuit, as well, has
applied Lujan to confer Article III standing on directly regulated
entities that “must incur costs to ensure that they are properly
complying with the terms” of a new regulatory regime. State Nat’l
Bank of Big Spring v. Lew, 795 F.3d 48, 53 (D.C. Cir. 2015)
14
(Kavanaugh, J.). Although we have addressed this issue only in
passing, see Bridgeport & Port Jefferson Steamboat Co. v. Bridgeport Port
Auth., 567 F.3d 79, 86 (2d Cir. 2009), the decisions of our sister circuits
reflect a nearly uniform approach with which we agree. See, e.g., City
of Kennett v. EPA, 887 F.3d 424, 431 (8th Cir. 2018); Weaver’s Cove
Energy, LLC v. Rhode Island Coastal Res. Mgmt. Council, 589 F.3d 458, 467
(1st Cir. 2009).
Applying these standards, we have little difficulty concluding
that Grand River has standing to pursue its claims. As a
Nonparticipating Manufacturer, Grand River is the object of
Connecticut’s Reconciliation Requirement. It alleges that it “has
expended over $300,000 in seeking and obtaining approval to be listed
on the Tobacco Directory, and has invested a similar amount in
regulatory and compliance fees and payments since obtaining such
approval.” Second Am. Compl. ¶ 9; see also id. ¶¶ 35, 36. Because at
the pleading stage we “presum[e] that general allegations embrace
15
those specific facts that are necessary to support the claim,” we
reasonably infer that some of these costs were incurred to comply with
the Reconciliation Requirement and that Grand River’s compliance
costs will continue so long as it remains subject to the regulation. John,
858 F.3d at 737 (alteration in original) (quoting Lujan, 504 U.S. at 561).
These allegations suffice to plead an injury in fact that is fairly
traceable to the Commission’s enforcement of the Reconciliation
Requirement and would be redressed by a favorable judicial decision.
B. Substantive Due Process
Grand River claims that the Reconciliation Requirement violates
the substantive guarantees of the Due Process Clause, U.S. CONST.
amend. XIV, § 1. On appeal, GRE argues, first, that it has a protected
interest in maintaining its current listing in the Directory and, second,
that the Reconciliation Requirement is arbitrary and irrational and
thereby fails the rational basis test. In considering this issue, we
assume (as did the District Court), without deciding, that Grand River
16
has a constitutionally protected interest in maintaining its listing in the
Directory, which is necessary for it to continue to market cigarettes in
Connecticut. We proceed to consider, therefore, whether the
Reconciliation Requirement is “rationally related to a legitimate state
interest.” Lange-Kessler v. Dep't of Educ., 109 F.3d 137, 140 (2d Cir.
1997).
It scarcely can be argued that Connecticut lacks a legitimate state
interest in preventing smuggling and tax evasion that affects, or
potentially affects, the distribution within its borders of cigarettes, an
extensively taxed product with adverse health effects. The inquiry
relevant to GRE’s substantive due process claim is, therefore, whether
the Reconciliation Requirement is rationally related to that state
interest. Grand River offers three arguments to challenge that
conclusion: (1) that the Reconciliation Requirement is arbitrary in
affecting only Nonparticipating Manufacturers, (2) that it also is
arbitrary in pursuing a national accounting of sales while
17
Connecticut’s interest is limited to preventing illicit sales within the
State, and (3) that no evidence proves the Reconciliation Requirement
in fact reduces cigarette smuggling.
The logic of the Reconciliation Requirement is apparent from the
types of reporting it seeks. Federal excise taxes are paid when a
cigarette is manufactured in, or imported into, the United States, at
which point it enters the flow of commerce in this country, see 26 U.S.C.
§ 5701(b), while state tobacco taxes typically are charged when
cigarettes enter retail sale and thereby leave the flow of commerce, see,
e.g., Conn. Gen. Stat. § 12-430(8). The Reconciliation Requirement
directs a Nonparticipating Manufacturer to report how many of its
cigarettes entered the flow of commerce, when federal excise tax was
charged, and then how many left the flow of commerce with,
presumably, state taxes properly paid. We do not view it as irrational
or arbitrary for a state legislature to conclude that data allowing a
comparison of the quantities of a manufacturer’s cigarettes entering
18
U.S. commerce with the quantities leaving U.S. commerce can reveal
possible smuggling activity. A discrepancy between a manufacturer’s
data sets, unless explained, is a potential indicator of state tax evasion
involving cigarettes diverted from the legitimate flow of commerce for
eventual untaxed sale. In combatting cigarette smuggling, federal law
employs a similar logic as to the use of data on quantities of cigarettes
in commerce. The Prevent All Cigarette Trafficking Act (“PACT Act”),
15 U.S.C. § 375 et seq., directs that reports of the quantities of cigarettes
shipped into each state be reported to that state’s tobacco tax
administrator (as well as to localities and Indian tribes that charge
tobacco taxes) for comparison with state and local records.
Grand River’s argument that the Reconciliation Requirement
fails rational basis review for arbitrarily affecting only Nonpartici-
pating Manufacturers is not convincing. Participating Manufacturers
are subject to information collection under the Agreement. See Master
Settlement Agreement § II(jj). This causes us to conclude that limiting
19
the effect of the Reconciliation Requirement to Nonparticipating
Manufacturers does not invalidate it for arbitrariness.
Nor are we persuaded by GRE’s argument that Connecticut
improperly collects nationwide information from a manufacturer
when its interest is confined to illicit sales within its own borders. If a
manufacturer’s cigarettes are diverted from the stream of legitimate
commerce anywhere in the United States, it is rational, and not
arbitrary, for a state legislature to anticipate that the diverted
cigarettes may cause harm in that state.
Finally, Grand River’s argument that the Reconciliation
Requirement has not been demonstrated to prevent smuggling is
unavailing. Rational basis review is not a post-hoc test of the
effectiveness of a legislative policy. See Beatie v. City of New York, 123
F.3d 707, 712 (2d Cir. 1997) (“We will not strike down a law as
irrational simply because it may not succeed in bringing about the
result it seeks to accomplish.” (citing Seagram & Sons, Inc. v. Hostetter,
20
384 U.S. 35, 50 (1966)). Rather, we examine whether, at enactment,
there is a rational link between the harm a statute is intended to
remedy and the method by which a legislature chooses to address it.
See F.C.C. v. Beach Commc’ns, Inc., 508 U.S. 307, 313–14, (1993)
(requiring only “’plausible reasons’” for legislative action under
rational basis review (quoting U.S. R.R. Ret. Bd. v. Fritz, 449 U.S. 166,
179 (1980))). Grand River cannot demonstrate that it is irrational or
arbitrary for a state legislature to regard unexplained discrepancies
between quantities of cigarettes entering, and leaving, U.S. commerce
as a potential subject of investigation that could uncover illegal activity
affecting that state.
Of course, there are legitimate reasons why reporting under the
Reconciliation Requirement that exceeds the 2.5% threshold might not
indicate smuggling activity. Among other things, the number of
cigarettes reported on federal excise tax forms may conflict with the
number of cigarettes reported pursuant to the PACT Act because
21
PACT Act filings exclude intrastate sales, cigarette inventory, and—as
Grand River argues—sales within “Indian Country.” But notably, the
Reconciliation Requirement affords a Nonparticipating Manufacturer
the opportunity to explain any discrepancies before imposing the
sanction of de-listing from the Directory. Conn. Gen. Stat. § 4-28(m)(3).
Even for manufacturers that routinely report a discrepancy of greater
than 2.5%, the expectation that the Commissioner will scrutinize the
discrepancy may encourage accurate record-keeping practices that
could reduce the number of cigarettes diverted to an illicit market.
In summary, we find no error in the District Court’s dismissal
of Grand River’s claim that the Reconciliation Requirement is
constitutionally impermissible on substantive due process grounds.
C. The Dormant Commerce Clause
Grand River argues that the Reconciliation Requirement
violates the “dormant” (or “negative”) Commerce Clause, which is an
implied limitation on a state’s power to regulate commerce outside its
22
borders stemming from the grant to the federal government of the
power to “regulate commerce . . . among the several states.” U.S.
CONST. art. I, § 8, cl. 3. GRE maintains that the Reconciliation Require-
ment impermissibly regulates its out-of-state commercial business
decisions by forcing it to choose importers and distributors that will
provide it with their business records, including federal excise tax
records and PACT Act reports, so that Grand River can comply with
the reporting demanded by the Reconciliation Requirement.
A state law may run afoul of the dormant Commerce Clause if
it “clearly discriminates against interstate commerce in favor of
intrastate commerce[,] . . . if it imposes a burden on interstate
commerce incommensurate with the local benefits secured” when
viewed according to the balancing test of Pike v. Bruce Church, Inc., 397
U.S. 137, 142 (1970), or “if it has the practical effect of extraterritorial
control of commerce occurring entirely outside the boundaries of the
state in question.” Grand River Enters. Six Nations, Ltd. v. Pryor, 425
23
F.3d 158, 168 (2d Cir. 2005) (quoting Freedom Holdings, Inc. v. Spitzer,
357 F.3d 205, 216 (2d Cir. 2004)). Of these three possible grounds,
Grand River confines its arguments to the third, extraterritoriality.
Relying on Healy v. Beer Institute, Inc., 491 U.S. 324 (1989), GRE argues
that the statute must be invalidated as impermissibly extraterritorial
because its practical effect is to control conduct outside the borders of
Connecticut. Specifically, Grand River contends that the “practical
effect” of the Reconciliation Requirement is to require each of its U.S.
importers, including those who do no business in Connecticut, to
provide the State with records on the number of cigarettes on which
the importers paid federal excise tax and the number of cigarettes each
importer sold into interstate and intrastate commerce for each year.
Grand River thus grounds its theory of extraterritoriality in the
effect Connecticut’s Reconciliation Requirement has upon its
importers, even though the directly regulated party is Grand River
itself. The practical effect of the Reconciliation Requirement on
24
interstate commerce, being indirect as well as incidental to the purpose
of the statute, is not analogous to that of the economic regulation held
to violate the dormant Commerce Clause in Healy, the principal case
Grand River cites as authority for its position. Healy invalidated a
Connecticut statute requiring out-of-state shippers of beer to affirm
that their prices for beer sold to Connecticut wholesalers, at the time
of posting, were no higher than the prices at which the products were
sold in bordering states. 491 U.S. at 337. The pricing decisions of out-
of-state wholesalers were directly controlled by this price-regulating
provision, which the Supreme Court held to have had the
impermissible effect of controlling the wholesalers’ commercial
pricing and marketing activity that occurred outside of Connecticut.
Id. “Moreover, the practical effect of this affirmation law, in
conjunction with the many other beer-pricing and affirmation laws
that have been or might be enacted throughout the country, is to create
just the kind of competing and interlocking local economic regulation
25
that the Commerce Clause was meant to preclude.” Id. Here, the
Reconciliation Requirement does not have, and is not intended to
have, a controlling effect on the cigarette sales transactions involving
the importers. Its reach is to the post-sale reporting of transactions.
The effect on the importers, if any, is only incidental to the purpose of
the Reconciliation Requirement, which is to allow for investigation of
cigarette smuggling with the potential to affect adversely the State of
Connecticut. Moreover, the adoption of this or similar reporting by
other states would not constitute the “competing and interlocking
local economic regulation” of a kind found objectionable by the
Supreme Court in Healy. Id.; see also id. at 336 (considering “what effect
would arise if not one, but many or every, State adopted similar
legislation”). To the contrary, it is akin to the very sort of regulation
that we have previously permitted. See VIZIO, Inc. v. Klee, 886 F.3d
249, 256 (2d Cir. 2018) (holding that Connecticut’s E-Waste law, which
calculates fees based on national market share data, “does nothing to
26
control interstate commerce, but rather merely considers out-of-state
activity in imposing in-state charges”).
Grand River also cites American Booksellers Foundation v. Dean,
342 F.3d 96 (2d Cir. 2003), but that decision too is inapposite. In
American Booksellers Foundation, we held that a Vermont statute
prohibiting internet dissemination of sexually explicit materials
harmful to minors had an extraterritorial effect prohibited by the
dormant Commerce Clause. We reasoned that Vermont had projected
“onto the rest of the nation” its prohibition on the dissemination of that
material through the internet. 342 F.3d at 103. “Although Vermont
aims to protect only Vermont minors, the rest of the nation is forced to
comply with its regulation or risk prosecution.” Id. Connecticut’s
Reconciliation Requirement does not seek to, and in practical effect
does not, project onto the rest of the nation a scheme to prohibit
cigarette sales or regulate the commercial terms of them and instead
requires reporting of those sales, regardless of the terms, after the fact.
27
Grand River also cites, unavailingly, Edgar v. MITE Corp., 457
U.S. 624, 642–43 (1982), which, unlike the Reconciliation Requirement,
involved a state statute that directly regulated interstate commerce. In
Edgar, the Supreme Court invalidated an Illinois statute that granted
state officials authority to block corporate takeovers by regulating
tender offers and that applied even where all the shareholders were
residents of other states. Stating that the Commerce Clause “permits
only incidental regulation of interstate commerce by the States” and
that “direct regulation is prohibited,” the Supreme Court held that the
Illinois statute violated the Commerce Clause because it “directly
regulates and prevents, unless its terms are satisfied, interstate tender
offers which in turn would generate interstate transactions.” 3 457 U.S.
3 The Supreme Court concluded that the Illinois statute also was
precluded by the Commerce Clause under the balancing test of Pike because
it imposed burdens on interstate commerce that were excessive in light of
the local interests of the Act in protecting resident security holders and
regulating the corporate affairs of companies incorporated under Illinois
law. See Edgar v. MITE Corp., 457 U.S. 624, 643–46 (1982). Grand River makes
no argument invoking the Pike balancing test.
28
at 640. While it requires reporting of interstate transactions, the
Reconciliation Requirement neither regulates nor precludes them.
In summary, we conclude that the District Court correctly held
that the Reconciliation Requirement is not prohibited by the dormant
Commerce Clause.
D. Supremacy Clause
Grand River also claims that the Reconciliation Requirement
violates the Supremacy Clause, U.S. CONST. art. VI, cl. 2, because the
Reconciliation Requirement is preempted by the PACT Act and it is
impossible for Grand River to comply with both statutes. Specifically,
Grand River contends that this impossibility arises because (1) Grand
River cannot reconcile its nationwide sales of cigarettes against
interstate sales reported pursuant to the PACT Act, and (2) the
Reconciliation Requirement uses PACT Act reports for purposes that
are prohibited by federal law. According to GRE, this is a case in
which “state law penalizes what federal law requires.” Appellant’s Br.
29
53 (quoting In re Methyl Tertiary Butyl Ether (“MTBE”) Prods. Liab. Litig.,
725 F. 3d 65, 97 (2d Cir. 2013) (“MTBE”)).
We review a district court’s application of preemption prin-
ciples de novo. New York SMSA Ltd. P’ship v. Town of Clarkstown, 612
F.3d 97, 103 (2d Cir. 2010) (per curiam) (“SMSA”). The doctrine of
federal preemption provides that “[u]nder the Supremacy Clause of
the Constitution, state and local laws that conflict with federal law are
without effect.” Id. (internal quotation marks omitted). In SMSA, we
described the three general types of preemption:
(1) express preemption, where Congress has expressly
preempted local law; (2) field preemption, where
Congress has legislated so comprehensively that federal
law occupies an entire field of regulation and leaves no
room for state law; and (3) conflict preemption, where
local law conflicts with federal law such that it is
impossible for a party to comply with both or the local
law is an obstacle to the achievement of federal
objectives.
Id. at 104 (internal quotation marks omitted). Grand River’s argument
is, essentially, that the Reconciliation Requirement violates the
30
Supremacy Clause due to “impossibility” preemption, the first of two
types of conflict preemption, which is where “local law conflicts with
federal law such that it is impossible for a party to comply with both.”
Id. For a plaintiff to establish impossibility preemption, “it must show
that federal and state laws ‘directly conflict.’” MTBE, 725 F.3d at 99
(quoting Am. Tel. & Tel. Co. v. Cent. Office Tel., Inc., 524 U.S. 214, 227
(1998)).
We do not find merit in plaintiff-appellant’s preemption argu-
ment. As is pertinent here, the PACT Act requires reporting by “[a]ny
person who sells, transfers, or ships for profit cigarettes or smokeless
tobacco in interstate commerce . . . or who advertises or offers cigar-
ettes or smokeless tobacco for such a sale, transfer, or shipment.”
15 U.S.C. § 376(a). A party regulated thereunder must file with the
tobacco tax administrator of the state into which a shipment was made
(and to the administrators and law enforcement officers of local
governments and Indian tribes that apply their own tobacco taxes)
31
a memorandum listing the recipient’s name and address, the brands
and quantities of cigarettes (or smokeless tobacco) shipped, and the
information of the shipper acting on behalf of the delivery seller. Id.Grand River argues that even if its importers file all reports
required by the PACT Act, the figures Grand River submits to
Connecticut’s Department of Revenue Services to comply with the
Reconciliation Requirement inevitably will not reconcile within the
2.5% margin. GRE explains that the PACT Act reporting does not
apply, for example, to sales taking place within a single state and to
sales of cigarettes distributed exclusively within Indian Country. This
argument is unconvincing because a Nonparticipating Manufacturer
need not achieve actual, numerical reconciliation within the 2.5%
variance in order to achieve compliance with the Reconciliation
Requirement; the statute affords the Nonparticipating Manufacturer
the opportunity to “satisfactorily explain[] the discrepancy.” Conn.
Gen. Stat. § 4-28(m)(3). Grand River in fact has maintained its listing
32
in the Directory during the pendency of this litigation. Therefore, we
do not agree with Grand River’s view that the federal and state statutes
“directly conflict” or that the Reconciliation Requirement “penalizes
what federal law requires.” MTBE, 725 F.3d at 97, 99. Instead, the
Reconciliation Requirement and the PACT Act can “stand together” as
reporting requirements. Id. at 102.
As a second argument under the Supremacy Clause, Grand
River maintains that the Reconciliation Requirement violates the
PACT Act by using PACT Act reports for impermissible purposes. We
are unconvinced by this argument as well. PACT Act reports may be
used “solely for the purposes of the enforcement of this chapter and
the collection of any taxes owed on related sales of cigarettes and
smokeless tobacco.” 15 U.S.C. § 376(c) (emphasis added). The
Reconciliation Requirement uses PACT Act reporting for a purpose—
the investigation of possible tax evasion involving cigarettes—
expressly contemplated by the PACT Act.
33
E. Grand River’s Request for a Declaratory Judgment
Grand River sought a declaratory judgment that it is in compli-
ance with the Reconciliation Requirement in the District Court, in the
event the Reconciliation Requirement is upheld as constitutional. On
appeal, Grand River argues that the District Court erred in dismissing
its request for a declaratory judgment as moot. We review a District
Court’s decision to refuse to issue a declaratory judgment for abuse of
discretion. Dow Jones & Co. v. Harrods Ltd., 346 F.3d 357, 359 (2d Cir.
2003).
Grand River seeks a declaratory judgment on the ground that it
has provided adequate reasons why it cannot reconcile its federal
excise tax and state sales figures and, therefore, is entitled to a decision
that it is in compliance with the Reconciliation Requirement. GRE
currently is listed in the Directory and so has complied with the
Reconciliation Requirement for the most recent year. In the future,
should the State of Connecticut rule that Grand River is no longer in
34
compliance with the Reconciliation Requirement, Grand River might
be in a position to pursue its potential administrative and judicial
remedies in contesting that determination. The administrative
determination of whether GRE has “satisfactorily explained” any
discrepancies is for the DRS to make in the first instance for each year
for which Grand River seeks listing in the Directory. It was not an
abuse of discretion for the District Court to decline to make this
determination.
III. CONCLUSION
We hold that Connecticut’s Reconciliation Requirement is
rationally related to the State’s legitimate interest in preventing
evasion of state tobacco taxes and, therefore, does not violate GRE’s
due process rights, that any incidental burdens the Reconciliation
Requirement imposes on interstate commerce do not have an
impermissible extraterritorial reach inconsistent with the dormant
Commerce Clause, and that the Reconciliation Requirement is not
35
preempted by federal law so as to violate the Supremacy Clause. We
further hold that the District Court’s decision to not issue Grand River
a declaratory judgment was a permissible exercise of its discretion.
For the foregoing reasons, we AFFIRM the September 27, 2018
and March 3, 2019 judgments of the District Court.
36