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People ex rel. Becerra v. Native Wholesale Supply Co.

California Court of Appeals, Third District, Sacramento

July 2, 2019

THE PEOPLE ex rel. XAVIER BECERRA, as Attorney General, etc., Plaintiff and Respondent,
v.
NATIVE WHOLESALE SUPPLY COMPANY, Defendant and Appellant.

         CERTIFIED FOR PARTIAL PUBLICATION [*]

          APPEAL from a judgment of the Superior Court No. 34200800014593CUCLGDS of Sacramento County, David I. Brown, Judge.

          Lipsitz Green Scime Cambria and Paul J. Cambria, Jr., Erin E. McCampbell and Patrick J. Mackey for Defendant and Appellant.

          Xavier Becerra, Attorney General, Karen Leaf, Senior Assistant Attorney General; Nicholas M. Wellington, Michael M. Edson, and Nora Flum Deputy Attorneys General for Plaintiff and Respondent.

          ROBIE, J.

         Defendant Native Wholesale Supply Company (NWS), an Indian-chartered corporation headquartered on a reservation in New York, sold over a billion contraband cigarettes to an Indian tribe in California, which then sold the cigarettes to the general public in California. (People ex rel. Harris v. Native Wholesale Supply Co. (2011) 196 Cal.App.4th 357, 362-364 (Harris).) The cigarettes were imported from Canada, stored at various places in the United States (not including California), and then shipped to California after they were ordered from the reservation in New York. The Attorney General succeeded on his motion for summary judgment holding NWS liable for civil penalties in violation of two California cigarette distribution and sale laws and Business and Professions Code section 17200 (the unfair competition law), and obtained a permanent injunction precluding NWS from making future sales. The Attorney General further obtained an award of attorney fees and expert expenses.

         NWS appeals from the judgment and the attorney fee order. We affirm.

         BACKGROUND

         I

         Factual Background -- The Cigarette Sales Transactions

         The material facts are undisputed.[1] NWS is a corporation chartered under the laws of the Sac and Fox Nation of Oklahoma (Sac and Fox), a federally-recognized Indian tribe, headquartered on the Seneca Nation of Indians' (Seneca) reservation in New York.[2] Arthur Montour, an enrolled Seneca member, is NWS's sole owner. NWS's principal business is the sale of tobacco products produced and packaged by Grand River Enterprises Six Nations Ltd. (Grand River), a Canadian corporation located in Ontario, Canada. Grand River has never been listed on the California Attorney General's Tobacco Directory as specified in Revenue and Taxation Code section 30165.1.

         NWS imported Grand River's cigarettes and stored them in rented space at one of the following three federally regulated facilities before shipping them to customers: (a) the Western New York Foreign Trade Zone in Lackawana, New York; (b) the Southern Nevada Foreign Trade Zone in Las Vegas, Nevada; or (c) a bonded warehouse located on the Seneca reservation in New York.

         Between 2004 and 2012, NWS sold and shipped 98, 540 cases of Grand River cigarettes (equaling more than 54.5 million cigarette packs or over a billion cigarettes) to the Big Sandy Rancheria Band of Mono Indians (Big Sandy), a small Indian tribe residing in California.[3] The sales occurred in 476 invoiced transactions, with a total value of almost $67.5 million. NWS used a customs broker located in Woodland Hills, California, to assist with some of the transactions, and paid shipping carriers headquartered in Texas, Nebraska, and New York to deliver the cigarettes.

         II

         Legal Background -- The Cigarette Distribution And Sale Statutes

         To provide context for the trial court's rulings and the discussion that follows, we briefly summarize the two pertinent sets of statutes governing different aspects of the sale and distribution of cigarettes in California -- the Directory Statute (Rev. & Tax. Code, § 30165.1) and the California Cigarette Fire Safety and Firefighter Protection Act (Fire Safety Act) (Health & Saf. Code, § 14950 et seq.).

         A

         The Directory Statute

         In 1998, California and 45 other states entered into a master settlement agreement (the MSA) with the four largest American tobacco product manufacturers. (State ex rel. Edmondson v. Native Wholesale Supply (2010) 2010 OK 58');">2010 OK 58 [237 P.3d 199, 203] (Edmondson); Harris, supra, 196 Cal.App.4th at p. 363; see Health & Saf. Code, § 104555, subd. (e).) The states had sued the manufacturers to recoup health care expenses incurred by the states because of cigarette smoking. (Edmondson, at p. 203.) “In exchange for a liability release from the states for smoking-related public healthcare costs, the settling manufacturers agreed to limit their marketing and to pay the settling states billions of dollars in perpetuity” (Harris, at p. 363) by making “an annual payment to each settling state computed in relation to that manufacturer's volume of cigarette sales in the state” (Edmondson, at p. 203).

         “In order to prevent tobacco manufacturers not participating in the MSA from gaining a cost advantage over the settling manufacturers and to provide the states with a source of money from which to recover tobacco-related health care costs attributable to the sales of cigarettes by non-participating manufacturers, the MSA calls for each settling state to enact and enforce a statute (a ‘qualifying statute') requiring all tobacco manufacturers not participating in the MSA who sell cigarettes in a state to make annual payments into an escrow account based on the manufacturer's relative market share in such state.” (Edmondson, supra, 237 P.3d at p. 203.)

         California's “qualifying statute” is commonly referred to as the Escrow Statute. It provides that cigarettes sold in this state must be produced by manufacturers who either (a) have signed the MSA, or “(b) in lieu of signing the MSA, have agreed to pay sufficient funds into a reserve fund in escrow to guarantee a source of compensation should liability arise.” (People ex rel. Becerra v. Huber (2019) 32 Cal.App.5th 524, 530.)

         The Directory Statute serves as a complement to the Escrow Statute, to ensure compliance with its provisions. “Under the Directory [Statute], the Attorney General maintains a published list of all cigarette manufacturers who have annually certified their compliance with the requirements of the MSA or the alternative escrow funding requirements.” (People ex rel. Becerra v. Huber, supra, 32 Cal.App.5th at p. 530; Rev. & Tax. Code, § 30165.1, subds. (b)-(c).) The Directory Statute prohibits any person from selling, offering, or possessing for sale in California, or shipping or otherwise distributing into or within California any cigarettes not listed as legal for sale on the Attorney General's directory. (Rev. & Tax. Code, § 30165.1, subd. (e)(2).) Revenue and Taxation Code section 30165.1, subdivision (e)(3) prohibits persons from selling, distributing, acquiring, holding, owning, possessing, importing, transporting, or causing to be imported, cigarettes that the person knows or should know are intended to be distributed in violation of subdivision (e)(2).

         B

         The Fire Safety Act

         “[U]nder the Fire Safety Act, any manufacturer of cigarettes sold in California must meet specified testing, performance, and packaging standards established for the purpose of minimizing the fire hazards caused by cigarettes. [Citations.] This statute provides that all cigarettes sold in this state must, among other things, be packaged in a specified manner and certified with the State Fire Marshal as compliant with these safety standards. [Citation.] It is categorically illegal for any ‘person' to ‘sell, offer, or possess for sale in this state cigarettes' that do not comply with the Fire Safety Act.” (People ex rel. Becerra v. Huber, supra, 32 Cal.App.5th at pp. 530-531.)

         III

         Procedural Background

         The Attorney General filed a civil enforcement action against NWS in 2008, seeking an injunction, civil penalties, contempt and other relief for violations of the Directory Statute and Fire Safety Act, violation of Business and Professions Code section 17200 predicated on violations of the Directory Statute, Fire Safety Act, and a federal statute, and violation of an injunction. NWS filed a motion to remove the case to federal court, but the case was remanded back to state court for lack of federal subject matter jurisdiction.

         In state court, NWS filed a motion to quash service for lack of personal jurisdiction, which culminated in our 2011 opinion concluding NWS is subject to personal jurisdiction in California for the claims asserted against it in this action. This court held that, among other things, NWS purposefully availed itself of the substantial benefits of conducting activities in California (i.e., it had minimum contacts) because the cigarettes it sold to Big Sandy were in turn sold to the general public in California. (See Harris, supra, 196 Cal.App.4th at pp. 360, 362-365.) NWS then filed a demurrer to all the causes of action. The trial court sustained the demurrer with respect to the injunction violation cause of action and overruled it with respect to the remaining causes of action.

         The parties subsequently engaged in discovery, resulting in several motions and rulings, five of which are the subject of this appeal. Those motions and rulings are discussed in greater detail in the pertinent Discussion section below.

         In August 2016, the Attorney General and NWS filed their respective motions for summary judgment. The Attorney General argued NWS did not dispute the essential facts supporting the causes of action. NWS argued: (1) the Indian Commerce Clause preempted the claims against NWS because the “transactions occurred on a reservation solely among various Indian-owned entities”; and (2) injunctive relief would be unnecessary and ineffectual because NWS is a bankrupt entity and voluntarily discontinued selling cigarettes within California in 2012.

         NWS raised the same preemption and injunctive relief arguments in its opposition to the Attorney General's motion for summary judgment, and further argued: (1) the trial court lacked personal jurisdiction over NWS for the claims presented; (2) the Directory Statute violated NWS's equal protection rights; (3) NWS “was under no legal obligation to comply with the mandates of the Directory and Escrow Statutes at the time of the cigarettes sales at issue in this case (i.e. 2004-2012)” because the statutes did not apply to NWS until 2013; and (4) the calculation of civil penalties was too speculative for summary judgment because the Attorney General submitted no proof of the quantity of cigarettes sold to non-Indian customers and could not seek penalties for cigarettes sold to Indian customers.

         The trial court granted the Attorney General's motion and denied NWS's motion, finding none of NWS's defenses availing and no triable issues of material fact relating to the alleged violations.

         The trial court found the Attorney General provided sufficient evidence to establish Directory Statute violations by “demonstrat[ing] that NWS sold in and shipped or otherwise distributed into California cigarettes that were not listed on the Attorney General's directory in violation of subdivision (e)(2)” and “that NWS knew or should have known that Big Sandy intended to redistribute the cigarettes in violation of subdivision (e)(2), which constitutes a violation of subdivision (e)(3).” The Attorney General “met [his] burden to shift to NWS the burden on demonstrating the existence of a triable issue of material fact. It failed to do so.”

         The trial court further found the Attorney General provided sufficient evidence to establish Fire Safety Act violations by “show[ing] that NWS sold cigarettes to Big Sandy for which no certification had been filed between July 9, 2008, when it was served with the complaint in this action, and May 25, 2012, when it claimed to have stopped selling the cigarettes. [Citations.] At no time prior to February 2014 were any [Grand River]-Cigarettes certified as being in compliance with Health & Safety Code section 14951, subdivision (a)(4). [Citations.] The evidence [wa]s sufficient to shift to NWS the burden of demonstrating the existence of a triable issue of material fact.” NWS again failed to carry its burden.

         Finally, the trial court found the Attorney General proved NWS's violation of Business and Professions Code section 17200 through the violations of the Directory Statute and Fire Safety Act, and violation of a federal cigarette interstate commerce statute (15 U.S.C., § 376), which required NWS to file monthly reports with the state tax administrator, providing specific information about each shipment. “The evidence show[ed] that NWS, headquartered in New York, sold and shipped cigarettes from outside California to Big Sandy in California, which is not a licensed distributor in California, thus engaging in interstate commerce. [Citations.] NWS failed to file monthly reports with the state tax administrator. [Citation.] The evidence [wa]s sufficient to shift to NWS the burden of demonstrating the existence of a triable issue of material fact.” NWS failed to carry its burden.

         Given that there were no disputed factual issues regarding remedies, the trial court granted the Attorney General's request for civil penalties in the amount of $4, 292, 500, and his request for an injunction.

         The Attorney General subsequently moved for attorney fees. The court granted that motion and awarded $3, 843, 981.25 in attorney fees and $9, 119.25 in expert expenses, for a total of $3, 853, 100.50. We discuss the specifics relating to the attorney fee order in the pertinent Discussion section below.

         NWS appeals from the trial court's judgment in favor of the Attorney General and the order granting the Attorney General's request for attorney fees.

         DISCUSSION

         I

         Summary Judgment

         Summary judgment is properly granted when no triable issue exists as to any material fact and the moving party is entitled to judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).) We review the grant and denial of summary judgment motions de novo. (Law Offices of Dixon R. Howell v. Valley (2005) 129 Cal.App.4th 1076, 1092.) We independently examine the record and evaluate the correctness of the trial court's ruling, not its rationale, and must affirm the order if it reaches the correct result under any legal ...


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