California Court of Appeals, Third District, Sacramento
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 ...